There are many reasons to purchase a home, not least of which is that ownership can be valuable from a tax perspective. Homeowners who itemize their deductions can qualify to write off mortgage interest, property taxes, and several other expenses, but many either don’t know what to claim or how to go about doing so.
The truth is that the rules can get confusing. People who work from home may be able to claim more write-offs than those who work outside the home, whether they itemize or not, for example. Taxpayers who are still itemizing after the Tax Cuts and Jobs Act (TCJA) need to ensure that they’re claiming all possible deductions, also known as “write-offs.” Home-related write-offs are among the best tools for keeping your tax liability as low as possible, so taxpayers should research them thoroughly.
This guide will discuss the basics of homeowner deductions and which ones are the most valuable.
An Introduction to Tax Deductions for Homeowners
Deductions are provisions that reduce your taxable income, and when you file your federal income tax return, you have the option of taking the standard deduction or itemizing your deductions. The standard deduction for tax year 2020 is $24,800 for couples filing jointly and $12,400 for individuals, which will directly reduce your taxable income.
Taxpayers who itemize, on the other hand, add up all their qualifying deductions, and they reduce their taxable income by that number. For example, a married couple filing jointly with $40,000 in qualifying itemizable write-offs will reduce their taxable income by $40,000 instead of the standard amount.
Tax Deductions for Homeowners Who Itemize
The decision to itemize or not is typically straightforward. You should only itemize in most cases if the total of your qualifying deductions exceeds the standard amount for your filing status. The IRS lets you write off medical expenses over 7.5% of your adjusted gross income (AGI), charitable donations, and a few other expenses. For most taxpayers, though, the following write-offs tied to homeownership are the most valuable.
You can deduct mortgage interest paid on your primary or secondary home, but you can only write off interest on the first $750,000 of debt for mortgages taken out after December 15, 2017, and on the first $1 million of mortgage debt taken out before December 16, 2017.
Interest on Home Equity Loans
Interest on home equity loans is deductible if the loan proceeds were used to build, buy, or substantially improve a home. You cannot write off interest on home equity loans used for other purposes, such as consolidating credit card debt.
Private Mortgage Insurance (PMI)
You can deduct PMI payments if your AGI is less than $100,000 (this applies to both single filers and married couples filing jointly), and you can claim a partial write-off if your AGI is over that threshold but less than $109,000.
State and Local Property Taxes
Taxpayers who are single or married filing jointly can deduct up to $10,000 in state and local taxes (SALT). This limit applies to the total of your property taxes and any state or local income and sales tax you paid throughout the year.
Points are up-front fees you pay to lower your interest rate, and you can write off points on loans used to buy, build, or substantially improve your primary residence in the year you paid them. You can deduct points on second mortgages incrementally over the lifetime of the loan, but in both cases, you can only do so for points related to $750,000 or $1 million of debt, depending on when you took out the loan.
Home modifications for medical reasons such as adding wheelchair ramps are also deductible if they exceed 7.5% of your AGI for tax year 2020 or 10% of your AGI for 2021 and on. You can add these to other medical expenses, but if the upgrade increased your home’s value, you must subtract the increase in value from the cost of the deduction.
Taxpayers who do not itemize cannot claim these benefits, but they may be eligible for certain credits. Deductions lower your taxable income, while credits reduce the tax you owe. The IRS offers credits for energy-efficient purchases such as solar energy devices, geothermal heat pumps, and energy-efficient windows, doors, and skylights.
Deductions for Homeowners Who Run Businesses From Home
People who run businesses from their homes may be able to qualify for even more write-offs, whether they itemize or not. Unfortunately, these are only available to people who run their own businesses or rent out part of their homes, so people who work from home for an employer do not qualify to claim them.
Simplified Home Office
The home office write-off is available to small business owners and freelancers who use part of their homes regularly and exclusively for work. The simplified deduction lets you claim a deduction of $5 per square foot of your home office up to $1,500.
Actual Expenses Home Office
You can write off a portion of your home’s bills (homeowners insurance, mortgage insurance, utilities, etc.) as a business expense. As long as you don’t create a business loss, there is no maximum limit on this deduction. If your office takes up 10% of your home, for instance, 10% of your electric bill qualifies as a business write-off.
Home Day Care
Claiming deductions for running a day care out of your home is like the home office deduction, but you don’t have to use the space exclusively for day care. You can deduct a portion of your home’s expenses based on home much of the time you use the space for personal use versus for work.
Deductions for Renting Out Part of Your Home
The IRS expects you to report the income you receive from renting out part of your home, but you can deduct eligible expenses from that income. You can write off a portion of your home’s expenses just as you do with your home office, and all expenses related to the part of your home you’re renting. You can deduct the entire cost of a new door or a can of paint purchased just for the rented space, for example.
The write-offs for people who run businesses out of their homes are available to both homeowners and renters, but again, they are not part of your itemized deductions. Instead, they help to lower your self-employment or rental income.
Being a homeowner can lower your tax liability, but you need to make the correct elections on your return. Claiming more than you are eligible for is a sure way to send up red flags with the IRS, so it is always advisable to seek professional advice if you are unsure.
Get Help with Tax Deductions as a Homeowner
Do not leave your tax liability in the hands of an amateur. Silver Tax Group has an experienced team of pros who will ensure you optimize your tax situation.
Learn more by contacting us at Silver Tax Group today. We can help you with your current year’s tax prep, and we also assist with amending returns and dealing with tax debt.