The Best Tax Deductions for Homeowners
Tax season is around the corner. That means it’s time to start thinking about your tax deductions. Fortunately, there are quite a few tax deductions homeowners can take. Read them over so you have a better idea of which deductions you can take on your tax return this year.
What are tax deductions?
Tax deductions are expenses deducted from your gross income to reduce your taxable income on your tax return. In general, people either take the standard deduction or an itemized deduction in an effort to lower their tax burden. However, as a rule of thumb, it only makes sense to take an itemized deduction if the total tax benefit is greater than it would be for the standard deduction.
For the 2020 tax year, the standard deduction is as follows:
- Single filers and those married filing separately: $12,400
- Those married filing jointly: $24,800
- Heads of household: $18,650
Common tax deductions for homeowners
While there’s no specific homeowner tax deduction, homeowners will often choose to itemize their deductions because quite a few of the costs related to home ownership qualify as tax deductions. We’ve laid them out so you can determine which ones apply to you specifically.
The mortgage interest deduction is one of the most common deductions homeowners take. Every month, when you pay down a portion of your loan, some of it goes to interest. Each tax year, you can deduct a portion of the interest you’ve paid for a tax break.
Unfortunately, though, you can only deduct mortgage interest up to a certain limit, and that limit depends on when your loan was originated. These are the limits as they stand in 2021:
- If your mortgage originated any time between October 14, 1987 and December 16, 2017, you are allowed to deduct up to $1 million in mortgage debt if you are married filing jointly or $500,000 if you’re married filing separately.
- If your mortgage originated after December 15, 2017, you are allowed to deduct up to $750,000 of mortgage debt or $375,000 if you’re married filing separately.
As for how you will know how much interest you’ve paid for the tax year, your mortgage service will send you a statement annually.
If you currently carry mortgage insurance on your loan, there’s good news. The IRS looks at mortgage insurance the same way as mortgage interest, which means you can write off this cost on your tax bill. This deduction covers the amount paid in private mortgage insurance for a conventional loan and the amount paid for your mortgage insurance premium on an FHA loan. Notably, it also can help with the guarantee fee on a USDA loan or the funding fee on a VA loan.
That said, in order to be able to utilize this tax deduction, you must meet a certain set of criteria. In particular, your mortgage insurance contract has to have been issued after 2006. In order to qualify for the full deduction, you also need to have an adjusted gross income that falls below $109,000, or $54,500 if married filing separately. If your adjusted gross income is higher than that, the amount you can deduct may be lowered.
While the mortgage insurance deduction technically expired at the end of 2017, Congress extended it to include premiums paid through 2020.
The last mortgage tax deduction you can take is for mortgage points. Also known as “discount points,” mortgage points are fees you can pay to lower the interest rate on your loan. For tax purposes, points are also viewed the same as home mortgage interest. So if you’re within the limit for your mortgage interest deduction, you can also deduct the cost of any mortgage points.
One other thing to remember is that mortgage points should not be confused with “loan origination points.” Some lenders will use this term to refer to fees they charge in order to cover the cost of processing your home loan. However, those fees are not the same mortgage discount points and cannot be deducted from your tax bill.
Home equity loan interest
In the past, you could deduct the interest from a home equity loan or home equity line of credit (HELOC) no matter how the funds were used. Unfortunately, that changed with passage of the Tax Cuts and Jobs Act.
These days, you can only deduct the interest from a home equity loan or HELOC if you used the funds to make substantial home improvements. In addition, this interest will also count toward your mortgage debt limit, so if you’re deducting a substantial amount of mortgage interest, you may not be able to use this deduction.
Aside from mortgage deductions, you can also take a property tax deduction. For the 2020 tax year, homeowners are allowed to deduct up to $10,000 worth of property taxes or $5,000 if married and filing separately.
This number is in addition to any state and local income tax you deduct on your tax return. You’ll want to keep an eye on your deductions to make sure you don’t exceed that limit.
Home office expenses
Finally, whether you’re self-employed or you’ve mainly been working from home as a result of the pandemic, you may be able to use the home office deduction. At its core, the home office deduction allows you to deduct a portion of certain home-related expenses, including home insurance, utilities, repairs, and depreciation as expenses related to your business.
That said, the formula for deducting these expenses can be a bit tricky. In this case, it may be best to rely on the wisdom of a tax professional. However, you can also check out the resources the IRS provides for this deduction.
Research state-specific deductions as well
Once you’ve looked into deductions to see which ones you qualify for, the next step is to research state-specific deductions. Here are some examples:
- According to Florida’s tax code, an eligible taxpayer can decrease their property’s taxable value by up to $50,000 under the Homestead exemption.
- Meanwhile, in Connecticut, qualifying veterans can get an exemption up to $1,500 on their property taxes.
Again, if you’re unsure whether your state offers any of these exemptions or if you qualify, talk to a tax advisor. In general, though, those with lower incomes, senior citizens, veterans, and individuals with disabilities are most likely to qualify for a state-specific tax exemption.
The bottom line
While there are many expenses related to home ownership you can deduct on your tax return, unfortunately, not all of them are deductible. For example, you can’t deduct your mortgage payment or home insurance premium.
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