What Kind of Tax Breaks Do Homeowners Receive?
Many benefits come along with being a homeowner. One of them is that mortgage rates are usually lower than that of rental payments. Another benefit of being a homeowner is that you have the flexibility to use your home as an investment to earn an income stream. Perhaps the most fruitful benefit of being a homeowner is that it gives you access to a wide variety of tax breaks.
Many homeowners are unaware of the tax breaks they can receive just by owning a home. Here is a list of some of the most common tax breaks you can receive as a homeowner. Sift through the list and see if there are any breaks that you have not yet used and can take advantage of next year. Pay attention to any tax tips that you receive in the text, as well.
1. Capital Gain Exclusion
One of the most popular tax breaks for consumers is the capital gain exemption or exclusion. You may be eligible for this exclusion if you have sold your home for more than its value and received a capital gain because of such. Normally, you would have to report that capital gain to the IRS and pay taxes on it. However, you may be eligible to take the exemption in certain circumstances.
You must have owned the home for at least two years and lived in the home for at least two years to qualify. Additionally, you must not have taken the exemption recently. You could qualify for up to $250,000 of an exemption if you are single. If you are married, you may be eligible for up to $500,000 of exemptions.
2. Rental Expense Deductions
You may also be entitled to some tax breaks if you own a rental home that you rent to other people. The deductions may apply if the rental home is currently empty, and you are making efforts to rent it. You can take the deductions for a wide variety of expenses that you may accrue while you're trying to keep up the rental property. Examples of those expenses are pest control services, repairs, utilities, insurance, management fees, and more.
3. Medical Home Improvement Deduction
Another one of the great tax breaks is a break you can get on home improvements that you have to do for medical reasons. For example, you might have to install a ramp so that your loved one can easily access your home in his or her wheelchair. You may have to add an elevator to your home to make getting upstairs easier for someone with a bad heart. You get the idea.
You can deduct those expenses and get credit for them as long as they do not increase the value of your home. If they do increase the value of your home, then you will have to deduct the value boost from the amount of the expense to come up with the amount that you can use as your credit. To qualify for this deduction, the amount of your expenses must be equal to or greater than 10 percent of your adjusted gross income.
4. Energy-Saving Improvement Credit
You can receive some amazing tax breaks if you upgrade your home to make use of renewable energy. Examples of upgrades that may qualify include upgrades such as solar panels, solar-powered water heaters, geothermal heat pumps, fuel cells, wind turbines, and more. The credit that you will receive will be equal to 30 percent of the cost of your upgrade. The government allowed a maximum credit for fuel sales of $1,000 for each kilowatt.
Going Green Can Save You a Lot
If you never before considered installing solar panels to your home, you may want to consider it now. You can reap the benefit of getting a huge discount on your taxes just for making your home more modern. You can save yourself money regularly and once per year just making that simple change to your lifestyle.
5. Home Office Deduction
You can qualify for a home office deduction if you legitimately work from home, and you dedicate a portion of that space within your home to your office work. Examples of the type of jobs that can help you qualify for this deduction are journalism positions, child care jobs, remote customer service positions, and more.
How to Claim It?
There are two ways that you can claim your tax breaks if you have a home office. IRS form 8829 is a 44-line document that you can fill out to get the amount of your credit. Many people decide to go the other route, however. They take the standard maximum deduction which is $1,500, and they never have to deal with lengthy calculations. You can go that route as well, and you can save money on your taxes.
6. Property Tax Deduction
Another benefit of being a homeowner is that you have to pay taxes each year. You can get tax breaks on any taxes that you have to pay relating to your home. Examples of such taxes are sales taxes, state taxes, federal taxes, and more. As of now, you may deduct up to $5,000 if you are married filing a separate return from your spouse. That number doubles to $10,000 if you are married filing a joint return.
What Properties Can I Use?
You can use a wide variety of properties to claim this deduction. You may use your primary home, a car or RV, land, a vacation home, and more. You may not claim the property tax deduction on property do you don't own, and you may not claim the property tax deduction on taxes you have not yet paid for the year. This deduction can help reduce your income taxes a great deal, and it may even put you on the path toward receiving a refund.
7. Mortgage Interest Credit
Another one of the tax breaks you can get from being a homeowner is the mortgage interest credit. The mortgage interest credit is something that you can receive based on the amount of interest that you pay on your mortgage. In order to claim this credit, you have to have a special certificate called a mortgage credit certificate or MCC.
Qualifications You Have to Meet:
- For one, you must be a first-time home buyer, or you must be a home buyer who has not purchased a primary residence within the past three years.
- The home that you purchase must be used for a primary residence, and you must also have a 30-year mortgage term.
- There is also a fee that you must pay to participate in the MCC program.
- Furthermore, you must have a sales contract that thoroughly describes your property, and you must have copies of your federal income tax returns for three previous years.
Not all MCCs qualify for the mortgage interest credit. Certificates that are issued by the Farmer's Home Administration, the Department of Veterans Affairs, and the Federal Housing Administration are not eligible for the mortgage interest credit. You may not use a homestead staff exemption certificate either.
