Maximize Homeowner Tax Benefits: 8 Deductions, US Tax Made eZ

8 Tax Deductions for Homeowners: Maximizing Your Breaks and Benefits

Key Points

  1. Homeowners have access to exclusive tax deductions.
  2. Homeowners with enough expenses can itemize their deductions to lower taxable income further.
  3. Not every home expense is deductible. It’s important only to claim the ones that are.

Table of Contents

  1. Standard vs Itemized Deductions
  2. Nondeductible Home Expenses
  3. Maximizing Your Breaks with These 8 Tax Deductions
    • Mortgage Interest
    • Home Equity Loan Interest
    • Discount Points
    • Property Taxes
    • Home Office Expenses
    • Mortgage Insurance
    • Home Improvements
    • Homeowners’ Exclusion
  4. Conclusion

Owning a home can be expensive. Rising interest rates and inflation push up purchase prices, so tax time is the perfect opportunity to put hard-earned money back into your pocket for certain home expenses.

Part of the American Dream is owning a home, which is why the government heavily incentivizes the purchase of real estate. Whether you’ve finally bought your first house or have been a homeowner for two decades, it’s important to leverage the tax breaks the government offers.

In this article, we’ll discuss how these eight homeowner tax deductions can help you maximize your breaks and benefits.

1. Standard vs Itemized Deductions

Before we get too far into the homeowner tax deductions you can claim, it’s important to differentiate between standard and itemized deductions. The 2023 standard deduction is $13,850 for single filers, $27,700 for married filing joint taxpayers, and $20,800 for head of household filers. These dollar amounts are subtracted from your adjusted gross income to reduce the taxes you pay.

However, taxpayers have another option outside of claiming the standard deduction, which is known as itemized deductions. The IRS allows taxpayers to claim certain expenses on Schedule A. If the sum of these expenses exceeds the standard deduction, taxpayers can further lower their income.

Itemized deductions include state and local taxes up to $10,000, medical expenses, mortgage interest, and charitable contributions. Many of your qualifying home expenses will fall into the itemized deduction category. Below are the standard deduction thresholds.

Tax YearSingleMarried Filing JointlyMarried Filing SeparatelyHead of Household

2. Nondeductible Home Expenses

It’s not uncommon for homeowners to try to claim every house expense. Unfortunately, the IRS does limit what types of expenses you can take. Here is a list of expenses that are nondeductible:
• Fire insurance
• Homeowners insurance premiums (unless claiming the Home Office Deduction)
• Depreciation (unless claiming the Home Office Deduction)
• Utilities (unless claiming the Home Office Deduction)
• Down payment
• Domestic service
• Principal portion of your mortgage payment

3. Maximizing Your Breaks and Benefits with These 8 Tax Deductions

Now, let’s get into which homeowner tax breaks and benefits you can take to reduce your tax bill each year as a homeowner. Remember, you might not be able to claim all of these expenses. The deductibility of home expenses is determined based on your specific situation.

1: Mortgage Interest

Many homeowners take out a mortgage to secure the purchase of their home. Lenders will require principal and interest payments. Although the principal portion of your payment is nondeductible, the interest portion is a qualifying itemized deduction.

Lenders will send you Form 1098 each year, which outlines the total interest you paid on your mortgage for that tax year. This information will be entered on Schedule A. With rising interest rates over the past couple of years, it’s not uncommon for your interest to be high enough to itemize your deductions.

The amount of mortgage interest you can claim each year is capped at $750,000. Most homeowners won’t have to worry about reaching this limit.

2: Home Equity Loan Interest

A home equity loan is a second mortgage on your home that pulls out any existing equity. Normally, home equity loan payments are nondeductible. Even so, if you use the funds to make improvements to your existing home, you can deduct the interest portion of your payments.

Similar to mortgage interest, you might receive a 1098 from your financial institution that outlines the amount of interest paid during the year. If you don’t receive this tax form, you might need to contact your loan servicer or go through your monthly statements.

3: Discount Points

When you take out a mortgage, you might have the option to purchase discount points. Discount points lower your interest rate on your mortgage by prepaying interest. One discount point equals 1% off your interest rate.

