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If you own a home, you could throw away considerable money each year at tax time without knowing it. How? By not paying attention to the available tax deductions for homeowners.
You don’t need a CPA or a costly software program to take advantage of the savings, although we recommend consulting a tax professional for expert advice. What are the top eight tax deductions for homeowners? Read on to keep more money in your pocket.
1. Home Mortgage Interest
The American taxation system continues to reward those who invest in the dream of homeownership. Unlike renters, who get nothing for their payments, owners can deduct part of their monthly housing bill.
If you bought your home in the past two years, you could deduct interest on the first $750,000 of debt. If you purchased before December 6, 2017, the limit rises to a million bucks.
To take advantage of this and several other deductions on this list, you must file Form 1040 or 1040-SR. The 1040-EZ form doesn’t allow for itemization. These entries flow from worksheets to your Schedule A.
You may deduct mortgage interest on your first or second home. However, landlords take note — investment and business properties do not qualify. You may rent out your second home. However, you must use it as a personal residence for at least 14 days or 10% of the time you lease it to others, whichever is longer.
What if you rent out a bedroom in your first home? You may deduct only the percentage of your home used for your residential purposes and treat the leased portion as a business.
Fortunately, ample tax breaks exist for landlords. Please don’t try to cheat by claiming something as residential when it isn’t. You could probably save more money by treating it as a business.
2. Home Equity Interest
Here’s something to consider when it’s time to send the kids to school — what creates the most substantial deduction? Student loan interest or second mortgage interest?
While you’ll have to run the numbers, the government does allow you to deduct interest on second mortgages. When deciding how to finance your child’s education, ask yourself the following questions:
How much interest will I pay over the life of the loan? Interest rates fluctuate. Sometimes, federally secured student loans offer lower rates, but you typically get a better bargain as a homeowner.
How much can I deduct each year on taxes? Find out which deduction will result in the most significant savings. Remember that you’ll have to collaborate with your child if they file taxes independently.
The term “points” applies to specific fees incurred when taking out a home mortgage. Basically, in such an arrangement, you prepay interest and can deduct it as such on Schedule A.
However, as with most things IRS-related, rules apply. You can’t have borrowed the funds, and they can’t have gone to pay attorney fees or other costs associated with obtaining an ownership interest.
4. Property Taxes
Most jurisdictions charge property taxes to support anything from schools to public goods and services like libraries. Fortunately, you may deduct these.
If your lender puts your taxes in escrow, you probably don’t receive a separate bill. However, when you receive your Form 1098, you’ll see these listed. Don’t overlook this valuable tax deduction for homeowners.
One question tax software company representatives often receive is, “I entered my deduction. Why didn’t it lower my bill?” Keep in mind that under the Tax Cuts and Jobs Act, the standard deduction came close to doubling from $6,500 per individual to $12,000, with similar increases for those married and filing jointly.
Therefore, if your standard deduction continues to exceed itemized breaks, your software will automatically give you the most bang for your buck. Please don’t think your entries didn’t count — they merely may not have added up to $12,000 or $24,000.
5. Energy Efficiency
Did you put in a more efficient water heater or pay more for Energy Star everything when buying your home? You may qualify for credits and deductions. You can get a credit of up to 30% for items placed in service between December 31, 2016, and January 1, 2020, with slightly smaller percentages for those purchased later.
What’s the difference between credits and deductions? A deduction can only reduce your taxable income to zero, never below. Conversely, some refundable credits, like the earned income credit, result in money in your pocket even if you owe no liability.
While the home energy credits are not refundable, you can apply any excess to your following year’s taxes. Therefore, you should take advantage, even if you don’t see an immediate benefit. You never know how your financial picture may change.
6. Home Office Deduction
With more people telecommuting today, many folks will take advantage of the home office deduction. You can reduce your tax liability easily, but make sure your space qualifies.
To take this deduction, you must use your home office for work only — your kitchen table doesn’t meet the standard if you also eat there. While you don’t need an enclosed room, you do need to prove exclusive use.
7. Medical Expenses
Schedule A also covers medical deductions. How does this relate to homeownership?
If you put in a wheelchair ramp or grab bars in your bathroom, or made other accessibility improvements, you can deduct those costs. Keep your receipts when you head to the local big-box store.
8. Small Farm Deductions
Finally, while these represent rare tax deductions for homeowners, if you went overboard on spring’s gardening craze, you might qualify for some small farm deductions. These options only apply if you sold your zucchini and peppers. However, if you did, you might be able to deduct expenses related to your endeavor — check with a CPA to see if you qualify.
Take Advantage of These Tax Deductions for Homeowners
If you are a homeowner, you stand to reap substantial benefits come April 15. Take advantage of these tax deductions for homeowners and put more money back in your pocket.