Tax time is around the corner. Any homeowners should be eagerly looking into the tax deductions that are available to them.
In general, the tax code aims to help homeowners. For example, here are 10 common home related tax deductions that are not available for renters. In fact, according to Robert Moss, the national director for government affairs at CohnReznick (an accounting and tax advisory firm):
“(The code) is completely skewed [towards homeowners]. There is not a direct way in the code to get a direct tax benefit from renting.”
Overall, from state to federal regulations, homeowners have dozens of tax deductions available.
Connecticut Based and Personal Tax Deductions
As a homeowner in Connecticut, there are a few tax deductions and other financial incentives provided to state residents. In general, most tax deductions relate to mortgages and energy efficiency.
Renewable Energy Systems Property Tax Exemption
For any commercial, multi-family or residential property, Connecticut provides a property tax exemption for “Class I” renewable energy systems that generate electricity for private residential use. The exemption is available for systems installed on or after October 1, 2007, that serve single-family homes or multi-family dwellings limited to four units.
In addition, “any passive or active solar water or space heating system or geothermal energy resource” is exempt from property taxes, regardless of the type of facility the system serves.
An exemption claim must be filed with the assessor or board of assessors in the town in which the property is placed on or before the first day of November in the applicable assessment year. Contact your local tax assessor’s office for more information.
Energy Efficiency Upgrade Financing
As part of the Connecticut Housing Investment Fund Inc. customers of Connecticut Light and Power Company (CL&P) and United Illuminating Company (UI) may apply for financing for eligible energy efficiency upgrades through the Home Energy Solutions Program.
Eligible homes include single- and two-family homes and condos as well as vacation (second) homes. The program offers loan amounts up to $25,000 for energy efficient upgrades. Eligible upgrades include items, such as:
- water heaters
- heat pumps
- air conditioners
- caulking or weather-stripping
- air and duct sealing
- roofs and more.
For more information refer to the program’s website.
Mortgage-Related Tax Deductions
The most notable of the homeowner tax deductions is the mortgage payment interest deduction, which covers interest paid on the first $1 million of home loans, which is particularly valuable for first-time homeowners. However, additional mortgage-related tax deductions and financial incentives exist.
FHA Energy Efficient Mortgages
Energy efficient mortgages help homeowners finance energy efficiency improvements to existing homes, including renewable energy technologies. These mortgages also allow homeowners an increased budget while purchasing a new energy efficient home.
The U.S. federal government supports these loans by insuring them through Federal Housing Authority (FHA) or Veterans Affairs (VA) programs, which allows borrowers who might otherwise be denied loans to pursue energy efficiency, and it secures lenders against loan default.
The FHA allows lenders to add up to 100% of energy efficiency improvements to an existing mortgage loan with certain restrictions. FHA mortgage limits vary, but the maximum amount of the portion of an energy efficient mortgage allowed for energy improvements is now the lesser of 5% of:
- The value of the property.
- 115% of the median area price of a single-family dwelling.
- 150% of the Freddie Mac conforming loan limit.
For more information, then please review the HUD website for more details.
Energy Star Partnerships
To promote energy efficient mortgages and lenders who offer them, the Energy Star program offers a partnership program for lenders who provide energy efficient mortgages to borrowers. In order to maintain their partnership benefits, lenders must write a certain number of energy efficient mortgages per year, so please review the program information to access the partner locator tool.
Federal Tax Deductions
As a homeowner, there are also federal tax deductions and other financial incentives that can be helpful. Again, as with the other tax deductions, these credits and breaks mainly relate to energy efficiency upgrades.
Property Tax Deduction
Beside the mortgage interest deduction, the other major tax break is property taxes. If you maintain an escrow account as part of your monthly mortgage payments, then you’ll notice most of the payment is taxes. When your lender provides your annual statement, then the statement breaks out your taxes. Homeowners use these taxes as an annual deduction as long as you own your home.
