Scrambling to do taxes at the last minute can mean missing key breaks. Here are some tips, notes, and reminders to help you stay in shape, tax-wise, all year.
On the Rise: The Standard Deduction in 2022
When it’s time to calculate taxes for 2022, the quick and easy approach to a basket of tax breaks is to basically cover them by taking he standard deduction. To account for inflation, the IRS raised the standard deduction for tax year 2022. The filer can use the standard deduction to reduce taxable income by a set amount:
- The standard deduction for tax year 2022 is $12,950. This is for all single filers and married people who file separate tax returns.
- For married couples filing jointly, the standard deduction is $25,900. The IRS says registered domestic partners cannot use the married category for tax deduction purposes.
- For heads of households, the standard deduction is $19,400. Who is a “head of household”? An individual, unmarried filer who and can claim a qualifying dependent (and is not claimed on someone else’s tax return).
Homeowners should know, though, that mortgage interest is a tax break opportunity. So, instead of taking the standard deduction, many homeowners itemize deductions in order to claim large breaks, such as mortgage interest, and substantial home-based business expenses over the 2022 tax year. With itemizing, it’s the total of all the eligible deductions that offsets the filer’s taxable income by that much.
In short, if all itemized deductions added up comes out to more than the applicable standard deduction, it’s best to itemize.
Key Tax Breaks a Homeowner Should Bookmark
If you itemize, what are the items you’ll be listing on Schedule A of your Form 1040?
The first item that jumps to mind is mortgage interest. Many homeowners lower their taxable income by a hefty amount, by claiming anywhere up to $750,000 in mortgage interest. People who are married but filing separately can deduct up to $375,000 each. Got your mortgage before 2018? Then the interest you can claim has a higher cap of $1 million.
On a related note, any mortgage points the homeowner paid for can also be claimed — if applied to reduce the mortgage’s interest rate. (The loan principal and loan origination points don’t count as tax deductions.)
Recent home buyers: Check the settlement document in your closing papers to find the mortgage points and the interest you paid in your month.
Private mortgage insurance, or PMI, is paid monthly by some mortgage borrowers. It can be itemized for a deduction by borrowers who bought or refinanced any time after 2006. See at Box 5 on the Form 1098 you receive from your lender (mailed at the year’s end, and posted to your account page on the mortgage servicer’s website), for the amount of PMI paid over the year.
Note: The ability of homeowners to deduct PMI has yet to be extended to the 2022 tax year, but is expected.
What about home modifications? Certain aspects of these may be deductible:
- The homeowner may claim a tax deduction for interest paid on a home equity loan (HEL) or home equity line of credit (HELOC) that’s taken out for home improvements.
- Just as some home healthcare spending is deductible, so are medically necessary home improvements (not upgrades to increase property value). Installing medical equipment, railings, ramps or special doorways count, if they’re a necessary part of medical care. Caution: These are deductible only if they exceed 7.5% of the filer’s adjusted gross income, and are lowered by any increase in property value.
Some energy-efficiency changes to the home (energy-efficient insulation, HVAC, etc.) can probably earn energy tax credits, too. We have to wait and see how they get extended into the 2022 tax year. (Here’s the 2021 form and information, for the general idea.) What appears clear now is that a homeowner can save up to 26% on eligible renewable, biomass, or fuel cell electric, water heating, and HVAC.
And what about property taxes? Homeowners can claim that tax deduction, too, by itemizing. Mortgage borrowers can find the amount of taxes taken out of escrow on the year-end mortgage statement. Look for Form 1098, which must be filed with the federal and state tax return. The cap for deduction purposes is $5,000 in property taxes (state and local) — up to $10,000 for a couple filing jointly.
And don’t forget to check on whether you can opt into a local homestead exemption on your real estate taxes. Philadelphia homeowners, for example, can lower the tax assessment of primary residences by $80K. The City states: “Homeowners will typically save up to $1,119 each year with Homestead starting in 2023.” There are also real estate tax breaks connected with military service, long-time homeownership, catastrophic damage, severe tax hikes, age, and income.
A homeowner or renter running a home business can deduct certain expenses, by percentage of the home that’s completely and regularly dedicated to business use. With the simplified method, just deduct $5 per square foot, up to 300 square feet, devoted regularly and exclusively to the business.
(There are deductible expenses outside the home, too, such as travel and meals.) Home businesses that depend on technology can deduct business equipment and internet access costs.
What Can’t a Homeowner Deduct?
It helps to know what expenses you don’t have to track specifically for tax break purposes.
The IRS does not let filers deduct:
- Homeowner’s insurance premiums. According to H&R Block, these can only be deducted on rental properties, and never on a primary residence.
- Depreciation for the living space. But parts of the home dedicated to business or rental use have their own set of rules (see IRS Publications 946 and 527). Note:A homeowner who sells might have to pay back depreciation claimed for business use.
- What the homeowner paid on water, gas, and electric bills.
In short, not all housing expenses are tax deductions for homeowners.
And those using the home office space to carry out remote work for W2 employment can’t deduct these expenses.
Capital Gains, for 2022 Home Sellers
Did you sell a home in 2022 and make a profit? Good news. Most people who have owned a home as a primary residence for at least two out of the last five years before selling have no taxablecapital gains. Find out more from the IRS about capital gains and losses.
Even if you do have a taxable gain through your sale, you can offset it by adding the cost of qualifying home improvements to the tax basis. This is only for substantial upgrades, and not do-it-yourself or routine repairs. Save receipts for materials and work, to show the value you have added.
Note: Mortgage debt forgiven on a short sale or when surviving foreclosure is not counted as an income increase. Up to $750,000 of forgiven debt on a principal residence is non-taxable ($375,000 for married partners filing separately).
Wrapping Up: A Few Words to the Wise
Keeping good records throughout the year makes life easier when tax season comes around again. Today’s tax software makes recordkeeping easy, especially for homeowners running their businesses out of the home. Phone apps can upload images of odometer readings and fuel and restaurant receipts straight onto a secure accounting platform. Software also makes it easier to track changes in expenses from one year to the next. (It’s important to keep records showing how any significant changes in spending occurred.)
Finally, don’t forget to keep up with your quarterly estimated (ES) state and federal taxes for the 2022 tax year if you’re self-employed and no one is withholding your taxes!
We hope this column gives our readers a head start on getting 2022 taxes in order. We can’t possibly cover taxes for every situation here, of course. Readers should talk to their tax professionals about case-specific questions.
Supporting References
Jason Stauffer for Next Advisor (via Time.com): Is PMI Tax Deductible? (May 1, 2022).
Kiplinger.com: Tax Breaks for Homeowners and Home Buyers.
Stewart Title: A Homeowner’s Guide to Preparing for Tax Season (Jan. 20, 2022).
Deeds.com: Eleventh-Hour Tax Tips for Homeowners (Mar. 21, 2022).
And as linked.
Photo credits: Nataliya Vaitkevich and Polina Tankilevitch, via Pexels.