Let there be no contest – there is absolutely nothing quite like buying your first home.  Not only do you have something that is officially yours, you’ve got an investment that could pay you back considerably if managed properly, and you also have a new way to save quite a bit when tax time comes around.

“Homeownership is one of the best tax benefits that the federal government gives out,” says attorney Robin Gronsky, principal of Gronsky Law Offices in Ridgewood, N.J. “People count on it. It’s how they calculate their out-of-pocket costs in owning versus renting.”

With every stage of buying a home, regardless of the location in Michigan, there’s some new daunting thing to learn.  Finding the right Michigan mortgage banker, navigating the mortgage process, trying to find just the right home and neighborhood – and now learning about how your taxes will change.

Schedule A – Buying a Home Means Deductions

There are three big home related deductions that come with getting a mortgage

• Mortgage interest
• Points connected to your loan
• Property taxes

Claiming these means itemized deductions, a new experience for many first time home buyers.  That means it’s time to switch over to a Schedule A .  But don’t just rush out to grab the new forms when the time comes.  It pays to talk to a tax professional here because not every new home buyer will benefit from itemizing.

It’s important to make sure the deduction method you choose is the most appropriate – basically the one that is going to give you the largest deduction amount.

Getting the Most out of Your Mortgage Interest

If you find that itemizing is the best way for you to save, then your biggest write-off during tax time is likely going to be interest paid on your mortgage.  When you first buy your home is when you’ll see the biggest benefit here, because in the early years of your mortgage, the bulk of payments go toward your interest charges.

Remember Your Points at Tax Time

The 1098 form you get from the lender at the beginning of the year, along with the HUD-1 form, will list any points you paid for your mortgage.  Remember the process for getting a mortgage?  Points are sometimes paid in order to obtain a lower interest rate depending on the credit-worthiness of the home buyer.

The IRS allows you to deduct those points for the tax year in which you bought that house.  You can amortize or deduct the points all at once, the choice is yours.  Most first-time buyers in Michigan opt for claiming it all at once.

For example:  If you paid 1.5 points on a $200,000 mortgage, $3000 would go to your itemized deduction.

Another cool aspect of the point system is that even if the seller paid the points, the buyer can often claim the deduction!

Working Through Tax Time with Property Taxes

Property taxes can get a little complicated, and how complicated depends primarily on when you bought your home and the tax year of your jurisdiction.  For example, lets say your tax year runs on the calendar year with your local property taxes due in April.  You bought the home on July 1^st.

When you close on the house, the previous owner of the home already paid the taxes in April for the entire year.  When you close, you reimburse the seller for the amount from the purchase date to the end of the tax year (December).  The amount you reimburse would be shown on your HUD-1, and you can deduct that.

Unless the taxes are in escrow – if you give the lender a portion of your annual property tax bill each month along with your payment, and the lender takes money from that account to pay the local tax collector, then you cannot write off this amount on your first return.

In the next post I’ll talk about some other deductions, how timing is everything, and some things you can’t claim when tax time rolls around.

(note that the information given here is just general material meant to provide a path to a solution, not a solution in full.  Always consult with a professional when it comes to your taxes to ensure you file properly and maximize your deductions!)