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Owning a home comes with numerous benefits, and one of them is the opportunity to claim various tax credits and deductions. Let’s look at some ways you can maximize your tax savings as a homeowner this year.
At a glance:
- Choose between itemizing or taking the standard deduction depending on tax savings potential.
- Homeowners can deduct property taxes, mortgage interest, and explore homestead exemptions.
- Understand capital gains tax rules when selling a home, including exclusions for profit up to $250,000 (or $500,000 for joint filers).
- Consider energy-efficient home improvements for tax credits like Energy Efficient Home Improvement and Residential Clean Energy Credits.
1. Decide whether you want to itemize or take the standard deduction
When filing your taxes as a homeowner, you have a choice between itemizing your deductions or taking the standard deduction. Which option is best for you depends on several factors — most importantly, whether your itemized deductions would give you a bigger tax break than the standard deduction.
Here are the standard deduction rates for tax years 2022 and 2023:
|Tax filing status
|Standard deduction 2023
|Standard deduction 2022
|Head of Household
|Married filing jointly and surviving spouse
|Married filing separately
When taking the standard deduction, you won’t be able to take certain homeowner deductions that are only available to itemizers. However, for many people, the standard deduction is still the best option because their itemized deductions would amount to less than the standard deduction. It’s all about which option will get you the biggest tax break.
2. Claim tax deductions and tax credits available to homeowners
What do homeowners get to write off on taxes?
Homeowners have the option to deduct the following:
- Property tax deduction – Married couples filing jointly can deduct up to $10,000 of property taxes, while single filers and those married filing separately can deduct up to $5,000. This deduction is only available if you itemize.
- Mortgage interest deduction – This deduction allows you to lower your taxable income by deducting mortgage interest you paid during the year. This deduction is limited to interest on up to $750,000 of qualified mortgage debt for single filers, heads of household, and those married filing jointly. If you are married filing separately, the limit is $375,000. This deduction is also only available to itemizers.
- Homestead exemption – Most states offer a homestead exemption to minimize property taxes for homeowners, but the rules and eligibility requirements vary greatly by state. To learn if you might qualify, head over to your county tax assessor’s website.
We’ll go over some other tax breaks available to homeowners — such as the Energy Efficient Home Improvement Credit — in more detail below.
What is the difference between deducting and depreciating?
First things first: You can only take advantage of real estate depreciation if you are a rental property owner who uses the property in your business. This deduction is not available to general homeowners for their primary residence.
That being said, the tax deductions we’ve discussed — property taxes and mortgage interest — are deductible in the year you’ve spent the money. Real estate depreciation is different in that you spread the deduction out over the useful life of the property.
How much of your mortgage can you write off?
While you can’t write off your entire mortgage payment on your taxes, you can deduct the interest on a mortgage up to $750,000 (or up to $375,000 for those married filing separately).
What does the homestead exemption do?
The homestead exemption is a reduction in the taxable value of your property. As an example, let’s say your home is worth $350,000 and your property tax rate is 1 percent ($3,500). If your state allows you to exempt the first $50,000 of your home’s assessed value, the taxable value of your home would drop to $300,000, reducing your tax bill to $3,000.
3. Make energy-efficient home improvements and updates
If you’re considering making some green energy home updates, we’ve got good news — there are some tax incentives available. Namely, the Energy Efficient Home Improvement Credit and the Residential Clean Energy Credit.
What home improvements are tax deductible 2023?
The Energy Efficient Home Improvement Credit allows you to claim 30 percent of the cost of installing eligible energy-efficient home updates. Generally, there is a $1,200 annual limit. Other limits apply depending on what kind of home improvement you are doing. Here are some updates that qualify:
- Exterior doors and windows
- Central air conditioners
- Electric panels
- Natural gas, propane, or oil furnaces and hot water boilers
- Home energy audits
- Electric or natural gas heat pumps, water heaters, or biomass stoves and boilers
The Residential Clean Energy Credit allows you to write off up to 30 percent of the cost of installing qualifying clean-energy systems to produce electricity or regulate your home’s temperature, including solar, wind, geothermal heat pumps, and fuel cells.
If you want to delve into this topic a little deeper, our article about the Inflation Reduction Act goes into these tax credits and their recent updates in more detail.
4. Know how capital gains taxes work
Thinking of selling your home? If so, you might be subject to capital gains tax.
The good news is you can exclude some of that gain from your taxable income. If you sell your home for more than you paid for it, you will not have to pay capital gains tax on the first $250,000 of profit ($500,000 if you are married filing jointly). If your profit is above this limit, you’ll pay capital gains tax on the excess. Unlike short-term capital gains that are dependent on your tax bracket, the long-term capital gains tax rate is determined by your income.
You can generally only claim this exclusion once every two years. You also need to have owned the property for at least two years and the house must have been your primary residence.
However, you can still qualify for a partial exclusion if you need to sell your home before the two-year mark due to “unforeseen circumstances.” This could include unexpected situations such as a change of employment or health issues that you “could not have reasonably anticipated” before you bought and lived in the home. Some examples include:
- A death in your family
- Divorce or legal separation
- Losing your job and not being eligible for unemployment compensation
- A change in employment status that leaves you unable to pay for housing or basic living expenses
- A pregnancy resulting in multiple births
- Natural or manmade disasters
Certain home improvements can increase your basis (and thereby reduce your gains) when selling your home. To qualify, these improvements must have added value to your home; repairs and general maintenance expenses do not count. This is why it’s crucial to maintain records of all home improvements — it may save you money down the road.
Here are just a few examples of qualifying home improvements that can reduce your gains:
- Additions such as a room, patio, or garage
- Fences and landscaping
- Roofs and siding
- Heating systems or central air conditioning
- Water heaters
- Kitchen updates
The IRS Publication 523, Selling Your Home delves into this topic in more detail.
5. Know what is NOT deductible for 2023
While homeowners can enjoy numerous tax benefits, not all homeowner expenses are tax deductible.
The following expenses are generally not tax-deductible for your primary residence:
- Your down payment
- Home insurance premiums
- Depreciation of the home
- Homeowners’ association fees
- Utility costs
Keep in mind that this is not an exhaustive list and different rules apply to certain rental properties you may own.
TaxAct® can help you if you are unsure whether a home expense is deductible. We’ll ask you detailed questions about your home expenses when you file and help you claim any related tax breaks (certain tax breaks may only be available in paid SKUs).
The bottom line
As a homeowner, understanding the various tax credits and deductions available to you is crucial for maximizing your tax savings. By implementing energy-efficient upgrades, taking advantage of tax deductions, and properly documenting expenses for home improvements, you can significantly reduce your taxable income.
And when you’re ready to file your tax return, check out our useful tax document checklist that includes a section for personal records such as mortgage interest paid and real estate taxes.