Ben Franklin once quipped, “A penny saved is a penny earned.” The old adage still holds true today, especially in an uncertain economy. Homeowners should take advantage of every tax break they can to heed Ben’s advice and put some of those greenbacks back where they belong: in your pocket. Let’s take a gander at 4 tax breaks you should take advantage of as a homeowner.
- Interest on home improvements. According to the friendly IRS, home improvement loan interest is entirely deductible up to $100,000 in debt. Sweet, right? In addition, tax-deductible is the interest paid on a home equity line of credit (HELCO). But here’s a caveat: if the loan is worth more than the value of the house, or if it is over 100% loan-to-value, then the home loan isn’t deductible. Darn. Maybe they aren’t so friendly after all.
- Points on home mortgage and refinancing. If you bought a home, you can more than likely write off both the origination and discount points on your tax returns. Here is the way it is calculated: 1% of the principal loan amount is equivalent to 1 point. Points are seen as prepaid interest by the IRS. You will have to conclude whether you are able to deduct all the points at once or whether you have to spread the costs throughout the life of the mortgage. How does that work? Well, the IRS laws state that if you bought your initial house or obtained a mortgage to purchase your first home, you can take all the deductions at once. Conversely, for refinancing of your first home or a second home, it will more than likely have to be spread out. Take some time to examine the IRS’ guide “Tax Information for Homeowners” for additional specifics.
- Tax credit for making your home more energy efficient. ENERGY STAR federal tax credits expired at the end of 2016. Shucks. However, federal tax credits for solar energy systems are available at 30% through December 31, 2019. In addition, be forewarned that the credit shrinks to 26% for tax year 2020; drops further to 22% for tax year 2021, and then expires on December 31, 2021. Existing homes and newly constructed homes qualify. Furthermore, both principal residences and second homes qualify. However, there are no tax credits available for rentals. Be sure to check your respective state tax credits for energy improvements that the feds no longer allow such as dual pane windows and siding.
- Casualty losses. A lot of losses incurred by homeowners may be deducible as well. If you suffered property damage and your insurance company did not reimburse you for repairs, you may be eligible for a huge deduction. Substantial flooding, fallen trees or even vandalism that sustain damage to your home can be extraordinarily costly. Your casualty loss deduction must exceed 10% of your adjusted gross income, so don’t fool around and write off minor repairs. However, if you suffer major out-of-pocket expenses repairing your home after an ill-fated incident, make sure you document everything and use this tax break to alleviate some of the painful expenses.
Many homeowners are unaware of the number of tax breaks available to them. State tax breaks vary from state to state so it’s best to check with your local tax expert to determine what is available to you on an annual basis. But don’t be like old Ben and save a penny, save some big bucks!