Tax Deductions for Homeowners [Ultimate Guide for 2023]
Last Updated: March 17, 2023
Owning a home can be a challenging experience with imposing responsibilities and expenses. There are, however, multiple benefits to owning a home, one of which includes tax deductions for homeowners. In this guide, we cover what are tax deductions, and what do they mean for homeowners, and other essential information.
A tax deduction reduces the amount of taxable income for individuals on federal and state levels. A deduction is an expense that a taxpayer can subtract from their gross income to reduce the total that is subject to income tax. There are two types of deductions taxpayers can choose from:
Most people are entitled to the standard deduction when filing for federal taxes. The amount varies from year to year, depending on the taxpayer’s filing status. With these deductions, there’s no need to make any calculations, as the amount is predetermined.
These types of deductions cover expenses that can be deducted from the taxpayer’s adjusted gross income (AGI), such as that of a mortgage deduction. In this way, the amount of taxable income is reduced, as well as the amount of taxes you owe. Not all expenses can be itemized, so not everyone qualifies for this type of deduction.
|NOTE: Tax deductions are different from tax exemptions—although they’re related. Tax exemptions cover income that is not subject to taxation—unlike deductions, which cover taxable income that might be excluded from taxation.|
Tax Deductions for Homeowners
There are several tax benefits of owning a home that homeowners can utilize if they itemize their deductions correctly.
This is the biggest deduction available for homeowners. Each mortgage payment includes an interest rate, which is where tax filers get their deductions from. The money paid in interest can be deducted up to a certain amount, depending on when the mortgage was taken out. The maximum mortgage interest tax deduction you can take annually is up to $750,000.
If you’re filing jointly with your spouse, the maximum property tax deduction available is $10,000 per year. For single filers or married filing separately, the maximum deduction is $5,000 per year.
Private Mortgage Interest
Those that don’t qualify for a traditional mortgage often decide to turn to private lenders to buy a home. Interest rates are higher for private mortgages, but the government offers a mortgage tax deduction if filers’ AGI doesn’t exceed $109,000 per year.
Home Equity Loan Interest
A home equity loan functions much like a second mortgage on your home. The interest on these loans can be deducted only if you use the money acquired through a loan for home improvements on your main or second home.
Home Office Expenses
A home office can get you a deduction if you’re using this space exclusively for business and regularly. If you’re self-employed or registered as a freelancer working from home, you can claim a homeowner deduction. The amount of the deduction depends on the size of space the office occupies within your home.
Home renovations are generally considered non-deductible home expenses. But some necessary changes to the home are classified as deductible expenses, such as those for medical or health reasons, including ramps, railings, or doorway adjustments. Anything else that includes accessibility can qualify as a home improvement tax deduction.
Some homeowners buy ‘discount points’ when taking out a mortgage to lower their interest rate on monthly payments. This covers only the cost of the prints purchased by the homeowner and not the lenders’ costs for providing the loan.
Homeowner Deductions for 2021
Homeowners can always claim the standard deduction, which has increased since 2020. For single filers or married persons filing separately, the standard deduction for 2021 is $12,550. For married persons filing jointly, it’s $25,100 and $18,800 for heads of household.
Some choose to itemize their deductions to receive a bigger return. But since tax laws are subject to change each year, be careful to understand what you can itemize on your return for 2021.
The largest tax breaks for homeowners are mortgage interest returns, as well as interest on private mortgages or home equity loans, and on other related expenses, such as discount points.
Most Vital Questions About Deductibles in 2021
We’ve provided answers to four of the most pressing questions about what’s deductible on your tax return in 2021:
Are Property Taxes Deductible?
Property taxes are deductible, but there is an annual cap on the return. The maximum return for married homeowners is $10,000 and for single tax filers, it’s $5,000, regardless of the value of the property.
Are Home Improvements Tax Deductible?
Certain home improvements are deductible. Any changes done to the home, due to medical or health reasons, are deductible. And any changes made to transform the home into an energy-efficient unit are deductible. This is known as the ‘residential energy credit’. It provides tax breaks on energy-efficient doors and windows, insulation, metal and asphalt roofs, water heaters, biomass stoves, and other systems that make your home more environmentally friendly.
Are There Tax Breaks for Buying a Home?
Even though buying a home is a big investment, it might save you money in the long run. If you’re a first-time homeowner accustomed to paying rent, unlike your monthly rent payments, your mortgage payments can give you back a certain amount of money.
Are There Additional Taxable Deductions?
Some additional tax breaks that can be utilized by homeowners, such as:
Child Tax Credit
This tax credit has doubled since 2017. If you’re a homeowner with children or dependents, you can now get up to $3,000 per child (aged 6 to 17) and up to $3,600 for a child under 6 years old.
Adoption Tax Credit
Those who have decided to adopt a child can get as much as $14,660 per child.
