Owning a home can be expensive. Paying for property taxes, repairs and homeowners insurance can significantly reduce what you can spend on luxury items and discretionary goods and services. Fortunately, homeowners may be able to recoup some of the money they’ve lost by claiming tax deductions and credits. Let’s look at some of the tax breaks for household expenses.
Check out our federal income tax calculator.
Tax Breaks for Energy-Efficient Household Expenses
Taking steps to make your home more energy-efficient can pay off in more ways than one. In addition to saving energy, installing certain systems and equipment can help you get a tax credit.
Some home energy tax credits – including the Residential Energy Efficiency Tax Credit – expired in December 2016. But you can still claim them when you file your 2016 tax return. With the Residential Energy Efficiency Tax Credit, you can potentially save up to $500 for installing doors, windows, roofs and other Energy Star-certified equipment.
If you invested in fuel cells, geothermal heat pumps or residential wind turbines, you may qualify for the Residential Renewable Energy Tax Credit. Thirty percent of what you paid to install those renewable energy systems can directly lower your tax bill. Through December 2021, you may be able to get a tax credit for putting solar water heaters or solar panels in a first or second home.
The Home Office Deduction
Small business owners who work from home may qualify for the home office deduction. If you’re eligible, you may be able to deduct a portion of your homeowners association fees, utility bills, homeowners insurance premiums and the money you used to repair your home office. The amount you can deduct depends on several factors, including the percentage of your home that’s used exclusively for business.
Claiming the home office deduction won’t automatically trigger an IRS audit, but you’ll need to be careful. You’ll need to keep up with receipts, canceled checks and other documentation and be ready to prove that your home office isn’t used for another purpose that isn’t related to your business.
Related Article: What Can You Deduct at Tax Time?
Tax Breaks for Homeowners
Owning a home has its perks. Homeowners can get a tax deduction for various expenses (although many of these tax breaks tend to favor the rich). For example, while it’s another tax break that expired at the end of 2016, the mortgage insurance premium deduction is available for homeowners to claim on their 2016 tax returns. If you paid private mortgage insurance during tax year 2016, your payments may be completely deductible if your household’s adjusted gross income is under $101,000 and you bought your home on or after Jan. 1 2007.
Your mortgage interest may be deductible as well. If you qualify for the mortgage interest deduction, you can deduct mortgage interest on up to $1 million of debt (up to $500,000 if you and your spouse are filing separate tax returns) that accrued while you were buying or improving a first or second home. You can deduct interest for paying down a home equity loan, too, if you have debt of up to $100,000 (or $50,000 if your filing status is married filing separately).
Another deduction can give homeowners a tax break for paying mortgage points. Homebuyers can pay points to reduce their mortgage rate. A single point is equal to 1% of a mortgage loan amount. If you purchased a house for $1 million or less, the full amount of mortgage points that you paid may be deductible. You may also be able to deduct the full amount of points you paid if you refinanced or took on a second mortgage (if your home equity debt burden is less than $101,000).
In order to deduct your mortgage points as prepaid interest, you must meet certain requirements. For example, the money you used to pay mortgage points must come from your own bank account, not a loan. And the points must be discount points. For your first and second home, you cannot get a deduction for paying origination points, which are what you pay to have a loan processed (and they may include fees and closing costs).
The Property Tax Deduction
In addition to claiming the deductions for paying mortgage interest and points, just about any property owner with land, a primary home, second home or foreign property may be able to get a deduction for paying real estate taxes. But you cannot deduct your property taxes if you have a rental or investment property.
If you split your property tax burden with the person who sold you a home, you can only write off the portion you actually paid. If you’ve been paying into an escrow account, you can only deduct the amount that your lender paid (this should be reflected on your property tax bill).
See real estate taxes for your property.
Claiming Tax Breaks for Household Expenses
In order to claim your home-related tax deductions, you’ll need to itemize your deductions. You can do that by completing the Schedule A tax form and figuring out how much you can deduct. Itemizing your deductions might not be worth it, however, if you can reduce more of your taxable income by taking the standard deduction.
If you want to claim a tax credit, you’ll likely need to fill out a form and submit it when you file taxes. For example, in order to claim the Residential Energy Efficient Credit, you’ll need to complete IRS Form 5695 and attach it to your tax return.
Know What You Can’t Deduct
As you prepare to file your income tax return, you’ll need to have a firm understanding of what you can and can’t deduct. For example, you can’t directly deduct expenses that you paid while working on a home improvement project. Of course, if fixing up your home boosts your property value, you may be able to deduct the additional property tax payments that you made during the year.
Note that if your second home doubles as a residence and rental property, it’s considered an income-producing property for tax purposes if it’s rented out for more than 14 days out of the year (or you use it for personal reasons for less than 10% of the total days you rent it out, whichever is greater). In addition to increasing the amount of money that’s subject to taxation, having rental income may reduce what you can deduct on your tax return.
Photo credit: ©iStock.com/Geber86, ©iStock.com/gpointstudio, ©iStock.com/alfexe