Standard deductions or itemized deductions?
The state and local tax deductions homeowners can claim on their taxes are designed to reduce their overall taxable income. Homeowners can choose between claiming standard deductions or itemizing their deductions.
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Standard deductions
A standard deduction describes the fixed amount the IRS allows U.S. taxpayers to deduct from their taxable income. This is done without itemizing each expense. For the 2023 tax year, the standard deduction is $13,850 for single filers or married individuals filing separately and $27,700 for joint filers.
If you choose to claim the standard deduction, you can’t also claim itemized deductions.
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Itemized deductions
Itemized deductions are specific expenses you can deduct from your taxable income, provided you furnish valid documentation for each expense. Some common itemized deductions include:
- Mortgage interest
- Property taxes
- Home equity loan interest
- Home repairs or improvements (in certain circumstances)
The caveat to the itemized deduction is that the total amount must exceed the standard deduction of $13,850 for single filers and $27,700 for joint filers.
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Which deduction should you take?
If you have significant mortgage interest, you may benefit more from itemizing your deduction than taking the standard deduction. However, you should consult with your accountant or another tax professional to make sure you’re choosing the most advantageous option.
Five tax deductions available for homeowners
If you want to move forward with an itemized deduction, here are five opportunities available to you as a homeowner.
Keep in mind that there are requirements, qualifications, and limits on all the benefits mentioned in this article. Some you may qualify for, while others you may not.
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A property tax deduction allows you to deduct the property taxes you paid during the tax year on your tax return.
You pay your property taxes to your local government. The amount of taxes paid is based on the assessed value of your real estate property. Depending on the value of your property along with the local tax rate, the amount of your deduction will vary.
This itemized deduction is only available on taxes you paid during the tax year. You must have actually paid these taxes to claim the deduction.
There are limits to the amount of property tax you can deduct. Currently, the tax law for 2023 limits real estate tax deductions to $10,000.
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Mortgage interest is the amount you pay to a lender as a fee for borrowing your mortgage through them. The amount you pay in mortgage interest will depend on a number of factors, including:
- The value of your home
- Your credit
- The type of loan you qualify for
- The year you began borrowing
If you have a $200,000 mortgage with an interest rate of 4%, you’re paying $8,000 in yearly interest. This puts you close to the cap for a standard tax deduction. You can use these payments as an itemized deduction as long as you meet certain requirements:
- You can deduct mortgage interest on your primary residence and one other qualified residence, like a second home
- Your mortgage must be a secured debt, which means it’s backed by your home as collateral
Like anything else, there are limits on mortgage interest deductions. Currently, the IRS rules that homeowners may deduct up to $750,000 of home mortgage interest costs. Depending on your situation, you may be able to add your mortgage insurance premiums to your deduction.
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If you have a home office, you may be able to deduct some of your expenses as a home office deduction. There are specific rules around using this deduction, so it’s important to make sure you qualify.
To qualify for a home office deduction, you must use your home office space regularly and exclusively for business. It must also be the principal place where you do business or meet with clients or customers.
Assuming you qualify, the next step is to calculate the percentage of your home that you use for business purposes. In order to find this number, divide the square footage of your home office by your home’s total square footage.
You can also deduct certain eligible expenses if you use your home for business, such as utilities, insurance, and maintenance costs.
When deducting your home office space you’ll need to complete IRS Form 8829. This form can help you calculate the total amount of your home office deduction.
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A home equity line of credit HELOC offers homeowners a flexible way to borrow funds. This can be used for a variety of purposes, such as:
- Debt consolidation
- Home renovations
- Education expense
In some cases, interest on a home equity loan is tax-deductible. This is true when the loan funding is used for making improvements.
At this time, qualified home equity loan interest is tax deductible through 2026.
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Mortgage points are fees you pay to a lender when closing on a loan to secure a lower interest rate on your mortgage. One point is equal to 1% of your total mortgage amount. For example, if your mortgage is $200,000, one mortgage point would be equal to $2,000.
Paying mortgage points can lower your interest rate, resulting in reduced monthly mortgage payments. This could potentially save you thousands in interest savings during the life of the loan.
Mortgage points are tax-deductible in the year you pay them, though the deductions are subject to certain restrictions and limitations. The IRS considers mortgage points prepaid interest, which means they can be itemized deductions on Schedule A of Form 1040.
Tax credits vs. tax deductions
Standard or itemized deductions aren’t the only potential tax benefits of owning a home. Another venue you can explore is tax credits.
Your tax deduction reduces the amount of your income taxes. Tax credits, on the other hand, are dollar-for-dollar reductions on the taxes you owe. If you owe $5,000 in taxes and have a $2,000 tax credit, your tax bill would drop to $3,000.
Tax credits are usually based on specific circumstances like paying for college tuition, adopting a child, or installing energy-efficient windows.
Two big tax credit benefits homeowners can take are the energy-efficient property credit and the first-time homebuyer credit.
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Energy-efficient property credit
Energy-efficient property credits provide a financial incentive to invest in energy-efficient improvements and additions, such as:
- Solar panels
- Wind turbines
- Geothermal heat pumps
- Fuel cells
Energy credits allow you to claim a percentage of the cost of installed energy-efficient equipment. These percentages vary depending on the year you installed the equipment and the type of property you installed it on.
In 2023, this credit becomes equal to 30% of the total amount paid on qualifying home improvements. Or, you can take the annual $1,200 credit limit.
To qualify for this credit, your property must meet the outlined energy-efficient requirements. Additionally, all new equipment must be installed in your primary residence. Second homes and rental properties are not eligible.
The energy-efficient property credit is non-refundable. It can’t ensure a refund if the credit exceeds your tax liability.
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First-time homebuyer credit
The first-time homebuyer tax credit was a federal credit program that offered financial assistance to first-time homebuyers. This program was active between April 2008 and September 2010.
In 2021, U.S. lawmakers introduced the First-Time Homebuyer Act. This would grant first-time homebuyers up to $15,000 in refundable federal tax credits. As of September 2024, the bill has not yet been passed into law.
If and when it passes, first-time homebuyers who satisfy the specific requirements can qualify for a $15,000 tax credit. They would have to meet the following criteria:
- Being a first-time homebuyer
- Not owning a home in the last 36 months
- Not exceeding the area’s income limitations
- Purchasing a primary residence (rental properties and second homes don’t qualify)
- Being at least 18 years old or married to someone who’s at least 18
- Purchasing a home from a non-relative
The tax credit will equal 10% of the home’s purchase price and cannot exceed $15,000.
Other tax benefits of owning a home
These aren’t the only tax benefits available to homeowners. If you were to sell your home, you might also qualify for:
- A capital gains exclusion
- Rent deduction for temporary housing
- Write-offs for moving expenses
Final thoughts
Knowing the available tax benefits allows you to make strategic decisions when it’s time to file.
For example, have you been wanting to renovate your home? If so, now may be the perfect time to take out a home equity loans to write off on your taxes.
