Tax deductions for homeowners

Tax deductions can help reduce your taxable income by the deduction claimed, lowering your overall tax burden. As a result, you free up cash for saving money or other purposes.

You can choose between claiming the standard deduction, a fixed amount that depends on filing status, or itemizing deductions, which means claiming all eligible individual deductions, including homeowner tax deductions. The standard deduction is an IRS-determined amount that you subtract from taxable income before calculating the tax due. For the 2023 tax year, the standard deduction is:

• $13,850 for single filers or married individuals filing separately

• $20,800 for heads of households

• $27,700 for married couples filing jointly or surviving spouses

Itemized deductions are qualified expenses determined by adding up the homeowner tax breaks and other tax deductions you qualify for. If the sum exceeds the standard deduction, itemizing is the best choice. It’s best to consult with a financial advisor or a CPA to find tax breaks for homeowners and maximize your deductions. 

Mortgage interest is the interest cost of any loans secured by your house, including first mortgages and home equity lines of credit (HELOCs). The mortgage interest deduction is often the most significant homeowner tax benefit available.

Married homeowners who file joint tax returns can deduct the mortgage interest they pay annually on loans of up to $750,000 — or $375,000 if you are married, but file separately. Any mortgage interest paid on balances beyond this threshold is non-deductible.

This deduction applies to mortgages taken out to buy, build, or improve your primary residence. Lenders typically send Tax Form 1098 to you in January to specify how much mortgage interest you paid in the previous year.

Taxpayers can typically deduct up to $10,000 of state and local income, sales, and property taxes paid, commonly known as the state and local tax (SALT) deduction. If you’re married but filing separately, the deduction is limited to $5,000 each. Depending on all the SALT taxes you pay, you may end up deducting your property taxes fully or partially.

If you’re legally self-employed and work from home, you can deduct a portion of home office-related expenses. These expenses can include part of your utility costs, homeowners' insurance, depreciation, rent, and mortgage insurance. You can deduct a rate of $5 per square foot for business use — up to 300 square feet — or base the deduction on the percentage of your home that’s devoted to business purposes. Again, it’s best to consult a financial advisor or CPA for assistance with this.

To qualify, you must regularly use part of your home solely for work, and it should be your principal place of business. The home office deduction is unavailable to W-2 employees — even those that work from home.

If you make eligible green improvements to your home, you may have the opportunity to offset some of this cost on your tax return. For example, installing energy-efficient insulation, doors, windows, water heaters, and heating and air conditioning units could land you a tax credit of up to $500. In addition, you could be eligible for a tax credit of up to 30% of the cost of specific energy-efficient systems that use solar, wind, geothermal, or fuel cell power to produce electricity or heat water.

Discount points are a percentage of your loan used to lower your monthly interest rate. You can pay discount points if you decide it's a good time to refinance your home. By prepaying interest, you pay more upfront costs at closing but receive a lower interest rate and pay less over time. When you itemize on your tax return, you can only deduct discount points paid on the first $750,000 of debt you owe.

Even if you’re eligible for deductions, you must itemize to benefit from homeowner tax deductions. Most deductions are claimed on Schedule A of your federal tax return. However, if you are self-employed, use Schedule C to report the business use of your home.

You may need to prove your deductions in the future, so keep copies of any year-end tax reporting statements, receipts for home office or real estate tax expenses, and documentation for energy-efficiency improvements.

Consulting with a financial professional can help uncover tax savings when you own your home. An experienced advisor can help first-time homebuyers determine whether buying a house helps with taxes and maximize deductions while reducing filing errors.