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“You must pay taxes. But there's no law that says you gotta leave a tip.”--Morgan Stanley advertisement
One of the biggest perks of home ownership is the tax breaks and benefits, but owning your own home can make filing taxes more complicated. In this blog post, we’ll discuss the most common questions homeowners ask during tax season.
Should I itemize my home expenses or take the standard deduction?
The good news for 2020 is that the standard deduction is increasing (albeit slightly) for most taxpayers. According to Forbes, more than 90% of taxpayers will take the standard deduction for 2019 and 2020. It’s certainly the less complicated option, and not having to add up expenses and find receipts makes filing less of a hassle. That said, you should still check with your tax advisor to see if you could benefit from itemizing your deductions. Many homeowners living in areas with high real estate values, like California, may find it more beneficial to itemize.
For 2020, the standard deduction for married couples filing jointly is $24,800, and for those who are single or married and filing separately, it’s $12,400.
Chances are, your best bet and easiest option is to go with claiming the standard deduction. If you think you have more than the standard deduction and are willing to put in a bit more work in preparing the necessary documents, you should talk to your tax advisor about itemizing your deductions.
Which home-related expenses can I deduct on my taxes?
The standard rule of thumb for home-related expenses is that you can deduct the cost of home improvements, but you cannot deduct the cost of home repairs. Many big-ticket renovation projects, such as installing a swimming pool or solar panels, are tax deductible. You can also deduct any home improvements that are required for medical care, such as installing a wheelchair ramp. Other tax-deductible expenses include energy improvements and a home security system.
Some items that you can’t deduct include homeowners association fees, insurance on your home, moving costs, and general repairs or maintenance expenses.
How much can I claim for my mortgage interest deduction?
One of the most significant and widely-known tax benefits for homeowners is the mortgage interest deduction. Unfortunately, recent changes to the tax code have a lot of people wondering how much they can actually deduct.
As of 2018, homeowners can deduct home mortgage interest on the first $750,000 worth of debt if they choose to itemize their returns instead of taking the standard deduction. Married taxpayers who are filing separately have a principal limit of $375,000. If you bought your home before December 15, 2017, it’s grandfathered in and you can claim the first $1 million (or $500,000 if filing separately).
Can I still deduct interest on my home equity line of credit?
According to U.S. News, “Interest on up to $100,000 of a home equity line of credit, which is debt secured by your home, is only now deductible if you use it to build or improve your property. The new law also causes the loan amount to apply toward your maximum deduction instead of being in addition to that limit.”
How much can I deduct for state and local property taxes?
You can deduct up to $10,000 in state and local taxes for your property tax deduction on your federal tax return. This is a change from before 2018, when there was no cap on how much you could deduct. If you live in a state that has relatively low property taxes, this is not a huge change. However, if you live in a state like New York or California, you may lose out on being able to deduct a significant portion of your state and local property taxes.
If you’re feeling stressed out over the process of filing your taxes, then take a deep breath! There are endless perks to owning your own home, and they include some great tax breaks and benefits.
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