Recovery Rebate Credit
You could be eligible for this credit if your Economic Impact Payment for 2020 was under $1,200 for single filers or $2,400 for married filers, as well as $500 for qualifying children. To itemize this on your tax return, you’ll need the additional Notice 1444, which is an IRS letter that confirms your Economic Impact Payment payment.
|NOTE: In the US, average kitchen remodels cost $23,000. If you’re looking to remodel your home but don’t have this kind of money, consider applying for one of the top-rated home improvement loans available.|
100% Tax Deduction on Mortgage Interest?
The home mortgage interest deduction (HMID) is among the most popular tax incentives in the US. This is one of several homeownership tax deductions provided by the IRS for people contemplating buying a home.
One of the most alluring features of this incentive is the possible 100% interest return. Homeowners can get a full return if their yearly interest rate payments do not exceed $750,000, as decreed by the 2017 Tax Cuts and Jobs Act (TCJA). Before 2017, the cap on mortgage interest returns was at one million dollars—any mortgage acquired before 2017 is still eligible for this return.
|NOTE: Hiring a tax professional to help you understand all the intricacies of tax law can cost you up to $500.00. If you’re looking to save money, consider purchasing affordable tax software to help with your return.|
What Is No longer Tax Deductible?
Certain expenses that were deductible as homeowners tax are no longer recognized by the government as deductibles. Before considering a specific deduction, make sure that it’s covered in the same year of your filing. Deductions that homeowners can no longer itemize in 2021 include:
Buying a new home and moving to a different city or state is no longer on the list of deductibles, except for military personnel.
According to Schedule A, people can file for casualty and theft losses caused by some type of disaster not covered by insurance. The 2017 Tax Cuts and Jobs Act (TCJA) states that you can no longer file for this deduction unless you live in a federally designated disaster zone.
Home Equity Interest
If such money is used for anything other than buying, building, or improving your home, it isn’t classified under home tax deductions and the interest is non-deductible. Routine maintenance and repairs are not listed under home improvements.
Cash-Out Mortgage Refinance
If the money you received through the refinancing of a mortgage isn’t used to invest in your home, you cannot deduct the interest on the amount you’ve cashed out.
|NOTE: One of the first forms of taxation was imposed on property, recorded as early as the sixth century B.C. Read our article on property taxes to get more info on taxation.|
Itemize or Standard Deduction?
Tax burden is determined for each situation. Only you can decide whether your situation calls for the standard deduction or itemized deduction. In 2018, there was a sudden decrease in those filing for itemized deductions. The number of households that itemized deductions in 2017 amounted to 46.2 million; those in 2018 numbered 16.7 million. This difference was a result of the limits that TCJA placed on tax deductions for homeowners. But the TCJA nearly doubled the standard deduction, making it more alluring to a larger portion of the population. It’s smarter to itemize deductions when:
- Your itemized deductions add up to more than the standard deduction.
- You’re a homebuyer and receive a tax break for buying a house.
- You have medical or dental expenses paid out-of-pocket.
- You’ve paid mortgage interest and real estate taxes.
- You have made significant contributions to charity.
- You’ve suffered gambling losses.
If you find yourself in one of these situations, you should consider itemizing and possibly receive a larger return.
|NOTE: 90% of tax-filing Americans opted for the standard deduction in 2018. Calculating itemized deductions will indeed bring you more money.|
Deduct Property Taxes When Taking Standard Deduction?
New homeowner taxes can be confusing. When filing taxes, you have the option to choose between the standard or itemized deduction. Taking the standard deduction means that you’re not entitled to file for itemized deductions—you’re giving up the itemized deductions for that year of your filing.
|NOTE: The average time spent on a tax return is 24 hours, 13 of which is devoted to record-keeping, and the rest of the time (11 hours) is dedicated to filling out the necessary forms.|
Homeowners benefit not only from the security of owning a home but also from the homeowner’s tax credit on property taxes and interest rates. Those who own a home can choose between the standard or itemized deduction. Typically, the better choice is to itemize.
The primary ‘write-offs’ for homeowners are mortgage interest rates and property taxes. Although there are other expenses you can itemize, the largest part of the return is based on property tax and mortgage interest.
There are 53 available tax deductions and credits you can claim. They range from tuition fees to education credits to charitable contributions. Health care home improvements and a home buyer tax credit are also among the deductions you can claim.
Alimony, moving expenses, investments, hobbies, and tax preparation were excluded as deductibles. Limits were imposed on state and local taxes and certain tax deductions for homeowners, such as the limited return on mortgage rate interest.
There are two types of dependents: a qualifying child and a qualifying relative. They must be US citizens, nationals, or permanent residents of the US, Canada, or Mexico. They must live with the person claiming them as dependents and have no other dependents outside their household.