A home is the dream of millions, whether a mobile home, operative apartment, townhouse, or single-family home. Regardless of what it looks like, a home is the American dream.
You cannot deny it if we say that you are either looking to own one or are relaxing on your couch that is arranged next to the perfectly customized walk-in closet of your choice in your own home. However, when the tax time rolls out, many of you still panic.
But there is a fact that you should at least realize now and that is nothing other than the tax deductions for the homeowners.
At least some of you might be afraid of owning a home, just because you heard people say it is quite expensive to maintain. What if we say you do not lose but earn after owning a home? Yes, you heard it right. Although it sounds weird, you can effortlessly support your luxury lifestyle once you own a home. Now let’s see how.
If you rented in the past, then discussing the money you lost to your landlord is needless. But now, the situation is not that anymore. You are now eligible for a tax deduction, one of the perks of owning a home.
Although these tax breaks can save you money, the only loophole is that your taxes will become more complicated. As a homeowner, you are expected to be more responsible, especially when dealing with finances. But it is not as problematic as it may seem to others.
You will realize the benefits when you step into it. Even you will be astounded to see how much you are saving.
What Is The Difference Between Tax Credits And Tax Deductions?
If you are not well-familiarized with the tax world, then there is a chance for you to get confused between a tax credit and a tax deduction. For your kind information, there are both credits and deductions of which the former represents money from your tax bill.
In other words, tax credits are no different from a coupon. For example, if you get a $2,000 tax credit, then your tax due will be reduced by $2,000. Whereas, a tax deduction will bring an effect on adjusted gross income (AGI) as it will reduce that particular amount which will in turn reduces the tax liability.
For instance, if you are in the 18% tax bracket, you will be eligible to claim a deduction for the entire 18%. In short, if you claim a $2000 deduction, then your tax liability will be reduced by $180 ($2,000*18%).
Tax deductions For Homeowners
There is a term called favorable tax treatment, which not only sounds good but feels good when received. In the case of homeowners, such treatment comes in the form of deductions. Now, let’s see which are the most popular tax deductions available for homeowners.
List Of Top 13 Tax Breaks For Home Buyers And Homeowners
- Using Retirement Funds for a Down Payment
- Credits for Energy-Saving Improvements
- Credit for Electric Vehicle Charging Equipment
- Mortgage Points Deduction
- Mortgage Interest Deduction
- Mortgage Interest Credit
- Deduction of Medically Necessary Hoem Improvements
- Deduction of Rental Expenses
- Home-Office Expense Deduction
- Forgiveness of Debt on a Foreclosure or Short Sale
- Property Tax Deduction
- Capital Gain Exclusion When Selling Your Home
- Increased Basis When Selling Your Home
1. Using Retirement Funds For A Down Payment
Before becoming a homeowner, there is a string of tax facts that you need to know and one among them is a traditional IRA. Before you buy a home, you can withdraw a maximum of $10,000 from the account and can use the sum to build, buy, or rebuild your first home.
And the peculiarity with these types of accounts is that you are not required to pay the 10% penalty and this deal persists even if you are younger than 59.
Moreover, there is good news for those of you who are married. You and your spouse can both withdraw $10,000 each from individual IRAs without being subjected to penalties.
Remember, these features are only available if you are about to build, buy, or re-build your first home, and to qualify for your first home, neither of you should have built, bought, or re-build a home in the past couple of years.
But dodging paying the tax doesn’t mean, you are free from any sort of tax liabilities as you are still supposed to pay tax on the amount you withdraw.
2. Credits For Energy-Saving Improvements
If you want to save a few dollars, then you can simply install some energy-efficient equipment in your home. If you do so, the IRS will reward you with tax credits.
You can save around 30% on new systems such as geothermal, wind, solar, fuel power, or biomass to regulate the temperature or produce heat water, or electricity, only if they qualify certain criteria put forward by IRS.
But starting from 2023, biomass systems have been excluded from the list and therefore, the credit won’t be applied to them.
Additions to the list are the installation of energy-efficient insulation, doors, roofings, air-conditioning systems, water heaters, wood stoves, and others of this kind.
The credit amount is $200 for every new energy-efficient window.
3. Credit For Electric Vehicle Charging Equipment
Compared to the last few years, the number of buyers of electric vehicles has been increasing day by day.
If you are one of those, then you might have previously heard about the availability of tax credits for the purchase of electric cars. But have you ever heard about a credit provided against the recharging equipment at your home?
From this year onwards, the Electronic Vehicle charger tax credit will also apply to charging equipment that is bidirectional. This includes the equipment used to charge the battery or send electricity from the battery to the grid.
4. Mortgage Points Deduction
Generally, if you have taken out a mortgage, then you are asked to pay points to the lender. But in some distinct cases, you will be asked not to pay them in the year you repay the loan amount, if the loan was taken to build, buy or re-build your first home.
But one of the key conditions to unlock this feature is to secure the loan amount with your main home.
This option is only available for your first home. If you are building your second home, then you still be required to pay the points in the year you repay the loan. But that doesn’t indicate there will be no benefit at all as you can gradually deduct the points over the life of the loan.
For example, if you have taken a 40-year mortgage, then you can reduce up to 1/40th of the points. That will be $44 a year for every $1,000 point you paid. Although it may not look worth your time, you can still choose not to push the opportunity away.
Moreover, there is a separate set of rules for refinancing. If you are refinancing, then you can again gradually reduce the points over the life of the loan.
In addition to that, if you are spending the amount to substantially improve your primary home, you can also deduct the particular portion of the points which is related to the improvement you made in the years, for which you paid them.
