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Real Estate
Tax benefits of owning a home
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What kind of tax advantages come with being a homeowner? In this article, we’ll touch on the many credits and deductions available to homeowners, such as the Energy Efficient Home Improvement Credit, the mortgage interest deduction, and many more.
Key takeaways:
- The IRS offers a range of tax credits and deductions designed to lighten the financial load for homeowners.
- While there isn’t a current tax credit available to first-time home buyers, there are many credits and deductions that can make owning a home more affordable.
- The home mortgage interest deduction allows you to subtract the interest you pay on your mortgage loans from your taxable income.
- The property tax deduction allows you to offset some of the financial burden of property taxes by deducting them from your taxable income.
- There is no current provision for deducting mortgage insurance premiums.
- The home equity loan interest deduction allows you to deduct the interest paid on qualifying home equity loans or lines of credit (HELOCs) from your taxable income.
- The home office deduction can help offset some of the expenses associated with maintaining a home office if you are self-employed or a gigger.
- HOA fees are not tax deductible for individual homeowners. However, if you own rental property or use your home for business purposes, you may be able to deduct a portion of your HOA fees as a rental or business expense.
- Work with a Jackson Hewitt Tax Pro to unlock these tax advantages and make the most of homeownership.
There are many IRS tax credits and deductions available for homeowners
Owning a home isn't just about having a place to call your own. It's also often a smart financial move that can come with some significant tax benefits. The IRS offers a range of tax credits and deductions designed to lighten the financial load for homeowners.
Whether you're a first-time buyer or a seasoned homeowner, understanding these tax perks can help you maximize your savings and make the most of your investment. In this article, we'll explore some of the key tax benefits available to homeowners.
First-time home buyer tax credit
Buying your first home can be difficult, because it often requires a large down payment and a strong credit score to qualify for a home loan. Many first-time buyers wonder if there’s a tax credit available to help.
In that not-too-distant past, first-time home buyers could get up to $7,500 in financial relief through the first-time home buyer tax credit, ushered in by the Housing and Economic Recovery Act of 2008 and then expanded under the Worker, Homeownership, and Business Assistance Act in 2009. But unfortunately, this credit has since expired.
While there’s no current first-time home buyer tax credit and the fate of future credits still hangs in the balance, there’s some tax relief available to prospective homeowners. By leveraging available deductions, such as mortgage interest and property tax deductions, new homeowners can find a measure of relief.
Home improvement tax credit
Did you know that making improvements to your home could benefit your wallet when you file? The Energy Efficient Home Improvement Credit and the Residential Clean Energy Credit are tax credits for homeowners looking to make environmentally friendly upgrades that can save both energy and money in the long run.
These home improvement credits reward homeowners who invest in qualified home improvement projects aimed at boosting energy efficiency and reducing environmental impact. Consider upgrades like installing energy-efficient windows and doors, beefing up insulation, upgrading HVAC systems, and installing solar panels.
By encouraging the adoption of energy-efficient technologies and practices, this credit not only benefits individual homeowners but also contributes to broader efforts to combat climate change and reduce carbon emissions from residential properties.
To take advantage of the Energy Efficient Home Improvement Credit and the Residential Clean Energy Credit, it’s important to ensure that your projects meet the eligibility requirements outlined by the IRS. This may include using specific products that meet energy efficiency standards or working with certified contractors. Keeping thorough documentation of expenses is also crucial for a successful claim.
Home mortgage interest deduction
One of the biggest tax benefits of homeownership is the home mortgage interest deduction. This deduction allows you to subtract the interest you pay on your mortgage loans from your taxable income, resulting in potential savings come tax time.
However, there are some important things to keep in mind. To start, there are limits to how much mortgage interest you can deduct. You can deduct interest on mortgage loans up to $750,000 for married couples filing jointly ($375,000 for those filing separately) if your loan was taken out after December 15, 2017. The allowed interest was up to a principal amount of $1M prior to December 2017.
Additionally, you'll need to itemize your deductions on your tax return in order to claim the home mortgage interest deduction. This means instead of the standard deduction you will list out your qualifying expenses, like mortgage interest, property taxes, and other eligible expenses.
While the home mortgage interest deduction can result in significant tax savings for homeowners, it's essential to understand the specific rules and limitations that apply to your situation. Consulting with a Tax Pro can help ensure you maximize your deductions and take full advantage of this valuable tax benefit.
Are property taxes deductible?
Yes! Property taxes are a fact of life for homeowners, but the silver lining comes in the form of potential tax savings through the property tax deduction. This deduction allows homeowners to offset some of the financial burden of property taxes by deducting them from their taxable income.
The IRS allows you to deduct property taxes from your taxable income when you file your tax return. This means that the amount you pay in property taxes can help lower your overall tax bill, potentially resulting in significant savings.
The property tax deduction is an itemized deduction. This means that to claim it, you'll avoid using the standard deduction and instead itemize your deductions on Schedule A on Form 1040. For many homeowners, especially those with significant mortgage interest and other deductible expenses, itemizing can be a smart financial move.
