Buying and maintaining a house isn’t cheap, but tax deductions for homeowners can help make the processes more financially manageable. When you apply tax deductions, you reduce the amount of income the government taxes, reducing the amount of tax you owe. Most deductions work to help people who need it the most or as a reward, like those who have children, are in school, own a house, or donate to charity.
As a homeowner, there are several tax perks to take advantage of, including many credits and deductions. Although we focus on the MCC tax credit for first-time homebuyers, this article looks deeper into the five top tax deductions for homeowners. Some of these you may already know, while others may help you reduce your taxes even more.
What are Tax Deductions for Homeowners?
First, let’s distinguish between standard tax deductions and those for homeowners. The thing that makes them different is that only those who own homes can use these specific deductions. Much like if you own a business or have children, you can deduct from your annual income only if you are a business owner or a parent.
Tax deductions, as mentioned above, reduce the amount of income the government can tax. Tax credits work differently, giving you credit to apply toward the tax that you owe. This is what the MCC tax credit does for first-time homeowners. But if you don’t fall into the category of a “first-time homeowner,” then you cannot qualify for this perk. However, you can be eligible for tax deductions for homeowners and use them simultaneously with the MCC program.
These tax deductions can include things like your mortgage interest, property taxes, and other home-related expenses that you can itemize. You want these itemizations to add up to more than the standard deduction. Otherwise, you won’t get the benefit. For married couples, the standard deduction is $24,800. For single filers, it’s $12,400 and $18,650 for heads of households.
Top Tax Deductions for Homeowners
Our list of the top tax deductions for homeowners falls into two categories. First, we want to suggest perks that most homeowners can use, but we also want to include those that earn you the biggest benefit. So let’s dive in.
#1. Mortgage Interest Deductions
This deduction sits at the top of the list because it’s typically the one that gives you the most significant reduction in your taxes. You can deduct the interest your pay annually by up to a specific limit.
What are those limits? Well, that depends on when you secured your home loan:
To know how much interest you paid on your mortgage each year is easy — your servicer will provide you with an official tax statement showing you exactly how much you paid.
#2. Home Equity Loan Interest
Like mortgage interest, you can also deduct the interest you pay on your home equity loan if you have one. But as tax deductions for homeowners go, this one is only of use if you used some of that loan to improve your house. Before 2018, this process was different, and you could deduct the interest regardless of what you used the borrowed money to support.
Remember that you can’t combine this tax perk with the mortgage interest deductions unless you’re under those limits. So if you hit the mortgage interest deduction limit, you can’t deduct your home equity interest.
#3. Property Taxes
Of all the tax deductions for homeowners, this one is the most universal as nearly everyone deals with property taxes. You can deduct your paid property taxes up to $10,000 ($5,000 each for those who are married and filing separately). The fine print here is that the limit also includes any deductions for sales tax or state and local income taxes.
#4. Mortgage Insurance Premiums
If you purchase mortgage insurance, you can deduct the annual cost if following a few rules and limits. This tax deduction includes the amount of insurance you paid for conventional loans, FHA loans (Federal Housing Agency), USDA home loans, or VA mortgages. It boils down to that the IRS considers mortgage insurance premiums to be deductible, just like mortgage interest.
The 2020 tax year is the final year to claim this perk. And to qualify, the following must pertain to you:
Keep in mind that although the income threshold is $109,000, the IRS may reduce the deduction if your AGI is more than $100,000 ($50,000 for those who are married and filing separately).
#5. Medical Home Improvement
Many believe that some of the best tax deductions for homeowners come from the cost of home improvement projects. Unfortunately, this is a myth. Most home improvement projects are not tax-deductible (or not fully deductible) because they often increase your home’s value. However, if you need to make renovations due to medical conditions, then those are tax-deductible.
These renovations can be of benefit to you, a spouse, or a dependent. If these additions are temporary, then they’re fully deductible. If they’re permanent and increase your home value, then they are only partially deductible. Some examples include installing a wheelchair ramp or railings, widening doorways, or renovating bathrooms.
Should You Use Tax Deductions for Homeowners?
Yes, you should absolutely apply as many tax deductions and credits as possible, as long as they benefit your tax situation. As a homeowner, you’re making a costly move while helping to stabilize and stimulate the economy. This action is a positive one for our country, and therefore, there are tax benefits that go along with it. You’d be remiss not to apply them.
If you have any questions about tax deductions for homeowners or the MCC tax credit, feel free to reach out!