The next point is that if you are selling the house you rebuild or refinanced it again, then you can again get a deduction to the leftover points from the previous financing. That way, you can reduce the amount gradually over the life of the loan.
5. Mortgage Interest Deduction
Most of you must be looking for Mortgage Interest Deduction as it is one of the biggest tax breaks available for homeowners.
Now let’s teach you how this one works. If you are filing individually to build, buy, or rebuild your home, then you can deduct interest up to $750,000 and if you are married and filing separately, then each of you can deduct interest up to $375,000.
If your mortgages were filed before 2018, then interest on up to $100,000 of debt will be eligible for deduction. On top of that, improvements made to the home are substantial, but the basic repairs are not.
6. Mortgage Interest Credit
If you are someone who bought their home before December 16, 2017, you will be eligible for a home mortgage interest deduction on the first $750,000 of the mortgage debt. If you are married and filing separately, then each of you can claim a deduction of $375,000.
However, the old limit allowed more deduction to the filers as the first $1 million of the mortgage debt used to be deducted. When filed separately after marriage then, each of the filers was supposed to be eligible for a $500,000 deduction before the recent update.
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7. Deduction Of Medically Necessary Home Improvement
To qualify for the medical expense deduction, you should have either made modifications to your home or should have installed special equipment solely for medical purposes.
It includes adding ramps, installing handrails, moving electrical outlets, installing elevators, widening doorways, grading the grounds, or changing the door knobs. If the upgrades are made for medical necessity, then the upkeeping of these upgrades is also deductible.
However, you are only allowed to claim a deduction for medical expenses that exceed 7.5% of your adjusted gross income. If your medical expense comes within the limit, then no deductions will be available.
Also, if the value of your property suddenly increases, then it will also affect the deduction rate as it will be reduced with respect to the increase in value.
8. Deduction Of Rental Expenses
If you have been lending out your apartment or just a part of it, then you normally owe tax on your rental income. But did you know that you were also able to claim a deduction for the rental space? The deductible expenses include repair, insurance, utilities, real estate taxes, supplies, and more.
In addition to that, you can also claim for deduction for the part of the apartment that you are renting and for the furniture or equipment installed in that space.
To figure out how much you can deduct, you should divide the entire expense of the apartment and allocate the appropriate amount to the rented space. However, this specific method cannot be applied to vacation homes. Although deductions can be made for them, the estimation and the calculation are done differently.
9. Home-Office Expense Deduction
Home-Office Expense Deduction might seem like good news for you if you are a self-employed individual working from your home. If so, then you might be able to receive a sum in exchange for the expenses caused to carry forward that work at your home.
This option is not only available for homeowners but also for renters. Regardless of how your home looks- a mobile home, apartment, townhouse, or even a condo, you will be able to claim the amount if you come under the aforementioned category.
In addition to that, this offer would be still valid for you even if you are working from an outbuilding on your property. So, you can also work from an unattached studio or barn and still be eligible for a home-office appliance expense deduction.
With that being said, you likely get an idea about the basic criteria of qualification. In short, if you are constantly using a part of your home for your business endeavor then you can move on to the next set of procedures. They include the submission of insurance costs, utility bills, general repairs, and other expenses.
If you are working from a rental home, then you are free to mention the rental amount along with the expenses list. Once you complete the necessary procedures, you will be eligible for $5 for every square foot of home space you use as your office.
10. Forgiveness Of Debt On A Foreclosure Or Short Sale
In tough economic conditions, it is only normal for homeowners to fall behind on their mortgage payments. You must have been the luckiest if your landlord ever told you that they eliminated your mortgage sale through foreclosure. Generally, when a debt is forgiven, that amount is deemed as income to the debtor.
But, it is different with mortgage debt. Up to $750,000 of the amount forgiven are tax-free and if you are married and are filing separately, then $375,000 will be treated as tax-free.
11. Property Tax Deduction
As a homeowner, you are expected to pay several taxes and one of those is Property Tax Deduction. But you need not have to fret because local and state property taxes can be deducted. So, all you need to do is to itemize them.
If the combined amount of the sales, local income, and property tax is something to go by, then you claim a deduction of up to $10,000. In case you are married and filing separately, then each of you can claim around $5,000.
12. Capital Gain Exclusion When Selling Your Home
Not only while you are still a homeowner, but you are generally asked to pay taxes while you sell your home. But the good news is that IRS may fully or partially deduct the sale amount after you sell it. Since your home is termed as a capital asset, you will be required to pay capital gain tax when you sell it for profit.
So if you have owned the home for the last five years and haven’t used it as an income generator in the past two years and have lived there for the last two years, then you will be eligible to claim a tax deduction of up to $250,000 and if you are married and filing separately, then you can claim a deduction for $500,000.
13. Increased Basis When Selling Your Home
If you are unable to get qualified for a 100% tax deduction while you sell your home, then there is still waiting for you. If you adjust the basis of your home, then you can claim an additional deduction.
Generally, the taxable gain is equal to the difference between the sales price of your home and your home’s basis. So, when the basis increases, the tax amount also increases.
Here, the basis includes certain settlement fees and other costs such as contractor fees, utility connection charges, building permit costs, related legal fees, and other costs you bought when you initially bought the home.
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Conclusion
It is needless to mention that most of you might be thinking of not closing the interest payment on your home loan, just to make it look like you have not yet been a homeowner. But don’t you regret that decision at the moment after going through the article? After all, why would you delay the payment, when the tax you were afraid of, has prepared a long list of deductions for you?
So, if you are planning to stay in that home for a long time, then it is always advised to pay off your home as soon as possible. If you want expertise adverse then you can simply arrange a consultation with your financial planner and which of the movies aforementioned is better for your benefit.