When it comes to taxes every year, many homeowners like you seek tax breaks. Fortunately, many homeowner tax deductions can add up to several thousand dollars.
Consider your household expenses as a homeowner and whether you should use the standard deductible.
Standard vs. Itemized Deductions
Before discussing the deductions available to homeowners, it is essential to understand the difference between standard and itemized deductions. Both types of deductions can reduce your overall tax burden by lowering your taxable income.
The IRS makes the standard deduction available to all taxpayers. For the 2021 fiscal year (the tax you pay in 2022), the standard deduction is distributed as follows:
For single and married persons filing separately, the standard deduction is $12,550.
For couples filing jointly, the standard deduction is $25,100.
The standard deduction for heads of households (HOH) is $18,800.
The standard deduction can reduce your taxable income by a lump sum. You waive the standard deduction by itemizing deductions, including homeowner's tax relief. Instead, the total amount of your itemized deductions will offset your taxable income and reduce your tax burden.
If you plan to take tax deductions, ensure your total itemized deductions are greater than the standard deduction. If not, it makes more sense to take advantage of the standard deduction to keep your tax liability as low as possible.
Non-deductible Home Expenses
Once you start exploring the deductible expenses available, you can expand your deductions to cover any number of household expenses. That said, there are some non-deductible household expenses you should be aware of, including:
Depreciation
Domestic service
Down Payment
Fire insurance
Homeowners insurance premiums
The cost of utilities, including electricity, gas, or water
The principal amount of the mortgage payment
As a homeowner, you will not be able to deduct all your home expenses. If you have questions regarding what you cannot deduct, take the time to consult a tax professional.
TAX BREAK FOR OWNERS
The IRS has detailed rules regarding the tax breaks available to homeowners. Let's get into the tax breaks you should consider as a homeowner.
Mortgage Interest
If your home has a mortgage, you can take advantage of the mortgage interest deduction. You can reduce your taxable income with this itemized mortgage interest deduction.
Homeowners could deduct up to one million dollars in mortgage interest in the past. However, the TCJA lowered this limit to $750,000 for single or married couples filing jointly. The deduction limit is $375,000 for each party if you are married but filing separately.
Home Equity Loan Interest
Essentially, a home equity loan is a second mortgage on your home. With a home loan, you can access the equity you've built up in your home as collateral to borrow funds you need for other purposes.
Like regular mortgage interest, you can deduct interest paid on home loans and home equity lines of credit. But, you can only claim this deduction if you use the borrowed funds to pay for home improvements. Before the TCJA 2017, you could deduct the interest on these loans regardless of how you spent the funds.
Discount Points
When you get a mortgage, you may have the option of buying discount points to reduce the interest rate on your loan. If you have this option, one discount point equals 1% of the value of the mortgage.
If you buy points to reduce your mortgage interest rate, you can deduct the cost of the discount points. However, "loan origination points" will not be deductible as they are charges that do not affect the loan's interest rate.
Property Taxes
As a homeowner, you must pay state and local property taxes. You can deduct up to $10,000 in estate tax for a couple filing jointly or $5,000 if filing separately for single or married filers.
Depending on where you live, the property tax deduction can be very attractive.
Necessary Home Improvements
Necessary home improvements may qualify for tax deductions. The definition of "necessary" is somewhat limited. These upgrade costs may not be eligible if you decide to upgrade your fully functional kitchen.
However, if you need to make permanent improvements to make your home more accessible for medical reasons, that should qualify. Examples may include medical equipment, handrails, or widening doorways for an accessible home.
Home Office Expenses
Some of the costs of maintaining that space may be deductible if you operate a home-based business. The Internal Revenue Service requires that you use your home office for regular and exclusive business purposes to qualify for a deduction. If you use the office space only when it suits you or only to work from home for your employer, this will not qualify.
For deductions, the deduction amount is based on the percentage of your home dedicated to the place of business.
Mortgage Insurance
PMI, or Private mortgage insurance, is another expense many homeowners need to factor into their budget. PMI exists to protect your lender if you can't keep paying your mortgage.
You can deduct mortgage insurance payments from your detailed tax return.
Capital Gains
Capital gains tax relief comes into play when you sell your home for profit. The capital gain was the difference between the value of the house when you bought it and when you sold it. For instance, you bought your house for $100,000. A few years later, you sold the house for $150,000. With this deal, you would walk away with a capital gain of $50,000.
If you have used the house as your main residence for 2 of the last 5 years, you can keep part of your income without any tax burden. You can keep up to $500,000 in capital gains as a couple filing jointly. Each party can deduct up to $250,000 in capital gains tax-free as an individual taxpayer or a couple filing a separate return.
The key is that you have lived in the house for 2 out of the last 5 years. With a big tax break, taking this deduction seriously is important.
The Bottom Line
Homeownership comes with many financial benefits. It's essential to approach tax season as a homeowner to maximize the value of your home.
With tax deductions of up to thousands of dollars, it's a good idea to add up the tax breaks. Compare the amount of your itemized deductions with the standard deduction before deciding which option is best for your tax return.
If you own a home, take the time to explore your tax deductions. If you need help navigating the details of your situation, it's a good idea to speak with a tax expert to make sure you're taking advantage of all available tax deductions.
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