Home ownership comes with many benefits, one of the most significant being the potential to save money on taxes. As a homeowner, you may be eligible for deductions, exclusions, and credits that can lower your overall tax bill.
In this blog, we will explore the top tax benefits of home ownership, including the mortgage interest deduction, property tax deduction, capital gains exclusion, and energy-efficient home improvement tax credits. Whether you are a first-time homebuyer or a seasoned homeowner, understanding these tax benefits can help you maximize your savings and keep more money in your pocket.
So, if you want to learn more about the tax advantages of owning a home, keep reading!
Mortgage Interest Deduction
How Mortgage Interest Deduction Works
The mortgage interest deduction is one of the most well-known tax benefits of home ownership. This deduction allows homeowners to deduct the interest paid on their mortgage from their taxable income. The result is a lower tax bill, which can save homeowners thousands of dollars over the life of their loan.
To qualify for the mortgage interest deduction, homeowners must meet certain criteria. First, the mortgage must be on a primary residence, meaning the home where the homeowner lives the majority of the time. Second, the mortgage must be a secured loan, meaning it is backed by the home as collateral. Finally, the mortgage must be used to purchase, build, or improve the home.
The amount of interest that can be deducted depends on the date the loan was taken out. For loans taken out before December 15th, 2017, homeowners can deduct the interest paid on mortgages up to $1 million. For loans taken out after December 15th, 2017, the limit is $750,000.
To claim the mortgage interest deduction, homeowners must itemize their deductions on their tax return. This means that instead of taking the standard deduction, they will list all their eligible deductions, including the mortgage interest, on their tax return.
It is important to note that the mortgage interest deduction is not available to all homeowners. For those who have a high income or a high mortgage balance, the standard deduction may be more beneficial. Additionally, some states have their own limitations on the mortgage interest deduction, so it is important to check with a tax professional to understand the specific rules in your state.
How To Calculate The Amount Of Money That Can Be Saved
Calculating the amount of money that can be saved through the mortgage interest deduction is relatively straightforward. To start, homeowners will need to know the total amount of interest paid on their mortgage in a given tax year. This information can typically be found on the Form 1098, which is issued by the mortgage lender at the end of the year.
Once the total amount of interest paid is determined, homeowners can calculate the amount of money that can be saved by using the following formula:
(Total Interest Paid) x (Tax Rate) = Tax Savings
For example, if a homeowner paid $15,000 in mortgage interest in a given tax year and their tax rate is 25%, their potential tax savings would be $3,750 ($15,000 x .25 = $3,750).
It’s important to note that the mortgage interest deduction is subject to income limitations, so homeowners should consult with a tax professional to understand how their income affects the amount of money that can be saved. The Tax Cuts and Jobs Act (TCJA) of 2017 also has a limit for the amount of mortgage interest that can be deducted, depending on when the mortgage was taken, and homeowners should be aware of this limit to know the exact amount they can deduct.
Additionally, there are certain home-related deductions that can be claimed along with the mortgage interest deduction such as the property tax deduction, capital gains exclusion, and energy-efficient home improvement tax credits, that can further increase the amount of money that can be saved.
Examples Of How Much Someone Could Potentially Save On Their Taxes
Understanding the potential savings from the mortgage interest deduction can be difficult without concrete examples. Here are a few examples of how much someone could potentially save on their taxes by taking advantage of the mortgage interest deduction:
- A homeowner with a 30-year fixed-rate mortgage at 4% interest, and a $300,000 loan amount could save up to $6,000 in taxes over the life of the loan if the mortgage was taken out before December 15th, 2017.
- A homeowner with a 15-year fixed-rate mortgage at 3.5% interest, and a $200,000 loan amount could save up to $4,667 in taxes over the life of the loan if the mortgage was taken out before December 15th, 2017.
- A homeowner with a 30-year fixed-rate mortgage at 4% interest, and a $500,000 loan amount could save up to $9,375 in taxes over the life of the loan if the mortgage was taken out after December 15th, 2017.
It’s important to note that the examples above are based on the assumption that the homeowner’s tax rate is 25%. Additionally, these examples are based on the standard mortgage interest deduction limit, and if the homeowner’s income is higher, they might not be able to claim the full amount of interest paid, or might not be able to claim this deduction at all.
These examples do not factor in additional tax benefits such as the property tax deduction, capital gains exclusion, and energy-efficient home improvement tax credits. By taking advantage of these additional tax benefits, homeowners could potentially save even more money on their taxes.
Property Tax Deduction
Explanation Of The Property Tax Deduction And How It Works
The property tax deduction is another valuable tax benefit for homeowners. It allows homeowners to deduct the amount of property taxes paid in a given tax year from their taxable income. This can result in a lower tax bill, which can save homeowners money.
To qualify for the property tax deduction, homeowners must meet certain criteria. First, the property must be a primary residence, meaning the home where the homeowner lives the majority of the time. Additionally, the property taxes must be based on the value of the property and must be assessed and imposed uniformly.
