Tax Breaks for Homeowners

It’s tax season! Plenty of homeowners are asking themselves “what are the tax benefits of owning a home?”  We are here to let you know that there might be options out there for you to explore!

Let’s walk through some of the tax benefits that you may qualify for as a homeowner. 

Break #1: Mortgage Interest

If you were a homeowner with a mortgage that went into effect BEFORE December 15, 2017, you are eligible to deduct interest on loans up to $1 million! 

So what does this mean for you? The ability to deduct the interest on a mortgage continues to be a HUGE benefit of owning a home.  Plus the more recent your mortgage, the greater your tax savings.

According to Wendy Connick, owner of Connick Financial Solutions - The way mortgage payments are amortized, your first payments are almost all interest.  You have to remember that your mortgage is an itemized deduction. This means that in order for this break to work in your favor, all of your itemized deductions need to be greater than the new standard deduction.  The new standard deduction almost doubled with the Tax Cuts and Jobs Act. (realtor.com)

Note that the mortgage interest deduction is an itemized deduction. This means that for it to work in your favor, all of your itemized deductions (there are more below) need to be greater than the new standard deduction, which the Tax Cuts and Jobs Act nearly doubled.

And note that those standard deduction amounts increased for the 2021 tax year. For individuals, the deduction is now $12,550 (up $150 from 2020), and it’s $25,100 for married couples filing jointly (up $300 from 2020). The deduction also went up to $18,800 for the head of household (up $150 from 2020). And if you’re 65 or older, you can add on an extra $1,350 per person if married and filing jointly or an extra $1,700 if you’re a head of household or a single filer.  (Realtor.com)

Itemizing may not work in your favor so make sure to do all your research! 

Break #2: Property Taxes

The property tax deduction is capped at $10,000 for those married filing jointly no matter how high the taxes are.  Taxpayers can take one $10,000 deduction.

Your property taxes are on the itemized deductions list that must add up to more than your standard deduction to work in your favor.  If you have a mortgage, your property taxes are more than likely built into your monthly payment.

Breakt #3: Private Mortgage Insurance

Here is some good news for PMI holders - you can deduct the interest on this type of insurance due to the Mortgage Insurance Tax Deduction Act of 2021.  This reinstated certain deductions and credits for homeowners that were due to expire in 2020.

Don’t know if you have PMI?  If you put less than 20% down on your home, you are more than likely paying a private mortgage insurance.

The PMI interest deduction is also an itemized deduction, but if you take it, it might help push you over the $25,100 standard deduction for married couples under 65.

Break #4: Energy Efficiency Upgrades 

The Residential Energy Efficient Property Credit was a tax incentive for installing alternative energy upgrades in your home, however most of those tax credits expired.  

There are still two credits available for solar electric and solar water-heating equipment  additions or upgrades that are available until December 2023.  The SECURE Act also retroactively reinstated a $500 deduction for certain qualified energy-efficient upgrades “such as exterior windows, doors and insulation” according to Josh Zimmelman, owner of Westwood Tax & Consulting. (realtor.com)

This is a credit, so you don’t have to worry about  itemizing here. However, the percentage of the credit varies based on your  installation date. For example, for equipment installed after Dec. 31, 2019 and before Jan. 1, 2023, 26% of the expenditure is eligible for the credit. (realtor.com)

Break #5: A Home Office 

If you are self-employed this tax break is for you!  You can deduct $5 per square foot, up to 300 square feet of office space, which amounts to a maximum deduction of $1,500. 

There are very strict rules around this deduction so you have to be careful and make sure you fully understand what constitutes as a home office.  Here’s more about this deduction.

Bad news about this deduction?  Anyone who was forced to work from home due to COVID-19, this deduction does not apply to you.  Unfortunately, if you are a W-2 employee, you’re not eligible.

Break #6:  Home Improvements to Age in Place

To qualify for this break, these home improvements will need to exceed 7.5% of your adjusted gross income. 

This tax break can be great for many older homeowners who plan to age in place and add renovations, like wheelchair ramps or grab bars.  These improvements could also include widening doorways, lowering cabinets or fixtures and adding stairlifts. 

Remember…you will need a letter from your doctor to prove these changes are/were medically necessary. 

Break #7: Interest on a HELOC

If you have a home equity line of credit, the interest on that loan is deductible only if that loan is used specifically to “buy, build or improve a property” according to the IRS.  You can only deduct up to the $750,000 cap and this is for the amount that you pay in interest on your HELOC and mortgage combined. (realtor.com)

*** We are not financial experts. With these options to explore, please research and talk to a financial professional about your property tax and tax deduction options for your taxes before you file. 

Blog Sources:

Realtor.com