As a homeowner there are many tax deductions you can explore
to keep more of your hard-earned money in your pocket and less paid out to
Uncle Sam. To claim the majority of them it is required to itemize your
deductions. Of course, this option is best if the total amount of your itemized
deductions is larger than the standard deduction. If not, it is better to take
advantage of the standard deduction to keep your tax liability as low as
possible.
One of
our favorite credits is for the installation
of renewable energy sources. The Energy-Saving Improvements Credits
were
put in place to encourage the use of renewable energy sources, which includes
installing certain energy-efficient equipment in your home. Itemizing
deductions is not required to claim this credit.
You will earn a credit of 26% on qualifying new systems that
use solar, wind, geothermal, biomass or fuel cell power to produce electricity,
heat water or regulate the temperature in your home. This credit continues
through 2022, drops to 23% in 2023, and is set to expire thereafter.
For this year, homeowners can also earn up to $500 off their
tax bill by installing energy-efficient insulation, doors, roofing, heating and
air-conditioning systems, wood stoves, water heaters, or the like. And up to
$200 for new energy-efficient windows. Additional credits include advanced main
air circulating fans ($50), certain furnaces and boilers ($150), and
energy-efficient building property ($300). The $500 general cap and $200
maximum for windows are lifetime credit limits, meaning credits claimed in the
past accumulate up to these limits.
Another deduction related to improvements includes the
installation of special equipment or modifications to your home for medical
reasons. Qualified examples of Medically Necessary Home Improvements
to
a home include building ramps, widening doorways, installing handrails,
lowering cabinets, moving electrical outlets, installing lifts or elevators,
changing doorknobs, and grading the ground to provide access to the home.
Expenses for the operation and maintenance of these upgrades
are also deductible as medical expenses if the upgrade itself is medically
necessary. Unfortunately, improvements that are made to make your home
elder-friendly aren't deductible if not deemed medically necessary to an
occupant.
Additional deductions that can be claimed include:
- Mortgage Points
– Most often, the points you pay on a
loan to buy, build, or substantially improve your primary residence are fully
deductible in the year you pay them. Unfortunately points for a second home or
refinance cannot be deducted all at once. Yet, if part of the refinanced
mortgage proceeds are used to substantially improve your primary home, you can
deduct that portion related to the improvement in the year you paid them.
- Mortgage Insurance Premium
– If you paid private
mortgage insurance last year on loans originated after 2006, you can deduct
their premiums if you itemize.
- Mortgage Interest
– You can deduct interest on up to
$750,000 (married filing jointly) of debt used to buy, build or substantially
improve your primary home or a single second home. Generally, additions and
major renovations are considered substantial; basic repairs and maintenance are
not.
- Mortgage Interest Credit
– This is a mortgage
interest tax credit available to lower-income homeowners issued a qualified
Mortgage Credit Certificate (MCC) from a state or local government to subsidize
the purchase of a primary home. This credit amount can range from 10% to 50% of
mortgage interest paid during the year. There are limitations, as well as a
number of restrictions and special rules for this credit.
- Property Tax
– Homeowners’ state and local property
taxes paid can be deducted on your federal income tax return if you itemize
deductions. There is a $10,000 limit (married filing jointly} on the combined
amount of state and local income, sales and property taxes you can deduct.
- Home-Office Expense
– This credit is for you if you
are self-employed and work at home, employees who work remotely cannot deduct
the costs of maintaining a home office. The caveat is that you use this part of
your home regularly and exclusively for your business. If so, part of your
utility bills, homeowner’s insurance, general repairs, and other home expenses
can be deducted against your business income. You can also write off part of
the depreciation of your home.
There are some things related to home-ownership that you
won’t be able to deduct. Some of these nondeductible home expenses include:
- Homeowner’s insurance premiums
- Homeowner association fees
- The principal amount of your
mortgage payment
- Domestic services
- Depreciation
- The cost of utilities
- Down payment
- Closing Costs
- Homeowner association fees
As with all things relating to taxes, there are rules,
restrictions and limitations that apply to every deduction. It is always best
to consult with a tax professional to help maximize the value of this most
important asset.
[Disclaimer: This article is not intended to be construed
as certified tax advice. We are not a tax professional and make no claims to be
one. Please seek the advice of a certified tax professional to determine which
deductions you can legitimately claim for your own unique circumstances.]
