If you’re a homeowner, or looking to buy soon, here’s what you need to know about your tax burden for 2016.
Let’s face it: The last thing you want to worry about after that second glass of eggnog during this year’s holiday festivities is what you might need to deal with during next year’s tax season. But it’s well worth paying attention to real estate tax deductions now so that you can save later.
In the summer of 2015, a Senate committee approved many tax extender bill provisions into 2016. The bill extended a collection of tax-related deductions and credits that had expired, and this could give taxpayers a break through the end of 2016 if the bill is fully passed by Congress before the end of the year.
This act amends sections of the IRS tax code and can change what you’ll owe come April. Yes, the extenders bill is packed with many tax breaks targeted to special interests, such as the research and development credit, so you may be tempted to think the changes don’t apply to you — but they do!
If you own a home or are hoping to close on a home for sale in Santa Fe, NM, your tax picture for 2016 may look different than it did previously. Here are a few of the breaks up for consideration in Congress that could help lower your federal tax bill.
Mortgage debt forgiveness
When a mortgage lender writes off all or any part of a forgiven debt, the amount that is forgiven is “passed back” to the borrower as taxable for federal income tax purposes. The rule applies to all debt, including home mortgages. However, in 2007, in the midst of the housing crisis, Congress pushed through the Mortgage Forgiveness Debt Relief Act, which allowed for an exemption.
Under the rule, qualifying homeowners who have either lost their homes to foreclosure or qualified for some kind of repayment adjustment don’t have to pick up the forgiven debt as income on their tax returns. The rule was intended to be temporary but has been renewed several times, and Congress is currently debating whether it will renew this rule for 2016.
Deduction for mortgage insurance premiums
In a tough market, lenders are a bit more cautious. Buyers who financed homes in the last few years found that many lenders required private mortgage insurance (PMI) to protect the lender in the event of a default.
But here’s the rub: Even though the lender required you to purchase PMI as a condition of getting a mortgage, you couldn’t write it off. Unlike the interest paid on your mortgage, mortgage insurance payments are generally not deductible for tax purposes.
It was possible to claim and deduct PMI payments in 2015. If the tax extenders bill is approved and enacted through 2016, those who qualify and itemize may now claim a tax deduction for the cost of paying PMI for their homes.
Deduction for state and local general sales taxes
A big consideration in buying a new home is tax benefit and cost. The good news is that even though you’re now paying property taxes, you can deduct them (plus interest paid on your mortgage) from your gross income to reduce your overall taxable income.
Another big consideration when choosing a new place to live is not just the additional cost of real estate taxes in your area but state income tax as well. A handful of states (Alaska, Florida, Nevada, South Dakota, Texas, and Washington) have no state income tax, and a number of others have a relatively low state income tax rate.
But there’s one downside to living in a state with no income tax — if there’s no income tax, there’s no deduction. To ease the pain of the lost deduction, Congress gave residents in those states a temporary break: Taxpayers could deduct state and local general sales taxes paid in 2015, rather than state and local income taxes, and Congress may extend the break through the next year.
Tax credit for residential energy-efficiency improvements
It’s trendy to go green, but it’s also cost-effective. Energy-efficient home improvement tax credits of up to $500 are available through 2015 for the installation of qualified insulation, windows, and doors and roofs, as well as certain water heaters and qualified heating and air-conditioning systems. It might be a bit much to tackle a big project such as installing a new roof over the holidays, but now is definitely the time to invest if you can.
Bottom line: If you’re a homeowner, you can’t get too comfortable with these tax breaks, since they’re up for renewal each year. Congress has passed them consistently in the last few years, but things can change. Unless extended again, these tax breaks expire on December 31, 2015.
What last-minute tax breaks do you plan to take advantage of before the end of the year? Share your experiences in the comments below!