Owning a home can be expensive. While it is a valuable investment for building wealth, it comes with its fair share of challenges. With monthly payments, unexpected repairs, and ongoing maintenance, the costs of homeownership can quickly pile up. Luckily, you may be able to offset these costs by taking advantage of various tax deductions for homeowners. These deductions will help lower your taxable income and ultimately reduce the amount of income tax you need to pay.
Standard vs. Itemized Deductions: What’s The Best Way To Take Advantage of Tax Deductions for Homeowners
When it comes to getting the most out of tax breaks for homeowners, there are two options you need to consider: the standard deduction and itemizing deductions. The standard deduction is a fixed amount set by the IRS, which makes things easier during tax filing and requires less record-keeping. If your eligible deductions, like mortgage interest and property taxes, are lower than the standard deduction, it’s better to go with the standard deduction. However, this means you might miss out on additional tax benefits related to homeownership that can be claimed through itemized deductions.
On the other hand, itemized deductions mean listing and deducting specific homeownership expenses. It takes more effort since you’ll need to keep records and file a more complex tax return. But if your total itemized deductions are higher than the standard deduction, you could enjoy more significant tax savings. To make the right choice, carefully compare the total value of your eligible deductions to the standard deduction based on your filing status. You may also want to seek guidance from a tax professional to determine the best approach for your specific financial situation.
Popular Tax Deductions for Homeowners:
You can deduct the interest you pay on your mortgage loans, up to a certain limit, from your income tax. This deduction applies to both primary and secondary homes. The Tax Cuts and Jobs Act (TCJA) of 2017 reduced the limit on deductible mortgage debt for new loans to $750,000 for single and married couples and $375,000 for married couples filing separately. However, those loans taken before December 15, 2017, may be eligible for the previous limit of $1 million ($500,000 for married couples filing separately).
Home Equity Loan Interest
If you have taken out a home equity loan or line of credit (HELOC) for purposes such as home improvements, you may be able to deduct the interest paid on the loan, subject to certain limitations. As of the TCJA, the interest deduction is only applicable if the loan was used to buy, build, or substantially improve the home that secures the loan.
You can deduct the state and local property taxes you pay on your primary residence and other real estate properties from your federal income taxes. If you are single or married and filing jointly, you can deduct up to $10,000 per year in paid property taxes. However, if you’re married and filing separately, the deduction limit is $5,000 each.
Discount points can be a way to lower your mortgage interest rate. When you get a mortgage, you might have the choice to buy discount points, which are equal to 1% of your mortgage amount. If you buy these points to reduce your interest rate, you can deduct the cost of the discount points from your taxes.
Necessary Home Improvements
While it’s possible to write off expenses for home improvements, only home improvements that are ‘’necessary’’ qualify. These include medical home improvements, such as installing equipment for special accommodations or modifying your home for safety and usability, as well as energy-efficient improvements that meet certain standards, like solar water heaters or geothermal heat pumps.
Capital Gains Exclusion on Home Sales
When homeowners sell their primary residence, they can exclude a certain amount of the profit they make from their taxable income. If you have owned and lived in your home for at least two years out of the last five years before selling, you can exclude up to $250,000 (or $500,000 for married couples) of the capital gains from being taxed. This means you won’t have to pay taxes on that portion of the profit you made from selling your home.
If you operate a business from your home, you may be eligible to deduct some of the expenses associated with your home office. To qualify, the IRS requires that you use your home office regularly and exclusively for business purposes. Using the space only occasionally or for remote work for your employer won’t meet the criteria. The amount you can deduct is based on the percentage of your home that is dedicated to your office space.
Non-Deductible Expenses for Homeowners
There are several expenses that homeowners cannot deduct from their tax returns. Here are some examples:
- Homeowners Insurance: While homeowners insurance is crucial for safeguarding your property, it is not considered tax-deductible.
- Home Improvements: The cost of home improvements, such as remodeling or adding a swimming pool, generally cannot be deducted from your taxes. However, it’s worth noting that these expenses may impact the tax you owe when you sell your home by affecting its basis.
- Maintenance and Repairs: Regular maintenance and repair costs, such as painting, fixing leaks, or replacing broken appliances, cannot be deducted. These expenses are considered part of the overall cost of owning a home.
- Homeowners Association Fees: Although homeowners association (HOA) fees cover services like maintenance and landscaping, they typically do not qualify for tax deductions. However, there are exceptions for specific expenses related to common area improvements or community amenities.
- Mortgage Principal Payments: While mortgage interest payments are often deductible, the portion of your mortgage payment that goes toward the principal loan amount is not eligible for a tax deduction.
- Transfer Taxes and Stamp Duty: Taxes paid during the purchase or sale of a home, such as transfer taxes or stamp duty, are generally not deductible.
The Bottom Line
While owning a home can come with significant costs, it also offers valuable opportunities for tax deductions. It’s crucial to stay informed about the tax laws and regulations to ensure that you can take full advantage of all the deductions and credits your home can offer. If you’re unsure about the specific details of your tax situation, consult with a tax professional. Tax Samaritan can provide expert guidance and help ensure that you’re taking advantage of all the tax deductions that you’re eligible for. By consulting with us, you can make sure you’re maximizing your tax savings and making the most of available deductions.