Homeowners face a lot of expenses over the course of a year, so it's helpful to get as many home-related tax deductions as they can when tax time rolls around. The following are some of the best tax deductions for homeowners.
Homeowners are entitled to several deductions on their taxes related to their homeownerships. Keep in mind that it's important to keep good records throughout the year to validate these deductions and to have ready in the event of an audit.
- Mortgage Interest: The interest on a mortgage to buy, improve or build a home is typically 100 percent tax-deductible. Homeowners can even deduct the interest from multiple mortgages in most cases as long as they do not exceed a total of $1 million. This can apply to RVs and boats if they include cooking, sleeping and bathroom facilities. Deductions for mortgage interest paid on rental properties are trickier. You must spend a certain amount of time there each year in order to deduct the mortgage interest on the property (usually 14 days or more than 10 percent of the number of days you rent it out, whichever is greater).
- Mortgage Insurance Premiums: If your down payment was less than 20 percent of the value of your home, then you were probably required to purchase private mortgage insurance. The premiums paid for this insurance are fully deductible.
- Points: "Points" is a term used to describe charges paid by a borrower to get home mortgage or to get a better interest rate on a home mortgage or a refinanced home loan. With a home mortgage, the points must be used to get a loan for the purchase or building of your main home, they must be within a normal range and the payment of points has to be an established practice in your area. If it doesn't meet these qualifications, you can't deduct the points.Home mortgage points are deducted all in the year they were paid, while loan refinancing points are deducted over the life of the loan. Since this is a tricky area, you may want to consult a tax professional about how to deduct your points.
- Property Taxes: You can deduct the cost of all annual property taxes paid to a local taxing authority. This includes both state and local property taxes. There are a couple of options for how to take this deduction. Homeowners usually list property taxes as an itemized expense on Schedule A. However, homeowners taking the standard deduction can usually add at least part of their payments for property taxes to the standard amount (up to $500 for single homeowners and $1000 for married homeowners). If your taxes are more than these limits, you should probably itemize your deductions to gain the full tax benefit.
- Health-Related Improvements: In some cases, a home must be modified in order to accommodate a resident's medical condition. As long as the improvements don't add to the overall value of the home and were made for someone who has a chronic illness or disability, the cost of the home improvement is likely to be entirely deductible. Even if the improvement does add to the value of the house, you still might be able to deduct some of the cost. If you're unsure about whether a particular home improvement qualifies in this category, make an appointment with a tax professional.
- Home Office: If you work from home, you may be able to deduct the costs associated with maintaining your home office, including painting, upkeep and a portion of indirect expenses like the mortgage payment and the costs of utilities. However, this is only applicable for those who have a space in their home dedicated exclusively to being a home office. If it's also a bedroom, a dining room or used for storage then it isn't like to be eligible for the deduction.
What You Can't Deduct
There are several things relating to home ownership that you can't deduct, unfortunately, including:
- Insurance premiums
- Homeowners association dues
- Depreciation of the home
- Local assessments
- Closing costs
- Wages paid for domestic help
- Utility expenses (gas, electricity, water, etc.)
- Down payments
The best way to get the most deductions on your taxes is to see a tax professional. However, there are also some great online tools that can file your federal and state taxes for you if you feel comfortable completing them on your own. In either case, it's important to keep detailed records in all of the areas listed above to insure that you get the most tax deductions possible. Keep these deductions in mind this tax season and you could end up saving thousands of dollars on your next tax bill.