As a homeowner, your house is not just a place to live and grow; it's also a significant asset that can offer various tax advantages. Understanding these can help reduce your annual tax bill, offset some homeownership costs, and increase your refund during tax season. From deductions for mortgage interest to credits for energy-efficient home improvements, here's a comprehensive guide to tax breaks that every homeowner should know.
Mortgage Interest Deduction
One of the very common tax breaks for homeowners is the mortgage interest deduction, which allows you to deduct the interest paid on your mortgage from your taxable income. For mortgages taken out after December 15, 2017, you can deduct interest on loans up to $750,000 – or up to $1 million for mortgages taken out before that date.
Property Tax Deduction
Homeowners are also eligible to deduct property taxes paid to their local public sector. However, with the Tax Cuts and Jobs Act (TCJA) of 2017, there's now a cap of $10,000 ($5,000 if married filing separately) on the total amount of state and local taxes (SALT), including property taxes, that can be deducted.
Home Office Deduction
If you use a portion of your home exclusively for business purposes, you may qualify for the home office deduction. This can include a prorated share of real estate taxes, mortgage interest, rent, utilities, insurance, depreciation, maintenance, and repairs. The deduction is calculated based on the percentage of your home devoted to business activities.
Home Equity Loan Interest
Interest on home equity loans or lines of credit is deductible if the funds are used to buy, build, or substantially improve the taxpayer's home that secures the loan. Just like the mortgage interest deduction, the loan amount is capped at $750,000 for qualifying loans.
Energy Efficiency Credits
Certain energy-efficient home upgrades can qualify for tax credits. For instance, the Residential Renewable Energy Tax Credit offers a credit for installing solar energy systems, including solar water heaters and solar panels. Other qualified energy-efficient improvements may also be eligible for credits, which can reduce your taxes dollar-for-dollar.
Private Mortgage Insurance (PMI)
If you're paying PMI as a part of your mortgage payment, you might be able to deduct these premiums. The deduction is gradually phased out starting at an adjusted gross income (AGI) of $100,000 ($50,000 if married filing separately) and eliminated entirely at $109,000 AGI ($54,500 if married filing separately).
Capital Gains Exclusion
When selling your primary residence, you can exclude up to $250,000 of the capital gains from your income ($500,000 for married couples) if you've owned and lived in the home for at least two out of the last five years.
Disaster and Theft Losses
If your home is affected by a federally declared disaster, you may be able to deduct some of your loss after insurance recovery. This deduction is limited and only applies to major disasters.
Tax Breaks for Older Americans
Older homeowners can enjoy additional tax benefits. For instance, you might qualify for a higher standard deduction when you reach age 65, which can further reduce your taxable income.
Considerations and Tips
- Evaluate Whether to Itemize: After the TCJA increased the standard deduction, fewer individuals may find it advantageous to itemize. Calculate if your total itemized deductions exceed the standard deduction before deciding which route to take.
- Maintain Proper Records: Keep thorough records of all expenses related to home improvements, mortgage payments, and office expenses if you're claiming the home office deduction.
- Stay Informed on Current Laws: Tax laws can change, affecting the benefits you may claim. Always stay updated on current laws to ensure you maximize your eligible tax breaks.
Conclusion
Knowing the tax breaks available to you as a homeowner can lead to significant savings. By taking advantage of these opportunities, you can alleviate some of the financial burdens of homeownership and keep more money in your pocket. Always consider consulting a tax professional to help navigate the complexities of homeowner tax benefits and ensure you are receiving the full advantage of your entitlements.
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