The U.S. tax code is subject to change, and the Tax Cuts and Jobs Act, passed in 2017, brought forth a number of changes that work to the typical American’s advantage. For example, as part of that overhaul, virtually all individual tax brackets were lowered so that workers could retain a higher percentage of their earnings as they got paid. And while some changes were instituted that limit homeowners’ ability to lower their taxes, these four benefits are still very much alive and well.
1. The mortgage interest deduction
The payment you send to your mortgage lender each month is divvied up between principal and interest. In the earlier stages of your repayment period, your interest payments will be higher, and they’ll gradually decrease as your loan balance gets paid off.
The principal portion of your mortgage payments doesn’t qualify for a tax break, but you are allowed to deduct the interest portion, provided you take out a $750,000 mortgage or less. (This limit drops to $375,000 if you’re married and file separately.) That said, if you signed your mortgage prior to Dec. 15, 2017, you can deduct the interest on a home loan of up to $1 million (half that amount if you’re married filing separately), since that’s what the old rules allowed for.
2. The property tax deduction
Property taxes are a huge burden in some corners of the country, and the good news is that you’re still allowed to deduct yours on your tax return. The bad news, however, is that you’re limited to a total of $10,000 between all state and local taxes, which includes state income tax and property taxes. If you live in a state where you’re taxed heavily on your income and your home, you may not get to deduct those amounts in full (whereas prior to 2018, the state and local tax deduction was unlimited).
Here’s how that might play out: Imagine your state income tax totals $6,000 in a given year, and your property taxes are $8,000. Between the two, you can only deduct $10,000, so that additional $4,000 does you no good as far as lowering your taxes goes. Also, if you’re married filing separately, the state and local tax deduction is limited to $5,000.
3. The home equity loan/HELOC interest deduction
If you have equity in your home, you can borrow against it when you need money, whether it’s to make repairs to your property or finance another large purchase having nothing to do with your home. You have two choices when tapping your home equity: a home equity loan, and a home equity line of credit (HELOC).
With a home equity loan, you borrow a specific amount -- say, $30,000 -- and then pay it back, with interest, on a preset schedule. With a HELOC, you gain access to a line of credit that you can withdraw from as the need arises, and you’re only liable for interest on the amount you withdraw. If you’re given a $30,000 HELOC but you only draw down $10,000 of it, you’ll just repay that $10,000, with interest.
It used to be that interest on a home equity loan or HELOC was deductible in any situation. Now, you can only deduct that type of interest if the loan or HELOC in question is used for home improvement purposes. And to be clear, repairs don’t count as improvements, so if you’re using that money to fix a bum heating system, you’re out of luck. But if you’re using it to finish a basement or put on an addition, you should qualify to snag the tax break.
4. The rental expense deduction
If you rent out a portion of your home -- say, a finished garage or basement -- you’ll need to pay taxes on your rental income. But if you incur expenses in the course of securing that rental income, those are deductible. Such expenses might include repairs to the rented area, maintenance of that area, and utilities that you’re responsible for as part of your lease agreement. You can also take a depreciation deduction on the part of your home you rent out, where you essentially write off its value over time.
Owning a home could put you in a pretty strategic position tax-wise. It pays to read up on the tax benefits homeowners can reap so you’re able to save yourself as much money as possible.
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