It's also worth noting that there are some limits to the property tax deduction. As of the latest information available, you can deduct up to $10,000 in state and local taxes, including property taxes, if you're filing as a single taxpayer or married filing jointly. This cap is reduced to $5,000 if you're married filing separately.
Overall, the property tax deduction can be a valuable tool for homeowners looking to save money on their taxes. By taking advantage of this deduction, you can ease the financial burden of property ownership and keep more of your hard-earned money in your pocket.
Is mortgage insurance tax deductible?
The answer, unfortunately, is no. In the past, homeowners were able to deduct mortgage insurance premiums as part of the mortgage insurance premium deduction. This deduction allowed eligible taxpayers to deduct the premiums they paid for mortgage insurance on qualified loans. However, this deduction expired January 1, 2023, and has not been extended.
It's essential to stay informed about any updates or changes to tax laws that may affect your credits and deductions on your tax return. While the deduction may not currently be available, it's always a good idea to consult with a Tax Pro to ensure you're taking advantage of all available tax benefits as a homeowner.
Home equity loan interest deduction
If you’re looking to tap into your home's equity to fund major expenses, such as home improvements, college tuition, or debt consolidation, a home equity loan can be a valuable financial tool. But beyond providing access to funds, home equity loans may also offer a tax benefit in the form of the home equity loan interest deduction.
The home equity loan interest deduction allows you to deduct the interest paid on qualifying home equity loans or lines of credit (HELOCs) from your taxable income. This deduction can provide significant savings, making it an attractive option for those considering borrowing against their home equity.
To qualify for the home equity loan interest deduction, the loan must meet the IRS’s requirements. First, the loan must be secured by your primary or secondary residence. Second, the loan proceeds must be used to "buy, build, or substantially improve" the home that secures the loan. This means that using the funds for purposes, like home renovations or additions, typically qualifies, while using them for personal expenses, like vacations or shopping sprees, does not.
It's important to note that, like the mortgage interest deduction and property tax deduction, the home equity loan interest deduction is an itemized deduction. This means that instead of claiming the standardized deduction, you'll need to itemize your deductions on Schedule A on Form 1040 to claim it.
Home office deduction
If you use part of your home for business purposes, you may be eligible to claim the home office deduction. This is a valuable tax benefit that can help offset some of the expenses associated with maintaining a home office.
To qualify for the home office deduction, the home office must be used for your self-employment, gig work, or contracting. Currently, employees are not eligible to claim the deduction. Your home office space must meet the requirements established by the IRS.
You must use your home office regularly and exclusively for conducting business. This could mean a place where you meet with clients, customers, or patients, and store products or samples, or where you provide daycare services. Personal activities, like paying bills or watching TV, don't count.
There are two methods you can use to calculate the home office deduction: the simplified method and the regular method.
The simplified method allows you to deduct $5 per square foot of your home office space, up to a maximum of 300 square feet. This method offers a straightforward way to calculate the deduction without the need for extensive record-keeping. This method does not include, or allow, depreciation.
Alternatively, you can use the regular method, which involves calculating the actual expenses associated with your home office, such as mortgage interest, property taxes, utilities, and home maintenance and includes depreciation of the home office space. To determine the percentage of these expenses that can be attributed to your home office, you'll need to measure the square footage of your office space relative to the total square footage of your home.
It's essential to keep accurate records of your home office expenses and maintain documentation to support your deduction in case of an IRS audit. Additionally, if you're using the simplified method, you'll need to complete IRS Form 8829 to claim the deduction.
Are HOA fees tax deductible?
Homeowners' association (HOA) fees are a common expense for many homeowners. These fees typically cover the cost of maintaining shared amenities, such as landscaping, community pools, and security services. But when it comes to tax time, many homeowners wonder: Are HOA fees tax deductible?
In most cases, HOA fees are not tax deductible for individual homeowners. The IRS considers HOA fees to be personal expenses rather than deductible expenses related to the production of income.
However, there are some exceptions to this rule. If you own rental property or use your home for business purposes, you may be able to deduct a portion of your HOA fees as a rental or business expense. Additionally, if your HOA fees include assessments for specific improvements or services that directly benefit your property, such as repairs to your roof or maintenance of your driveway, you may be able to deduct those expenses as a home improvement or repair expense.
If you're unsure about whether you qualify for any deductions related to your HOA fees, it's a good idea to work with a Tax Pro who can provide personalized guidance based on your individual circumstances.
Consult a Jackson Hewitt Tax Pro to unlock these tax advantages
Navigating the complexities of homeownership and tax deductions can be daunting, but you don't have to go it alone. Whether you're a first-time homebuyer, a seasoned homeowner, or simply exploring the potential tax benefits of home-related expenses, consulting with a Tax Pro can help you unlock these tax advantages and maximize your savings.
Don't leave money on the table. Schedule an appointment with a Jackson Hewitt Tax Pro today to unlock these tax advantages and make the most of your homeownership journey.
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