How to Save This Tax Season by Becoming a Homeowner
Tax season is a stressful time for many people, but there is good news. With historically low interest rates and many people becoming new homeowners, you now have ways to reduce your tax bill. Here’s how to save on taxes by becoming a homeowner.
Am I Eligible for Homeownership Tax Breaks?
Not everyone can take every tax deduction for homeowners. In order to capitalize on the benefits of homeownership during tax season, you’ll need to meet a few criteria.
You itemize deductions
The standard tax deduction for all groups nearly doubled in 2018, making it easier to file your taxes — but less beneficial to itemize.
If your itemized deductions are higher than the standardized deduction for your filing status, more tax breaks for homeowners are available to you. If not, you may still have some options when it comes to reducing your tax burden.
As of the 2021 tax season, the standard deduction for all groups is:
- Single: $12,550
- Married, filing separately: $12,550
- Married, filing jointly: $25,100
- Head of household: $18,800
Of all groups, itemizations benefit those who file as head of household the most. This includes divorced couples who have negotiated a house buyout and are raising dependent children — each person is considered the head of their respective household.
Talk to your tax professional to see which status is right for you. If your itemized deductions exceed your standard deduction, you're ready to reap the tax benefits of homeownership.
You’re self-employed
People who are self-employed and work out of their home can take deductions that are not available to those who get a W-2. These include deducting home office expenses.
Do note that these deductions reduce your adjusted gross income but do not count towards the itemized deduction total.
You meet local tax criteria
Even if you are not eligible for federal tax deductions, it's possible that your home can get you some money back in your state and local municipalities.
Each city, county, and state will have different SALT (state and local tax) tax relief programs for homeowners. A quick search can help you find programs in your area.
9 Ways to Save This Tax Season
If you are looking for home buying tax deductions and deductions for the expense of owning a home but are a tax planning beginner, here are nine ways you can save.
1. Keep track of moving expenses
You’ve bought your new home across the country (or down the block) and are faced with the daunting task of relocation. In the confusion of packing and moving, don’t forget to save your receipts for every moving expense — these are tax deductible in some situations.
Deduct moving expenses such as:
- Transporting your belongings
- Storage fees
- Travel
- Lodging while you relocate
Keep in mind that this benefit was paused for most taxpayers from 2018-2025, but it’s still allowed in seven states in the US.
2. Retrofit for energy savings
As of 2021, the Residential Renewable Energy Tax Credit is set to gradually phase out by 2023, so it’s a good idea to take advantage while you can.
Qualified improvements include:
- Solar panels
- Wind turbines
- Solar-powered water heaters
- Geothermal heat pumps
You can also claim up to $200 on your taxes for new windows through December 31, 2021.
Sure, it’s an initial outlay of cash, but this is a tax credit that directly decreases your tax bill.
3. Use mortgage points
Mortgage points are fees the buyer pays to the bank to help reduce the interest rate of their home loan. Paying down points and getting a lower interest rate reduces the cost of your home over the life of the mortgage. They are deductible the year that you pay them.
You can also deduct these points if the seller pays them, but there are rules about how to handle them when the time comes to sell your house. Check with your tax professional for more clarity on how to handle this when it comes up, but save all of your documentation until it does.
4. Get credit for paying interest
The Tax Cuts and Jobs Act of 2017 restricts the ability to deduct the interest paid on a home equity line of credit (HELOC) but leaves open one significant loophole. Homeowners can deduct the interest on funds used to “buy, build, or substantially improve the taxpayer’s home.” This includes things like:
- Making medically necessary home improvements
- Adding or renovating rooms
- Putting in pools
- Making energy improvements
This interest deduction may also be available for home equity loans and second mortgages, but there are caps on how much can be deducted — only on mortgages of $750,000 or less if your loan originated after December 15, 2017.
5. Deduct your insurance
If your income qualifies, the IRS allows you to write off various forms of mortgage insurance that also includes:
- Private mortgage insurance
- VA loan funding fee
- USDA loan guarantee fee
- FHA loan up-front mortgage insurance premiums
These deductions are subject to income qualifications. To qualify, you’ll need an adjusted gross income (AGI) that is below the following levels:
- Married filing jointly, single, or head of household: $100,000
- Married filing separately: $50,000
Remember that homeowners’ insurance itself is not tax deductible.
6. Look for property tax breaks
Property taxes are one of the biggest bills homeowners face annually. In addition to deducting property taxes on your federal return, many cities and states offer additional property tax breaks for state and local taxes.
To find these, inquire directly with your locality. SALT tax deductions are capped at $10,000, including property tax.
7. Don’t forget the home office
Independent contractors and freelance workers who use a portion of their home exclusively for work are eligible to take a home office deduction. The amount of deduction depends on the square footage and can include things like:
- Utilities
- Repairs
- Furnishings
Many contractors opt to take the standard office deduction of $1,500 instead of itemizing these expenses.
Working from home during COVID? Unfortunately, the same act that increased the standard deductions also eliminated any home office tax breaks for W-2 employees.
8. Write off disaster relief
With a warming planet comes intensifying weather, and in 2021, 20 natural disasters cost the US over one billion dollars and resulted in many people being forced from their homes. If you experience a casualty loss (when property is damaged by a declared natural disaster), you can deduct the loss on your tax return.
While no one wants to save money at tax time by losing their home, it’s good to know you are protected if this occurs.
9. Capitalize on capital gains exemptions
Investors who utilize 1031 exchange companies to help reinvest profits from a home sale can be exempt from taxes on capital gains. This may not apply to new homeowners, but if you sold a home in 2021, you may be able to avoid taxes on it if you properly reinvest your capital from the sale.
Plan Now for Tax Breaks
When you're planning your home-buying journey, it pays to consider all of your potential tax breaks. Your home is the largest investment you’ll ever make — let it work for you to lower your tax bill.
