Refinancing To Save Tax Dollars

Refinancing To Save Tax Dollars



Refinancing to​ Save Tax Dollars
Even though many people think that refinancing their home is​ an​ expensive proposition,​ the​ truth is​ that refinancing can saves homeowners hundreds of​ dollars on​ a​ monthly basis .​
In addition to​ saving money each month on​ your house payment,​ there are also tax benefits associated with refinancing your home loan.
By making yourself aware of​ the​ potential tax benefits of​ refinancing and planning carefully,​ you​ can help keep a​ greater percentage of​ the​ funds you​ save in​ your own pocket.
Itemize Your Deductions
When you​ first finance or​ refinance your home,​ most of​ the​ money you​ pay each month goes toward the​ interest on​ your loan rather than toward reducing the​ principal balance .​
For many homeowners,​ taking advantage of​ itemized deductions allows them to​ save taxes because they are able to​ write off the​ interest paid in​ on​ their home loan.
Spouses who file joint income tax returns are able to​ deduct up to​ $1 million of​ interest each year .​
If you​ had a​ mortgage for $300,​000 and you​ refinance your home with a​ $350,​000 mortgage,​ you​ can enjoy increased tax deduction benefits associated with the​ additional interest you​ are paying.
Under Internal Revenue Service regulations,​ the​ amount of​ your new loan that replaces the​ original loan ($300,​000) is​ home acquisition debt .​
The additional $50,​000 of​ the​ new loan is​ classified as​ home equity debt .​
Interest paid on​ both types of​ home-related debt qualify as​ a​ legitimate tax deduction.
A couple of​ caveats: Be certain that the​ home equity debt must be less than $100,​000 and the​ total amount of​ debt on​ the​ home does not exceed the​ actual value of​ the​ property.
Improve Your Home
Many people refinance your mortgage for an​ amount higher than their original loan amount for the​ purpose of​ making improvements to​ their home .​
In this situation,​ homeowners are able to​ take an​ advantage of​ an​ additional tax deduction equivalent the​ portion of​ loan points paid during the​ initial year of​ the​ loan.
This tax benefit covers all types of​ home improvements,​ assuming that that the​ improvement is​ within the​ scope of​ a​ reasonable improvement that has a​ positive impact on​ property value.
Additionally,​ interest paid on​ money used for expenses not related to​ home improvement may also be deductible in​ certain situations.
The Advantages and Disadvantages of​ Amortization
When you​ pay points to​ buy down the​ interest rate on​ a​ home loan refinance,​ you​ are able to​ recover some of​ the​ money through tax deductions .​
Points paid on​ a​ refinanced mortgage are amortized over the​ life of​ the​ loan .​
The amount that you​ pay in​ points can be written off,​ in​ even amounts each year.
If you​ end up selling your home before the​ loan is​ fully paid off,​ or​ if​ you​ refinance the​ home again,​ you​ are allowed to​ write off the​ remaining amount of​ the​ deduction in​ the​ year the​ home is​ sold or​ the​ loan is​ refinanced.
Learn Tax Advantages
To learn more about the​ tax advantages of​ refinancing your mortgage,​ read Home Mortgage Interest Deduction (IRS Publication 936) .​
You should also speak with your tax advisor before making a​ decision.
You can learn more about the​ tax benefits of​ mortgage refinancing from the​ IRS Publication 936,​ Home Mortgage Interest Deduction .​
It’s also important to​ consult with your accountant or​ tax attorney to​ learn how refinancing your home loan can impact you​ and your tax liabilities.




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