With tax season already upon us, Lyons Mortgage wanted to go over some of the advantages that homeowners can enjoy on their upcoming tax filings.
Tax benefits are available to homeowners to incentivize homeownership in America. There are tax breaks no matter the type of home you own, from mobile homes to co-ops and condos. They reduce the burden of yearly expenses, which is always welcome! The first suggestion we make to clients who inquire about these breaks is to keep immaculate records and keep receipts. This will make it that much easier for your accountant to help you get all applicable breaks.
Tax benefits come in the form of credits and deductions.
Credits get applied to the amount of taxes that you owe. Deductions reduce the adjusted gross income of a taxpayer, reducing the tax liability. These deductions are especially valuable to taxpayers in high tax brackets.
A question we are often asked at Lyons: “Should I use the standard deduction or itemize my deductions?”
The answer to this question differs based on the scenario. Standard deductions are deduction amounts set by the government. The limits for this year can be found here. This is another reason why tidy bookkeeping will benefit you. If the deductions you qualify for are higher than the standard deduction amount, then you should itemize your deductions.
Common tax advantages to homeowners include mortgage interest and property tax deductions.
Each year, your lender will send you IRS Form 1098, detailing how much interest you paid on your mortgage that year. The mortgage interest paid up to $750,000 used to buy, build, or improve any home you own can be deducted in taxes. This does not apply to the interest paid on cash-out refinance transactions.
Property taxes can be deductible up to $10,000. According to the Tax Policy Center, homeowners saved approximately $6 billion in income tax in the fiscal year of 2019 by deducting the property taxes paid on their homes.
Two tax benefits that are relevant in 2021: the home office deduction and environmental tax breaks.
COVID-19 has changed the way people work around the world. If you’re a homeowner that now works from home, it’s possible to get a home office deduction. Read more about how this works directly from the IRS.
The government also incentivizes eco-friendly practices in the form of tax breaks. For example, if you install solar panels or wind turbines, you may be eligible for the residential energy credit.
Homeowners don’t have to pay capital gains taxes on the sale of their primary home.
If you have made a profit on selling your home, you will not have to pay taxes on up to $250,000 of profits made, doubling to $500,000 for joint filers. This might come as a shock to some, as most other profits made from a sale are subject to capital gain taxes. To qualify, the owners of the home must have used the house for at least two of the five years before the sale date.
Are you thinking about buying your first home and taking advantage of some of these tax benefits? Read our latest article on how to save for a down payment to buy a home!
Above are suggestions only. Please advise your tax preparer for your more specific needs