Benjamin Franklin famously said, “In this world nothing is certain but death and taxes“. But there are certain tax deductions for homeowners which you can take advantage of.
The average American paid a median income tax of $4,567 for the 2020 tax year. As a homeowner, you can make the best of tax breaks to reduce your taxable income amount.
Taxes can weigh you down. In our blog, you can learn the 9 ways to reduce your taxable amount and help you save your hard-earned money.
🔑 Key Takeaways
- Understand the options: Homeowners have the choice between the standard tax deduction and itemized tax deductions when it comes to reducing their tax liability.
- Identify eligible deductions: Various expenses can be deducted, including mortgage interest, property taxes, necessary home improvements, home office expenses, and certain energy credits.
- Keep up with changes: Tax laws can change, so it’s important to stay informed about the latest regulations, income limits, and qualifying criteria for each deduction.
- Consult a professional: To maximize tax benefits, homeowners should consider consulting with a tax professional who can provide personalized advice based on your specific situation.
What is a Tax Break?
A tax break is a valuable benefit provided by the government that helps reduce the amount of taxes you owe. It is a tax deduction or tax write-off that allows you to subtract certain expenses from your taxable income.
Thereupon by making specific expenditures, you can qualify for tax breaks, enabling you to keep more of your hard-earned money. These deductions include mortgage interest, medical expenses, and charitable donations.
When you claim tax write offs, you essentially inform the government about your eligible expenses and provide proof of payment. Overall, tax breaks are advantageous opportunities to lower your tax burden.
What are the Types of Tax Deductions for Homeowners?
To begin with, there are two primary types of tax deductions. You can choose to itemize deductions or opt for a standard deduction. Understanding these deduction types can help you reduce your taxable income and save you money on your taxes.
Standard Tax Deduction:
As the name suggests, this is a fixed amount you can claim without itemizing specific deductions. The IRS generally decides this amount every year as per inflation.
The standard deduction for taxes filed in 2023 will increase to $13,850 for single filers. For those married but filing separately, the amount will be $13,850, whereas, for joint filers, it’s $27,700. Further, for heads of household, it will cost $20,800.
It’s important to note that homeowner tax deductions do not have a tailor-made standard deduction. It may not capture all eligible tax deductions for buying a house.
Also Read: Maximizing Tax Benefits & Risks – A Guide to Cash-Out Refinance Tax Implications!
Itemized Tax Deductions:
Here you are to list out and claim specific home owner tax breaks on your tax return. All nine of the options given below fall under itemized deductions.
By itemizing, you might be able to maximize tax savings by claiming deductions that surpass the standard amount.
- 😵 Beware: For tax evasion, one can be fined up to $100,000 and sent to jail for up to five years.
Itemized Tax Deductions
There are 9 such specific itemized deductions you can use to claim tax breaks as a homeowner. They are:
1. Mortgage Interest:
The interest on your mortgage is tax deductible. The tax is deductible on the interest amount of or up to $750,000 for married joint filers. Whereas, $375,000 is married filing separately.
This limit applies to mortgages taken out after December 15, 2017. However, if you had a mortgage before this date, the previous limit of $1 million may still apply for those married filing jointly, and $500,000 married filing separately.
2. Home Equity Loan Interest:
The tax credit for homeowners reduction of home equity loan interest depends on the intent for which the loan was used and the tax laws in effect at the time.
Under the current tax law, you can generally deduct the interest paid on a home equity loan or line of credit only if you used the loan proceeds to buy, build, or substantially improve your home (subject to certain limitations).
3. Discount Points:
Discount points or Home Mortgage Points are prepaid interest that you can choose to pay when obtaining a mortgage loan. For instance, each discount point typically represents 1% of the loan amount.
By paying discount points upfront, you can lower the interest rate on your mortgage loan. The deductibility of discount points depends on whether the loan was used for a home purchase or refinancing.
- Home Purchase: If you paid discount points on a loan used to purchase your primary residence, the points may be deductible as an itemized deduction on your tax return for the year of purchase.
- Refinancing: If you paid discount points on a loan used to refinance your primary residence, the points may be deductible. However, individuals typically distribute it over the life of the loan instead of fully deducting it in the year of refinancing.
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4. Property Taxes:
You can only deduct property taxes that you pay on real estate that you own. Mainly your primary residence, vacation home, or land. The property taxes must be based on the assessed value of the property and imposed by a state or local authority.
The property tax write offs for homeowners are subject to certain limits. The Tax Cuts and Jobs Act (TCJA, 2018) imposes a $10,000 cap on the total amount of state and local taxes (including property taxes) that taxpayers can deduct in a tax year.
To claim the deduction for property taxes, it’s important to keep records of the property tax payments made during the tax year. This may include receipts, canceled checks, or other forms of proof of payment.
