Tax Season for Homeowners: Know the Deductions

With the new tax laws passed in 2017, 2018 and 2019, the standard deductions are now $12,200 for an individual and $24,400 for a married couple. You might now have enough in homeowner deductions, which need to be over those limits to be of benefit, but you should know the rules regardless.

For some homeowners, itemizing simply may not be worth it. So when would itemizing work in your favor? As one example, if you're a married couple who paid $20,000 in mortgage interest and $6,000 in state and local taxes, you would exceed the standard deduction and be able to reduce your taxable income by an additional $2,000 by itemizing.

Mortgage Interest

Homeowners with a mortgage that went into effect before Dec. 15, 2017, can deduct interest on loans up to $1 million.

However, for acquisition debt incurred after Dec. 15, 2017, homeowners can only deduct the interest on the first $750,000.

Property Taxes

This deduction is capped at $10,000 for those married filing jointly no matter how much in property tax you paid.

And remember that if you have a mortgage, your property taxes are usually built into your monthly payment, so don't overlook them.

You should get a statement from your mortgage holder in January that itemized all the costs of your mortgage.

Private Mortgage Insurance

If you put less than 20% down on your home, odds are you're paying private mortgage insurance, or PMI, which costs from 0.3% to 1.15% of your home loan. But here's some good news for PMI users: You can deduct the interest on this insurance thanks to the Mortgage Insurance Tax Deduction Act of 2019. Also known as the Secure Act, it retroactively reinstated for 2018 and 2019 certain deductions and credits for homeowners.

Energy Efficient Upgrades

The Residential Energy Efficient Property Credit was a tax incentive for installing alternative energy upgrades in a home. Most of these tax credits expired after December 2016; however, two credits are still around. The credits for solar electric and solar water heating equipment are available through Dec. 31, 2021.

The Secure Act also retroactively reinstated a $500 deduction for certain qualified energy-efficient upgrades "such as exterior windows, doors, and insulation.

For equipment installed between Jan. 1, 2017, and Dec. 31, 2019, 30% of the expenditures is eligible for the credit. That goes down to 26% for installation between Jan. 1 and Dec. 31, 2020, and then to 22% for installation between Jan. 1 and Dec. 31, 2021.

A Home Office

Good news for all self-employed people whose home office is the main place they work: You can deduct $5 per square foot, up to 300 square feet, of office space, which amounts to a maximum deduction of $1,500.

Understand, however, that there are strict rules on what constitutes a dedicated, fully deductible home office space. Here's more on the much-misunderstood home office tax deduction.

The fine print: If you work from home occasionally but have an office to go to, you can't take this deduction.

Home Improvements that are Age Related

To get this break, these home improvements will need to exceed 7.5% of your adjusted gross income. So if you make $60,000, this deduction kicks in only on money spent over $4,500.

The cost of these improvements can result in a nice tax break for many older homeowners who plan to age in place and add renovations such as wheelchair ramps or grab bars in slippery bathrooms. Deductible improvements might also include widening doorways, lowering cabinets or electrical fixtures, and adding stair lifts.

The fine print: You’ll need a letter from your doctor to prove these changes were medically necessary.

Interest on a Home Equity Line of Credit (HELOC)

If you have a home equity line of credit, or HELOC, the interest you pay on that loan is deductible only if that loan is used specifically to "buy, build, or improve a property," according to the IRS. So you'll save cash if your home's crying out for a kitchen overhaul or half-bath. But you can't use your home as a piggy bank to pay for college or throw a wedding.

In the end, tax laws are complicated. If you have questions, consult a tax expert.