Lions, and tigers, and bears. Oh my! It’s that time of year again. TAX TIME!
Fear not. Just ease on down the Yellow Brick Road, and whistle a happy tune. Your home appreciated nicely in 2020 while you were hunkered down in it, and there are some nice deductions available to you to help alleviate any potential tax bill that may lay ahead “in Oz” as you prepare for your 2020 filing.
It’s never a bad idea to consider your tax deduction options, and by getting an earlier start, you can be more confident that you’re taking advantage of the tax code provisions designed to benefit homeowners like yourself.
The Three Biggest Tax Advantages for Homeowners
The three most significant tax advantages available to you are the mortgage interest deduction, deductions for mortgage insurance, and property tax deductions.
Of those, the most significant is the mortgage interest deduction which is based upon the interest paid for your primary home mortgage, as well as the interest paid on a mortgage on a second home, or vacation home.
Today, married couples are limited to a debt of $750,000 when accounting for their mortgage deduction. However, two single people can each own a portion of a home and each claim up to $750,000 each.
Secondarily is the possibility to take a deduction for private mortgage insurance. You may be able to deduct thousands of dollars a year in PMI fees from your taxes. Not all homeowners with a mortgage pay private mortgage insurance; it generally applies when you have less than 20% equity in your property, says Amanda Han, CPA and co-author of “The Book on Advanced Tax Strategies: Cracking the Code for Savvy Real Estate Investors.”
It usually costs 0.5% to 2% of your loan amount annually. The average mortgage balance in the U.S is around $200,000, so PMI can be an extra $1,000 to $4,000 on average each year on top of your mortgage, interest, and homeowner’s insurance. You can read more about this by clicking the following link… https://time.com/nextadvisor/mortgages/pmi-tax-deduction/
And, of course, your property tax deduction is Number Three. It can sometimes seem like one taxing authority or another always has its hand out for your money. Your state will ask for a share if the federal government doesn’t get you, and even local and county governments can get into the act, assessing taxes on property you own. Fortunately, the IRS allows you to take a property tax deduction for the cost of taxes that you must pay to local taxing authorities.
The rules changed somewhat with the passage of the Tax Cuts and Jobs Act (TCJA) in 2018, but the property tax deduction is still available. Read more here… https://www.thebalance.com/property-tax-deduction-3192847
The Home Office Deduction
One you may want to tread lightly around is the Home Office Deduction… it will be interesting to see what changes may occur moving forward (post-COVID) as more and more of us work remotely in our homes. Especially since the Tax Cuts and Jobs Act suspended the business use of home deduction from 2018 through 2025 for employees. Employees who receive a paycheck or a W-2 exclusively from an employer are not eligible for the deduction, even if they are currently working from home.
This deduction has had a reputation for being used (and abused) which is why it has earned its reputation as a potential audit trigger. Again, tread lightly as you make your way down The Yellow Brick Road on this one, but don’t entirely ignore it either if you are a self-employed homeowner, or fully remote worker.
If you are reasonable and use a room (or rooms) in your home exclusively for business, you should consider it. Make sure you document your use, and expenses, and take the deduction. But don’t try to claim you use half your home for a side hustle that barely brings in money. Tread lightly, be prudent, and follow the instructions in the IRS documentation below…
Good luck with your tax preparation! Should you need any help with your buying or selling your home, or need real estate advice, please contact Sarah and Lisa today and they will be happy to assist you in any way!