Being a homeowner has its advantages… especially at tax time. In fact, this time of year, what is likely one of the biggest investments of your life, can really pay off if you take advantage of tax deductions, credits, and other perks.
Here are a few that you might be eligible for.
The Tax Cuts and Jobs Act took effect in December 2017, changing some benefits and limiting others available to homeowners. One of those changes involved the standard deduction.
In the simplest of terms, deductions work like this. The amount of the tax deduction is subtracted from your income, making the taxable income lower. The lower the income, the lower the bill. That can shave sometimes thousands of dollars off your tax bill.
Everyone gets to claim a standard deduction. The tax law changes recently bumped it a little for the 2019 tax year. It’s now $24,400 for married, joint-filing couples.
MORTGAGE INTEREST DEDUCTIONS
This is usually a big one, especially in the first few years of homeownership when you tend to pay more in interest. Mortgages after 2017 are impacted by the latest tax law changes too. Specifically, the maximum size for a home loan that you can deduct interest dropped to $750,000. There are also new limits on how much you deduct the interest on a home equity loan.
HOME OFFICE DEDUCTION
There are also some tax perks if you are self-employed and have a home office and use the room exclusively for business. There is a pretty involved formula for figuring out what percentage of your home your office occupies. But once you have that, you can deduct that percent of utilities, taxes, insurance, maintenance, etc. Got a fully dedicated phone line for that space? You can deduct it. Need work done on that space? You can deduct it.
PENALTY FREE IRA WITHDRAWALS
Technically this isn’t a deduction but FIRST-TIME home buyers can withdraw up to $10K from an IRA for a down payment without paying the traditional 10% penalty. That doesn’t mean you get that money with no strings attached. The amount will be taxed by the IRS unless the money is withdrawn from a ROTH IRA. Make sure to weigh the trade-off of using your retirement savings to purchase a home.
ENERGY TAX CREDIT
Uncle Sam wants to encourage homeowners to use renewable energy sources. We support that too! Homeowners who install certain energy efficient equipment in their home might be eligible for a tax credit. You can save 30% on solar, wind, geothermal or fuel cell power systems that produce electricity or regulate your home’s temperature. As with most tax laws, there are limits and specifics on this one you should be aware of before making any major decisions.
Our advice is to consult a tax professional for any tax planning decisions. They know this stuff in their sleep! With home values rising alongside rents, these tax breaks can not only make homeownership more attractive but also reduce the long term cost of owning a home! Of course, the possible tax benefits are only one thing to consider before buying. Our real estate agents are happy to help you navigate the many factors.