Everyone knows that owning a home is the American dream, but if you’re like most homeowners you may have discovered that you can no longer write off your property taxes or claim the mortgage interest deduction
The standard deduction is the amount everyone gets to claim whether they have actual deductions or not. It skyrocketed after the 2017 tax law changes, and has gone up again, incrementally, for tax year 2020. It’s now $24,800 for married, joint-filing couples (up from $24,000 in tax year 2018). It’s $18,650 for heads of household (up from $18,000). And $12,400 for singles (up from $12,000).
Many more people now find the standard deduction is higher than their itemizable write-offs. In fact, the proportion of homeowners who now find it advantageous to itemize their deductions (including mortgage interest and property taxes) under the new rules has fallen from about one in three to around one in 10.
This doesn’t necessarily mean that those who no longer itemize will pay more taxes, it just means that they’ll no longer get a tax incentive for buying or owning a home.
The increase in the standard deduction for homeowners and nonhomeowners also has another downside: There’s no longer a personal exemption. You can no longer exempt from your income $4,150 for each member of your household. And that might temper the benefit of a higher standard deduction, depending on your particular situation.
For example, single filers and married couples without children might still come out ahead. This is because their increase in the standard deduction is more than the amount lost by the repealed personal exemption.
However, families with two or more dependent children over age 16 are likely to come out losers from the loss of the personal exemption. This is because the loss of the personal exemption is greater than the extra amount included in the increased standard deduction.
Families with children under age 17 received an additional $1,000 in child credits, which, depending on their tax bracket, is more valuable than the loss of the personal exemption.
The takeaway: Your household composition will probably affect whether you gained or lost under the 2017 tax law.
Mortgage Interest Deduction
One of the neatest deductions itemizing homeowners can take advantage of is the mortgage interest deduction, which you claim on Schedule A. To get the mortgage interest deduction, your mortgage must be secured by your home — and your home can be a house, trailer, or boat, as long as you can sleep in it, cook in it, and it has a toilet.
Interest you pay on a mortgage of up to $750,000 million — or $375,000 if you’re married filing separately (however, if your loan was in place by Dec. 15, 2017, the loan is grandfathered, and the old $1 million maximum amount still applies.) — is deductible when you use the loan to buy, build, or improve your home.
If you take on another mortgage (including a second mortgage, home equity loan, or home equity line of credit) to improve your home or to buy or build a second home, that counts towards the $750,000 limit.
If you use loans secured by your home for other things — like sending your kid to college — you can no long write off the interest on this portion of your loan.
State and Local Tax Deduction
The state and local taxes (SALT) you pay — including income (or sales in states without a state income tax), and property taxes — are itemizable write-offs. But, the tax rules say you can’t deduct more than $10,000 for all your state and local taxes combined, whether you’re single or married. (It’s $5,000 per person if you’re married but filing separately.)
The SALT cap is bad news for folks in areas with high taxes such as New York and California. The majority of homeowners in around 20 states have been writing off more than $10,000 in SALT each year, so many will lose some of this deduction.
You can deduct on Schedule A the real estate property taxes you pay. If you have a mortgage with an escrow account, the amount of real estate property taxes you paid shows up on your annual escrow statement.
If you bought a house this year, check your HUD-1 settlement statement to see if you paid any property taxes when you closed the purchase of your house. Those taxes are deductible on Schedule A, too.
Prepaid Interest Deduction
Prepaid interest (or points) you paid when you took out your mortgage is generally 100% deductible in the year you paid it along with other mortgage interest.
If you refinance your mortgage and use that money for home improvements, any points you pay are also deductible in the same year.
But if you refinance to get a better rate or shorten the length of your mortgage, or to use the money for something other than home improvements, such as college tuition, you’ll need to deduct the points over the life of your mortgage. Say you refi into a 10-year mortgage and pay $3,000 in points. You can deduct $300 per year for 10 years.
So what happens if you refi again down the road?
Example: Three years after your first refi, you refinance again. Using the $3,000 in points scenario above, you’ll have deducted $900 ($300 x 3 years) so far. That leaves $2,400, which you can deduct in full the year you complete your second refi. If you paid points for the new loan, the process starts again; you can deduct the points over the life of the loan.
Home mortgage interest and points are reported on Schedule A of IRS Form 1040.
Your lender will send you a Form 1098 that lists the points you paid. If not, you should be able to find the amount listed on the HUD-1 settlement sheet you got when you closed the purchase of your home or your refinance closing.
PMI and FHA Mortgage Insurance Premiums
You can deduct the cost of private mortgage insurance (PMI) as mortgage interest on Schedule A if you itemize your return.
What’s PMI? If you have a mortgage but didn’t put down a fairly good-sized down payment (usually 20%), the lender requires the mortgage be insured. The premium on that insurance can be deducted, so long as your income is less than $100,000 (or $50,000 for married filing separately).
