Aside from having more space, more comfort and the opportunity to build equity for yourself instead of a landlord, owning your own home also potentially gives you federal and state tax deduction and tax credit benefits. And who wouldn’t like to see their tax obligations lowered? How much benefit you get depends on whether you file your taxes using the standard deduction or whether you choose to itemize your deductions. A tax deduction decreases the amount of your taxable income, while a tax credit can be applied directly to your tax bill to reduce the amount you owe.
The standard deduction, according to the Internal Revenue Service, is a specific dollar amount that reduces the amount of income on which you’re taxed. The dollar amount of the standard deduction for the 2022 tax year filed in 2023 varies depending on your filing status, whether you’re 65 or older, impaired with blindness, and whether another taxpayer is claiming you as a dependent, but for general purposes, the 2022 standard deduction is $12,950 for single filers, $25,900 for joint filers or $19,400 for heads of household. The advantages to taking the standard deduction is that tax preparation is quicker and easier, and the fact that the deduction is usually bigger each year as Congress adjusts the amount for inflation. The disadvantage is that you could pay more in taxes than you would if you itemized your deductions.
To find out how much your standard deduction will be, use this tool. You should know that some standard deductions may not be available to certain individuals, such as:
- A married individual filing as married filing separately whose spouse itemizes deductions.
- An individual who files a tax return for a period of less than 12 months because of a change in his or her annual accounting period.
- An individual who was a nonresident alien or a dual-status alien during the year. However, nonresident aliens who are married to a U.S. citizen or resident alien at the end of the year and who choose to be treated as U.S. residents for tax purposes can take the standard deduction.
- An estate or trust, common trust fund, or partnership.
Itemized deductions are expenses that you’re allowed by the tax code to decrease your taxable income. Credible.com advises paying special attention to your filing status, such as married filing jointly, as well as which deductions you plan to take. As a homeowner, you must itemize to take advantage of deductions. The rules and amounts for itemized deductions are specific, which will take you time and effort to learn and list them correctly. You’ll use different forms for itemizing such as Form 1040 and Schedule A and any related schedules. Most importantly, you must be able to substantiate your deductions with accurate record-keeping such as receipts, bills, payables, receivables, equipment depreciation schedules, and so on. If you decide to itemize, your homeowner benefits allow you to take the following deductions:
Points. If you purchased your home in 2022 with a mortgage loan, you may have paid points to the lender to reduce the amount of your interest payments. Points are typically one percent of the loan and paid upfront to the lender, whether you’re making a purchase loan or refinancing your loan. If you borrowed $500,000, and paid the lender $5,000 for a lower interest rate, that amount can be itemized to reduce your tax burden for one time only.
Mortgage interest. Your mortgage loan statement will tell you exactly how much you paid in interest for 2022. You can deduct home mortgage interest on the first $750,000 ($375,000 if married filing separately) that you borrowed. If you purchased your home before December 16, 2017, the limitations are higher – ($1 million ($500,000 if married filing separately.) You can’t deduct home mortgage interest unless you file Form 1040 or 1040-SR and itemize the deductions on Schedule A. You can deduct all of your home mortgage interest, but that depends on the date of the mortgage, the amount of the mortgage and how you use the mortgage proceeds. You can only deduct mortgage interest if the home is a qualified first or second home that is used as collateral for the loan, and in which you have an ownership interest. You may also deduct interest on home equity loans or lines of credit only if the borrowed funds are used to buy, build, or substantially improve the taxpayer’s home that secures the loan, notes the IRS.
Mortgage insurance (PMI). If you put less than 20% down on your home, it’s likely that you were required to get mortgage insurance. The larger the down payment, the less risk for the lender, but many homeowners can’t afford or are not required to put that much down on a home. Private mortgage insurance is paid to protect the lender in case of default. Again, your loan statement will provide the exact amount you paid in PMI for 2022, so you’ll know how much you can deduct from your taxes.
Property taxes paid in 2022. State and local taxing authorities charge property taxes to pay for community services such as infrastructure, schools, roads and so on. You can only take property tax deductions for the tax year of your filing. In 2023, you can deduct property taxes that you paid in 2022 for the previous year; however, keep in mind that there are other limitations on the total amount of state taxes paid that you are allowed to deduct when itemizing.
Home office expenses. If you’re self-employed, you can deduct expenses for the part of your home that is the exclusive and primary location for your trade or business that you use on a regular basis. This home space can’t be used for personal purposes, with rare exceptions for child care and elder care. According to H&R Block, exclusive use can be for a room or otherwise identifiable space that’s used for trade or business. To establish your home office, studio, or workshop as a principal place of business, you must use this location primarily for meeting clients, selling or delivering goods or services, or performing administrative duties such as billing clients, record-keeping, ordering supplies, setting appointments, etc. You can depreciate computer equipment, deduct expenses such as furnishings and fixtures, deduct the space’s household share of utilities and maintenance, and many other benefits. Unfortunately, home office deductions are no longer available to employees who work from home.
Tax credits can also be applied to lower your taxes. Residential energy credits, such as putting solar panels on your roof or installing other energy-saving appliances and systems, depend on the dates installed and amounts paid. There’s also a mortgage credit certificate to help low-income and first-time homebuyers which is capped at $2,000 which is provided at the state or local level.
When you do your taxes, you should run the numbers both ways, as you can’t take the standard deduction if you itemize, and you can’t itemize if you take the standard deduction. Also, consider hiring an accountant or other tax preparation professional to help you work your way through the many complex rules and regulations associated with federal and state income tax filings.