You can deduct the cost of purchasing discount points as an itemized deduction. However, you aren’t able to deduct loan origination points, which are fees paid to the loan provider to process your mortgage.

Your closing document should outline the amounts spent on loan origination fees and prepaid interest. If you can’t find these figures, reach out to your loan servicer and they should be able to provide you with a breakdown.

4: Property Taxes

Property taxes are one of the main deductions homeowners can take. In addition to claiming the amount as an itemized deduction, many states have extra credits and deductions you can take to lower your state tax bill.

Property taxes are only deductible if paid during the tax year. If paid in January of the following year, you cannot claim the property tax expense until the following year. Additionally, state and local taxes are limited to $10,000.

This means if you had $5,000 in state taxes withheld from your paycheck and your property taxes were $7,000, you can only claim $10,000 in expenses. As a business owner who operates in a state with pass-through entity (PTE) tax provisions, you might be able to use the PTE tax workaround.

5: Home Office Expenses

Here is a bonus for business owners, entrepreneurs, and side hustlers. Sole proprietorships and single-member LLCs that report income or loss on Schedule C have the ability to claim home office expenses with their individual tax return using Form 8829. The owners of multi-member LLCs, partnerships, and S-corporations can utilize an Accountable Plan.

Nevertheless, the Home Office Deduction is only applicable if you use a room or portion of your house exclusively for qualifying business activities.

For example, if you use a spare bedroom to run a quilting business or use a portion of your garage for a woodworking spot, you can claim this deduction. The Home Office Deduction allows homeowners to deduct a certain percentage of household costs.

These include utilities, repairs, maintenance, homeowners’ insurance, and your mortgage. In addition, you might be able to claim a depreciation deduction for a portion of your home. The percentage of the expenses you can deduct depends on the square footage of your office space.

6: Mortgage Insurance

Private mortgage insurance, known as PMI, is a fee charged by your loan provider when you put down less than 20% of the home purchase price. Like mortgage interest, private mortgage insurance is deductible as an itemized deduction on Schedule A.

This can be a significant expense, as it’s not uncommon for PMI to be 1%-5% of your total loan cost. Your monthly statement should break down how much of your payment is allocated to PMI. Otherwise, reach out to your loan servicer for the amount you paid in the prior year.

7: Home Improvements

Home improvements are another way you can lower your tax bill as a homeowner. The first type of home improvement deduction comes in the form of energy-efficient upgrades. In prior years, the Energy Efficient Home Improvement Credit was capped at a lifetime value of $500. However, with recent legislative changes, homeowners can now claim credit each year for energy-efficient upgrades.

The credit is equal to 30% of the cost of certain expenses, including energy-efficient improvements, residential energy property expenses, EV chargers, and home energy audits. The maximum credit is $1,200 for energy property costs and certain energy-efficient home improvements and $2,000 per year for qualified heat pumps.

If you upgrade your windows, doors, HVAC system, roof, or reinsulate, you might be able to claim this credit. In addition, EV charging stations are also a qualifying expense for the income improvement credit. This is a nonrefundable credit, meaning it can’t result in a refund.

Home improvements for medical purposes might also give way to a deduction. Medical expenses in excess of 7.5% of your adjusted gross income get factored into your itemized deductions. Improvements to your home with an underlying medical purpose, such as adding a ramp for a wheelchair, are qualifying expenses.

8: Homeowners’ Exclusion

When it finally comes time to sell your house, you also have some tax advantages. Normally, capital gain taxes are triggered when you sell an item for more than you paid. For example, selling a stock for $7,000 when you paid $5,000 would result in capital gains taxes on $2,000.

The sale of primary residences is treated differently, with the IRS giving you a capital gains tax exclusion. Married filing joint taxpayers can claim a $500,000 capital gains tax exclusion. This means if you bought your home for $500,000 and sold it for $900,000, you wouldn’t have to pay any taxes as it is within the $500,000 exclusion.

There are some requirements to use this exclusion. The main requirement is that you have lived in the home as your primary residence for two out of the past five years. This is why many homeowners “house hack” and live in a home for two years and then upgrade.

4. Conclusion

The government recognized that owning a home could be challenging and placed incentives for real estate purchases and ownership. Homeowners can maximize their tax benefits by exploring various deductions and strategies to optimize their financial outcomes.

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