Editor's Note: This story originally appeared on Point2.
Move over, spring! It’s tax season that’s on everyone’s minds.
For many Americans, this time of the year is about making sure their tax returns are filed correctly by mid-April. And, as a homeowner, the post-filing relief can only be rivaled by the satisfaction of finding out you can benefit from more tax deductions than you initially thought.
Tax deductions lower the income you’re taxed on, thereby reducing tax liability and leading to a lower tax bill. Homeowners can benefit from a number of such deductions, including mortgage interest, property taxes, and home office expenses.
So, as you wrap up your returns, make sure to check your eligibility and scan the Internal Revenue Service’s official information on 2021 homeowner tax returns. Following is a look at the difference between itemized and standard deductions, followed by itemized tax deductions that every homeowner should know about.
Standard deduction versus itemized deductions
First things first: You can’t do both.
Every tax year, you can either take the standard deduction or claim itemized deductions. Many taxpayers take the standard deduction on account of less paperwork, more straightforwardness, and because it can make up for the 2017 cap on property tax deduction. But the choice depends on your situation.
The standard deduction essentially represents a flat sum that reduces your taxable income. The amount differs depending on your filing status (single filer, married couples filing separately, joint filer, head of household) and changes over time. For example, for the 2021 tax year, the standard deduction for a head of household is $18,800 — that’s $150 more than it was for 2020 and $600 less than it will be for the 2022 tax year.
If you go for the standard deduction, you can no longer itemize any further deductions. Check out the IRS interactive tool to see how much your standard deduction is. If the standard deduction you qualify for is less than the sum of your itemized deductions, then itemizing is the better option that can save you money — even though it comes with more forms and time spent on proving your entitlement for said deductions.
1. Property tax deduction
Property tax deduction allows homeowners to write off their property from their federal income taxes. The assessed property tax is usually used by local administrations to fund school districts, police and fire departments, local infrastructure, and public services such as garbage pickup. If you bought or sold your home during the tax year, you can usually deduct property taxes paid during this time — prior to the sale or since the purchase, respectively.
Notably, property taxes vary heavily depending on the area you live in (county, city, or even neighborhood) and, since 2017, the deduction amount was capped at $10,000 for all state and local taxes combined. This cap is what may influence homeowners to go for the standard deduction instead of itemizing, in hopes of saving more.
2. Mortgage interest deduction
When filing tax returns, checking home mortgage interest deduction (HMID) eligibility is one of the first things homeowners with a mortgage do. Ideally, this deduction fully writes off the mortgage interest amount from the federal income tax of those who qualify.
More often than not, eligible homeowners can deduct the entire home mortgage interest, but the exact deductible sum depends on several factors, such as the date and amount of the mortgage, as well as how you use the mortgage proceeds.
3. Rental expenses deduction
Those who rent out part of the home may benefit from rental expenses deductions. For instance, any amount going directly toward your tenant’s use (like painting the room they live in) may be fully written off as a rental expense. While you still owe tax on the rental income you receive from the tenant, you can still write off expenses for the rented space, such as: home mortgage interest, mortgage insurance premiums, real estate taxes, and even some nondeductible personal expenses like painting the house exterior or electricity.
Speaking of, when it comes to expenses covering the entire property (like heat and other utilities), you need to divide them between the part of the property rented out and the part used for personal purposes. In this case, the two most common methods for calculating expenses are by the number of rooms or by square footage. Notably, the qualification criteria and method of calculation change if you rent out a second home or a vacation home you don’t use.
4. Home office deduction
When part of your home is exclusively used for non-residential activities, such as working from home, you may be eligible for a home office deduction. If your home office qualifies as your principal place of business, you can deduct home office costs, certain utilities, repairs, maintenance, and other related expenses.
Note that you may be eligible if you are self-employed, an independent contractor or a business owner, and not an employee of a company. Check out the IRS page on the business use of your home for more examples and case-by-case scenarios.
5. Necessary home improvement deduction
This deduction frequently falls under the umbrella of “medically necessary expenses” and can often be fully written off. It includes the dollar amount paid for health care equipment or for medical installations necessary for increased accessibility such as handrails, support bars, building wheelchair ramps, and even widening doorways.
It’s also important to know the difference between repairs and improvements. While home repairs like replacing a broken window pane cannot be deducted, certain necessary improvements like putting in new plumbing or wiring can sometimes be written off even if they are not medically mandated.