August 9, 2023

5 Tax Tips for Homeowners

Owning a home comes with numerous benefits, and one of them is the opportunity to claim various tax credits and deductions. Let’s look at some ways you can maximize your tax savings as a homeowner this year. 

At a glance:

Choose between itemizing or taking the standard deduction depending on tax savings potential.
Homeowners can deduct property taxes, mortgage interest, and explore homestead exemptions.
Understand capital gains tax rules when selling a home, including exclusions for profit up to $250,000 (or $500,000 for joint filers).
Consider energy-efficient home improvements for tax credits like Energy Efficient Home Improvement and Residential Clean Energy Credits.

1. Decide whether you want to itemize or take the standard deduction 

When filing your taxes as a homeowner, you have a choice between itemizing your deductions or taking the standard deduction. Which option is best for you depends on several factors — most importantly, whether your itemized deductions would give you a bigger tax break than the standard deduction.  

Here are the standard deduction rates for tax years 2022 and 2023: 

When taking the standard deduction, you won’t be able to take certain homeowner deductions that are only available to itemizers. However, for many people, the standard deduction is still the best option because their itemized deductions would amount to less than the standard deduction. It’s all about which option will get you the biggest tax break. 

2. Claim tax deductions and tax credits available to homeowners 

What do homeowners get to write off on taxes? 

Homeowners have the option to deduct the following: 

Property tax deduction – Married couples filing jointly can deduct up to $10,000 of property taxes, while single filers and those married filing separately can deduct up to $5,000. This deduction is only available if you itemize. 
Mortgage interest deduction – This deduction allows you to lower your taxable income by deducting mortgage interest you paid during the year. This deduction is limited to interest on up to $750,000 of qualified mortgage debt for single filers, heads of household, and those married filing jointly. If you are married filing separately, the limit is $375,000. This deduction is also only available to itemizers. 
Homestead exemption – Most states offer a homestead exemption to minimize property taxes for homeowners, but the rules and eligibility requirements vary greatly by state. To learn if you might qualify, head over to your county tax assessor’s website.  

We’ll go over some other tax breaks available to homeowners — such as the Energy Efficient Home Improvement Credit — in more detail below. 

What is the difference between deducting and depreciating? 

First things first: You can only take advantage of real estate depreciation if you are a rental property owner who uses the property in your business. This deduction is not available to general homeowners for their primary residence. 

That being said, the tax deductions we’ve discussed — property taxes and mortgage interest — are deductible in the year you’ve spent the money. Real estate depreciation is different in that you spread the deduction out over the useful life of the property.  

How much of your mortgage can you write off? 

While you can’t write off your entire mortgage payment on your taxes, you can deduct the interest on a mortgage up to $750,000 (or up to $375,000 for those married filing separately). 

What does the homestead exemption do? 

The homestead exemption is a reduction in the taxable value of your property. As an example, let’s say your home is worth $350,000 and your property tax rate is 1 percent ($3,500). If your state allows you to exempt the first $50,000 of your home’s assessed value, the taxable value of your home would drop to $300,000, reducing your tax bill to $3,000. 

3. Make energy-efficient home improvements and updates 

If you’re considering making some green energy home updates, we’ve got good news — there are some tax incentives available. Namely, the Energy Efficient Home Improvement Credit and the Residential Clean Energy Credit. 

What home improvements are tax deductible 2023? 

The Energy Efficient Home Improvement Credit allows you to claim 30 percent of the cost of installing eligible energy-efficient home updates. Generally, there is a $1,200 annual limit. Other limits apply depending on what kind of home improvement you are doing. Here are some updates that qualify: 

Exterior doors and windows 
Central air conditioners 
Electric panels 
Natural gas, propane, or oil furnaces and hot water boilers 
Home energy audits 
Electric or natural gas heat pumps, water heaters, or biomass stoves and boilers 

The Residential Clean Energy Credit allows you to write off up to 30 percent of the cost of installing qualifying clean-energy systems to produce electricity or regulate your home’s temperature, including solar, wind, geothermal heat pumps, and fuel cells. 

If you want to delve into this topic a little deeper, our article about the Inflation Reduction Act goes into these tax credits and their recent updates in more detail. 

4. Know how capital gains taxes work 

Thinking of selling your home? If so, you might be subject to capital gains tax. 

The good news is you can exclude some of that gain from your taxable income. If you sell your home for more than you paid for it, you will not have to pay capital gains tax on the first $250,000 of profit ($500,000 if you are married filing jointly). If your profit is above this limit, you’ll pay capital gains tax on the excess. Unlike short-term capital gains that are dependent on your tax bracket, the long-term capital gains tax rate is determined by your income. 

You can generally only claim this exclusion once every two years. You also need to have owned the property for at least two years and the house must have been your primary residence. 

However, you can still qualify for a partial exclusion if you need to sell your home before the two-year mark due to “unforeseen circumstances.” This could include unexpected situations such as a change of employment or health issues that you “could not have reasonably anticipated” before you bought and lived in the home. Some examples include: 

A death in your family 
Divorce or legal separation 
Losing your job and not being eligible for unemployment compensation 
A change in employment status that leaves you unable to pay for housing or basic living expenses 
A pregnancy resulting in multiple births 
Natural or manmade disasters  

Certain home improvements can increase your basis (and thereby reduce your gains) when selling your home. To qualify, these improvements must have added value to your home; repairs and general maintenance expenses do not count. This is why it’s crucial to maintain records of all home improvements — it may save you money down the road. 

