Your home could pay you a big tax refund: Here’s how it works

As 2024 comes to a close, owning a home is more expensive than ever, according to a new report Case-Shiller National Home Price Index for the United States. Aside from the mortgage itself, the average homeowner pays an additional $18,118 per year in “Hidden costs“.

However, all of these expenses come with an upside — tax credits and deductions for your homeownership that can result in a larger tax refund. For homeowners, learning as much as you can about potential tax benefits can help you maximize your tax refund when filing your income tax return.

Most homeowners with mortgages know they can deduct their loan interest payments, but many of the tax deductions and tax breaks associated with owning a home are less obvious. Learn about all the possible tax breaks for homeowners to get the largest possible refund on their taxes.

To learn more about taxes, learn All about tax breaks And how Create your IRS account online to save time during tax season.

How do homeowner tax credits work?

Most federal income tax benefits for homeowners are tax deductions, which are reductions on your taxable income. The less taxable income you have, the less money you pay in taxes.

When you file your tax return, you must Decide whether you want to take the standard deduction — $14,600 for single tax filers, $29,200 for married filers filing jointly or $21,900 for heads of household or married filing separately — or itemizing deductions, such as gifts to charity and state taxes.

To take advantage of homeowners’ tax deductions, you’ll need to itemize your deductions using… Form 1040 Schedule A. Your itemization decision will depend on whether your itemized deductions are greater than your standard deduction. all Best tax software It can quickly help you decide if you want to itemize (plus help you fill out all the tax forms mentioned in this article).

tax Credits For homeowners no It requires you to detail. It directly reduces the amount of taxes you owe, and you can usually get those credits whether you itemize deductions or not.

The mortgage interest deduction is a great tax break

Mortgage interest — or the amount of interest you pay on your home loan annually — is one of the most common tax deductions for homeowners. They are also often the most profitable, especially for new homeowners whose payments generally go toward loan interest during the first years of the mortgage.

Homeowners who file taxes jointly and single tax filers can deduct all mortgage interest payments on the first $750,000 of mortgage debt, or mortgage debt up to $1,000,000 if you deduct mortgage interest before December 15, 2017. If Married filing separately, you can deduct half of these amounts — $375,000 or $500,000, respectively.

To deduct the interest on your mortgage, you will need to fill out IRS Form 1098which you should receive from your lender in early 2024. You can then enter the amount from Line 1 of this Form 1098 on Line 8 of 1040 Schedule A.

Mortgage points can also be deducted

You can buy Mortgage pointsalso called “discount points,” when you purchase a home to reduce your mortgage interest. Each 1% of the mortgage amount a home buyer makes in addition to the down payment generally lowers the interest rate by 0.25%, although the exact amount will depend on the lender and the loan.

Discount points can save you big money on a 30-year mortgage by lowering the total interest you’ll have to pay over decades, but they can also save you money on your taxes when you buy them. The IRS considers mortgage points to be prepaid interest, so you can add the amount paid for points to the total mortgage interest entered on Line 8 of 1040 Schedule A.

Mortgage tax breaks can give new homeowners big money

Homeowners who have Mortgage credit certificate From a state or local government—usually obtained through a mortgage lender—they can receive a percentage of their mortgage interest payments as a tax credit. Mortgage certificate credit rates vary based on states and can range between 10% and 50% with a maximum credit of $2,000.

This tax tip for homeowners is most effective if you’re a first-time homeowner, which is generously defined as not living in a home you’ve owned within the past three years. If you are Buying your first homebe sure to ask your lender or mortgage broker to see if you qualify for an MCC account.

To apply for the tax credit for your mortgage interest, use… IRS Form 8396. Remember, you don’t need to itemize deductions to claim tax credits.

Property taxes are deductible, but only partially

State and local property taxes, commonly called property taxes, can be deducted from your taxes, but at a much smaller amount than before 2017.

Thanks to the Tax Cuts and Jobs Act of 2017, you can only deduct up to $10,000 total Of your estate taxes and State and local income taxes. Before 2017, the full amount of property taxes was deductible.

To claim your property tax deduction, you’ll need to track your annual property tax payments. Your property taxes may also be listed in Box 10 of Form 1098 from your mortgage lender. Enter the total amount of property taxes paid for the year on Line 5B of 1040 Schedule A.

Home office expenses can be deducted if you are self-employed

Homeowners who use any part of their house, apartment, or condominium “exclusively and regularly” for their own business or side hustle can claim home business expenses with IRS Form 8829. These discounts are available to renters as well.

The easiest way to claim a home office tax break is to use… Standard home office deductionwhich is based on $5 per square foot used for businesses up to 300 square feet. The “normal method” for deducting a home office involves calculating the percentage of your home used for business. Both methods use Form 8829 for reporting.

