4 Things to Think About When Filing Taxes as a Homeowner
Becoming a homeowner can be an exciting adventure. Once you become a homeowner, you will be able to considerably build your wealth over time through the accumulation of equity and also have the long-lasting joy that comes with having a place you can call your own.
Overall, the benefits of homeownership often outweigh the drawbacks, which is why millions of Americans will decide to become first-time homeowners every year. Though your cost of living may have marginally increased compared to when you were renting, the wealth-building opportunities that homeownership can provide are unrivaled.
There are also some additional financial benefits that many homeowners—especially first-time homeowners—tend to overlook. Specifically, while there are many tax benefits available to current (and even prospective) homeowners, only a fraction of these filers will actually take advantage of them.
Are you a homeowner who is preparing to file their taxes? Be sure to keep these things in mind:
1. Home Mortgage Interest Deduction
When you are filing your taxes, one of the first decisions you will need to make is whether you want to take the standard deduction or whether you want to itemize your eligible personal expenses, hoping that the sum of these expenses will give you an even greater tax discount.
Currently, the standard deduction for tax filers is $15,000 for individuals and $30,000 for married couples and other eligible joint filers. This means that you can automatically subtract these amounts from your adjusted gross income (AGI), whatever that might happen to be. In most cases, the standard deduction will be larger than your itemized expenses. But there are also plenty of situations in which itemizing will be financially beneficial. And there are few, if any, itemized expenses that are more broadly beneficial than the home mortgage interest deduction.
Via the home mortgage interest deduction, you can potentially deduct all—or at least some—of the interest you have paid on your mortgage over the course of the past year. If you own a home that is worth about $375,000, for example, and you are relatively early on in your mortgage, you could very easily be paying about $10,000 per year in interest—certainly nothing to sneeze at. Currently, the home mortgage interest deduction can be used on all mortgage debt for individuals up to $375,000 and for married couples up to $750,000.
2. State and Local Tax (SALT) Deductions
In addition to paying federal taxes, you also very likely also need to pay both state and local taxes on your income. Currently, there are nine states with no income tax (AK, FL, NV, NH, SD, TN, TX, WA, and WY), though even within these states, local taxes are still very common (especially within their larger cities).
In many cases, SALT taxes will apply to both the income that you generate and the property that you own—so homeowners should take an active interest. Prior to the passage of the JOBS Act in 2017, there was no limit to the level of SALT deduction a household could take (it has been mostly utilized by the relatively wealthy). Now, the SALT Tax Deduction is capped at $5,000 for individuals and $10,000 for married couples filing jointly. If you live in a high tax state, including New York, New Jersey, and California, you’ll be much more likely to benefit from itemizing your taxes rather than taking the standard deduction.
3. Home Improvement Tax Deductions
Though it’d be nice if every improvement you made to your home—the new backsplash in your kitchen, a new water heater, a fixed pipe in the backyard, etc.—were tax-deductible in the current year, most, unfortunately, are not. However, if you make significant investments into your home these investments might be tax-deductible once it comes time to actually sell.
When you sell your home—and make money from doing so—you will often be subject to paying capital gains taxes. However, any concession you make to the prospective buyer, such as home improvements, can be deducted from the supposed capital gain, ultimately enabling you to lower your total tax bill. In other words, if you are thinking about selling your home in the near future—a process that will likely involve making at least a few changes—you should save your receipts. They just might help you significantly reduce your total tax bill. Home improvements that promote energy efficiency might provide an even wider range of possible deductions.
4. Home Office Tax Deductions
Over the past five years, a growing number of Americans have begun working from home. And, depending on how you work from home, you may be eligible for a notable Home Office Tax Deduction.
However, you should be careful to overstate your working from home status—working on your laptop in the kitchen will likely not land you much of a deduction. According to tax expert Josh Zimmelman, “not everyone who works from home can claim a home office… The home office must be used regularly and exclusively for business and be the primary site of the business.” Still, a Home Office Tax Deduction is certainly something worth exploring, especially if it is easy to prove that a large portion of your home is dedicated to your business.
Final Thoughts
Generally speaking, people who own homes will be more likely to benefit from itemizing their taxes than those who do not own homes, regardless of their income. Tax deductions including the mortgage interest deduction, SALT deduction, home improvement deductions, and home office deductions are all worth entertaining. If you are planning on filing your own taxes, be sure to give each of these common deductions a closer look.
Need help with financing for Home Maintenance? Our team of Mortgage Experts can help!