Why Home Insurance Premiums and Tax Deductions Don’t Go Together

Arthur Murray for Taxpayersforjustice.org writes: Among the great side benefits of buying a home are the tax deductions you also acquire once you sign on the bottom line – and sign and sign and sign. You’ll have to itemize next year to get them, of course. But it’s well worth the time you’ll spend on it. But not everything related to your home, particularly when it comes to home insurance, is deductible.

It really doesn’t follow: Many of the other things related to buying and owning a home are deductible. That includes your mortgage interest payments, your real-estate taxes and, in many cases, your private mortgage insurance payments. Private mortgage insurance usually is required by lenders when the buyer puts down less than 20%. It’s best to check with your tax accountant on whether this deduction is available to you.

But homeowners insurance isn’t deductible. Nor are any closing costs you paid when you buy a home. Nor are utilities, including water, electricity and natural gas.

That being said, the mortgage interest deduction is substantial, particularly in the early years of homeownership, when much of your payment goes toward the interest on your loan. You can reduce your tax liability substantially through using it.

The home business exception
There is one situation in which home insurance premiums – or at least a portion of them – can be deducted. That’s when you operate a home business. This is an extremely complicated area – you should work closely with a tax specialist before you choose this path because there are a number of conditions you must meet before you can qualify.

If you do wind up being able to use the home business option, remember that you’ve now established that you are running a business out of your home. This means you need some form of business insurance – home insurance in most cases will not cover claims related to a business you operate from home. If customers visit your home or if you perform a service that could result in a malpractice or similar claim, you could be vulnerable.

Home insurance premiums and your tax refund
With any luck, however, homeownership means you’ll get a tax refund – possibly a larger one than you were expecting. Now you’ve got a new question: What should you do with that money?

Your options are numerous – you could blow it on something you want, for example. But most people know that’s not necessarily a great idea. Here are some better spending choices that could even save you some money:

• Buy something for your home. Maybe your appliances are wearing out. You could invest in a new refrigerator or dishwasher or water heater. In some cases, if you buy an Energy Star certified model, you could qualify for a tax credit on next year’s taxes.

• Start a roof replacement fund. You likely could get a break on your home insurance premium when you install that roof.

• Pay your home insurance premium in a lump sum using your refund. You’ll likely get a discount for paying in full, and you’ll have peace of mind for the coming year.