Homeownership comes with many benefits like providing a sense of security, peace of mind, and financial security. Besides, it also has other significant tax benefits that can save you thousands year after year. Many new homeowners do not realize it, but there are potential tax deductions that they can claim every year.
These tax benefits are not just available for single-family homes, but also for townhouses, condominiums, cooperative apartments, and mobile homes purchased with a mortgage contract. So, if owning a home is on your list of goals, you should be aware of these benefits that can play an important part in reducing the total amount you owe and also maximize your tax return.
Here are some tax considerations you need to keep in mind to get the maximum benefit from your home purchase and make your life easier at tax time.
MORTGAGE INTEREST DEDUCTION
The first most important tax benefit available to homeowners is the mortgage interest deduction. This means that if you itemize your federal income tax deductions you can deduct the interest you pay on a first and second home every year up to a maximum of $ 750,000 as a single taxpayer or as a married couple filing jointly ($350,000 if married and filing separately). This is if you purchased your home after December 15, 2017. However, if you have purchased a home before this then the limit is $1 million. After 2025 the $1 million limits will return.
The Mortgage Interest Statement Form 1098, which you will receive from your lender will detail the amount of interest you paid during the year. You should also make sure you include any interest you have paid as part of the closing.
The same deductions limits also apply to homeowners who take out a home equity loan or a HELOC (home equity line of credit). However, you will only qualify for a deduction if you use this money for home improvements like remodeling. If it is used to fund debt, college costs, and other expenses then that amount will not qualify for a deduction. This also applies to funds you receive in a cash-out refinance.
You can review the Internal Revenue Service Publication 936 which explains the rules for deducting home mortgage interest.
STATE & LOCAL TAXES DEDUCTION
The money that you pay as property taxes is deductible, so this is a fantastic way to reduce your taxable income every year. If you are paying your property taxes through an escrow account you will come to know how much taxes you have paid by checking your 1098 form. If you are paying your taxes directly to your municipality you need to check your personal records.
It is important to note that if you have purchased your home after December 14, 2017, the amount deductible is capped at $10,000 for single taxpayers and married couples filing jointly. ($5,000 if married couples filing separately)
You may have paid points to your mortgage lender at closing, to lower the interest rate on your mortgage, or refinance your existing mortgage. These points are tax-deductible, but the requirement is that you have paid the lender for these points.
These points are priced as a percentage of the total loan. It means that each point will cost you 1% of your loan principal. Generally, home loans have fees in the amount of 1 to 3 points that can add up to thousands of dollars.
You can also get a deduction of points if you have refinanced your mortgage or taken out a home equity line of credit. However, these deductions must be done over the life of the loan and not all at once.
OTHER TAX SAVINGS
The other tax benefits of homeownership are:
- PMI (Mortgage Insurance Premiums): Generally, lenders charge PMI to borrowers who put less than 20% down payment. These premiums are also tax-deductible. You are eligible for a deduction if you are single and your adjusted gross income is less than $50,000. The deduction will phase out above this amount. The threshold is $ 100,000 if you are married.
- Energy-Efficient Home Upgrades: There are tax benefits for certain environmentally friendly home upgrades like solar panels and wind turbines. The percentage of deduction on solar energy for electricity and water heating equipment was 30% in 2019. However, that credit has come down to 26% this year and will further drop to 22% in 2021.
Buying a home can be daunting, but taking advantage of the tax deductions at the federal and state level can make the process more financially attractive. However, you should not let tax benefits dictate your home purchase. Your decision should be based on how long you intend to stay in the home, your family situation, and your financial ability to maintain your home.
Please do consult a tax professional whether these benefits pertain to your specific situation and only then make any deductions on your taxes.You could also use a premium product like TurboTax that can guide you through the process step-by-step.