The tax paying American’s filing has been extended to July 19, 2020, but there are plenty of reasons to file your taxes early so you can collect your tax refund sooner (which, in turn, provides you more security during insecure times). For homeowners the question of whether to take the “standard deduction” or an “itemized deduction” is an important question. In a nutshell, itemized deductions are great if you’ve recently purchased a home, but you need to know what you can, and cannot deduct. In rare cases the itemized deduction will be less than the flat deduction to your adjusted gross income for tax purposes, in which case it’s prudent to take the “standard deduction” which is $12,000 (single filers) and $24,000 (married, filing jointly). While there are benefits to taking the “standard deduction,” this article is more interested in “itemized deductions.”
Itemized deductions are exactly what they sound like: you itemize expenses that qualify as deductions, and support those expenses with documentation (because the IRS might come-a-knocking one day). Purchasing a home has a major impact on your tax returns and is likely to make itemizing your deductions the most prudent course of action. For example, you can deduct the following expenses:
- Mortgage interest (current owners can deduct up to $1M for 1st and 2nd homes, while new buyers can deduct $750k on 1st and 2nd home); (2) real estate and property taxes (there is a cap); (3) state and local income tax or sales taxes; (4) Casualty or theft losses; (5) unreimbursed medical and dental expenses; and (6) gifts to charities.
As you can see, (1) – (2) are directly related to owning a home and may be enough to tip the scales in favor of becoming an itemized deduction filer; this is particularly so in California, where the mortgage interest on its own will exceed the standard deduction. By way of example, let’s say you purchased a $400k home with a 30-year mortgage at a fixed 5% interest rate. At the end of your first year, you will have paid $5,901 off of the principal, and $19,866 in interest. If you are a single tax filer, your mortgage interest exceeds your standard deduction and it’s close to eating up the entire deduction for a married couple filing jointly. Ultimately, you need to check with your accountant, but it is probably wisest to go down the itemized deduction path if you want to save as much money as possible.
At the Chernov Team we understand that knowledge is power, and knowledge of how to avoid paying more than you owe to the federal government is powerful knowledge indeed. At the Chernov Team we know that whoever comes to the table most prepared leaves with the most, and the Chernov Team always leaves the table with the most.