Tax Deductions Every Homeowner Should Know

Tax Deductions Every Homeowner Should Know

Homeownership comes with a host of responsibilities and expenses, but luckily, it also provides tax benefits that can significantly reduce your taxable income. Understanding these tax deductions can lead to savings during tax season. Let’s dive into the top deductions every homeowner should keep in mind.

Mortgage Interest Deduction

This is one of the most substantial tax deductions available to homeowners. The Mortgage Interest Deduction allows you to deduct the interest you pay on your mortgage from your taxable income. This means that if you have a mortgage of up to $750,000, you can write off the interest you pay each year, which can amount to thousands of dollars in savings.

Pro Tip: Make sure to track your mortgage interest paid throughout the year. Your lender will provide you with Form 1098, which shows how much interest you’ve paid. Keep this form for your records and ensure your deduction is accurate.

Property Tax Deduction

Homeowners can deduct real estate property taxes paid on their residences. This includes local, municipal, and state property taxes. However, it’s important to remember that there is a $10,000 cap on the state and local tax (SALT) deduction, which includes property tax. So, if your total state and local taxes exceed this amount, you won’t be able to deduct the full amount.

Pro Tip: Check your property tax records and ensure you’ve claimed all necessary deductions. If you believe you’ve been over-assessed, you may also want to explore options to appeal the valuations.

Home Office Deduction

If you work from home, you might qualify for a Home Office Deduction. To qualify, your home office must be used regularly and exclusively for business purposes. You can deduct a portion of your home’s expenses, including mortgage interest, property tax, and utilities, proportional to the size of your office space compared to your entire home.

Pro Tip: Keep detailed records of your expenses related to your home office. Utilize IRS Form 8829 to calculate your home office deduction properly.

Home Improvement Deductions

While you can’t directly deduct the cost of home improvements, certain improvements can increase the basis of your home. When you sell your house, these adjustments can lead to reduced capital gains tax. Particularly, significant home renovations that add value, such as a new roof or major kitchen remodels, can be beneficial in this respect.

Pro Tip: Save all receipts and documentation for home improvements, as these will be valuable if you sell your home and need to establish adjusted basis.

Points Paid on a Mortgage

When you take out a mortgage, you may encounter points—essentially prepaid interest. One point equals 1% of your mortgage amount. If you buy points at closing to lower your interest rate, the points you pay can be deductible in the year you pay them. For a new mortgage, the deduction can significantly affect your tax savings.

Pro Tip: Document your points payment clearly, as you’ll need to report them on your tax returns accurately. Consult IRS guidelines for specific reporting methods.

Energy-Efficient Home Improvements

Investing in energy-efficient upgrades—like solar panels or energy-efficient windows—can qualify you for various tax credits. For instance, the Federal Investment Tax Credit allows you to deduct a percentage of the cost of solar panels from your tax bill.

Pro Tip: Research state and local programs offering incentives. Many areas have specific initiatives that allow for additional rebates or credits for energy-efficient home upgrades.

Conclusion

Maximizing your tax deductions as a homeowner can lead to significant savings, and it’s essential to keep track of all relevant information and documentation throughout the year. Whether it’s mortgage interest, property taxes, or home office expenses, understanding these deductions can help you keep more of your hard-earned money in your pocket.

Be proactive and consult with a tax professional to ensure you’re leveraging all possible tax benefits tailored to your specific situation. Remember, tax laws can change, and staying informed is key to making the most of your homeowner tax benefits.