Posted by Income Taxes and Bookkeeping LLC

Some Major Tax Breaks Homeowners Shouldn't Miss

Some Major Tax Breaks Homeowners Shouldn't Miss

You can get federal tax relief for owning a home if you itemize your deductions on the 2021 tax return and if it makes financial sense. But it's a bigger "if" than before.

Although homeowner tax deductions can run into thousands of dollars, it's only worth claiming if all itemized deductions are greater than the standard IRS deduction.

The standard deduction for the 2021 financial year is:

  • $12,550 for single and married taxpayers filing separately, an increase of $150 from the previous year.

  • $18,800 for heads of household, an increase of $150 from the previous year.

  • $25,100 for couples filing jointly, $300 more than fiscal 2020.

To decide if you are itemizing, add up your homeowners' deduction and other tax deductions you are entitled to. If the amount is greater than the standard deduction, please itemize. Otherwise, take the standard deduction. Here are the tax deductions homeowners should include in their calculations.

Mortgage Interest

This is normally the largest tax deduction for homeowners. A portion of each mortgage payment goes to interest on the loan. You can deduct interest paid up to a limit that depends on when you took out the loan.

  • As of December 16, 2017: You can deduct up to $750,000 in interest on your mortgage debt (up to $375,000 if you are married filing separately).

  • From October 14, 1987, to December 15, 2017: You can deduct up to $1 million in interest on your mortgage debt ($500,000 if you are married filing separately).

If you refinance a mortgage, the limit depends on the original date of the previous loan. If the mortgage predates October 14, 1987, all interest on the mortgage may be tax-deductible.

Your mortgage administrator will send you a statement each year showing the amount of interest you have paid.

Home Equity Loan Interest

Home equity loans interests and home equity lines of credit interests can be deducted, but only if you spend the borrowed money to improve your home. Before the Tax Reform Act of 2017 came into force in 2018, you could deduct interest even if you put the money into other pressing needs, such as tuition.

Your home loan or HELOC debt is calculated from the total mortgage debt limit for the interest deduction. Therefore, if your first mortgage surpasses the deductible threshold, the interest on the equity loan is not deductible.

Discount Points

If you are deducting the interest on your mortgage, you can also deduct the discount points you paid when closing the mortgage. Some homeowners buy discount points to reduce their mortgage interest rate. A discount point costs 1% of the value of the mortgage.

The term "points" can be confusing, as some lenders refer to their rates as "loan origination points." These points are used to pay creditors' fees for making the loan and are not deductible. You can only deduct discount points that were paid to reduce the interest rate.

Property Taxes

You can get a tax exemption for paying property taxes, but there is a limit. You can deduct up to $10,000 ($5,000 if married filing separately) in property taxes in combination with state and local taxes or sales taxes.

Home Office Expenses

You can only deduct home office expenses if you are a freelancer/self-employed and you use a designated spot of your home exclusively and regularly for your business.

You can use the Internal Revenue Service "simplified method" or your actual expenses to calculate the amount of your home office expense deduction. Talk to a tax professional to provide details on how to determine if your home office qualifies for a tax deduction and how to calculate the deduction amount.

Medically Necessary Home Improvements

When calculating medical expense deductions, you can include the cost of installing medical equipment or other medically necessary home improvements for the benefit of you, your spouse, or a dependent.

Permanent improvements that increase the value of your home are only partially tax-deductible. The deductible cost is reduced by increasing the value of the property.

Many home improvements make the home more accessible, such as building ramps, widening doorways, or installing railings and bars, generally do not increase a home's value and can be deducted in full.

Mortgage Insurance Premiums

The cost of mortgage insurance is currently tax-deductible. The deduction covers the amount paid for private mortgage insurance for standard loans and mortgage insurance for FHA loans. It also includes USDA home loan guarantee fees and VA financing fees for VA mortgages. The IRS says the amount paid for mortgage insurance is treated as mortgage interest.

To benefit from this tax deduction for the fiscal year 2021, the mortgage loan insurance contract must have been issued after 2006, and the adjusted gross income must be less than $109,000 or $54,500 if you are married and filing separately on form 1040 or 1040-SR, line 8b. The amount you deduct may be reduced if your adjusted gross income (AGI) is more than $100,000 ($50,000 if you are married filing separately).

The mortgage insurance deduction expired at the end of 2017, but Congress expanded it to include premiums paid by 2021.

Non-deductible Homeowners Expenses

Here is a summary of the expenses that owners cannot deduct:

  • The costs of obtaining or refinancing a mortgage include loans, credit reports, and appraisal fees.

  • Depreciation.

  • Home insurance premiums.

  • Homeowners association fees.

  • Lost deposits, advances, or earnest money.

  • Rent for living in the home.

  • Stamp taxes or transfer taxes

  • The cost of utilities.

  • Wages for domestic help.



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