As we close in on tax season, you may be wondering: how does homeownership affect my taxes? Keep reading as we go into more detail on the different tax breaks offered to homeowners
Standard vs Itemized Deductions
If you are considering claiming itemized deductions on your taxes, you will want to make sure that the total of the itemized deductions exceeds the standard deduction. These are the current standard deductions for the 2022 tax year as outlined by the IRS:
Single or Married Filing Separately: $12,950
Married Filing Jointly or Qualified Widow(er): $25,900
Head of Household: $19,400
Once you’ve added up your homeowner tax breaks and any other applicable tax breaks, if the total is less than your standard deduction, you will want to use the standard deduction. But, if the itemized total is more, use itemized deduction.
It is also important to understand what is (and is not) considered a deductible expense. These items are not deductible:
Payments made to obtain or refinance a mortgage (earnest money, down payment, or appraisal fees)
Principal payments on the mortgage
Mortgage insurance premiums
"Due to the 2018 Tax Cuts and Jobs Act, fewer taxpayers are able to itemize their deductions, but there are still tax deductions available to homeowners,” says certified public accountant Stacy Herman Lang, owner of the Phoenix-based firm Lang Accounting Services. “Even if you don't itemize, federal income tax credits for energy efficiency home improvements under the Inflation Reduction Act of 2022. These will be available through 2032, and Arizona has some energy efficiency credits as well."
If you do itemize, here are some potential areas to make deductions:
Mortgage and HELOC Interest
Even though you can’t deduct the principal of your mortgage, you can deduct the interest payments up to a certain limit. For mortgages taken out on December 16, 2017, and later, a single filer or married couple filing jointly can deduct up to $750,000 in interest, and a married couple filing separately can deduct up to $375,000 each. For mortgages taken out before then, the limits are a little higher.
If you’ve taken out a home equity line of credit, or HELOC, and you’re still within the limits from your mortgage interest deductions, you can deduct HELOC interest payments as long as the borrowed money was put back into the house in the form of home improvements.
Single filers or married couples filing jointly can deduct up to $10,000 of combined state and local property taxes. For a married couple filing separately, the limit is $5,000 each.
When taking out a mortgage, you might purchase discount points to lower the interest rate on the loan (1 discount point equals 1 percent of the mortgage). The cost of these discount points can be deducted if you are still within your limit for mortgage interest deductions.
Please note these are not the same as loan origination points that lenders charge to provide a loan. Those are not deductible.
If you are self-employed and use part of your home exclusively for business, you can deduct home office expenses. The deduction limit is dependent on the percentage of the home used for the business, and the worksheets to determine eligibility and calculate deductions are available on the IRS website.
Necessary Home Improvements
You can also write off permanent changes to your home, such as installed railings or widened doorways, that are medically necessary or improve the home’s accessibility for you, a spouse, or a dependent. The deduction amount is based on the value of the alterations made to the home, so changes that don’t add value to a home can generally be deducted in full.
There are still more tax breaks you may be able to take advantage of, and we encourage working with a licensed tax professional to ensure you get the best possible benefit.
If you’re ready to find your dream home, sell your home, downsize or right-size, I would love to connect with you today!