Filing your taxes can be complicated — especially when you own a home. But there are also a lot of potential write-offs that are often overlooked, as well as tax benefits to home-owning that you’ll want to make sure you’re aware of come tax time.
Of course, everyone’s financial situation is different, so make sure you consult with a tax advisor before making any major decisions about your taxes.* But you can begin doing your own research by reviewing each of these potential deductions, understanding what it takes to qualify, and learning the relevant tax laws that may affect your taxes.
Standard Deductions vs. Itemized Deductions
The first thing to understand when evaluating tax savings options are the basics of deductions. When you’re filing your taxes, you’ll be offered the option to itemize your deductions, i.e. list out each qualifying item you can deduct from your income, or, use the standard deduction, a flat amount that everyone can deduct from their income if they don’t itemize.
You can’t do both, so be sure to choose the option that’s best for you. Hint: It’s probably whichever one is most favorable to your wallet.
The standard deduction is a flat amount that you can deduct from your annual gross income, if you are not itemizing your deductions. This amount changes every year, and the chart below shows the amounts for 2019 and 2020.
|Married (filing jointly)||$24,400||$24,800|
|Married (filing separately)||$12,200||$12,400|
|Head of household||$18,350||$18,650|
In order to claim any homeowner deductions, such as the mortgage interest deduction, you must itemize your deductions. In order to itemize, you’ll need to keep organized financial records of your qualifying deductions throughout the year. Itemizing your deductions usually requires a little bit of extra effort, but it often results in more tax savings if you have enough qualifying deductions.
Better to Take the Standard Deduction Or Itemize?
There are pros and cons to both routes, but overall you’ll want to ensure you choose the method with the greatest tax benefit in your situation.
- The standard deduction is the easiest choice. It takes much less time, and anyone can claim it. (However, if someone still claims you as a dependent, you can’t claim the full deduction.) The deduction relates to your filing status (see chart above), and it is very straightforward. However, choosing the standard deduction could leave you with a smaller deduction if you don’t take the time to itemize.
- Itemizing your tax deductions can save you a lot of money, but it can be a time consuming process. While there are restrictions on what you can itemize, you can often come out with larger tax savings and a bigger refund with itemized deductions. Your tax advisor can help you figure out whether or not this option will bring you the most savings, and how to maximize your benefit.
What is a Tax Deduction?
A tax deduction is a type of tax incentive that allows an individual to subtract a qualifying expense from their taxable income. This, in turn, reduces an individual’s tax liability by lowering their annual gross income.
Tax deductions are often expenses accumulated during the year that relate to the tax filer’s work, or there are also deductions available for mortgage interest, home office cost, medical bills, and more. There are many different types of tax deductions, and the sections below explain some of the most overlooked ones.
What are Tax Write-Offs?
A tax write-off, which is the same thing as a tax deduction, is a cost you can fully or partially deduct from your taxable income to lower the amount of taxes you owe the government. If you’’re itemizing your write-offs, or deductions, you want to make sure you’re claiming everything you possibly can in order to get the biggest tax benefit.
Often Overlooked Tax Write-Offs
- Sales tax: You can deduct sales tax off of your federal income tax return, so if you’ve made a big purchase with a large amount of sales tax, make sure you save your paperwork. Such purchases can include buying a car, boat, or RV.
- Charitable contributions: Financial and material donations are popular write-offs come tax time, but don’t forget to note that there are some other ways to take advantage of this donation. For example, if you purchase goods for a charitable bake sale or dinner, you can deduct the cost of those items.
- Ongoing education: The Lifelong Learning Credit allows you to claim a credit of up to $2,000 on post-secondary education — up to 20% of the first $10,000 spent on education.
- Home mortgage points: In addition to mortgage interest, if you paid home mortgage points on your home loan, you can deduct those costs all at once or over the course of the loan.
- Health insurance premiums: If you’re self-employed and paying for your health insurance, you can deduct 100% of your health insurance premiums.
- Offbeat business expenses: Generally, no expense is too weird to deduct, but you must prove that it relates to your work and your business.
- Self-employed social security: If you’re self-employed, you pay a large amount of social security and Medicare tax at 15.3% of your income. However, 7.65% of that amount actually counts as your “employer” portion, which can be deducted off of your taxable income.
- Job search: You can deduct any resources or materials used in your job search.
- Union fees: If you’re a worker who pays to be a part of a union, you can deduct your union fees from your taxable income.
- Personal casualty losses: If you have suffered a loss to property, whether via damage or theft, you will be able to deduct a portion of the value of what was lost.
What Can’t I Write Off?
Not everything is tax deductible, so it’s important to take a look at what you can and cannot write off. Here are some examples of expenses that are not deductible:
- Roth IRA contributions
- Political contributions
- Commuting costs
- Child support
- Alimony paid on divorce agreements entered into after December 31, 2018
- 529 College Savings Plan contributions (potentially deductible on state returns)
- Moving expenses (if not in the military)
Tax exemptions are ways to reduce your taxable income and therefore your tax liability. Some people and organizations are completely tax exempt, while others are able to take advantage of deductions and exemptions to save money during taxes.
2018 Tax Deductions
Significant changes were made to available tax exemptions in 2018, and those changes could affect how you file your taxes. Here’s a look at some of the changes that are in effect through 2025:
- Home equity line of credit: You can still deduct interest on your HELOC, but only if you are using that loan to make major improvements to your house. If you are using it to pay off debt or make other big purchases, you cannot deduct the interest.
- Alimony: If your divorce occurred after Dec. 31, 2018, you can no longer deduct alimony payments.
- Casualty, disaster, and theft: If you were a victim of a robbery or a federally-declared disaster, you can deduct the cost of your house, household items, your car and only the items that insurance did not already cover. Your losses also must make up at least 10% of your annual gross income.
- Military moving expenses: You can only deduct your moving expenses if you are an active member of the military. Anyone else who relocates for a job cannot deduct their moving expenses.
- Miscellaneous deductions: You can no longer take advantage of the unreimbursed employee education expenses deduction and the unreimbursed work expenses deduction. You also can no longer deduct costs for tax preparation or investment services.
This list does not include all deduction changes, so for a complete look at the 2018 changes, read IRS publication 5307, Tax Reform Basics for Individuals and Families.
Married Filing Separately
If you are married and filing separately, you can claim one exemption for yourself. Additionally, you can claim an exemption for your spouse under the condition that if they had no gross income, aren’t filing a return, and cannot be claimed as the dependent of another taxpayer. However, if you file jointly, you can claim an exemption for each one of you.
Alternative Minimum Tax (AMT) Exemption
The Alternative Minimum Tax is an alternative to standard income tax typically paid by individuals in higher tax brackets to make sure they’’re paying some taxes and not deducting too much. In essence, AMT payers calculate their income tax twice — under regular tax rules and under the stricter AMT rules — and must then pay the higher amount.
One of the most important things to note about the AMT Exemption is that, if you qualify and opt to take it, you may not be able to take as many tax breaks, including deductions and credits.
Get the Most Out of Your Tax Deductions
Make sure you take all these tax deductions into account as you plan for your financial future. If you’re curious about how buying a home can bring you benefits during tax time, talk to your tax adviser.
*Consult a tax adviser for further information regarding the deductibility of interest and charges.