Owning a home is not cheap. While the housing market has cooled lately, home prices are up 17% in 2021 and 10% in 2022, outpacing income gains,according to CNN, yourising mortgage ratesnow make the actual cost of home ownership even higher.
However, all of these expenses have a silver lining: tax credits and deductions for your home that can lead to a large tax refund. For homeowners, learning all you can about your potential tax benefits can help you maximize your tax refund when filing your taxes.
Most homeowners with mortgages know that they can deduct interest payments on their loan, but many tax deductions and tax credits associated with home ownership are less obvious. Learn about all the possible tax breaks for homeowners to get the biggest possible refund on their 2022 taxes.
For more tax information, learn more aboutnew income brackets and standard deduction for 2023.
Use:The 2022 tax forms have not been filed, so our links currently point toeraserPDF versions of the 2022 forms of theFederal Revenue official website.You cannot file your income tax return with these forms.-- official tax forms for 2022 will be available at the endJanuary 2023.
How do homeowner tax breaks work?
Most income tax exemptions for homeowners are tax deductions, which are reductions in your taxable income. The less your income is taxable, the less money you will pay in taxes.
When filing income tax, you mustdecide whether to accept the standard deduction-- $12,950 for individual filers, $25,900 for joint filers, or $19,400 for heads of household or married couples filing separately -- or specify deductions such as charitable donations and state taxes.
To take advantage of homeowners tax deductions, you will need to specify your deductions usingForm 1040 Annex A. Your decision to itemize will depend on whether your itemized deductions are greater than your standard deduction. All thebest tax softwareit can help you quickly decide whether or not to list (as well as help you complete all of the tax forms mentioned in this article).
Taxcreditsfor ownersnotrequire this detail. They directly reduce the amount of tax you owe, and you can usually get these credits whether or not you itemize the deductions.
Mortgage interest is the biggest tax break for homeowners
Mortgage interest, or the amount of interest you pay annually on your home loan, is one of the most common tax deductions for homeowners. It's also often the most lucrative, especially for new homeowners whose payments are typically more toward loan interest during the first few years of a mortgage.
Homeowners filing jointly can deduct all mortgage interest payments on loans up to $1 million, or loans up to $750,000 if made after December 15, 2017. Individual filers receive half of these amounts: $ 500,000 or $375,000, respectively.
To deduct interest from your mortgage, you will need to completeIRS Form 1098, which you are expected to receive from your creditor in early 2023. You may enter the amount from Line 1 of this Form 1098 on Line 8 of1040 Appendix A.
You can also deduct mortgage points from your taxes.
You can buymortgage points, also known as "rebate points", on the purchase of a home to lower mortgage interest. Every 1% of the mortgage amount that homebuyers pay, plus the down payment, typically reduces the interest rate by 0.25%, although the exact amount depends on the lender and the loan.
Discount points can save you a lot of money on a 30-year mortgage by reducing the total interest you'll have to pay over decades, but they can also save you money on taxes when you buy them. The IRS considers mortgage points as prepaid interest, so you can add the amount paid for the points to your mortgage interest total entered on Line 8 of1040 Appendix A.
A mortgage interest tax credit for new homeowners can cost a lot of money.
Homeowners who have received a Mortgage Credit Certificate from a state or local government, usually purchased through a mortgage lender, can get a percentage of their mortgage interest payments back as a tax credit. Mortgage certificate credit rates vary by state and range from 10% in Virginia to 30% in Florida.by bank fee.
For example, if you paid $12,000 in annual Florida mortgage interest with an MCC, you would get a $3,600 tax credit. However, this money is non-refundable; it can only be used against taxes you owe. If you don't owe federal taxes, you won't get your money back.
This tax tip for homeowners is most effective if you're a first-time homeowner, loosely defined as not living in a home you've owned within the past three years. If you arebuy your first house, be sure to ask your lender or mortgage broker if you qualify for an MCC.
To claim your home interest tax credit, useIRS Form 8396. Remember, you don't have to specify deductions to claim tax credits.
You can deduct property taxes, but only up to a certain amount
State and local estate taxes, more commonly referred to as property taxes, can be deducted from your taxes, but at a much lower amount than before 2017.
Thanks to the Tax Cuts and Jobs Act of 2017, you can only deduct up to $10,000defineof your property taxes andstate and local income tax. Prior to 2017, the full amount of property taxes was deductible.
To claim your property tax deduction, you will need to track your annual property tax payments. Your real estate taxes may also be included in box 10 on your mortgage lender's 1098 form. Enter the total amount of property taxes paid for the year in Line 5b of1040 Appendix A.
Home office expenses are only deductible if you are self-employed
Homeowners who use any part of their home, apartment or condominium "exclusively and regularly" for their own business or side job can claim household business expenses usingIRS Form 8829. These deductions are also available to renters.