5. Necessary Home Improvements:
If you make necessary home improvements for medical reasons. You may be able to deduct a portion of the expenses as medical expenses on your tax return.
To qualify, a medical professional must prescribe the improvements to alleviate or prevent a specific medical condition or illness. For example, it may include installing ramps, handrails, or lifts for accessibility purposes.
Capital improvements, increase the value of your property or extend its useful life. They are not typically home tax deductions, deductible as immediate expenses.
6. Residential Energy Credits:
A Residential Energy Credit provides tax credits for the purchase of qualifying equipment including solar, wind, geothermal and fuel-cell technology.
Residential Energy Efficient Property Credit:
This credit applies to qualified energy-efficient equipment and renewable energy systems installed in your primary residence. In brief, solar electric systems, solar water heaters, geothermal heat pumps, small wind turbines, and fuel cell properties.
The homeowners tax credit is generally equal to a percentage of the cost of the equipment or system, subject to certain limits.
Nonbusiness Energy Property Credit:
This credit applies to certain energy-efficient improvements made to your primary residence. For example insulation, energy-efficient windows, doors, and HVAC systems.
The credit is typically 10% of the cost of qualified improvements, up to specific maximum limits. However, you face a limitation, a cumulative lifetime total of $500 for all tax years combined.
7. Home Office Expenses:
The property tax deductions for home office expenses allow self-employed individuals and certain employees to deduct expenses related to the business use of their home. To qualify for the home office deduction, you must meet:
- Regular & Exclusive Use: You must use the space exclusively and regularly for business purposes. You should have a dedicated area solely used for conducting business activities.
- Principal Place of Business: The home office should be your principal place of business. A place where you conduct substantial administrative or management activities.
8. Mortgage Insurance:
The deduction for mortgage insurance premiums applies to qualified mortgage insurance contracts. These are issued by the Department of Veterans Affairs (VA), the Federal Housing Administration (FHA), or the Rural Housing Service (RHS).
The deduction begins to phase out for taxpayers with adjusted gross incomes (AGI) over $100,000 ($50,000 if married filing separately), and taxpayers with AGI over $109,000 ($54,500 if married filing separately) fully phase out the deduction.
9. Capital Gains:
The tax rates on capital gains depend on factors such as your income level and the type of asset sold. There are generally three tax rates for long-term capital gains: 0%, 15%, and 20%.
The rate you pay depends on your taxable income. Short-term capital gains, from the sale of assets held for one year or less, are generally taxed at ordinary income tax rates.
What can you Not Include for Tax Deductions?
There are certain things you may think can be used for Tax Deductions but actually are not.
Personal Expenses:
Personal expenses related to homeownership, such as mortgage principal payments, homeowner’s insurance premiums, and general repairs and maintenance, are not deductible.
Homeowners Association Fees:
While homeowners association (HOA) fees cover the costs of maintaining common areas and amenities in a community, they are typically not tax-deductible.
Home Decor and Furniture:
Expenses related to home decor, furniture purchases, or general improvements that do not qualify as necessary home improvements or capital improvements are not deductible.
Home Losses:
If your home is damaged or destroyed by a natural disaster or accident, any personal losses are generally not deductible. However, you may be eligible for other forms of assistance or insurance coverage to help with the recovery.
Home Rental Income:
If you rent out a portion of your home or your entire home, the expenses related to generating rental income are subject to different tax rules. They are typically reported on Schedule E of your tax return rather than being included as deductions.
It’s crucial to consult with a tax professional or refer to the latest tax regulations to determine which expenses you can claim as a tax break for buying a house.
Final Word
In conclusion, understanding the types of tax breaks for homeowners is essential for maximizing savings. While the standard tax deduction provides a straightforward option, itemized deductions can offer greater benefits.
From mortgage interest and property taxes to necessary home improvements and home office expenses, homeowners can potentially reduce their tax liability. Be sure to consult with a tax professional for personalized advice and to stay updated.
However, it’s important to stay updated on the latest tax regulations, income limitations, and qualifying criteria. By taking advantage of these deductions, you can make the most of their tax benefits and potentially save more money in the long run.
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Frequently Asked Questions
1. Is mortgage interest tax deductible?
Yes, mortgage interest is tax deductible. But, there are limitations to the amount and residences that qualify, such as a primary residence.
2. How much mortgage interest can I deduct on my taxes?
The limit to the mortgage interest amount you can deduct is the interest paid on up to $750,000 of mortgage debt ($375,000 if married filing separately). This limit applies to new mortgages taken out after December 15, 2017.
3. Is homeowners insurance tax deductible?
Yes, you can under certain conditions as listed by the IRS.
4. Can you claim your property taxes on your income tax?
Yes, you can deduct the property tax you pay on your real estate properties.
5. Can you write off home repairs on your taxes?
Yes, you can write off home repairs on your taxes. But, it depends on the purpose and nature of the improvements.
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