The amount of property taxes that can be deducted is limited to $10,000 per tax year, per taxpayer. This means that if you file jointly with your spouse, you can deduct up to $10,000 per tax year. This limit applies to the combined total of property taxes and state and local income, sales, and other taxes.
To claim the property tax deduction, homeowners must itemize their deductions on their tax return. This means that instead of taking the standard deduction, they will list all their eligible deductions, including the property tax, on their tax return.
For those who have a high income or a high property tax bill, the standard deduction may be more beneficial. Additionally, some states have their own limitations on the property tax deduction, so it is important to check with a tax professional to understand the specific rules in your state.
How To Calculate The Amount Of Money That Can Be Saved
Calculating the amount of money that can be saved through the property tax deduction is relatively straightforward. To start, homeowners will need to know the total amount of property taxes paid in a given tax year. This information can typically be found on the property tax bill, or by contacting the local tax collector’s office.
Once the total amount of property taxes paid is determined, homeowners can calculate the amount of money that can be saved by using the following formula:
(Total Property Taxes Paid) x (Tax Rate) = Tax Savings
For example, if a homeowner paid $5,000 in property taxes in a given tax year and their tax rate is 25%, their potential tax savings would be $1,250 ($5,000 x .25 = $1,250).
The property tax deduction is subject to income limitations and the standard limit of $10,000 per tax year per taxpayer, so homeowners should consult with a tax professional to understand how their income affects the amount of money that can be saved. Additionally, some states have their own limitations on the property tax deduction, so it is important to check with a tax professional to understand the specific rules in your state.
Examples Of How Much Someone Could Potentially Save On Their Taxes
Understanding the potential savings from the property tax deduction can be difficult without concrete examples. Here are a few examples of how much someone could potentially save on their taxes by taking advantage of the property tax deduction:
- A homeowner with a property valued at $300,000 and an annual property tax bill of $5,000 could save up to $1,250 in taxes per year if their tax rate is 25%
- A homeowner with a property valued at $500,000 and an annual property tax bill of $8,000 could save up to $2,000 in taxes per year if their tax rate is 25%
- A homeowner with a property valued at $800,000 and an annual property tax bill of $12,000 could save up to $3,000 in taxes per year if their tax rate is 37%
These examples are based on the assumption that the homeowner’s tax rate is within the 25% or 37% bracket, and if their income is higher their tax rate will be higher. Additionally, these examples are based on the standard property tax deduction limit of $10,000 per tax year per taxpayer, so homeowners might not be able to claim the full amount of property taxes paid.
Capital Gains Exclusion
Explanation Of The Capital Gains Exclusion And How It Works
The capital gains exclusion is a tax benefit that allows homeowners to exclude a portion of the profits from the sale of their primary residence from their taxable income. This can result in significant savings for homeowners who have lived in and owned their home for a long period of time.
To qualify for the capital gains exclusion, homeowners must meet certain criteria. First, the home must be a primary residence, meaning the home where the homeowner has lived the majority of the time. Additionally, the homeowner must have owned the home for at least two years out of the five years preceding the sale.
The amount of profit that can be excluded from taxes depends on the homeowner’s filing status. For single filers, the exclusion limit is $250,000, and for married couples filing jointly, the limit is $500,000. This means that if a single homeowner sells their primary residence for $300,000 and they have lived in it for 2 years, they can exclude $250,000 of the profits from taxes, and only pay taxes on $50,000.
To claim the capital gains exclusion, homeowners must file Form 1040 and Schedule D, Capital Gains and Losses, and fill out Form 8949, Sales and Other Dispositions of Capital Assets, when they file their taxes.
How The Exclusion Can Be Used To Avoid Paying Taxes On Profits Made From The Sale Of A Primary Residence
To use the capital gains exclusion to avoid paying taxes on profits made from the sale of a primary residence, homeowners must meet the following criteria:
- The home must be a primary residence, meaning the home where the homeowner has lived the majority of the time.
- The homeowner must have owned the home for at least two years out of the five years preceding the sale.
- The homeowner must file Form 1040 and Schedule D, Capital Gains and Losses, and fill out Form 8949, Sales and Other Dispositions of Capital Assets, when they file their taxes.
If the homeowner meets these criteria, they can exclude up to $250,000 of the profits from the sale of their primary residence if they are single, and up to $500,000 if they are married and filing jointly. This means that if a single homeowner sells their primary residence for $300,000 and they have lived in it for 2 years, they can exclude $250,000 of the profits from taxes, and only pay taxes on $50,000.
There are certain situations where the capital gains exclusion may not be available. For example, if the homeowner has used the exclusion in the past two years, or if the home was used for business or rental purposes, the exclusion may not be available. Additionally, homeowners should consult with a tax professional to understand how their specific situation may affect their eligibility for the exclusion.
