Owning your own home may be the American dream, but it doesn't come cheap. On top of the down payment and monthly mortgage payments, the average US homeowner pays $15,405 per year for maintenance, utilities, taxes, and insurance, according to real estate company Clever.
All those expenses come with a silver lining, however -- tax credits and deductions for your home that can lead to a bigger tax refund. For homeowners, learning as much as you can about your potential tax benefits can help you maximize your tax refund when you file your income tax return.
Most homeowners with mortgages know they can deduct payments toward their loan interest, but many tax deductions and tax credits involved in owning a house are less obvious. Learn about all the possible tax breaks for homeowners to get the biggest refund possible on your taxes.
How do homeowner tax breaks work?
Most income tax breaks for homeowners are tax deductions, which are reductions in your taxable income. The less of your income that 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 single tax filers, $25,900 for joint filers, or $19,400 for heads of household or married filing separately -- or itemize deductions, such as gifts to charity and state taxes.
To take advantage of homeowner tax deductions, you'll need to itemize your deductions using Form 1040 Schedule A. Your decision to itemize will depend on whether your itemized deductions are greater than your standard deduction. All of the best tax software can quickly help you decide whether to itemize or not (as well as help you fill out all of the tax forms mentioned in this article).
Tax credits for homeowners don't require you to itemize. They directly reduce the amount of taxes you owe, and you can usually get those credits whether or not you itemize deductions.
Mortgage interest is the biggest tax break for homeowners
Mortgage interest -- or the amount of interest you pay on your home loan yearly -- is one of the most common tax deductions for homeowners. It's also often the most lucrative, particularly for new homeowners whose payments generally go more toward loan interest during the first years of a mortgage.
Homeowners filing taxes jointly can deduct all payments for mortgage interest on loans up to $1 million, or loans up to $750,000 if made after Dec. 15, 2017. Single filers get half those amounts -- $500,000 or $375,000, respectively.
To deduct your 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 Form 1098 into Line 8 of 1040 Schedule A.
Mortgage points are tax-deductible, too
You can buy mortgage points, also called "discount points," when buying a house to decrease the interest on the mortgage. Each 1% of the mortgage amount that home buyers pay on top of their down payment generally reduces their interest rate by 0.25%, though the exact amount will depend on the lender and the loan.
Discount points can save you big money on a 30-year mortgage by lowering the total interest you'll have to pay across decades, but they can also save you money on your taxes when you buy them. The IRS considers mortgage points to be prepaid interest, so you can add the amount paid for points to your total mortgage interest that's entered on Line 8 of 1040 Schedule A.
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