Your tax return might be a high point in your year, especially if you recently became a homeowner. Last year’s average refund, filed mid-year in July because of the pandemic, was $2,741.* This number could increase if you own a home and have dependents or children.
Your homeowner’s tax guide for 2021: 5 big breaks and 3 more benefits
This year, the IRS started accepting 2020 tax returns a little later — beginning February 12, 2021, with the traditional filing deadline of April 15. Tax season may be more complicated for some, depending on how you were affected by the pandemic.
Accounting for annual inflation, tax brackets, as well as the standard deduction, rose for taxes filed in 2020:
As you’ve probably experienced, the reformed tax law lets consumers keep more money. Lower tax rates and a higher standard deduction make this possible. (Looking ahead, here’s where you can find the new standard deduction/brackets for the taxable year of 2021.)
With a higher standard deduction, there may be fewer taxpayers who itemize (list out expenses that can be subtracted from annual taxes). If you don’t have much to itemize, taking the standard deduction exempts two times as much of your earnings.
But if you own a home, itemizing some or all of these tax breaks could potentially bring more savings:
1. Home equity loan/HELOC interest.
- Now you can only deduct home equity interest that’s been used for renovations — a significant change from years past. But for those planning to renovate, this change to the 2018 tax law offers bigger benefits.
- If you’re eligible to deduct interest for renovations, that amount will go toward your total deduction limit of $750,000 in mortgage interest. (See below.)
- This kind of loan may be labeled as a home equity line of credit (HELOC), home equity loan, or second mortgage.
2. Mortgage interest.
- The max for mortgage interest deductions lowered in 2018, dropping from $1,000,000 to $750,000. This deduction can include a secondary residence. Your secondary home can also be a condo, mobile home, or boat, though it’s a good idea to contact your CPA for details.
- For homes financed before December 15, 2017, the former deduction amount still applies.
- You’ll find all deductible mortgage interest on your Mortgage Interest Statement, or your lender-provided IRS Form 1098. States in which you have to file a state income tax return may allow you to write off your mortgage interest, even if you don’t itemize on your federal form.
3. Mortgage points.
- If you paid mortgage points — charged by your lender to decrease your interest rate — you can include them in your deductions. Point deductions may be limited for homes that cost over $750,000.
- You could deduct all your points at one time for the tax year they were paid. (If you bought a house in 2020, for example.)
- Or, you could deduct gradually, writing off a percentage of your points for every year you have your mortgage. Each point is equal to 1 percent of your total loan amount.
With mortgage rates still at record lows, now’s a prime time to sell and relocate. Connect with a local loan officer to learn how to leverage your refund.
4. Some home improvements.
- Home renovations considered a medical expense, including equipment costs and fees for installation, could be fully deducted. (On a related note, you may be able to deduct unreimbursed medical expenses that exceed 7.5 percent of your AGI, or Adjusted Gross Income.)
- Examples of medically needed home renos include ramps, stairway and doorway modifications, support bars, new outlets or fixtures, and warning systems, as long as they don’t increase your home’s value.
- You could also get a credit for up to 26 percent of the cost of installing solar panels, solar water heaters, and other forms of solar energy.
5. State/local taxes.
- Tax reform also restricted deductions for state and local taxes (SALT), but the good news is that this write-off wasn’t eliminated.
- For taxes paid in 2020, the total deductible amount per taxpayer for property, sales, and income taxes is capped at $10,000. If you bought and sold a home last year, you could deduct a portion of your former property’s taxes.
- You should see a tax benefit in most parts of the U.S., except in higher-tax areas. But since a SALT deduction can only be used for a combo of state/local property taxes and either state/local sales or income taxes, itemizing can get complicated. This is another good time to consult your CPA.
While tax deductions help offset your taxable income, you may also be eligible for some tax credits, which help decrease how much you pay in taxes:
6. Child tax credit.
- If you’re a homeowner with children or other dependents, you may appreciate that the max Child Tax Credit doubled following the reform in 2017.
- The credit increased to up to $2,000 for each child who qualifies and maxes out at $400,000 in income for joint-filing married couples. A $500 Credit for Other Dependents may be available for any additional dependents a taxpayer can’t claim.
- With higher income limits, more families are eligible and could get more back. And, up to $1,400 of the Child Tax Credit may be refundable as the Additional Child Tax Credit, making it possible to get a refund even if you don’t owe tax. The 2020 Adoption Credit also sits at $14,300 per child.
7. Recovery rebate credit.
- If you received an Economic Impact Payment in 2020 for COVID relief, you’ll need the accompanying Notice 1444 for your tax records.
- You could be eligible to claim the Recovery Rebate Credit when filing your 2020 taxes if your Economic Impact Payment was under $1,200 ($2,400 for married filing jointly), plus $500 for qualifying children. You might also qualify if you didn’t receive an Economic Impact Payment.
- To file, you’ll need to fill out the Recovery Rebate Credit Worksheet on 2020 Form 1040 or 1040-SR, used to tally the amount of credit you may be able to claim.
8. Retirement contributions.
- Like the Child Tax Credit, deductions for retirement account contributions may not technically be homeowner-specific but are probably going to apply. A new tax change in 2019 gave anyone putting money toward retirement a bigger break.
- Limits on IRA contributions increased up to $6,000, while max contributions for 401(k)s also have risen to $19,500.
- For taxpayers age 50 and older, you can add $1,000 extra to your IRA contribution or $6,500 extra to your 401(k). You typically can’t contribute more than you make. There’s also a retirement Saver’s Credit of $1,000 ($2,000 for married filing jointly), as long as you meet income qualifications.
Still, there are a few home-related expenses you can’t deduct for 2020: homeowner’s association (HOA) dues, home appraisal fees, homeowner’s insurance, and the cost of any home renovations that aren’t required for medical purposes. Most of these tax changes are enacted through 2025. And if you’ve started working freelance as a result of the pandemic, this may be the year to look into the home office deduction.
Can you cash in your tax return for a brand-new place?
As a homeowner, you may be getting more money back, and you could use these funds toward a new down payment. A bigger house. More outdoor space. Even a move to a more affordable zip code, if you’re working remotely. Prequalify and find out what’s possible.
*”Filing Season Statistics for Week Ending July 24, 2020.” IRS, 2020.
For educational purposes only. Cornerstone Home Lending, Inc. and its affiliates do not provide tax advice. Please consult your professional tax advisor for specific guidance.
Sources deemed reliable but not guaranteed.