Common tax breaks for homeowners: Your deductions and benefits

It’s that time of year again - tax time. The filing deadline to submit 2022 tax returns or an extension to file and pay tax owed is Tuesday, April 18, 2023.

If you have a mortgage and are curious about valuable tax breaks for homeowners, here’s what you need to know when it comes to what you can and can’t deduct.

In this article (Skip to...)

• Standard vs. itemized deductions
• Common homeowner tax breaks
• Other homeowner tax breaks
• Expenses that are not tax deductible
• Tax break bottom line

Standard deduction vs. itemized deductions

When it comes to tax deductions, the IRS allows you to choose between a standard deduction and itemized deductions.

The difference between the two is that a standard deduction is a lump sum you subtract from your taxable income. An itemized deduction is an expense you subtract from your taxable income.

Claiming the standard deduction is an easier route. Itemizing involves keeping track of your spending on deductible expenses such as charitable donations and out-of-pocket medical expenses.

You also need to have your documentation organized. Documents such as real estate taxes, mortgage interest, receipts, bank statements, and medical bills should be easily accessible.

Standard homeowner deductions

Next, you need to determine whether your available itemized deductions exceed the standard deduction for your filing status.

Here are the standard deduction numbers for 2022:

• Single taxpayers: $12,950
• Married taxpayers filing a joint return: $25,900
• Married taxpayers filing separately: $12,950
• Heads of household: $19,400

If you are over 65 or blind, you’re eligible for an additional standard deduction of $1,500 to $1,850, depending on your filing status.

Going with itemized deductions may sound like a lot of effort, but it can pay off if your total deductions exceed the standard deduction for your filing status. Even if your itemized deductions add up to just slightly more than the standard deduction, you could see a significant difference in your tax bill.

Common tax breaks for homeowners

The IRS offers a number of tax breaks for homeowners. From your mortgage interest to energy efficiency-related credits, tax deductions can help offset the costs of homeownership.

Mortgage interest

Typically, the biggest tax break you get from owning a home comes from being able to deduct mortgage interest.

If you itemize, you can deduct interest on up to $750,000 of mortgage debt if you bought your home after December 15, 2017 (interest is deductible up to $1 million if you purchase prior to this date). This amount applies to both single and married taxpayers filing jointly. Married taxpayers filing separately may each deduct the interest on $375,000 of mortgage debt.

Home equity loan interest

Did you take out a home equity loan or a HELOC (home equity line of credit) in 2022? If so, you might be able to deduct the interest paid during the year.

You can only claim this homeowner tax break if you:

1. Itemize your deductions, and
2. Used the money to buy, build or substantially improve the home

More tax deductions for homeowners

Discount points

When you bought your home, you may have paid additional fees to buy down your rate. These fees are typically known as loan discount points or mortgage points.

The IRS treats points as prepaid mortgage interest and allows you to deduct them accordingly. You may be able to deduct the full amount of the points during the year that you paid them.

Property tax

As a homeowner, you can get a tax break for paying property taxes, but there’s a limit. Tax laws state that you may deduct up to $10,000 ($5,000 if married and filing separately) of property taxes in combination with state and local income or sales taxes.

Private mortgage insurance premiums

While mortgage insurance payments were previously tax deductible, they are no longer deductible for the 2022 tax year. If you’re filing amended returns for previous tax years, you may be able to get this deduction for those years going back to 2018.

Mortgage interest credit

Besides the mortgage interest deduction, there’s also a mortgage interest tax credit that’s meant to help lower-income, first-time homebuyers afford homeownership.

A Mortgage Tax Credit Certificate (MCC) is a tax credit issued by the government directly to a homeowner. It allows them to reduce their tax bill by a specific percentage of their mortgage interest.

Qualified homebuyers can claim a tax credit that reduces their tax bills dollar-for-dollar up to $2,000.

Other homeowner tax breaks

In addition to the tax breaks for homeowners listed above, there may be additional deductions you can take advantage of.

Medically necessary home improvements

Medical expense deductions can include the cost of installing health care equipment, or other medically necessary home improvements. These improvements must benefit you, your spouse, or a dependent.

Home office expenses

If you’re self-employed and part of your home is used solely for your business, you may be able to deduct some related expenses.

There are two ways to do this:

1. Simplified option. You can deduct $5 per square foot of the area used for business, up to 300 square feet (the IRS calls this the simplified option).
2. Regular method. You deduct the actual home office expenses.

To utilize the regular method, you need to track and add up the various expenses associated with running your entire home, i.e., homeowners’ insurance, utilities, repairs, and property taxes. You can then deduct a percentage of those costs depending on the area dedicated to your business.

Residential energy credits

For the 2022 tax year, homeowners can shave up to $500 off their tax bill by installing energy-efficient insulation, doors, roofing, heating and air-conditioning systems, wood stoves, water heaters, etc. For energy-efficient windows, the tax credit is worth up to $200.

Homeowner expenses that are NOT tax deductible

Not all homeowner expenses can be deducted on your taxes. The most common non-tax-deductible homeowner costs include:

• Homeowner association fees
• Homeowners’ insurance
• Mortgage insurance
• Loan origination fees
• Title insurance
• Transfer or stamp taxes
• Forfeited earnest money deposit or down payment
• Utility costs

The bottom line on homeowner tax breaks

Homeowner tax deductions can save you thousands of dollars a year – effectively reducing the cost of owning your home. Homeowner deductions are constantly changing, so it’s important to speak with a tax professional for the latest tax deduction information.

Note: The Mortgage Reports is not a tax website. All the information provided is intended to be for general guidance only. Check the relevant Internal Revenue Service (IRS) rules with a qualified tax professional to ensure they apply in your personal circumstances.