Unraveling the Tax Advantages for Homeowners 

by | Aug 9, 2023

Owning a home is a significant financial commitment, with expenses reaching beyond the mortgage payments to include maintenance, utilities, insurance, and most importantly, taxes. While the costs may seem mountainous, homeownership comes with notable tax benefits that could lead to considerable savings. This article explores these tax breaks and how to maximize your tax refund.

One of the most significant tax deductions for homeowners is the mortgage interest deduction. This deduction allows homeowners to subtract the interest paid on their home loan from their taxable income, thereby reducing overall tax liability. Particularly beneficial for new homeowners, who typically pay more towards loan interest in the early years of their mortgage, this deduction can be a substantial saving. Homeowners can deduct all payments for mortgage interest on loans up to $1 million, or loans up to $750,000 if made after Dec. 15, 2017. The IRS Form 1098, received from your lender, will aid in claiming this deduction.

Another less-known but equally beneficial deduction is the 'mortgage points' or 'discount points.' When purchasing a house, buyers can acquire these mortgage points to decrease the mortgage interest rate. The IRS regards these points as prepaid interest, allowing homeowners to add the amount paid for points to their total mortgage interest on IRS Form 1040 Schedule A.

In addition to mortgage interest and points, property taxes are deductible up to a certain amount. The Tax Cuts and Jobs Act of 2017 now restricts the deduction of combined property taxes and state and local income taxes to $10,000, a decrease from the previous full deductible amount. 

For those who operate a business from their homes, the home office deduction can be a game-changer. This deduction is applicable if a portion of your home is used "exclusively and regularly" for business purposes. The IRS offers a simplified method for this deduction, based on $5 per square foot used for business up to 300 square feet. 

On the energy front, homeowners who make energy-efficient improvements or install alternative energy systems can avail of corresponding tax credits. For instance, installing an electric car charging station can earn you a tax credit of 30% of the cost or $1,000, whichever is smaller. The residential clean energy credit offers 30% back on costs for installing solar electricity, solar water heating, wind energy, geothermal heat pumps, biomass fuel systems, or fuel cell property. 

For homeowners with lower income, the mortgage interest credit can help make homeownership more affordable. Eligible homeowners can claim the credit each year for a portion of the home mortgage interest paid, provided they hold a qualified Mortgage Credit Certificate (MCC) from their state or local government. 

Lastly, homeowners can also claim deductions for home improvements related to medical conditions, such as safety bars, accessibility ramps, wider doorways, railings, and lifts. These costs can be included in your tax deductions for medical expenses, provided they exceed 7.5% of your adjusted gross income.

While homeownership brings a host of tax advantages, not all house-related expenses are tax-deductible. Payments towards the principal of the mortgage, homeowner's insurance, utility costs, and home repairs, among others, are not deductible. 

Remember, every individual's tax situation is unique, and it's crucial to consult with a tax professional before making major tax decisions. By understanding and wisely utilizing the tax breaks offered by homeownership, you can potentially save a significant amount of money.

If you are a homeowner and would like more information on tax deductions please contact Freese, Peralez, & Associates and we will gladly answer any questions you might have.