Standard deductions or itemized deductions?
The state and local tax deductions homeowners can claim on their taxes are designed to reduce their overall taxable income. Homeowners can choose between claiming standard deductions or itemizing their deductions.
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Standard deductions
A standard deduction describes the fixed amount the IRS allows U.S. taxpayers to deduct from their taxable income. This is done without itemizing each expense. For the 2023 tax year, the standard deduction is $13,850 for single filers or married individuals filing separately and $27,700 for joint filers.
If you choose to claim the standard deduction, you can’t also claim itemized deductions.
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Itemized deductions
Itemized deductions are specific expenses you can deduct from your taxable income, provided you furnish valid documentation for each expense. Some common itemized deductions include:
- Mortgage interest
- Property taxes
- Home equity loan interest
- Home repairs or improvements (in certain circumstances)
The caveat to the itemized deduction is that the total amount must exceed the standard deduction of $13,850 for single filers and $27,700 for joint filers.
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Which deduction should you take?
If you have significant mortgage interest, you may benefit more from itemizing your deduction than taking the standard deduction. However, you should consult with your accountant or another tax professional to make sure you’re choosing the most advantageous option.
Five tax deductions available for homeowners
If you want to move forward with an itemized deduction, here are five opportunities available to you as a homeowner.
Keep in mind that there are requirements, qualifications, and limits on all the benefits mentioned in this article. Some you may qualify for, while others you may not.
Tax credits vs. tax deductions
Standard or itemized deductions aren’t the only potential tax benefits of owning a home. Another venue you can explore is tax credits.
Your tax deduction reduces the amount of your income taxes. Tax credits, on the other hand, are dollar-for-dollar reductions on the taxes you owe. If you owe $5,000 in taxes and have a $2,000 tax credit, your tax bill would drop to $3,000.
Tax credits are usually based on specific circumstances like paying for college tuition, adopting a child, or installing energy-efficient windows.
Two big tax credit benefits homeowners can take are the energy-efficient property credit and the first-time homebuyer credit.
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Energy-efficient property credit
Energy-efficient property credits provide a financial incentive to invest in energy-efficient improvements and additions, such as:
- Solar panels
- Wind turbines
- Geothermal heat pumps
- Fuel cells
Energy credits allow you to claim a percentage of the cost of installed energy-efficient equipment. These percentages vary depending on the year you installed the equipment and the type of property you installed it on.
In 2023, this credit becomes equal to 30% of the total amount paid on qualifying home improvements. Or, you can take the annual $1,200 credit limit.
To qualify for this credit, your property must meet the outlined energy-efficient requirements. Additionally, all new equipment must be installed in your primary residence. Second homes and rental properties are not eligible.
The energy-efficient property credit is non-refundable. It can’t ensure a refund if the credit exceeds your tax liability.
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First-time homebuyer credit
The first-time homebuyer tax credit was a federal credit program that offered financial assistance to first-time homebuyers. This program was active between April 2008 and September 2010.
In 2021, U.S. lawmakers introduced the First-Time Homebuyer Act. This would grant first-time homebuyers up to $15,000 in refundable federal tax credits. As of September 2024, the bill has not yet been passed into law.
If and when it passes, first-time homebuyers who satisfy the specific requirements can qualify for a $15,000 tax credit. They would have to meet the following criteria:
- Being a first-time homebuyer
- Not owning a home in the last 36 months
- Not exceeding the area’s income limitations
- Purchasing a primary residence (rental properties and second homes don’t qualify)
- Being at least 18 years old or married to someone who’s at least 18
- Purchasing a home from a non-relative
The tax credit will equal 10% of the home’s purchase price and cannot exceed $15,000.
Other tax benefits of owning a home
These aren’t the only tax benefits available to homeowners. If you were to sell your home, you might also qualify for:
- A capital gains exclusion
- Rent deduction for temporary housing
- Write-offs for moving expenses
Final thoughts
Knowing the available tax benefits allows you to make strategic decisions when it’s time to file.
For example, have you been wanting to renovate your home? If so, now may be the perfect time to take out a home equity loans to write off on your taxes.
