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There are some federal tax breaks available for owning a home. However, it only works if you are itemizing deductions for your 2021 tax return. Sometimes this isn’t an efficient process so make sure it is worth doing before you start this process.

The “If” Is Now A Bigger If Then It Used To Be

Tax deductions for homeowners still make sense and can add up to thousands of dollars for the year. It is only worth doing it if all of the expenses that you itemize add up to more than the standard deduction that is specified by the IRS.

The standard deduction in 2021 is the following:

  • $12,550 for those who are filing by themselves or for married individuals that want to file separeately. This is up $150 compared to the year before.
  • $25,100 is for couples who are married and want to file together This is up $300 from the year before.
  • $18,800 is the amount for heads of households which is up $150 from the 2020 tax year.

When deciding whether to itemize your expenses you should add up all of your household and tax deductions that you are eligible for. Take this number and compare it to the standard deduction. If this number comes out higher than the standard deduction then you should itemize. Below we’ve listed all of the tax deductions that you can include as a homeowner when making this calculation.

Interest On Your Mortgage

When looking at items to itemize this is usually the biggest tax deduction for homeowners. When calculating a mortgage repayment there is always a portion of it that goes towards interest on the loan (this is how the lender makes money). You are able to deduct the interest paid up to a certain threshold. This limit depends on when exactly you took out the mortgage.

16th December 2017 and After. If you’ve taken out your mortgage after this date then you can deduct interest on up to $750,000 of debt. If you are filing separately then you can claim up to $375,000.

14th October 1987 through to 15th December 2017. You are able to deduct interest on up to $1million of debt on your mortgage or $500,000 if you are filing separately to your spouse.

If you have refinanced then the limit is calculated when your original loan started. If you originally took out your mortgage before 14th October 1987 then you might be able to deduct all of the interest from your mortgage. You can find out how much interest you are paying when your mortgage provider sends you the annual statement.

Interest From Home Equity Loan

Interest that you pay on home equity loans and any home equity lines of credit are able to be deducted, but only if that money that you borrowed was spent to improve your home. In 2018, a tax reform law went into effect which meant you could deduct the interest if you used that money for other purposes like tuition for university or paying off other loans.

Your home equity loan (HELOC) is counted towards the debt limit for your mortgage when deducting interest. This means that if your first mortgage is over the limit for deductibles, then the home equity loan won’t be deductible.

Discount Points

If you’re still within the limit to deduct all of the interest from your mortgage, then you might also be able to deduct what is called discount points. Discount points are paid when the mortgage closes. Some home buyers buy discount points to decrease the mortgage interest rate so that they pay less over the long term. In general terms, one discount point is equal to 1% of the mortgage amount.

Sometimes the word points can be confusing because many mortgage lenders also refer to their fees as loan origination points. These points are not deductible because they go towards paying the lender’s costs for processing the loan. Only discount points are used to reduce the mortgage or interest are deductible.

Tax On Your Property

There are tax breaks available for property taxes but there is a limit to this. The upper limit for this is $10,000 ($5,000 if you’re married and are filing separately). This upper limit is in combination with local income or state taxes.

tax-on-your-propertyExpenses For Your Home Office

If you are self-employed and use part of your home or condo solely for your business, then you can deduct some home office expenses.

The IRS has a simplified method that you can use to figure out the total amount you can deduct for your home office. If you visit the IRS website, they show you details about whether you qualify for this discount and deduction and even provide worksheets that you can use.

Home Improvement For Medical Complications

You can deduct money for improvements made to your home that are medically necessary. These could be for installing healthcare equipment or anything else that benefits you a dependant or even your spouse.

If it is a permanent improvement that actually increases the cost of your home, then it’s only partly deductible. The deductible cost is calculated by reducing it by the amount the property has increased in value.

Most improvements to make a home more accessible like installing railings, putting an entrance ramp, or widening doorways usually don’t increase the value of a property and are completely deductible.

The Premiums For Your Mortgage Insurance

At the time of writing, the cost of mortgage insurance is deductible. Any deduction made for this includes the amount paid for conventional loans and mortgage insurance, private mortgage insurance, or even FHA loans. It can also include any guarantee fees for VA mortgages or even USDA home loans.

If you want to claim this deductible for the 2021 tax year, the contract for the mortgage insurance must have been offered after 2006. You also have to have an adjusted gross income of under $109,000 if you’re married. This goes down to $54,000 if you are filing separately.

What Homeowner Costs Aren’t Tax Deductible?

Below we’ve listed the expenses that you cannot claim as a homeowner.

  • Premiums for home insurance
  • Association fees
  • Step duty taxes or transfer taxes
  • Utilities
  • Any rent paid before the home has closed
  • Refinancing costs
  • Depreciation
  • Any down payments or money paid in earnest or forfeited deposits
  • Any wages paid for domestic help
Richard Allan

Richard Allan

Richard Allan is the founder of Capital Bean and a passionate writer about personal finance, budgeting and how to save money at home and work.

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