With Tax Day just around the corner (April 17th!), we wanted to break down the numerous tax breaks that may be available to you as a homeowner. As you prepare to file your taxes, we hope that this list will provide some clarity and most importantly, help save you some money!
#1 Mortgage interest
This is one of the biggest benefits of owning a home. For most middle-class Americans, it is the largest potential deduction. Keep in mind, the more recent your home purchase, the greater your tax savings because more interest is paid (vs. principal) in the first few years. According to TurboTax expert, Lisa Greene-Lewis, a 30-year mortgage on a $300,000 home at current rates will run you more than $12,000 in interest payments during the first year.
The new tax bill will change things for 2018. Homeowners with a mortgage that went into effect before Dec. 15, 2017 will be able to deduct interest on loans up to $1 million. However, anyone who closed on a mortgage after that, the cap for deducting interest is lowered to $750,000. If you have two homes, that’s a combined total (note: your second home cannot be a rental property).
#2 Property taxes
Property taxes are deductible and they can lead to major savings for some. According to the U.S. Census Bureau, the average household property tax is $2,127. In Tennessee, the average homeowner pays much less than that (yay!). If your property taxes are built into your monthly payment, here’s a guide on how to calculate your amount.
In 2018, the rules are changing. Property tax will no longer be a separate deduction, but will be included with state and local sales and income taxes. The cap for those of you who are married and filing jointly will be $10,000.
#3 Private mortgage insurance
If you put less than 20% down on your home, you most likely have private mortgage insurance or PMI. If you itemize and your insurance contract was issued after 2006, you can deduct the amount of your PMI. According to Realtor.com, here’s an example of how much you can save: If you make less than $100,000 and you put down 5% on a $200,000 home, you’ll pay about $1,500 in annual PMI. Therefore, you’ll cut your taxable income by $1,500.
Next year it will become more difficult for itemizers to deduct PMI since the standard deduction is nearly doubling (reminder: your total itemized deductions only reduce your taxes to the extent that they are greater than your standard deductions). According to Zillow, the percentage of homeowners who itemize their tax returns will drop from 44% to 14% in 2018.
2017 Standard Deductions:
2018 Standard Deductions:
#4 Energy-efficiency upgrades
The Residential Energy Efficient Property Credit is a tax incentive for installing alternative energy upgrades in the home. Though most of these credits expired at the end of last year, two are still available- credits for solar electric and solar water heating equipment. Tax credits are even better than a deduction because they are dollar-for-dollar savings. It’s important to note that the percentage of credit varies based on the date of installation, so make sure you save your documentation.
Other tax breaks to consider…
A home office: If you work from home, your office space and expenses can be deducted. You can take a $5-per-square foot deduction for up to 300 square feet (note: the maximum deduction is $1,500). There are strict rules on what constitutes a fully-dedicated home office, so make sure you do your research. For 2018, this deduction will be eliminated for employees who have an office but work from home occasionally.
Home improvements to age in place: Any renovations such as wheelchair ramps, grab bars in bathrooms, widening doorways, lowering cabinets and adding stair lifts fall into this category. You’ll need a letter from your doctor to prove these changes were medically necessary. The improvements will also have to exceed 7.5% of your adjusted gross income.
Interest on a home equity line of credit: If you took out a home equity line of credit (HELOC) in 2017 or before, the interest you pay on the line is deductible. Those filing jointly can deduct up to $100,000 and those filing single can deduct $50,000 in interest paid on home equity debt. In 2018, the new tax law will eliminate this deduction unless you used your HELOC to buy, build or improve a property.
Points: If you purchased a property but paid “points” to the bank in order to get a better rate, that expense is tax deductible in the year they were paid. A point is typically 1% of your loan amount.
Casualty losses: If you suffered property damage and you were not reimbursed by an insurance company, you may be eligible for this deduction. Your casualty loss deduction must exceed 10% of your adjusted gross income. Make sure you document everything and take advantage of this tax break!
We hope that this list has been helpful to you as you near the Tax Day deadline! Please feel free to reach out with any questions. We’d also be happy to refer you to some of our preferred CPAs, insurance agents, lenders and financial advisors.
If you’re looking to buy or sell real estate, contact The Southbound Group! We specialize in the Middle Tennessee (Nashville) area, but can help any buyer or seller nationally!
SOURCES: USA Today, Realtor.com, hrblock.com, The Nashville Business Journal, forbes.com