Please note this article is not intended to provide tax advice, it is strictly for informational purposes only. We encourage everyone to consult with a tax professional for all of their tax-related questions. For more information on tax implications and homeownership, visit IRS.gov.
According to Benjamin Franklin, “nothing can be said to be certain, except death and taxes,” and as we are quickly approaching tax season, it’s time to be looking for ways to save on those taxes. Homeowner tax deductions are one of those ways, offering many potential tax write-offs, some that are often overlooked.
With Rhode Island being the 10th highest state in property taxes, with an average of 1.53%, homeowners are looking for ways to reduce these taxes as much as possible. Let’s look at some of the options that are available to Rhode Island property owners.
What is a Tax Deduction?
Also known as a tax write-off, a tax deduction is an incentive allowing a person to subtract certain expenses from their taxable income. It is a cost that can be deducted to lower the amount of taxes owed to the government. These deductions can be related to work expenses, mortgage interest, medical bills, and many other areas of life. While many of these deductions stay the same each year, there are some annual changes as the IRS releases the new regulations for that tax season.
When preparing taxes, an individual will want to decide if taking the standard deductions or itemizing each individual deduction will work best for their situation. Looking at both options helps a person choose which benefits them the most.
This is the easiest option for getting taxes done. The standard deduction is a flat amount that is claimed and deducted from a person’s gross income. The amount that can be deducted changes every year and is different for individuals, married couples, and heads of households. While this option is the easiest, it may leave a person with a smaller deduction than if that individual itemizes their taxes.
In order to receive any homeowner deductions, a person will need to itemize. This means keeping financial records of qualifying deductions throughout the year. It takes some extra effort to itemize, but it often results in more tax savings and is worth the effort.
Home Specific Tax Deductions
There are several tax deductions related directly to owning a home. Some of these are available every year and some are available for specific projects that have been done throughout a certain year. These homeowner deductions can offset the expense of projects such as updating to an energy-efficient water heater or replacing windows with more energy-efficient ones. Let’s take a look.
Property Tax Deduction: Homeowners that itemize may take a property tax deduction. This allows a homeowner to deduct the taxes they pay on their property, up to $10,000. In 2019, an estimated $6 billion in income tax was saved by property owners taking this deduction
Mortgage Interest Deduction: The Tax Cuts and Jobs Act reduced this tax break for homeowners, but they can still deduct interest on up to $750,000 of mortgage debt to buy or improve their first home, or a second residence. Good news for homeowners looking to find ways to deduct from their tax bill.
Home Mortgage Points: This is different from your mortgage interest. These are fees that are paid to your lender at closing to buy down your interest rate. If a homeowner paid these home mortgage points at closing, these fees can be deducted from the tax return, either all at once or over the course of the loan.
Personal Casualty Losses/Theft or Disaster Losses: If a homeowner suffers loss of property during the course of the past year from either theft, damage, or a declared disaster, the cost of those household items can be deducted. This only applies if insurance does not cover the cost of the items being deducted.
Home Equity Line of Credit (HELOC): When a HELOC is used to make major improvements or renovations on a home, the interest from the loan can be deducted. If the homeowner chooses to use the loan to make a large purchase that is not house-related, such as a boat, or if it is used to pay off debt, the interest cannot be deducted.
Home Office Renovations/Repairs: People who work from home and have a dedicated office space for that work can deduct repairs made to the office in that tax year. If there is a bigger renovation affecting the value of the home for resale, it can be depreciated over time. This only applies if that space is used for business and no other purpose.
Energy Tax Credits
The energy tax credits were extended once again, through December 31, 2020. This gives homeowners who made energy-efficient improvements during the year another chance to claim these expenses on their tax return. These upgrades to a home can range from adding solar panels to water heaters, windows, and insulation. Here’s how these credits work.
Residential Renewable Energy Credit
Solar, wind, and geothermal equipment creating energy can qualify for this tax credit, as well as fuel-cell technology. The U.S. Department of Energy states that this credit can be claimed in both your principal residence and your second home. The one exception is for fuel-cell equipment. This only qualifies if installed in your main home.
The renewable energy credit is 30% of the cost of equipment plus installation, with no upper limit, except again for the fuel-cell technology. The maximum credit here is $500 for every half-kw of power capacity.
Some of the equipment included in this credit are:
- Geothermal heat pumps meeting the Energy Star guidelines
- Solar panels used for generating electricity in the homeowner’s home — the electricity cannot be sold
- Solar-powered water heaters that heat over half of the home’s water
- Wind turbines used to generate electricity within the home — again, the electricity cannot be sold
Energy Property Tax Credit
The Department of Energy has certain standards that must be met in order for equipment and materials to qualify for the Nonbusiness Energy Property Credit. The manufacturers have some products labeled and can let homeowners know if other products meet the criteria.
There are two different categories of upgrades for these improvements, according to the IRS.
The first category is the “Qualified Energy Efficiency Improvements.” This includes materials that make your home more energy-efficient, such as insulation in the walls, exterior doors, window and skylights, and even roofing materials.
“Residential Energy Property Costs” is the second category the IRS recognizes. This includes energy-efficient electric heat pumps and water heaters, central air conditioning, and biomass fuel stoves. It also includes your natural gas, propane, or oil water heaters, furnaces, hot water boilers, and advanced circulating fans.
A homeowner can claim tax credit for 10% of the qualified energy efficiency improvements, up to a maximum of $500. The residential energy property costs can be claimed at 100% of the cost, up to a maximum of $300.
Overlooked Tax Deductions
Owning a home can be expensive, and the cost of upkeep is an ongoing factor of life. While these tax deductions don’t necessarily have to do with the home itself, they are often overlooked write-offs that can help a homeowner catch a break on their taxes for the year. These tax write-offs include:
Sales Taxes: Homeowners can deduct sales tax off their income tax return if a large purchase, such as a boat, RV, or car is made.
Charitable contributions: Financial contributions are often remembered, as are material donations, but many people forget they can also deduct goods purchased for charitable bake sales or dinners as well.
Health Insurance Premiums: Self-employed individuals that are paying for their own health insurance can deduct 100% of their premiums come tax time.
Business Expenses: Office supplies, computers, headsets and anything else needed to conduct business can also be written off. Depending on the nature of the business, items may be pretty off the wall. As long as the business owner or employee can prove it is related to the business, it is allowed.
Continuing Education: Up to 20% of the first $10,000 spent on continued education can be deducted off taxes using The Lifelong Learning Credit.
Job Fees: If money was spent this past year on searching for a job, as many people were, this money can be deducted from an individual’s tax bill, as long as it can be proven that it truly was spent on a job search.
Self-Employed Social Security: Self-employed individuals pay a large amount of social security and Medicare taxes. The employer portion of these taxes, 7.65% of them, can be deducted off the taxable income, as those are normally paid by an employer.
Wrapping It Up
With tax season upon us, these tax breaks for homeowners may help ease the financial burden of owning a home. While homeownership is exciting, it can also be a bit stressful in worrisome times. If you’re looking for other ways to save a bit, or if you are looking to buy or sell a home, let us know. We’d love to chat with you and help you determine the next best steps for your situation.