Itemized Deductions
Itemizing deductions might save you more money than taking the standard deduction.
Keep track of all your itemized deductions so you get every tax break you deserve. We'll take care of these common itemized deductions and more in the Interview:
Ex: Christine, a single filer, bought a home in 2010 and paid real-estate taxes and mortgage interest. She also made charitable donations in 2010. Her totals were:
She can deduct the grand total of $10,200. Her standard deduction would have been $6,200, the total of her $5,700 standard deduction plus $500 of her real estate taxes. (Including the $500 real estate taxes in her standard deduction is a benefit that expired at the end of 2009, but Congress might extend it for 2010.) Her itemized deductions will save her $1,000 in the 25% bracket ($10,200 minus $6,200 multiplied by .25).
Also, new homeowners can deduct real-estate taxes paid at closing to reimburse the seller for real estate taxes paid before the closing. See your closing's settlement statement for details.
Ex: Max paid taxes in March covering April through June for a home he was selling. Christine bought the home in May and reimbursed Max for the taxes covering the period from the purchase date through the end of June. Christine can deduct these taxes, even though she didn't pay them directly.
If you purchased a home before Oct. 1, 2010, you might be able to claim the homebuyer credit if:
The homebuyer credit is the lesser of 10% of the purchase price or whichever of these limits applies:
Ex: Becky, a single filer, bought her first home for $120,000. Since 10% is $12,000, she must claim an $8,000 homebuyer credit.
You must print and mail your return to claim the homebuyer's credit. The IRS can't accept your return electronically.
When figuring your Alternative Minimum Tax (AMT), you might not be allowed to deduct all the home mortgage interest you deducted on Schedule A for your regular tax.
Disallowed interest you can't deduct for the AMT includes interest on a home loan, with the exception of an eligible mortgage. An eligible mortgage is a loan used to build, buy, or substantially improve your main home or second home.
Ex: You use interest on proceeds from a home equity loan - an eligible mortgage - to add a room to your main home. The interest is deductible for both regular and AMT tax purposes.
Disallowed home mortgage interest for the AMT includes:
If you sell your main home, you might be able to exclude up to $250,000 of the profit you make on the sale. To qualify, you must have owned and used the home as your main home for at least 2 years during the 5-year period ending on the date of sale.
If you're married filing jointly, you can exclude up to $500,000 of the profit if:
Special use rules apply for homeowners serving outside the United States on extended active duty in the military or as Peace Corps volunteers.
If you meet the ownership and use requirements, you might still have to report some of the gain on the home if:
If you claimed the first-time homebuyer credit (Form 5405) for a home purchased in 2008, you must repay this credit. Beginning in 2010, you must:
If, during any year of the 15-year period, you dispose of your home or no longer use it as your main home, you must add to that year's tax any part of the credit you hadn't previously repaid.
This rule applies if:
Ex: Alan claimed a $7,500 first-time homebuyer credit for a home purchased in 2008, so his annual repayment amount is $500 ($7,500 divided by 15). He'll begin repayments on his 2010 return.
If he sells his home in 2013 after making 3 of the 15 payments, he must include $6,000 in additional tax on his 2013 return. This will account for his remaining 12 annual repayment amounts. He won't be allowed to spread the payments over the next 12 years as he could have done if he'd kept the house as his main home.
You must repay the first-time homebuyer credit (Form 5405) if both of these apply:
You repay the credit by adding it to your tax for the year of the sale or change in use. This rule applies if:
If the home continues to be your main home throughout the 36-month period, you don't have to repay any part of the credit.
If you refinance a mortgage on your main home, you can't deduct expenses related to the refinancing except for points. You must usually deduct points over the life of the loan.
Ex: If you pay $3,600 points for a 15-year loan, you can deduct $20 a month ($3,600 divided by 180 months) for each month you make a loan payment. You can usually deduct points the year you sold or refinanced points you haven't deducted in prior years if you:
However, if you use loan proceeds to improve your main home, you can deduct the points allocable to the part of the loan used for the improvement in the year you financed. Deduct the remainder of the points over the life of the loan.
If you refinance a mortgage on rental property, you can deduct points over the life of the loan. Figure the deduction using the constant yield method, explained in IRS Publication 527. You also can deduct the other costs of obtaining the loan over the life of the loan. You can make these deductions in the year you sold or refinanced any amounts you haven't deducted in prior years if you:
If you take an equity loan on the rental property, you might be able to deduct the interest you pay on the loan. It depends on how you spend the equity loan proceeds.
If you use the proceeds to:
To exclude the gain on the sale of your main home, you usually must have owned and used the home for at least 2 years during the 5-year period ending immediately before the sale date. You can claim the exclusion only once in any 2-year period.
You can claim a reduced exclusion for 1 of these situations:
Other unforeseen situations might qualify for the reduced exclusion. You must first get IRS approval to claim the reduced exclusion.
If you build a home, you can deduct mortgage interest paid up to 24 months after construction begins. You can claim this deduction only if the home becomes your main home when it's ready to be occupied - even if it's after the end of the 24-month period.
You must amend prior-year returns to remove a mortgage-interest deduction if both of these apply:
If a contractor produces faulty construction and you're awarded damages as a result, you don't have to pay taxes on the damages. The damages reduce the basis of your home. Amounts you spend to repair the faulty construction increase the basis.
If you pay a contractor and the contractor fails to complete the construction, you can claim the amount you pay as a nonbusiness bad debt. A nonbusiness bad debt is s a short-term capital loss.
You can deduct as a medical expense any capital expenditure - a permanent improvement - you make to your home if the improvement directly relates to the medical care of a resident of the home. You usually must reduce the deduction for the improvement's cost by the amount that the improvement increases the home's value.
The IRS ruled that certain items don't increase the value of the home. So you can deduct the entire cost of these items as a medical expense:
You can deduct medical expenses only if you: