The federal government has blessed homeowners with tax benefits, primarily in the form of income-tax deductions. However, the complexities of these deductions often cause homeowners to miss out on these savings when calculating their taxes. In addition to interest on mortgage payments, major deductions for a home include costs of improvements and home office expenses.
Follow these tips to understand how you can benefit from this year's taxes by being a homeowner.
Overview: Tax Tips for Homeowners
Owning a home may qualify you for additional tax deductions, such as those for PMI, local property taxes, and some home improvements
Decide if it makes sense to file your taxes using the standard IRS deductions or by itemizing deductions
Standard deductions for 2022 taxes are $12,950 for single filers, $25,900 for joint filers, and $19,400 for heads of household
Make sure to keep written records of all itemized deductions in case of an IRS audit
Standard tax deductions versus itemized tax deductions for homeowners:
The IRS allows all tax filers to deduct a standard amount from their taxes. Homeowners need to be aware of the current standard deduction as well as which tax deductions they are eligible for (outlined below). Itemized deductions can lower your taxes if they total more than the federal standard deduction, (https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2022), which can change from year to year.
The standard deduction for 2023 is $12,950 if you're single or filing separate from your spouse. It's $25,900 if you're married and filing jointly, and $19,400 if you're filing as head of household.
The Tax Cuts and Jobs Act of 2017 placed lower limits on many deductions, generally making it more difficult to exceed the standard deduction. On the other hand, this legislation also removed the income-based limits on itemized deductions, which may benefit high-income households with a large number of deductions.
Tax deductions for homeowners from 2022-2023
Most people who don't own homes won't have enough deductions to make it worthwhile to itemize. However, homeowners often benefit by itemizing deductions.
Mortgage Interest: If you have a mortgage on your house, you can deduct some or all of the interest you paid this year on your primary residence. This limit is currently $1M for mortgages that you took out before December 15, 2017, and $750K for mortgages taken out on or after this date.
Home equity loan and HELOC interest: Home equity loans and home equity lines of credit (HELOCs) are second mortgages that allow you to borrow money against the equity you have built up in your house. You can deduct interest paid on these loans for funds used for home improvements or renovations. Prior to the Tax Cuts and Jobs Act of 2017, interest on home equity loans and lines of credit were eligible for deductions regardless of what they were used for. The current law will remain in place until 2025.
Property taxes: Deducting your property taxes can greatly lower your overall tax bill. Property taxes are based on the current market value of your home and are paid to state and local governments. Homeowners can deduct up to $10,000 if filing jointly or $5,000 if filing single or separately.
Home office deduction: If you are a business owner that operates out of your home, you can deduct home office expenses from your taxes. This deduction is not available to employees who work remotely or business owners who also have a separate office place. The size of the deduction is calculated based on the percentage of the home that is dedicated to the business.
Private mortgage insurance (PMI): The purpose of private mortgage insurance is to protect the lender or banking institution if you become unable to make payments on your mortgage. You can deduct all mortgage payments made during the year if you choose to itemize your tax deductions.
Discount points: Mortgage discount points allow you to pay upfront when you take out your mortgage to lower the interest rate on your loan. These differ from loan origination points, which are fees charged by the lender. If you buy mortgage discount points, you can deduct a portion of them from your taxes in the form of an itemized deduction. You can't deduct the cost all at once, but annually throughout the term of the mortgage. (https://www.irs.gov/publications/p936#en_US_2022_publink1000229939)
Home improvements: Certain home improvements come with tax benefits. Home improvement costs can be deducted if you can prove that they were medically necessary, such as adding a ramp or making a bathtub more accessible. For solar panel installation and certain other energy efficiency improvements, you can receive a tax credit of up to 30% of the cost (https://www.energy.gov/eere/solar/homeowners-guide-federal-tax-credit-solar-photovoltaics). Interest on home equity loans or HELOCs used for home improvements can also be deducted.
Capital gains: This deduction is applicable only if you sold your home during the fiscal year 2022. Capital gains refer to profits made from selling an investment, including real estate, and are taxed at a different rate than income from employment. If you were using your home as a primary residence for at least 2 of the last 5 years, a portion of your gains can be tax-free.
Non-deductible homeowner expenses for 2022-2023 taxes
Several items homeowners regularly spend on are, unfortunately, not tax deductible. This includes homeowner’s insurance premiums, fire insurance, domestic service (such as gardeners and housecleaners), depreciation, and any money paid toward the principal on your mortgage or used for a down payment.
Deductions and credits on your income taxes routinely require detailed records, but this is especially true of home-related expenses. Start saving these records now to ensure you're organized before you need to file your taxes.
You can also use this time to scan and store your physical documents digitally. The Internal Revenue Service (IRS) requires you to keep records for at least three years from the time you file the return. An audit may need to go back as far as six years if the IRS identifies a substantial error on a tax return.
Tax breaks can offset much of the expense of owning a house. The primary tax advantage is that you don't pay taxes on the interest for your mortgage. Other common deductions are for home improvement and home office expenses.
Homeowners should review all of the deductions they are eligible for and compare that with the standard IRS deduction to make an informed decision about whether they should itemize their tax deductions.
Understand the specific deductions that apply to you, as the rules can be complex, and seek the help of an accountant when in doubt.