Owning a home is a significant life milestone which comes with potential tax benefits. As a homeowner, you may be eligible for various tax deductions that can help reduce your overall tax liability. Understanding the deductions available to you can result in substantial tax savings. In this comprehensive guide, we will explore the most common tax deductions available to homeowners, providing you with the knowledge you need to maximize your tax benefits.
Mortgage Interest Deduction
One of the most significant tax deductions available to homeowners is the mortgage interest deduction. This deduction allows you to deduct the interest paid on your mortgage loan, potentially reducing your taxable income. Here are some key points to keep in mind:
- Qualified Residence: The mortgage interest deduction applies to your primary residence and a second home, such as a vacation home. However, there are limits on the amount of mortgage debt eligible for the deduction.
- Itemizing Deductions: To claim the mortgage interest deduction, you must itemize your deductions on Schedule A of your tax return.
- Limits on Deductible Interest: For mortgages taken out after December 15, 2017, you can deduct interest on up to $750,000 of qualified mortgage debt ($375,000 if married filing separately). For mortgages taken out before this date, the limit is $1 million of qualified mortgage debt ($500,000 if married filing separately).
- Home Equity Loan Interest: In certain cases, you may also be able to deduct the interest on a home equity loan or line of credit, subject to certain limitations.
Property Tax Deduction
Property taxes can be a significant expense for homeowners. Fortunately, they are generally deductible on your federal tax return. Here are key points to consider:
- Itemizing Deductions: Similar to the mortgage interest deduction, you must itemize your deductions to claim the property tax deduction on Schedule A.
- Limits on State and Local Tax Deductions: The property tax deduction falls under the category of state and local taxes (SALT). With the Tax Cuts and Jobs Act of 2017, there is now a $10,000 limit ($5,000 if married filing separately) on the total amount of state and local taxes you can deduct.
- Proper Documentation: Keep records of your property tax payments, including any adjustments or prorations, to support your deduction claim.
Home Office Deduction
If you use part of your home exclusively for business purposes, you may be eligible for the home office deduction if you are self-employed or own a small business (W-2 employees do not qualify). This deduction allows you to deduct expenses related to the portion of your home used for your business. Here are some important considerations:
- Exclusive and Regular Use: To qualify for the home office deduction, the space in your home must be used exclusively and regularly for your business activities. It should be your primary place of business or where you meet clients or customers.
- Simplified Option: The IRS offers a simplified option for calculating the home office deduction. Instead of calculating actual expenses, you can multiply the square footage of your home office by a prescribed rate.
- Eligible Expenses: The home office deduction consider a pro-rated portion of your mortgage interest, property taxes, insurance, utilities, and other qualified expenses. Be sure to keep accurate records and only claim the expenses directly related to your home office.
Other Deductions to Consider
In addition to the deductions mentioned above, there are several other deductions that homeowners should be aware of:
- Residential Energy Efficient Property Credit: This credit applies to qualifying solar electric systems, solar water heaters, geothermal heat pumps, and small wind turbines installed in your primary residence. The credit is equal to a percentage of the cost of the qualified property.
- Points Deduction: If you paid points to obtain a mortgage, you may be able to deduct those points over the life of the loan.
- Medical Home Improvements: If you made home improvements for medical reasons, such as installing ramps or modifying bathrooms, you may be able to deduct the cost as long as it does not increase the vale of the home or other capital asset.
Conclusion
As a homeowner, understanding and maximizing tax deductions can significantly impact your financial well-being. By familiarizing yourself with the common tax deductions available to homeowners, such as the mortgage interest deduction, property tax deduction, home office deduction, and others, you can optimize your tax savings. Proper planning and documentation will help you make the most of the tax benefits associated with homeownership.
If you have questions about how this topic will impact you, Team LittleOwl CPA is here to help. Schedule a discovery call today!
About Tabitha Regan
Tabitha Regan is the Founder and CEO of LittleOwl CPA. She is a Certified Public Accountant, Certified Financial Planner™ and Personal Financial Specialist. In her 16+ year career span, she has developed an expertise in the specific needs of small businesses and busy professionals with accounting, tax and advisory services.
