If you own a home, you may have access to deductions that collectively can save you thousands in taxes.
Take the most common — a deduction for interest paid on your home mortgage. U.S. taxpayers collectively get a break to the tune of about $100 billion each year from this single item alone!
If you’re a homeowner, you have access to breaks like this and more, which can add up to significant savings off your annual tax bill.
- Mortgage interest.As mentioned, this is one of the most common breaks for taxpayers, and with good reason. Consider that a 30-year mortgage of $250,000 will result in almost $10,000 in interest payments over the first year at current market rates. And don’t forget your vacation home or the condo, because you’re also allowed to use interest paid on your primary residence as well as one other home.
- Real estate taxes.Another important tax break for homeowners is a deduction for local property taxes, which can be substantial depending on where you live. This is a more common tax break than even the mortgage interest deduction. There are lots of folks who own a home and don’t have a mortgage, but everyone’s paying real estate tax right!
- Mortgage insurance.Borrowers who do not have 20% equity in their homes are required to carry private mortgage insurance, or PMI, to protect the lender if the loan defaults. PMI typically costs 0.5% to 1% of the entire loan amount each year, so deducting those payments can add up fast if you have a large loan balance.
- Mortgage points. A “point” on a home mortgage is a payment that equals 1% of your total loan amount, and is paid up front to a lender to reduce your total interest rate. Some borrowers choose to pay points to get a more favorable lending rate, and an added bonus is that they also get a tax break. Unfortunately, you can only deduct the amount of any points paid in the year that you paid them — so don’t miss this break if you’ve taken out a new home loan in the past year and paid points.
- Casualty losses. If you’re unfortunate enough to suffer storm damage or a fire in your home, the IRS provides a tax break to offset some of those losses. You can’t double-dip, of course, and get a break for losses your insurance company has already compensated you for, but even folks with a decent homeowners insurance policy may still get some tax benefit. If you get an insurance reimbursement, it doesn’t necessarily mean you’re not going to get anything, it’s just going to reduce the total loss that you can recognize. Doing some simple math on form 4684 will let you know how much, if any, of your losses are tax-deductible.
- Home office.If you are self-employed and have a home office that meets IRS standards, there may be significant tax benefits for you. For instance, if your home office represents 5% of your home’s total square footage, you may be eligible to deduct 5% off that property’s utilities, insurance and property taxes, and general repairs, among other things. Just remember there are strict rules around what constitutes a home office that.
What bank interest is taxable?
Any interest you receive from a bank account is taxable income, whether it’s a checking or savings account or a certificate of deposit. And it’s taxed at the same rate as your wages.
Do you have to report interest if it’s just pennies? Reporting all income, no matter how small, is the rule; however, the IRS does allow you to round to whole numbers, so if it’s less than 50 cents, you could not claim it and still be following the rules.
What about other interest?
Outside of basic bank accounts, you might get money from sources such as savings bonds or investment accounts, including retirement plans. Although they count as taxable income, too, these are handled differently, and you may need a tax professional to help you.
Getting the paperwork: 1099-INTs
It‘s important to report checking or savings interest on your tax return, especially if you receive a 1099-INT form from your bank. The 1099-INT is a short document that shows the interest you received from a financial institution during the previous year.
Banks are required to send a 1099-INT only to account holders who received $10 or more in interest. If you got less than that, you may not get the form. In that case, you can find the amount of interest you received on bank statements from last year.
Where do I report it?
On your federal tax return, you insert the total interest earned last year in one of three places:
- Line 8a of Form 1040
- Line 8a of Form 1040A
- Line 2 of Form 1040EZ
You fill out only one of these. If you earn more than $1,500 in interest, you must use Form 1040 and complete another form called Schedule B. It’s a form for listing all banks or companies that paid you interest last year, and you’ll send it in with Form 1040.
The IRS will get a copy of the 1099-INT from your bank, so there’s no need to include that with your tax return.
What happens if I forget to report interest?
If a 1099-INT has been issued, the IRS knows that, they’ll do computer matching on tax returns.
And you might get hit with a small late-payment penalty for failing to claim interest income. If the IRS sends a notice, you typically have to pay a penalty of 0.5% of the tax owed. This charge is per month after the tax deadline — April 18 this year — and it includes the last half of April and the part of the month that the IRS sends you a letter.
But you don’t have to wait for the IRS to act if you forget to include interest as taxable income. Simply send in an amended tax return 1040X.