Tag: Tax

Homeowner Tips: Tax Deduction

Owning a home is a big financial responsibility, and it’s one of the largest investments you’ll probably ever make. Knowing the tax deductions and credits available to homeowners can help ensure your big investment pays you back a bit at tax time.

“Many homeowners miss out on a lot of deductions every year because they aren’t aware of all the savings opportunities available to them,” says Josh Zimmelman, president of Westwood Tax and Consulting.

These tax tips could help you make the most of the many tax breaks for homeowners and maximize any income tax refund you may be owed.

1. Save your tax records

Here’s one tax tip for homeowners: Once you take advantage of all the available tax benefits you’re able to claim in the current tax year, hold onto the documentation for those expenses.

“You never know when you might get audited,” Zimmelman says. “It’s important to have the documentation to back up your deductions.”

The law requires that you keep all the records you use to file your tax returns for three years from the date a return was filed. That’s typically how far the IRS goes back when doing an audit. But keep in mind that the IRS can go back further (usually no more than six years back) if it identifies a substantial error in a return.

2. Make energy-efficient updates

Adding a solar energy system to your home is not only good for the environment — it can also be good for your tax refund. The IRS allows you to take a tax credit worth 30% of the cost of installing a solar energy system.

If you’re thinking about holding off on taking advantage of this federal tax credit, don’t wait too long. The credit amount for residential improvements decreases to 26% in the year 2020, and then to 22% in 2021, after which it’s set to go away entirely.

3. Stay organized

Many of the federal income tax deductions or credits you can take as a homeowner require you to keep detailed records of your home-related expenses. Start saving receipts and other information right away — don’t wait for tax time to roll around.

“If you take a few minutes to set up an organization system for your tax paperwork and financial records, it should be quick and easy to maintain,” Zimmelman says.

To stay organized, keep hard copies of all your financial documents and receipts. Or if you’d rather go paperless, you can scan and store your documents digitally.

4. Hold onto home improvement receipts

If you make any improvements to your home, the expenses aren’t deductible for the current tax year. But when you sell the home in the future, they can help lower your tax burden then.

That’s because you can add home improvements expenses to your adjusted basis. This is generally what you paid to buy the house, plus the cost of construction, renovation or other improvements you’ve made, minus any losses you’ve experienced from damage to the home.

For the tax year in which you sell the home, your taxes on the sale are based on the sale price plus any concessions you get from the seller (such as them paying closing costs) minus your selling expenses. If the amount you gain from that equation is higher than your adjusted basis, you have a capital gain on the sale. So the higher your adjusted basis, the less taxes you may have to pay on your profit from the sale.

5. Track your home office expenses

If you’re self-employed and work from home, you may be able to deduct some of the expenses you incur for your business use of your home.

“Not every person who works from home can claim a home office,” Zimmelman says. “The home office must be used regularly and exclusively for business and be the primary site of the business.”

Because tax reform suspended certain deductions, including unreimbursed employee expenses (with some exceptions), until Dec. 31, 2025, you can’t take a home office deduction if you work from home as an employee.

Types of expenses you can deduct include the actual expenses you incur for the home office and depreciation for the portion of the home used.

6. Think ahead about deduction options

Deductions can help you lower your total tax obligation by reducing your taxable income. For the 2019 tax year, the federal standard deduction is $24,400 if you’re married filing jointly, $12,200 if you’re single or married filing separately, and $18,350 if you’re filing as head of household.

As a homeowner, though, you may have enough in eligible expenses to itemize your deductions. If those itemized deductions add up to more than the standard deduction, you could lower your tax bill even more.

Eligible expenses could include the following:

  • Charitable contributions — If you made a tax-deductible donation to a qualified charity, you can add it to your total itemized deductions. In most cases, you’re allowed to deduct cash contributions that equal up to 60% of your adjusted gross income.
  • Medical expense deduction — You may be able to write off some medical expenses that insurance didn’t pay for.
  • Home mortgage interest — If you took out a mortgage on or after Dec. 15, 2017, you may be able to take a mortgage interest deduction on up to $750,000 of mortgage debt for your primary residence. If your mortgage predates Dec. 15, 2017, the limit is $1 million. Interest paid on your home equity loan or line of credit may also be deductible if you used the money to buy, build or substantially improve the house that secures the loan.
  • State and local taxes — Real estate taxes can be high in some areas, but you may be able to deduct some (or all) of your property taxes. For federal tax returns, the law allows taxpayers to deduct up to $10,000 ($5,000 if married filing separately) of the total of your state and local property taxes plus either income taxes or state and local sales taxes.