Are you a first-time homebuyer wondering about the MCC program? Perhaps you’re interested in using it, but you’re not sure if you qualify. Maybe you love the idea of saving money on your home, but you don’t know how the MCC tax credit works.
Well, you’re in luck! As a CPA, I specialize in the MCC program, and I’m here to answer your FAQs. I’ve compiled the five most common questions I get about the program and will answer them here in this blog post. If you have further questions (or I missed anything), please don’t hesitate to contact me. My team and I work with homebuyers from across the United States.
The Most Common MCC Program FAQs
A lot of people contact me asking the same questions. I have an FAQ page on my website, but sometimes it’s helpful to address the most common of the bunch. If you’re curious about how the MCC program works and if you qualify, then this post is for you.
FAQ #1: What’s the Purpose of the MCC Program?
Let’s start with the basics. The MCC Program benefits first-time homebuyers by giving them an annual non-refundable tax credit. If you’re buying your first home, then you don’t have any capital from a previous property to help you afford it. You’re starting at the very beginning, which can be financially challenging for many.
To help you buy your first home, the federal government created the MCC program. This program gives you an annual tax credit based on how much interest you paid on your mortgage. The maximum credit is $2,000 per year. So for a 30-year loan, that’s a significant savings of $60,000.
FAQ #2: What Does ‘MCC’ Mean?
‘MCC’ stands for Mortgage Credit Certificate. To receive the MCC program’s tax credit, you must obtain a certificate before buying your home. Both your realtor and your loan officer can help you with this, but be sure to tell them that you want to use the MCC program. Not all realtors or banks understand the process, so choose someone who will be on your side. And, again, you can always ask us for help!
FAQ #3: How Do I Qualify for the MCC Tax Credit?
The MCC Program is a tax incentive for first-time homebuyers, helping them make such a big purchase for the first time. But you don’t necessarily have to be a “first-time” homebuyer to get the benefit. There are four ways you can qualify for the program:
FAQ #4: How Much Money Can I Get with the MCC?
That credit varies from person-to-person, as a few factors determine the final amount:
You can calculate the amount of credit once you obtain your MCC certificate. On that certificate, you’ll receive an assigned tax credit percentage. This percentage will vary depending on the factors listed above. In general, however, the rate ranges from 10%-50%.
Once you know this figure, you can calculate your tax credit benefit by using the following formula:
Annual Interest Paid on Mortgage ($) x MCC Program Assigned Percentage (%)
Let’s look at a simple example. Let’s say you have a mortgage loan of $100,000 and an interest rate of 5%. That means the annual interest you’ll pay on your first year is $5,000 (5% x $100,000). Now, let’s say your assigned MCC percentage is 30%. That means you’ll receive an annual tax credit of $1,500 (30% x $5,000).
As a non-refundable tax credit, you can apply that $1,500 towards your annual taxes. If you owe less than $1,500, you won’t receive a refund for the remaining amount (non-refundable). And if you anticipate a higher tax year in the future, you can always roll your credit forward.
FAQ #5: Are There Any Limits on How Much I Can Spend on a House?
Yes, there are two limits you’ll need to consider for the MCC Program: house price limits and annual income limits. These restrictions vary depending on where you live within your state. To determine yours, simply look up the MCC Program in your state or county.
House Price Limits: Each county will determine this limit individually, but in general, the limits are quite generous. The purpose of the program is to help first-time homebuyers and stimulate the housing market. Therefore, plenty of houses fall into the pricing limits.
For example, we call Blair County in Pennsylvania home. Here, the house you purchase cannot exceed $346,300 if you want to use the MCC Program. As a more impoverished county in the state, this is quite a high figure. The program allows both lower-income and middle-class people to benefit.
Income Limits: Again, these limits vary from county-to-county. I’ll use Blair County as another example. Here, if you want to use the MCC Program and purchase a 1-2 bedroom home, your annual income cannot exceed $92,200. For a 3+ bedroom home, that yearly income limit increases to $107,600.
Be Proactive And Save Money on Your Future Home
The above questions are the most common I receive, but if you have more questions, you can read our FAQ page, browse our blog posts, or contact us. The general rule of thumb with the MCC Program is to be proactive. Ask us questions, talk to your realtor, and discuss opportunities with your home loan officer or financial advisor. The MCC tax credit is just one benefit for homebuyers, but it’s a good one and an excellent place to start.