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There are many perks to owning a home. You earn equity, enjoy greater privacy and flexibility than renters, and you may be able to reduce your taxes if you can capitalize on homeowner tax breaks.
Among these are deductions for property taxes, mortgage interest, donations, mortgage points, medical bills, home office expenses, and mortgage insurance. You may also benefit from tax credits for things like energy-efficient upgrades if you qualify.
Learn more about tax deductions and tax credits, itemizing your deductions versus taking the standard deduction, common homeowner tax breaks you may be eligible for, and how to claim these deductions and credits.
Understanding homeowner tax breaks
Being a homeowner gets expensive, considering what you have to pay for your mortgage loan, property taxes, homeowners insurance, repairs, and maintenance. Fortunately, you may be able to lessen this financial burden by claiming eligible tax breaks.
“Homeowner tax credits and deductions are financial incentives offered by the government to decrease your tax burden,” says Min Hwan Ahn, an attorney in Philadelphia. “Tax credits directly lower, dollar for dollar, the amount of tax you have to pay on your annual tax return. Tax deductions, on the other hand, decrease your taxable income.”
Let’s say, after reviewing your yet-to-be-filed tax return, you calculate that your tax liability is $11,500 based on a gross income in 2023 of $125,000. But you remember that, during the tax year for which you are filing your return, you purchased and installed a new energy-efficient window that yields a tax credit of $600. This can reduce your tax liability to $10,900, saving you a full $600.
But if you don’t qualify for tax credits, you may still be able to benefit from tax deductions, including deductions on mortgage interest, property taxes, and home office expenses. Imagine those added up to $30,000 for the 2023 tax year. If so, your taxable income would now be $95,000.
The standard deduction vs. itemized deductions
Keep in mind that there are two ways to get a tax deduction: You can either claim what’s called the “standard deduction,” or you can itemize individual deductions on your tax return.
“The standard deduction for the 2023 tax year stands at $12,950 for individuals and $25,900 for married couples filing jointly,” says Brian Quigley, a tax and finance expert with Denver-headquartered Beacon Lending. “If you claim the fixed-sum standard deduction, it instantly diminishes your taxable income by that amount. But if you add up your possible itemized deductions, you may find that it exceeds the standard deduction, in which case it’s more advantageous to itemize your deductions.”
Case in point: You determine that you qualify for a state and local tax (SALT) deduction worth $10,000 (the max allowed), a mortgage interest deduction of $18,500, and a $2,500 deduction based on donations to non-profits, adding up to $31,000.
$31,000 is more than the standard deduction of $25,900, so it would be better to itemize your deductions in this example.
Commonly claimed homeowner tax deductions
Think you’re better off claiming itemized deductions? Here are some of the most commonly claimed tax deductions by homeowners:
- SALT taxes, including property taxes paid at the state and local level. Here, you can deduct a max of $10,000 if you file a married joint return or $5,000 if you are married filing separately or single.
- Interest paid on your mortgage loan. Today, your mortgage interest limit is $750,000 if you are married filing jointly or single; if you file married but separately, the deduction max is $375,000 for you and $357,000 for your spouse.
- Interest paid on a home equity loan or home equity line of credit (HELOC). Note that you are only allowed to claim this deduction if you used the funds for a home improvement project.
- Discount points on your mortgage loan. If you took out a mortgage loan last year and paid discount points to decrease the loan’s interest rate (with each discount point equivalent to 1% of the loan amount), these expenses are deductible. Just be aware that loan origination points, which don’t impact your mortgage’s interest rate, are not deductible.
- Mortgage insurance. If your mortgage lender requires you to pay private mortgage insurance or an equivalent, you are permitted to deduct these payments.
- Qualified home improvements. If you pay for permanent home improvements that the IRS deems are “necessary” (which can include things like making your residence more accessible to an elderly or special needs resident), you may be eligible to deduct these expenses. Most other types of home improvements are not tax deductible, although energy-efficient improvements may trigger a tax credit (explained later).
- Capital gains taxes. If you sold your home for a profit last year, and you occupied your home as a primary residence for at least two of the previous five years, you can pocket some of these profits without a tax consequence. Married couples filing separately or single filers can retain up to $250,000 in capital gains without penalty versus $500,000 for married couples filing jointly.
- Donations of cash or goods. The ceiling on charitable donations to qualified non-profits is 60% of your adjusted gross income for tax year 2023.
- Medical expenses. You are permitted to deduct only the portion of your qualified medical and dental costs that exceeds 7.5% of your adjusted gross income.
For more details on what the IRS allows when it comes to these tax breaks, click here.
Commonly claimed tax credits
Here are some popular tax credits homeowners may be eligible for:
- Energy efficient home improvement credit. If you buy and install energy-efficient doors, windows, insulation, air conditioning, or heat pumps, through 2032, you may qualify for a max credit of up to $3,200.
- Residential clean energy credit. If you add solar panels, a solar water heater, or other clean energy items, you may be able to claim a credit worth 30% of the costs.
- Earned income tax credit. If you are in a low-income tax bracket, you may qualify for this credit, worth between $600 to $7,430, based on the size of your family, if you are married, and your earnings.
- Child tax credit. Families with kids younger than 17 years can qualify for this credit worth up to $2,000 per child in tax year 2023, with $1,600 of the credit possibly being refundable.
- Child and dependent care credit (CDCC). This pertains to a portion of expenses paid for daycare or similar costs for a son or daughter under age 13, for a parent or spouse who can’t care for themselves, or for a different dependent. Usually, this credit is worth up to 35% of $3,000 of expenses for a single dependent versus $6,000 for at least two dependents.
- Lifetime learning credit. This permits you to claim 20% of the first $10,000 paid for tuition and fees up to $2,000.
- American opportunity tax credit. This education-related credit enables you to claim the first $2,000 you shelled over for tuition, education fees, books, and equipment as well as 25% of the next $2,000 spent.
How to claim these tax breaks
To claim any of these tax deductions or tax credits, you’ll need to complete your tax return and any associated IRS forms.
“Claiming tax breaks requires meticulous documentation and the completion of relevant forms,” Quigley notes. “Homeowners should always retain records, including receipts and documentation for any of these expenses, including mortgage interest, property taxes, home improvements, and other eligible deductions.”
If you are using tax software like TurboTax, make sure you enter all the necessary information carefully. If you are having your taxes professionally filed, ensure that your preparer shows you where the deduction and/or credit was claimed. If it wasn’t, ask them why.
The bottom line
Don’t leave money on the table as a homeowner: Review your expenses made over the last tax year and determine if you qualify for tax deductions and credits.
But be prepared that this due diligence can be time-consuming and complicated, including the actual process of claiming these tax breaks on your return. For best results consult a tax professional, who can provide tailored guidance for accurate filing, Quigley suggests.