If you own your home, you may qualify for several special tax breaks. Claiming these tax breaks can be an awfully helpful way to counterbalance the additional expenses involved in homeownership. Let's look at three tax breaks for homeowners and how to qualify and claim them.
Before we get started, however, keep in mind that all three of these deductions are itemized. That means you can't claim them unless you forgo the standard deduction, which has been nearly doubled by the recently passed Tax Cuts and Jobs Act. Therefore you should figure out how much money they can save you and only claim them if that amount exceeds the standard deduction you're eligible for.
The mortgage interest deduction
Most homeowners know they can deduct the interest they pay on their mortgages from their federal income taxes, but they may not be aware that because points are basically prepaid interest, they can also be deducted. The rules for the mortgage interest deduction have changed somewhat thanks to tax reform: The deduction is now capped at mortgage amounts of $750,000, though if you have an existing mortgage that's larger than that, you'll still be allowed to deduct the interest (the new limit applies to mortgages acquired after 2017).
The property tax deduction
Property taxes are a local tax that can be deducted as part of the state and local taxes deduction. This can be a huge tax break if you live in an area with high property taxes. However, note that the state and local taxes deduction will now be capped at $10,000 starting in 2018. If you pay high state income taxes and/or have very high property taxes, you may not be able to squeeze the full expenses into this deduction in future years.
Medical home improvements deduction
If you make changes to your home for medical reasons, you can deduct the costs as part of the medical expense deduction. This covers both big improvements (e.g., putting in an elevator if you can no longer climb stairs) and small ones (e.g., switching your doorknobs to lever-style knobs because arthritis makes it hard for you to grip things).
Note that you can only claim a deduction for these expenses to the extent that they don't increase the value of your home. For example, if your house was worth $200,000 and adding an elevator cost you $80,000 but increased your home's value to $250,000, then you could only deduct $30,000 of the expense (the $80,000 cost minus the $50,000 increase in the house's value). If the improvement doesn't change the value of your home, then you can deduct the entire amount. You can also deduct upkeep expenses for medical improvements in future years; for example, if you have a maintenance man check out your new elevator once a year, you can deduct his fees as a medical expense.
Although the recent tax reform bill dramatically increase the standard deductions for all filing statuses, if you can take all three of these deductions, you're far more likely to benefit from itemizing. And maxing out these deductions will also make other itemized deductions more attractive, including the charitable contribution deduction. When you throw those other itemized deductions into the pot, you may find that your total savings are significantly greater than your standard deduction.