Here are just a few examples of qualifying home improvements that can reduce your gains: 

Additions such as a room, patio, or garage 
Fences and landscaping 
Roofs and siding 
Insulation 
Heating systems or central air conditioning 
Water heaters  
Kitchen updates 
Flooring 

The IRS Publication 523, Selling Your Home delves into this topic in more detail. 

5. Know what is NOT deductible in 2023 

While homeowners can enjoy numerous tax benefits, not all homeowner expenses are tax deductible.  

The following expenses are generally not tax-deductible for your primary residence: 

Your down payment 
Home insurance premiums  
Depreciation of the home 
Homeowners’ association fees 
Utility costs 

Keep in mind that this is not an exhaustive list and different rules apply to certain rental properties you may own. 

TaxAct® can help you if you are unsure whether a home expense is deductible. We’ll ask you detailed questions about your home expenses when you file and help you claim any related tax breaks. Certain tax breaks may only be available in paid SKUs. 

The bottom line 

As a homeowner, understanding the various tax credits and deductions available to you is crucial for maximizing your tax savings. By implementing energy-efficient upgrades, taking advantage of tax deductions, and properly documenting expenses for home improvements, you can significantly reduce your taxable income.  

 And when you’re ready to file your tax return, check out our useful tax document checklist that includes a section for personal records such as mortgage interest paid and real estate taxes. 

 This article is for informational purposes only and not legal or financial advice. 

 All TaxAct offers, products and services are subject to applicable terms and conditions. 

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Everything You Need to Know About the Child Tax Credit

Raising kids is expensive. Thankfully, becoming a parent comes with some valuable tax breaks — most notably, the Child Tax Credit (CTC).

At a glance:

The CTC is worth up to $2,000 per child under 17 in 2023.
This credit is partially refundable. You might be able to receive up to $1,600 of the credit back as a tax refund.
The credit amount starts decreasing once your MAGI hits $400,000 for joint filers or $200,000 for all other filers.

What is the Child Tax Credit (CTC)?

The Child Tax Credit (CTC) is a tax credit for parents of dependent children designed to help offset the cost of raising kids.

For tax year 2023, $1,600 of the CTC is refundable (up from $1,500 in 2022), meaning you can claim up to this amount even if you do not owe any taxes or didn’t earn any income last year. On your 2023 return, you can claim the CTC for any children under age 17.

How does the Child Tax Credit work?

Like other tax credits, the CTC is valuable because it reduces your tax bill on a dollar-for-dollar basis. For example, if your adjusted gross income (AGI) was $50,000 in 2022 and you qualify to claim a $6,000 Child Tax Credit, the credit reduces any taxes you owe by $6,000. So, if your tax bill turns out to be $8,000, your $6,000 credit would reduce the total amount of taxes you owe to $2,000.

To recap, up to $1,600 of the Child Tax Credit is refundable this year. So, for example, if you qualify to receive a $6,000 CTC, but you only owe $3,000 in taxes, your tax credit reduces your bill to $0, and you get to pocket $1,600 of the remaining $3,000.

How much is the Child Tax Credit for tax year 2023?

For the 2022 and 2023 tax seasons, the maximum total credit amount is $2,000 per child under age 17.

You qualify to claim the maximum value of the Child Tax Credit if your modified adjusted gross income (MAGI) is $400,000 or below for joint filers or $200,000 or below for all other filers.

If your MAGI is higher than those limits, you could still receive a portion of the increased tax credit. In that event, your credit amount will be reduced by $50 for every $1,000 over the threshold.

Is the Child Tax Credit taxable?

No, the Child Tax Credit is not taxable.

What’s the difference between the Child Tax Credit and the Child and Dependent Care Credit?

The Child and Dependent Care Credit is a tax benefit to help offset some of the costs of childcare for your dependent while you are at work. This credit is designed to make it easier for parents to keep working without putting too much stress on their budget.

If you have a qualifying child, the Child Tax Credit is available regardless of your childcare or other expenses.

What is the Additional Child Tax Credit?

The Additional Child Tax Credit is the refundable portion of the CTC, which means you can claim it even if the credit is greater than your income tax liability for the year. Up to $1,600 per child is refundable with the Additional Tax Credit.

If that sounds complicated, don’t worry. TaxAct® does these calculations for you.

How do I claim the Child Tax Credit or the Additional Child Tax Credit?

TaxAct will determine if you qualify for the Child Tax Credit or the Additional Child Tax Credit based on your answers to a few simple questions.

Child Tax Credit qualifications

Do I qualify for the Child Tax Credit?

Your eligibility for this tax credit depends on your relationship to the child and the child’s age. For tax year 2023, the child you are claiming the credit for needs to be under age 17 as of Dec. 31, 2023. Qualifying dependents must be your son, daughter, adopted child, foster child, stepchild, younger sibling, stepsibling, or descendant of any of them (such as your niece, nephew, or grandchild).

You must have a valid Social Security number (SSN) and any children you claim must also have a valid SSN.

If the child does not have a valid SSN but does have an individual taxpayer identification number (ITIN), you may be able to claim the Credit for Other Dependents. This is a $500 (non-refundable) credit for dependents who do not qualify for the CTC, such as dependent parents and other relatives or dependents living with you who are unrelated to you.

Do I still qualify for the credit if I have a higher income?

The credit starts to phase out as your income rises. Your credit is reduced if your modified adjusted gross income is more than $200,000 if filing single or $400,000 if married filing jointly.

This article is for informational purposes only and not legal or financial advice.

All TaxAct offers, products and services are subject to applicable terms and conditions.

The post Everything You Need to Know About the Child Tax Credit appeared first on TaxAct Blog.

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