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As you may know, there are many tax benefits of owning a home. However, you may be wondering if you are utilizing every benefit possible to help save you money during tax season. According to an article on Realtor.com, there are 7 tax benefits that you may not be aware of and should make use of!
1) Mortgage Interest
Mortgage interest is the most significant benefit of owning a home. If you obtained a mortgage before December 15, 2017, you can deduct interest a loan up to $1 million. If your mortgage incurred after December 15, 2017, you can deduct the interest on the first $750,000 if married and filed jointly, or $375,000 if filed as single. If your mortgage is $250,000, you don’t need to worry about this rule.
It is important to note that your mortgage interest deduction is considered an itemized deduction. Therefore, to take the most advantage of this all your itemized deductions need to be greater than the new standard tax deduction. Also keep in mind that the standard deduction amounts for the 2021 tax year have increased. Individuals can now deduct $12,550 (up $150 from 2020), while married couples filing jointly can deduct $25,100 (up $300 from 2020). The deduction for the head of the household has also increased to $18,800 (up $150 from 2020). If you’re 65 or older, you can add $1,350 per person if you’re married and filing jointly, or $1,700 if you’re the head of the household or a single filer. Make sure to confirm the standard deduction amounts as they may have changed from the time you are reading this.
To claim your mortgage interest deduction, your lender will send you a Form 1098 at the beginning of the year which will state the mortgage interest you paid during the previous year. This is the amount you will deduct on Schedule A (Form 1040). Also, don’t forget to include the interest you paid on your home closing. If this isn’t identified on your 1098, it will be on your Settlement Statement that was provided at closing. You can add this amount to your total mortgage interest paid.
2) Property Taxes
You can deduct state and local property taxes in the year you pay them. Before the Tax Cuts and Job Act went into effect on January 1, 2018, homeowners were able to deduct the entire sum of their property taxes. However, since then the maximum deduction is $10,000 for those married filing jointly, no matter how high the taxes are.
Just keep in mind that property taxes are included in that itemized list of all your deductions, which must total more than your standard deduction to be worthwhile. If you have a mortgage, keep in mind that your property taxes are included in your monthly payment.
3) Private Mortgage Insurance
Private Mortgage Insurance (PMI) is required if you put less than 20% down payment on your home, which costs from 0.3% to 1.15% of your home loan. The purpose of PMI is to reassure and protect the lender in case you default on your loan.
The good news is that the Mortgage Insurance Tax Deduction Act of 2021, which revived various deductions and credits for homeowners that were set to expire in 2020, has allowed for PMI holders to deduct the interest on this insurance.
This is important because the interest on PMI is an itemized deduction as well. However, if you qualify, it might help you surpass the $25,100 standard deduction for married couples under 65. For example, if you earn $100,000 and put down 5% on a $200,000 home, you will pay $1,500 in annual PMI premiums, thus lowering your taxable income by $1,500!
4) Energy Efficiency Upgrades
The Residential Energy Efficient Property Credit was a tax incentive for home improvements that used alternative energy sources. The majority of these tax benefits expired in December 2016, however two remain in effect. According to Josh Zimmelman, proprietor of Westwood Tax & Consulting in New York, the credits for solar electric and solar water heating systems are now accessible through December 31, 2023.
According to Fogel, the SECURE Act also reintroduced a $500 tax credit for a certain qualified energy efficient modifications “such as external windows, doors, and insulation.”
Even with solar energy, you can save a lot of money! Plus, since it’s a credit, there is no need to itemize. However, depending on the date of installation, the credit proportion changes. For example, 26% of the cost of equipment installed between December 31, 2019 and January 1, 2023 is eligible for the credit. After December 31, 2022 and January 1, 2024, the percentage will reduce to 22%. The credit is currently set to expire in 2024.
5) A Home Office
There’s more good news for self-employed individuals whose home office is their primary location of business: You can deduct $5 per square foot of office space up to 300 square feet, for a total deduction of $1,500.
