Your tax return may be a high point in your year, especially if you became a homeowner before 2020. According to the CPA Practice Advisor, the average worker might see up to $2,000 in tax savings.* This number could increase if you own a home and have dependents or children.
Your homeowner’s tax guide for 2020: 5 big breaks and 2 more benefits
The IRS starts accepting 2019 tax returns as of January 2020. While the new tax credits introduced in 2019 made filing overwhelming for many, this year’s looking a lot smoother. Very few, if any, dramatic changes have been made.
Accounting for annual inflation, tax brackets, as well as the standard deduction, have risen for 2020:
Here’s where you can find the standard deduction/brackets for the taxable year of 2019. The recently reformed tax law lets consumers keep more money. Lower tax rates and a higher standard deduction make this possible.
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, you could use some or all of these tax breaks to see 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.
- If you are eligible to deduct HELOC 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 maximum for mortgage interest deductions lowered in 2018, dropping from $1,000,000 to $750,000. This deduction can also include a secondary residence.
- 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.
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 2019, for example.)
- Or, you could deduct gradually, writing off a percentage of your points for every year you have your mortgage.
Your tax return could give you the leg-up you need to sell and move to a better place. 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.
- Examples 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 and are medically needed.
- You could also get a credit for up to 30 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 2019, 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.
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.
7. 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 gives anyone putting money toward retirement a bigger break.
- Limits on IRA contributions increased by $500 to $6,000 for the taxable year of 2019, while max contributions for 401(k)s also rose by $500 to $19,000.
- For taxpayers age 50 and older, you can add $1,000 extra to your IRA contribution or $6,000 extra to your 401(k).
Still, there are a few home-related expenses you can’t deduct for 2019: 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. So, it helps to get familiar, reach out to your CPA, and use this info for financial planning.
Can you cash in your tax return for a brand-new place?
Absolutely. As a homeowner, you might be getting more money back, and you could use these funds to relocate. A bigger house. More outdoor space. Or even a centrally-located home or condo in the heart of the city. Get prequalified and see how much you could save when you put your tax return toward your down payment.
*”2020 IRS Income Tax Refund Chart: When Will You Get Your Tax Refund Check?” CPA Practice Advisor, Oct. 2019.
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.