Top tax breaks for homeowners
Owning a home can be quite expensive, all things considered. The amount of tax you need to pay as a homeowner can sometimes be overwhelming. That is why you may want to learn a bit more about top tax breaks for homeowners and make it a bit easier on yourself. But if you are already behind on your taxes, you may want to look into some of the best tax resolution companies instead. In either case, knowing more about homeowner tax breaks can significantly improve your financial situation. That is why we will break down all the top tax breaks that are available to you.
Understanding tax deductions
Before you can take advantage of our top ten tax breaks for homeowners, you first need to understand how tax deductions work. There are two main categories:
- Standard tax deductions
- Itemized tax deductions
Standard tax deductions are available to all tax filers. Single and married taxpayers (who file their taxes on an individual basis) received a standard deduction of $12,550 in 2021. For couples that jointly file their taxes, the number is doubled and amounts to $25,100. If you happen to be the head of your household, the standard deduction increases to $18,800.
These deductions serve to reduce your taxable income by their respective amount. Alternatively, you can choose to itemize your deductions, which may be necessary for most of the top tax breaks for homeowners. The way it works, in that case, is that your tax burden is offset by the amount that you itemize for. In most cases, this number can be quite significant.
But itemized deductions are not necessarily larger than the standard deduction. It varies from case to case and it is important to calculate whether you will be better served with a standard deduction or an itemized one. If you are looking to reduce your tax liabilities to a minimum, you will need to spend some time calculating the difference. But to do that, you need to know what the top tax breaks for homeowners are.
Top 10 tax breaks for homeowners
The IRS publication 530 (2021) details all the tax breaks that homeowners can utilize. While all of them are definitely worth checking out, some are simply more important than others. Here’s the list of the most important ones, in no particular order:
- Home equity loan interest tax deduction
- Mortgage interest tax deduction
- Property taxes
- Expenses for home office
- Capital gains
- Tax deductions for home improvements
- Mortgage insurance
- Discount points
- Energy-saving credits
- Rental expenses deductions
These tax breaks are available for every homeowner and can provide them with a welcome reprieve from an overwhelming tax burden. Let’s explore each one in greater detail.
Home equity loan interest tax deduction
Many homeowners decide to utilize home equity loans to pay for improvements to their homes. As with any other loan, a home equity loan will accrue interest over time. Before 2017’s Tax Cuts and Jobs Act, you could deduct the loan interest regardless of how you spent the funds but today you can only do so if you’ve used the money to improve your house.
This is one of the tax breaks that are easy to forget, as you are mostly thinking about mortgage interest when it comes to tax deductions. However, a home equity loan interest tax deduction is one of the best ways to boost your tax refund amount. Also, if you consider the home equity loan as a “second mortgage”, you are more likely to remember it when the time to calculate tax deductions arrives. Now, let’s see how the mortgage interest actually works.
Mortgage interest tax deduction
Any homeowner that has a mortgage on their home is eligible for the mortgage interest deduction. Through an itemized deduction of mortgage interest, homeowners are capable of significantly reducing their tax lien. In previous years (before 2021), up to $1 million could be deducted from mortgage interest alone. Today, the number is not as high but is still quite “respectable” at $750,000 and represents one of the top tax breaks for homeowners. This is, of course considering that you are a single filer or that you and your spouse are filing jointly. In case you and your spouse wish to file your taxes separately, the deduction limit is halved.
Homeowners are expected to pay property taxes at both the state and the local level. Property tax deduction varies from state to state and city to city, and you might want to look into the specifics with your local government. In some cases, these deductions can be so significant that you do not want to miss out. Property tax deduction goes up to $10,000 for single filers/married couples that file their taxes jointly and $5,000 for separate filing. If you need more information on property taxes, we go into a bit more detail about them in our property tax relief guide.
Needless to say, this is a “hefty” amount of money you could be saving. While most homeowners will not be able to get to the cap, even getting half of it deducted from your tax lien is a significant improvement. That being said, it still might not catch up with the standard tax deduction. But in combination with all the other tax breaks, it may very well be! Next up, we have:
Expenses for home office
COVID-19 pandemic has brought a resurgence of home office spaces. Homeowners are setting up their offices inside their homes and spending quite a lot of money on them. If you are one of the people that have a home office, you may be able to deduct some of the expenses that are involved in maintaining it. Provided, of course, that you use your home office for an exclusive (and regular) business. If you only use the space when it is convenient for you, or you are working from home for another employer, you will not qualify for this particular tax break.
The size of the deduction itself is largely dependent on the size of your office. Specifically, the percentage of your home that is dedicated for business purposes. The larger the office, the larger the deductions. You may also need to prove that you need such a large office in the first place.
