Owning a home has long since been a part of the American Dream. After all, who doesn’t want a yard, a white picket fence, and a whole bunch of tax deductions?
That’s right: owning a home can save you big when it comes to tax season. All of the costs associated with owning a house can add up, but between various deductions and credits, you’ll find that there are all sorts of ways to keep money in your pocket. The biggest homeowner tax deductions revolve around your mortgage interest, home improvement costs, keeping your house energy efficient, and mortgage points.
Mortgage interest payments
Paying off your mortgage is the most obvious cost of owning a home, so it’s only appropriate that getting a deduction for mortgage interest payments is the most popular tax deduction for homeowners. In 2012, mortgage interest deductions saved American homeowners $68.5 billion, or an average of $1,900 per homeowner.
If you’re going to deduct your interest payments, you need to itemize your deductions rather than taking the standard deduction. It’s eligible for mortgages under $1 million that are used to buy, build, or improve your house; you can also deduct additional interest on home equity debt up to $100,000. The smaller details about what’s considered eligible mortgage interest can be found on this IRS chart:
Have a second home? Lucky you! You can deduct the mortgage interest on that, too. You can even rent it out for a little extra cash, but keep in mind that you have to stay at the property for at least 14 days a year or more than 10% of the number of days that you rent it, whichever is longer, or else it’ll be considered a rental property by the IRS – at which point you don’t get the mortgage interest deduction.
If you’re looking to upgrade your home, fixing a leaky faucet won’t save you anything on your taxes, but other improvements might.
Capital improvements "increase your home’s value, prolong its life, or adapt it to new uses." Interest paid on loans taken out for these sorts of changes – adding a pool or a porch, for instance, or adding a new roof – can be deducted up to $100,000 of debt.
In a related note, capital improvements you make to your home for medical reasons, such as building ramps or modifying stairways or kitchen features to make them more accessible, can be included in your deductions for medical expenses.
Energy efficiency savings
One of the best ways to keep more green in your wallet is to keep your home green, and that means making sure it’s as energy efficient as possible.
There are two ways you can save by keeping your home green: energy-efficiency upgrades and renewable energy upgrades. These are credits rather than deductions – they lower your tax bill by a certain dollar amount rather than reduce your taxable income – but hey, saving is saving, right?
There are a lot of ways to upgrade your home to make it more efficient. Installing an energy efficient central air conditioning, adding insulation, fixing your roof, and putting in energy efficient windows and doors can all help keep your home as warm or as cool as you need it to be without wasting much energy. And it’ll get you a tax credit: 10% of the cost up to $500, can be cut from your tax bill.
When you’re installing those items, make sure they follow an energy efficiency standard like Energy Star so you’ll qualify for the tax credit.
You can also get a tax credit for installing renewable energy sources like geothermal pumps and wind turbines. You can get 30% off the cost of buying and installing the system (which drops to 26% in 2020 and 22% in 2021, after which it expires – so if you’re thinking of using it, better start planning ahead). The best part is that there’s no upper limit to this, so it’s a 30% credit no matter how much it costs you.
The Solar Investment Tax Credit is a specific credit that applies to solar panel installation. You can get a credit for 30% of the purchase and installation cost. This was set to be reduced to 10% at the end of 2016, but the 30% credit was extended through 2019, so you still have time!
Sounds like a pretty good way to save money and the planet, right? Plus, this helps twofold: not only do you save money with tax credits, but you can cut your utility bills and lower your costs every month!
Your first question about mortgage point tax deductions might be, "Um, what are mortgage points?"
Great question! Mortgage points are another way to pay back your mortgage. A mortgage point is equal to 1% of your total loan amount. Points will lower the rates on your mortgage. Here's an example of how mortgage points work:
|No points||1 point|
|Cost of points||$0.00||$1,000.00|
|Months to break even||N/A||100|
|Total cost after 30 years||$196,806.51||$193,256.49|
|Total payment savings on 30-year loan||N/A||$3,550.02|
Basically you’ll pay more at the beginning to lower your monthly mortgage payments. So you can lower your rates with mortgage points, and you can also lower your tax bill.
Your mortgage points are added as a line item on a Schedule A form, where you list your other itemized deductions. Here are the IRS’ requirements for deducting mortgage points:
Your main home secures your loan (your main home is the one you live in most of the time).
Paying points is an established business practice in your area.
The points paid were not more than the amount generally charged in that area.
You use the cash method of accounting. This means you report income in the year you receive it and deduct expenses in the year you pay them.
The points paid were not for items that are usually listed separately on the settlement sheet such as appraisal fees, inspection fees, title fees, attorney fees, or property taxes.
The funds you provided at or before closing, including any points the seller paid, were at least as much as the points charged. You cannot have borrowed the funds from your lender or mortgage broker in order to pay the points.
You use your loan to buy or build your main home.
The points were computed as a percentage of the principal amount of the mortgage, and
The amount shows clearly as points on your settlement statement.
Whether or not you accept mortgage points depends primarily how much you’re able to pay upfront for your mortgage and what your long term plans are for the house. But if you do take them, it’s worth looking into whether or not you can deduct them.
There are a lot of reasons to own a home, and tax deductions shouldn’t be at the top of your list. You don’t want to buy an expensive house just to get some tax deductions...and then find out that you’re having trouble meeting your mortgage payments. Those interest deductions won’t mean much in that case.
But if you do own a home, you should know the ways you can save money. What you qualify for will depend on your individual financial situation, but these four deductions are a good start to lowering your tax bill.