As a homeowner, you’re likely always looking for ways to save on the annual costs associated with owning property. But did you know you may be eligible for certain deductions that can save you money come tax time? Keep reading to learn about some of the most common tax deductions for homeowners.
Mortgage Interest Deduction
The mortgage interest deduction is a tax deduction that allows homeowners to reduce their taxable income by the amount of interest they pay on a mortgage for their primary residence. The deduction is available for both current homeowners and those buying a home for the first time. It’s important to keep all of your tax forms and paperwork organized throughout the year to make filing your taxes easier. Consider organizing your tax forms in designated tax envelopes or tax folders that can be quickly accessed when needed.
To qualify for the mortgage interest deduction, the loan must be used to purchase or build your home, and you must use the home as your primary residence. You can claim the deduction whether you itemize deductions or take the standard deduction. The mortgage interest deduction is one of the most popular tax deductions in the United States. In 2017, more than 33 million taxpayers claimed a total of $71 billion in mortgage interest deductions. The average mortgage interest deduction was $2,167.
Property Tax Deduction
The property tax deduction is a popular deduction that allows homeowners to reduce their taxable income by the amount of their state and local property taxes. This deduction is available to all taxpayers, regardless of whether they itemize or take the standard deduction. To claim the property tax deduction, taxpayers must include the amount of their property taxes on Schedule A of their federal income tax return.
The property tax deduction is especially important for homeowners in states with high property taxes. For example, in New Jersey, the average homeowner pays more than $7,000 in property taxes each year. By taking the property tax deduction, these homeowners can reduce their taxable income by $7,000, resulting in savings of more than $2,000 on their federal income taxes.
The value of the property tax deduction has been increasing in recent years as a result of the Tax Cuts and Jobs Act (TCJA). The TCJA increased the maximum amount that can be deducted for state and local taxes (including both property taxes and sales taxes) from $10,000 to $20,000 for married couples filing jointly. As a result, more taxpayers will be able to benefit from this deduction.
Capital Gains Exclusion
The capital gains exclusion on the sale of a home allows taxpayers to exclude from taxable income up to $250,000 of gain on the sale of their principal residence. To qualify for the exclusion, the taxpayer must have owned and used the residence as their principal home for two out of the five years preceding the sale. If married, both spouses must meet the ownership and use requirements. The exclusion is available to all taxpayers, regardless of income level.
Gain that is excluded from income is not subject to tax, either at the federal or state level. To claim the exclusion, taxpayers must file Form 1040 (U.S. Individual Income Tax Return) and complete Part III of Schedule D (Capital Gains and Losses). Taxpayers who do not meet all of the requirements for the full exclusion may be able to claim a partial exclusion based on their occupancy and ownership history.
Tax deductions for homeowners are important because they provide tax breaks that can help decrease the amount of taxes that homeowners owe each tax season. These deductions can include breaks for mortgage interest, property taxes, and other expenses related to owning a home. Altogether, these deductions can save homeowners a lot of money on their taxes, which can help them keep more of their income each year.
