The cost of owning a home isn’t limited to mortgage payments — the average American homeowner spent $12,904 on home improvements, maintenance and emergencies in 2022, according to Angi.
All those expenses come with a bright side, however — tax credits and deductions for your home that can lead to a bigger tax refund. For homeowners, learning as much as you can about your potential tax benefits can help you maximize your tax refund when you file your income tax return.
Most homeowners with mortgages know they can deduct payments toward their loan interest, but many tax deductions and tax credits involved in owning a house are less obvious. Learn about all the possible tax breaks for homeowners to get the biggest refund possible on your 2022 taxes.
For more on taxes, learn about the new income brackets and standard deduction for 2023.
How do homeowner tax breaks work?
Most income tax breaks for homeowners are tax deductions, which are reductions in your taxable income. The less of your income that is taxed, the less money you pay in taxes.
When you file your tax return, you must decide whether to take the standard deduction — $12,950 for single tax filers, $25,900 for joint filers or $19,400 for heads of household or married filing separately — or itemize deductions, such as gifts to charity and state taxes.
To take advantage of homeowner tax deductions, you’ll need to itemize your deductions using Form 1040 Schedule A. Your decision to itemize will depend on whether your itemized deductions are greater than your standard deduction. All of the best tax software can quickly help you decide whether to itemize or not (as well as help you fill out all of the tax forms mentioned in this article).
Tax credits for homeowners don’t require you to itemize. They directly reduce the amount of taxes you owe, and you can usually get those credits whether or not you itemize deductions.
Mortgage interest is the biggest tax break for homeowners
Mortgage interest — or the amount of interest you pay on your home loan yearly — is one of the most common tax deductions for homeowners. It’s also often the most lucrative, particularly for new homeowners whose payments generally go more toward loan interest during the first years of a mortgage.
Homeowners filing taxes jointly can deduct all payments for mortgage interest on loans up to $1 million, or loans up to $750,000 if made after Dec. 15, 2017. Single filers get half those amounts — $500,000 or $375,000, respectively.
To deduct your mortgage interest, you’ll need to fill out IRS Form 1098, which you should receive from your lender in early 2023. You can then enter the amount from Line 1 on that Form 1098 into Line 8 of 1040 Schedule A.
Mortgage points are tax deductible, too
You can buy mortgage points, also called “discount points,” when buying a house to decrease the interest on the mortgage. Each 1% of the mortgage amount that home buyers pay on top of their down payment generally reduces their interest rate by 0.25%, though the exact amount will depend on the lender and the loan.
Discount points can save you big money on a 30-year mortgage by lowering the total interest you’ll have to pay across decades, but they can also save you money on your taxes when you buy them. The IRS considers mortgage points to be prepaid interest, so you can add the amount paid for points to your total mortgage interest that’s entered on Line 8 of 1040 Schedule A.
A mortgage-interest tax credit for new homeowners can be big money
Homeowners who have received a Mortgage Credit Certificate from a state or local government — usually acquired via a mortgage lender — can get a percentage of their mortgage interest payments back as a tax credit. Mortgage certificate credit rates vary based on states and go as low as 10% in Virginia to as high as 30% in Florida, per Bankrate.
For example, if you paid $12,000 in yearly mortgage interest in Florida with an MCC, you’d get a $3,600 tax credit. That money is nonrefundable, however — it can only be used against taxes you owe. If you don’t owe federal taxes, it won’t give you money back.
This homeowner tax tip is most effective if you are a first-time homeowner, which is generously defined as not living in a home that you’ve owned for the past three years. If you’re buying your first home, be sure to ask your lender or mortgage broker to see if you qualify for an MCC.
To file for your mortgage-interest tax credit, use IRS Form 8396. Remember, you don’t need to itemize deductions to claim tax credits.
You can deduct property taxes, but only to a certain amount
Local and state real estate taxes, more commonly called property taxes, can be deducted from your taxes, but at a far lower amount than before 2017.
Thanks to the Tax Cuts and Jobs Act of 2017, you can only deduct up to $10,000 combined from your property taxes and state and local income taxes. Before 2017, your entire amount of property taxes was deductible.
To claim your property tax deduction, you’ll need to track your annual property tax payments. Your real estate taxes might also be listed in Box 10 of Form 1098 from your mortgage lender. Enter your total amount of real estate taxes paid for the year in Line 5b of 1040 Schedule A.
Home office expenses are only deductible if you’re self employed
Homeowners who use any part of their house, apartment or condo “exclusively and regularly” for their own business or side gig can claim home business expenses using IRS Form 8829. These deductions are available to renters too.
The easiest way to claim a home-office tax break is by using the standard home-office deduction, which is based on $5 per square foot used for business up to 300 square feet. The “regular method” for deducting a home office involves calculating the percentage of your home that is used for business. Both methods use Form 8829 for reporting.
Home-office deductions aren’t available to remote employees of companies.
Installing an electric car charging station can get you 30% back
Electric vehicle charging stations can give you money back on your tax bill. If you install any alternative energy charging station in your home, you get a maximum credit of 30% of the cost or $1,000 (whichever is smaller). File IRS Form 8911 to claim your tax credit for the money spent on clean energy installation.
Go green to get energy-efficiency tax credits
If you made energy-efficient improvements to your home in 2022, you can likely get back some of that money as tax credits, but it gets a little complicated. There are two types of tax credits for home energy improvements — the residential clean energy credit and the energy efficient home improvement credit.
The residential clean energy credit can give you 30% back on any money you spent installing solar electricity, solar water heating, wind energy, geothermal heat pumps, biomass fuel systems or fuel cell property. The only limit is for fuel cell property — $500 for each half a kilowatt of capacity.
The energy-efficient home improvement credit, also known as the nonbusiness energy property credit, is then split into two categories — “residential energy property costs” and “qualified energy efficiency improvements.”
In the first case of energy property costs, you’ll get a flat tax credit of $50 to $300 for installing Energy Star-certified items like heat pumps, water heaters or furnaces. In the second case of qualified improvements, you can get a 10% tax credit for the cost of improvements like adding insulation, fixing a roof or replacing windows.
The energy efficient home improvement credit has a $500 lifetime limit for all improvements made after 2005. Starting in 2023, the Inflation Reduction Act will replace the $500 lifetime limit with a $1,200 annual limit for the tax credit.
To claim tax credits for energy-efficient home improvements in 2022, you’ll need to document your costs on IRS Form 5695.
Interest from home equity loans can also be deducted
Any interest from a home equity loan or second mortgage can be deducted from your taxes just like regular mortgage interest, with the important limit of maximum loan totals of $1 million or $750,000 (for joint filers) if you purchased your home after Dec. 15, 2017.
It’s also very important to note that the 2017 tax law limits deductions for home equity loan interest to money that is used to “buy, build or substantially improve” homes. If you borrowed money to pay for a new car or tuxedo, you’re out of luck.
If you did pay interest on a home equity loan that was used directly on your residence, you can claim the deduction on the same line as mortgage interest and mortgage points: Line 8 on Form 1040 Schedule A.
When you’re selling your home, include all your improvements in the cost basis
Any income you earn from selling a home is taxable as a capital gain (with a notable exclusion — see below). Your gain is calculated by the difference between your sale price for the home and your “cost basis.” That cost basis includes what you paid for the home, the price of improvements that you may have made as well as any property loss from depreciation or casualty.
If you’ve put in a new roof, replaced a furnace, refinished floors or even landscaped the garden, be sure to include those costs to increase your adjusted basis and reduce the amount of your capital gains on the sale.
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