Home-Related Tax Credits for 2021: What You Need to Know Before Filing
Tax season will be here before you know it, and there are some key things you’ll want to keep in mind before you file your 2021 returns.
From stimulus payments to pandemic-related unemployment checks, Americans have had plenty of tax-related topics to stay up to date on over the last year. But there are some important home-related tax credit issues you should also be aware of before you file your 2021 taxes.
If you work from home, have a mortgage, or have completed home improvement projects over the last year—listen up. Here are some key takeaways you’ll want to keep top of mind before filing, some of which may save you money.
Mortgage Interest Deduction
There’s good news and potentially bad news if you’re a homeowner looking to take advantage of the mortgage interest deduction, which lowers your taxable income through itemized deductions.
The good news: Mortgage interest deduction is still a thing for your 2021 taxes.
The potential bad news, albeit for a relatively small segment of Americans: Up until recently, homeowners could deduct up to $1 million in mortgage interest. That amount is now limited to $750,000 as a single filer or married couple filing jointly as part of the Tax Cuts and Jobs Act. Those who are married but filing separately, the deduction limit is set at $375,000 each.
So how do you know if your home qualifies? Your debt must be secured by a qualified loan to qualify for home mortgage interest deduction. “This means your main home or your second home. A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities,” according to the IRS website.
Check Your Property Taxes
Did you know that as a homeowner, you can deduct up to $10,000 of property taxes if you’re a married couple filing jointly? That amount drops to $5,000 if you are single or married filing separately. As with mortgage interest, deducting property taxes works only if you choose to itemize your deductions. You’ll want to do the math beforehand, since the standard deduction could be higher than what you would save by itemizing.
What’s deductible when it comes to property taxes? A primary home, co-op apartment, vacation homes, land, cars and RVs, and boats.
To deduct property taxes, you’ll need a copy of your tax record. If your property tax payments come out of an escrow account, you’ll get a 1098 statement from your lender that will give you a breakdown of the property taxes paid that year. Finally, you’ll need to complete the IRS Schedule A to claim the property tax deduction for 2021.
What About Home Improvements?
When it comes to qualifying home improvements, you’ll need to ask yourself “Was it necessary?” Necessary home improvements such as installing medical equipment or widening doorways to make your home more accessible would qualify. However, if you remodel an already fully functional bathroom or kitchen, then you’re likely out of luck.
When It Comes to Energy Tax Credits, It’s Complicated
You can still claim the Residential Energy Efficiency Property Tax Credit on your 2021 tax return as it was extended through the end of this year. This credit includes improvements such as wind, solar, and geothermal equipment.
“You may be able to take these credits if you made energy saving improvements to your principal residence during the taxable year,” notes the IRS. “In 2018, 2019, 2020, and 2021, the residential energy property credit is limited to an overall lifetime credit limit of $500 ($200 lifetime limit for windows).”
Note that if you ordered qualifying improvements in 2021 but they have yet to arrive or be installed, you can’t take the credit for 2021. Bruce Bailey, who has worked in accounting and finance for more than 30 years and who is currently with Chalmers & Company in Bloomington, Minn., notes you’d have to carry the cost forward to 2022 because shipping and supply chain issues don’t matter and in that case, there’s a chance you may be out of luck.
“Under current law, it’s not available for 2022. The taxpayer would be stuck without any tax benefit for their investment without the extension to 2022,” Bailey explained. “As Congress has extended this for a number of years, it is possible they may extend it again to 2022. As of today it is not. We’re advised in our continuing education to monitor what Washington does.”
The Work-From-Home Deduction (Or Not)
If you were a remote worker in 2020, you may remember that the Tax Cuts and Jobs Act suspended write-offs for many workers who now do their job from home, meaning you can’t take a deduction on your taxes. If you’re an employee who receives a paycheck or a W-2 exclusively from an employer, the IRS says you’re not eligible for a home office deduction. “The home office deduction is available to qualifying self-employed taxpayers, independent contractors and those working in the gig economy,” according to the IRS.
If you do work from your home in the gig economy, qualified expenses that you can deduct include utilities, homeowners insurance, depreciation, and possibly some real estate taxes, mortgage interest, or rent.