The Tax Cuts and Jobs Act which went into effect in January of 2018 was a great incentive for homeowners and is still in effect today. If you are a homeowner, you want to make sure that you are taking full advantage of all the tax breaks there are for homeownership. Here is a guide to what you can count on when it comes to filing your taxes as a homeowner.
Tax Break 1: Mortgage Interest
For homeowners that had a mortgage that began before December 15, 2017 they can deduct interest on taxes for loans up to $1 million. “However, for acquisition debt incurred after Dec. 15, 2017, homeowners can only deduct the interest on the first $750,000,” explains Lee Reams Sr., chief content officer of TaxBuzz.
So in a nutshell, the more recent your mortgage went into effect, the more you save on tax breaks. “The way mortgage payments are amortized, the first payments are almost all interest,” says Wendy Connick, owner of Connick Financial Solutions. This can work to benefit the homeowner since it is an itemized deduction.
For the year 2022 the increase to the standard deduction amount is as follows: an individual is $12,950 and for a married couple it is $25,000. If you are the head of household, the deduction amount went up to $19,400. If you are 65 or older add $1,400 per person if married and $1,750 if you are single or head of household. So an example would be if you are 65 and paid $20,000 in mortgage interest and $6,000 in state and local taxes you would exceed the standard deduction and be able to reduce your taxable income by itemizing.
Tax break 2: Property Taxes
If you are married filing jointly then you can take $10,000 in a deduction no matter how high the taxes are on the property. Brian Ashcraft, of Liberty Tax Service warns that taxpayers can only take on $10,000 deduction. Just note that property taxes are on that itemized list of all your deductions that must add up to more than your particular standard deduction to be worth your while. Another thing to note is that your property taxes are included in your mortgage monthly payment.
Tax break 3: Energy efficiency upgrades
If you are a homeowner and have qualifying solar electric panels and solar water heaters you can get a credit for up to 30% of how much the equipment and installation costs. There is also a energy-efficient home improvement lifetime credit for energy improvements that will allow you to deduct $500. Examples of upgrades are exterior windows, doors and skylights, the cost of home energy audits, and insulation. January 2023 marked the starting point of an extension and expansion of credit by the IRA. The new credit amount will be worth up to $1,200 per qualifying property.
Tax break 4: A home office
This came especially handy during the pandemic. If you are self-employed and your home office is your primary workspace, then you can deduct $5 per square foot for up to 300 square feet. If you do decide to take this deduction, you need to realize that there are strict rules on what defines a home office space. If you are a W-2 employee then you cannot deduct for a home office.
Tax break 5: Home improvements to age in place
In order to receive this tax break, the home improvements have to be more than 7.5% of your adjusted gross income. For example, if you make $60,000 a year, you can only deduct if you spent over $4,500. This is a great break for homeowners that want to stay in the space they have lived in once they become elderly. Some examples of these types of home improvements are adding wheelchair ramps, adding grab bars, widening doorways, lowering cabinets or adding stairlifts. In order to prove that these improvements were done due to medical issues, your doctor will need to provide a letter stating this.
Tax break 6: Interest on a home equity line of credit
A home equity line of credit, also known as a HELOC, can also give tax break benefits. The interest paid on the loan can be deductible if you use the money to buy, build or improve a property. If you need a kitchen redo, then you can take out a HELOC and save cash when doing this on tax breaks. Side note, you cannot use your HELOC to pay for a wedding or college and take advantage of this tax break. Only up to $750,000 can be deducted and it is based on the amount you pay in interest on your HELOC and mortgage combined.