Energy-Efficient Home Improvements
Tax Credits Available For Energy-Efficient Home Improvements
Homeowners looking to make energy-efficient improvements to their home may be eligible for tax credits that can help offset the costs. These credits are designed to encourage homeowners to invest in energy-efficient upgrades that can save them money on their energy bills, while also helping to reduce their carbon footprint.
The most common tax credit available for energy-efficient home improvements is the Residential Energy Efficiency Property Credit. This credit allows homeowners to claim a credit of up to 30% of the cost of certain energy-efficient improvements, including solar water heaters, solar panels, and geothermal heat pumps, among others.
To qualify for this credit, homeowners must ensure that the energy-efficient property they are installing meets certain criteria as outlined by the Internal Revenue Service (IRS). Additionally, the property must be installed in a primary residence, and the credit must be claimed in the year the property is placed in service.
Another tax credit available for energy-efficient home improvements is the Nonbusiness Energy Property Credit. This credit allows homeowners to claim a credit of up to 10% of the cost of certain energy-efficient improvements, including insulation, energy-efficient windows and doors, and certain roofing materials, among others.
To qualify for this credit, homeowners must ensure that the energy-efficient property they are installing meets certain criteria as outlined by the IRS. Additionally, the property must be installed in a primary residence, and the credit must be claimed in the year the property is placed in service.
Eligibility Requirements And How To Claim The Credit
Homeowners looking to claim the tax credit for energy-efficient home improvements must understand the eligibility requirements and the proper way to claim the credit.
The Residential Energy Efficiency Property Credit and the Nonbusiness Energy Property Credit are the most common tax credits available for energy-efficient home improvements. To qualify for these credits, homeowners must ensure that the energy-efficient property they are installing meets certain criteria as outlined by the Internal Revenue Service (IRS).
For the Residential Energy Efficiency Property Credit, the property must be installed in a primary residence, and the credit must be claimed in the year the property is placed in service. Additionally, the property must meet certain energy-efficient standards, as outlined by the IRS.
For the Nonbusiness Energy Property Credit, the property must be installed in a primary residence, and the credit must be claimed in the year the property is placed in service. Additionally, the property must meet certain energy-efficient standards, as outlined by the IRS.
To claim the credit, homeowners must file Form 5695, Residential Energy Credits, with their tax return. This form must be accompanied by proper documentation, such as receipts and manufacturer certifications, that verify that the property installed meets the criteria for the credit.
Examples Of Energy-Efficient Home Improvements That Qualify For The Credit
Homeowners looking to claim the tax credit for energy-efficient home improvements may be wondering which specific improvements qualify for the credit. Here are a few examples of energy-efficient home improvements that qualify for the Residential Energy Efficiency Property Credit and the Nonbusiness Energy Property Credit:
- Solar water heaters: A solar water heater system that uses solar energy to heat water qualifies for the Residential Energy Efficiency Property Credit.
- Solar panels: A solar energy system that generates electricity from sunlight qualifies for the Residential Energy Efficiency Property Credit.
- Geothermal heat pumps: A geothermal heat pump system that uses the earth’s constant temperature to heat and cool a home qualifies for the Residential Energy Efficiency Property Credit.
- Insulation: Adding insulation to a home’s attic, walls, and floors to improve energy efficiency qualifies for the Nonbusiness Energy Property Credit.
- Energy-efficient windows and doors: Installing energy-efficient windows and doors that are designed to reduce heat loss and gain qualify for the Nonbusiness Energy Property Credit.
- Certain roofing materials: Installing certain types of metal or asphalt roofs that meet energy efficiency standards qualify for the Nonbusiness Energy Property Credit.
Conclusion
In conclusion, home ownership can provide significant tax benefits, including the potential to save thousands of dollars on taxes through deductions, exclusions, and credits. By understanding these benefits and consulting with a tax professional, homeowners can make informed decisions that can help them save money on their taxes and maximize the financial benefits of owning a home.
Owning a home comes with many benefits, including the potential to save significant money on taxes through deductions, exclusions, and credits. In this article, we have highlighted some of the top tax benefits of home ownership, including the mortgage interest deduction, property tax deduction, capital gains exclusion, and tax credits for energy-efficient home improvements.
The mortgage interest deduction allows homeowners to deduct the amount of mortgage interest paid in a given tax year from their taxable income. The property tax deduction allows homeowners to deduct the amount of property taxes paid in a given tax year from their taxable income. The capital gains exclusion allows homeowners to exclude a portion of the profits from the sale of their primary residence from their taxable income. Tax credits for energy-efficient home improvements can help offset the costs of energy-efficient upgrades that can save homeowners money on their energy bills.
These tax benefits are subject to income limitations and other rules, so it is crucial for homeowners to consult with a tax professional to understand how their specific situation may affect their eligibility for these deductions, exclusions, and credits. Additionally, some states have their own limitations on these benefits, so it is important to check with a tax professional to understand the specific rules in your state.