Speaking of business, when you sell your home for a profit you get “Capital gain”. This entails the difference between the price of your home when you purchased it and when you sold it. If you bought your home for $300,000 in 2020, for example, and sold it for $500,000 in 2022, your capital gain would be $200,000.
Now, if the home you’ve sold was your primary residence for at least two of the last five years, there’s a possibility of keeping some tax-free profits. The IRS set a limit of $500,000 for tax-free capital gains for joint-filing married couples. For single filers, this limit is $250,000.
The important thing to note here is that to be eligible for this tax deduction, you will need to have lived in the home for at least two years, within the last five years. Capital gains deductions are one of the top tax breaks for homeowners you can get (usually at the very top), so this is something well worth considering.
Tax deductions for home improvements
But let’s say that you don’t want to sell your home to get a large tax break. Let’s say that you want to keep improving your home. Some improvements are tax-deductible, but they need to be “necessary”. Upgrading your home is usually not tax-deductible but improving it in certain ways is. Most notably, making improvements to your home to make it more accessible usually comes with a tax deduction. Examples include widening doorways and installing additional railings. Furthermore, you can usually get a tax deduction for purchasing necessary medical equipment.
Basically, whenever a home improvement is deemed necessary by the IRS, you will be eligible for a tax deduction. If you simply want to upgrade your bathroom for additional luxury, you can’t expect the IRS to consider that to be a necessity. That being said, you may want to talk to a home improvement tax deductions expert (yes, it is an actual title) to see what kind of improvements might be tax-deductible in your situation. But make sure to take steps to avoid IRS tax relief scams, as well. Always verify that you are working with a trustworthy professional.
Another thing that you can put on your itemized tax return is mortgage insurance. Many homeowners are “forced” to get a PMI (Private Mortgage Insurance) to be able to get the mortgage in the first place. This insurance protects the lender (your bank, in most cases) from you being unable to continue paying off your mortgage. While mortgage insurance presents a hefty additional cost to owning a home, the good news is that you can deduct your mortgage insurance payments from your tax returns.
While on the subject of mortgage, there is an additional possibility that you can purchase to lower the interest rate. Homeowners can purchase “Discount Points”, where each point represents one percent of the total mortgage amount. What does all of this have to do with taxes, you ask? Well, if you purchased any discount points you can deduct their cost in your itemized tax return.
However, there’s a “catch”. Loan origination points are not tax-deductible at all. In other words, you can’t deduct any fees that you paid for the evaluation, processing, and approval of your mortgage loan. This adds some complexity to the whole matter as discount points are generally tax-deductible but some discount points are not. But as one of the top tax breaks for homeowners, it is definitely worth your time researching.
The U.S. government looks quite favorably on the use of renewable energy sources. So much so, that if you install certain equipment in your home, you get a sizeable tax credit. This equipment needs to utilize alternative power sources, such as solar energy, wind energy, geothermal energy, etc. Furthermore, you can also get a flat $500 off your tax lien by installing insulation/doors/heating/air-conditioning/roofing/wood stoves/water heaters/similar that are energy-efficient. Energy-efficient windows alone will net you a $200 deduction, as well!
But there is another catch with the whole process. These deductions look incredible on paper but you have to realize that there are “lifetime credit limits”. This means that if you have already gotten a tax deduction for energy-saving equipment for $500, you can never get another one. Well, never may be a strong word but don’t expect the laws to change anytime soon.
Rental expenses deductions
Another, “niche” tax deduction that some homeowners can get is the deduction of the rental expenses. If you, for example, are renting some parts of your home, you can deduct any associated expenses that you might have. Your rental income will, of course, be fully taxed but any expenses that you’ve incurred throughout the renting period can be deducted. Normally, these deductions include repairs, maintenance costs, utilities, supplies, and similar. You can even deduct the value of depreciation on the part of the home you’re renting, as well as any furniture or equipment that is located within the rented property.
However, figuring out the exact value of these deductions can be quite tricky. For example, calculating the electric bill for only a part of your home is incredibly complicated, even if you have a separate current counter. The best way of handling this is by simply allocating the expenses by percentage. As in, if you are renting 20% of your home, you may be able to deduct 20% of the utility bill.
But if you are renting an investment property or a vacation home, rules change quite a bit. The principle is still the same, of course, but calculating the rental expenses gets a bit more complicated.
Non-deductible home expenses
Knowing about the top tax breaks for homeowners is great, but you also need to know about non-deductible home expenses as well. Fire insurance, down payment, depreciation, domestic service, premiums for homeowner’s insurance, and the utility costs (gas, water, electricity, etc.) cannot be deducted from your tax burden. To figure out exactly what you can and cannot deduct, you will want to talk to a professional. If you want to find the best tax relief companies easily, browse the rest of the Consumer Opinion Guide. We have all the information you might need to keep ahead of your property taxes!