5 Biggest Tax Breaks for Homeowners in 2022:
5 Biggest Tax Breaks for Homeowners in 2022:
Own a home? Here are some tax benefits you might qualify for.
- Homeowners can capitalize on certain tax breaks that aren’t available to renters, such as home office and property tax deductions.
- To benefit from these tax breaks, you’ll generally need to itemize on your tax return.
Owning a home has certain benefits. For one thing, you get to build equity in an asset that can gain value over time. You may also be privy to certain tax breaks that aren’t applicable to renters. Here are five homeowner tax breaks it pays to know about.
1. The mortgage interest deduction
When you pay off your mortgage, a portion of each monthly payment you make goes toward your loan’s principal, while a portion goes toward interest. It’s the interest portion you’re eligible to deduct on your taxes.
If you signed your mortgage on Dec. 16, 2017 or later, you can deduct interest on up to $750,000 of mortgage debt. If your mortgage was signed prior to that, you can deduct interest on up to $1 million of mortgage debt.
The reason for this discrepancy is that the tax code underwent a major overhaul in 2017, known as the Tax Cuts and Jobs Act. Mortgages that were signed prior to the overhaul, however, were grandfathered into the old system where interest on mortgage debt of up to $1 million is eligible to be deducted.
You don’t have to worry about figuring out which portion of your monthly payments apply to mortgage interest versus principal. Your loan servicer will send you a tax form summarizing that information.
2. Property tax deductions
Property taxes are an unavoidable expense when you own a home. You can deduct up to $10,000 in property taxes each year, but that $10,000 limit also includes whatever state and local taxes you may be looking to deduct. If your property tax bill comes to $8,000 but you’re deducting $4,000 in state taxes, it means you can only deduct $6,000 of your property taxes.
3. The home office deduction
If you’re self-employed, you may be eligible to take a deduction for maintaining a home office. You can calculate your deduction in one of two ways. First, you can figure out what you spent on total housing expenses, from utilities to internet fees, and then take a deduction based on the percentage of your home your office takes up.
Or, to put it another way, if you have a 2,000-square-foot home and your office takes up 200 square feet, you can deduct 10% of your eligible expenses. If those home expenses total $10,000, you get a $1,000 deduction.
Another option is to use the simplified method, which allows you to deduct $5 per square foot of office space up to 300 square feet. In the example above, your deduction for a 200-square-foot office would be $1,000.
Keep in mind you can only take a home office deduction if you work on a freelance or self-employed basis. Many salaried employees are working from home right now due to the pandemic. But if you’re salaried, this deduction doesn’t apply to you.
4. Mortgage points
Sometimes, mortgage borrowers pay discount points to secure a lower interest rate on their home loans. If you paid points when your mortgage closed, you may be eligible to deduct them on your tax return.
5. Home equity loan or HELOC interest
Home equity loans and lines of credit (HELOCs) let you borrow against your home equity and use that money for any reason. However, if you took out a home equity loan or HELOC in order to improve your home, then you’re allowed to deduct the interest you paid on it. If you used that money for something outside of home improvements, that deduction won’t apply.
What tax breaks will you be eligible for?
Clearly, there are plenty of tax breaks you may be eligible to enjoy as a homeowner. But to capitalize on these, you’ll need to itemize your deductions on your tax return rather than claim the standard deduction. You’ll need to run the numbers to see if itemizing makes sense, but if it does, you may save yourself a lot of money by virtue of owning a home.
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