The Internal Revenue Service (IRS) offers several special tax deductions for homeowners, but the deductible you can claim varies according to your unique situation. If you want to reduce your tax burden and save money, then keep reading to learn more!
Tax Deductions for Homeowners | 5 Deductibles That Save You Money
1. Tax Deductions for Homeowners Who Itemize
One of the tax deductions for homeowners takes effect when they itemize.
When you file your income tax return, you can make deductions, which are either standard or itemized. As of 2018, the standard deduction is $12,000 for individuals and $24,000 for couples married filing jointly.
The majority of taxpayers claim the standard deduction, and because the 2018 tax law practically doubled the amount, the percentage of people who will claim it is likely to increase.
In contrast, an itemized deduction is the total of a number of small deductions such as dental and medical expenses over a certain percentage of your income, casualty losses, and a few special tax deductions for homeowners including the following:
- Mortgage-Interest Deduction — You can include interest you pay on your mortgage in your itemized deductions. As of 2018, you can only claim the interest on mortgages up to $750,000.
- Mortgage Points Paid at Purchase — If you pay some mortgage interest upfront when you buy your home, you can also include that in your itemized deductions.
- State and Local Property Taxes — You can include state and local taxes on property worth up to $10,000.
- Home Renovations for Medical Reasons — You can also claim expenses you have made to modify your home for medical reasons. These include adding a wheelchair ramp, putting a support bar in the bathroom, or installing new lighting for someone with vision impairment. However, you can only deduct the amount that exceeds 10% of your adjusted gross income.
As a general rule of thumb, you should only claim the itemized deduction if it exceeds your standard deduction.
To explain, imagine you are married filing jointly. Your standard deduction is $24,000. You have a mortgage for $600,000, and you paid $12,000 in interest last year.
You also paid exactly $10,000 in property taxes. On top of that, you have other various deductions worth $6,000.
In this case, your itemized deductions add up to $28,000, which is more than your standard deduction, so you claim that amount.
2. Capital Gains Exemption for Your Primary Residence
One of the tax deductions for homeowners is for those with a primary residence.
Normally, when you make a lot of money selling a significant asset, the IRS requires you to report your earnings and pay capital gains. To give you a simple example, imagine you bought a stock for $1,000 and you sold it for $100,000. You have a capital gain of $99,000, and you have to pay tax on that amount.
However, your primary residence is exempted from capital gains tax. As of 2018, you can earn up to $250,000 on your primary residence if you are single or up to $500,000 if you are married filing jointly, and you do not have to pay tax on those amounts. This is called a Section 121 exclusion of the tax code.
To qualify, the home must be your primary residence. It cannot be a vacation home or a rental property.
You must also have lived in the home for at least two of the last five years, and you must not have used a capital gains exemption on another home’s sale in the last two years.
There are a few exceptions to this rule. If you lived in your home for a year and then you sold it because you got married, you qualify for half the normal exemption amount.
To figure out the capital gains on your home, subtract the price you paid from the selling price. For instance, if you bought a house for $300,000 and sold it for $500,000, your capital gain is $200,000.
However, you can also subtract capital improvements from this amount. If you put in a new HVAC system, added a swimming pool, or made other significant improvements, you can subtract those amounts from your capital gain.
Keep your receipts. If you sell the home, those records can be useful.
3. Casualty, Disaster, and Theft Losses
If you have lost your home due to a natural disaster, such as a flood, hurricane, tornado, volcanic eruption, as well as to theft or a similar event, you can claim a deduction related to your losses.
If you have homeowners’ insurance, you cannot qualify for this deduction unless you make a claim in a timely fashion. Otherwise, you can claim the value of your losses minus any insurance payments you received. You must also subtract $100 and 10% of your adjusted gross income.
This is one of the relatively rare tax deductions for homeowners, but it does not make it any less useful. If you lose your home in a forest fire, for example, it can reduce your income to zero on paper and completely eliminate your income tax bill.
However, the specifics vary based on your income, the value of your home, and how much you received from your insurer.
4. Home Office
People with a home-based business or self-employed individuals can also lower their IRS obligation for the tax year and take advantage of tax deductions for homeowners. If you work from home, you can deduct business expenses related to your home office. To qualify, it must be the primary place where you work, run your business, or meet with clients.
To calculate your deduction, you can use the simplified method or add up your expenses.
With the simplified method, you multiply the square footage of your office with $5, but you can only claim a maximum deduction of $1,500 this way.
Generally, it is more lucrative to base your home office deduction on your actual expenses. With this method, you take the size of your home office relative to the rest of your home, and you multiply the percentage by your home expenses.
For instance, if your home office is 10% of your home’s total area, you can deduct 10% of your utility bills, garbage collection fees, and similar costs. Renters can also claim the percentage of their rent, while homeowners can deduct the percentage of their mortgage interest and property taxes.
5. Rental Expenses
If you rent out a part of your home, you can also deduct some expenses related to that.
When it comes to tax deductions for homeowners, you can figure out your tax deductible by getting the percentage of the rented area and multiplying it with your home expenses. You can also subtract any costs related to that space as well.
For instance, if you put a new carpet in the renter’s room, you can deduct the cost. On the flipside, you have to report the rent you receive as income.
What is a property tax? This video from City of Richmond explains it:
To keep your tax bill as low as possible, maximize these tax deductions for homeowners on your tax return. You may even be able to claim some deductions retroactively by amending prior year’s returns. If you’re dealing with an unwieldy tax bill, we can help. To learn more about tax relief options, contact our trusted friends at Tax Relief Center.
What tax deductions for homeowners do you claim? Let us know below!