9 Homeowner Tax Credits and Deductions
Table of Contents
- 1 What is Tax Deductible for Homeowners?
- 2 1. Interest on Your Mortgage
- 3 2. Private Mortgage Insurance Deduction
- 4 3. The Points Deduction
- 5 4. Interest on Home Equity Loans
- 6 5. Property Tax Deduction
- 7 6. Tax Deductions for Home Offices
- 8 7. Selling Costs
- 9 8. What is Capital Gains Exclusion?
- 10 9. Mortgage Tax Credit Deductions
- 11 Turning to H&R Block for Help at Tax Time
What is Tax Deductible for Homeowners?
Every new homeowner or buyer wants to know about the tax deductions they can claim. Did you know that your home offers a range of tax benefits?
This is the guide you need to read because the new Tax Cuts and Jobs Act (TCJA) has changed some of the tax breaks you have as a new homebuyer or long-time homeowner.
Most people don’t realize that within certain limits, you can deduct your mortgage interest.
The way it works is if you bought your home before December 15th, 2017, you’re entitled to deduct interest payments up to $1 million in loans that you used for buying a home, building a home, home improvement, or purchasing a second home.
However, if you purchased after this date, there are changes. The amount you can claim has been reduced to $750,000. This runs until 2025 when the $1 million limit will return.
There are no differences between filing separately or jointly. However, married couples filing separately will see the overall amount cut in half.
2. Private Mortgage Insurance Deduction
You’ll usually have Private Mortgage Insurance (PMI) if you borrowed an amount worth 80% or more of the total purchase price. PMI premiums that were taken out following 2006 were tax deductible for homeowners who have itemized for more than 20 years.
This deduction expired in 2016 and was extended to 2017. After 2018, PMI premiums aren’t tax deductible any longer.
If there’s an extension, the amount you can deduct depends on your household income. It begins to be phased out after $100,000. Married couples filing separately will see the phase-out start at $50,000. After $110,000, there’s no deduction. Married couples filing separately will see the deduction removed if they earn more than $55,000 per year.
3. The Points Deduction
The ‘Points’ system is a fee charged by mortgage lenders. Of the loan principal, one-point equals 1%. Most home loans have between one and three points, which inevitably leads to thousands of extra dollars you must find from somewhere.
If you have a mortgage, you can fully deduct the value of the points from your tax.
If you have a refinanced mortgage, you can also deduct the points. This can only be done over the full term of the loan, though, rather than all at the same time. If you refinance your mortgage, you can remove the balance from the old loan and begin with the new points on your refinanced loan.
4. Interest on Home Equity Loans
Before 2018, the interest could be deducted on home equity loans up to a $100,000 limit. The money could be used for anything you wanted, and you’d still get to take advantage of the deduction.
For example, a homeowner could deduct interest from a home equity loan and then use it to pay for a college education or to pay down credit card debt.
That deduction has been removed from 2018 up to 2025.
However, one piece of good news is that the deduction is still active if you use the money to buy, build, or improve a home/second home.
This loan must also be secured by your primary or secondary home.
So now, you can take the deduction if you wanted to add another room to your home or to refit your kitchen. Take note that this deduction counts towards the interest deduction limit on mortgages listed in the first part of this guide.
5. Property Tax Deduction
One of the most significant introductions with the TCJA was a $10,000 annual cap on how much you can deduct from property, state, and local taxes. Previously, there was never any cap. Now this cap lasts from 2018 to 2025.
Now, you can only deduct up to $10,000 from property tax, state income tax, and state/local sales taxes. There’s no index for inflation, and both single and married taxpayers have the same limit.
If your lender demanded that you set up some form of escrow or impound account, you can’t deduct the money held for property taxes until the money is used to pay them. Any city or state refund on property tax is deducted from the possible Federal reduction.
6. Tax Deductions for Home Offices
Are you using part of your home to run a business on an exclusive basis?
You may be able to deduct a portion of the costs, such as part of your insurance, any repair costs, and general depreciation.
7. Selling Costs
Whenever you decide to sell your home, you have to consider taxable capital gains. But you can take a reduction on this taxable amount.
There are exclusions, so you may not have to worry about this at all if the amount is low enough to fall within that zone.
You’ll find that there are a variety of selling costs involved when it comes to selling your home, such as inspection fees, title insurance, real estate commissions, legal fees, and more.
Every selling cost can be deducted from your total gain. The gain is the selling price minus closing costs, selling costs, and what’s known as your tax basis.
On a side note, your tax basis is calculated by taking the original purchase price and adding on the cost of capital improvements minus depreciation.
8. What is Capital Gains Exclusion?
As mentioned before, capital gains exclusion could reduce the amount of tax you have to pay when you sell your own home. Married couples who file jointly will be able to keep $500,000 in profit when they sell their primary residence (if they lived in it for two of the last five years).
Single filers can keep $250,000, with the same limit applied to married couples who make the decision to file separately.
9. Mortgage Tax Credit Deductions
There’s a program called the Mortgage Credit Certificate (MCC) designed for low-income homebuyers who are making a purchase for the first time. It provides a 20% mortgage interest credit of up to 20% of interest payments. The size of the credit does depend on the area of the country you happen to live in.
The cap on this tax credit is $2,000 per year if the certificate credit rate exceeds 20%.
To claim this credit, you must apply to your local or state government to obtain the certificate.
This credit is available every year that you have the loan, and for every year that you live in the house you purchased with the certificate. Any credit will be automatically subtracted from the income tax you owe.
These deductions are a general overview of what you can claim. There are more complex laws regarding when and how much of a credit you can claim. To find out more information about the credits you can claim, you should go to H&R Block or visit the official IRS website.
Turning to H&R Block for Help at Tax Time
When you turn to H&R Block online for help, it will be like an interview. They will ask easy to answer questions while filling in the correct tax forms for you behind the scenes.
The answers you provide will enable them help you claim the home buyer tax credits and deductions you qualify for. If you are unsure how to answer a question, there are tax experts readily available to help you.
H&R Block provides you with easy importing of your w-2 information and step by step instructions to ensure that you get every Homeowner tax deduction and credit that you are eligible for.
H&R Block ensures that you get the largest refund possible. They even have a free tax refund calculator available that allows you to know the amount of money that you will be getting back.