In this article:
Can tax breaks help make owning a home more affordable? They might. Although rules, restrictions and limitations apply, there are eight key tax deductions and tax credits that may help you save money on taxes—and, in turn, make it easier to cover your home expenses. Read on to learn more about homeowner tax breaks, how to use them and whether they might be a way for you to lower your tax bill.
8 Tax Breaks for Homeowners
You can deduct the interest on your mortgage, but you're limited to interest on $750,000 of mortgage debt if you purchased your home after December 15, 2017. This limit applies to both single and married taxpayers filing jointly: Married people filing separately may each deduct the interest on $375,000 of mortgage debt.
Any part of your mortgage payment that goes toward paying your principal loan balance, property taxes or home insurance isn't deductible as interest. Your lender will send you Form 1098 at the end of the year that summarizes how much interest you paid. To make a quick estimate of your interest payments now, check the payment schedule on this mortgage calculator. Read IRS Publication 936, Home Mortgage Interest Deduction to learn more.
Private Mortgage Insurance (PMI) Premiums
If your down payment was less than 20% of your home's purchase price, you're probably paying for PMI or a mortgage insurance premium. Mortgage insurance payments are tax deductible through 2021, but the deductions phase out if your adjusted gross income exceeds $100,000 ($50,000 for married people filing separately).
Any points you paid when you bought your home to reduce the interest rate on your loan are deductible on that year's taxes. If you paid points to reduce your interest rate on a refinance (and not an initial home purchase), you must spread that deduction over the life of the loan.
State and local property taxes are deductible, as are state income taxes, and state and local sales tax. However, there's a limit: You can only deduct a total of $10,000 for all of these state and local taxes combined.
Mortgage Tax Credit
The mortgage credit certificate program is designed to help low-income, first-time homebuyers afford homeownership. Qualified homebuyers can claim a tax credit that reduces their tax bills dollar-for-dollar up to $2,000.
To participate, you need to get a mortgage credit certificate from your state or local government agency before you purchase a home. The amount of the credit varies and you must subtract any credit you receive from your mortgage interest deduction. Read IRS Publication 530: Tax Information for Homeowners to learn more.
Interest on Home Equity Loans
Interest on home equity loan and home equity lines of credit is only deductible if you used the money to buy, build or substantially improve your home. If you took out a home equity loan to consolidate bills or pay for college, for example, the interest is not deductible. If your home equity loan's interest is deductible, your loan balance counts toward the $750,000 mortgage interest deduction loan limit.
Some Home Improvement Expenses
For the most part, home improvement expenses aren't tax deductible. One exception, though, is if you make medically necessary improvements—adding an accessible entrance or installing support bars, for example. You may be able to deduct these costs as medical expenses. To deduct medical expenses on your income tax return, your medical expenses for the year must total at least 7.5% of your income. Learn more about qualifying medical expenses from the IRS.
Taxpayers may be able to claim tax credits for installing energy-saving improvements as well, including 10% credits for energy-efficient items like air conditioning, skylights or water heaters, or up to 26% for eligible solar energy systems, small wind turbines and fuel cells. Get details on the IRS website.
Home Office Expenses
The Tax Cuts and Jobs Act of 2017 (TCJA) took away the home office deduction for employees. But if you're self-employed, you may be able to deduct eligible home office expenses if you maintain a dedicated office in your home and maintain it as your principal place of business.
Which Homeowner Expenses Aren't Deductible?
The following items won't qualify as deductions on your tax return:
- Home insurance
- Homeowner association fees
- Title insurance
- Loan origination "points" or other costs of obtaining a loan
- Costs for utilities
- Domestic services
- Closing or settlement costs
- Forfeited deposits, down payments or earnest money
Why Deductions for Homeowners Don't Always Count
As a homeowner, you're entitled to deduct qualifying expenses. But you may elect not to if your itemized deductions don't exceed your standard deduction. Currently, the standard deductions you can take without itemizing are fairly robust. Here's a quick look:
|Standard Deduction Amount by Filing Status|
|Filing Status||Standard Deduction|
|Single or married filing separately||$12,550|
|Head of household||$18,800|
|Married filing jointly||$25,100|
Getting Your Credit Ready for a Mortgage
Tax breaks aren't the only way to save money. In fact, securing a lower interest rate on your loan may be much more consequential. Borrowers with the best credit generally get the best rates and terms. If you're planning to buy or refinance a home in the near future, take some time to get your credit ready for a mortgage:
- Check your credit report and score. You can see your Experian credit score and report for free any time.
- Work on raising your score if necessary. You might also consider Experian Boost®ø, which could provide a bump to your FICO® Score☉ .
- Avoid credit mistakes. Pay bills on time, avoid opening new accounts and don't overspend on credit cards.
- Consider free credit monitoring. This free Experian service notifies you when your score changes or new information is added to your credit report.
Should You Adjust Your Tax Withholding?
If you've reviewed your potential tax deductions and expect significant savings on your tax bill, you can adjust your federal income tax withholding now. By increasing your take-home pay throughout the year, you can use your tax savings to cover monthly expenses. Before you adjust your withholding, you may want to consult your tax advisor. IRS rules can be complex; so can loan documents and tax forms. To make the most of your available tax benefits, consider meeting with your tax pro before buying a home to discuss potential tax breaks and how they might affect you.
Give Yourself a (Tax) Break
Between mortgage payments and property taxes, utilities and home maintenance, the costs of owning a home can be daunting. Tax breaks can add up, so it's worth figuring out how common deductions and credits might apply. Though they probably won't make or break your ability to buy a home, tax breaks could make the process more affordable.