Homeownership is very rewarding, but it can be expensive, too. General maintenance and upkeep can easily take a bite out of your monthly budget. There are also local and state taxes to consider. As your home ages, upgrades and improvements may also be necessary. Thankfully, having a mortgage does have some perks. There are federal tax deductions and credits that can save you money, especially if you itemize. Here are six tax-saving tips for homeowners you should consider when filing your taxes this year.
1. Mortgage Interest Deduction
If you itemize your taxes, the mortgage interest deduction is one of the largest you can take as a homeowner. Before the Tax Cuts and Jobs Act of 2017, you could deduct up to $1 million ($500,000 if you are married and filing separately) in mortgage interest. Now, the maximum you can claim is $750,000 (or $375,000 if your filing status is married filing separately).
There are some exceptions. If your mortgage was taken out before December 16, 2017, you are grandfathered into the higher previous rate. Additionally, mortgages that predate October 14, 1987, may deduct all interest regardless of the total amount.
2. Mortgage Points
When you obtained your home loan, did you purchase mortgage points (aka discount points) to lower your interest rate? Good news! The IRS considers them to be prepaid interest so you can deduct the cost of the discount points. One discount point equals 1% of the mortgage amount. Just be sure that the points weren’t for paying the lender’s costs (loan origination points), as these are not tax-deductible.
3. Home Equity Loan Interest
If you took out a home equity loan or line of credit (HELOC) last year, you may be able to deduct the interest paid if you meet the following requirements:
- You itemize your deductions; and
- The money from your HELOC was used to buy, build, or substantially improve your home.
Remodels, additions, new roofs, and new HVAC units are all examples of “improvements” that would qualify for the deduction. If you used your HELOC to pay off debt or for educational expenses, however, you cannot take this deduction.
It’s also important to note that your HELOC’s interest counts toward your total mortgage interest deduction limit. If you’re over the limit with your primary mortgage, you can’t deduct your HELOC interest, too.
4. Property Tax Deduction
Under the state and local (SALT) tax deduction, you can deduct up to $10,000 annually. If your filing status is married filing separately or single, the deduction decreases to $5,000. The limit includes your property taxes and either:
- State and local income taxes; or
- Sales taxes.
For example, if your property taxes are $6,000 and your state income taxes are $4,000, you can deduct the entire amount if you’re married and filing jointly. If you are single, you may claim the $4,000 in state income taxes, but only $1,000 in property taxes.
5. Energy-Efficient Improvements
The Inflation Reduction Act (IRA) of 2022 provides federal tax credits and deductions for taxpayers who make energy-efficient upgrades to their homes. These new tax credits are available through 2032 and provide up to $1,200 annually (beginning in tax year 2023) to help lower the cost of improvements by up to 30%. You can also receive up to $2,000 for buying and installing an eligible heat pump. Examples of qualifying improvements include, but are not limited to:
- Heat pumps
- Water heaters (natural gas)
- Insulation
- Doors
- Windows and skylights
Upgraded electrical panels and home energy audits are also covered by the tax credits. For tax year 2022, you can claim a federal tax credit of 10% for energy-efficient improvement costs, as well as up to $300 for purchasing certain heating and cooling equipment. Check with your state for any rebate programs offered.
6. Capital Gains
Did you sell your home for a profit last year? If you lived in it for at least two of the last five years before selling, you can exclude up to $500,000 (or $250,000 if you’re single or married filing separately) in profits from your federal income tax return.
Don’t forget to include the costs of home improvements when calculating your cost basis. You should also keep your receipts in case you are audited.
Home Expenses That Aren’t Tax Deductible
Unfortunately, not all home-related expenses are tax-deductible. This includes, but is not limited to:
- Mortgage down payment
- Costs for refinancing a mortgage
- Mortgage insurance
- Payments made toward your mortgage’s loan principal
- Utility expenses (gas, water, electric, etc.)
- Homeowner’s insurance
- Homeowner association fees
- Cleaning and yard maintenance costs
- Depreciation of your home’s value
If you need help determining which tax breaks you are eligible to take as a homeowner or need help filing your tax returns (state and/or federal), reach out to a tax professional. At Tax Defense Network, we offer a free consultation and affordable tax preparation fees. Call 855-476-6920 to speak to one of our tax experts today!