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Owning your own home costs a lot of money, but you can get some of it back with a tax refund.
Can I Deduct Home Improvements On My Taxes
Peter is a writer and editor for the How-To team. Since working for @Home Network and Excite in the 1990s, he has covered technology, software, finance, sports and video games. Peter managed reviews and listings for Download.com during the 2000s and is passionate about software and advice for creators, consumers and investors.
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This story is part of Taxes 2023, covering the best tax software, tax tips and everything else you need to file your return and track your refund.
Home ownership is a huge goal for many Americans, but it doesn’t come cheap. In addition to the down payment and monthly mortgage costs, the average U.S. homeowner pays $15,405 a year for maintenance, utilities, taxes and insurance, according to real estate firm Clever.
However, all of these expenses come with a silver lining – tax credits and deductions for your home that can lead to a bigger tax refund. Homeowners learning as much as possible about their potential tax benefits can help you maximize your tax refund when you file your tax return.
Most homeowners with mortgages know they can deduct their loan interest payments, but many of the tax deductions and tax breaks associated with home ownership are less obvious. Read about all the possible tax breaks for homeowners to get the most refund on your taxes.
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Learn more about taxes by learning about the biggest tax breaks and how to create an online IRS account.
Most of the income tax breaks for homeowners are tax deductions, which are reductions in your taxable income. The less your income is taxed, the less money you pay in taxes.
When you file your tax return, you must decide whether to take the standard deduction — $12,950 for a single person, $25,900 for a joint return or $19,400 for heads of household or spouses filing separately — or itemize deductions like are donations to charity and state taxes.
To take advantage of the homeowner’s tax credit, you’ll need to itemize your deductions using Form 1040 Schedule A. Your itemization decision will depend on whether your itemized deductions are more than your standard deduction. All the best tax software can quickly help you decide whether or not to itemize (as well as help you fill out all the tax forms listed in this article).
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Require you to itemize. They directly reduce the amount of taxes you owe, and you can usually get these credits regardless of whether you itemize deductions or not.
Mortgage interest – or the amount of interest you pay annually on your home loan – is one of the most common tax deductions for homeowners. It’s also often the most lucrative, especially for new homeowners whose payments generally go more toward loan interest during the first few years of the mortgage.
Homeowners filing jointly can deduct all mortgage interest payments on loans up to $1 million or loans up to $750,000 if they were made after December 15, 2017. Individual filers will get half of those amounts— $500,000 or $375,000, respectively.
To deduct mortgage interest, you’ll need to fill out IRS Form 1098, which you should receive from your lender in early 2023. You can then enter the amount from line 1 on that 1098 on line 8 of Schedule 1040 A.
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When you buy a home, you can buy mortgage points, also called “discount points,” to lower your mortgage interest. Every 1% of the mortgage amount that homebuyers pay toward their down payment generally lowers their interest rate by 0.25%, although the exact amount will depend on the lender and the loan.
Discount points can save you big money on a 30-year mortgage by reducing the total interest you’ll have to pay over the decade, but they can also save you money on taxes when you buy them. The IRS considers mortgage points prepaid interest, so you can add the amount paid for points to the total mortgage interest shown on line 8 of your 1040 Schedule A.
Homeowners who have received a state or local mortgage loan certificate – usually obtained through a mortgage lender – can get a percentage of their mortgage interest back as a tax credit. Mortgage certificate loan rates vary by state and can range from 10 to 50 percent.
For example, a homeowner with a Louisiana MCC — which allows 40% of mortgage interest as a credit — who paid $10,000 in mortgage interest in 2022 could claim $2,000 of that interest and the remaining $8,000 as a deduction.
Tax Deductions For Home Improvements
This homeowner tax tip is most effective if you’re a first-time homeowner, which is loosely defined as not living in a home you’ve owned for the past three years. If you’re buying your first home, ask your lender or mortgage broker if you qualify for an MCC.
To claim the mortgage interest tax credit, use IRS Form 8396. Remember, you don’t have to itemize deductions to claim the tax credits.
Local and state property taxes, more commonly called property taxes, can be deducted from your taxes, but at a much lower rate than before 2017.
From your property taxes and state and local income taxes. Before 2017, your entire property tax amount was deductible.
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To claim the property tax deduction, you will need to track your annual property tax payments. Your real estate taxes may also be reported in box 10 of your mortgage lender’s Form 1098. Enter your total amount of property taxes paid for the year on line 5b of your 1040 Schedule A.
Homeowners who use any part of their house, apartment or condo “exclusively and regularly” for their own business or side gig can claim home business expenses using IRS Form 8829. These deductions are also available to renters.
The easiest way to claim the home office tax credit is to use the standard home office deduction, which is based on $5 per square foot used for a business up to 300 square feet. The “usual method” for the home office deduction involves calculating the percentage of your home that is used for business. Both methods use Form 8829 for reporting.
Electric car charging stations can put money back on your tax bill. If you install any alternative energy charging station in your home, you’ll receive a maximum credit of 30% of the cost or $1,000 (whichever is less). File IRS Form 8911 to get a tax credit for money spent on a clean energy installation.
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If you made energy-efficient improvements to your home in 2022, you can probably get some of that money back as tax credits, but it’s going to be a bit complicated. There are two types of home energy improvement tax credits – the clean energy home credit and the energy efficient home improvement credit.
The Clean Energy Home Credit can get you back 30% of the money you spend on installing solar electricity, solar water heating, wind power, geothermal heat pumps, biomass fuel systems or owning a fuel cell. The only limit is for the properties of the fuel cells – $500 for each half kilowatt of capacity.
The home energy efficiency credit, also known as the non-business energy property credit, is then divided into two categories – “residential energy property costs” and “qualified energy efficiency improvements”.
In the first case of energy property costs, you get a flat tax credit of $50 to $300 for installing Energy Star-certified items such as heat pumps, water heaters, or furnaces. In the second case of qualified improvements, you can get a 10% tax credit for the cost of improvements such as adding insulation, repairing the roof or replacing windows.
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The Energy Efficient Home Improvement Credit has a lifetime limit of $500 for all improvements made after 2005. Beginning in 2023, the Inflation Reduction Act will replace the lifetime limit of $500 with an annual limit of $1,200 for the tax credit.
To claim tax credits for energy-efficient home improvements in 2022, you’ll need to document your costs on IRS Form 5695.
Any interest on a home loan or second mortgage can be deducted from your taxes just like regular mortgage interest, with an important cap on the maximum loan amount of $1 million or $750,000 (for joint registrants) if you bought your home after December . 15, 2017.
It’s also very important to note that the 2017 tax bill limits home loan interest deductions to money that is used to “purchase, construct, or substantially improve” homes. If you borrowed money to pay for a new car or a tuxedo, you’re out of luck.
How To Deduct The Cost Of Repairs And Maintenance Expenses
If you paid interest on a home loan that was used directly on your residence, you can claim a deduction on the same line as mortgage interest and mortgage points: Line 8 on Form 1040 Schedule A.
Any income you get from selling the house
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