Top 10 Tax Deductions Every Homeowner Should Know

Owning a home comes with many financial responsibilities, but it also offers numerous tax benefits that can help you save money. Understanding the tax deductions available to homeowners can significantly impact your annual tax bill. Here’s a comprehensive guide to the top 10 tax deductions every homeowner should know:

1. Mortgage Interest Deduction

One of the most significant tax benefits of homeownership is the mortgage interest deduction. Homeowners can deduct the interest paid on mortgage loans up to $750,000 ($1 million for loans taken before December 15, 2017) used to buy, build, or improve their primary or secondary residences. This deduction can substantially reduce taxable income, especially in the early years of a mortgage when interest payments are highest.

2. Property Tax Deduction

Property taxes paid on your primary residence and any other real estate you own are fully deductible on your federal income taxes. This deduction is particularly valuable in states with higher property tax rates and can be claimed in the year you pay them, regardless of when they are assessed.

3. Home Office Deduction

If you use a portion of your home exclusively for business purposes, you may qualify for the home office deduction. The space must be used regularly and exclusively for business, and you can deduct a percentage of home-related expenses like utilities, insurance, and repairs based on the proportion of your home used for business.

4. Points Deduction

Points, also known as loan origination fees or discount points, paid to obtain a mortgage are generally tax-deductible in the year they are paid. Each point is equal to 1% of the loan amount, and if you meet certain criteria, such as using the loan to purchase your primary residence and the points being within the usual range for your area, you can deduct these costs.

5. Home Improvement Loan Interest Deduction

Interest on a home improvement loan used to make “capital improvements” (those that increase your home’s value or prolong its life) may be tax-deductible. Examples include renovations to kitchens, bathrooms, or adding a new room.

6. Energy Efficiency Upgrades Deduction

Homeowners who make qualifying energy-efficient improvements, such as installing solar panels, geothermal heat pumps, or energy-efficient windows and doors, may be eligible for a tax credit. Unlike deductions, which reduce taxable income, credits directly reduce the amount of tax owed.

7. Medical Home Improvements Deduction

If you make medically necessary improvements to your home, such as installing ramps or widening doorways for a disabled individual, you may be able to deduct the cost of these improvements as medical expenses, provided they exceed 7.5% of your adjusted gross income.

8. Casualty and Theft Loss Deduction

If your home is damaged or destroyed by a sudden, unexpected event such as a fire, storm, or theft, and the loss is not covered by insurance, you may be able to deduct the casualty or theft loss. The deductible amount is limited, and you must subtract $100 from each casualty or theft event and then subtract 10% of your adjusted gross income from the total.

9. Moving Expenses Deduction (in some cases)

While the moving expense deduction was eliminated for most taxpayers starting in 2018 due to tax law changes, members of the Armed Forces on active duty who move due to a military order and certain non-military taxpayers moving for a new job may still be eligible to deduct moving expenses related to their residence.

10. Mortgage Insurance Premiums Deduction

If your mortgage originated after 2006 and you make a down payment of less than 20%, you likely have private mortgage insurance (PMI). The premiums paid for PMI may be tax-deductible, subject to income limits.

Conclusion

Owning a home offers several valuable tax deductions that can help homeowners reduce their taxable income and overall tax burden. To maximize these benefits, it’s essential to keep accurate records of all eligible expenses and consult with a tax professional to ensure compliance with current tax laws and regulations. By taking advantage of these deductions, homeowners can make homeownership more affordable while optimizing their tax strategy.