Buying a home can be difficult and expensive. Thankfully, there are tax breaks that can help you in your quest to become a homeowner, and also assist you with the mortgage and maintenance. Our tax experts have put together a list which can provide great savings for those who qualify.
- Using 401(k) or IRA funds to buy a home:
Among the first steps toward becoming a homeowner is making the down payment. You may have thought to get a loan from a family member, use a gift, bonus, or inheritance, but did you think about tapping your retirement savings? If you have a retirement account, you may be able to use a portion of that towards the lump sum you need to put down on that dream house. Consider the following:
- If you are younger than 59.5 years of age and you have a traditional IRA, there is an exception to penalties if you’re a qualified first-time home buyer who hasn’t owned a home in the last 3 years prior to closing. You can withdraw up to $10,000 to buy or build your first home without that nasty 10% tax penalty,
- If you’re under 59.5 years of age, and your Roth IRA has been open five years or more, your earnings will not be subject to taxes if you use the withdrawal (up to a $10,000 lifetime maximum) to pay for a first-time home purchase.
- Typically when you withdraw funds from a 401(k) before age 59.5, you incur a 10% penalty. This rule also applies if you use your 401(k) toward buying a house. Therefore, a 401(k) withdrawal for a home purchase may not be best for some buyers because of the opportunity cost. However, there are two exemptions to this rule.
- The first is using your Roth 401(k). Since you have already paid taxes on your Roth 401(k) contributions, there are no early withdrawal penalties.
- A second exemption to the 10% penalty rule is a 401(k) loan, which allows you to borrow from your 401(k) funds to buy a house. Since this counts as a loan to yourself, you don’t have to pay the early withdrawal penalty or income tax on the borrowed amount.
- Mortgage interest deduction:
For most people owning a home is their biggest investment, and the biggest tax break they get from owning that home comes from deducting mortgage interest. If you itemize, you can deduct interest on up to $750,000 of debt ($375,000 if married filing separately) used to buy, build, or substantially improve your primary home or a single secondary residence. Allowable mortgage interest deduction amounts differ for married taxpayers filing separately and for homes purchased prior to December 16, 2017.
Improvements are “substantial” if they add value to the home, extend the home’s useful life or adapt the home for new uses. Basically, additions and major renovations are “substantial,” but basic repairs and maintenance are not. Your lender will send you a Form 1098 in January listing the mortgage interest you paid during the previous year. That’s the amount you deduct on Schedule A (Form 1040).
- Mortgage Tax Credit Certificate (MCC)
MCCs are a dollar-for-dollar federal tax credit which assists people in making their monthly payments more affordable as long as the home remains their primary residence. MCCs are certificates issued by a State Housing Finance Agency, often at the request of the lender, that increase the federal tax benefits of owning a home, and helps low- and moderate-income, first-time homebuyers offset a portion of the amount they owe in mortgage interest.
Qualifying home buyers are entitled to take a non-refundable federal tax credit at the time they file their return, equal to a specified percentage (20%-40% of the total) of the interest paid on their mortgage loan each year. If you itemize, the remaining interest obligation may be deducted as a standard home mortgage interest deduction. The IRS caps the maximum tax credit for any given year at $2,000. The total MCC tax credit for each year cannot exceed the recipient’s total federal income tax liability, after accounting for all other credits and deductions. Credits in excess of the current year tax liability may be carried forward for use in the subsequent 3 years. Recapture exceptions may apply. Find out more HERE: https://www.fdic.gov/resources/bankers/affordable-mortgage-lending-center/guide/part-2-docs/mortgage-tax-credit.pdf
- Credits for energy-saving home improvements
Looking to minimize expenses in the home? IRS rewards homeowners with an Energy Efficient Home Improvement Tax Credit of up to $3,200. You can claim the 30% credit (up to $1200) for certain eligible energy efficient improvements and energy property expenses made through 2032. Even a home energy audit for your main residence may qualify for a tax credit of up to $150.
To qualify, home improvements must meet energy efficiency standards. They must be new systems and materials. Labor costs don’t qualify. The maximum credit you can claim each year is:
- $1,200 for energy property costs and certain energy efficient home improvements, with limits on doors ($250 per door and $500 total), windows ($600) and home energy audits ($150)
- $2,000 per year for qualified electric or gas heat pumps, biomass stoves or biomass boilers
- Residential energy property qualifies for a credit up to $600 per item.
