Getting the Most out of Your Home: Tax Benefits You Might Be Missing
Jaime Aulicino, EA
Owning a home is part of the American Dream for many people. You can decorate it how you would like; you can raise a family there if you wish, and you can hopefully build equity. Whether you are just moving into your first home, or you are celebrating 50 years there, homeownership could save you taxes. Unfortunately, the once popular first-time homebuyer credit expired in 2010.
Mortgage Interest Deductions
Most homeowners finance their house with a note and mortgage. During the life of the mortgage, you may be able to deduct the amount of interest paid and any points you bought. These deductions are allowed if you are itemizing rather than taking the standard deduction. The IRS allows taxpayers to choose whichever method is most beneficial.
Mortgage interest is fully deductible if the house had a purchase price under $375,000 for single taxpayers or $750,000 for married taxpayers filing a joint return, and the house was bought after January 1, 2018. If the house was acquired prior to that, the limitation increases to $1,000,000 purchase price.
Mortgage points are a form of prepaid interest that you can choose to pay up in front in exchange for a lower interest rate, and consequently, a lower monthly payment over the life of your loan. Each point is equal to 1% of the total loan amount. Generally, these points are fully deductible in the year you pay for them.
Property and School Tax Deductions
Owning a home also comes with property, school, and other taxes (also called state and local tax, or “SALT”) depending on the area you live in. These taxes are also deductible if you itemize, and the deduction is limited to $10,000. This means that even if you paid $13,000 in property tax, only $10,000 of that is deductible and only if you itemize. Further, the excess SALT cannot be carried forward for use in future years.
Tapping into Retirement Accounts
If you have a retirement savings account, such as a 401(k) or an IRA, you can withdraw money early without penalty from these accounts in order to buy a home. Typically, withdrawing money from a retirement account before the age of 59 ½ incurs a 10% penalty. Some accounts have limits. For example, a Roth IRA allows up to $10,000 to be withdrawn penalty- and tax-free in order to purchase a home. However, if you decide to use a retirement account, you may need to repay the money to your account; you may owe income tax and you may miss out on the investment growth.
Gain Exclusion When Selling Your Home
Another great tax benefit of owning a home is when you sell that home. Typically, houses increase in value and sell for more than the original purchase price. The IRS allows a gain exclusion that is calculated by adding the price you paid for your house and any improvement costs that you incurred to arrive at your “basis” in the house. The sales price of your house is subtracted by this basis and if you end up with a gain, you can exclude up to $250,000 if you are filing single, or $500,000 if you are filing jointly with your spouse. However, to qualify for this exclusion, the home had to be owned and used as the taxpayer’s primary residence for at least two of the last five years and the taxpayer can only claim this exclusion once every two years.
Home Improvement Tax Credits
Speaking of improvements, there are many tax credits that are available for homeowners who make improvements to their homes. One of the credits is for making home energy improvements. For example, you may be able to take this credit if you installed an electric vehicle (EV) charger or solar panels in your home. The credit is equal to 30% of the qualifying expenses that were incurred for these improvements, subject to limitations.
Another credit available is for “necessary improvements” that are typically needed for medical needs. These include installing a ramp and widening doorways. The credit amount varies and is limited based upon whether the improvement increases the home’s value.
Home Office Deductions
Since the COVID-19 pandemic, people have been working from home more than ever before. If you regularly use your home for business, you could deduct home office expenses. To qualify, your home office must be the principal location of your business or a place where you meet with customers on a regular basis. The deduction is based on the square footage of the office. Typically, being a remote employee does not qualify for this deduction.
Summary
At times, being a homeowner can be quite frustrating but also exciting. It can also be the source for beneficial tax deductions and credits. If you have questions regarding how your home can save you money, please reach out to your trusted Louis Plung & Co. advisor or email us at [email protected]
