One of the many advantages to being a homeowner is the ability to deduct certain home-related expenses from your federal taxes. Here are some tax deductions and credits you’ll want to be sure to take advantage of when you file your 2016 federal tax return.
- Mortgage interest deduction. You can deduct mortgage interest paid annually. For singles, you can deduct interest on a mortgage up to $500,000. Joint filers can deduct interest paid on a mortgage up to $1 million.
- Deduction for interest paid on a home improvement loan. If you take out a home improvement loan, you can deduct the interest paid on that loan. There is no limit. However, there is a caveat – this deduction only applies to capital improvements made to your home, not to costly home repairs.
- Private mortgage interest (PMI) deduction. If you put less than 20 percent down, your lender likely required that you carry private mortgage insurance. Depending on your income, you may be able to deduct the premiums paid for PMI. Check with your accountant or tax preparer to see what the current year’s limits are and where you fall on the spectrum.
- Deduction for mortgage points. When you purchased your home, you may have paid mortgage points – or up-front fees – to get a lower interest rate. A point is typically equal to 1% of the total loan amount, so points can be costly. For example, a point on a $300,000 mortgage would cost $3,000. You are eligible for the deduction for the tax year in which you paid the points. If you bought a home in 2016 and paid points to lower your rate, you can deduct that amount on your 2016 federal tax return. If you refinanced a home or bought a second home, you may have to spread that deduction out over the life of the loan.
- Property tax deduction. Homeowners can deduct the amount of their property taxes on their federal income tax return. Your tax preparer can help you figure out the amount of the deduction which is not always straightforward because of how and when property taxes are billed and paid.
- Tax credits for residential and renewable energy efficiency improvements. If you made certain energy efficiency improvements (e.g., biomass stoves, air source heat pumps, insulation, etc.) to your primary residence in 2016, you may be eligible for a tax credit. Visit EnergyStar.gov for details.
- Home office deduction. Homeowners who have a separate home office that they use exclusively for business may qualify for a home office deduction. Visit IRS.gov for rules, restrictions and documentation required to qualify.
Here is a partial list of items you cannot deduct, courtesy of the IRS, publication 530:
- Homeowner’s insurance premiums
- The principal portion of your mortgage payment
- Cost of utilities (e.g., gas, water, electricity)
- Forfeited deposits, down payments or earnest money
We are not tax experts, however, so please talk with your accountant or tax preparer to confirm the deductions you are eligible for and what documentation you’ll need to provide to back up those deductions.
Sources: The Motley Fool, https://www.fool.com/retirement/2017/01/04/6-tax-deductions-homeowners-wont-want-to-miss.aspx