If you own a home, you’re probably thinking about the top tax benefits of homeownership. But you may not know how your single biggest asset (your home) can help you save on your tax bill. You probably already know that your biggest asset could also help you save on your taxes. It’s the “how” that’s tricky, since the tax benefits of homeownership vary by state and often change year-by-year, even at the federal level.
Just in time for tax season, I talked to two tax analysts from Wolters Kluwer Tax and Accounting, a global company specializing in information, software and services, who have plenty of great tax tips for homeowners filing in 2017.
- Mark Luscombe (JD, LLM, CPA) is a principal federal tax analyst. He covered my questions about homeowners’ taxes nationally.
- Rocky Mengle is a senior state tax analyst. He responded to my questions asking for a state tax perspective.
Q: What are the most popular tax breaks homeowners can take advantage of on their federal and state income taxes?
A: The most popular federal tax breaks for homeowners remain the mortgage interest deduction, the deduction for real estate taxes, and the exclusion on sale of a principal residence. The House Ways & Means tax reform blueprint would drop the real estate tax deduction, preserve a mortgage interest deduction and is silent on the home sale exclusion.
A couple of new developments on the mortgage interest deduction. The IRS acquiesced in the Voss case, which means that the mortgage interest deduction limits of $1 million for mortgage loans used to buy, build or improve a home and the $100,000 limit on home equity loans will now be applied on a per-taxpayer basis rather than a per-residence basis. Also, to help control abuses in claiming the mortgage interest deduction, Form 1098 will now report not only mortgage interest but also the amount of the mortgage, the address of the property and the loan origination date.
A couple of other more recent tax breaks for homeowners, the mortgage insurance premium deduction and the mortgage debt forgiveness exclusion, expired at the end of 2016, and their future is tied up in the tax reform debate and may not be extended.
Q: Are there any tax credits available in the energy efficiency/green realm? How do they work? What is the true net benefit for homeowners?
A: There have been two energy-related tax breaks for homeowners.
The Nonbusiness Energy Property Credit is a 10 percent credit for certain energy-efficient improvements such as windows, doors, insulation and roofs and a 100 percent credit for certain property installations such as a qualified natural gas, propane or oil furnace, hot water boiler, or advance main air circulating fan. The credit has a lifetime limit of $500 and has been around for several years, so many taxpayers may have already used up the credit. It also expired at the end of 2016, so it is currently not available for 2017.
The Residential Energy Efficient Property Credit is a 30 percent credit for qualified fuel cell, wind energy, geothermal electric, solar electric and solar water heating property. It expired at the end of 2016, except it continues through 2021 for solar electric and solar water heating property, with a phase-down starting in 2020.
There was an Energy Efficient Appliance Credit that expired in 2013, but it was directed at manufacturers of appliances, not homeowners.
Q: What are any other tax credits or deductions that people never remember to take?
A: Job search expenses are deductible if you’re looking for a job in the same field but not if searching for a new job. Moving expenses are deductible if certain distance requirements are satisfied. Taxpayers often seem to forget that the moving expense deduction can apply to moving to your first job even though the job search expenses are not deductible for the first job.
Taxpayers often overlook the child and dependent care credit, probably because they have failed to collect the taxpayer identification numbers for the child care personnel that would be needed to support claiming the credit.
Q: What mistakes do home buyers/sellers/owners make with their taxes?
A: Homeowners often do not handle points on home loans correctly. On the original mortgage, points that are related to interest adjustments may be deducted in the year paid; however, on a refinancing loan, the points must only be deducted over the term of the loan. When the home is sold or the loan is otherwise paid off, any remaining points that have not been deducted may be deducted in that year.
Homeowners also are not very good at keeping track of whether line of credit funds were used to improve a home. If used to improve a home, such funds could fall within the $1 million limit rather than the $100,000 limit.
Next week: In the second part of our conversation, Mark, Rocky and I focus on tax issues faced by real estate investors.
Ilyce Glink is the Publisher of ThinkGlink.com, and the Founder/CEO of Best Money Moves, an employee benefit in the financial wellness space.