Tax Benefits of Owning a Home: Deductions and Credits You Need to Know

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For many people, home ownership provides an opportunity to live more comfortably and take root. However, there are also tax breaks that come with buying and owning a home.

From being able to deduct mortgage interest to potential loans to improve the energy efficiency of your home, you can see a lower tax bill.

Here are some of the deductions and loans you can get as a homeowner:

How Homeowner Tax Credits Work

As a homeowner with mortgage, you have access to many different tax breaks, including several deductions and two significant credits. By taking advantage of these tax breaks, you can cut your tax bills, making your home a more profitable investment in the long run.

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Deductions versus loans

Both deductions and credits reduce your tax bill, but there are some key differences between the two.

Tax deduction Tax credit
Featured at the beginning of your return Invented at the end of your return
Reduces your income for tax purposes Directly reduces the amount of your tax debt

A tax deduction will reduce your overall tax liability by reducing taxable income, but a tax credit is more like a gift card that you can apply to your tax account to directly reduce the amount you owe.

Choosing a feeding method

Your registration status can have a big impact on your tax account, as well as determining which deductions and credits you are eligible for. For example, the standard deduction is higher for married couples filing jointly than for those filing as singles or heads of household.

Check: How to buy a home: a step-by-step guide

5 tax deductions for homeowners

If you want to claim tax credits available to homeowners, you will need to provide details of your return. When making the list, you list the applicable deductions, including charitable donations, work-related deductions, and home ownership deductions.

Instead of making the standard deductions that everyone gets, you can list all of your deductions. However, this only makes sense if your detailed deductions total more than the standard deduction, which in 2021 will be $ 25,100 for joint applicants, $ 12,550 for single applicants, and $ 18,800 for those who are applying as the head of the family.

Homeowner Deduction What does it do
Deduction of mortgage points Reduces your liability based on the points actually paid to the lender
Mortgage Insurance Deduction Reduces your liability based on your PMI payments
Deduction of interest on mortgages Reduces your liability based on how much interest you paid on your mortgage – a limit on how much you can deduct
Home office deduction Reduces your liability by the cost of using a portion of your home solely for business purposes.
Property tax deduction Reduces your liability based on how much you paid property tax – a limit on how much you can deduct

1. Deduction of mortgage points

Usually, mortgage points paid to the lender at closing in order to lower your interest rate. They are expressed as a percentage of the loan, usually 1%.

Since the interest on the mortgage is deductible, you must also pay the points, provided that you gave money to the lender for them.

For example: If you pay $ 250,000 for a home, each point will cost you $ 2,500. You must pay these points upfront to the creditor to be claimed as a deduction from your tax return. You can also do this when refinancing your mortgage.

2. Deductions for mortgage insurance

If you do an initial fee less than 20%, you are more likely to pay PMI. The good news is that you can deduct PMI payments if you took out a loan in 2007 or later.

However, once your Adjusted Gross Income (AGI) reaches a certain level – $ 50,000 for single filers and $ 100,000 for joint filers – the deduction will decrease until you lose your eligibility. getting this income based on your income.

3. Deduction of mortgage interest

One of the main tax incentives for home ownership is generally subtract all your mortgage interest, up to a certain amount of debt.

If you purchased a home before December 15, 2017, you can deduct interest up to $ 750,000 if you are applying for joint registration and up to $ 375,000 if you are applying alone.

Good to know: If you purchased the home before that date, you could potentially claim up to $ 500,000 in interest deduction on your mortgage as the sole applicant and $ 1 million as the joint filler.

4. Deduction from home office

You can subtract home office space if it is used solely for business. There are two methods for calculating deduction:

  • Simplified: Just charge $ 5 per square foot, up to 300 square feet, or $ 1,500.
  • Normal: Calculate the percentage of your home that is occupied by a home office and then calculate other expenses based on that percentage. For example, if your office accounts for 5% of the value of your home, you can deduct 5% of your mortgage costs.

With the conventional method, you need to keep a good record of your expenses and consider other issues such as depreciation.

5. Withholding property tax.

When do you pay property taxYou can deduct the entire amount you pay each year up to $ 5,000 as a single applicant or $ 10,000 as a joint entity. This limit includes state and local taxes as well as sales taxes. As with the other deductions listed here, you can only withhold property tax if you list it.

2 tax deductions for homeowners

A tax credit is more like a gift card that helps keep tax costs down. After everything is deducted and your bill is finalized, a tax credit comes in, which reduces your total debt.

The two main tax benefits of owning a home in terms of credit include: mortgage credit certificate (MCC) and the potential for a home loan for energy.

Homeowner Tax Credit What does it do
Mortgage Loan Certificate Provides a tax credit of up to US $ 2,000 to eligible low-income families.
Housing Energy Loan Taking into account the property put into operation and the updates made – up to 26% of the cost.

1. Mortgage credit certificate

A program to help low-income homeowners, Mortgage Credit Certificate (MCC) is issued by the state or local government.

Generally, you should be first time home buyer and meet the income requirements for the MCC. If you qualify, the MCC sets your loan in the range of 10% to 50% depending on the mortgage amount and the mortgage interest rate. The maximum loan amount is US $ 2,000.

For example: If you take out a $ 200,000 mortgage with an interest rate of 3.75% and the local government sets the MCC at 20%, you will be eligible for a $ 1,500 loan.
$ 200,000 (Mortgage Amount) x 3.75% (Mortgage Interest Rate) x 20% (MCC Interest) = $ 1,500 (Eligible Loan)

2. Energy loan for residential construction

A residential energy loan allows you to get credit for installing geothermal systems, wind farms, fuel cells, biomass and solar energy to improve the efficiency of your home. The amount of credit received depends on the cost of installation and the time it takes to commission these systems.

Systems commissioned between the following dates are eligible for a certain percentage of the loan:

  • December 31, 2019 and until January 1, 2023: 26%
  • December 31, 2022 and until January 1, 2024: 22%

A loan of 30% has been granted for systems in operation between December 31, 2016 and January 1, 2020. Thus, you will get more benefit from this tax credit by installing your system sooner rather than later.

Read on: Tax implications for refinancing when cashing out

about the author

Miranda Marquit

Miranda Markuit is a mortgage, investment and business specialist and a member of Credible. Her work has been featured on NPR, Marketwatch, FOX Business, The Hill, US News & World Report, Forbes and others.

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