Homeownership has a lot of benefits, including the potential to lower your tax bill. The tax code allows you to take advantage of deductions and credits that specifically benefit homeowners. You can work with a CPA or other qualified, licensed advisor to ensure these deductions and credits are properly applied and use them to your fullest benefit.
Credit vs. Deduction
Before you dive in and explore the potential tax savings available to you as a homeowner, it’s important to understand the difference between a tax credit and a tax deduction. Though both save you money at tax time, credits and deductions work differently to help keep money in your pocket.
Deductions are subtracted from your total income before your taxes are calculated, thereby reducing the amount of money you pay taxes on. In other words, deductions allow you to report a smaller income for the year, which lowers the amount you owe the IRS and your local tax agencies.
Mortgage Insurance Premium Deductions
After expiring in 2017, congress revived this deduction in 2019, allowing homeowners to take advantage of it on their 2020 taxes. If you paid less than 20% down on your mortgage when you purchased your home and currently pay PMI premiums, this deduction allows you to subtract the cost of those payments from your taxable income. The law that renewed this deduction allows you to amend your tax returns if you qualified for this deduction in 2017 and 2018.
Keep in mind that you can only take the Mortgage Insurance Premium Deduction if you itemize your deductions. In addition, if your adjusted gross income exceeds $50,000 ($100,000 for married couples), then the amount of tax is reduced by 10% for each $1000 in income over that amount.
Mortgage Interest Deduction
Almost all homeowners qualify for the Mortgage Interest Deduction. You can reduce your taxable income by the amount you’ve paid in interest on any loan used to buy, build or substantially improve their residence. This deduction applies to both your primary residence and a second home that is not rented out. Homeowners can generally deduct the entirety of their interest payments so long as total mortgage debts do not exceed $375,000 ($750,000 for married couples filing jointly).
State and Local Tax Credits and Deductions
Potential tax benefits associated with homeownership don’t end at the federal level. You could potentially save on your state and local taxes as well. Many states and municipalities offer tax credits and deductions for homeowners, especially first-time home buyers. You could also be eligible to receive credits for qualifying expenses, such as restoring a historic home or making green improvements, or based on your income level and whether you bought or sold a home this year.
Your state and local taxes could even benefit you back at the federal level. If you live in a state or city with high property taxes, may want to consider deducting local tax payments on your federal tax returns using the SALT deduction. Filers can deduct the cost of their property taxes as well alongside either their income or sales taxes. The higher your income and property tax, the more you stand to gain from this deduction. Currently, the SALT deduction is capped at $10,000.
Remember, every state, city and county offers different incentives, and some may not offer any tax breaks at all. Check your city or state’s department of revenue website for more information about what credits you might qualify for and work with a local accountant or tax preparation specialist.
Need some help navigating the benefits of homeownership? We can help. Get in touch with your local branch today!
Note: Find ‘Part 1: Credits’ in the April print issue of Tigard Life or read the entire article here.