Owning a house has many benefits, and one of them is the tax reduction. Do you know how many household expenses are tax deductible? Let’s look on tax deductions for homeowners.
When we talk about tax deductions, there are two types of deductions: Standard deduction and Itemized deductions. Before you file tax return, make sure you calculate your itemized deductions, double check with standard deduction to assure which one will benefit you the most.
Standard Vs. Itemized Deductions
Both types of deductions can lower your overall income tax burden by reducing your taxable income.
The standard deduction is a specific dollar amount that reduces your taxable income. For the 2022 tax year (filed in 2023)
- For single and married individuals filing taxes separately $12,950.
- For married couples filing jointly, $25,900.
- For heads of households, $19,400.
For 2023 (taxes filed in 2024), the standard deduction will increase to $27,700 for joint filers, $20,800 for heads of household, and $13,850 for single filers and those married filing separately.
Tax deductions for homeowners
Mortgage Interest
if you have a mortgage or home equity loan it’s worth seeing if itemizing would save you money. Use the numbers you find on IRS Form 1098, and the Mortgage Interest Statement (you typically get this from your mortgage company at the end of the year).
You can deduct home mortgage interest on the first $750,000 ($375,000 if married filing separately) of indebtedness. However, higher limitations ($1 million ($500,000 if married filing separately)) apply if you are deducting mortgage interest from indebtedness incurred before December 16, 2017. Details here.
Home Equity Loan Interest
A home equity loan is a second mortgage on your house. With a home equity loan, you can access the equity you’ve built in your home as collateral to borrow funds that you need for other purposes.
You can deduct the interest you’ve paid on home equity loans and home equity lines of credit.
But you can only make this deduction if you used the borrowed funds to pay for a home improvement. Prior to the Tax Cuts and Jobs Act of 2017, you could deduct the interest on these loans regardless of how you spent the funds, but not anymore. Details here.
Discount Points
When you apply for a mortgage, you may have the option to purchase discount points to lower your interest rate on the loan. If you have this option, one discount point will equate to 1% of the mortgage amount.
If the points are purchased to reduce the mortgage’s interest rate, you can deduct the cost of the discount points. On the other hand, loan origination fee and other fees don’t affect the interest rate of your loan, so will not be tax deductible.
Property Taxes
As a homeowner, you’ll face property taxes at the state and local levels.
The deduction for state and local taxes, including real estate taxes, is limited to $10,000 ($5,000 if married filing separately). See the Instructions for Schedule A (Form 1040) for more information.
Home Improvements
Necessary home improvements can qualify as tax deductions. Of course, the definition of “necessary” is very vague. If you decide to upgrade your fully functioning kitchen, those improvement costs may not qualify.
Most home improvements and repairs aren’t tax-deductible, but the following are some exceptions:
Capital improvements that can increase the cost basis of your home, which lowers your tax bill if you make a profit when you sell.
Home improvements for medical reasons are deductible as medical expenses. These expenses are fully deductible subject to if they don’t increase the value of your home. A few examples might include installing medical equipment, installing railings, or widening doorways for an accessible home.
Energy-efficient improvements can let you claim a federal tax credit; depending on where you live, they may lower your state or local taxes as well.
Through December 31, 2022, the energy efficient home improvement credit is a $500 lifetime credit. As amended by the IRA, the energy efficient home improvement credit is increased for years after 2022, with an annual credit of generally up to $1,200.
Beginning January 1, 2023, the amount of the credit is equal to 30% of the sum of amounts paid by the taxpayer for certain qualified expenditures, including (1) qualified energy efficiency improvements installed during the year, (2) residential energy property expenditures during the year, and (3) home energy audits during the year. There are limits on the allowable annual credit and on the amount of credit for certain types of qualified expenditures. More details here.
Capital Gains
The capital gain is the difference between the purchase price of the home and the sale price.
For example: You bought the house for $100,000 – Sold the house for $150,000 => Capital gain $50,000.
If you were using the home as your primary residence for 2 of the last 5 years, you could keep some profits without any tax obligation.
As a married couple filing jointly, you can keep up to $500,000 in capital gains. As a single filer or married couple filing separately, each party can keep up to $250,000 of capital gains without a tax obligation.
Mortgage Insurance (PMI)
If you made a down payment of less than 20%, you must pay the Private mortgage insurance (PMI). PMI is there to protect your lender if you are unable to continue making payments on your mortgage. It is another expense that many homeowners must factor into their budget.
There are other insurances for your house, but the Fire insurance and Homeowner’s insurance are NOT tax deductible.
Home Office Expenses
If you use part of your home for business, you may be able to deduct expenses for the business use of your home. The home office deduction is available for homeowners and renters and applies to all types of homes.
There are two basic requirements for your home to qualify as a deduction:
Regular and exclusive use: You must regularly use part of your home exclusively for conducting business. For example, if you use an extra room to run your business, you can take a home office deduction for that extra room.
Principal place of your business: You must show that you use your home as your principal place of business. If you conduct business at a location outside of your home, but also use your home substantially and regularly to conduct business, you may qualify for a home office deduction.
Generally, deductions for a home office are based on the percentage of your home devoted to business use. So, if you use a whole room or part of a room for conducting your business, you need to figure out the percentage of your home devoted to your business activities.
Room Rental Deductions
If you rent out a part of your home such as a spare bedroom, you’re eligible for a rental deduction. You need to pay taxes on the rental income, but maintenance and repair costs, insurance, utilities and more can be deductibles. Please ask your tax professional for more details.
Consult with your tax professional
If you are considering taking advantage of tax deductions for homeowners, make sure that the total amount of your itemized deductions is larger than the standard deduction. Otherwise, it makes more financial sense to take advantage of the standard deduction to keep your tax liabilities as low as possible.
All we mentioned above are for informational purpose, please make sure to consult with your tax professional for more details.