If this is your first year in the home, then review the settlement sheet, which may include additional tax payment data. When the property was transferred from the seller to you, the year’s tax payments were divided so that each of you paid the taxes for that portion of the tax year during which you owned the home. Your share of these taxes is fully deductible.
Homeowners deduct property taxes as an itemized expense on Schedule A.
Solar Energy Tax Credits
The Energy Policy Act of 2005 established a federal tax credit for residential properties that are applied to solar-electric systems, solar water heating systems and fuel cells. In 2008, the tax credit extended to small wind-energy systems and geothermal heat pumps.
Homeowners may claim a credit of 30% of qualified expenditures for a system that serves a dwelling unit located in the United States that is owned and used as a residence by the taxpayer. Expenditures include labor costs for on-site preparation, assembly or original system installation, and for piping or wiring to interconnect a system to the home. If the federal tax credit exceeds tax liability, the excess amount may be carried forward to the succeeding taxable year. The maximum allowable credit, equipment requirements and other details vary by technology, but are mainly applicable to the following upgrades.
- Solar-electric property
- Solar water-heating property
- Fuel cell property
- Small wind-energy property
- Geothermal heat pumps
Home Improvement Tax Deductions
In addition to the mortgage or energy efficiency tax breaks, there are also federal deductions related to certain home improvement projects (based on the current tax code, which is always subject to change).
If you completed (or plan to complete any of these projects) be sure to save any home improvement costs. Why? The expenses may reduce your capital gains tax when selling your home. Plus, the costs add to the overall cost of the house, which reduce gains. This lowers your taxes because you can recoup large expenses. Plus, the improvements add to the long-term value of your home.
Home Improvement Loans
Many home improvement projects are quite costly and homeowners take out a loan to complete the work. For any qualifying loans the interest can be deducted. Qualifying loans mean money that adds “capital improvements” to your home. This means the improvement must increase your home’s value, adapt it to new uses, or extend its life.
Examples of capital improvements include:
- adding a third bedroom
- adding a garage
- installing insulation
Tax experts also point out that qualifying loans do not apply to basic repairs and fixes. However, it is important to distinguish these two types of work. For example, eligible deductions only include the interest on loans taken out for home improvements.
Energy Efficiency Upgrades
Improving the energy efficiency of your home can lead to many tax deductions. For example, the Renewable Energy Efficiency Property Credit. This credit allows homeowners to deduct up to 30% of the cost of equipment and installation.
Jayson Mullin, founder of Top Tax Defenders, explains the benefits:
“You could save up to 30% of the total cost of installing certain renewable energy sources in your home. The 30% credit applies to the cost, including labor and installation, and must be taken in the year the item was placed in service.”
If you work from home, then the home office tax deduction is a great way to depreciate the home improvement cost for people with a home business.To qualify for the home office deduction, homeowners must have a legitimate business that uses an exclusive portion of the house for regular business use.
For example, if you use a bedroom in your home as a home office and pay a carpenter to install built-in bookshelves, the you may depreciate the entire cost of the project. However, for any improvements that benefit the entire home, then the corresponding deduction requires a pro rata ratio. For example, if you use 20% of your home as an office, you may depreciate 20% of the cost to upgrade your home heating and air conditioning system.
Separately, there are other programs that help reduce the cost of making energy efficient home improvements. While they may not impact your home improvement tax deductions, they will contribute to saving money over time.
For example, home energy checkups identify inefficient areas in the home and provides recommendations to address the issues. At SolvIt, our checkups focus on the following:
- Provide a Whole-House Energy Assessment
- Improve Energy Efficiency
- Reduce Energy Usage
- Lower Monthly Utility Costs
In addition, TurboTax details some major homeownership tax benefits, however, keep in mind that every individual may have unique circumstances. With a few exceptions or caveats, these homeownership tax deductions most homeowners are eligible. However, consult a tax professional so you understand how any deductions or incentives impact your personal situation.
For any homeowners looking to take advantage of the many energy efficiency tax deductions or incentives, then SolvIt has the experience and expertise to help with any HVAC or electrical needs, so call us today!