The answer is “It depends.” Now that the standard deduction has been raised to $12,400 for individuals, $18,600 for heads of household, and $24,800 for married couples filing jointly, you may gain more by taking the standard deduction.
However, it pays to check before you file. Take some time to do the calculations.
Here’s a rundown on the tax breaks available to homeowners who itemize.
Mortgage Interest is first, foremost, and largest. Couples filing jointly can still deduct interest on up to $1 Million in mortgage debt if they purchased prior to December 15, 2017. For loans after that date, only the interest on the first $750,000 of mortgage debt is deductible.
Since interest makes up the bulk of the payment in the early years of a mortgage, you may gain from this deduction, at least for a few years after a purchase or refinance.
Your mortgage lender sends a statement at the end of each year showing how much you paid in interest, and if they’re escrowed, how much you paid for property taxes and homeowner’s insurance. If your debt is $750,000 or less and your mortgage interest is more than the standard deduction, do itemize. If the debt is higher, ask your financial advisor for help in doing the calculations.
Mortgage Points are still deductible, but note that they must be discount points, not origination points. Points are, after all, just pre-paid interest.
Private Mortgage Insurance is deductible for some borrowers. It is fully deductible if your adjusted gross income is less than $100,000. Between $100,000 and $109,000 it is 90% deductible.
Interest on Home Equity loans is deductible – again, with restrictions. The interest is only deductible if home improvements are the purpose of the loan. You cannot deduct interest on a home equity loan used to fund a vacation or your daughter’s wedding. Deductibility is further limited by the limits on deducting home mortgage interest. You may only deduct interest on $750,000 of debt on both loans combined.
Property taxes offer limited relief. There’s a $10,000 cap on tax deductions, whether property tax, state and local income tax, or deductible sales tax. You are allowed to bundle tax from all the real estate you own and deduct up to $10,000.
Pet-related home deductions…
- When you are required to move for work, you’re entitled to a deduction for moving expenses. You’re also entitled to deduct the cost of moving your pets. Talk with your tax preparer about the requirements.
- Purchase and care of a guard dog for your business premises is deductible even if your business is in your home.
- Pest control – I was amazed to read this one, but purchase and care of a cat who “patrols” your premises for vermin is deductible. This is especially true if special circumstances apply. For instance: living next door to a landfill.
Tax credits are even nicer than deductions, and energy-efficient upgrades qualify.
If you added solar panels or a solar-powered water heater in 2020, do look into taking this 26% credit on the cost of purchase and installation. To qualify, solar panels must provide half of the energy used by the home (only your primary residence) and they can’t be used to heat your hot tub or pool.
Unless the rules change once again, the credit for 2021 purchases will drop to 22% before being eliminated.
You can take a home office deduction even if you don’t itemize…
While you are no longer allowed to claim this deduction if you’re a W-2 employee with access to an office elsewhere, self-employed individuals who work from home are entitled to the deduction on Schedule C – Business income and expense.
There are two ways to calculate the deduction. One is to calculate mortgage interest, taxes, insurance, and utilities, then use a percentage of the square footage to find the expense attributable to the home office. The other is to take the simplified deduction – $5 per square foot of office space, up to 300 square feet.
Do note that it must be a dedicated home office – used only for work. If you have a desk in the corner of your TV room, it isn’t deductible.
Is it time for you to take out a home equity loan to purchase solar equipment?
If you’ve been thinking about it, 2021 is the time to do it, before the credit expires. So call us …
Homewood Mortgage – the Mike Clover Group
Call us today at 800-223-7409