Owning a home comes with numerous benefits beyond just having a space to call your own. Not only can you decorate and customize it to your liking, but there are also financial advantages that can save you money come tax time. Unlike renting, where your money goes straight to a landlord, being a homeowner opens the door to various tax breaks. In this guide, we'll explore the tax advantages available to homeowners, helping you navigate the complexities and maximize your potential savings.
Tax Credits vs. Tax Deductions
Understanding the tax world is crucial when delving into homeownership benefits. Tax credits and deductions play a significant role. Tax credits directly reduce your tax bill, while deductions lower your adjusted gross income, subsequently reducing your tax liability. Let's explore some of the tax deductions homeowners can take advantage of.
Mortgage Interest Deduction
One of the most notable deductions is the mortgage interest deduction. Homeowners can deduct interest paid on the first $750,000 of mortgage debt ($375,000 if married filing separately). If you purchased your home before December 16, 2017, the previous limit of $1 million ($500,000 if married filing separately) still applies. To claim this deduction, you must itemize your deductions on Schedule A Form 1040 or 1040-SR.
How to Claim: Your lender will provide a form detailing the interest paid during the tax year. Ensure you include any interest paid as part of your closing when filing your taxes.
Mortgage Points Deduction
Homeowners who paid for mortgage points as part of a new loan or refinancing can also benefit. Each point generally costs 1% of the total loan amount and lowers the interest rate by 0.25%. These points are deductible on the first $750,000 of debt and can be claimed using information provided by your lender on Form 1098.
How to Claim: Your lender's Form 1098 will detail the amount paid in mortgage points, allowing you to claim the deduction on Schedule A Form 1040 or 1040-SR.
State and Local Tax (SALT) Deduction
The SALT deduction enables you to deduct certain taxes paid to state and local governments, provided you itemize on your federal return. This includes state income, local income, and sales and property taxes. To claim this deduction, ensure you itemize your deductions on Schedule A and file your tax return accordingly.
How to Claim: Your property tax payments can be found on Form 1098 from your lender or through personal records if paid directly. State and local income taxes withheld from your paycheck appear on your W-2 form.
Interest on Home Equity Loans Deduction
Homeowners who used a home equity loan or HELOC for substantial home improvements can deduct the interest on these loans, considered second mortgages. The deduction applies to the interest on a total of $750,000 in mortgages for loans taken out after December 15, 2017.
How to Claim: Itemize deductions on Schedule A (Form 1040) and file Form 1040 or 1040-SR.
Home Sale Exclusion
The home sale exclusion allows homeowners to exclude taxes on the first $250,000 of profit ($500,000 if married filing jointly) when selling their primary residence, provided they meet certain ownership and residency requirements.
How to Claim: Report any taxable gain exceeding the exclusion on Form 8949.
Additional Home Savings Opportunities
Beyond these well-known deductions, homeowners may find additional savings through various avenues:
- Home Office Expenses: If you're self-employed and use a home office exclusively for work, you may deduct a portion of utility bills and business-related expenses.
- Medical Home Improvements: Some medically necessary home improvements, such as accessibility modifications, may be deductible as part of your medical expenses.
- Energy Improvements: Investing in energy-efficient improvements, like solar panels or energy-efficient windows, may qualify for tax credits under the Residential Clean Energy Credit.
As you explore the potential tax advantages of homeownership, remember to consult with a professional tax advisor. While this guide provides valuable insights, individual circumstances may vary. A tax professional can help tailor these benefits to your specific situation and ensure you maximize your savings.
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Disclaimer: This information is provided for general informational purposes only and should not be considered tax advice. Consult with a qualified tax professional to address your specific circumstances and receive personalized guidance.
