Here are the nine main tax deductions you should know about as a homeowner.
1. Mortgage Points Deduction
Your mortgage may be the largest debt you’ll ever tackle. Consider purchasing mortgage points. These can be a great way to not only save money over the duration of your mortgage but also to write off some of the interest paid on your loan.
What Are Mortgage Points?
Mortgage points are often referred to as discount points and are bought upfront, at the time you close on your mortgage.
One point is equal to 1% of your total mortgage amount. For example, let’s say your home is $200,000 and you want to put down an additional $2,000 at closing. In this case, you’d purchase one mortgage point. The purpose of mortgage points is to reduce your interest rate over the lifetime of your loan. Your interest rate decreases for each mortgage point you purchase.
How Do Tax Deductions Work For Mortgage Points?
You can typically claim the full amount on your taxes the same year you buy mortgage points. There are some stipulations you must meet to qualify, but most U.S. homeowners meet these standards. If your home loan amount is over $750,000, you’ll be limited to a specific amount you can claim on your taxes.
Use Form 1098 (provided by your mortgage lender) to claim the deduction and find the total number of mortgage points purchased. You’ll put this amount on line 10 of Form 1040 Schedule A. Your accountant or tax software can walk you through this step.
2. Mortgage Interest Deduction
You can also put a little money back into your own pocket with a type of tax break called a mortgage interest deduction. This deduction allows you to claim the total amount paid toward your mortgage interest within one year.
Homeowners can deduct the interest paid on the first $750,000 of qualified personal residence debt on a primary or second home.
You can find the amount of mortgage interest paid per year on Form 1098 from your mortgage lender. You’ll report this amount on Schedule A of the 1040 form.
3. Property Tax Deduction
Homeownership also requires you to pay property taxes. What you’ll pay in property taxes ranges depending on the state and county you live in as well as the overall value of your home. This covers things like road and highway construction, education and more. You can deduct the property tax payments you make each year if you itemize your tax return.
Let’s say you’re married and filing jointly. You can deduct up to $10,000 in property taxes per year when filing your taxes. On the other hand, if you’re single or filing separately, you can deduct up to $5,000 in property taxes. You’ll claim this deduction using Schedule A of the 1040 tax form.
4. Rental Deductions
Did you know you’re eligible for a rental deduction if you rent out a part of your home, such as a garage apartment, basem*nt or spare bedroom? You’ll need to pay taxes on any rental income, but you can recoup some money by deducting maintenance and repair costs, insurance, utilities and other rental expenses.
Simply fill out Schedule E of the 1040 form and subtract any expenses from your rental property income. Be sure to check with a tax professional to ensure you maximize this deduction.
5. Home Office Deductions
In some cases, you may be able to deduct business expenses from your taxes, particularly if you’re a self-employed homeowner. You must be self-employed – not just a remote employee – and meet all of the IRS’s stringent requirements to take advantage of this deduction, such as the requirement of the space being used exclusively for work.
The IRS allows homeowners with a qualifying home office to calculate the amount they’re able to deduct from their taxes in one of two ways. The first method involves calculating the actual expenses you spend operating your business from home. This could include maintenance, utilities, internet and other expenses. You’ll need to keep your receipts to back up your claims.
The second method is a simplified estimate that allows you to deduct $5 per square footage of office space. So, if your work area is a 10x20 space, or 200 square feet, you’d qualify for a $1,000 deduction.
6. Home Improvement Deductions
Home improvement products can add tremendous value to your home both by improving your space and increasing your home’s worth. Another upside to home improvementprojects is that many of them qualify for tax deductions.
Home improvements that improve your home’s value are called capital improvements. Types of qualified improvements include swimming pools, home additions, garages, a new roof, a new central air conditioning system, water heater upgrades, home security systems and more.
As a homeowner, you can’t deduct these expenses. But the value of any capital improvements you make to the home is added to your cost basis in the home which in turn affects whether, and how much, you’ll pay in capital gains taxes when you sell the property. It’s important to keep records of all major home improvements for this reason. A qualified accountant or tax specialist can help you work through all improvements to determine which ones are eligible for this tax treatment.
Some taxpayers have asked if homeowner's insurance is tax deductible. Here's the skinny: You can only deduct homeowner's insurance premiums paid on rental properties. Homeowner's insurance is never tax deductible your main home.
The Bottom Line: You Won't Be Able To Deduct Insurance Premiums. Unfortunately, homeowners insurance premiums aren't tax deductible, unless the property creates a source of income.
Typical homeowners insurance deductibles range from $500 to $2,000, though lower and higher amounts may also be available. However, not all home insurance deductibles are flat dollar amounts.
Is mortgage insurance tax-deductible? No, private mortgage insurance isn't tax-deductible now. The mortgage insurance deduction was only available for eligible homeowners for the 2018–2021 tax years.
1. You may be able to claim utilities on your taxes if you work from home and are self-employed. You can deduct a portion of your home-related expenses, including utilities, if you use your home office exclusively for self-employment or business use. This is true whether you're a homeowner or a renter.
Understanding your eligibility for different deductions, including potential deductions from your auto and home insurance premiums, can help. Typically auto and home insurance premiums are not tax deductible, but there are few instances where you may be able to claim a deduction.
Only in rare cases can you get your homeowners insurance deductible waived. It is usually very difficult to do this unless your home has been completely demolished and needs to be rebuilt from the ground up.
The average deductible for home insurance lies between $500 and $2,000. Generally, the higher the deductible, the lower your home insurance premiums and vice versa. A policy's deductible is typically set at the time of purchase, but you can change it at any time during the term.
Typically, the only closing costs that are tax-deductible are payments toward mortgage interest, buying points or property taxes. Other closing costs are not.
You can deduct the mortgage interest you paid during the tax year on the first $750,000 of your mortgage debt for your primary home or a second home. If you are married filing separately, the limit drops to $375,000.
How much interest can I write off? You can deduct the interest you paid on the first $750,000 of your mortgage during the relevant tax year. For married couples filing separately, that limit is $375,000, according to the Internal Revenue Service.
If you're eligible, you may be able to deduct a portion of your homeowners association fees, utility bills, homeowners insurance premiums and the money you used to repair your home office. The amount you can deduct depends on several factors, including the percentage of your home that's used exclusively for business.
But if you bought a car and are making monthly payments, or you're leasing a car, the payments are not actually tax-deductible. But there are still car-related business expenses that you can write off and save significantly on your taxes.
You can claim your Internet deductible on your tax forms. These forms will differ if you're self-employed or a business owner. Internet access that supports services for the business—and is not mandatory for operation—is considered an office expense. Otherwise, your Internet access is classified as a utility.
If you're self-employed, operate a business out of your home and maintain a dedicated space for a home office, you may deduct a portion of your home expenses, including homeowners insurance, from your business income.
Homeowners' insurance for your residence is not tax deductible and is not entered on your tax return. If the home is a rental home, homeowners insurance can be deducted as a rental expense.
Are Home Warranties Tax Deductible? If you buy a home warranty for your primary residence, it isn't tax deductible on your federal return. The same is true for homeowners insurance. However, if you use a part of your house for a home office, you can deduct a portion of the home warranty.
In a nutshell — yes. But let's be clear. We're talking about the interest portion of your mortgage payment that you make each month. The deduction doesn't apply to the mortgage principal, nor the down payment or mortgage insurance premiums (after tax year 2021).
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Introduction: My name is Cheryll Lueilwitz, I am a sparkling, clean, super, lucky, joyous, outstanding, lucky person who loves writing and wants to share my knowledge and understanding with you.
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