Owning a home is a big expense. If you're about to become a new homeowner, you may be wondering whether you'll get a tax break for buying property. There are actually a number of tax benefits to home ownership, from deductions to credits. Knowing what tax breaks you're eligible for will help you put more money back in your pocket -- where it belongs.
Mortgage interest deduction
In the early years of your mortgage, you'll find that most of what you pay each month is applied to the interest portion of your loan, not the principal. But while it may be a bit disheartening to see that outstanding balance remain fairly stagnant, you can take comfort in the fact that those hefty interest payments could work wonders for your taxes. As a homeowner, you can deduct the interest you pay on your mortgage as long as your loan doesn't exceed $500,000 if you're a single tax filer, or $1 million if you're filing jointly.
Interest deduction on a home-improvement loan
It's not just mortgage interest you're allowed to deduct on your taxes, either. You can also deduct up to $100,000 in home equity debt ($50,000 apiece if you're a married couple filing separately). If that new house of yours came with a kitchen in need of repairs and a basement just begging to be finished, you can finance those home improvement projects with a home equity loan and use the interest you pay as your own personal tax break.
Tax deductions for points on a mortgage
It's not uncommon to pay points on a mortgage, which are basically fees paid to a lender that result in a reduced interest rate. Every point on your mortgage is equal to 1% of your loan, which can be a huge outlay when you close on your home. The good news, though, is that points on a mortgage are tax-deductible -- either immediately, or over the life of the loan.
Lenders will typically insist on private mortgage insurance, or PMI, for borrowers who fail to make a 20% down payment on a home. If you're paying a PMI premium, take comfort in the fact that it can serve as a tax deduction provided you don't earn too much money. You can claim a PMI deduction if your income doesn't exceed $54,000 as a single filer or $109,000 as a couple filing jointly. Also note that the deduction begins to phase out for single filers earning $50,000 per year and couples earning $100,000 per year.
Property tax deduction
The average American household pays $2,127 a year in property taxes, and in some parts of the country, that figure can easily be quadrupled. Thankfully, property taxes can serve as a major tax deduction for homeowners, which can help ease the burden significantly.
Home office deduction
If you use part of your house to work independently or conduct business, you can claim a home office deduction when you file your taxes. You can write off anything pertaining to your work or business, such as computer equipment or ink for your printer. Beyond that, you can also write off a portion of the living expenses that play a role in letting you do your job, like your electric bill, utility bill, cable bill, and homeowners' insurance premium. The amount you write off should be proportionate to the amount of space in your home occupied by your office. So if your home is 3,000 square feet and your office is 150 square feet, you can write off 5% of your expenses.
Taxes credits for energy efficiency
If you're committed to making your home more energy-efficient, you could see a large reduction in your taxes thanks to the Residential Energy Efficient Property Credit. If you qualify for this credit, you'll get to claim 30% of the cost of a renewable energy system (think solar panels and the like), including installation, on your taxes.
If you own a home, it pays to learn more about the tax breaks available to you. A little research could shave thousands of dollars off your tax bill year after year.