Homeowners Celebrate Tax Season: 10 Tax Tips You Need to Know

Homeowners Celebrate Tax Season: 10 Tax Tips You Need to Know

February 12 marked the beginning of the Year of the Ox, but for taxpayers, it was also the start of the 2021 tax-filing period when the Internal Revenue Service (IRS) began accepting 2020 tax returns. The Chinese Lunar New Year gives revelers a reason to rejoice and homeowners, too, can celebrate their 2021 income tax deductions as one of the many benefits of homeownership. 

Don’t assume you already know what is deductible and what is not. The 2017 Tax Cut and Jobs Act made significant changes to rules affecting tax deductions for homeowners. As always, a trusted tax professional can offer guidance in navigating the tax code.

Here are 10 tax tips for homeowners to help you make the most of your investment this tax season!


1. Mortgage Interest

First-time homebuyers quickly learn the importance of itemizing deductions. While the standard deduction is much easier and less time-consuming, mortgage interest is entirely deductible and worth the few extra steps involved in tax return preparation. The National Association of Realtors® says the ability to deduct interest paid on a mortgage can mean significant savings for homeowners. For example, a family home purchased with a $200,000, 30-year, fixed-rate mortgage at an interest rate of 4.5 percent, could save nearly $3,500 in federal taxes the first year.  Since most of the monthly mortgage payment applies toward interest, the savings can be substantial.

Explaining the changes enacted in 2017, U.S. News and World Report says, “If you bought your home before Dec. 16, 2017, you may be able to deduct the interest paid on up to $1 million in mortgage debt (or up to $500,000 if you're married filing separately). But if you bought your home after that date, you can only deduct the interest paid on up to $750,000 in mortgage debt (or up to $375,000 if you're married filing separately). If you refinance your mortgage, your cut-off is based on the date you originally purchased the house.


2. Points

When buying a home, the lower your points the better. Points represent the amount you pay a lender to get your mortgage – usually a percentage of the loan. TurboTax says points are deductible just like mortgage interest if the cash paid at closing at least equals the points. Assuming you paid two points (2 percent) on a $200,000 mortgage, you could deduct $4,000 for the points if your down payment was at least $4,000. Bonus:  you can even deduct the cost of points if the seller, as part of your deal, pays them.


3. Mortgage Insurance Premiums

If you bought your home after 2007 and your down payment was less than 20 percent of the cost of your new home, private mortgage insurance (PMI) may be one of your monthly expenses. Though you pay for the insurance as part of your mortgage, it protects your lender in case you default on the loan. The premiums are tax-deductible thanks to legislation reauthorizing the deduction passed by Congress in 2019. PMI premiums deductions can be claimed for 2020 and retroactively for 2018 and 2019. 


4. Sales Expenses

Did you sell a home in 2020? WalletGenius says many expenses associated with marketing and selling are deductible. From advertising to some home repairs and title insurance, check to see if those costs you incur qualify as sales-related. If your profit from the sale is under $250,000 (or $500,000 for a married couple) it should be tax-exempt. There is a caveat: you must have lived in the house for at least two years out of five years of ownership.


5. Property Taxes

Yes, you pay taxes but you can also deduct them. State and local property taxes – usually included in your mortgage payment – are deductible on your federal tax return. Check your mortgage statement’s escrow account to see how much you paid in 2020. Before 2018 your property taxes were deductible in addition to other state and local taxes. Now, the deduction is capped at a total of $10,000 for all state and local taxes, including property taxes.


6. Losses

In Alabama, we have beautiful homes from the mountains to the coast. We also have two extra seasons – tornado and hurricane – with an occasional flood or hailstorm thrown in. Losses from natural disasters that are not recovered through insurance may qualify as tax deductions. The fair market value of items lost in what the IRS calls “a sudden, unexpected or unusual” event can be deducted subject to limits. 


7. Home Office

In 2020, the home became the office for many sheltering against the pandemic and would provide a welcome tax deduction under the old rules. Under the new rules, however, a home office deduction is only available for the self-employed or freelancers. New IRS rules make it easier to claim the deduction. Instead of using percentages of space and expenses, self-employed homeowners can multiply the square footage of their workspace (up to 300 feet) by $5 to determine the deduction. You may get a larger deduction by calculating your actual expenses. In an example cited by U.S. News and World Report, if your home office is 1/10th of the total square footage of your home, you can deduct 10% of those expenses. Don't forget to include other expenses for your home, such as a portion of the cost of a pest control service or homeowners association dues. 


8. Home Equity

Using your home’s equity to finance major expenses remains one of the benefits of owning a home. In the past, borrowers could deduct interest paid on home equity loans of up to $100,000 regardless of how the money was used. Now, you can only deduct interest on a home equity loan if you use the money to buy, build or improve the house. Interest payments are deductible on the total of your home debt – mortgage and home equity loan – up to $750,000. Remember, for the interest to be deductible, the loan must be used for improvements, not maintenance. 


9. Recreational Vehicles and Second Homes

That beach or lake house you want to buy has some justification at tax time. All the tax breaks that apply to your first home apply to a second one, too, says WalletGenius. Of course, there is a catch: the deductions are allowed only if you do not rent the home to others. Of course, there is an exception: you can rent out a second home tax-free for less than 14 days per year. There are also partial deductions if you rent the home for longer periods.

If a houseboat or recreational vehicle is more your style, your mortgage interest may be deductible as well. WalletGenius says the RV or boat must have sanitation, cooking, and sleeping facilities to qualify. If you can live on it, it must be a second home, right?


10. Energy Credits

One word makes all the difference here – credits. Credits on your tax return can have much more impact than deductions because a credit is deducted from the taxes you owe. A deduction is applied to the income on which taxes are calculated. So, you can earn up to a $500 credit by upgrading your home’s outside doors and windows, insulation, roof, and some heating and cooling systems. A larger credit  -- 26 percent with no cap – is available for qualified solar-powered generators and water heaters. 

The most important tip of all: save any receipt remotely associated with your home and save a digital backup as well. Deductions can lower your taxable income and credits can lower your tax bill giving you reasons to celebrate the beginning of tax filing season.