Keep in mind that the Tax Cuts and Jobs Act of 2017 limited the amount of certain deductions, which may make it harder to come up with an itemized deduction total that will exceed your standard deduction amount. In that situation, itemizing might not give you the most tax benefit. That said, if you have deductible expenses that exceed your standard deduction amount, there’s no longer an income-based limit on the amount of itemized deductions you’re allowed to claim (though there may be other limitations).

Bottom line

Owning a home can be expensive — but fortunately, the tax breaks can help make up for the extra costs. As a homeowner, it’s critical to know which deductions and credits you qualify for and to make sure you maximize them to your benefit. Using Credit Karma Tax to file your taxes for free, and following these tax tips for homeowners could help.

Homeowner Tax Benefits

Indeed, there’s no place like home.

Let’s examine how homeownership makes “cents” –  from the tax benefits, to good old fashioned financial stability.  The financial benefits of homeownership are evident year round, but particularly around tax time – they seem to jump off the page!

1. You Build Equity Every Month

Your equity in your home is the amount of money you can sell it for minus what you still owe on it. Every month you make a mortgage payment, and every month a portion of what you pay reduces the amount you owe.  That reduction of your mortgage every month increases your equity. That is especially true now with the elimination of risky mortgages like negative amortized and interest-only loans – thanks to the new “Qualified Mortgage” rules. The way mortgages work is that the principal portion of your payment increases slightly every month year after year. It’s lowest on your first payment and highest on your last payment. Thus, as the months and years go by, your equity grows!

2. Homeownership Builds Wealth Over Time

We were always taught growing up that owning a home is a financially savvy move. Our parents knew it, and their parents knew it. But this past decade of real estate turbulence has shaken everyone’s confidence in homeownership. That is why it’s so important that we discuss this again now that we’re in a ‘new market.’ Homeownership can be a very savvy financial move – but only if people buy homes they can actually afford. In 2014, this idea of sticking to a home you can afford to gradually build wealth is a “rule” that just happens to be new and old at the same time.

3. You Reap Mortgage Tax Deduction Benefits

  • Mortgage deduction: The tax code allows homeowners to deduct the mortgage interest from their tax obligations. For many people this is a huge deduction, since interest payments can be the largest component of your mortgage payment in the early years of owning a home.
  • Some closing cost deductions: The first year you buy your home, you are able to claim the points (also called origination fees) on your loan, no matter whether they are paid by you or the seller. And because origination fees of 1 percent or more are common, the savings are considerable.
  • Property tax is deductible: Real estate property taxes paid on your primary residence and a vacation home are fully deductible for income tax purposes.

4. Long Term, Buying Is Cheaper than Renting

In the first few years, it may be cheaper to rent. But over time, as the interest portion of your mortgage payment decreases, the interest that you pay will eventually be lower than the rent you would have been paying. But more importantly, you are not throwing away all that money on rent. You gotta live someplace, so instead of paying off your landlord’s home or building, pay off your own!

5. Tax Deductions on Home Equity Lines

In addition to your mortgage interest, you can deduct the interest you pay on a home equity loan (or line of credit). This allows you to shift your credit card debts to your home equity loan, pay a lower interest rate than the horrendously exorbitant credit card interest rates, and get a deduction on the interest as well.

6. A Mortgage Is Like a Forced Savings Plan

Paying that mortgage every month and reducing the amount of your principal is like a forced savings plan. Each month you are building up more valuable equity in your home. In a sense, you are being forced to save—and that’s a good thing.

7. You Get a Capital Gains Exclusion

If you buy a home to live in as your primary residence for more than two years then you will qualify. When you sell, you can keep profits up to $250,000 if you are single, or $500,000 if you are married, and not owe any capital gains taxes. Now, it may sound ridiculous that your house could be worth more than when you purchased it after these past several years of falling house prices. However, if you purchased your home anytime prior to 2003, chances are it has appreciated in value and this tax benefit will come in very handy.

Tax Benefits for Homeowners

We asked ourselves: What tax benefits do you exactly have by owning a house? That’s why we put together a little overview for every houseowner who wants to save tax money!

The main tax benefit of owning a house is that the imputed rental income homeowners receive is not taxed. Although that income is not taxed, homeowners still may deduct mortgage interest and property tax payments, as well as certain other expenses from their federal taxable income. Additionally, homeowners may exclude, up to a limit, the capital gain they realize from the sale of a home.

