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7 Deductions Homeowners Can Use to Reduce Their Income Tax

7 Deductions Homeowners Can Use to Reduce Their Income Tax

Buying a house can be very expensive. First is the down payment. Then there are closing costs, including appraisal, inspection, and title search fees. And once you own it, your expenses, including maintenance, taxes, and insurance, continue to rise.

However, owning a home has certain tax advantages. Tax-deductible property charges can reduce the amount of income tax you have to pay.


What is a tax-deductible expense?

A tax-deductible expense is what you can deduct from adjustable gross income when you file taxes for the year. Deducting these expenses reduces taxable income, and the lower your taxable income, the less tax you will have to pay.

When analyzing potential tax deductions for homeowners, it is essential to know the differences between standard and itemized deductions.

A standard deduction is a certain dollar amount that reduces the income you have to pay tax, depending on filing status, age, and other variables. Itemized deductions include every deduction, such as certain homeowners' expenses and charitable donations. When you file your tax return, you must choose either the itemized or standard deductions, but not both.

Here are the standard deductions for the 2022 tax year:

  • Head of Household: $19,400

  • Married filing jointly or an eligible widow/widower: $25,900 

  • Single or married filing separately: $12,950 

If itemized deductions reduce your taxable income more than the standard deduction, you'll probably want to include the following deductions to save homeowners more money.


7 tax deductions for homeowners

1. Mortgage interest

Each month, part of the mortgage payment goes to the principal (the amount borrowed) and partly covers interest. During your loan period, you can deduct interest paid up to $750,000 from the principal balance if you are single or married and filing jointly. If you are married, file separately; you can deduct interest paid up to $375,000 each.

There are a few exceptions to this. If you bought a home between October 14, 1987, and December 15, 2017, you could deduct the interest paid on your mortgage up to $1 million. You could deduct the interest paid if you bought it before October 14, 1987.


2. Interest on the Home Equity loan

A home equity loan is considered a second mortgage, and you end up borrowing against the equity you have in your home. If your home is worth $450,000 and you still owe $400,000, you have $50,000 in equity.

As with the first mortgage, the interest you pay on the home loan may be tax-deductible. There are no restrictions on how the home loan can be used, but the interest is only tax-deductible if you use the money for substantial improvements to your home.


3. Discount points

You have the option of paying a fee, known as "discount points," at closing, which lowers the interest rate you will pay on the mortgage. A one-time discount usually costs 1% of the new mortgage and reduces the rate by 0.25%. So if the rate on a $200,000 mortgage is 3.5% and you pay $4,000 on two discount points, the new interest rate is 3%.

The amount you pay for discount points is generally tax-deductible over the life of the loan. If you meet multiple Internal Revenue Service requirements, your discount points may be fully deductible in the year you pay them.


4. Property taxes

You can deduct up to $10,000 yearly from property taxes paid if you are single. You can deduct up to $5,000 each if married filing separately or $10,000 if married filing jointly. This limit applies to combined state and local income and property taxes.


5. Mortgage insurance

As of 2022, mortgage insurance payments will be tax-deductible through the fiscal year 2021. Whether mortgage insurance payments going forward will be tax-deductible has not yet been determined.

You can deduct private mortgage insurance for conventional mortgages, Federal Housing Administration mortgage insurance, VA mortgage financing rate, and US Department of Agriculture mortgage.

By filing a separate return, you can deduct all insurance premiums if you earn $100,000 or less or $50,000 if you are married and filing separately. If you make between $100,000 and $109,000, your deduction will be reduced by 10% for each additional $1,000 you earn.

Your mortgage loan insurance is not deductible if you earn $109,000 or more or $54,500 as a separate deposit.


6. Home Improvements

Improvements to your home may be tax-deductible. For example, it may be necessary to update the house for medical reasons or to make the house accessible to someone with a disability. These expenses may be deductible if they are made to accommodate your situation, that of your spouse, or a dependant.


7. Home office costs

You can deduct home office expenses if you have an out-of-home business and use the space exclusively for business purposes. However, you cannot deduct expenses if you work from home for an employer. The amount you are able to deduct depends on the size of your office space relative to the rest of your home.


What are some homeowner's expenses that are not deductible?

You cannot deduct the following from adjustable gross income:

  • Closing Costs

  • Down Payment

  • Forfeited earnest money

  • Loan Origination Points

  • Title Insurance

You can deduct some of the expenses listed below, but only if they relate to the home office deduction under certain circumstances. If you have questions about these costs, it is best to consult a tax expert.

  • Depreciation of the house

  • Domestic services

  • Fire insurance

  • Homeowners association fees

  • Insurance for owners

  • Refinancing costs

  • Utilities

Add up the tax deductions from the eligible categories to see if an itemized deduction would help you save more money than a standard deduction would. If you have any questions, please contact a tax professional for assistance.


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