Tax Planning Strategies for Homeowners
Tue May 26 2020
On average, homeowners pay $2,375 on property taxes for their home each year. Good thing being a homeowner means you get to take property tax deductions – and a whole lot more. To take advantage of these breaks, you just need to implement a few tax planning strategies.
Knowing what you can deduct and how it compares to a standard deduction lets you make the most of expenses that are fully or partially deductible. Let’s take a look at the common homeownership tax deductions as well as other household expenses that could save you in taxes. *
*This guide is for educational use only and should not be construed as tax advice. Please see a professional CPA or tax preparer for your specific tax planning purposes.
Tax Planning Strategy #1: Know Your Homeownership Deductions
You may have heard many times that buying a house is a great way to save on taxes. That’s because you can take more deductions than someone who rents. Be aware that homeowners insurance premium isn’t tax deductible, but plenty of other expenses are.
Here are some common deductions for homeowners.
Property taxes are the amount paid to the county you live in. Some counties, even in the same state, are higher than others depending on local tax laws. On average, Florida residents have a 0.98 percent effective property tax rate, and the average homeowner pays $1,752 in taxes. That’s about $300 less than the national average.
Mortgage interest is the interest on the loan to pay for your home. You can deduct what you paid in interest for the calendar year. And that interest adds up. Say, for example, you bought a home for $260,900 with 4.44 percent interest on a 30-year fixed-rate loan. If you put 20 percent put down and your loan is $208,720, you’d pay $169,390 in interest during the 30-year loan term. That’s $5,646 paid annually – a sizable deduction.
Private Mortgage Insurance
Private mortgage insurance is required on loans where less than 20 percent is put down on the house. It’s intended to protect the lender if stop making payments on the loan. PMI rates vary from 0.5 percent to 1 percent of the loan amount and can easily be several thousand dollars a year.
The ability to deduct PMI may be in jeopardy unless Congress extends the deduction. The Further Consolidated Appropriations Act of 2020 allows taxpayers to deduct PMI from the years 2018 through 2020.
Points on Your Loan
This is a deduction to consider in the year you purchased or refinanced your home. Points are paid to a borrower to reduce your interest rate. One point is equal to 1 percent in interest on the mortgage loan. These are also called discount points or loan origination fees.
Tax Planning Strategy #2: Consider Other Tax Deductions
Maximize your deductions by considering what else the IRS allows you to itemize and deduct against your income. Record keeping is essential to make sure you get the most out of your tax deductions.
Medical and Dental Expenses
Medical expenses that exceed 7.5 percent of your adjusted gross income are deductible on your tax return. These expenses include all out-of-pocket costs (included deductibles and co-pays) to doctors and dentists. It also includes the cost of hospital visits, psychotherapy, doctor prescribed weight loss or smoking programs, prescriptions, and medical aids such as wheelchairs, crutches, and guide dogs.
The money you put in the basket at church, the bag of clothes you donated to the thrift store, and the monthly sponsorship of an endangered animal are examples of charitable contributions. Generally speaking, you can deduct up to 60 percent of your adjusted gross income with these contributions, but make sure they are made to an IRS-recognized 501(c)3 and that you have a receipt. Not all charitable contributions are deductible up to 60 percent, either. Contributions to private foundations, fraternal societies, and veterans organizations may have lower limits ranging from 20 to 50 percent.
Self-employed individuals will file a Schedule C for all business expenses including supplies, utilities, marketing, and operational expenses. You can also deduct the cost of certain tools or uniforms that the employer requires but doesn’t reimburse. For example, a K-12 teacher is able to deduct up to $250 per year for educator expenses. A security officer can deduct uniform expenses not paid for or reimbursed by their employer.
Uninsured Catastrophic Casualty or Theft Losses
Property losses that homeowners insurance doesn’t cover but that were caused by a federally declared disaster are tax-deductible. The loss must be more than 10 percent of your adjusted gross income and you must subtract $100 from the total loss. Eligible losses may be caused by earthquakes, floods, fires, terrorist attacks, vandalism, and hurricanes, and more.
Sales Tax on Major Purchases
Sales taxes on major purchases can also be deducted, though many homeowners often overlook this tax break. This could include the sales tax on a car, boat, appliances, electronics, or materials for a home renovation. For example, if you bought a new car for $42,000 in Florida with a 6 percent sales tax, you can deduct $2,520 for the sales tax on your itemized return.
Pro tip: Home renovations can increase the value of your home and help you maximize profits when you sell it. If you bought your home for $250,000 and put $30,000 into a new kitchen, keep track of the records to have a new cost basis of $280,000 when you sell it, reducing potential capital gains.
Tax Planning Strategy #3: Know When the Standard Deduction Is Better
Add up all your itemized deductions on Schedule A to see what the total is. If your itemized deductions are less than the standard deduction, opting for the standard deduction allows you to file a simplified tax return – generally at less risk of an audit – than an itemized return.
Here are the 2019 standard deductions.
|Filing Status||Standard Deduction|
|Head of Household||$18,350|
|Married Filing Joint||$24,400|
What that means is you can automatically reduce your taxable income by the amount of the deduction. If you have more than the standard deduction in deductions, an itemized deduction may be the way to go. Talk with your financial advisor or tax preparer to determine which path is right for your financial goals.
Where to Put Your Deductions on Your Tax Return
How you file your tax return depends on whether you take the standard deduction or itemized deductions. Those taking the standard deduction get the benefit of filing a Form 1040A (formerly referred to as a Form 1040EZ). Those who itemize deductions must file Form 1040 and complete a Schedule A.
Don’t let the number of lines scare you from filing the Schedule A. Use every line time to determine whether you are eligible for other tax deductions to reduce your tax burden further. You aren’t required to have something on every line.
When filing your deductions, make sure you have good records in case you get audited. You aren’t required to turn your records in when filing, but most experts suggest keeping them for at least seven years after filing.
Use Schedule A to calculate the total value of your itemized deductions. Schedule A is broken down into major categories:
- Lines 1-4: Medical and dental expenses
- Lines 5-7: Taxes you paid (including property taxes on line 5b)
- Lines 8-10: Interest you paid
- Lines 11-14: Gifts to charity
- Line 15: Casualty and theft losses (uninsured)
You should note any major purchases you made for your house (or life) as well. The sales taxes on appliances, cars, boats, etc. are deductible on Line 5c.
Most tax software does a good job of walking you through what is the best way to file your taxes, either as a Form 1040A or Form 1040 with a Schedule A. But knowing what you can deduct helps you have the right records on hand.
Start Saving on Your Home Insurance