One of the neatest deductions itemizing home owners can take advantage of is the mortgage interest deduction, which you claim on Schedule A. Your home can even be a house trailer or boat, as long as you can sleep in it, cook in it, and it has a toilet. Interest you pay on a mortgage of up to $1 million — or $500,000 if you’re married filing separately — is deductible when you use the loan to buy, build, or improve your home. If you take on another mortgage (including a second mortgage, home equity loan, or home equity line of credit) to improve your home or to buy or build a second home, that counts towards the $1 million limit.
If you use loans secured by your home for other things — like sending your kid to college — you can still deduct the interest on loans up $100,000 ($50,000 for married filing separately) because your home secures the loan.</em
1. PMI and FHA mortgage insurance premiums -the government extended the mortgage insurance premium deduction through 2013. DO THIS ON SCHEDULE A.The change only applies to loans taken out in 2007 or later.
2. Prepaid interest deduction- Prepaid interest (or points) you paid when you took out your mortgage is 100% deductible in the year you paid them along with other mortgage interest. If you refinance your mortgage and use that money for home improvements, the points are also deductible in the same year. If you refinance to get a better rate and term or to use the money for something other than home improvements, such as college tuition, you’ll need to deduct the points over the term of the loan.
3. Energy tax credits- The energy tax credit of up to a lifetime $500 had expired in 2011. But the Feds extended it for 2012 and 2013: to determine if the system is eligible. Go to Energy Star’s website for detailed descriptions of what’s covered. And talk to your vendor. The product or system must have been installed, not just contracted for, in the tax year you'll be claiming it.
4. Vacation home tax deductions- The rules on tax deductions for vacation homes are complicated. If you’re the only one using your vacation home (you don’t rent it out for more than 14 days a year), you can deduct mortgage interest and real estate taxes on Schedule A. Rent your vacation home out for more than 14 days and use it yourself fewer than 15 days (or 10% of total rental days, whichever is greater), and it’s treated like a rental property. Those expenses get deducted using Schedule E. Rent your home for part of the year and use it yourself for more than 14 days and you have to keep track of income, expenses, and divide them proportionate to how often you used and how often you rented the house.
5. Home buyer tax credit- There were federal first-time home buyer tax credits in 2008, 2009, and 2010. If you claimed the home buyer tax credit for a purchase made after April 8, 2008, and before Jan. 1, 2009, you must repay 1/15th of the credit over 15 years, with no interest. If you used the tax credit in 2009 or 2010 and then sold your house or stopped using it as your primary residence, within 36 months of the purchase date, you also have to pay back the credit. Example: If you bought a home in 2010 and sold in 2012, you pay it back with your 2012 taxes. Members of the armed forces who served overseas got an extra year to use the first-time home buyer tax credit. If you were abroad for at least 90 days between Jan. 1, 2009, and April 30, 2010, and you bought your home by April 30, 2011, and closed the deal by June 30, 2011, you can claim your first-time home buyer tax credit.
6. Property tax deduction- You can deduct on Schedule A the real estate property taxes you pay. If you have a mortgage with an escrow account, the amount of real estate property taxes you paid shows up on your annual escrow statement. If you bought a house in 2012, check your HUD-1 Settlement statement to see if you paid any property taxes when you closed the purchase of your house. Those taxes are deductible on Schedule A, too. (Houselogic 1/13)