Tax season can be a busy time for homeowners, who have many deductions to compile when filing their tax returns.
Here are 11 tax season tips to help taxpayers get the most out of their home. Most require itemizing deductions. Be sure to check with your tax professional to make sure you’re eligible for these exemptions, deductions and credits:
Mortgage interest deduction
Mortgage interest is the most common tax deduction homeowners think about when putting their tax forms together.
“Taxpayers who itemize their deductions on Schedule A are eligible to deduct mortgage interest paid on up to $1.1 million of debt that was used to acquire or improve their primary or secondary residences,” says Laurie Samay, a certified financial planner and client service and portfolio manager with Palisades Hudson Financial Group in Stamford, Conn.
If the secondary residence is rented out, the taxpayer must use it for more than 14 days or more than 10 percent of the number of rental days, whichever is longer, to deduct the mortgage interest paid on the property, Samay says.
If the owner occupies their home at least 14 days and rents it at least 15 days per year, they can’t double up on the mortgage interest by claiming it as a homeowner and as a rental property, says Josh Zimmelman, owner of Westwood Tax & Consulting in Rockville Centre, N.Y. They can only deduct it on one, Zimmelman says.
Rental expenses such as utilities and cleaning can also be deducted if the home is rented for 15 days or more per year, he says. A homeowner who lives in the home and rents it out at least 15 days each year can take both the mortgage interest deduction and the rental property expenses deduction, he says.
Many of the same deductions for home ownership apply to home rentals, he says. These include mortgage interest and real estate taxes, and the rental income must be reported as income and taxes on the rental income must be paid.
Other parts of a home loan can also be deducted from taxes. Points paid when getting a mortgage can also be deducted, Zimmelman says. Points on a home purchase may be fully deducted for the year the home was bought if they were paid for up front. But they must be amortized over the life of the loan if they were financed as part of the loan or if the mortgage is for a rental or a refinanced home loan.
Payments for private mortgage insurance (PMI) may also be deducted by some homeowners, Zimmelman says.
State or local property taxes can be deducted by homeowners on their federal tax returns.
State tax deduction
Either state and local income taxes, or state and local sales taxes paid in the tax year, can be deducted. Choose the largest deduction, Samay says, though part of it won’t be applicable in states that don’t have an income tax, such as Texas and Florida.
If you choose the state and local sales tax deduction, include sales taxes paid on your home or home building materials, so long as they don’t include these taxes in the home’s cost basis, she says.
Personal use casualty, disaster and theft loss
Casualty and theft losses related to a home, and household items and vehicles that aren’t covered by insurance can be deducted from taxes, Samay says.
Losses for normal wear and tear or progressive deterioration of property can’t be deducted.
To figure the allowable deduction, calculate the loss from each casualty or theft event, net of any salvage value, insurance or other reimbursement and an additional $100 reduction per event, she says. The aggregate net losses that exceed 10 percent of your adjusted gross income can be deducted.
Nonbusiness energy property credit
Did you use a home equity line of credit last year to make your home more energy efficient?
Energy-efficient improvements such as adding insulation, energy-efficient exterior windows and doors are worth a credit for 10 percent of the costs, including installation costs for certain high-efficiency heating, air-conditioning and water heaters and stoves that burn biomass fuel.
A lifetime credit of $500 is allowed, of which only $200 may be used for windows.
Residential energy efficient property credit
Thirty percent of the cost of qualified alternative energy equipment installed on a primary home can be used as a tax credit. These include solar hot water heaters, solar electric equipment and wind turbines.
There is no dollar limit for most types of property, Samay says. Any unused credit can be carried forward to the following year’s tax return.
Up to $250,000 for single filers and $500,000 for married taxpayers filing jointly of the capital gain from the sale of a principal residence can be excluded for some taxpayers.
They must have used the home as their principal residence for at least two of the past five years, and have not excluded a gain from the sale of another home during the past two years.
Also, expenses incurred during the sale — such as home repairs, advertising and legal fees — can be deducted, Zimmelman says.
Buying a home because they had to move for work allows homeowners to deduct the moving expenses, depending on how far they moved, Zimmelman says. Deductible expenses include money spent on travel, moving trucks and storage units.
This may not apply to every homeowner, but people who use their homes as a business office can get a few deductions, says Scott Vance of Taxvanta Tax Services. The home office must be used regularly for your business and it has to be your “principal” place of business.
The IRS has a simplified option for figuring the deduction for business use of a home, starting with a standard deduction of $5 per square foot of home used for business, up to 300 square feet.
Other home office deductions include, according to Vance:
- Direct costs such as painting or new carpet for an office, which can be deducted entirely.
- Indirect costs such as personal expenses that are converted to business expenses if your office takes up 10 percent of your total home space. Indirect costs include utilities, insurance, homeowners fees, security, general maintenance and repairs.
- Rent or depreciation can be deducted as the percentage of the home.
“You are limited on how much you can write off,” Vance says. “Home office deductions cannot exceed your home based business income.”