Browsing Category

tax breaks

7 Tax Benefits of Owning a Home: A Complete Guide for Filing in 2020

February 4, 2020

WilshireImages/iStock; Neustockimages/iStock
davidmariuz/iStock; ChristianChan/iStock

What are the tax benefits of owning a home? Plenty of homeowners are asking themselves this right around now as they prepare to file their taxes. You may recall the new Tax Cuts and Jobs Act—the most substantial overhaul to the U.S. tax code in more than 30 years—went into effect on Jan. 1, 2018. And as a result, last year likely brought big changes to your taxes, especially the tax perks of homeownership.

While not much has changed taxwise since then, an entire year has passed—so you might need a refresher as you sit down with your receipts.

Well, look no further than this complete guide to all the tax benefits of owning a home, where we break down all the tax breaks homeowners should be aware of when they file their 2019 taxes in 2020. Read on to make sure you aren’t missing anything that could save you money!

Tax break 1: Mortgage interest

Homeowners with a mortgage that went into effect before Dec. 15, 2017, can deduct interest on loans up to $1 million.

“However, for acquisition debt incurred after Dec. 15, 2017, homeowners can only deduct the interest on the first $750,000,” says Lee Reams Sr., chief content officer of TaxBuzz.

Why it’s important: The ability to deduct the interest on a mortgage continues to be a big benefit of owning a home. And the more recent your mortgage, the greater your tax savings.

“The way mortgage payments are amortized, the first payments are almost all interest,” says Wendy Connick, owner of Connick Financial Solutions. (See how your loan amortizes and how much you’re paying in interest with this online mortgage calculator.)

Note that the mortgage interest deduction is an itemized deduction. This means that for it to work in your favor, all of your itemized deductions (there are more below) need to be greater than the new standard deduction, which the Tax Cuts and Jobs Act nearly doubled to $24,400 for a married couple. For individuals the deduction is $12,200, and it’s $18,350 for heads of household.

As a result, only about 5% of taxpayers will itemize deductions this filing season, says Connick.

For some homeowners, itemizing simply may not be worth it. So when would itemizing work in your favor? As one example, if you’re a married couple who paid $20,000 in mortgage interest and $6,000 in state and local taxes, you would exceed the standard deduction and be able to reduce your taxable income by an additional $2,000 by itemizing.

Tax break 2: Property taxes

This deduction is capped at $10,000 for those married filing jointly no matter how high the taxes are. (Here’s more info on how to calculate property taxes.)

Why it’s important: Taxpayers can take one $10,000 deduction, says Brian Ashcraft, director of compliance at Liberty Tax Service.

Just note that this year, property taxes are on that itemized list of all of your deductions that must add up to more than the standard deduction ($24,000 for a married couple) to be worth your while.

And remember that if you have a mortgage, your property taxes are built into your monthly payment.

Tax break 3: Private mortgage insurance

If you put less than 20% down on your home, odds are you’re paying private mortgage insurance, or PMI, which costs from 0.3% to 1.15% of your home loan. But here’s some good news for PMI users: You can deduct the interest on this insurance thanks to the Mortgage Insurance Tax Deduction Act of 2019. Also known as the Secure Act, it retroactively reinstated for 2018 and 2019 certain deductions and credits for homeowners.

“These include the deduction for PMI,” says Laura Fogel, certified public accountant at Gonzalez and Associates in Massachusetts. (This credit is retroactive for 2018, so talk to your accountant to see if it makes sense to amend your 2018 tax return.)

Why it’s important: The PMI interest deduction is also an itemized deduction. But if you can take it, it might help push you over the $24,000 standard deduction. And here’s how much you’ll save: If you make $100,000 and put down 5% on a $200,000 house, you’ll pay about $1,500 in annual PMI premiums and thus cut your taxable income by $1,500. Nice!

Tax break 4: Energy efficiency upgrades

The Residential Energy Efficient Property Credit was a tax incentive for installing alternative energy upgrades in a home. Most of these tax credits expired after December 2016; however, two credits are still around. The credits for solar electric and solar water heating equipment are available through Dec. 31, 2021, says Josh Zimmelman, owner of Westwood Tax & Consulting, a New York–based accounting firm.

The Secure Act also retroactively reinstated a $500 deduction for certain qualified energy-efficient upgrades “such as exterior windows, doors, and insulation,” says Fogel.