The easiest way to claim a home office tax break is by using thestandard home office deduction, which is based on $5 per square foot used for businesses up to 300 square feet. The "regular method" for deducting a home office is to calculate the percentage of your home that is used for business. Both methods use form 8829 for reporting.
Home office deductions are not available forremote employeesof companies
Installing a charging station for electric cars can yield 30%
Electric vehicle charging stations can put money back in your tax bill. If you install any alternative energy charging stations in your home, you will receive a maximum credit of 30% of the cost or $1,000 (whichever is less). ArchiveIRS Form 8911to claim your tax credit for money spent on installing clean energy.
Go Green for Energy Efficiency Tax Credits
If you made energy efficiency improvements to your home in 2022, you might be able to recoup some of that money as tax credits, but it gets a little tricky. existtwo types of tax credits for home energy improvements-- the Residential Clean Energy Credit and the Energy Efficient Home Improvement Credit.
The Clean Energy Residential Credit can reimburse 30% of the money spent on installing solar electricity, solar water heating, wind energy, geothermal heat pumps, biomass fuel systems or fuel cell properties. The only limit is on fuel cell ownership: $500 for every half kilowatt of capacity.
Energy-efficient home improvement credit, also known asnon-commercial energy property credit, divided into two categories: "residential energy ownership costs" and "qualified energy efficiency improvements".
In the first case of energy ownership costs, you will receive a flat tax credit of $50 to $300 for installing Energy Star certified items such as heat pumps, water heaters or furnaces. For the second case of qualifying improvements, you can get a 10% tax credit for the cost of improvements, such as adding insulation, repairing a roof, or replacing windows.
The Home Energy Efficiency Improvement Credit has a lifetime limit of $500 for all home improvements made after 2005.Inflation Reduction Lawwill replace the $500 lifetime limit with a $1,200 annual tax credit limit.
To claim tax credits for home energy efficiency improvements in 2022, you will need to document your costs inIRS Form 5695.
Interest on real estate loans can also be deducted
Any interest on a home loan or second mortgage is tax-deductible, just like regular mortgage interest, with the important limit being $1 million total maximum loan or $750,000 (for joint filers) if you bought your home after December 15, 2017.
It is also very important to note that the 2017 tax law limits home loan interest deductions to money used for "buy, build or substantially improve" houses. If you borrowed money to pay for a new car or a tuxedo, you're out of luck.
If you paid interest on a home loan that was used directly on your residence, you can claim the deduction on the same line as mortgage interest and mortgage points: Line 8 onForm 1040 Annex A.
When selling your home, include all your improvements in the cost base.
Any income gained from the sale of a home is taxed as a capital gain (with one notable exclusion, see below). Your profit is calculated by the difference between the home's selling price and its "base cost". This cost base includes what you paid for the home, the price of any improvements you may have made, as well as any property loss through depreciation or accident.
If you've installed a new roof, replaced a furnace, redone floors, or even landscaped the yard, be sure to include these costs to increase your adjusted base and reduce the value of your capital gains on sale.
If you sold your primary residence, you get a big tax deduction.
When you sell a house, you must pay taxes on the amount of money you made on the sale as capital gains. However, if you lived in the home for two of the previous five years before selling it, you get a very large tax exclusion: $500,000 for married filers or $250,000 for single or separate filers.
All Americans receive this tax exemption, regardless of age and how many times they have benefited. Please note that residency requirements apply regardless of whether or not you own the home. If you rent a house for two years and then buy it, you can sell it with the default residence exclusion at any time.
You will likely receive tax information on the sale of your home in aForm 1099-S, and report your final earnings, excluding $500,000/$250,000, to the IRSForm 8949. If you don't get a 1099-S and your gain on the home is less than the exclusion, you don't need to report the sale on your taxes.
Home improvements can be deducted for medical needs
Medical expenses can be a significant tax deduction, but only if they exceed 7.5% of your adjusted gross income, which is essentially your taxable income. Any home improvements (roll bars, accessibility ramps, wider doors, railings and elevators, for example) related to medical conditions may be included in your medical expense tax deduction.
Save all your receipts and invoices and include the total cost of improvements or additions with all your additional medical and dental expenses on Line 1 of the1040 Appendix A.
What household expenses are not tax deductible?
Despite all the tax advantages available to homeowners, there are some housing-related expenses that cannot be deducted from your income.
- Your down payment on a mortgage
- Any mortgage payment towards the principal of the loan
- Expenses for utilities such as gas, electricity and water.
- Fire or home insurance
- House cleaning or lawn maintenance.
- Any depreciation in the value of your home
Each person's tax situation is unique. Before making important tax decisions, we recommend consulting atax professionalwho can help you with federal and state tax laws.
For more information on income tax, seehow student loan debt forgiveness can affect your tax bill.