Owning a home is often regarded as the American dream, and it comes with its fair share of perks, including some valuable tax benefits that can lead to significant savings. Here, we explore some of the most lucrative tax breaks homeowners should be aware of, which can reduce their tax bill and enhance their financial well-being.
Mortgage Interest Deduction
One of the most significant tax breaks for homeowners is the mortgage interest deduction. This allows homeowners to deduct the interest paid on their mortgage loan from their taxable income, potentially saving them thousands of dollars each year. To qualify, the mortgage must be secured by the taxpayer’s primary or secondary residence, and there are limits on the amount of interest that can be deducted.
Property tax Deduction
Homeowners can also deduct the property taxes they pay on their homes. This deduction is taken on Schedule A of the federal tax return and can result in substantial savings. However, it’s essential to note that the Tax Cuts and Jobs Act has capped the state and local tax (SALT) deduction, which includes property taxes, at $10,000.
Energy-Efficient Home Improvement Credits
The federal government offers tax credits for homeowners who make energy-efficient improvements to their homes. These improvements can include installing solar panels, energy-efficient windows, or insulation. The credit amount varies based on the specific improvement, but it can be a substantial help in offsetting the costs of these upgrades.
Home Office Deduction
With more people working from home than ever, the home office deduction has become increasingly relevant. If you use a portion of your home exclusively for business purposes, you may be eligible to deduct a portion of your mortgage interest, property taxes, and other expenses related to your home office. It’s important to consult with a tax professional to ensure you meet the criteria for this deduction.
Capital Gains Exclusion
One of the most significant tax benefits for homeowners comes when they sell their home. If you’ve lived in your home for at least two of the past five years, you may be eligible to exclude up to $250,000 of the gain from the sale of your home from your income ($500,000 for married couples filing jointly). This exclusion can result in substantial tax savings and is a significant advantage of homeownership.
Mortgage Points Deduction
If you paid points to lower your mortgage interest rate, you might be eligible to deduct those points from your income. The points must have been used to purchase or build your primary residence, and the deduction must be taken in the year the points were paid.
Loan Forgiveness Exclusion
In some cases, homeowners who have had mortgage debt forgiven may be eligible to exclude that amount from their income. This can occur in situations such as foreclosure or short sale. The Mortgage Debt Relief Act of 2007 initially provided this exclusion, and while it has expired, there are still some situations where the exclusion may apply.
Home Improvements and Medical Expenses
Homeowners who make improvements to their homes for medical reasons may be eligible to deduct those expenses. This can include installing ramps, widening doors, or adding handrails. The improvements must be medically necessary and must not increase the value of the home.
Due to complicated and ever-evolving tax codes, navigating the landscape of homeownership and its associated tax benefits can feel overwhelming. That’s where hiring a tax professional becomes your greatest ally. Armed with expert knowledge, Better Accounting tax professionals can ensure you seize every tax break and avoid costly mistakes.
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