Why it’s important: You can still save a tidy sum on your solar energy. And—bonus!—this is a credit, so no worrying about itemizing here. However, the percentage of the credit varies based on the date of installation. For equipment installed between Jan. 1, 2017, and Dec. 31, 2019, 30% of the expenditures is eligible for the credit. That goes down to 26% for installation between Jan. 1 and Dec. 31, 2020, and then to 22% for installation between Jan. 1 and Dec. 31, 2021.

Tax break 5: A home office

Good news for all self-employed people whose home office is the main place they work: You can deduct $5 per square foot, up to 300 square feet, of office space, which amounts to a maximum deduction of $1,500.

Understand, however, that there are strict rules on what constitutes a dedicated, fully deductible home office space. Here’s more on the much-misunderstood home office tax deduction.

The fine print: If you work from home occasionally but have an office to go to, you can’t take this deduction.

Tax break 6: Home improvements to age in place

To get this break, these home improvements will need to exceed 7.5% of your adjusted gross income. So if you make $60,000, this deduction kicks in only on money spent over $4,500.

The cost of these improvements can result in a nice tax break for many older homeowners who plan to age in place and add renovations such as wheelchair ramps or grab bars in slippery bathrooms. Deductible improvements might also include widening doorways, lowering cabinets or electrical fixtures, and adding stair lifts.

The fine print: You’ll need a letter from your doctor to prove these changes were medically necessary.

Tax break 7: Interest on a home equity line of credit

If you have a home equity line of credit, or HELOC, the interest you pay on that loan is deductible only if that loan is used specifically to “buy, build, or improve a property,” according to the IRS. So you’ll save cash if your home’s crying out for a kitchen overhaul or half-bath. But you can’t use your home as a piggy bank to pay for college or throw a wedding.

The fine print: You can deduct only up to the $750,000 cap, and this is for the amount you pay in interest on your HELOC and mortgage combined. (And if you took out a HELOC before the new 2018 tax plan for anything besides improvements to your home, you cannot legally deduct the interest.)

The post 7 Tax Benefits of Owning a Home: A Complete Guide for Filing in 2020 appeared first on Real Estate News & Insights | realtor.com®.

Your 2019 Home Tax Deduction Checklist: Did You Get Them All?

March 22, 2019

Your Home Tax Deduction Checklist: Did You Get Them All?

utah778/iStock

Welcome to your home tax deduction checklist! For homeowners, this kind of guidance is essential in the wake of all the (confusing) changes ushered in by the new tax plan, the Tax Cuts and Jobs Act.

The biggest change? The standard deduction jumped to $12,200 for individuals, $18,350 for heads of household, and $24,400 for married couples filing jointly. And this higher number means you need to dig into all of your home expenses to see if their total sum tops the standard deduction, depending on your filing status. (If the total doesn’t surpass it, then you’ll just take the standard deduction on your taxes when you file.)

To help, here’s a list of all the tax breaks for homeowners.

Mortgage interest

In the past, you could deduct the interest from up to $1 million in mortgage debt (or $500,000 if you filed singly).

“But for loans taken out from Dec. 15, 2017, onward, only the interest on the first $750,000 of mortgage debt is deductible,” says William L. Hughes, a certified public accountant in Stuart, FL.

Mortgages are structured so that you start off paying more interest than principal. For example, in the first year of a $300,000, 30-year loan at a fixed 4% interest rate, you’d be deducting $10,920. (To find out how much you paid—or will pay—in mortgage interest any year, punch your numbers into our online mortgage calculator.)

Note that taking this deduction under the new tax law does require itemizing deductions, but it may be worth the hassle, especially for new homeowners.

Mortgage points

If you bought a home and paid points, then you can still deduct those from your taxes. They must be “true,” or discount, points, not origination points. After all, points are essentially mortgage interest that you prepay, so it makes sense that they’d be treated like the rest of your mortgage interest. Each point is 1% of the loan amount, so if you paid 2 points on that $300,000 loan, you can deduct $6,000.

———

Watch: 5 Pet-Related Tax Deductions We Bet You Didn’t Know Of

———

Private mortgage insurance

For now at least, Congress has renewed this deduction.

If you can’t make a 20% down payment on your home, most lenders require that you pay private mortgage insurance, or PMI. The upside: It’s tax-deductible as long as your adjusted gross income is less than $100,000. (For each $1,000 you make after that, you can deduct 10% less of your PMI, up to $109,000.) PMI is generally between 0.3% and 1.5% of the loan amount annually, so on a $300,000 loan, you’d be deducting between and $900 and $4,500.

