Unlocking Savings: Federal Income Tax Breaks
Maximizing Your Home's Potential: Navigating Tax Savings with Confidence
Owning a home is a milestone achievement for many, but it comes with its set of responsibilities — and benefits, especially when tax season rolls around. The U.S. tax code offers several opportunities for homeowners to reduce their taxable income through various deductions and credits. Let’s dive into nine federal income tax breaks that could save homeowners a significant amount on their tax bill.
1. Mortgage Interest Deduction
One of the most significant tax breaks for homeowners is the mortgage interest deduction. If you itemize your deductions, you can deduct interest on up to $750,000 of mortgage debt used to buy, build, or improve your home. This cap is $1 million if you got your mortgage before December 16, 2017.
2. Property Tax Deduction
The property tax deduction allows homeowners to deduct the real estate taxes they pay on their property. Under the State and Local Taxes (SALT) deduction, there’s a combined total limit of $10,000 ($5,000 if married filing separately) for property, income, and sales tax.
3. Home Equity Loan Interest
Interest on home equity loans or lines of credit is deductible if the loan was used to buy, build, or substantially improve the taxpayer’s home that secures the loan. Like the mortgage interest deduction, the loan balance is capped at $750,000 for this deduction to apply.
4. Mortgage Points Deduction
Homeowners can also deduct points paid to secure a mortgage for buying or building a home. Points are prepaid interest paid upfront to reduce the mortgage interest rate, and this deduction can be made in the year the points are paid or over the life of the loan.
5. Energy-Efficient Upgrades
The Residential Energy Efficient Property Credit rewards homeowners for making energy-efficient upgrades. You can claim a credit for up to 30% of the cost of installing solar energy systems, wind turbines, geothermal heat pumps, and fuel cells.
6. Home Office Deduction
With more people working from home, the home office deduction has become increasingly relevant. If you use part of your home exclusively for business purposes, you may be able to deduct expenses such as mortgage interest, insurance, utilities, repairs, and depreciation.
7. Capital Gains Exclusion
When selling your primary residence, you might be able to exclude up to $250,000 ($500,000 for married couples filing jointly) of the capital gains from your income, provided you’ve lived in and owned the home for at least two of the five years before the sale.
8. Rental Property Deductions
If you rent out a portion of your home or have a separate rental property, you can deduct expenses related to renting it out, including mortgage interest, property tax, operating expenses, depreciation, and repairs.
9. Mortgage Insurance Premiums
For those who put down less than 20% on their home, mortgage insurance premiums can be a necessary expense. The tax code allows for these premiums to be deducted, subject to income limitations.
Maximizing Your Benefits
To make the most of these tax breaks, keep meticulous records and consult with a tax professional. They can help ensure you’re taking full advantage of the opportunities available to you as a homeowner and navigate the complexities of the tax code.
Homeownership comes with its set of challenges, but the federal tax code offers several breaks that can ease the financial burden. By understanding and utilizing these tax breaks, homeowners can significantly reduce their tax bill, turning a good investment into a great one.
