Does home ownership still offer tax benefits? Yes, depending upon several factors:
The benefits aren’t as pronounced, however, since the Tax Cuts and Jobs Act went into effect on Jan. 1, 2018. This raised the standard deduction to $24,400 for married couples, so only about 5% of taxpayers now itemize.
It could still be in your best interests to itemize, especially if you have a recent mortgage, so the bulk of your monthly payment is going to interest.
Here’s what’s deductible under itemization:
Interest: Under the new rules, you’re entitled to deduct interest on loans up to $1 million if the mortgage went into effect before December 15, 2017. If your mortgage is dated December 16, 2017 or later, you can deduct interest on up to $750,000. This calculation will give your tax preparer a bit of extra work to do.
Still staying within the $1 million and $750,000 limits, you can also deduct the interest on Home Equity Lines of Credit – as long as the money was used to purchase or improve your house. If you used the money to finance a vacation, a wedding, or a new car, the interest is NOT deductible.
Property taxes: The deduction for property taxes is capped at $10,000 for those filing jointly, no matter how much you pay in taxes. Added to your mortgage interest and line of credit interest, this could bring you above the standard deduction, so be worthwhile to note.
Remember that if you have a mortgage, property taxes are built into the payment. Check your year end statement to see how much you’ve paid.
Private Mortgage Insurance: If you paid less than 20% down on your home, you’re no doubt paying for private mortgage insurance. This costs from 0.3% to 1.15%, depending upon the details of your loan. Again, check your end-of-year statement to see how much you paid in 2019.
Adding this to interest and property tax figures could make itemizing worthwhile.
Home Improvements to Age in Place: These can be deducted as part of your medical expense deduction, which must exceed 7.5% of your income and adds to your total itemized expenses on Schedule A.
These expenses must be deemed necessary by a doctor, and can include items such as entry ramps, grab bars, widening doors for wheelchair accessibility, installing railings, support bars, or other modifications to bathrooms, lowering or modifying kitchen cabinets and equipment, moving electrical outlets, and much more.
Credits and other deductions
Some energy efficiency upgrades are still a tax benefit.
Since these are credits, they’re worth more to your bottom line than a deduction, so be sure to claim them!
While most energy efficiency credits expired after 2016, you can still get tax credits for solar electric and solar water heating equipment. If you installed your equipment between January 1, 2017 and December 31, 2019, your credit will be 30% of the expenditure. This drops to 26% for 2020 installation and to 22% if you wait until 2021.
You can also take a credit for up to 10% of the cost of other energy efficient upgrades, such as doors and windows. There’s a lifetime cp of $500 on this, but if you’ve made the upgrades, you might as well take the available credits.
Home Office Deduction:
This is a deduction, but is reported on Schedule C, because it is a business expense. If your home office is your primary place of business, you’re entitled to deduct $5 per square foot, up to 300 square feet, for a total deduction of $1,500 per year.
Note that you may not take this deduction if you have another office and only work from home occasionally.
The bottom line: Owning a home is still a financially sound decision.
You may or may not save on taxes, due to the increased standard deduction. But you will build equity as each year goes by. And, when you obtain a fixed-rate mortgage, you will have the security of knowing that the only increase to your monthly payments will come from property taxes and insurance.
On the other hand, rent payments are likely to keep increasing.
If you’d like to explore the difference between continuing to rent and owning your own home, call us here at Homewood Mortgage, the Mike Clover Group.
We’ll be glad to get you pre-qualified for a loan, show you how much you can pay for a new home based on your current rent payments, and give you facts and figures with which to make a sound decision about your future.
Call us today at 800-223-7409