When you rent a home, your money goes to a landlord without any tax benefits. However, the scenario changes when you become a homeowner, as various tax breaks can help you save money, whether you purchase a townhouse, condominium, cooperative apartment, or a single-family home.
While homeownership brings tax benefits, preparing your tax return might become more complex. It goes beyond simply inputting your W-2 details into Form 1040. Nonetheless, by itemizing your deductions, you can potentially lower your tax bill and save money.
Tax Credits vs. Tax Deductions
Tax deductions and credits differ significantly, with credits offering greater advantages.
- A tax credit directly reduces your tax bill dollar-for-dollar, whereas a tax deduction lowers your taxable income, thereby decreasing the amount of taxes owed.
For the 2024 tax year, the standard deduction is $29,200 for couples filing jointly and $14,600 for single filers. It’s crucial to evaluate whether itemizing deductions or claiming the standard deduction would provide greater tax savings, as you can only choose one option.
Tax Deductions for Homeowners
Most of the tax benefits for homeowners come in the form of deductions, listed on Schedule A of Form 1040 or 1040-SR. To leverage these deductions, you must forego the standard deduction and ensure the total exceeds the standard deduction for your filing status.
Mortgage Interest Deduction
Homeowners can deduct mortgage interest on up to $750,000 of mortgage debt. This limit increases to $1 million for homes purchased before Dec. 16, 2017.
Ensure all interest payments, including those from the closing, are accounted for. Lenders provide Form 1098 detailing the interest paid.
Mortgage Points Deduction
Homebuyers can deduct points paid to lower their mortgage interest rate. These deductions apply to the first $750,000 of debt.
Refinancing or a home equity line of credit can also lead to deductible points being spread out over the loan term.
Private Mortgage Insurance (PMI) Deduction
Homeowners paying PMI might be eligible for deductions, subject to income limits and purchase year. This deduction is no longer available starting 2023.
State and Local Tax (SALT) Deduction
The SALT deduction lets you claim state and local taxes paid, with a cap of $10,000 for single filers and $10,000 for married couples. Include these taxes from escrow accounts or records.
The Home Sale Exclusion
Home sellers can exclude up to $250,000 ($500,000 for joint filers) of the profit if residency and ownership requirements are met.
Different tax rates apply to short-term and long-term capital gains, depending on the duration of homeownership.
Tax Credits
Certain mortgage credits and energy-efficient home improvements may make you eligible for tax credits. Investigate state programs for potential credits and incentives.
Which Expenses Can I Itemize?
Homeowners can itemize mortgage interest, home equity loan interest, mortgage points, SALT deductions, and other expenses on Schedule A of Form 1040 to potentially maximize tax savings.
Who Should Itemize Deductions?
Consider itemizing deductions if it results in more tax savings than claiming the standard deduction. Assess your total itemized deductions to make an informed decision.
What Are the Standard Deduction Amounts for 2023 and 2024?
Standard deduction amounts for 2023 and 2024 have different thresholds depending on your filing status. Evaluate these amounts to determine the most advantageous deduction strategy.
The Bottom Line
While paying off your home quickly can be financially beneficial, understanding and leveraging tax benefits from homeownership can provide significant savings.
Explore how Investopedia’s Tax Savings Guide can assist in maximizing your tax credits and deductions related to owning a home.
Note: The article correction has been made regarding the standard deduction amount for single filers in 2024.