What Home Expenses Are Tax Deductible?
Homeowner will probably be the most expensive role you ever take on in your life. There are the expected expenses, like your mortgage insurance, homeowners insurance, routine maintenance, and property taxes. These can be overwhelming on their own, but on top of them are the unexpected repairs that can throw anyone’s budget for a loop.
This is part of the journey of homeownership. One way savvy homeowners work to regain some of that capital is through finding tax deductions for homeowners.
Spending a little time reading about the current options for recouping some of your home expenses is the only way to make up some of your money with taxes. The government won’t show up at your door and let you know you overspent, it’s up to you to make sure you take advantage. And luckily, it’s not as complicated as reading tax code can often sound.
Let’s go over some of the areas for home expenses and the options for saving within them and figure out what applies to you so you can save money this year.
Deductions vs Credits
A quick guide to get you started! Tax deductions and credits are not the same thing.
A deduction lowers your taxable income. So when you file a deduction, the amount is subtracted from your total adjusted gross income and this means that your taxable income is lower. This lessens the amount of money you owe on your taxes.
Example: Instead of making $100,000 this year, the deductions put your income at $80,000. You then owe 25% of your income to taxes, and your tax bill is 25% of $80,000 ($20,000) instead of 25% of $100,000 ($25,000).
In the above scenario, your deductions totaled $20,000, and in the end, you saved $5,000 on your tax bill.
A credit is a direct reduction on your tax bill. They often have the potential to lower your tax bill more than a deduction would.
Example: You made $100,000. Your tax credits totaled $20,000, the same as the deduction above. Your taxable income of $100,000 at 25% means you owe $25,000, but your tax credit covers $20,000 of that, so in the end, your tax bill is $5,000.
There are fewer credits than deductions and deductions are still worth your time and save you money, but it’s worth noting how these work and understanding how the different advantages will save you in the end.
Savings Through Energy-Efficient Home Improvements
Are home improvements tax deductions? They are for the right ones, and energy-efficient upgrades is one area where you can save. In fact, upgrading your home to become more energy-efficient can save you money in more ways than one.
You’ll save money on your energy bill, which will help you out in the long term as you recoup money from your initial investment. Making any improvement to your home can help when it comes time to resell the property. Energy-efficient upgrades will peak buyer interest, since they know they’ll save money on their energy bills. On top of these benefits, there is also a homeowner tax credit.
The Residential Energy Credit can save you up to 30% of the installation cost of solar energy systems. This includes solar panels, geothermal heat pumps, and solar water heaters.
Be aware that while you can save up to 30% for installations done by December 31st, 2019, the credit percentage lowers every year. For 2020 the credit is 26% and 22% in 2021, when the credit opportunity will expire. Every year, the cost of installation is going down, and so is the tax advantage.
Your individual state may have additional incentives.
Mortgage Interest Tax Deduction
This deduction is specifically meant to make it more affordable to own a home. You can deduct the amount of interest you’ve paid on your mortgage. This is good for up to $750,000 of mortgage debt. If you have a home equity loan, this also applies on the interest paid on that for up to $100,000 of debt.
The Property Tax Deduction
This is an interesting deduction, because it’s essentially a tax deduction for paying your other taxes. Every year you can write off your property tax expense for the year as one of your deductions. Be aware that it only applies to the amount you paid, so if you split these costs with the previous homeowner, only what you paid during the year applies.
A Deduction for Your Home Office
If you are a small business owner who uses part of your home only for business, then you may qualify for a deduction.
There are a few different factors that affect how much the deductible is, including the percentage of the property used for your small business.
The home expenses you can list for this include things like real estate taxes, utility bills, office repairs and maintenance, rent, homeowners insurance premiums, and homeowner association fees.
To qualify for this, be sure to keep a thorough record of your receipts for these expenses throughout the year. It’s not a guarantee that you’ll be audited for claiming this deduction, but it can make that riskier. Be sure you keep good records and file things correctly and never file a tax credit for buying house supplies or other expenses used in both your house and your office without drawing a clear line on what is for your business and what is for the rest of your home.
Frequently Asked Tax Questions for Homeowners
Is there a first-time buyer credit?
There used to be a tax credit for buying a house for the first time. The first-time buyer credit does still apply if you haven’t used it yet and if closing took place on or before September 30th, 2010.
Are home repairs tax deductible? There are home improvements that are tax deductible, such as making your home more energy efficient, but home repairs are not. The exception to this is when the repairs are to a home office. If the repairs are done to a space used exclusively for business, then that may be used for a deduction.
When you are wondering what home expenses are tax deductible and find it a little confusing, never forget that you can consult a tax professional to clarify anything you already know. It’s acceptable to do your taxes yourself and still consult a professional with questions. Also keep in mind that tax laws change year to year, and so do the available deductions and credits. You’ll want to stay current on what you can and can’t do year-to-year.