Did you know there are tax benefits to buying a home that could work in your favor? It’s true. There are a number of tax breaks available to homebuyers that could save you money when you file your tax returns. We break down the basics of them for you here.
If your mortgage amount is less than $750,000, you can deduct the interest you paid on the loan. With the way loan amortization works, the newer your mortgage is the more you will save because most of your first payments are all interest.
Under current laws, you can deduct up to $10,000 in property taxes paid for the year. Make sure you keep a record of this payment if you pay directly to the municipality as opposed to paying through escrow.
Private Mortgage Insurance (PMI)
If you took out a conventional loan and didn’t put 20 percent down on your mortgage when you closed, the lender requires you to pay PMI. You can deduct those payments if your adjusted gross income is $100,000 or less if you’re married or $50,000 if you’re single. Bear in mind this deduction is reviewed annually so it isn’t always guaranteed to be available. It is, however, available for 2020 filings.
Energy Efficiency Upgrades
While most tax credits for making energy-efficient upgrades to your home have expired over the last few years, you can still deduct 10 percent of the cost of qualified energy efficiency improvements and the amount of the residential energy property expenditures paid or incurred up to $500 for 2020. Qualifying expenses include solar electric and solar water heater upgrades, energy-efficient exterior windows, doors, skylights, roofing, and insulation.
If you worked from home at any time over the last year (and are not a W-2 employee), you can deduct home office expenses and the space you used as your office. You can deduct $5 per square foot up to 300 square feet of office space which equates to a maximum deduction of $1,500.
Age in Place Improvements
If you make any improvement to your home to make it more comfortably liveable for you as you age, like installing wheelchair ramps, installing a more accessible bathtub, or lowering cabinets, you can deduct the cost of some of those changes. To qualify for the deduction, the improvements must exceed 7.5 percent of your adjusted gross income.
Be sure to keep these tax implications in mind as you consider purchasing a home in 2021 or file your return for a home you purchased in 2020.