Most Americans are proud to call themselves homeowners, but many other worry about how much owning property could cost. Fortunately, there are various tax breaks available to help offset the burden. Here are five major tax breaks you should know about if you own a home or are planning to buy.
As far as mortgage interest is concerned there is always room for you to deduct all the mortgage payments that you make on your home. This not only applies to your home equity line of credit but also to a second mortgage. If you own a second home you can deduct its mortgage interest, provided you stay there for at least 14 days a year or 10% of the year is rented out.
Private Mortgage Insurance (PMI) Deduction
Private mortgage insurance (PMI) is a type of mortgage insurance used with conventional loans. Like other kinds of mortgage insurance, PMI protects the lender if you stop making payments on your loan. But keep in mind: the PMI deduction begins to phase out if you earn more than $50,000 a year as a single filer or $100,000 as a joint filer. And if you earn more than $54,500 as a single filer or $109,000 as a couple filing jointly, you won’t be allowed to claim this deduction at all.
It might sound strange but you can deduct tax on your taxes. State taxes levied on your primary residence are deductible from your federal tax. Always keep all your property tax bills and other statements, as you never know when you might need them. But this is a deduction that can really pay off. For instance, the Tax Foundation found in 2015 that New Jersey residents typically pay almost 2.4% in state property taxes – almost twice the national average, and about $7,000 on a $300,000 home. Hence deducting this big local tax bill can save you a lot on your federal return.
Implementing energy-efficient improvements can earn you a credit of up to 10% of the cost of the improvements with a maximum of $500. This includes expenses like new doors and windows, insulation, and high-efficiency heating and cooling systems. Adding solar power to your home earns you a credit worth 30% of its total cost. State credit, which you can add to your federal credit, could also be available for these items. But what’s the difference between a deduction and a credit? Well, if you’re in the 28% tax bracket, then a $1,000 deduction lowers your tax bill only $280, while a credit lowers your tax bill by $1,000 regardless of your effective tax rate. Hence a tax credit is even better than a deduction, because they are dollar-for-dollar savings instead of saving based on your income bracket.
If you suffer property damage—as from fire, weather, theft—that is not reimbursed by an insurance company, you are suffering a casualty loss and you are eligible for a big deduction. Sometimes damage to your home costs you thousands of dollars out-of-pocket. Your casualty loss deduction must exceed 10% of your adjusted gross income, so don’t bother writing off small-time repairs. But if you incur significant expenses repairing your home after an unfortunate event, document everything and tap into this tax break to ease some of the pain.