Taxes are a mainstay in life. However, you might not know that there are certain deductions, credits, and incentives that you can qualify for to lower your tax payments. By putting in more effort and being more organized, you can save a lot of money.
Itemized Versus Standard Tax Deductions
Taxpayers must know the difference between standard and itemized tax deductions and what it means to them. Most taxpayers choose the standard deduction when filing taxes because this is the easiest. A set amount is set each year. For instance, in 2020, married couples who filed their taxes jointly had a standard deduction of $24,800. If they filed separately, they had the same standard deduction as singles, which was $12,800. The standard deduction for household heads, on the other hand, was $18,650.
If you have been using the standard deduction, it is advisable to check if you can lower your taxes by using itemized deductions instead. As a homeowner, you immediately have certain deductibles you can include in your itemized computation.
The interest you paid for your mortgage during the year is tax-deductible. If you bought the house on or before December 15, 2017, you could deduct the interest from the first million of your mortgage. If you bought the house after that, you could only deduct the interest from the first $750,000 of your mortgage.
If you bought discount points to lower your interest rate at the time you got your mortgage, the cost of those discount points is deductible. If you are paying private mortgage insurance (PMI) as your mortgage lender requires, your monthly insurance payment is deductible. You can also deduct the funding fee for a VA loan, the guarantee fee for a USDA loan, and mortgage insurance for an FHA loan.
If you took out a home equity loan or a home equity line of credit (HELOC), the interest you paid for the year is tax-deductible, but only if you used the loan for home improvements. The cost of your home improvements is also tax-deductible if they are necessary. For instance, installing modifications to accommodate the elderly or the disabled members of the family is deductible.
If you own a small business and you work from your home office regularly and use the space exclusively for the business, you can deduct expenses such as rent, maintenance, repairs, utilities, and real estate taxes based on the ratio of the space to your entire residence. A simpler method is to multiply the area of your home office by five dollars per square foot. This has a cap of 300 square feet. You must check which method will be more advantageous for you.
The property taxes you pay locally and to the state are tax-deductible. The cap is $10,000 for joint filing as a couple or $5,000 if you file separately or for singles.
Green Tax Credits
You can also qualify for a section 45L tax credit for energy efficiency. This has been extended to cover residential units finished after August 8, 2005 and sold, leased, or lived in before January 1, 2022. You qualify if you had the house built, not if you bought it from a developer. In the latter case, the developer is the one who qualifies for the tax credit.
The credit is $2,000 per residential unit if the house is certified to have an annual energy consumption of 50 percent less than that of the 2006 International Energy Conservation Code (IEEC). A fifth of the energy reduction must come from improvements in components of the building envelope consisting of the foundation, walls, and roof.
For newly constructed and existing homes, you can get tax credits up to 26 percent of the cost of the installation of renewable energy systems. These include geothermal pumps that use natural heat from the earth, residential wind turbines, solar energy or photovoltaic systems, fuel cells, and stoves that burn biomass fuel.
For existing homes that are not newly constructed, you can get tax credits of up to $500 for installing other energy-efficient features that are recommended by the Energy Star program. This includes certain types of roofing, skylights, doors, windows, heating, ventilation, and air-conditioning (HVAC) systems.
It is advisable to have a checklist of allowed tax deductions, credits, and incentives so that you are aware of these in daily life. Prepare envelopes for each type and file your receipts and other documentary proof diligently. When making home improvements or purchasing new appliances, choose those that give you tax credits. This will not only help you save money, but it can also motivate you to do good.