Maximizing Tax Savings: Homeowners’ Guide to Deductions and Credits
As a homeowner, you have the advantage of utilizing various tax credits and deductions to minimize your tax burden. By taking advantage of these opportunities, you can potentially save a significant amount of money. In this article, we will explore two essential deductions that homeowners can leverage: the mortgage interest deduction and the State and Local Tax (SALT) deduction.
Mortgage Interest Deduction
The mortgage interest deduction is one of the most significant tax benefits available to homeowners. It allows you to deduct the interest paid on your mortgage from your taxable income. This deduction applies to both your primary residence and a second home, such as a vacation property.
To qualify for the mortgage interest deduction, you must itemize your deductions on Schedule A of your tax return. It’s important to note that this deduction is only available if you have a mortgage secured by your property. If you own your home outright or have paid off your mortgage, you won’t be eligible for this deduction.
When claiming the mortgage interest deduction, you should receive Form 1098 from your mortgage lender, which details the amount of interest paid during the year. This form is essential for accurately reporting your deduction on your tax return.
It’s worth mentioning that there are limits to the mortgage interest deduction. As of 2021, you can deduct interest on up to $750,000 of mortgage debt if you’re married filing jointly or $375,000 if you’re single or married filing separately. If your mortgage exceeds these limits, the deduction may be reduced.
State and Local Tax (SALT) Deduction
The State and Local Tax (SALT) deduction allows homeowners to deduct certain state and local taxes they have paid from their federal tax return. This deduction includes property taxes, as well as either state income tax or sales tax, depending on which is higher for you.
Similar to the mortgage interest deduction, you must itemize your deductions to claim the SALT deduction. It’s important to keep track of your property tax payments and any state income or sales tax you’ve paid throughout the year. These amounts will be necessary when completing your tax return.
However, it’s crucial to note that there is a cap on the SALT deduction. Starting in 2018, the Tax Cuts and Jobs Act limited the deduction to $10,000 ($5,000 if married filing separately). This change significantly impacted homeowners in high-tax states who previously relied heavily on this deduction.
Other Homeownership Tax Benefits
In addition to the mortgage interest deduction and the SALT deduction, there are other tax benefits available to homeowners:
Home Office Deduction:
If you use part of your home exclusively for business purposes, you may be eligible for a home office deduction. This deduction allows you to deduct a portion of your home expenses, such as utilities and insurance, based on the square footage of your home office.
Energy-Efficient Home Improvements:
By making energy-efficient upgrades to your home, such as installing solar panels or energy-efficient windows, you may qualify for tax credits. These credits can help offset the costs of your home improvements while also reducing your tax liability.
Capital Gains Exclusion:
If you sell your primary residence and meet certain criteria, you may be able to exclude up to $250,000 of capital gains from your taxable income ($500,000 if married filing jointly). To qualify, you must have owned and lived in the home for at least two of the past five years.
As a homeowner, it’s essential to take advantage of the various tax credits and deductions available to you. The mortgage interest deduction and the SALT deduction are two significant opportunities that can significantly reduce your tax bill. Additionally, exploring other homeownership tax benefits, such as the home office deduction, energy-efficient improvements, and capital gains exclusion, can provide further savings.
Remember to consult with a tax professional or utilize tax software to ensure you accurately claim these deductions and credits. By maximizing your tax savings as a homeowner, you can keep more money in your pocket and enjoy the benefits of homeownership to the fullest.