All of us are aware that owning a home has some definite potential tax benefits. Mortgage interest and property taxes are deductible on your personal income tax return. However, how do we make your home be MORE or a tax benefit on your return?
Interest deductions seem to be a pretty straight-forward item on your tax return. The interest amount is provided by your mortgage company each year on form 1098. This amount is then carried onto Schedule A and any tax benefit carried onto your form 1040. But what are you missing? The equity in your home may be a great way to tap into more deductible amounts. Are you paying off credit card debt, student loans, investment loans, or other debt? Refinancing these items into an equity loan secured by your residence may make these expenses deductible, and with rates, where they are at it may also lower your overall payments. Personal credit card interest is not deductible, but putting that into an equity loan may be. Student loan interest is limited to $2,500 annually (and further limited for high income earners), but rolling this into an equity loan may allow for more deductions. Investment interest (loans on assets that produce interest, dividends, or other passive income) is limited to your overall investment income. Without the income, the expense is not deductible, but putting this debt into a home equity loan can change that. Your financial advisor can help you determine if securing these items by your home is a good financial decision and not just a good tax decision. However, when taking on additional debt secured by your home not only should you involve your financial planner, but you must also stay under a few limits. The home equity debt on the home may not exceed the smaller of $100,000 or the actual equity in your home. Also, the loan to buy, build or improve your home may not exceed $1 million (under a recent IRS tax court case, this limit is now based on per taxpayer not per residence; so joint ownership with a non-spouse would allow the loan to be as high as $2 million!).
Home office deductions are another way to get your home to do more tax “work” for you. If you have your own small business or rental, or even just have an office at home for your job as an employee, the home office deduction may be available to you. When calculating the home office deduction you are allowed to not only write-off a portion of your already deductible home expenses (interest and property taxes), but also your non-deductible expenses such as utilities, insurance, repairs, maintenance, and even a portion of the cost of the home itself.
Credits are always another great benefit for taxpayers, and your home can offer you a few of those as well. Energy efficiency improvements done on your home can mean up to a $500 tax credit, and “going green” can be even more beneficial. Expenses for renewable energy improvements can mean a credit of up to 30% of the cost of the improvements! Last but not least is the Mortgage Interest Credit. This credit requires a few more hoops to jump through (a government certificate must be obtained from your state housing finance agency and meet some low income limitations), but can also mean a savings of up to $2,500.
Not only can your home “work” for you with these tax benefits, one should not forget that most tax deductions mean you had to spend some money for the tax deductible item. Since tax deductions only provide a potential tax benefit of a percentage (based on your tax rate), eliminating or reducing the expense itself is always a better financial solution.
Interest rates are still low, so don’t forget to review your mortgage terms and see if today may be a good day to refinance that loan. Also, paying extra principal on your loan helps save you overall interest costs, so rounding that payment up each month is rarely a bad idea.
Property taxes are based on your “estimated fair market value” so don’t forget to review the annual assessment your community sends out each year. You can dispute that amount with the assessor (usually during the first few months of the new year) and possibly lower your property taxes.
Taking a home office deduction can potentially affect your basis and/or gain when you sell your home. Taking the simplified method (based only on the square footage of your office) may be better in the long run when you sell your home (the simplified method saves your from decreasing your basis).
Reilly, Penner, and Benton LLP can help you with these items and many more. Saving money, through tax reductions and reducing expenses, is one of our goals. Don’t leave any saving opportunities untapped. We can review your tax positions help you find any missing savings and help you grow your wealth. We are here to help so don’t hesitate to contact us….