However, there are very rigorous restrictions about what constitutes a dedicated, fully deductible home office space for those who qualify for the deduction. Here’s more information on the sometimes misunderstood home office tax deduction.
Unfortunately, you are not eligible for the home office deduction under the CARES Act if you are a W-2 employee, even if you spent most of 2021 in your home office. If you are a W-2 employee, an option might be to ask your company (and tax adviser) whether you can change your status from employee to independent contractor, which would allow you to continue collecting this deduction. However, it’s important to consider the benefits and drawbacks of this status change that is not solely based on the tax benefits.
If you are self-employed, you are eligible to claim a home office tax deduction. You will deduct a portion of your home expenses on your tax return by separating the costs of utilizing your property for personal and business uses. To qualify for the deduction, you must designate a portion of your house as your principal place of business and utilize it primarily for work. For example, it does not count if you work in a room that serves as a guest room when family or friends come to visit. If your desk is in a corner of your bedroom or is part of an open floor plan, you will need to measure the space you use for your office, including any walls. The key is that you must utilize the space exclusively for work and not to check personal email.
There are a couple methods to go about claiming a home office deduction. The first method is to calculate the amount of space in your home that you use for business purposes. As mentioned above, each square foot you use for work is worth $5 and you can claim up to 300 square feet every year for a total of $1,500. The second method is to keep track of all your home’s costs (i.e. upkeep, insurance, repairs, utilities, etc) as well as depreciation (normal wear and tear). Then divide and allot these expenses based on the percentage of your home that you use exclusively for business. For example, if your office space accounts for 10% of your total square footage, you can deduct 10% of your home costs. The key with this method is keeping careful records.
You do not need to worry about getting audited as the IRS simplified its method of measuring out your office space to take the audit scare out of the home office tax deduction.
6) Home Improvements
To qualify for this deduction, your home modifications must cost more than 7.5% of your adjusted gross income. For example, if you earn $60,000, you can deduct the money you spend over $4,500.
For many older homes who plan to age in place and add additions, such as wheelchair ramps or grab bars in the bathroom, the expense of these improvements might result in a nice tax break. Widening doorways, lowering cabinets or electrical features, and installing stairlifts are all examples of deductible improvements.
It is important to note that to establish that these adjustments were medically necessary, you will need a note from your doctor.
7) Interest on a Home Equity Line of Credit (HELOC)
The regulations of home equity debt have altered drastically as a result of the 2018 Tax Cuts and Jobs Act.
According to the IRS, the interest you pay on a home equity line of credit, or HELOC, is deductible only if the loan is used exclusively to “purchase, develop, or improve a property.” So whether your house needs a kitchen makeover or a half-bath, you will save money. This is known as acquisition debt because it will almost certainly increase the value of your home.
However, if the loan is used for something other than buying, building, or substantially improving a house, then the interested paid is not deductible. For example, if you used your property as collateral to pay for college, a wedding, or a vacation. This is known as home equity debt and it is no longer tax-deductible. Before the new tax bill passed, you could deduct the interest on up to $100,000 of home equity debt as long as your total mortgage debt was less than $1 million. This is no longer allowed, even if you took out the loan before the new tax bill. All home equity obligations, as well as cash-out refinancing, are subject to the new tax law.
In the meanwhile, acquisition debt used to buy, build, improve a house is still deductible, but there is a limit. You can only deduct up to $750,000 in interest paid on your HELOC and mortgage combined. In addition, you can’t legally deduct interest if you took out a HELOC before the new 2018 plan for anything other than home improvements.
Be sure to seek the advice of an accountant to assist you in navigating and understanding the new tax laws.
Resource
https://www.realtor.com/guides/homeowners-guide-to-taxes/7-tax-benefits-of-owning-a-home/
https://www.realtor.com/guides/homeowners-guide-to-taxes/how-to-take-a-home-office-tax-deduction/
