The new deadline for filing last year’s taxes is Wednesday, July 15, 2020. Time to review the current tax implications of owning a home.
First, we need to itemize homeowner deductions if we decide to claim them on our federal returns. There are a number of deductions available, but if you’re like most homeowners, you won’t itemize and claim them. This is because the IRS standard deduction is quite high since the Tax Cuts and Jobs Act of 2017. The standard deduction that applies to the 2019 tax year is $24,400 for married partners filing jointly, $12,200 for single and married people filing separately, and $18,350 for single heads of households.
Most people prepare an itemized worksheet at least for their own knowledge — if only to compare the standard deduction against the itemized total before deciding how to file, or to show their accountants the expenditures. So, here are some major deductions of note at the current time.
Real Estate Taxes
There’s a field on Schedule A to deduct property taxes you’ve paid last year as a homeowner. Local tax authorities assess real estate tax — property tax, in everyday conversation — according to your home’s location and school district. Substantial renovations, such as additions that require permit applications, are often noted by local officials and raise the appraised value of a home.
A home is taxed on its assessed value, which should be lower than fair-market value. You’ll receive statements, and can also contact the local tax authority for the precise amount. A homeowner can pay these tax bills with the tax collector directly; yet for many people, these taxes are taken automatically, from a mortgage escrow account.
Note: In 2017, federal law capped the formerly unlimited local and state deductions at $10,000 ($5K if you’re a married partner filing separately). This limit is for property taxes combined with state and local income and sales tax.
In most states, homeowners receive a form with simple instructions on applying for the homestead tax exemption, and the deadline for getting the form in to get credit for the year. This allows homeowners to shelter a portion of their primary home’s value from the property tax calculation. This is part of the states’ protection of homeowners from steep local taxes. Some states offer the exemption across the board; others offer break to particular groups such as veterans, seniors, and people with disabilities.
Your exemption, once issued, stays in place as long as you live in the home. The local tax assessor should apply the exemption for your home annually, until you move, or you or a co-owner pass away.
Most people won’t itemize, so they won’t claim mortgage interest. But if you recently bought a home, the amortization schedule involves paying a lot of interest early on, so this item could be substantial.
Your mortgage company should have sent you an interest statement early this year, showing what you paid in 2019. Within specified restrictions, mortgage insurance premiums count, along with your mortgage interest and private mortgage insurance (PMI), for deductions on Schedule A, in light of the Mortgage Insurance Tax Deduction Act of 2019 (the “Secure Act”). This tax break is not only good for 2019, but retroactive to 2018 — so, some people will benefit from an amended 2018 tax return.
Note 1: You can deduct interest on home equity loans and home equity lines of credit (HELOC), subject to a cap on the amount you pay in interest on combined this loan combined with your mortgage loan. HELOC interest is deductible if you took out the loan to buy or renovate a home. The HELOC’s average interest rate is much lower than credit card interest. Expect applying for a HELOC to get a lot harder during and after 2020.
Note 2: Did you buy down your mortgage rate at closing? You may be able to deduct those discount points on Schedule A.
Updates to the Home Office Deduction
You may deduct home office expenses including the use of areas in your home for work and for business-related storage, if you’re self-employed and use part of your home exclusively for your business. What if you’re home because of health-related work-from-home mandates? When 2020 taxes come due, can you deduct home office space for the time you worked at home? Probably not. Consult with your accountant regarding your particular situation, but know that the Tax Cuts and Jobs Act jettisoned W-2 employees’ home office deductions for the tax years 2018 through 2025. Microsoft calls this change in the law “grossly unfair,” but there we are.
Clearly, those who start online businesses and pivot to self-employment or independent contractor status may deduct the portion of the home used for their businesses on Schedule C of their returns. If you’re using actual expenses instead of the simplified method, deduct $5 per square foot of office space, up to 300 square feet — so, up to $1,500 — and the portion of your communications equipment and utilities used in business. Also deductible are transportation, meals and entertainment costs for business meetings, and continuing professional education and licensing fees.
Disaster-related expenditures are not taxed as gross income. This could cover child care, commuting costs or medical costs related to Covid-19, and “reasonable and necessary” emergency expenses such as buying a data plan, devices, and office furnishings and supplies for use at home.
Indeed, as Microsoft observes, “California, Pennsylvania, Illinois, Montana, Iowa and New Hampshire all require employers to reimburse their employees for necessary job expenses they pay themselves. These may include at least some home office expenses.”
Green Energy Upgrades
Remember the Residential Energy Efficient Property Credit? It incentivized people to install alternative energy systems, and was slated to sunset (pardon the pun) at the end of 2016. But under the Secure Act, credits for solar electric and water heating systems now extend through Dec. 31, 2021.
For home installations done in 2019, you can get a 30% credit (no need for itemized deductions here). The provision retroactively reinstated a $500 deduction for specified energy-efficient upgrades in 2018; speak with your accountant if you did some home improvement in this area and believe amending your 2018 tax return could be worthwhile.
Medically Necessary Home Improvements
If you have a statement from your doctor saying so, equipment that supports health and accessibility at home are deductible medical costs. If the enhancements add up to more than 7.5% of your adjusted gross income, then these home adjustments — wheelchair ramps, guardrails, shower modifications, accessible doorways, stair lifts, the lowering of shelves, thermostats, and lighting and so forth — are completely deductible as long as they won’t increase the home’s assessed value.
If you sold a property in 2019, various costs can be deducted as long as you’ve lived in the home more than two years out of the last five.
On the other side of the coin, if you sell the home for more than you initially paid, capital gains are taxed on the profit you made selling your home, right? Well, say you did earn a capital gain from the sale of your primary home. Under current tax law, you may exclude up to $250,000 of that gain from tax — up to $500,000 for couples filing jointly.
Peace of Mind
We’re glad to be able to point out some key tax highlights to our readers during a complicated time in our financial lives. That said, this brief guide should not be taken as case-specific advice. Especially if you’re a new homeowner or opting to handle your returns yourself, we recommend doing your own thorough research on taxes, and the information from the Internal Revenue Service is a good place to start.
The best way to be sure you’re filing your taxes correctly is to consult with a professional. Today’s accountants use online portals to help their clients submit state and local taxes, as well as estimated taxes for the self-employed. Depending on a range of individual factors, some deductions are capped, and some credits and deductions may differ or not apply to everyone. A reputable accountant will ensure you’re getting every possible break, while steering clear of errors or anything that the tax authorities could find questionable.
Photo credit: Kelly Sikkema, via Unsplash.