If you are a first-time homebuyer, there are several important deductions and credits that may be available.
Watch the video above. Retirement Daily's Robert Powell caught up with Jeffrey Levine, CPA and tax pro from Buckingham Strategic Wealth Partners, to discuss everything you need to know about how to claim large charitable contributions as tax deductions.
TurboTax Live experts look out for you. Expert help your way: get help as you go, or hand your taxes off. You can talk live to tax experts online for unlimited answers and advice OR, have a dedicated tax expert do your taxes for you, so you can be confident in your tax return. Enjoy up to an additional $20 off when you get started with TurboTax Live.
Recommended Read: Homebuyer Tax Credit: 7 Surprising Facts
Recommended Read: Can You Still Take the First-Time Homebuyer Credit?
Video Transcript| Jeffrey Levine, CPA and Tax Expert, Buckingham Strategic Wealth
Robert Powell: What are the authorized deductions for first-time homebuyers? Here to talk to me about this is Jeffrey Levine from Buckingham. Jeffrey, welcome.
Jeffrey Levine: It's good to be with you, Bob. And when it comes to first-time homebuyers, the tax breaks that are available to them are really the same as most other taxpayers. So notably, two things to keep in mind here. First, any real estate taxes that are paid may be deductible. I say may, because right now there's a limit of up to $10,000 of state and local taxes that a taxpayer can claim as an itemized deduction. If you don't already have $10,000 in taxes, well, then the additional taxes from your real estate can be accretive. But if you already have, let's say, $15,000 of income taxes attributable to your state because of your income, well, having another five, ten, whatever, thousand dollars of real estate taxes won't move your needle there.
However, most first-time homebuyers are not buying in cash. And so that means they're taking out a mortgage. And mortgage interest is deductible. Now there is a limit. It's a maximum of $750,000 of mortgage that you can use as the interest that is deductible, that's attributable to the maximum of $750,000 of a mortgage. But property prices have risen significantly since the start of the pandemic. So more people are approaching that $750,000 mark. Plus interest rates have risen rather significantly so far in 2022, which means many people have bigger mortgages with larger interest rates, which kind of significantly increases the potential of their interest deduction. And there is no maximum dollar amount of that deduction. It's simply limited to the interest that you have on up to a $750,000 mortgage. So that could be quite substantial.
Now, it's worth noting one other thing, Bob, and that's that many new homeowners will not only buy their homes but will do some renovations. They'll do the work themselves. Unfortunately, those expenses are generally not deductible. However, it does add to the basis generally of your property. So when you go and sell your home down the road, you can limit the future taxes that you would be subject to by keeping track of the amounts. So for instance, if you need to put $30,000 into a new roof on the home that you purchase, well, that $30,000 adds to your total investment in the property and should reduce the amount of taxes you're responsible for later on when you go to sell it, hopefully with a really big gain.
Robert Powell: All right. So one quick follow-up. Given the way that mortgage loans are amortized, folks should know that in the early years, there will be a greater portion of the interest that's deductible and that will get reduced over time, say, 30 years, if that's what their mortgage is.
Jeffrey Levine: That's exactly right. So initially and obviously it depends upon the mortgage rate itself, but certainly more loan initially is interest or a greater percentage of your loan payment interests early on in the mortgage versus later on. It kind of goes down over time, which effectively works out nicely because over time, even though you're losing that deduction as inflation kind of takes its toll, the payments that you're making are actually much lower in terms of real dollars. Which actually is a great benefit now for homeowners with these mortgages already is that it's kind of an asset having a mortgage rate. Some who bought in the last few years with mortgages of 3% and 4% when interest rates are 5, 6, and 7%, well, those mortgages are actually a lot more valuable because of their relative at least lower rate as compared to the way or where current rates are. So that's certainly one thing worth pointing out.
I'll throw one other as a bonus out there. If you are someone who works from home, which many people do in this day and age, well, you may want to look at claiming the home office deduction. You can find a portion of your home that is separate and identifiable, doesn't have to be a whole room. It could literally be like the space under which this desk sits. Now, obviously, if it's limited space, it will be a limited deduction. But Bob, when it comes to taxes, every dollar in your pocket is a good day.
Editor's Note: The content was reviewed for tax accuracy by a TurboTax CPA expert.