On March 17, 2021, the IRS announced that the federal income tax filing due date for individuals for the 2020 tax year will be automatically extended from April 15, 2021, to May 17, 2021. It’s a pleasant reminder that there are people behind those three letters … people who recognize that times are hard.
Perhaps the IRS is not just some nasty, nebulous machine churning through paper and chasing down dollars. Maybe there are ways that the IRS actually wants to help or reward us for making investments in the larger economy. Some of the most generous deductions the IRS offers to individuals are the tax benefits they offer to homeowners.
When you buy a house, you become eligible for particular tax deductions that are not available to renters. You may also qualify for certain tax credits with homeownership. Deductions and credits are two different things. Deductions reduce your adjusted gross income, which in turn reduces your tax liability. Credits, on the other hand, reduce your tax liability at the end, like a coupon that is applied after the total.
Tax Deductions Available for Homeowners
Most of the significant tax benefits for homeowners are deductions. Here are some common types of deductions homeowners take.
The IRS let you deduct the interest you pay on your mortgage to buy, build, or improve your home. You can deduct the interest paid on up to $750,000 of mortgage debt if you’re an individual taxpayer or a married couple filing a joint tax return. For married couples filing separately, the limit is $375,000. You may even be able to deduct the interest on the mortgage of a second home, too, provided that the combined mortgage debt does not exceed the cap.
Real Estate Taxes
The money you pay in property taxes is also deductible. This deductible amount is capped at $10,000 for single taxpayers and married couples filing taxes jointly. The deduction limit is $5,000 for married couples filing separately. You can find out how much property tax you pay from your lender (if you have an escrow account) or from your municipality (if you pay them directly).
In some states, this deduction covers all of the property taxes you pay. Unfortunately, if you own a home in a state with high property taxes, such as California, Connecticut, Illinois, Massachusetts, New Jersey, or New York, your property taxes might exceed the cap, so you wouldn’t be able to deduct all of them.
Another tax benefit of buying a home is the ability to deduct mortgage points you paid upfront when closing on your home purchase. One mortgage point, also called a discount point, is equal to 1% of your loan amount.
In general, you deduct points over the life of your loan rather than in the year you paid them. There are exceptions to this rule if you meet a series of tests that are defined by the IRS.
If you work from home or have a home-based business, you may qualify for the home office deduction. To qualify, a portion of your home (like the bedroom you turned into an office, for example) must be used exclusively and regularly for business purposes.
Many more people have been working from home over the last year. (We’re looking at you, COVID.) It’s important to note that this deduction only applies to you if you are self-employed or can show that your home is the main location used to conduct your business. If you’re just working from home during the pandemic, you likely won’t qualify for this deduction.
Tax Credits Available for Homeowners
There are some tax credits that may be available for homeowners, too, depending on circumstances.
- If you’ve made energy improvements or energy-efficient upgrades to your home, such as installing solar panels, you might qualify for the residential energy-efficient property credit. This eco-friendly tax break for homeowners provides a residential energy credit that ranges from 22% to 30% of the improvement cost, depending on what year the energy upgrades were made. This credit expires Dec. 31, 2021, so if you want to make some green home improvements, now is the time to do them.
- You might also be eligible for a mortgage credit if you were issued a qualified Mortgage Credit Certificate (MCC) by a state or local governmental agency under a qualified mortgage credit certificate program.
Let’s face it: if times are so tough that the IRS is pushing back tax deadlines (again), then it’s for real. As we face the inevitable tax due date, it’s up to us to look for ways we can maximize our resources and take advantage of any deductions and credits we can find. Owning a home is one of the best ways to find those. We’d love to help you find a house so you can claim all the tax benefits of homeownership, no matter when taxes are due.
Editorial Note: The contents of this article should not be construed as tax advice or guidance.