Before you decide to simply take the standard deduction for 2022, check to see if your home ownership gives you a better break.
The 2017 Tax Cuts and Jobs Act of 2017 did reduce your allowable deductions. However, there is still an opportunity to save, especially if your mortgage is in its early years.
Do check the year-end statement from your mortgage lender to see how much you paid in mortgage interest during 2022.
The standard deduction for 2022 is $12,950 for individuals, $19,400 for heads of household, and $25,900 for couples filing jointly.
If your mortgage interest plus other home ownership deductions bring you to or near these numbers, look at your other expenses. If you file Schedule A to claim mortgage interest, then you can also claim property taxes, state and local income taxes (up to a combined $10,000), charitable contributions, and medical expenses that exceed 7.5% of your income. Together these may well bring you above the standard deduction.
Mortgage Interest is probably the largest number.
Note the changes. If you took out your loan before December 15, 2017, you can deduct interest on up to $1 million in mortgage debt. ($500,000 for single filers.)
If you took out your loan from that date forward, you can deduct interest on only the first $750,000 of mortgage debt.
Not that this $750,000 does include home equity loans and home equity lines of credit.
Note the restriction on Home Equity debt interest.
Interest on home equity loans is deductible ONLY if the money was used to make improvements to the home. Using it to consolidate credit card debt, pay for a wedding, or take a cruise, renders it non-deductible.
So if you take out a home equity loan or home equity line of credit to remodel the kitchen, be sure to save your receipts. Should you be audited you’ll need to show proof of where that money went.
Points you paid to buy down your interest rate.
Since discount points are essentially pre-paid interest, you can deduct them along with your mortgage interest. Each point is equal to 1% of your mortgage loan, so if you paid 2 points on a $400,000 loan, you can deduct $8,000.
Private Mortgage Insurance is no longer deductible.
Property tax deductions are also limited.
While you can claim property tax deductions for all the properties you own, there’s a $10,000 deduction cap on the combined amount of property taxes plus state and local income taxes. In states without income tax, you can deduct sales tax, but still only up to the combined limit of $10,000.
Energy Efficient upgrades to your home.
If you added solar panels or a solar water heater last year, you can deduct up to 30% of the cost, including installation.
In addition, if you upgraded exterior windows, doors, or skylights, or if you added insulation or paid for an energy audit, you can take advantage of a credit for up to $500. In general, the credit is limited to 30% of the cost of improvements. This credit expired on December 31, 2022.
However – Passage of the Inflation Reduction Act renewed and expanded the credit to up to $1,200 annually for property placed in service on or after January 1, 2023.
The home office deduction still stands, but…
The rules have changed and this deduction has gone away for W-2 employees who have a company office that they could use.
Self-employed people who actually have dedicated office space in their homes are still entitled to the deduction. Under the simplified home office deduction, they can deduct $5 per square foot of office space, up to 300 square feet.
Do note that your bedroom or dining room doesn’t count, just because you have a computer and printer, or a file cabinet set up in the corner. It must be a space used only for work.