Your home is probably the most expensive purchase you will ever make, and you'll remember it regularly with your mortgage payments, monthly bills, property taxes, insurance, and other expenses. But in tax season, homeowners get a massive break with a host of tax benefits - in some cases, all of Uncle Sam's perks could alleviate the taxes you owe or even create a huge boost for your bank account.
These tax exemptions apply to all types of homes and not just the conventional single family home. If the roof over your head is a mobile home, townhouse, apartment, co-op apartment, or other dwelling that you call home and you have a mortgage contract, these tax breaks are great. It turns out that home ownership isn't just about making decisions like decorating and avoiding rent increases, if you do your research and claim every tax benefit you're eligible for, owning a home could help you get back more money on your pockets during tax season.
Here's a comprehensive look at the various tax credits and deductions you should use.
1#. Notes on Maintenance of Taxes
As a homeowner, you will be seeing results with your tax refund. Say goodbye to the days of simply typing your W-2 information on a 1040EZ form - things are about to get more complicated as you start itemizing your deductions and credits, and staying on top of receipts and bills to support your claim of taxes.
When it comes to your taxes, there are deductions and credits. Credits are like coupons: they are subtracted from the amount of taxes you will have to pay. For example, if you owe $ 1,000 but are eligible for a $ 500 tax credit, you will essentially cut the taxes owed in half. On the other hand, tax deductions take away your adjusted gross income, which can drive you to a lower tax bracket and reduce your tax liability.
Not everyone has to itemize their deductions. A standard deduction refers to how much you can reduce your taxable income, no questions asked, without having to itemize your return. Under the Tax Cuts and Jobs Act of 2017, the standard deduction was increased starting in 2018, which means that far fewer Americans must itemize their returns to receive the maximum amount of their tax refund. The standard deductions increased to $ 24,000 for married filers filing jointly and $ 12,000 for single filers. The Tax Policy Center estimates that as many as 27 million fewer people need to itemize their taxes due to this change, but that means another 19 million taxpayers will still benefit from doing so.
With these tax breaks below, it may be worth itemizing your taxes and capitalizing on the benefits designed by the IRS to encourage real estate buying and sweeten the deal for homeowners.
2#. Mortgage Interest
The largest payment you will receive on your taxes for owning a home is tied to your mortgage interest. All homeowners with a mortgage of up to $ 750,000 can deduct the interest paid on their loan if they are married and file a joint return. Individual taxpayers can cancel up to $ 375,000. .
For tax years prior to 2018, homeowners can deduct interest of up to $ 1 million (or $ 500,000 if filed separately). The Tax Cuts and Jobs Act ushered in reduced limits, which are in effect through 2026. If you are unsure whether your loan falls into the exemption category and exceeds $ 750,000, check with your lender or a tax advisor.
You can also deduct interest on a home equity line of credit of up to $ 100,000 when used to buy or make improvements to your home.
Here's how to claim your mortgage interest deduction: Your lender will send you a Form 1098 at the beginning of the year with a clear list of the mortgage interest you paid during the previous year. This is the amount you will deduct on Schedule A (Form 1040).
Be sure to include the interest you paid at your home closing: Most of the time, lenders include interest for the first partial month of your mortgage that is included in your closing. If it is not identified on your 1098, you can find it on your settlement sheet and add it to your total mortgage interest paid. Every little bit counts!
This deduction is especially lucrative for Americans with large mortgages. If you just bought a home for around $ 150,000 to $ 250,000, you probably paid around $ 6,000 to $ 10,000 in mortgage interest in your first year, which you can now deduct from your income. Deductions only increase from there with more expensive homes.
3#. Property Tax
While property taxes, or real estate taxes, are annoying, when tax season rolls around, you can deduct this expense up to $ 10,000. The $ 10,000 limit was introduced with the Tax Cuts and Jobs Act. Before that, homeowners could deduct the full sum of their property taxes.
The latest rules combine your state and local taxes, which also include your property taxes, in your $ 10,000 limit. You can't deduct foreign property taxes, which homeowners used to do. This change in tax reform could hurt homeowners who spend a lot on property taxes, but most should fall comfortably within the $ 10,000 limit.
The average American homeowner pays about $ 2,127 a year in property taxes, but this amount can easily double, triple, or quadruple depending on which state you live in. That's right, we are watching you, New Jersey, Connecticut and New York!
If you have paid your taxes directly to the municipality you live in, keep records, receipts, and copies of checks for the payments you have made. If you paid your taxes through an escrow account or they roll over to your monthly mortgage payments and are paid through your lender, you will see the total amount you paid for this category on your Form 1098.
If you are a new owner, the seller will most likely pay the property taxes that they later reimbursed them. Include this payment as well; it will be on your clearance sheet.
