Tax Tips for Home Owners
Owning a home is a big financial responsibility, and one of the largest investments you’ll probably ever make. Knowing the tax deductions and credits available to homeowners can help ensure your big investment pays you back a bit at tax time. Owning a home gives you access to special tax breaks, and taking advantage of them could help you at tax time.
1. Stay organized
Many of the tax deductions or credits you can take as a homeowner require you to keep detailed records of your home-related expenses. Start saving receipts and other information right away; don’t wait for tax time to roll around.
“If you take a few minutes to set up an organization system for your tax paperwork and financial records, it should be quick and easy to maintain,” Zimmelman says.
One way is to keep hard copies of all your financial documents and receipts. Or, you can scan and store your documents digitally. Apps like HomeZada can help you stay organized for a small fee.
2. Consider itemizing your deductions
For the 2018 tax year, the standard deduction is $24,000 if you’re married filing jointly, $12,000 if you’re single or married filing separately, and $18,000 if you’re filing as head of household.
As a homeowner, though, you may have enough in eligible expenses to itemize your deductions. If those itemized deductions add up to more than the standard deduction, you could lower your tax bill even more.
Eligible expenses could include:
- Home mortgage interest
- Property taxes
- Charitable contributions
- State and local income taxes or sales tax (but not both)
- Some medical expenses not paid for by insurance
3. Hold onto home improvement receipts
If you make any improvements to your home, the expenses aren’t deductible for the current tax year. However, when you sell the home in the future, they can help lower your tax burden then.
That’s because you can add home improvements expenses to your adjusted basis, which is generally what you paid to buy the house, plus the cost of construction, renovation, or other improvements you’ve made, minus any losses you’ve experienced from damage to the home.
For the tax year in which you sell the home, your taxes on the sale are based on the sale price plus any concessions you get from the seller (such as them paying closing costs) minus your selling expenses. If the amount you gain from that equation is higher than your adjusted basis you have a capital gain on the sale. So, the higher your adjusted basis, the less taxes you may have to pay on your profit from the sale.
4. Track your home office expenses
If you work from home, you may be able to deduct some of the expenses you incur for your business use of your home.
“Not every person who works from home can claim a home office,” Zimmelman says. “The home office must be used regularly and exclusively for business and be the primary site of the business.”
Types of expenses you can deduct include the actual expenses you incur for the home office and depreciation for the portion of the home used.
You may even be able to qualify for this deduction if you’re an employee. You have to meet additional requirements, however. For example, your remote work situation must be for your employer’s convenience. So, if you’re working from home just because it’s an option, you might not qualify for the deduction. If, on the other hand, the employer has no home office and you have no choice, you could be eligible.
5. Make energy-efficient updates
Adding a solar energy system to your home is not only good for the environment, it can also be good for your tax refund. The IRS allows you to take a tax credit worth 30 percent of the cost of installing a solar energy system.
If you’re thinking about holding off on taking advantage of this tax credit, don’t wait too long. The credit amount for residential improvements decreases to 26 percent in the year 2020, then to 22 percent in 2021, after which it goes away entirely.
6. Save your tax records
Here’s one tax tip for homeowners that’s probably valuable for most people. Once you take advantage of all the available deductions and credits in the current tax year, hold onto them.
“You never know when you might get audited,” Zimmelman says. “It’s important to have the documentation to back up your deductions.”
The law requires that you keep all the records you use to file your tax returns for three years from the date a return was filed. That’s typically how far the IRS goes back when doing an audit. Keep in mind, however, that the IRS can go back further (usually no more than six years back) if it identifies a substantial error in a return.
Owning a home can be expensive, but, fortunately, the tax breaks can help make up for the extra costs. As a homeowner, it’s critical to know which deductions and credits you qualify for and to make sure you maximize them to your benefit.
Info provided by creditkarma.com