February 24th, 2019 9:12 AM by Jackie A. Graves
FREEHomePurchaseAnalysis FREEFHAHomePurchaseAnalysis FREEVAHomePurchaseAnalysis
are the tax benefits of owning a home? Homeowners might be
wondering this right around now as they prepare to file their taxes.
Especially since the new Tax Cuts
and Jobs Act—the most substantial overhaul to the U.S. tax code in more than 30
years—went into effect on Jan. 1, 2018. You might even be wondering how
the new plan affects the tax perks of homeownership.
Well, look no
further than this complete guide to all the tax benefits of owning a home. We
break down exactly what's changed, and all the tax breaks homeowners should be
aware of when they file their 2018 taxes.
Read on to
make sure you aren't missing anything that could save you money!
What changed: In the past, one of the most lucrative tax breaks for
homeowners was the deduction for mortgage interest. The new tax code didn't
eliminate the deduction, but it did change substantially. The new tax bill
allows homeowners with a mortgage that went into effect before Dec. 15,
2017, to continue to deduct interest on loans up to $1 million.
for acquisition debt incurred after Dec. 15, 2017,
the tax reform only allows the homeowner to deduct the interest on the first
$750,000," says Lee Reams Sr.,
chief content officer of TaxBuzz.
Why it's still important: The ability to deduct the interest on
a mortgage continues to be a big benefit of owning a home. And the more
recent your mortgage, the greater your tax savings.
mortgage payments are amortized, the first ones are almost all
interest," says Wendy Connick, owner
of Connick Financial Solutions. (See how your loan amortizes and how much
you're paying in interest with this mortgage calculator.)
Note that the
mortgage interest deduction is an itemized deduction. This means that for it to
work in your favor, all of your itemized deductions (there are more below) need
to be greater than the new standard deduction, which the Tax Cuts and Jobs Act
nearly doubled to $24,400 for a married couple (it used to be $12,700). For
individuals the deduction is $12,200, and it's $18,350 for heads of household.
As a result,
only about 5% of taxpayers will itemize deductions this filing season, says
Connick. "In the past it was more like 30%."
homeowners, itemizing simply may not be worth it this year. So when would
itemizing work in your favor? As one example, if you're a married couple who
paid $20,000 in mortgage interest and $6,000 in state and local taxes, you
would exceed the standard deduction and be able to reduce your taxable income
by an additional $2,000 by itemizing.
What changed: In the past, property taxes in
their entirety had always been deductible. (Here's more info on how to calculate property taxes.)
But now, this deduction is capped at $10,000 for those married filing jointly
no matter how high the taxes are.
Why it's still important: Taxpayers can still take
one $10,000 deduction, says Brian Ashcraft,
director of compliance at Liberty Tax Service. Just note that this year,
property taxes are on that itemized list of all of your deductions that
must add up to more than the standard deduction ($24,000 for a married couple)
to be worth your while. And remember that if you have a mortgage, your
taxes are built into your monthly payment.
What changed: If you put less than 20% down on your home, odds are
you're paying private mortgage insurance,
or PMI, which costs from 0.3% to 1.15% of your home loan. Good news! The new
tax bill extended the ability to deduct the interest on this insurance, a
deduction that was set to expire, says Connick.
Why it's still important: The PMI interest deduction is also an
itemized deduction. But if you can take it, it might help push you over the
$24,000 standard deduction. And here's how much you'll save: If you make
$100,000 and put down 5% on a $200,000 house, you'll pay about
$1,500 in annual PMI premiums and thus cut your taxable income by
What changed: Nada. The Residential Energy Efficient Property Credit was
a tax incentive for installing alternative energy upgrades in a home. Most
of these tax credits expired after December 2016; however, two credits are
still around. The credits for solar electric and solar water
heating equipment are available through Dec. 31, 2021, says Josh
Zimmelman, owner of Westwood Tax & Consulting, a New
York–based accounting firm.
Why it's still
important: You can still save a tidy sum on your solar energy.
And—bonus!—this is a credit, so no
worrying about itemizing here. However, the percentage of the credit varies
based on the date of installation. For equipment installed between January
1, 2017, and December
31, 2019, 30% of the expenditures are eligible for
the credit. That goes down to 26% for installation between Jan. 1 and Dec. 31, 2020, and then to 22%
for installation between Jan. 1 and Dec. 31, 2021.
What changed: In the good ol'
days of 2017, if you worked from home at all, your office space and expenses
could be deducted. Now this deduction is gone completely
for employees who have an office to go to but work from home occasionally.
Why it's still
important: Good news for all self-employed people whose home office
is the main place they work, you can still take
a $5-per-square-foot deduction for up to 300 square feet of office space,
which amounts to a maximum deduction of $1,500. Understand, however, that there
are strict rules on what constitutes a dedicated, fully deductible home office
space. Here's more on the much-misunderstood home office tax deduction.
What changed: Not much, except
that for this filing season, these home improvements will need to exceed
7.5% of your adjusted gross income. So if you make $60,000, this
deduction kicks in only on money spent over $4,500.
Why it's still
important: The cost of these improvements can result in a nice
tax break for many older homeowners who plan to age in place and add renovations such as
wheelchair ramps or grab bars in slippery bathrooms. Deductible improvements
might also include widening doorways, lowering cabinets or electrical fixtures, and
adding stair lifts. Caveat: You’ll need a letter from your doctor to prove
these changes were medically necessary.
What changed: In the past,
people used these loans to do all sorts of things: pay for college, throw a
wedding, or make improvements to their home. And they could legally deduct
the interest. Not anymore, even if you took out the loan before the new tax
Now if you have a home equity line of credit,
or HELOC, the interest you pay on that loan is deductible only if that
loan is used specifically to "buy, build, or improve a
property," according to the IRS.
Why it's still important: You'll still save cash if your
home's crying out for a kitchen overhaul or half-bath. Major note: You can
deduct only up to the $750,000 cap, and this is for the amount you pay in
interest on your HELOC and mortgage combined.
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