Homeownership comes with a number of tax perks that can help reduce your income tax bill. Among these are the mortgage interest deduction and property tax deduction. However, you can only claim these deductions if you itemize your deductions rather than taking the standard deduction. If you’re unsure whether to use the standard or itemized deduction, it’s best to consult with a financial professional or tax attorney for guidance.
In addition to the property tax and mortgage interest deduction, you can deduct other homeownership expenses, such as real estate taxes, insurance premiums, utilities, repair costs, and even mortgage points. You can also claim a credit for the use of your home as an office or studio, though this is only available if you itemize your deductions.
- You can deduct state and local income, sales, and transfer taxes. However, you can only deduct the total of these items to a maximum of $10,000 ($5,000 if married filing separately) for the tax year.
If you own a home, your property taxes are probably paid through an escrow account overseen by the lender that holds your mortgage. At the end of each year, you should receive a 1098 statement that outlines exactly how much you paid in property taxes for that year. You can usually file this form with your ordinary 1040 income tax return. Remember that you must prove that the property tax you paid was assessed and levied against your property to qualify for this deduction. You should keep records of all payments for this purpose and a receipt for any property tax prepayments you made.
Mortgage Interest Deduction
Before the Tax Cuts and Jobs Act (TCJA) of 2017, homeowners were able to claim a mortgage interest deduction for up to $1 million in debt. However, this limit was lowered to $750,000 in 2023. In addition, the mortgage interest deduction is only available for new homes purchased after December 16, 2017. Moreover, this tax incentive only works for the first home.
The IRS regularly adjusts standard deductions to reflect the cost of living, so keeping up with these changes is important. In 2023, the standard deduction will be $12,550 for individuals or married filing separately and $18,800 for head of household. It will be possible for taxpayers to beat this amount by racking up multiple large itemized deductions, but it is likely that fewer people will choose to do so than in previous years. As a result, the mortgage interest deduction may see a slight decrease in 2023.