Tax deductions for homeowners

Tax benefits are a significant perk of owning a home, so missing out on deductions is like leaving money on the table. Whether you already own a home, are considering buying or just want to understand the benefits of tax deductions for homeowners, we cover all the basics for you here.

Tax benefits of homeownership

The Internal Revenue Service (IRS) provides tax benefits for people who buy their homes. These tax breaks usually come in the form of credits or deductions. In basic terms, the difference is that:

• Tax credits decrease your tax burden by a set dollar amount.
• Tax deductions make a portion of your income nontaxable.

Tax credits for homeowners are often an incentive for taking certain actions, while tax deductions for homeowners are a way to offset some standard costs of homeownership. Think of it this way — you might get a tax credit for installing energy-efficient features, but your deductions might just help you afford necessary updates to your home.

Types of tax deductions

Brackets change every tax year.

Generally speaking, tax deductions reduce your tax burden by lowering your taxable income. For example, if your annual income is $100,000 and you qualify for $15,000 in deductions, your taxable income would lower to $85,000. This deduction could even drop you into a lower tax bracket, saving you even more money.

You claim tax deductions by using either a standard deduction or an itemized deduction, whichever saves you more money.

Standard deduction

The IRS sets the standard deduction amount yearly. For the 2020 tax year:

• The standard deduction for single or married people filing separately was $12,400.
• The standard deduction for married people filing jointly was $24,800.
• The standard deduction for heads of households was $18,650.

For most people, it makes sense to stick with the standard deduction. In 2018, more than 87% of all filers claimed the standard deduction.

Itemized deductions

Despite the popularity of the standard deduction, you should run the numbers on your itemized deductions to see if you can save more money that way. By taking itemized deductions related to homeownership, you can lower your adjusted gross income (AGI) and reduce the amount of taxes you owe. Deductible expenses can range from mortgage insurance to property taxes, and there are even deductions for having a home office.

Other than deductions for homeowners, some of the most common itemized tax deductions include:

• State or local income taxes and sales taxes
• Charitable donations
• Medical and dental costs that aren’t reimbursed

Many deductions come with limits and stipulations, though. For example, you can only claim medical and dental expense deductions for the parts that exceed 7.5% of your income. So, if your income is $50,000, you can claim the portion of your medical expenses above the $3,750 threshold.

If you’re looking to save money on your taxes, calculate your itemized deductions and see if they add up to more than your standard deduction. If the amount of itemized deductions you can claim is higher than the standard deduction amount, it makes sense to itemize your deductions on your taxes.

What can I write off on my taxes as a homeowner?

If you’re a homeowner and you want to itemize your deductions, here are some write-offs you may qualify for:

• Mortgage interest: If you have a home loan, you have to pay back both the principal amount that you borrowed plus interest. Interest paid on your mortgage is deductible. Singles and married couples filing jointly can get mortgage interest deductions on the first $750,000 of each mortgage. If you are a married couple filing separately, each spouse can deduct interest on up to $375,000 of the principal mortgage balance.
• Home equity loan interest: A home equity loan lets you borrow money against the equity in your home. Like with a mortgage, you pay interest on the amount you borrow, and this interest is potentially deductible. In order to deduct the interest, you must use the money for an improvement that would add value to your home if you get a new appraisal. Like with mortgage insurance, the home equity loan interest deduction is only applicable to up to $750,000 of your mortgage debt ($375,000 if you are married and filing separately).
• Mortgage points: You earn mortgage discount points when you pay extra at closing to reduce the interest rate on your loan. The IRS sets certain parameters for deducting discount points, like the home being your primary residence, the points being clearly marked on your settlement statement and the points being calculated on your principal mortgage amount. If your discount points don’t meet the criteria to be deducted in this tax year, you might be able to deduct them over the life of the loan.
• Property taxes: Property taxes can be deducted for most noncommercial real estate you own, including vacation homes, rental property and land. If you are a married couple filing jointly, you can write off a combined total of $10,000 per tax return for state income taxes, state sales tax and property taxes. This limit is $5,000 for single people and married couples filing separately, though.
• Mortgage insurance premiums: Some buyers must pay mortgage insurance to reduce the risk for their lender. The premiums are deductible, but the IRS reduces the deduction by 10% for each $1,000 of income you make over $100,000. You can’t write off mortgage insurance premiums at all if your AGI is more than $109,000.
• Rental property expenses: If you own rental property, you might be able to write off certain expenses, like utilities you pay for, maintenance and repairs. The IRS defines a rental property as a home you own that you reside in fewer than 14 days per year or fewer than 10% of the total days you rent it to a tenant at a fair market rate.
• Home office expenses: If you have a home office, some expenses are deductible. For this write-off, your home must be your primary place of business, and you should only use the office space for work purposes — so your dining room table would not count as a home office for tax purposes.
• Medically necessary home improvements: Home improvements might be deductible if their primary purpose is for medical use. If the improvement increases the value of your home, subtract the increase in value from the cost of the improvement to determine your deduction. If you spend $10,000 on a swimming pool used mostly for medical reasons and the pool increases your home’s value by $4,000, you’re only eligible for a $6,000 deduction. Medically necessary home improvements also fall under the medical expense deduction, so you can only write off amounts that exceed 7.5% of your AGI.

