Types of mortgage loans
Which mortgage is right for you? Learn about the different types of home loans and how to choose a mortgage that will fit your needs.
Brandi Marcene
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.
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 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.
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.
The IRS sets the standard deduction amount yearly. For the 2020 tax year:
For most people, it makes sense to stick with the standard deduction. In 2018, more than 87% of all filers claimed the standard deduction.
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:
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.
If you’re a homeowner and you want to itemize your deductions, here are some write-offs you may qualify for:
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.
There are also plenty of expenses related to owning your home that are not tax deductible. These include:
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.
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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.
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.
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).
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.
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:
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.
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.
Which mortgage is right for you? Learn about the different types of home loans and how to choose a mortgage that will fit your needs.
Brandi Marcene
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