Prepping for Taxes: Don’t-Miss Home Tax Breaks (Part 2)

Prepaid Interest  deduction
 
Prepaid interest (or points) you paid when you took out your mortgage is 100% deductible in the year you paid them along with other mortgage interest. If you refinance your mortgage and use that money for home improvements, any points you pay are also deductible in the same year.

But if you refinance to get a better rate and term or to use the money for something other than home improvements, such as college tuition, you’ll need to deduct the points over the term of the loan. Say you refi for a 10-year term and pay $3,000 in points. You can deduct $300 per year for 10 years.

So what happens if you refi again down the road?

Example: Three years after your first refi, you refinance again. Using the $3,000 in points scenario above, you’ll have deducted $900 ($300 x 3 years) so far. That leaves $2,400, which you can deduct in full the year you complete your second refi. If you paid points for the new loan, the process starts again; you can deduct the points over the term of the loan.

Home mortgage interest and points are reported on IRS Form 1098. You enter the combined amount on line 10 of Schedule A. If your 1098 form doesn’t indicate the points you paid, you should be able to confirm the amount by consulting your HUD-1 settement sheet. Then you record that amount on line 12 of Schedule A.
 
Energy tax credits
If you upgraded one of the following systems last year, the energy tax credit is an opportunity for a dollar-for-dollar reduction in your tax liability: If you get the $500 credit, you pay $500 less in taxes.
Congress renews it retroactively, which may happen, but is uncertain. By the way, the 2013 tax season is the last for which you can claim this deduction unless Congress renews it retroactively, which may happen, but is uncertain.

Biomass stoves
Heating, ventilation, air conditioning
Insulation
Roofs (metal and asphalt)
Water heaters (non-solar)
Windows, doors, and skylights

Varying maximums
Some of the eligible products and systems are capped even lower than $500. New windows are capped at $200 — and not per window, but overall. Read about the fine print in order to claim your energy tax credit.

Determine if the system is eligible. Go to Energy Star’s website for detailed descriptions of what’s covered. And talk to your vendor.

The product or system must have been installed, not just contracted for, in the tax year you’ll be claiming it.

Save system receipts and manufacturer certifications. You’ll need them if the IRS asks for proof.

File IRS Form 5695 with the rest of your tax forms.

Source: HouseLogic.com - Don’t-Miss Home Tax Breaks by Dona DeZube
Read more: http://tinyurl.com/houselogictaxes
This article provides general information about tax laws and consequences, but shouldn’t be relied upon as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice; tax laws may vary by jurisdiction.