Tax tips for homeowners 2021: Tax credits and breaks
Homeownership comes with a lot of financial responsibility and a never-ending list of home improvement projects.
But for anyone who pays a mortgage, the good news is that you can deduct several home expenses come tax time — especially if you itemize your taxes — or enjoy other tax breaks as a homeowner.
Here are the top tax tips for homeowners.
1. Mortgage interest deduction
A portion of every mortgage payment you make goes toward interest on your home loan, but you can deduct that interest if you’re eligible and you itemize your deductions.
Start by looking at the date you took out the mortgage and how much you borrowed. If you closed before Dec. 16, 2017, then interest is deductible on up to $1 million in mortgage debt (or up to $500,000 if you’re single or married filing separately). The limit falls to $750,000 ($375,000 for single and separate filers) if you bought the home after this date.
2. Home equity loan interest deduction
If you took out a home equity loan or line of credit in 2020, you might be able to deduct the interest paid during the year. But you can only claim this tax break if you 1) itemize your deductions and 2) used the money to buy, build or substantially improve the home.
“Good examples are HVAC (improvements or replacements), remodels, and new roofs,” said Dan Herron, a CPA/PFS CFP with Elemental Wealth Advisors. If you’re looking to claim the tax break, “do not pay off personal expenditures, like credit card debt,” he adds.
If you’re eligible, the interest is deductible on up to $750,000 of qualified residence loans ($375,000 for a married taxpayer filing separately), which include your original mortgage plus second mortgages such as home equity loans and home equity lines of credit.
3. Deduction cap for property taxes
The state and local tax (SALT) deduction allows you to deduct up to $10,000 paid toward your state and local governments ($5,000 for married couples filing separately). That includes property tax payments but also expenses like local income tax and sales tax. To claim the tax break, you’ll need to itemize your deductions.
“Even though you don’t think you will benefit from the SALT deduction, still report the related expenditures,” Herron said. “You may have still have some deductibility on the state return.”
4. Tax exclusion for home sale profits
2020 was a good year for home sellers. Home sales hit their highest level since 2006 and the median home price reached a new record. Even better, those who made a profit on a sale might not have to pay taxes on the earnings. If you lived in your home for at least two out of the five years before selling, then you can exclude up to $500,000 in profits on your income tax return (up to $250,000 if you’re single or filing separately).
If you’re close to the limit, you can adjust your cost basis by calculating the costs of home improvements. “Keep records of them,” Herron advised. “These improvements — think remodels — increase the basis of your home.”
5. Other home sale costs
If you do have to pay taxes on some of your home sale profits, expenses used for selling your home — such as legal fees, advertising expenses, and real estate agent commissions — can reduce how much is taxable. These costs are subtracted from your home’s sale price, which reduces your capital gains tax.
6. Mortgage insurance premiums
Homeowners can deduct money paid toward mortgage insurance, which is a type of coverage that protects the lender if the borrower falls behind on mortgage payments. You might be able to claim this tax deduction if the insurance contract was issued after 2006 and your adjusted gross income falls below $109,000 ($54,500 if you’re married filing separately).
7. Home office expenses
Whether you’re a renter or homeowner, your home office may be tax-deductible — as long as you’re self-employed. You don’t even have to itemize to claim this tax break.
If you work for someone else as an employee, you can’t claim your home office as a deduction. But the home office “could be deductible for state purposes,” Herron said. Also, “you could approach your employer and see if they will reimburse you for some of your home-related expenditures.”
8. Renewable energy additions
You can also claim credits for green improvements you make to your home.
One credit called the Residential Renewable Energy Tax Credit is for installing qualifying solar, wind, geothermal and fuel-cell technology. The credit in 2020 is equal to 26% of the cost of the equipment, including installation. There’s also no maximum limit for the credit for solar, wind and geothermal equipment, but max credit for fuel cells is $500 for each half-kilowatt of power capacity, or $1,000 for each kilowatt.
9. Energy efficiency improvements
There’s also the Nonbusiness Energy Property Tax Credit for certain energy-efficiency improvements you made to your home last year. The credit is worth either 10% of the cost of the qualified improvement or the amount of what you paid for a qualified purchase, up to $500.
Qualified improvements include:
Energy-efficient exterior windows, doors and skylights
Roofs (metal and asphalt) and roof products
Qualified purchases include:
Energy-efficient heating and air-conditioning systems
Water heaters (natural gas, propane or oil)
You can also get credits up to $50 for any advanced main air-circulating fan; $150 for any qualified natural gas, propane, or oil furnace or hot water boiler; and $300 for any item of energy-efficient building property.
10. Forgiveness of mortgage debt
If you had some portion of mortgage debt forgiven last year by your lender—either through a foreclosure, short sale, deed-in-lieu of foreclosure or loan modification—the forgiven amount is not considered taxable income on your federal taxes.
Typically, forgiven debt is taxable, but this exclusion of mortgage debt was extended for the 2020 tax year.
11. Casualty losses
You can also deduct casualty theft losses related to your home, household items and vehicles on your federal taxes as long as the loss was caused by a federally declared disaster declared by the president. Other qualifications include:
Losses covered by insurance aren’t eligible to be deducted.
Your total amount of losses also must exceed 10% of your adjusted gross income (AGI).
Losses were incurred during the tax year that you’re filing.
12. Are there tax consequences for taking mortgage forbearance?
In 2020, more than 4 million homeowners asked their lenders to hit the “pause” button on their mortgage payments by enrolling in forbearance programs. Homeowners with federally backed mortgages could request this protection for up to 12 months.
“There isn’t a lot of information on how mortgage forbearance will impact your deductibility of your mortgage interest,” Herron said.
He recommends comparing your own mortgage payment records with your Form 1098, which your lender uses to report the mortgage interest you paid during the year. Talk with your lender if it appears incorrect. And keep an eye on how the lender treats your loan once you’re out of forbearance. “If the lender forgives a portion of your loan, that is a cancellation of debt, which could be taxable,” Herron said.
Read more information and tips in our Taxes section
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