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Tax Deduction Tips for Homeowners in 2021

If you’re a homeowner, should you claim a standard or itemized tax deduction in 2021? Homes.com breaks down what you need to know.

Homeowners, especially those who bought their first homes in 2020, should set time aside early in the new year to consider their tax deduction options. By reviewing your deductions before filing your tax return, you can be confident you’re taking full advantage of the tax code provisions that benefit homeowners.

Claiming Standard Deductions vs. Itemized Deductions

The Tax Cuts and Jobs Act (TCJA), passed in December 2017, made several significant changes that impacted homeowners, beginning with a massive increase in the standard deduction available to all taxpayers. In 2016, the standard deduction was $6,300 for single filers, and $12,600 for married couples filing jointly. In 2021, single heads of households will be able to deduct $18,880, while married couples filing jointly will be able to deduct $25,100. 

For many taxpayers, the new standard deductions are greater than itemized deductions. But, depending on your unique situation, itemizing may be the best choice for you.

The three most significant tax advantages for homeowners are the mortgage interest deduction, deductions for mortgage insurance, and property tax deductions. 

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What are Mortgage Interest Tax Deductions?

The mortgage interest deduction allows owners to deduct the interest they pay on their mortgage each year from federal and state income taxes.  For a new owner or an owner who has refinanced, the mortgage interest deduction is especially valuable. Mortgages are structured so that interest payments are front-end loaded; in the first year, about 83% of monthly payments pay for mortgage interest (about $15,497 per year for the average 30-year fixed-rate mortgage).

In addition to your primary home, you can deduct the mortgage interest you pay for vacation homes, land, boats, and even property outside the US. Here is a calculator to help you estimate the amount of mortgage interest you paid in 2020.  

The mortgage interest deduction is limited by the amount of debt secured by the mortgage. For debt secured between October 13, 1987 and December 16, 2017, the limit is $1 million ($500,000 if married filing separately). For debt secured after December 15, 2017, the limit is $750,000 ($375,000 if married filing separately).

What are Mortgage Insurance Tax Deductions?

Homeowners who utilize low down payment mortgages are usually required to also carry private mortgage insurance (PMI); however, these mortgage insurance fees may be tax deductible. PMI fees range from 0.30 to 1.15% of the loan principal, which can be a substantial tax deduction. It’s worth noting, though, that homeowners with adjusted gross incomes of more than $109,000, or $54,500 if married filing separately, cannot deduct the cost of mortgage insurance. 

What are Property Tax Deductions?

Property taxes significantly increase the amount of state and local taxes that homeowners pay each year, and vary across state lines. They range from $1,923 per year in Missouri to $8,477 in New Jersey (2015).  

If you’re a new owner who purchased a home in the past year, you can deduct the property taxes you paid at closing, along with other items. These may include recordation and transfer fees, and any real estate taxes paid by your lender. Loan origination fees, or “points,” are also deductible since the IRS considers points to be prepaid mortgage interest.

State and Local Tax (SALT) Caps

For most homeowners, state and local taxes play a significant role in deciding whether to itemize. The 2017 tax legislation included a $10,000 limit on the amount of state and local taxes deducted. This state and local tax (SALT) cap can significantly reduce the amount of state and local taxes that residents of higher-tax states like California, Hawaii, Iowa, New Jersey, and New York could deduct before the passage of the new law. Residents of lower-tax states such as  Alaska, South Dakota, Texas, and Wyoming may not pay enough taxes to reach the $10,000 cap.

The SALT cap may be the most controversial aspect of the Tax Cuts and Jobs Act (TCJA).  Members of Congress from high tax states will seek to repeal it in 2021, so it will be something to pay attention to.

Steps to Filing Your Taxes as a Homeowner

Your lender will provide you a year-end report of the mortgage interest and property taxes you paid in 2020.  Your mortgage insurer can provide a yearly total of your mortgage insurance payments. If you closed on a mortgage in 2020, your lender provided you a closing disclosure that contains any taxes you paid in the transaction.

Outside of your mortgage, the 1099 form from your employer will report state taxes withheld from your paycheck during the year. Finally, review any documents related to your contributions. These items can include donations to charities (for the 2020 tax year, you can deduct up to $300 of cash donations without having to itemize), contributions to IRAs, 401ks, health savings accounts, home office deductions (for non W-2 employees), and unreimbursed medical expenses that are more than 7.5% of your adjusted gross income.

(READ MORE: Home Offices, Tax Laws and Other Considerations)

Add these figures together, and you should have a rough idea of the total tax deductions that result from homeownership in 2020. This number will help you decide whether itemizing or claiming a standard deduction is best for you. 

As a general rule, homeowners with larger mortgages and higher state and local taxes are more likely to itemize than those with less debt and pay fewer state taxes.

After You File

Many homeowners who receive tax returns choose to utilize them for home projects, upgrades, or rainy day savings. Work with trusted financial expert to determine what’s best for you; in the meantime, Homes.com has a newsletter that sends helpful articles right to your inbox every two weeks! They include DIY tips, home improvement inspiration, financial advice, and much more you won’t want to miss. Sign up for this bi-weekly resource HERE!

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Steve Cook is the editor of the Down Payment Report and provides public relations consulting services to leading companies and non-profits in residential real estate and housing finance. He has been vice president of public affairs for the National Association of Realtors, senior vice president of Edelman Worldwide and press secretary to two members of Congress.

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