Home equity debt interest

Homeowners often take out a home equity loan or home equity line of credit in order to tap into some quick cash—for college, weddings, home improvements, or otherwise—using their home as collateral. And up until 2017, homeowners could deduct the interest on home equity debts up to $100,000 for married joint filers.

Now? “Home equity debt interest deductions have been eliminated,” says Eric Bronnenkant, a certified public accountant and financial planner, and head of tax at Betterment. That is, unless you spend the money on one thing only: home improvements.

So if you’re eager to renovate that kitchen, this deduction still stands. But if you have to foot the bill for your daughter’s wedding, the IRS will no longer pitch in, explains Amy Jucoski, a certified financial planner and national planning manager at Abbot Downing.

And unlike mortgage interest deductions, the new rules on home equity debt apply to all loans regardless of when they were taken. And to reap the benefit, your total debt—meaning your mortgage plus your home equity loan—can’t be more than the new $750,000 cap.

Property taxes

In the good ol’ days of 2017, your property taxes were fully tax-deductible.

This tax season, there’s a $10,000 cap on the combined amount of your property taxes, state and local income taxes, and (for states without income tax) deductible sales tax.

One bright side for landlords and those with vacation homes: “You can take deductions for all the properties you own, plus add your state income tax,” says Steven Weil, president of RMS Accounting, in Fort Lauderdale, FL.

Energy-efficient upgrades

Did you add solar panels or a solar-powered water heater last year? That means you can help yourself to a tax credit.

According to Bishop L. Toups, a taxation attorney in Venice, FL, qualifying solar electric panels and solar water heaters are good for a credit of 30% of the cost of the equipment and installation. For a $30,000 green investment, that’s a cool $9,000 back!

To qualify, the solar panels have to generate at least half of the energy used by the home, they have to be installed in your primary residence, and they can’t be used to heat a pool or hot tub (sorry!).

The credit will remain 30% of the cost for equipment installed between now until the end of 2019, 26% until the end of 2020, and 22% until the end of 2021.

Home office deduction

The home office tax deduction disappeared for all W-2 employees who have an office elsewhere that they could use if they wanted to. The only people who can continue taking this deduction are those who truly run their own business from home, says Joshua Hanover, a senior manager at Marks Paneth.

Using the simplified home office deduction, self-employed people can take $5 for every square foot of office space, up to a maximum of 300 square feet. For a 200-square-foot home office, you’re looking at a nice $1,000 deduction. Just don’t try any funny stuff—it has to be a dedicated home office, used only for work. Here’s more on the home office tax deduction.

The post Your 2019 Home Tax Deduction Checklist: Did You Get Them All? appeared first on Real Estate News & Insights | realtor.com®.

7 Tax Benefits of Owning a Home: A Complete Guide for Filing Now and Next Year

February 19, 2019

What are the tax benefits of owning a home? Homeowners might be wondering this right around now as they prepare to file their taxes. Especially since the new Tax Cuts and Jobs Act—the most substantial overhaul to the U.S. tax code in more than 30 years—went into effect on Jan. 1, 2018. You might even be wondering how the new plan affects the tax perks of homeownership.

Well, look no further than this complete guide to all the tax benefits of owning a home. We break down exactly what’s changed, and all the tax breaks homeowners should be aware of when they file their 2018 taxes.

Read on to make sure you aren’t missing anything that could save you money!

Tax break 1: Mortgage interest

What changed: In the past, one of the most lucrative tax breaks for homeowners was the deduction for mortgage interest. The new tax code didn’t eliminate the deduction, but it did change substantially. The new tax bill allows homeowners with a mortgage that went into effect before Dec. 15, 2017, to continue to deduct interest on loans up to $1 million.

“However, for acquisition debt incurred after Dec. 15, 2017, the tax reform only allows the homeowner to deduct the interest on the first $750,000,” says Lee Reams Sr., chief content officer of TaxBuzz.

Why it’s still important: The ability to deduct the interest on a mortgage continues to be a big benefit of owning a home. And the more recent your mortgage, the greater your tax savings.

“The way mortgage payments are amortized, the first ones are almost all interest,” says Wendy Connick, owner of Connick Financial Solutions. (See how your loan amortizes and how much you’re paying in interest with this mortgage calculator.)

Note that the mortgage interest deduction is an itemized deduction. This means that for it to work in your favor, all of your itemized deductions (there are more below) need to be greater than the new standard deduction, which the Tax Cuts and Jobs Act nearly doubled to $24,000 for a married couple (it used to be $12,700).

