Typical Deductions for Homeowners When Filing Taxes
Now is the time to file taxes. Or, one may make the case that taxes are constantly on the horizon.
Property owners in the United States are fortunate in that they can claim a wide variety of tax deductions. It’s possible to save several thousand dollars thanks to these breaks. Taking advantage of these deductions on your tax return depends on your familiarity with the rules and with the types of products that qualify for them. While it’s common knowledge that mortgage interest may be written off, it’s not the only tax break available to homeowners. Let’s examine the various tax breaks that exist to make house ownership more accessible and rewarding.
Deductions on taxes…what are they?
First, let’s talk about tax breaks. These deductions lower your taxable income and, consequently, your tax bill each year. (Here’s a hint: consider it a tax deduction as well.) Standardized and itemized deductions are the two main categories. You can reduce your taxable income either through itemized deductions or through the standard deduction, which is a monetary amount established by the Internal Revenue Service.
Conversely, an itemized deduction is a tax write-off for which you and only you are responsible for determining the amount. Taxes levied by states and municipal governments, as well as other homeowner costs like mortgage interest and tax payments, are one example. As unfortunate as it may seem, not all housing-related charges are tax deductible. These include, but are not limited to, homeowner association fees, closing costs, relocation expenses (save for military-related costs), title insurance, etc.
At tax time, you’ll have to choose between taking the standard deduction and itemizing your deductions based on whether or not your total itemized deductions surpass the standard deduction. You must itemize deductions to benefit from the many homeowner tax breaks. However, if the standard deduction reduces your tax liability more than itemizing your deductions would, you should use the latter.
We’ll go over some of the most prevalent tax deductions for itemizes now.
The tax break for mortgage interest:
Most homeowners deduct the full amount of their mortgage interest paid each year as a tax deduction thanks to the mortgage interest deduction. In the first few years of a mortgage, interest often accounts for the bulk of monthly payments. Therefore, deducting them can greatly lessen a person’s tax burden.
The former cap of $1,000,000 in mortgage debt that may be deducted has been reduced to $750,000 thanks to the Tax Cuts and Jobs Act (TJCA). After December 16, 2017, the maximum loan amount you can borrow to start a mortgage is $750,000. Between October 14, 1987 and December 15, 2018, mortgages originated between October 14 and December 15 are eligible for a deduction of up to $1,000,000. In addition, if your mortgage was originated before to October 1987, 100% of your mortgage interest could be eligible.
If you spent more than $600 in mortgage interest during the year, your lender must give you a Form 1098. To find out how much interest you’re paying, though, you should get in touch with your mortgage service and get a copy of your mortgage interest statement. For more information on how your tax status, such as whether you’re married and filing jointly or separately, can affect whether or not your mortgage interest is deductible, you should see a tax professional.
The deduction for private mortgage insurance (PMI):
As private mortgage insurance (PMI) covers the lender in the event that you default on your mortgage payments, it is typically required of homeowners whose down payments amount to 20% or less of the purchase price. PMI, or private mortgage insurance, is an expense that is added to the cost of a mortgage for many borrowers. Homeowners used to be able to take a tax deduction for mortgage insurance since the IRS treated it the same way. However, due to changes in the tax rules, this deduction no longer applies after the end of 2017, but it has been extended to cover premiums paid until the 2021 tax year (filed in 2022). Mortgages that were started in 2007 or later and meet additional requirements, such as those linked to adjusted gross income, are eligible for this deduction.
Deduction for Mortgage Points:
The mortgage points deduction, also known as the mortgage origination deduction, is a tax write-off for homeowners that applies to points paid at closing. Discount points can be a tax write-off for homeowners who use them to lower their interest rate on a mortgage loan (loan origination points, on the other hand, cannot). To take advantage of the deduction, home buyers must deduct all points paid in that tax year. If you refinanced your home and paid discount points, you’ll have to a mortise those costs into your new monthly payment.
Deduction for use of a home office :
The home office deduction is one of the most prevalent tax breaks for self-employed professionals who own homes. It allows those in that position to deduct some of the costs associated with running a home office, such as a percentage of the monthly rent, utilities, and other home-related expenses. You can’t claim this deduction if you’re an employee of a corporation, even if you work from home, and you can’t claim it if you utilize any part of your home for anything other than your business. Also, if you have any business-related out-of-pocket expenses, such as buying supplies or tools, you may be able to write them off on your taxes.
Tax breaks for interest on home equity loans:
Success awaits those who have used a home equity loan or line of credit to upgrade their dwelling. As of the Tax Cuts and Jobs Act of 2018, interest on these loans is only tax deductible if they are used to “purchase, construct, or significantly renovate” a primary residence. That is to say, you can’t use the money to settle your own debts or pay for your own education and then claim a tax deduction. You should talk to a tax professional about the destructibility of interest and fees on a home equity loan because the rules for doing so are complex and subject to change according to IRS guidance.
You probably know all about the state and municipal property taxes as a homeowner. On the bright side, state and municipal property taxes paid together may be deducted up to $10,000, depending on where you live. Get up to speed on the tax deductions that apply to your area by consulting a tax expert.
Is there anything more that needs to be taken into account in terms of taxes?
Mortgage tax credits, for example, are tax credits that are intended to help people with low and moderate incomes become homeowners for the first time. This home buyer aid program , formerly known as a Mortgage Credit Certificate (MCC), allows mortgage lenders to convert a portion of qualified home buyers’ interest into a tax credit. If the pandemic has made it difficult for you to maintain your mortgage payments, you may want to inquire with your loan service regarding homeowner pandemic assistance.
Tax breaks and deductions aren’t the only ways in which property ownership can save you money. Having a better credit score can help you qualify for a mortgage with more favorable interest rates and terms, among the many financial perks of home ownership. Borrowers who are concerned about housing costs should speak with a tax expert, who can explain the impact of the borrower’s tax band, and a mortgage expert, who can explain the various strategies available for making home ownership within reach.
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