Owning a home can result in many unexpected expenses. But if you itemize your tax deductions, homeownership can also help you offset these expenses. A tax deduction is different from a tax credit — you subtract a tax credit directly from your tax bill, while you subtract a tax deduction from your taxable income.
Up to certain limits, you can deduct the interest you pay on your mortgage loan from your taxable income. Make sure your lender provides you with Form 1098, because it tells you exactly how much of your payments represent interest. Subject to certain restrictions, you can deduct the cost of fees you paid to obtain the mortgage. You can also deduct the cost of private mortgage insurance, although deductions are gradually phased out for higher-income taxpayers. If you took out a construction loan to build your home, you may be able to deduct the interest during the first two years of the loan period.
You may deduct state and local real estate taxes from your taxable income. State and local governments impose a variety of taxes and fees, however, so you need to make sure that the tax you are deducting qualifies under Internal Revenue Service rules. Generally, if the tax is based on the assessed value of your home, it qualifies. If you pay these taxes through an escrow account, your property tax amount should appear on Form 1098.
If you have dedicated an area of your home exclusively to your work, the IRS allows you to deduct certain expenses from your taxable income. Under the home office deduction, you may deduct your home-related expenses — mortgage payments, for example, as well as real estate taxes and insurance — in proportion to the percentage of your home's total square footage that you use for office space. In addition, you can generally deduct 100 percent of all home office expenses that you wouldn't have incurred at all if you didn't have a home office — for example, a dedicated phone line.
The IRS allows you to deduct expenses for making certain environmentally friendly improvements to your primary residence, as long as you actually install them by the end of the tax year. To qualify for the deduction, your improvements must meet the requirements of the U.S. government's Energy Star program, including the use of Energy Star-approved products. Deductions include expenses for energy-efficient doors, windows, skylights, lighting, insulation and many other items. In addition, as of 2012, you are entitled to a tax credit for 10 percent of the cost of some of these products, up to a limit of a few hundred dollars for each type of improvement.
David Carnes has been a full-time writer since 1998 and has published two full-length novels. He spends much of his time in various Asian countries and is fluent in Mandarin Chinese. He earned a Juris Doctorate from the University of Kentucky College of Law.