Owning your own home is a great feeling. After years of scrimping, you have finally saved up enough money for a down payment on your dream house. And now that you’re a homeowner, you’re able to use specific credits on your tax return. While using deductions and credits might sound complicated, it’s easier than you think. Follow these tips to make the most of tax season.
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Tax Credits and Deductions
Even though both are used on your tax return, there is a difference between a credit and a deduction. Credits are an amount of money that you can subtract from your taxes owed. Deductions are expenses that can be subtracted from your taxable income. By using both credits and deductions, you can get a significantly lower tax bill and a larger tax refund, depending on your financial situation.
As a homeowner, you can claim house-specific deductions for costs like:
- Mortgage Interest
- Home Equity Loan Interest
- Local and State Property Taxes
- Capital Appreciation from Selling a Home
- Medically-Required Home Improvements
- Home Office Expenses
These expenses will need to have proper documentation to be claimed on your tax return. That’s why it is crucial to keep meticulous records of any improvements or purchases you make for your home.
To use your claimable credits and deductions, you must first add up all your eligible expenses. From there, you can decide which is more beneficial, a standard deduction, or an itemized deduction. Then you’ll need to subtract all of your deductions from your taxable income. Once you have your final income amount, you can use all of your available credits to lower any taxes you might owe. Make sure you have applied all of your possible deductions and credits to get the lowest possible tax bill.
Depending on how you are filing your taxes, you’ll have to use a Form 1040 for standard deductions. If you are itemizing your deductions, a Schedule A along with your Form 1040 will be necessary. For tax credits, you can use the same Form 1040 for your return, unless you are claiming an earned income tax credit. In that case, you must also include a Schedule EIC if you plan to list any qualifying dependents.
While there are plenty of options for claiming credits and deductions as a homeowner, there are some costs you cannot claim on your tax return. Home expenses like home insurance premiums, homeowner association fees, transfer taxes, utility bills, or depreciation cannot be used as deductions or credits. If you incur any costs from refinancing your home mortgage, you also cannot claim those on your tax return. To find out if an expense is eligible to be claimed, you can use the IRS Interactive Tax Assistant to learn more about available tax deductions and credits for homeowners.
Additional Tax Tips
Get Your Refund Direct Deposited
After preparing your tax return, you might be excited to get your refund. To speed up the process, you should elect to have your money directly deposited into your bank account. This payment method not only saves you time waiting for a paper check to come in the mail but also speeds up the processing of your tax return. A refund paid through direct deposit can be as quick as a couple of weeks, compared to the usual three or four-week waiting period. Plus, you won’t have to worry about your money getting lost at the post office or stolen from your mailbox.
You might also want to consider setting up a dedicated sinking fund for any home improvement projects you have planned. Sinking funds are specific savings accounts that are used to accumulate money in small increments to pay for big purchases. Since becoming a homeowner, you have probably noticed that even the most minor home repairs can be expensive. To get ahead, create a savings account that’s manageable online. Then you can have your tax refund automatically deposited into your account while tracking your budget in real-time. You can even create scheduled transfers into your sinking fund to prepare for the next home improvement project.
Protect & Organize Your Records
Each time you purchase something for your home or pay an expense, you should keep a record of your payment. Every receipt you have needs to be organized and stored in preparation for next year’s tax return. If you don’t have a filing system in place, now is the time to set up a process for keeping your records. To protect your sensitive information, you should make sure to use a lockable fire safe or filing cabinet. Tax season is a perfect time for identity thieves to steal your social security number, birth date, or other relevant personal information. Protect yourself by keeping your records in a safe place.
If you are self-employed or a business owner that works out of your own home, you can use home office expenses as a tax deduction. However, you need to track all of your business-related expenses to claim them on your tax return. To keep a record of your expenses, you can use a dedicated business credit card or an electronic spreadsheet. Both of these methods are easy to use and more secure than collecting receipts throughout the year. No matter how you track your expenses, they should be up to date and appropriately categorized so that you can save time and money next tax season.
Make Energy-Efficient Updates
Depending on your home improvement project, you could receive additional credits or deductions if it makes your home more energy-efficient. If you are environmentally conscious and looking to lower your energy bills, a solar energy system could make you eligible for a residential solar energy tax credit. You could even add a wind turbine to your property for a residential renewable energy tax credit. For smaller investments, you can also replace doors, windows, and insulation. If you need a new roof for your home, some kinds of roofing materials can be eligible for tax credits as well.
Whatever you decide to improve in your home, you should take the time to research the tax credits you could be eligible for by making your home more energy-efficient. These projects might be expensive to purchase, but they could quickly pay for themselves in years of lower utility and tax bills. Energy-efficient improvements can also increase the value of your home as future buyers won’t have to worry about making these updates themselves.
Tax season as a homeowner doesn’t have to be stressful or expensive. Take advantage of all your available tax deductions and credits to make the most of your refund, and don’t forget to save all of your home project receipts. Next season will be easier if you have well-organized records and a plan on how to reinvest your money in your home.
Other Resources:
- Save your sellers closing disclosure to give to your accountant when you sell your house. There may be some tax deductible closing costs that will reduce your tax liability.
- Everyone usually accounts for closing costs and down payment when purchasing a house. Paul Sian gives us some insight on other costs that you need to account for when you purchase a home.
- Rental properties have been in a strong demand across the country. And, many investors are jumping in as first time landlords. Lynn Pineda shares some thought on what you need to know about buying an investment property for rental income.
- Do you think your paying too much in Property Taxes. Bill Gassett provides a great guide to dispute your property tax assessment. It certainly can’t hurt to try and reduce those high property taxes.
- Are you selling an investment property to buy a new one? Consider using a 1031 tax exchange. Danny Margagliano provides some great tips on using a 1031 Tax Exchange.
