What are some of the tax benefits of owning a home? Plenty of homeowners are asking themselves this right around now as they prepare to file their taxes.
The “Tax Cuts and Job Acts” went into effect on January 1, 2018 which was a substantial overhaul to the U.S. Tax Code. The result was likely a big change to your taxes, especially the tax perks of homeownership. Read on to make sure you aren’t missing anything that could save you money.
Tax Break #1: Mortgage Interest
Homeowners with a mortgage that went into effect before December 15, 2017, can deduct interest on home loans up to $1 million. However, for home loans incurred after December 15, 2017, homeowners can only deduct the interest on the first $750,000.
The ability to deduct interest on a mortgage continues to be a big benefit to owning a home. The mortgage interest deduction is an itemized deduction. For it to work in your favor, all of your itemized deductions need to be greater than the new standard deduction which the “Tax Cuts and Job Act” nearly doubled. Also, note those amounts just increased for the 2020 tax year. For individuals the deduction is now $12,400 and $24,800 for married couples filing jointly, plus $1,300 for each spouse 65 or older. The deduction also went up to $18,650 for head of household, plus an additional $1,650 for those 65 or older. For some homeowners, itemizing simply may not be worth it.
Tax Break #2: Property Taxes
This deduction is capped at $10,000 for those married filing jointly no matter how high the taxes are. Just note that property taxes are on that itemized list of all of your deductions that must add up to more than your particular standard deduction to be worth your while.
Tax Break #3: Private Mortgage Insurance
If you made less than a 20% down payment on your home, odds are you are paying private mortgage insurance or PMI on your home loan. For those PMI users, you can deduct the interest on this insurance thanks to the Mortgage Insurance Tax Deduction Act of 2019 – also known as the Setting Every Community Up for Retirement Enhancement (SECURE) Act – which reinstated certain deductions and credits for homeowners. Note that this tax deduction is set to expire again after 2020 unless Congress decides to extend it to 2021.
Tax Break #4: Energy Efficiency Upgrades
The Residential Energy Efficient Property Credit was a tax incentive for installing alternative energy updates in a home. Most of these tax credits expired after December 2016, however, two credits are still around (but not for long). The credits for solar electric and solar water-heating equipment are available through December 31, 2021. The SECURE Act also retroactively reinstated a $500 deduction for certain qualified energy-efficient upgrades such as exterior windows, doors and insulation.
Tax Break #5: A Home Office
Good news for all self-employed people whose home office is the main place where they work: You can deduct $5 per square foot, up to 300 square feet, of office space which amounts to a maximum deduction of $1,500. For those who take this deduction, understand that there are very strict rules on what constitutes a dedicated, fully deductible home office space. The bad news for everyone forced to work from home due to COVID-19? Unfortunately, if you are a W02 employee, you are not eligible for the home office deduction.
Tax Break #6: Home Improvements to Age In Place
To get this break, these home improvements will need to exceed 7.5% of your adjusted gross income. So, if you make $60,000 this deduction kicks in only on money spent over $4,500. The types of home improvements for older homeowners who plan to age in place might include renovations such as wheelchair ramps or grab bars in bathrooms, widening doorways, lowering cabinets and adding stair lifts. Note, you will need a letter from your doctor to prove these changes were medically necessary.
Tax Break #7: Interest on a Home Equity Line of Credit
If you have a home equity line of credit, or HELOC, the interest you pay on that loan is deductible only if that loan is used specifically to “buy, build or improve a property” according to the IRS.