Updated: Apr 7, 2020
It's tax time! We'll try not to bore you too much, but we think you should know the tax advantages of buying or owning a home.
Here is an overview of the various tax benefits that may be available to you. Just bear with us, we'll get through it together...
First, What is a Tax Deduction?
A "tax deduction" refers to any item or expense that can reduce how much of your income is subject to tax. Everyone is entitled to a standard deduction regardless of your expenses during the year. The standard deduction for the 2019 tax year is:
$12,200 if you are single (not married)
$12,200 if you are married and filing separately
$24,400 if you are married and filing jointly
$18,350 for head-of-household
You can choose to itemize your deductions instead of using the standard deduction. This benefits you only if your itemized deductions exceed your standard deduction.
Mortgage Interest Deduction
The interest you pay on your first and second mortgage, in most cases can be deducted (up to $750,000* in mortgage debt plus up to $100,000 in home equity debt, if the loan was used to substantially improve the home. *The limit can change year-over-year. Any interest over this amount is not tax-deductible.)
Real Estate Taxes
The amount you pay in real estate taxes is tax-deductible up to $10,000. It must have been paid within the calendar year that you claim it.
Deductions for Points (Over the Life of Your Loan)
Points you paid to your lender when you got your mortgage or refinanced may be eligible for a tax deduction. The caveat is that you have to have actually given money to the lender for these points.
The Home Sale Exclusion
If you’ve lived in your primary residence for at least two out of the five years before you sell it, you’re excluded from paying taxes on profits you make for up to $500,000 if you’re married or up to $250,000 if you’re single.
If you didn’t meet the requirement of living in the home two out of the five years before the sale, you can still take advantage of the home sale exclusion. Your deduction will be prorated.
OK, this one is a little more involved. If you upgrade your home to make use of renewable energy, you may be eligible for a tax credit to offset some of the costs.
Through the 2019 tax year, the federal government offers the Nonbusiness Energy Property Credit for solar, wind, and geothermal equipment in both your principal residence and a second home.
The Renewable Energy Tax Credits are good through 2019 and then are reduced each year through the end of 2021. There are individual maximums, and this credit is worth a combined maximum of $500 for all years combined, from 2006 until it expires.
(The manufacturer can tell you whether the equipment and material will meet the standards set by the Department of Energy. "Qualified energy efficiency improvements" can include home insulation, exterior doors, exterior windows and skylights, and certain roofing materials. "Residential energy property costs" can include electric heat pumps or water heaters; central air conditioning systems; natural gas, propane or oil water heaters; stoves that use biomass fuel; natural gas, propane or oil furnaces; natural gas, propane or oil hot water boilers; advanced circulating fans for natural gas, propane or oil furnaces. Source: TurboTax)
Is Snoozeville calling? We hear you but stay with us! We're almost done.
Deductions for Those Who Work at Home
Whether it’s a full-time work-from-home position or a side hustle, you can deduct your home office expenses and the space you use, but there are strict guidelines. The space must be used regularly and exclusively for business, and it must be the primary place you conduct business.
PMI (Private Mortgage Insurance) Premiums
The deduction expired in 2017, but the good news is it has been retroactively reinstated for 2018 and 2019. Private mortgage insurance protects your lender, and you are typically expected to pay these premiums if you put less than 20% down on your house. If you are paying these monthly premiums, take advantage of the tax deduction.
Tax Benefits & Real Dollars
We know having a lower taxable income or higher deductions allows us to keep more money in our pocket, but it can be difficult to understand in real dollars. Here is an example, for reference:
“....if your income is $80,000, and you have $20,000 worth of tax deductions, your taxable income is $60,000. If you're single, this would reduce your tax bill by over $4,000, based on the 2019 tax brackets.” (source: The Motley Fool; making the world smarter, happier, and richer)
Work with a Tax Professional
This is a broad overview of the various tax benefits that may be available to you if you meet the requirements. Keep in mind, each year many tax deductions are left unchanged, but others get modified or eliminated entirely. It is important to work with a professional, so you can take full advantage of the benefits you qualify for.
Phew, that's it!
We feel better getting that off our chests and hopefully putting a little dough back in your pocket. Thanks for reading!