Becoming a first-time homeowner is an exciting milestone that brings new responsibilities, including the added complexity of filing taxes as a homeowner. While there are several tax benefits available, first-time homeowners often make mistakes that can cost them valuable deductions or lead to problems with the IRS. Understanding the common tax mistakes new homeowners make is crucial to ensuring you maximize your deductions while staying compliant. Nathan Duane Oeming will explore the most frequent errors and provide practical tips to help you navigate tax season with confidence.
1. Overlooking Mortgage Interest Deduction
One of the most significant tax advantages for homeowners is the mortgage interest deduction. As a first-time homeowner, you can deduct the interest paid on a mortgage for your primary residence up to a certain limit. However, many first-timers either forget to claim this deduction or don’t fully understand how to apply it correctly.
To avoid this mistake, it’s essential to have your mortgage interest statement, typically provided by your lender in a document called Form 1098. Nathan Duane Oeming explains that this form outlines the interest you paid during the tax year and allows you to deduct it when filing. Be sure to include the correct amount and verify that your mortgage qualifies for the deduction, as there are caps depending on the amount borrowed.
2. Failing to Deduct Property Taxes
Property taxes are another area where homeowners can save money on their taxes. Many first-time homeowners fail to realize that they can deduct the property taxes paid on their primary residence, which can significantly reduce taxable income.
To avoid missing out on this deduction, make sure you track your property tax payments. This can include taxes paid at the time of closing or through an escrow account. Your annual mortgage statement or closing documents will provide the necessary information to claim this deduction, so ensure you’re keeping these records organized.
3. Forgetting About Points Paid on a Mortgage
If you paid points when securing your mortgage to lower your interest rate, these points can often be deducted in the year they were paid. Nathan Duane Oeming understands that many first-time homeowners forget this deduction, either due to lack of awareness or misunderstanding how it works.
Points are typically included in your closing costs, and the amount should be listed on your closing disclosure. When filing taxes, you can usually deduct the full amount of points paid in the year of purchase, provided certain conditions are met. If you didn’t pay points upfront, but instead spread them over the life of the loan, you’ll need to allocate a portion of the deduction annually.
4. Missing Out on Energy-Efficient Home Improvement Credits
With the growing emphasis on sustainability, there are often tax credits available for energy-efficient home improvements. Unfortunately, many first-time homeowners either don’t know about these credits or miss the window to claim them.
If you’ve made qualified energy-efficient upgrades—such as installing solar panels, upgrading insulation, or adding energy-efficient windows—you may be eligible for tax credits. Nate Oeming explains that these credits can be applied directly against your tax liability, lowering the amount you owe. Always check for the latest federal and state incentives related to energy efficiency, and keep receipts and documentation for any qualifying improvements you make.
5. Not Understanding the Capital Gains Exclusion
The capital gains exclusion is a major tax benefit that can save homeowners thousands when they eventually sell their homes. However, misunderstanding this rule is a common mistake among first-time homeowners, leading to potential tax liabilities down the line.
Under current tax law, if you sell your primary residence, you can exclude up to $250,000 ($500,000 for married couples filing jointly) of capital gains from your taxable income, provided you’ve lived in the home for at least two of the past five years. First-time homeowners should be aware of this exclusion as they plan their long-term finances. It’s essential to keep track of the dates of purchase and sale, as well as any major improvements made to the home, which can also impact your capital gains calculation.
6. Failing to Adjust Withholdings After Purchasing a Home
Purchasing a home can significantly alter your tax situation, and failing to adjust your withholdings accordingly can lead to underpaying or overpaying taxes. First-time homeowners may find that they are eligible for more deductions, such as mortgage interest and property taxes, which could lower their overall tax liability.
To avoid this mistake, consider reviewing and updating your W-4 form with your employer after purchasing a home. Nate Oeming emphasizes that by adjusting your withholdings, you can ensure that the correct amount of tax is taken from your paycheck, potentially preventing a large tax bill at the end of the year.
7. Ignoring Private Mortgage Insurance (PMI) Deductions
If you made a down payment of less than 20%, you are likely paying Private Mortgage Insurance (PMI) on your loan. Many homeowners don’t realize that PMI premiums are tax-deductible, depending on income levels and other factors.
The deduction for PMI is subject to income limitations, so it’s essential to check whether you qualify. As of 2024, taxpayers with an adjusted gross income (AGI) of less than $100,000 can claim the full deduction while the deduction phases out for higher incomes. Be sure to review your income and eligibility carefully and include PMI on your tax return if applicable.
8. Overcomplicating Tax Filings by Not Seeking Professional Help
Taxes can become increasingly complex after purchasing a home. First-time homeowners often attempt to file their taxes without seeking professional help, which can lead to mistakes that either reduce their refund or increase their tax liability.
Consider working with a certified public accountant (CPA) or tax professional who has experience in homeowner deductions. They can help you maximize deductions and credits while ensuring that your tax filing is accurate and compliant with IRS regulations. Additionally, many professionals offer tax planning services, which can help you manage your tax situation throughout the year, not just during tax season.
Buying your first home is a major financial milestone, but it also brings new tax obligations that can be confusing if you’re unfamiliar with the process. Nate Oeming emphasizes that you can avoid costly errors by being aware of common tax mistakes such as overlooking mortgage interest and property tax deductions, missing out on energy-efficient credits, and misunderstanding capital gains exclusions. Additionally, seeking professional advice and staying informed about current tax laws can ensure that you maximize your tax benefits as a homeowner. Nathan Oeming of Eugene, Oregon, explains that taking a proactive approach to tax planning will help you save money and reduce stress when tax season rolls around.