Home office discounts are not available to Remote employees From companies.

Get 30% back on the cost of the electric vehicle charging station

Electric vehicle charging stations can give you money back on your tax bill. If you install any alternative energy charging station in your home, you will receive a maximum credit of 30% of the cost or $1,000 (whichever is smaller). file IRS Form 8911 To claim your tax credit for money spent on clean energy installation.

Energy efficiency tax credits can pay off big

If you make energy-efficient improvements to your home in 2024, you’ll likely be able to recoup some of that money as tax breaks, but it gets a little complicated. there Two types of tax credits for home energy improvements – Residential Clean Energy Credit and Energy Efficient Home Improvement Credit.

The Residential Clean Energy Credit can give you 30% back on any money you spent on installing solar electricity, solar water heating, wind energy, ground-based heat pumps, biomass fuel systems, or a fuel cell property. The only limit is for the fuel cell feature – $500 per half kilowatt of capacity.

Energy Efficient Home Improvement Credit, also known as Non-commercial energy mortgage creditthey are then divided into two categories – “Residential Energy Ownership Costs” and “Qualifying Energy Efficiency Improvements.”

In the first case of energy property costs, you’ll get a flat tax credit of $50 to $300 for installing Energy Star-certified items like heat pumps, water heaters, or furnaces. In the second case of qualifying improvements, you can get a 10% tax deduction for the cost of improvements such as adding insulation, repairing the roof, or replacing windows.

The Energy Efficient Home Improvement Credit was previously capped at $500 for all improvements, but starting in tax year 2023, the lifetime cap is $500. Inflation reduction law This age limit is replaced by an annual limit of $1,200.

To claim tax credits for energy-efficient home improvements made in 2023, you’ll need to document your costs on IRS Form 5695.

You can deduct interest on home equity loans

Any interest from a home equity loan or second mortgage can be deducted on your taxes just like regular mortgage interest, with the important limit on the maximum total loan being $1 million or $750,000 (for joint filers) if you purchased your home after December 15, 2017.

It is also important to note that the 2017 tax law limits deductions for home equity loan interest on funds used for “Purchase, build or significantly improve“Houses. If you borrow money to pay for a new car or a vacation, you’re out of luck.

If you have already paid interest on a home equity loan that was used directly on your residence, you can claim the deduction on the same line as your mortgage interest and mortgage points: Line 8 on Form 1040 Schedule A.

When selling, include all home improvements in the cost basis

Any income you gain from the sale of a home is taxed as a capital gain (with a notable exception – see below). Your gain is calculated by the difference between the home’s sales price and its “cost basis.” This cost basis includes what you paid for the home, the price of improvements you may have made, plus any property loss due to depreciation or injury.

If you have put on a new roof, replaced a furnace, refinished floors, or even landscaped the garden, be sure to include these costs to increase your adjusted basis and reduce the amount of your capital gain from the sale.

When you sell your primary residence, you get a significant tax deduction

When you sell a home, you will need to pay taxes on the amount you gained from the sale as capital gains. However, if you lived in the home for two of the previous five years before selling, you’ll get a very large tax break — $500,000 for married filers jointly, or $250,000 for single or separated filers.

All Americans get this tax break regardless of their age and how many times they have taken advantage of it before. Note that residency requirements apply whether you own the home or not. If you rent a home for two years and then buy it, you are free to sell with the standard residence exception at any time.

You will likely receive tax information about the sale of your home at Form 1099-Sand you’ll report your final gains—excluding the $500,000/$250,000 split—to the IRS. Form 8949. If you don’t receive a 1099-S form and your gain on the home is less than the exclusion, you don’t need to report the sale on your taxes at all.

You can deduct home improvements that have medical reasons

Medical expenses can be a significant tax deduction, but only if they exceed 7.5% of your adjusted gross income, which is essentially your taxable income. Any home improvements — safety bars, access ramps, wider doorways, railings, and elevators, for example — related to medical conditions can be included in your tax deductions for medical expenses.

Keep all of your receipts and invoices and include the total cost of improvements or additions along with all of your additional medical and dental expenses on Line 1 of 1040 Schedule A.

What household expenses are not tax deductible?

Despite all the tax breaks available to homeowners, there are some home-related expenses that cannot be deducted from your income.

• Your down payment for a mortgage.
• Any mortgage payments made toward the principal of the loan.
• Utility costs such as gas, electricity and water.
• Fire or homeowner’s insurance.
• House cleaning or garden maintenance.
• Any decrease in the value of your home.

Everyone’s tax situation is unique. Before making major tax decisions, we recommend consulting with A Tax professional Who can help you with federal and state tax laws.