New Tax Deduction for VA Home Owners

Family outside suburban house.

For those who were new home owners last year there is a benefit of homeownership that enables you to deduct mortgage interest from your taxable income. This coveted deduction for homeowners was highly publicized as a potential reform during the looming “fiscal cliff” debates towards the end of 2012. For now, this is something that homeowners will continue to benefit from.

As you make your mortgage payments to your lender each month, at the end of the calendar year you will receive a 1099-INT statement from your lender. This statement will show the amount of mortgage interest you paid to the lender for the previous year.

For example, say that you bought a $300,000 house using your VA eligibility and you put zero down. Since this was your first home, your funding fee is 2.15 percent, resulting in a $306,450 loan amount. With a 30 year fixed rate at 4.00 percent, your principal and interest payment calculates to $1,463.04. If you made 12 mortgage payments that year, you paid $12,159.77 in interest. That is the amount shown on your 1099-INT.

As you prepare your tax returns, the $12,159.77 will be deducted from your taxable income. That’s a huge savings. If you made $80,000 that year you would subtract the interest paid from that amount and your taxable income is reduced to $67,840. Your tax bracket, assuming married filing jointly, would be reduced from a 25% bracket to 15%. Using this example from 2012 tax brackets, not only did your taxable income decrease but you also fell into a much lower tax bracket. It’s important to note at this stage that all tax matters should be discussed between you and your accountant or financial planner. This example is not to be construed as tax advice.

But the bottom line is that mortgage interest is a huge savings when it’s time to pay Uncle Sam.

There are other positive income tax implications when financing a home. If you paid discount points to a lender in order to buy a home, those points may be tax deductible as is an origination fee as well.

Not only does home ownership help solidify your financial future, it helps you keep more of your own money come tax time!

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