While we’ve covered the major deductions that can come with being a homeowner here, it’s worth checking with the IRS to see all the deductions available and all the stipulations that come with them.

What’s not deductible?

There are also plenty of expenses related to owning your home that are not tax deductible. These include:

• Homeowners association (HOA) fees, if you live in a community that requires them
• Closing costs when purchasing your home, except for the discount points explained above
• Homeowners insurance payments

If you're unsure of what qualifies as a tax deduction or whether you should itemize or take a standard deduction, consult a tax professional.

Tips on tax deductions for homeowners

Owning a home is probably one of the biggest expenses you will have in your lifetime, and understanding what tax deductions you're eligible for can save you a lot of money. We’ve gathered some tips to help you maximize your tax savings, most of which focus on tax credits.

Tax credits are different from tax deductions, but they can still save you money on your tax bill by reducing the overall amount of taxes you owe. We only discuss federal credits here, but there are also local credits available in some states.

1. Consider residential renewable energy credits 

Installing energy-efficient equipment might qualify you for the IRS’s residential energy-efficient property credit. Eligible items include solar panels, solar water heaters, wind turbines, certain fuel cells and geothermal heat pumps. The credit amount ranges from 26% for installations done through 2022 and steps down to 22% in 2023 until the current legislation expires at the end of that year.

There is also the nonbusiness energy property credit for energy-efficient home improvements, like energy-efficient windows, doors, insulation and roofing. This credit is for a maximum of $500.

2. Consider the electrical plug-in car credit 

Installing an electric car charging station at your home has potential tax benefits. The alternative fuel vehicle refueling property credit includes either a 30% credit on certain equipment or $1,000 (whichever is smaller).

3. Consider income-based tax credits 

In addition to mortgage interest deductions, there's also a mortgage interest tax credit program for low-income individuals. If you qualify, your state or local government issues you a Mortgage Credit Certificate (MCC) when you purchase your home.

4. Stay on top of your record-keeping 

Itemized deductions require that you have receipts and proof of expenses. You might not need to submit them all with your taxes, but saving them in case of a future audit can help prevent some major headaches. Paperwork you want to keep includes:

• Home improvement receipts
• Home office expense receipts
• Records of energy-saving improvements

Keeping track of costs can also help you determine whether you should itemize or take a standard tax deduction. If you add up all of your potential deductions and they exceed your standard deduction, it's probably worth itemizing. The IRS requires that taxpayers hold on to documents for three years after the tax filing date.

Bottom line

If you own your home, tax deductions can be a great way to reduce your tax bill each year. Add up all of your potential deductions to see if the standard deduction makes more sense than itemized deductions. If the amount you can write off as line items is higher than your standard deduction, it makes sense to put your individual deductions to use. Looking for federal and state tax credits can also lower your tax burden and keep more money in your pocket.

However, deductions and credits likely aren’t enough if you’re already in tax debt. If you find yourself in tax trouble, consider tax relief.