Tax Breaks Homeowners Should Know About
Owning a home is a significant milestone for many people. However, homeowners often face a myriad of financial responsibilities, from mortgage payments to property taxes. Thankfully, there are several tax breaks available to homeowners that can help ease the financial burden. In this article, we will discuss some of the lesser-known deductions, including the home equity loans tax deduction, that can make a real difference when filing your tax return. Our goal is to inform you in a friendly and human manner, so you can take full advantage of these tax-saving opportunities.
Mortgage Interest Deduction
One of the most significant tax breaks for homeowners is the mortgage interest deduction. If you itemize deductions on your tax return, you can deduct the interest paid on your mortgage up to a specific limit. For mortgages taken out after December 15, 2017, the limit is $750,000 for married couples filing jointly and $375,000 for individuals or married couples filing separately. For mortgages taken out before this date, the limits are $1 million and $500,000, respectively.
Home Equity Loans Tax Deduction
Another deduction that homeowners should be aware of is the home equity loans tax deduction. Home equity loans, also known as second mortgages, allow homeowners to borrow against the equity they’ve built in their homes. The interest paid on these loans can also be deducted if the loan proceeds are used to buy, build, or substantially improve the home that secures the loan. Keep in mind that the combined total of your mortgage and home equity loan cannot exceed the aforementioned limits of $750,000 or $375,000, depending on your filing status.
Property Tax Deduction
Property taxes can be a considerable expense for homeowners. The good news is that you can deduct your property taxes on your federal income tax return if you itemize deductions. However, there is a limit to how much you can deduct. The State and Local Tax (SALT) deduction, which includes property taxes; is capped at $10,000 for both single filers and married couples filing jointly. This cap applies regardless of the number of properties you own.
Home Office Deduction
With remote work becoming increasingly common, many homeowners have dedicated spaces in their homes for work purposes. If you use a part of your home exclusively and regularly for business; you may be eligible for the home office deduction. This deduction allows you to claim a portion of your home expenses, such as utilities, rent, and depreciation; based on the percentage of your home used for business. It’s essential to maintain accurate records and follow the IRS guidelines to claim this deduction.
Energy-Efficient Home Improvement Tax Credits
If you’ve made energy-efficient upgrades to your home, you may be eligible for tax credits. The Nonbusiness Energy Property Credit allows homeowners to claim a tax credit for certain energy-efficient improvements, such as insulation, windows, doors, and certain roofing materials. The Residential Energy Efficient Property Credit covers costs associated with installing alternative energy equipment, such as solar panels or geothermal heat pumps. Both credits are subject to specific limits and requirements; so it’s essential to review the IRS guidelines before claiming these credits.
Mortgage Points Deduction
When taking out a mortgage, some homeowners opt to pay “points” to lower their interest rate. One point is equal to 1% of the loan amount. These points can be deducted as mortgage interest on your tax return. However, the deduction must be spread out over the life of the loan rather than being claimed all at once. If you refinance your mortgage, you may be able to deduct the remaining points from the original loan in the year you refinance.
