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!