Being a homeowner comes with all kinds of pros and cons that don’t come with renting. You have a yard, but you have to care for the yard. You have a payment, but you get to deduct your mortgage interest on your tax return! And while the Tax Cuts and Jobs Act (TCJA) reduced or eliminated many of the benefits homeowners used to enjoy, there are a few tax deductions you, as a homeowner, can still claim on your 2018 income taxes, including:
- Home mortgage points
- Property tax expenses
- Mortgage insurance costs
American homeownership has long been subsidized by tax savings, and if your real estate agent didn’t tell you about them, we cover some here or an accountant or tax preparer can tell you more.
“The path to owning a home has a great deal of tax benefits, and a discussion with your tax professional will help to clarify the details,” says William Slade, a certified financial planner in California and enrolled agent licensed by the IRS.
Slade says he is regularly asked if home improvements, such as adding rooms, remodeling and landscaping help reduce taxes. “They don’t when they’re first done, but they may help when the property is sold by increasing the cost basis and lowering the gains tax on the sale,” he says.
Changes for the 2018 Tax Year
New homeowners should know that things have shifted a bit for the 2018 tax year. The standard home mortgage interest point deduction has been modified by the TCJA. More on that lower down.
What hasn’t shifted is that you still have to itemize income tax deductions in Schedule A in order to claim a deduction on home mortgage interest. Schedule A is more complicated than the standard deduction, which you may have taken in previous years. But the savings can make it worth doing.
Itemized deductions for new homeowners include more than just mortgage interest though. Property taxes, private mortgage insurance costs and even charitable contributions can be deducted. To get your mortgage interest deduction, you have to itemize with Schedule A. You can add up these other deductions there and get a bigger overall tax reduction.
Sadly, the previous moving expenses deduction is gone for all but those on active military duty. So, if you just moved in this past year and aren’t serving your country, too bad. No added deduction for you.
Tax Deductions Available for Homeowners
Tax breaks help cushion the impact of mortgage payments. So, take full advantage of those available to you.
The Mortgage Loan Interest Deduction
Mortgage points are prepaid interest on home mortgages. Under the home mortgage points deduction, mortgage loan interest is tax deductible if you itemize. The TCJA capped the deduction on interest paid on up to $750,000 for a qualified home loan taken out after December 15, 2017. Loans taken out before that date still qualify for up to $1,000,000 of deductible interest—the previous cap. Note: if you use the Married Filing Separately status, you can only claim half of that amount on your own return.
When you itemize your deductions, you can add your mortgage loan interest to the list if you purchased the home before December 15, 2017. The deduction applies for up to $1 million for loans that you used to improve the home or buy a new home. Purchases made after this date can only deduct interest on $750,000 of the home acquisition debt. This is down $250,000 from previous years. These new tax laws are set to expire in 2025, and after that point, the $1 million limit may return.
Property Tax Deduction
State and local property taxes are still deductible on your federal tax return under the state and local taxes deductions, known as the SALT deduction. TCJA modified this one. For the 2018 tax year, the amount you can claim for your property taxes is limited to $10,000. For many taxpayers, that still covers you well. For those in states with high property taxes, it could dampen deductions considerably.
Mortgage Insurance Tax Deduction
Private mortgage insurance (PMI) is deductible still. There are changes here too though. PMI is used by people whose home loan or refinance loan is 80% or more of the purchase price, AKA their down payment lower than 20%.
To deduct your PMI for the 2018 tax year:
- Your loan had to be taken out in 2007 or later
- The home has to be your primary residence or a second home that you’re renting out
- Your adjusted gross income (AGI) has been less than $109,000 for any deduction and lower than $100,000 for the full deduction—you can use Schedule A to calculate your deduction amount
Another lesser-known credit for a homeowner is the energy tax credit, called the Nonbusiness Energy Property Credit. This deduction is getting reduced through 2021 but can be claimed using Form 5695. This tax credit is limited to 10% of the cost of your qualifying energy. Items that qualify under this credit include skylights, insulation systems, and certain qualifying appliances like water heaters and central air conditioners. Some restrictions apply.
You can also take advantage of the Residential Renewable Energy Tax Credit. This one is a credit for using solar, wind, fuel-cell and geothermal energy sources, including solar water heaters.
The Residential Energy Efficiency Property Credit can be used to deduct 30% of the cost of solar, wind, fuel-cell and geothermal equipment at your main home or wind, solar and geothermal equipment at a second home. The deduction is unlimited for all but fuel-cells, which are capped at $500 per each half-kilowatt of capacity or $1,000 per kilowatt.
How Much Can Homeowners Really Save?
The amount of money you can save on your annual income taxes depends on a number of factors including filing status, standard deduction amount, the other itemized deductions you’re claiming and total taxable income. Total savings are a mystery until you itemize while doing your tax forms.
There are also things you can’t deduct when filing your taxes too. These items include any dues you pay to your homeowner’s association, the home owner’s insurance on your home, the appraisal fees you paid when buying your home and the cost of nonenergy-related improvements. Some home improvements can reduce your taxes when you sell your home, but you’ll need to keep good records of everything and hold onto the receipts.
This article was originally published February 23, 2013, and has since been updated by another author.