 

OVERVIEW

The tax code provides several benefits for people who own their homes. The main benefit is that the owners do not pay taxes on the imputed rental income from their own homes. They do not have to count the rental value of their homes as taxable income, even though that value is just as much a return on investment as are stock dividends or interest on a savings account. It is a form of income that is not taxed.

Homeowners may deduct both mortgage interest and property tax payments as well as certain other expenses from their federal income tax. In a well-functioning income tax, all income would be taxable and all costs of earning that income would be deductible. Thus, in a well-functioning income tax, there should be deductions for mortgage interest and property taxes. However, our current system does not tax the imputed rental income that homeowners receive, so the justification for giving a deduction for the costs of earning that income is not clear.

Finally, homeowners may exclude, up to a limit, the capital gain they realize from the sale of a home. All of these benefits are worth more to taxpayers in higher-income tax brackets than to those in lower brackets.

MORTGAGE INTEREST DEDUCTION

Homeowners who itemize deductions may reduce their taxable income by deducting interest paid on a home mortgage. Taxpayers who do not own their homes have no comparable ability to deduct interest paid on debt incurred to purchase goods and services.

The Tax Cuts and Jobs Act (TCJA) trimmed this important tax break for homeowners. Prior to TCJA, the deduction was limited to interest paid on up to $1 million of debt incurred to purchase or substantially rehabilitate a home. Homeowners also could deduct interest paid on up to $100,000 of home equity debt, regardless of how they used the borrowed funds. TCJA limited the deduction to interest on up to $750,000 of mortgage debt incurred after December 14, 2017, to buy or improve a first or second home. It also generally eliminated the deduction for home equity debt.

The congressional Joint Committee on Taxation (JCT) estimated that the cost of the mortgage interest deduction will shrink from $72 billion to $41 billion in fiscal year 2018, because of the lower cap on deductible mortgage interest and because other provisions of TCJA will result in many fewer taxpayers itemizing their deductions. The Urban-Brookings Tax Policy Center estimates that the share of tax units that benefit from the deduction in 2018 will shrink from 21 percent to 9 percent because of TCJA.

PROPERTY TAX DEDUCTION

Homeowners who itemize deductions may also reduce their taxable income by deducting property taxes they pay on their homes. That deduction is effectively a transfer of federal funds to jurisdictions that impose a property tax (mostly local but also some state governments), allowing them to raise property tax revenue at a lower cost to their constituents. The JCT estimated that the deduction saved millions of homeowners a total of $33 billion in income tax in fiscal year 2017. The cost of that deduction will also go down because of TCJA, as many fewer homeowners will itemize and because TCJA puts an overall cap of $10,000 on the state and local taxes that taxpayers can deduct.

EFFECT OF DEDUCTIONS AND EXCLUSIONS

The deductions and exclusions available to homeowners are worth more to taxpayers in higher tax brackets than to those in lower brackets. For example, deducting $2,000 for property taxes paid saves a taxpayer in the 37 percent top tax bracket $740, but saves a taxpayer in the 22 percent bracket only $440. Additionally, even though they only represent about 20 percent of all tax units, those with more than $100,000 in income received over 85 percent of the mortgage interest deduction tax benefits in 2017. That difference results largely from three factors: compared with lower-income homeowners, those with higher incomes face higher marginal tax rates, typically pay more mortgage interest and property tax, and are more likely to itemize deductions on their tax returns.

PROFITS FROM HOME SALES

Taxpayers who sell assets must generally pay capital gains tax on any profits made on the sale. But homeowners may exclude from taxable income up to $250,000 ($500,000 for joint filers) of capital gains on the sale of their homes if they satisfy certain criteria: they must have maintained the home as their principal residence in two out of the preceding five years, and they generally may not have claimed the capital gains exclusion for the sale of another home during the previous two years. The JCT estimated that the exclusion provision saved homeowners $32 billion in income tax in fiscal 2017.

IMPUTED RENT

Buying a home is an investment, part of the returns being the opportunity to live in the home rent free. Unlike returns from other investments, the return on homeownership—what economists call “imputed rent”—is excluded from taxable income. In contrast, landlords must count as income the rent they receive, and renters may not deduct the rent they pay. A homeowner is effectively both landlord and renter, but the tax code treats homeowners the same as renters while ignoring their simultaneous role as their own landlords. The Office of Management and Budget estimates that the exclusion of imputed rent reduced federal revenue by nearly $110 billion in fiscal year 2017.