August is a great time to get all your ducks in a row for next year’s tax filing. This is particularly true for homeowners who may be eligible for several deductions. Tax season may seem a long way off when you’re winding down your summer vacation and getting ready to send the kids back to school. It’s not. The first of the year will be here before you know it.
Think of this from a seasonal perspective. Back-to-school season is already upon us. October is all about positioning for the holidays, which consume most of November and December. Are you going to wait until January to get organized? That’s how homeowners lose out on valuable tax breaks. Here are six steps you can take to prevent that from happening to you:
Step 1: Find Your Homebuyer Sales Agreement
An often-overlooked tax deduction for homeowners is the amount you can deduct for mortgage points. This is a deduction you’ll want to take the same year you buy your home, but you may still qualify to write your points off during the life of the loan. In both cases, the IRS allows you to deduct the full amount you paid for points, but you need to meet the following criteria:
- Mortgage must be for buying or building your primary home
- Points must be a percentage of the mortgage
- Use of points must be a normal business practice
- Number of points must not be excessive in your area
- Homeowner must use cash accounting
- Amount paid for points cannot be borrowed from the mortgage lender
- Points must be clearly itemized on your mortgage documents
- Points can’t be used for property taxes
Step 2: Gather Your 2023 Monthly Mortgage Statements
Mortgage interest might be your biggest tax deduction next year. The interest you pay each year on your primary residence or second home is 100% tax deductible. That could add up to several thousand dollars, particularly in the early years of your mortgage when amortization has you paying more to the interest portion of the loan than the principal portion.
The mortgage interest deduction is rarely missed, even by homeowners who do their own taxes. Tax preparation software like Intuit Turbo Tax will ask the question automatically if you check off the box saying you’re a homeowner. Accountants dig deeper because they also look for the points and property tax deductions. Turbo Tax might miss those. A professional CPA will not.
Step 3: Check Your 2023 Property Tax Records
State and local property taxes are deductible up to $10,000 for individual or joint tax filings and $5,000 per party for married couples filing separately. It’s known as the SALT deduction, and it’s applicable on primary homes, co-op apartments, vacation homes, land, and property owned outside the United States. In some cases, it can also be applied to RVs and boats.
The SALT deduction can get complicated if you don’t fully understand it. For example, tax assessments for streets, sidewalks, or sewage systems are not deductible, but assessments for maintenance or repair on those infrastructure components might be. That doesn’t include taxes for water or trash. Those are not deductible. Call your accountant to learn more.
Step 4: Review Home Equity Loans and HELOC Agreements
The interest you pay on home equity loans or home equity lines of credit (HELOCs) is deductible up to $750,000 for single or married couples filing jointly. It’s $375,000 for married couples filing separately. This does not apply in all circumstances. As of December 16th, 2017, this deduction is only applicable if you use the funds to “buy, build, or improve” a property.
You can probably see where this might get complicated. The simplest scenario is the homeowner taking out a home equity loan or HELOC for a home improvement. They would qualify for this credit, and there might be an additional deduction for the money spent on the improvement itself. Using the money for non-property expenses makes you ineligible.
Step 5: Research Alternative Energy Incentives
The effects of climate change are difficult to deny after a record-hot summer. Heat indexes in the Middle East were close to the limits of human survivability. To combat that, the US government is offering “energy credits” of up to 22% on alternative energy upgrades during the 2023 tax year. That’s down from 26% last year, so now is the time to take advantage.
Energy credits apply to solar panels, solar water heaters, geothermal heat pumps, small wind turbines, and other alternative energy solutions. There may also be state tax credits available or incentives from your utility company to do green energy upgrades. You’ll want to speak with an alternative energy specialist, along with your accountant, to research this.
Step 6: Schedule Monthly Reviews with Your Spouse
This obviously applies to married couples, but we’re talking about any home ownership groups that involve more than one party. Everyone with equity in the home should be aware of what your tax deductions are and the actions you need to take to capitalize on them. Meeting monthly to discuss those issues will ensure you don’t miss anything come tax season.
The added benefit to a monthly review is that it will help you stay organized. You might even find that you’ve missed a step in past reviews. Each time you repeat the process, you’ll become more efficient at it. In business, this is known as iterating. Each iteration is an opportunity to refine your processes and improve communications with your co-homeowners.
Step 7: Make an appointment with your accountant
Your home is an investment. Paying for it takes hard work and dedication, and it’s expensive. Tax deductions are one way to offset your costs. Knowing what they are and when you can apply them could save you thousands of dollars every year. Follow the steps we’ve laid out here, then make an appointment with your accountant to plan for next year’s tax filing.