What are the tax benefits of owning a home? Homeowners might be wondering this right around now as they prepare to file their taxes. Especially since the new Tax Cuts and Jobs Act—the most substantial overhaul to the U.S. tax code in more than 30 years—went into effect on Jan. 1, 2018. You might even be wondering how the new plan affects the tax perks of homeownership. Well, look no further than this complete guide to all the tax benefits of owning a home. We break down exactly what’s changed, and all the tax breaks homeowners should be aware of when they file their 2018 taxes.
What changed: In the past, one of the most lucrative tax breaks for homeowners was the deduction for mortgage interest. The new tax code didn’t eliminate the deduction, but it did change substantially. The new tax bill allows homeowners with a mortgage that went into effect before Dec. 15, 2017, to continue to deduct interest on loans up to $1 million. “However, for acquisition debt incurred after Dec. 15, 2017, the tax reform only allows the homeowner to deduct the interest on the first $750,000,” says Lee Reams Sr., chief content officer of TaxBuzz.
Why it’s still important: The ability to deduct the interest on a mortgage continues to be a big benefit of owning a home. And the more recent your mortgage, the greater your tax savings. “The way mortgage payments are amortized, the first ones are almost all interest,” says Wendy Connick, owner of Connick Financial Solutions. (See how your loan amortizes and how much you’re paying in interest with this mortgage calculator.) Note that the mortgage interest deduction is an itemized deduction. This means that for it to work in your favor, all of your itemized deductions (there are more below) need to be greater than the new standard deduction, which the Tax Cuts and Jobs Act nearly doubled to $24,400 for a married couple (it used to be $12,700). For individuals the deduction is $12,200, and it’s $18,350 for heads of household. As a result, only about 5% of taxpayers will itemize deductions this filing season, says Connick. “In the past it was more like 30%.” For some homeowners, itemizing simply may not be worth it this year. So when would itemizing work in your favor? As one example, if you’re a married couple who paid $20,000 in mortgage interest and $6,000 in state and local taxes, you would exceed the standard deduction and be able to reduce your taxable income by an additional $2,000 by itemizing.
What changed: In the past, property taxes in their entirety had always been deductible. (Here’s more info on how to calculate property taxes.) But now, this deduction is capped at $10,000 for those married filing jointly no matter how high the taxes are.
Why it’s still important: Taxpayers can still take one $10,000 deduction, says Brian Ashcraft, director of compliance at Liberty Tax Service. Just note that this year, property taxes are on that itemized list of all of your deductions that must add up to more than the standard deduction ($24,000 for a married couple) to be worth your while. And remember that if you have a mortgage, your taxes are built into your monthly payment.
What changed: If you put less than 20% down on your home, odds are you’re paying private mortgage insurance, or PMI, which costs from 0.3% to 1.15% of your home loan. Good news! The new tax bill extended the ability to deduct the interest on this insurance, a deduction that was set to expire, says Connick.
Why it’s still important: The PMI interest deduction is also an itemized deduction. But if you can take it, it might help push you over the $24,000 standard deduction. And here’s how much you’ll save: If you make $100,000 and put down 5% on a $200,000 house, you’ll pay about $1,500 in annual PMI premiums and thus cut your taxable income by $1,500. Nice!
What changed: Nada. The Residential Energy Efficient Property Credit was a tax incentive for installing alternative energy upgrades in a home. Most of these tax credits expired after December 2016; however, two credits are still around. The credits for solar electric and solar water heating equipment are available through Dec. 31, 2021, says Josh Zimmelman, owner of Westwood Tax & Consulting, a New York–based accounting firm.
What changed: In the good ol’ days of 2017, if you worked from home at all, your office space and expenses could be deducted. Now this deduction is gone completely for employees who have an office to go to but work from home occasionally.
Why it’s still important: Good news for all self-employed people whose home office is the main place they work, you can still take a $5-per-square-foot deduction for up to 300 square feet of office space, which amounts to a maximum deduction of $1,500. Understand, however, that there are strict rules on what constitutes a dedicated, fully deductible home office space. Here’s more on the much-misunderstood home office tax deduction.
What changed: Not much, except that for this filing season, these home improvements will need to exceed 7.5% of your adjusted gross income. So if you make $60,000, this deduction kicks in only on money spent over $4,500.
Why it’s still important: The cost of these improvements can result in a nice tax break for many older homeowners who plan to age in place and add renovations such as wheelchair ramps or grab bars in slippery bathrooms. Deductible improvements might also include widening doorways, lowering cabinets or electrical fixtures, and adding stair lifts. Caveat: You’ll need a letter from your doctor to prove these changes were medically necessary.
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