Owning a home is a significant milestone in many people's lives. It comes with responsibilities, including understanding which expenses can help lower your tax bill and which won't. Let's break down five home ownership expenses that you can deduct on your taxes and five that you can't.
Tax-Deductible Expenses:
Mortgage Interest: If you have a mortgage, you can deduct the interest you pay on it, including cash-out refinances. This deduction applies to the first $750,000 of mortgage debt.
Discount Points: If you paid for discount points to reduce your mortgage interest rate during refinancing, you can deduct them. However, this deduction is usually spread out over the life of the loan.
Property Taxes: You can deduct the property taxes you pay on your home. This can be a significant deduction, especially if you live in an area with high property taxes.
Home Equity Loan Interest: If you use a home equity loan to make substantial improvements to your home, you can deduct the interest on it. Minor repairs and upgrades usually don't qualify.
Home Office Expenses: If you use part of your home for business purposes and meet IRS requirements for a home office, you can deduct a portion of your utilities, HOA fees, and hazard insurance based on the square footage of your office.
Expenses That Aren't Tax Deductible:
Homeowner's Insurance Premiums: While homeowner's insurance protects your home from various risks, the premiums you pay aren't tax deductible.
Refinance Fees: Fees associated with refinancing, such as loan assumption, credit report, and appraisal fees, generally aren't tax deductible.
Settlement Fees: Costs like appraisal fees, inspection costs, title insurance, and legal and recording fees incurred during the home purchase process aren't tax deductible.
Private Mortgage Insurance (PMI): PMI premiums paid after 2021 aren't tax deductible. Congress didn't extend the deduction beyond 2021.
Origination Points: Unlike discount points, origination points, which are fees charged by lenders to process your loan, aren't tax deductible.
Understanding these distinctions can help you make informed decisions about your finances as a homeowner. While some expenses offer tax benefits, others are simply part of the cost of homeownership. By knowing what's deductible and what isn't, you can better manage your finances and plan for the future.