4#. Mortgage Points
When you applied for your mortgage, whether it was to buy a new home or to refinance your existing home loan, there is a good chance that you will pay “points” to your lender to help secure your loan or obtain a reduced interest rate.
Mortgage points are another fee that homeowners pay - conventionally, each point costs you about 1 percent of your home. For example, if you bought a home and you need a $ 250,000 mortgage, one point would cost you $ 2,500. Your lender may charge you a single point, multiple points, or no points, but regardless, any point you have paid is eligible to be included as a deduction. The key here is that you must have paid your lender for these points in the last year.
When you make a mortgage payment, if there are points involved, they are incorporated into the loan. Check with your lender, evaluate your mortgage payment breakdown, and scan your 1098 form to determine what this amount is. If your monthly payment includes $ 100 for points, your deductible for the year would be $ 1,200.
5#. Private Mortgage Insurance
We can't all pay a 20 percent down payment when it comes time to buy a home. If you can't afford a fifth up front, you'll need to purchase private mortgage insurance (PMI) as collateral for your lender and protect them in the event of your loan default. There is a small silver lining to this additional expense for homeownership: You can claim a tax deduction on your PMI payments if you retired your mortgage after 2007.
Current guidelines suggest that you can claim this deduction if your adjusted gross income is $ 100,000 or less if you are married or $ 50,000 if you are single. Make sure to take advantage of this benefit, as it is a deduction that may not last, it turns out that it was one of the 30 tax provisions that were just fulfilled with an extension in 2018 and will likely be reviewed again.
6#. Energy Efficient Improvements
In a push toward green energy, the IRS is rewarding homeowners who have made energy efficiency improvements a priority in their homes with a handful of tax credits.
Under the energy efficiency residential property credit, any home improvement you make to increase energy efficiency carries a tax credit of up to 30 percent of the installation cost. Examples include solar energy panels and geothermal heat pumps. Upgrades made to your home prior to a resale are also eligible.
It is worth noting that the longer you wait, the less money you can claim. Between January 1, 2017 and December 31, 2019, 30 percent of your expenses related to energy efficiency are eligible for the tax credit. But between January 1, 2020 and December 31, 2020, the credit tax decreases to 26 percent. By 2021, the credit is 22 percent before this credit is reevaluated.
Take a full look at energy.gov because tax credits, rebates, and other incentives are plentiful, but can be based on the state you live in. Not all energy efficiency upgrades and products are eligible for the tax credit. Before you commit to anything, check the manufacturer's tax credit certification statement, which is usually found on the product packaging or listed on the manufacturer's website.
In some cases, you could get up to 10 percent of the cost for energy-efficient skylights, insulation systems, central air conditioners, furnaces and water heaters. These upgrades are not as ambitious as installing complete renewable energy systems, but they could significantly affect your taxes.
Remember, tax credits are pretty valuable - they essentially erase the taxes that you owe dollar for dollar.
New homeowners have it easier: New construction is likely already equipped with green technology, making it eligible for these tax credits without having to do the groundwork.
7#. Home Office Expenses
Whether you've turned the spare bedroom into your office space or you're teaching piano lessons from the basement, any space used for working from home can also be deducted. Right now, tax laws allow you to take a $ 5 per square foot tax deduction for up to 300 square feet of office space for a maximum total deduction of $ 1,500. The guidelines are pretty strict, so it's worth reviewing them carefully before adding this deduction.
Deductions are limited to freelancers only - your home office cannot be a spare or dual-purpose room, and must be used regularly as your primary workspace.
If you meet the criteria, you can write off a portion of certain work-related living expenses, such as your electric bill, Internet bill, and homeowners insurance. You can even write off expenses like computer equipment and stationery.
8#. Capital Gains from Selling Your Home
We have now documented the various ways that homeownership can earn various tax credits, but what most people don't realize is that selling your property also generates a decent tax deduction.
Due to the capital gains exclusion rule (or the home sales exclusion rule), Americans who sell their homes can keep all the profits without paying any taxes.
The only downside is that the property must serve as your primary residence for at least two of the five years prior to sale. You can earn up to $ 500,000 if you are married and $ 250,000 if you are single tax free. In general, most homeowners do not have to pay any tax on the profits they made from their sale.
If you did not live in the home for two of the five years prior to its sale, you are still eligible for the exclusion from the sale of the home, but your deduction will be prorated. Partial foreclosures can even be made if you had to sell your home early due to unforeseen circumstances due to a job change or divorce.
Ultimately, this benefit, along with the other deductions we've covered, could save you thousands of dollars at the time of taxes and when buying a new home. And of course, if you have any questions about whether you qualify for these tax benefits, it's always best to speak with a tax professional about your particular situation.
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