Owning a home is expensive. From mandatory and nondeductible expenses and fixed costs to the rising costs of home improvements – remodeling a bathroom alone cost an average of $13,400 in 2020 – homeowners win the security and legacy of a home of their own for an enormous annual expense sheet.
In addition to basic upkeep, homeowners must worry about insurance premiums, depreciation, fire insurance, and mortgage payments. Then, there are the taxes. Aside from income taxes, homeowners face property taxes and potential capital gains taxes.
Thankfully, there are also a few tax advantages to owning the property you’re living in. There are plenty of different tax breaks for homeowners, potentially minimizing what they owe the IRS and state tax authorities each year. These tax breaks come in the form of itemized deductions, which reduce how much of your income is subject to tax, and special homeowner tax credits, which reduce what you owe in taxes. Let’s take a look at some itemized deductions and tax breaks for homeowners.
Mortgage Interest Deduction
Mortgage interest deductions allow a homeowner to deduct the amount of interest paid in a year from their income taxes.
A homeowner’s annual mortgage interest payments are dictated by the terms of their loan. For example, a home loan of $200,000 with a 4 percent interest rate would result in a monthly interest of $666.67, or an annual interest of $8000.04.
There are limits on how much mortgage debt a homeowner can deduct from their taxes. For mortgages taken out before December 15, 2017, the limit is a total of $1 million across the debt’s lifetime (for joint filers, half for single filers). For mortgages taken out after December 15, 2017, the limit is $750,000 (half for single filers).
Mortgage Discount Points
Depending on your means when negotiating a home loan, you can score “points” with a lender by paying additional fees at the closing of your loan. Every “point” is equivalent to about 1 percent of the total loan. These points help reduce the interest rate on your mortgage and lower your monthly payments – and they’re also tax deductible. It’s important to note that mortgage payments themselves are not tax deductible.
Property Tax Deduction
Homeowners can deduct a portion of their property taxes (as well as state and local income taxes) each year. In 2022, the annual limit for joint filers is $10,000 (half for single filers).
Home Office Deduction
Home offices have become incredibly popular in recent years, and even as people return to the office, more and more are considering staying home at least part-time for work. Home office deductions allow homeowners to recoup some of the costs of setting up a workspace at home, at a limit of $5 per square foot, for a maximum deduction of $1,500.
Home Equity Loan Interest Deduction
Home equity loans allow homeowners to take out a loan based on the value (equity) of their home. So long as the money from that loan is poured back into the home, the interest paid is tax deductible; if the loan is used for other purposes, whether it’s tuition money or a nice vacation, the interest is no longer deductible.
Qualifying Home Improvements
Most home improvements are not tax-deductible. Aside from the home office example provided earlier, most exceptions to this rule are either based on medical necessity (such as installing accessibility ramps to the front porch due to your medical condition, or a stairlift). Certain home improvements are not tax deductible but may warrant a tax credit (more on this later).
Homeowner Association Fees
Homeowner’s Association fees are not tax-deductible either, unless you have a home office, at which point a portion of your HOA fees are effectively a business expense. This is a minor deduction at best but may be worth it if a substantial portion of your home is used for business.
Theft and Other Losses
Theft and other financial casualties may be tax deductible if they aren’t covered by insurance, and if you filed a police report (for stolen items) in a timely manner.
In addition to certain limitations, stolen items can only be deducted if they’re at a value of at least 10 percent of your adjusted gross income for the same year.
Should Homeowners Itemize?
Tax preparation can be a complicated task, and itemized deductions are a huge part of that process. If you choose to itemize, you may stand to save thousands and thousands of dollars in taxes, especially if you file jointly. However, it should be noted that the standard deduction was massively overhauled in 2017 as part of the Tax Cuts and Jobs Act, while certain itemized deductions (such as moving expenses) are no longer eligible.
Consider going over your annual homeowner expenses carefully with a tax professional to identify all eligible tax-deductible expenses, and determine if going itemized might eclipse the standard deduction of $25,900 for couples filing jointly in 2022.
Homeowner Tax Credits
While deductions reduce your taxable income, tax credits can be used to reduce what you owe. Some tax credits are refundable, meaning if they exceed what you owe – or if your taxes are completely paid off – the IRS sends the excess to you as a cash payment. However, most homeowner-specific tax credits are not refundable. In addition to refundable and partially-refundable tax credits such as the Earned Income Tax Credit (EITC) and the Additional Child Tax Credit (ACTC), homeowners may be eligible for:
Solar Investment Tax Credit
The Solar Investment Tax Credit allows homeowners to receive a portion of the total cost of installing a solar panel system on their home as a tax credit, or a tax break. In 2023, the credit is equal to 22 percent of the project’s total cost.
Residential Energy Efficient Property Credit
Similar to the SITC, the Residential Energy Efficient Property Credit reimburses homeowners for 26 percent of the cost of installing eligible energy-efficient home improvements, such as geothermal heat pumps, hydrogen fuel cells, and wind turbines.
Non-Business Energy Property Tax Credit
Installing a heat pump or a solar-powered water heater is a major investment. Homeowners who make smaller improvements to their home for energy efficiencies – such as windows with better insulation, or roofing upgrades – are eligible for a tax credit of up to 10 percent of the project’s cost, for a maximum of $500 per year.
E-Vehicle Tax Credit
Homeowners owning or leasing a plug-in electric vehicle may be eligible or an additional tax credit based on the battery capacity of the EV and the date of its purchase. The tax credit ranges between $2,500 and $7,500. In addition to a federal tax break, certain local and state tax authorities provide additional incentives for the purchase of EVs.
While there are many different potential tax breaks for homeowners, eligibility differs from case to case. Filing your taxes as a homeowner can be just as complicated as filing taxes as a business, and it’s important to weigh the pros and cons of any given tax breaks for homeowners before finalizing your returns.
Be sure to review your options with a tax professional each year – tax laws change, as does the market, and several factors can drastically alter which way the wind blows. Contact Rush Tax Resolution today to learn more.