Uncategorized January 13, 2023

You Can Take Advantage of These 8 Tax Breaks If You Own A Home

Many homeowners, like yourself, look for tax deductions every year around tax time. The good news is that homeowners qualify for many tax breaks that may save them thousands of dollars.

Let us examine which of your home-related costs are tax-deductible as a homeowner, and whether or not you should utilize that amount as your deductible.

Differences Between the Standard and Itemized Deductions

The net effect of both deduction types is the same: a decrease in taxable income and, consequently, in the amount of income tax owed. Both types of deductions can lower your overall income tax burden by reducing your taxable income. The net effect of both deduction types is the same: a decrease in taxable income and, consequently, in the amount of income tax owed.

All taxpayers have access to the standard deduction provided by the Internal Revenue Service (IRS). The 2021 standard deduction is broken out as follows:

  • For single and married individuals filing taxes separately, the standard deduction is $12,550.
  • For married couples filing jointly, the standard deduction is $25,100.
  • For heads of households, the standard deduction is $18,800.

The standard deduction is a method for reducing your taxable income by a set amount. Homeowner tax credits are one example of an itemized deduction. Instead, your tax liability will be reduced by the sum of your itemized deductions.

If you want to take advantage of homeowner tax deductions, you’ll need to have more itemized deductions than the standard deduction in total. Taking advantage of the standard deduction to reduce your taxable income is the more fiscally responsible option.

All Home Expenses That Can’t Be Deducted

When calculating your tax return, you may find that you may deduct a wider range of household costs than you first thought. However, there are some costs associated with maintaining a house that cannot be deducted from your taxes.

  • Fire insurance
  • Homeowner’s insurance premiums
  • The principal amount of mortgage payment
  • Domestic service
  • Depreciation
  • The cost of utilities, including gas, electricity, or water
  • Down payment

All your mortgage payments and maintenance costs will not be tax deductible if you own your property. Talk to a tax expert if you are not sure what you can and cannot deduct.

8 Tax Breaks for Homeowners

The Internal Revenue Service has stringent regulations governing the various tax advantages offered to homeowners. Let’s investigate the tax benefits that homeowners might expect.

1. Mortgage Interest

The mortgage interest deduction is available to homeowners who are still paying down their mortgages. Mortgage interest is an itemized deduction that can reduce your taxable income.

For a while, mortgage interest deductions were capped at $1 million. The Tax Cuts and Jobs Act lowered this threshold, however, to $750,000 for an individual or $1,000,000 for a married couple. Each spouse can deduct up to $375,000 if they file separately from each other.

2. Home Equity Loan Interest

Simply put, a home equity loan functions as a second mortgage against your property. You may use the equity you’ve built up in your house as collateral for a loan to get the money you need for whatever you need it for with a home equity loan.

The interest you pay on a home equity loan or line of credit can be deducted from your taxes just like it is on a mortgage. You may only claim this deduction if the money you borrowed was utilized to make repairs or upgrades to your primary residence. The interest on these loans used to be tax deductible regardless of how the money was ultimately used until the Tax Cuts and Jobs Act of 2017.

3. Discount Points

Discount points can be purchased at the time of mortgage closing in order to reduce the overall interest paid by the borrower. One discount point, if available, would be equal to one percent of the mortgage principal.

The cost of discount points is deductible if they are used to lower the interest rate on a mortgage. Loan origination points, on the other hand, are not tax deductible because they do not lower your interest rate.

4. Property Taxes

If you own a residence in the United States, you must pay state and municipal property taxes. Property taxes paid by a married couple filing jointly are deductible up to $10,000, while those paid by an individual or a married couple filing separately are deductible up to $5,000.

The value of the deduction for real estate taxes varies widely by region.

5. Necessary Home Improvements

Home upgrades that are absolutely necessary might be deducted from your taxes. The term “necessary” has certain narrow connotations. Costs associated with enhancing a fully functional kitchen may not be tax deductible if the upgrade is chosen.

However, this should be the case if you need to make long-term changes to your house to make it more accessible for medical reasons. Accessible house modifications might include things like making bathrooms more accessible, adding handrails, or enlarging entrances.

6. Home Office Expenses

You may be able to deduct some of the costs associated with keeping your home as a place of business. In order to receive a deduction from the IRS, you must utilize your home office exclusively for business purposes on a regular basis. Inconsistent or occasional usage of the office space, or using it only as a remote location for your employer, will not be accepted.

The extent of your deduction is determined by the proportion of your house that is used for business purposes.

7. Mortgage Insurance

PMI, or private mortgage insurance, is an additional cost that many homeowners must account for. Mortgage insurance, or PMI, is insurance for the lender in case you default on your mortgage.

Mortgage insurance premiums are a tax deduction if you itemize your deductions.

8. Capital Gains

When you sell your house for a profit, you may qualify for a capital gains tax reduction. The profit from selling a property is the difference in price between when you acquired it and when you sold it. Say you paid $100,000 for your house. You decide to sell your house a few years later for $150,000. You would receive a capital gain of $50,000 with that transaction.

Some of the earnings made from the sale of your property would be exempt from taxation if you used it as your principal residence for at least two of the preceding five years. You can keep up to $500,000 in capital gains as a married couple filing jointly. Each individual or married couple filing separately can keep $250,000 in capital gains tax-free.

The fact that you spent 2 of the previous 5 years there is crucial. Considering the large tax savings that might result from this deduction, it is prudent to do so.

In Conclusiveness

As a homeowner, you will enjoy a number of tax breaks and other savings. As a homeowner, you should approach tax time with an eye on increasing your home’s worth.

It is wise to tally all your tax benefits because they might save you hundreds of dollars. Before selecting which is better for your tax return, add up all of your itemized deductions and compare it to the standard deduction.

As a homeowner, you may be eligible for certain tax breaks that you should investigate. Speak with a tax expert to make sure you are taking advantage of all the deductions you are entitled to if you need assistance navigating the specifics of your case.

Read on to gain insight into the connection between taxation and property ownership, how costs like taxes and insurance could affect monthly mortgage payments.