Many people buy homes because they want to permanently settle down or acquire additional space for their family. While these benefits make buying a home a worthy investment, there are other financial benefits that come with investing in a home. Did you know that homeowners are eligible for tax breaks including deductions and credits? Explore all the tax benefits of owning a home and learn if you’re eligible for those benefits below.
Tax Deductions vs. Tax Credits
Both deductions and credits can reduce your tax bill and help you save money, but there are some notable differences between the two. Tax credits reduce the amount of money you owe in taxes directly, while tax deductions lower your taxable income and reduce your tax liability. Tax deductions are figured at the beginning of your return, while tax credits are figured at the end.
Tax Deductions for Homeowners
The best tax benefits for homeowners come in the form of tax deductions. If you want to claim homeowner tax deductions instead of the standard tax deduction, you’ll need to itemize your tax return or list out every deduction you’re eligible for. For homeowner deductions to be worthwhile, your itemized deductions should exceed the cost of the standard deduction. Here are some of the most common deductions homeowners should consider.
Mortgage Interest Deduction
You can deduct a percentage of your mortgage interest if you meet certain stipulations. Homeowners who bought houses after December 15, 2017, can deduct interest on the first $750,000 of their mortgage.
Mortgage Points Deduction
Mortgage points are paid to your lender at closing to reduce your interest rate. They usually constitute around 1% of your total loan. Since your mortgage is deductible, mortgage points are also eligible for a deduction if you paid your lender for them upfront. You might be eligible for a mortgage points deduction while refinancing your mortgage.
Private Mortgage Insurance Deduction
Lenders charge private mortgage insurance (PMI) to buyers who make a down payment that’s less than 20% of their loan. PMI is meant to protect the lender if you fail to pay your mortgage on time. If you took out a loan after 2006, your PMI payments might be eligible for a deduction. However, your deduction starts to decrease once your adjusted gross income surpasses $50,000 for single filers or $100,000 for joint filers.
State and Local Tax Deduction
The state and local tax (SALT) deduction lets you deduct a portion of the taxes you paid to the state and local government if you itemize them on your tax return. You can also deduct the amount of property taxes you pay each year, but the combined deduction cannot exceed $5,000 for single filers or $10,000 for joint filers.
Home Office Deduction
If you use a designated area of your home exclusively for business, you might be able to deduct a portion of the cost of your home office space from your taxes.
Tax Credits for Homeowners
Tax credits function like gift cards or coupons, which reduce the cost of your finalized tax bill. The best tax credits homeowners can qualify for are the mortgage credit and the residential energy credit.
If your state or local government-issued you a Mortgage Credit Certificate under a qualifying program, you may be eligible for a credit up to $2,000 per year, based on your mortgage interest. This program was designed to help first-time homeowners and low-income homeowners to afford housing.
Residential Energy Credit
Making your home more energy efficient by installing geothermal, wind, fuel cell, and biomass systems or solar panels may qualify you for a residential energy credit. The amount of the credit is based on the price you paid to install the systems.
Now that you know all the tax benefits available to homeowners, you can save money by itemizing your tax return. Want to get more financial literacy tips? Explore more articles about insurance and budgeting on our blog.