If your adjusted gross income is more than $100,000, your deduction is reduced by 10% for each $1,000 ($500 in the case of a married individual filing a separate return) that your adjusted gross income exceeds $100,000 ($50,000 in the case of a married individual filing a separate return). So, if you make $110,000 or more, you can’t claim the deduction (10% x 10 = 100%).
Besides private mortgage insurance, there’s government insurance from FHA, VA, and the Rural Housing Service. Some of those premiums are paid at closing, and deducting them is complicated. A tax adviser or tax software program can help you calculate this deduction. Also, the rules vary between the agencies.
Vacation Home Tax Deductions
The rules on tax deductions for vacation homes are complicated. Do yourself a favor and keep good records about how and when you use your vacation home.
- If you’re the only one using your vacation home (you don’t rent it out for more than 14 days a year), you deduct mortgage interest and real estate taxes on Schedule A.
- Rent your vacation home out for more than 14 days and use it yourself fewer than 15 days (or 10% of total rental days, whichever is greater), and it’s treated like a rental property. Your expenses are deducted on Schedule E.
- Rent your home for part of the year and use it yourself for more than the greater of 14 days or 10% of the days you rent it and you have to keep track of income, expenses, and allocate them based on how often you used and how often you rented the house.
Taxpayers who upgrade their homes to make use of renewable energy may be eligible for a tax credit to offset some of the costs. As of the 2018 tax year, the federal government offers the Nonbusiness Energy Property Credit. The credits are good through 2019 and then are reduced each year through the end of 2021.
Nonbusiness Energy Property Tax Credit
Equipment and materials can qualify for the Nonbusiness Energy Property Credit only if they meet technical efficiency standards set by the Department of Energy. The manufacturer can tell you whether a particular item meets those standards. For this credit, the IRS distinguishes between two kinds of upgrades.
- Home insulation
- Exterior doors
- Exterior windows and skylights
- Certain roofing materials
- Electric heat pumps
- Electric heat pump water heaters
- Central air conditioning systems
- Natural gas, propane or oil water heaters
- Stoves that use biomass fuel
- Natural gas, propane or oil furnaces
- Natural gas, propane or oil hot water boilers
- Advanced circulating fans for natural gas, propane or oil furnaces
Details of nonbusiness tax credit
You can claim a tax credit for 10% of the cost of qualified energy efficiency improvements and 100% of residential energy property costs. However, significant limits apply:
- This credit is worth a maximum of $500 for all years combined, from 2006 to the present.
- Of that combined $500 limit, a maximum of $200 can be for windows.
- The maximum tax credit for a furnace circulating fan is $50.
- The maximum credit for a furnace or boiler is $150.
- The maximum credit for any other single residential energy property cost is $300.
Tax credits are especially valuable because they let you offset what you owe the IRS dollar for dollar for up to 10% of the amount you spent on certain home energy-efficiency upgrades.
Residential Renewable Energy Tax Credit
Equipment that qualifies for the Residential Renewable Energy Tax Credit includes solar, wind, geothermal and fuel-cell technology:
- Solar panels, or photovoltaics, for generating electricity. The electricity must be used in the home.
- Solar-powered water heaters. The water heated by the system must be used inside the home, and at least half of the home’s water-heating capacity must be solar. (Solar heaters for swimming pools and hot tubs do not qualify.)
- Wind turbines that generate up to 100 kilowatts of electricity for residential use.
- Geothermal heat pumps that meet federal Energy Star guidelines.
- Fuel cells that rely on a renewable resource (usually hydrogen) to generate power for a home. The equipment must generate at least 0.5 kilowatts of power.
Renewable energy tax credit details
According to the U.S. Department of Energy, you can claim the Residential Energy Efficiency Property Credit for solar, wind, and geothermal equipment in both your principal residence and a second home. But fuel-cell equipment qualifies only if installed in your principal residence.
Home Sale Gain Exclusion
Finally, with the right knowledge, information, and patience, you can completely avoid paying taxes on the gain from the sale of your home (or a rental property or vacation home) — stick the gain in your pocket and thumb your nose at Uncle Sam. For more on this topic read Avoid Paying Taxes When You Sell Your Home.
If you, or someone you know is considering Buying or Selling a Home in Columbus, Ohio please give us a call and we’d be happy to assist you!
The Opland Group Specializes in Real Estate Sales, Luxury Home Sales, Short Sales in; Bexley 43209 Columbus 43201 43206 43214 43215 Delaware 43015 Downtown Dublin 43016 43017 Gahanna 43219 43230 Grandview Heights 43212 Galena 43021 Hilliard 43026 Lewis Center 43035 New Albany 43054 Pickeringto, 43147 Polaris Powell 43065 Upper Arlington 43220 43221 Westerville 43081 43082 Worthington 43235