7 tax credits every homeowner should be aware of
Jennifer Noonan | Improvement Center Columnist | February 8, 2016
The benefits of home ownership are many. There is, of course, the monetary investment you hope will increase over time, and even more than that, most people gain a sense of stability and belonging with the purchase of a home. When you buy a home, you're establishing roots. But beyond all that, owning any type of home - single-family, condo, cooperative, or mobile home - is a major asset come tax time, and can save you money on what you owe the government. These 7 tax credits are ones every homeowner should be aware of, and take advantage of if they are eligible.
1. Mortgage interest
Most people purchase homes with a mortgage, and thereby pay monthly interest on that loan to a bank. That interest is tax deductible. The total you paid in mortgage interest is on Form 1098. Use that total when you fill out Schedule A for your itemized deductions. This credit is available for primary residences, as well as secondary residences.
If you paid points when you took out a mortgage for your home, you can take a tax deduction. In general, because points are considered pre-paid interest, you can't deduct them fully in the year that you purchased the home. Rather, you get to deduct a portion of them each year over the life of the loan. Points can also be called loan origination fees, discount points, loan discount, or maximum loan charges. Points paid for refinancing can be deducted over the life of the new mortgage. Just divide the amount you paid in points by the number of years of your loan to calculate how much you can deduct each year.
3. Property taxes
The annual real estate taxes you pay on your home are also deductible. If you have a mortgage, you are probably paying your taxes through an escrow account. Look on your mortgage interest statement to see the total real estate taxes you paid. If you purchased your home in the tax year you're filing for, you will also be able to deduct any real estate taxes you paid at settlement. So take a close look at your closing statement.
4. Interest on home equity loans
If you've taken out a home equity loan or home equity line of credit, you can deduct the interest on up to $100,000 of what you borrowed. And it doesn't matter how you use the money.
5. Renewable-energy tax credits
If you've installed any renewable energy systems or equipment in your home, you could be eligible for the Renewable Energy Efficiency Property Credit. It's a big tax deduction. Up to 30% of the cost and installation of equipment. This includes solar panels, wind energy, fuel cells, and geothermal heating systems. The equipment must be installed and operating by December 31, 2016 to be eligible. If you've been considering an investment in a renewable energy system, now is the time move.
6. Home improvements
You cannot deduct the cost of home improvements. But keep your receipts anyway. When you sell your home, you can add the cost of those improvements to the price you paid for the home, thereby reducing your capital gains on the sale. That will be a meaningful tax break to you. And, of course, if you take a loan out to make home improvements, you can deduct the interest on that loan.
7. Home office deduction
These days, more and more people are working from home. If you are one of those people, you may be able to write off the part of your home that you use for your business. For a home office to be eligible for this deduction it must be exclusively used on a regular basis for your business. There is more than one way to calculate the expense, but the simplified option lets you deduct $5/square foot, up to 300 square feet. Many stipulations apply, so be sure to check with the IRS or your accountant before claiming this deduction.
Homeowner tax credits can change year to year, depending on how the tax code gets amended. So, whether you're a brand new homeowner, or have owned a home for 40 years, do your due diligence each tax season, and see what homeowner tax deductions are available to you. You could save lots of money on your tax bill - and maybe even qualify for a refund.