Oh, tax season. Everyone’s favorite time of year.
If you didn’t quite get around to gathering all your documents and determining what number goes in each box by April 15, there’s good news: The filing deadline for 2020 federal income taxes is extended to May 17.
Now that you have a little more time, you can take a minute to consider the tax benefits of owning your home.
Here’s a quick rundown of home-related deductions (with some tips and common mixups). To claim them, you have to itemize. Get ready to make friends with IRS Schedule A!
1. Mortgage interest
For most homeowners, this is the big one. You can find the total amount of mortgage interest you paid over the last year on Form 1098, which your loan servicer sends out at the end of each year.
This deduction is heftiest in the early years of your loan since most of your monthly payment is going toward interest. Over time, as more goes toward principal, the deduction shrinks.
The amount of the deduction depends on your principal, interest rate, and income tax rates. To give you an idea, here’s an example:
- Mortgage principal and interest: $200,000 loan at 3.5%
- Federal income tax rate: 22%
- State income tax rate: 8%
- Deduction in the first year of your loan: $2,500
Home equity loans
Did you use a home equity loan to renovate? You can usually deduct the interest on that too.
Tip: Know tax credits from deductions. Deductions are expenses that lower your tax bill indirectly, by reducing your gross income. Tax credits lower your bill directly: A $1,000 credit lowers your bill by $1,000.
2. Property taxes
Most homeowners pay a fair amount in property taxes. Luckily, they’re deductible.
The cap on deductions for local property tax and state income tax combined is $10,000.
First year of homeownership: Prepaids
If you bought a home in the last year, remember to deduct any prepaid property taxes you reimbursed the seller for. Check your Closing Disclosure.
Common mix-up: Escrowed vs. actual taxes
It’s easy to make the mistake of deducting escrowed taxes instead of the taxes you actually paid.
When property taxes go into your escrow account each month, you’re not actually paying them. Your loan servicer does that when the bills come out.
The amount actually paid out is on the annual escrow analysis provided by your servicer. Keep an eye out for that document toward the end of the year.
Common mix-up: Deducting taxes for the wrong year
Some cities bill for the year’s taxes the next year. The year you pay them is the year you deduct them.
For example, your 2020 property taxes might be billed in 2021. You would claim the deduction in the 2021 tax year.
3. Energy credits
You can claim tax credits for the cost of certain energy efficiency improvements. Like efficient doors and windows, insulation, heating equipment, solar panels, and more. Keep your receipts!
The size of the credits and what qualifies are always changing. For details, go to IRS.gov and search for “energy credits.”
4. Mortgage insurance
The 2020 tax year is your last chance to deduct private mortgage insurance (PMI) and mortgage insurance premium (MIP).
The amount you can deduct starts to phase out at $100,000 in adjusted gross income. That figure applies if you’re single, head of household, or married filing jointly.
This deduction has expired before, in 2017. Congress then extended it to 2018, 2019, and 2020. If you missed claiming it while it was expired, you can file an amended return.
Tip: You might qualify for free tax prep. Do you make $57,000 or less, have disabilities, or speak limited English? The IRS’s Volunteer Income Tax Assistance (VITA) program offers free, in-person basic tax-return prep.