Buying a home is a great way to enjoy stable house payments and build personal wealth. Even so, the cost of homeownership adds up quickly once you factor in mortgage-related expenses and home improvements. However, by itemizing your tax deductions you might be able to write off some of your household expenses and reduce your taxable income.
Here’s a look at six common tax deductions for homeowners.
1. Mortgage interest
Your home mortgage is likely your biggest monthly expense, and it’s not uncommon to pay hundreds or even thousands in mortgage interest every single month. The good news, though, is that you can deduct the interest paid up to a certain amount.
Currently, you can deduct the interest on up to $750,000 of mortgage debt if you’re single or married and filing jointly (and up to $375,000 if you’re married and filing separately). This applies to mortgages originated on December 16, 2017 and later. If you received your mortgage prior to this date, you can deduct the interest on up to $1 million (or $500,000 if married and filing separately).
In addition, you might be eligible to deduct interest paid on home equity loans and home equity lines of credit — but only when using funds to buy, build or substantially improve your home.
2. Discount points
Some homebuyers pay discount points when purchasing a home to lower their mortgage rate.
Each discount point costs 1% of the mortgage amount and reduces the interest rate by .25%.
Discount points are paid out-of-pocket at closing and deductible in the year you paid them.
3. Mortgage insurance
If you purchase a home with less than 20% down and pay mortgage insurance, you might be able to deduct this expense when itemizing your tax return.
Mortgage insurance allows buyers to purchase with less upfront cash. But even though you’re responsible for these premiums, the insurance protects your lender in the event of default.
4. Property taxes
Likewise, you can deduct property taxes associated with homeownership, which includes state and local taxes.
If you’re single or married and filing jointly, you can deduct up to $10,000 in property taxes each year, or $5,000 if you’re married and filing separately.
5. Home office
The home office deduction is an often overlooked write-off. If you’re self-employed or use part of your home exclusively for business purposes, you might qualify.
To take advantage of this write-off, you’ll first need to figure out the percentage of your home used for business activities. This deduction also allows you to write off a percentage of your utility bills.
6. Medical home improvements
If you improve your home with medically necessary equipment, you might be able to deduct some of these expenses too — but only when the equipment benefits a spouse or a dependent.
Examples of qualifying improvements include building an entrance ramp, installing support bars, widening doorways, modifying bathrooms, installing porch lifts, modifying stairways and lowering cabinets.
Final Word
“Tax season” can be an expensive time of the year, especially if you owe money. For this reason, it’s important to take advantage of as many tax benefits available to you (deductions and credits).
For information on how to reduce your taxable income, speak with a tax professional for further guidance.