To claim your credit, you must use form 8396 from the IRS. The way you will calculate your mortgage interest credit is by multiplying the interest you pay on the mortgage by the certificate rate. You will have a unique certificate rate on your MCC, and you will use that to figure out what your credit should be. You can claim the credit each year when you do your taxes.
8. Mortgage Insurance Premium Deduction
The mortgage insurance deduction is another one of those tax breaks that you may be interested in receiving. Many borrowers are forced to purchase mortgage insurance at the request of their lenders when they apply to purchase a home. Those mortgage insurance premiums can cause the homeowner's monthly payments to skyrocket.
The mortgage insurance premium tax deduction is a way for a debtor to get a little something back at the end of the year. To qualify for the deduction, the homeowner has to:
- Have a loan that was taken after January 1st of 2007.
- The insurance policy must also be for the purchase of a first or second home.
- The home must be used as a primary residence and not a vacation rental.
- Taxpayers can claim the deduction as long as they do not earn more than $109,000 a year for married couples. Persons who are married filing separate returns will not be eligible if their adjusted gross income is more than $54,500.
- To claim the deduction, the taxpayer must itemize tax deductions and report them on line 13 of schedule a.
9. Mortgage Points Deduction
Debtors sometimes have to pay certain charges to obtain a mortgage for a home. These charges are referred to as points by mortgage professionals. The Home mortgage point deduction is another one of those tax breaks that many taxpayers are unaware of. If you have a mortgage, then most likely you can qualify to deduct all of your points. However, you must meet certain criteria.
Your main home must secure your loan, and it must be the home that you live in most of the time. The points that you pay cannot be more than the points that are charged in the area in which you live. You must also use the cash method of accounting, and the money that you paid at or before closing must be at least as much as the points that were charged. Your amount must also show clearly as points on a statement for your settlement. To receive this credit, you must itemize your deductions and complete a schedule A in form 1040 or 1040-SR.
10. Home Equity Loan Interest Deduction
At some point during the course of your homeownership, you may have taken out a home equity loan. You may have used the proceeds from this loan to make home renovations, to pay for your education, to purchase a vehicle, or for some other reason. One of the tax breaks that you can take advantage of is the home equity loan tax deduction. The rules regarding the deduction have been changed recently. However, it is still possible for you to receive this deduction.
There is a $750,000 limit for the amount of deductions a married couple can claim. If you are a single individual, then your limit will be $375,000. The new limitations are supposed to stay in place until at least 2025. The only way that this deduction will be fruitful for you is if it is more than the $12,000 standard deduction for single filers or the $24,000 standard deduction for married couples. If you believe your deduction will be greater than that, then you should take it.
Other Notable Tax Breaks
We also wanted to include some additional tax breaks that you can take advantage of when you do your taxes. These are not limited to homeowners, but they are generally easy to qualify for, and they can make your life much better. Ask a tax professional if you qualify for any of these three tax breaks. You might be surprised to find that you do qualify, and you can either reduce your tax payments or increase your tax refund.
1. Earned Income Credit
The earned income credit may be available to you whether you own a home or not. It is a special credit that mostly affects low income or moderate-income taxpayers. To qualify for the credit, you must have a filing status of anything except married filing separately. You must also have a valid social security number and less than $3,400 of investment income for the tax year. You must also have an adjusted gross income that is within the limits. Single persons with no dependents can receive a maximum credit of $519 as long as that individual has an AGI of less than $15,270. Many persons can qualify if their income is less than $20,950. Those with one child can receive $3,461 if they earn less than $40,320 as a single individual or $46,010 as a married couple. The maximum amount of credit that one can receive for the current year is $6,557.
2. Higher Education Breaks
You can also get a tax break for your efforts to obtain a higher education. The American Opportunity Credit is an example of one that you can take. You can claim up to $2,500 for qualified educational expenses. The Lifetime Learning Credit is another example of an educational credit you can take to reduce your taxes. You can claim a $2,000 credit one time on each return, and you can claim it for as many years as you want. To qualify to take these credits, you must be learning at a post-secondary institution, and you must be eligible to participate in a student financial aid program. The credit can cover expenses such as tuition, enrollment fees, books, supplies, and equipment. It will not cover housing, meals, transportation, and insurance.
3. Retirement Plan Contribution Credits
The Saver's Credit is another example of a credit for which you may be eligible. You're going to be eligible for this credit if you save money to put into a 401k, IRA, or other eligible savings retirement plan. To be eligible to take the credit, you must be 18 years or older and not be a full-time student or someone who is currently being claimed on someone else's return as a dependent. You must file Form 8880 to figure out how much of a tax credit you can take. The maximum credit that you can take is $2,000 if you are a person who is married filing jointly. That maximum reduces to $1,000 if you are a single individual.
Contact Us for Assistance
Now you know just a few of the many tax breaks you can get because you own a home. You can start giving yourself the discounts and credits that you deserve on your taxes. You can also contact us for assistance in finding the financial products and services that you need. We are a long-standing consumer advocate, and our main goal is to help debtors find products such as mortgage loans, debt consolidation loans, personal cash advances, and more.
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