As a result, only about 5% of taxpayers will itemize deductions this filing season, says Connick. “In the past it was more like 30%.”

For some homeowners, itemizing simply may not be worth it this year. So when would itemizing work in your favor? As one example, if you’re a married couple who paid $20,000 in mortgage interest and $6,000 in state and local taxes, you would exceed the standard deduction and be able to reduce your taxable income by an additional $2,000 by itemizing.

Tax break 2: Property taxes

What changed: In the past, property taxes in their entirety had always been deductible. (Here’s more info on how to calculate property taxes.) But now, this deduction is capped at $10,000 for those married filing jointly no matter how high the taxes are.

Why it’s still important: Taxpayers can still take one $10,000 deduction, says Brian Ashcraft, director of compliance at Liberty Tax Service. Just note that this year, property taxes are on that itemized list of all of your deductions that must add up to more than the standard deduction ($24,000 for a married couple) to be worth your while. And remember that if you have a mortgage, your taxes are built into your monthly payment.

Tax break 3: Private mortgage insurance

What changed: If you put less than 20% down on your home, odds are you’re paying private mortgage insurance, or PMI, which costs from 0.3% to 1.15% of your home loan. Good news! The new tax bill extended the ability to deduct the interest on this insurance, a deduction that was set to expire, says Connick.

Why it’s still important: The PMI interest deduction is also an itemized deduction. But if you can take it, it might help push you over the $24,000 standard deduction. And here’s how much you’ll save: If you make $100,000 and put down 5% on a $200,000 house, you’ll pay about $1,500 in annual PMI premiums and thus cut your taxable income by $1,500. Nice!

Tax break 4: Energy efficiency upgrades

What changed: Nada. The Residential Energy Efficient Property Credit was a tax incentive for installing alternative energy upgrades in a home. Most of these tax credits expired after December 2016; however, two credits are still around. The credits for solar electric and solar water heating equipment are available through Dec. 31, 2021, says Josh Zimmelman, owner of Westwood Tax & Consulting, a New York–based accounting firm.

Why it’s still important: You can still save a tidy sum on your solar energy. And—bonus!—this is a credit, so no worrying about itemizing here. However, the percentage of the credit varies based on the date of installation. For equipment installed between January 1, 2017, and December 31, 2019, 30% of the expenditures are eligible for the credit. That goes down to 26% for installation between Jan. 1 and Dec. 31, 2020, and then to 22% for installation between Jan. 1 and Dec. 31, 2021.

Tax break 5: A home office

What changed: In the good ol’ days of 2017, if you worked from home at all, your office space and expenses could be deducted. Now this deduction is gone completely for employees who have an office to go to but work from home occasionally.

Why it’s still important: Good news for all self-employed people whose home office is the main place they work, you can still take a $5-per-square-foot deduction for up to 300 square feet of office space, which amounts to a maximum deduction of $1,500. Understand, however, that there are strict rules on what constitutes a dedicated, fully deductible home office space. Here’s more on the much-misunderstood home office tax deduction.

Tax break 6: Home improvements to age in place

What changed: Not much, except that for this filing season, these home improvements will need to exceed 7.5% of your adjusted gross income. So if you make $60,000, this deduction kicks in only on money spent over $4,500.

Why it’s still important: The cost of these improvements can result in a nice tax break for many older homeowners who plan to age in place and add renovations such as wheelchair ramps or grab bars in slippery bathrooms. Deductible improvements might also include widening doorways, lowering cabinets or electrical fixtures, and adding stair lifts. Caveat: You’ll need a letter from your doctor to prove these changes were medically necessary.

Tax break 7: Interest on a home equity line of credit

What changed: In the past, people used these loans to do all sorts of things: pay for college, throw a wedding, or make improvements to their home. And they could legally deduct the interest. Not anymore, even if you took out the loan before the new tax plan.

Now if you have a home equity line of credit, or HELOC, the interest you pay on that loan is deductible only if that loan is used specifically to “buy, build, or improve a property,” according to the IRS.

Why it’s still important: You’ll still save cash if your home’s crying out for a kitchen overhaul or half-bath. Major note: You can deduct only up to the $750,000 cap, and this is for the amount you pay in interest on your HELOC and mortgage combined.

The post 7 Tax Benefits of Owning a Home: A Complete Guide for Filing Now and Next Year appeared first on Real Estate News & Insights | realtor.com®.