July 24, 2023
What we’ll cover:
Homeownership is one of life’s major milestones. A pricy milestone, mind you, but it’s definitely a significant achievement.
The federal government provides a number of deductions and credits to help ease some of the cost of owning a home (or homes). As you prepare your taxes this year, here are some federal tax breaks to keep an eye out for. If you qualify, they could help lower your tax bill.
You may be able to deduct your mortgage interest payments on your federal return if you meet a few requirements. The home mortgage interest deduction appears on IRS Schedule A (Form 1040), which means you must itemize deductions in order to claim it. If you choose to take the standard deduction instead, you would not be able to deduct your mortgage interest on your return.
Generally, you may deduct the mortgage interest you pay on your main home, where you reside most of the time, or on your second home. And these homes do have to be yours – that is, you have to have an ownership interest.
So how much can you deduct?
The deduction limit depends, in part, on when you took out the mortgage, the mortgage type and the mortgage amount. For certain loans that originated…
Let’s look at a basic example: If you and your spouse purchased a home in 2019 and took out a $700,000 mortgage, the interest you pay on that loan would be fully deductible – if you’re eligible to claim the mortgage interest deduction.
Bear in mind that these are general guidelines to the home mortgage interest deduction. There are additional qualification rules and exceptions that might apply to you. The IRS lays out the complete details in Publication 936. Consider checking in with a tax professional or your loan officer to confirm your eligibility for this valuable deduction.
If you’re a first-time buyer, you may not be familiar with the concept of “points.” Simply put: Points are certain charges you pay in order to get a mortgage. For instance, points can refer to loan origination fees or prepaid interest.
Sometimes buying a home just feels like you’re paying fees on top of fees, doesn’t it?
The good news is that you may be able to deduct prepaid interest points (also known as “discount points”) if you itemize deductions on your personal return. The IRS provides this flowchart to help you figure out whether you can fully deduct your points for a given tax year. (It's more user-friendly than flipping through pages of fine print in Publication 936.)
Want to see if you’re eligible for other mortgage-related tax deductions, such as the one for mortgage insurance premiums? The IRS has an interactive tool to help you get started. You will need your filing status, basic income information and an estimated total of your mortgage interest, points and/or mortgage insurance premiums.
If you itemize deductions on your federal return, you may also be able to deduct the annual property or real estate taxes you pay to your local and state governments.
The IRS caps this state and local tax (SALT) deduction at $10,000 for joint filers (or $5,000 if married filing separately). That means if your annual property tax were more than $10,000 – say, $20,000 – you would only be able to deduct that first $10,000 on you return.
One caveat to be mindful of, too, is that if you use an escrow account to pay your annual real estate taxes, you can only deduct the actual amount that was paid out to cover those taxes in a given year. In other words, any additional deposits to the escrow account that were not used to pay taxes are not deductible.
To learn more about the SALT deduction for homeowners, see IRS Publication 530.
You may be able to catch a tax break when you equip your home with energy-efficient or renewable energy technology.
Generally, there are two residential energy credits to look out for.
The credit rate for property placed in service in 2022 through 2032 is 30%.
This credit is available for both existing homes and homes under construction. See IRS Form 5695 for more eligibility details.
This credit is only available for existing homes.
Generally, you may claim the credits if you’ve made qualified energy-efficient improvements to your home. That means the home improvements have to meet specific requirements in order to be eligible. The “home” can be a house, houseboat, mobile home, cooperative apartment, condo and certain manufactured homes – but it must be located in the US.
Keep in mind that the availability and amount of these residential energy credits are subject to change. The IRS also places specific limitations on the amount of the credits. For more details, see IRS: "Energy Incentives for Indiviuals: Residential Property."
All this is to say: It’s a good idea to consult the IRS (see Form 5695) or a tax professional for the most up-to-date and complete information.
This article is for informational purposes only and is not a substitute for individualized professional tax advice. Individuals should consult their own tax advisor for matters specific to their own taxes. This article was prepared by and approved by Marcus by Goldman Sachs, but does not reflect the institutional opinions of The Goldman Sachs Group, Inc., Goldman Sachs Bank USA, Goldman Sachs & Co. LLC or any of their affiliates, subsidiaries or divisions. Goldman Sachs Bank USA and Goldman Sachs & Co. LLC are not providing any financial, economic, legal, accounting, tax or other recommendations in this article. Information and opinions expressed in this article are as of the date of this material only and subject to change without notice. Information contained in this article does not constitute the provision of investment advice by Goldman Sachs Bank USA, Goldman Sachs & Co. LLC or any of their affiliates. Neither Goldman Sachs Bank USA, Goldman Sachs & Co. LLC nor any of their affiliates makes any representations or warranties, express or implied, as to the accuracy or completeness of the statements of any information contained in this document and any liability therefore is expressly disclaimed.