- Central air conditioners
- Natural gas, propane, or oil water heaters
- Natural gas, propane, or oil furnaces and hot water boilers
- Oil furnaces or hot water boilers can also qualify
- If you use your home partly for business, the credit for eligible clean energy expenses is as follows:
- Business use up to 20%: full credit
- Business use more than 20%: credit based on share of expenses allocable to nonbusiness use
The credit is nonrefundable, so you can’t get back more on the credit than you owe in taxes. You can’t apply any excess credit to future tax years. The credit has no lifetime dollar limit. You can claim the maximum annual credit every year that you make eligible improvements until 2033. File Form 5695, Residential Energy Credits Part II, with your tax return to claim the credit. You must claim the credit for the tax year when the property is installed, not merely purchased. Lots more info HERE: https://www.irs.gov/instructions/i5695
- Home office Deduction
If you’re a business owner working from home or an entrepreneur with a home-based side gig, you may qualify for valuable home office deductions. But employees who work remotely can’t deduct home office expenses under current federal tax law. To qualify for a deduction, you must use at least part of your home regularly and exclusively as either:
- Your principal place of business, or
- A place to meet with customers, clients or patients in the normal course of business.
Keeping track of indirect expenses is time-consuming, we recommend you take advantage of a simplified method of deducting home office expenses. Instead of deducting actual expenses, you can claim a deduction equal to $5 per square foot for the area used as an office, up to a maximum of $1,500 for the year. Although this method takes less time than tracking actual expenses, it generally results in a significantly lower deduction. Explore your other option HERE: https://www.fuoco.cpa/home-sweet-home-office-deduction/
- Credit for electric vehicle charging equipment
There is a tax credit available for installing electric vehicle recharging equipment at your home, in addition to the EV tax credit. The federal tax credit for EV chargers is worth 30% of the costs of the qualifying equipment, up to $1000.
- Tax deduction for medically necessary home improvements
You may qualify for a medical expense deduction if you make modifications to your home for medical reasons. Here are some common examples of medically necessary upgrades:
- Adding ramps, modifying stairs
- Widening doorways or hallways
- Installing handrails or grab bars
- Modifying kitchen cabinets or equipment
- Modifications to bathrooms
- Installing lifts or elevators
Costs for the upkeep or operation of these upgrades are also deductible as medical expenses if the upgrade itself is medically necessary. You will have to itemize in order to claim this deduction, and you can only deduct medical expenses that exceed 7.5% of your adjusted gross income. FYI: The deduction may also be reduced by any increase in the value of your property.
- Property tax deduction
What is the property tax deduction limit? In 2023 and 2024, the SALT deduction allows you to deduct up to $10,000 ($5,000 if married filing separately) for a combination of property taxes and either state and local income taxes or sales taxes. Not all property tax payments qualify, and be sure to deduct your property taxes in the year you pay them. Use Schedule A when you file your return, that’s where you figure your deduction. This means you’ll need to itemize your taxes instead of taking the standard deduction.
- Capital gain exclusion when selling your home
Your home is considered a capital asset. You probably won’t have to pay taxes on all or part of the gain from the sale. Normally, you have to pay capital gains tax when you sell a capital asset for a profit. However, there is a capital gains tax exclusion for homeowners: If you’re married and file a joint return, you don’t have to pay tax on up to $500,000 ($250,000 for single filers) of the gain from the sale of your home if all of the following apply:
- You owned the home for at least two of the past five years
- You lived in the home for at least two of the past five years
- You haven’t used this exclusion to shelter gain from a home sale in the last two years
If you don’t meet all the requirements, you still might be able to exclude a portion of your home-sale profits if you had to sell your home because of a change in your workplace location, a health issue, a divorce or some other unforeseen situation. The amount of your exclusion depends on how close you come to satisfying the ownership, live-in and previous-use-of-exclusion requirements.
- Increased basis when selling your home
If the capital gains tax exclusion doesn’t eliminate your tax bill when you sell your home, you can still reduce the tax you owe by adjusting the basis of your home. Basis is the amount your home (or other property) is worth for tax purposes. Your taxable gain is equal to the sales price of your home minus the home’s basis. So, the higher the basis, the lower the tax. What you originally paid for the home is included in the basis, but you can increase the home’s “basis,” or purchase price, by tacking on the cost of certain improvements like the cost of home additions, updated systems, landscaping or new appliances.
CONTACT US: We’re not just here for you at tax time! Many folks are not aware of all the other ways that a TFG CPA can help with your money and your individual financial goals as well as those of your business. Tax planning with a TFG CPA can help you proactively save money on taxes and make sure you’re not missing any credits or deductions. We can also help with financial projections for your savings goals, and financial statements to help you get a mortgage or other financing. Our CPAs have hands-on experience working with people facing a variety of financial challenges and looking for opportunities to save. Contact us today for solutions that best fit your needs, toll free at 855-534-2727 or cpa@fuoco.com.
