Ah, spring has sprung! And along with the flowers blossoming and birds chirping comes something a little bit more harrowing: Tax Day.
Tax Day means something different to homeowners than it does to renters and we’re here to break down all the unnecessarily complicated jargon to help you understand exactly what taxes you’ll need to pay as a homeowner, what tax breaks you get (yay!), and what documents you need to hold onto.
And, if you’re still trying to comprehend all of the changes to the tax code that were implemented last year in the Tax Cuts and Jobs Act of 2017 (a major overhaul of the tax system), we’ve got you covered there, too!
Ready to find out exactly what it takes to conquer your taxes as a homeowner? Here’s what you need to know:
Own a Home? This is What You Owe Uncle Sam
When you were a renter, the only taxes you likely paid were your federal income taxes (and sometimes state income and sales taxes). Now that you’re a homeowner, you’re responsible for paying property taxes, too. Joy! But, really, the payment can bring some semblance of joy. Because when you pay your property taxes, your money is going toward local government funding for things like local public schools, fire department budgets, libraries, and other services that make your city or town the place you call home.
The easiest way is to pay property taxes is through an escrow account, which is an account that your lender sets up as part of your home payment. The lender calculates the amount that goes into your escrow account each month by dividing your annual property taxes and homeowner’s insurance premiums by 12 (for each month)—meaning you don’t have to worry about paying your property taxes by any certain deadline because you’re already chipping away at it each month.
Some homeowners like to reduce their monthly payment to free up some of their regular cashflow and choose not to pay their property taxes through their escrow account. For those who go this route (if you put down less than 20 percent on your home, you’ll need to ask your lender if this is possible), you’ll be required to pay your property taxes in lump sums throughout the year. Check with your local county treasurer’s office to see what dates your property taxes are due, and determine whether or not you can pay them online or if you have to mail a check.
Want a Break? Here’s How Homeowner Tax Breaks Work
Now that your name is officially on the deed, you can potentially reduce your taxable income, thanks to tax deductions that are only available to homeowners.
One of the major tax deductions you should know about is the one you can get for paying property taxes. Under the current tax law, homeowners can deduct up to $10,000 in property taxes.
Another big tax deduction for homeowners is the mortgage interest tax deduction. Under the current tax law, you can deduct the interest you paid on your mortgage—up to $750,000 of acquisition debt (if you have more than $750,000 of mortgage debt, you can only deduct the interest you paid on the first $750,000).
As a homeowner, you also have the opportunity to deduct the interest you’ve paid on a home equity loan (money that you can borrow from the value of your home if it has earned equity) as part of the $750,000 cap mentioned above. The only catch with this deduction is that you have to use the money from the deduction towards your home improvement efforts.
The Caveat: Deductibles Have Changed Under the New Tax Law
Tax season can already be complicated for a homeowner, but throw in a brand new set of laws and you have a surefire way to confuse anyone who pays taxes. Don’t stress too much, though, because we’re here to help you better understand the law changes.
One of the biggest changes from last year is that the standard deduction (or, the amount of income that you can use to reduce your tax bill) has increased significantly across the board:
- For married couples filing jointly, the standard deduction is now $24,000—up from $12,700 in 2017.
- For single filers, the standard deduction is now $12,000—up from $6,350 in 2017.
- For heads of household (an unmarried person who has a dependent who lives in their home), the standard deduction is $18,000—up from $9,350 in 2017.
The main thing to know is this: unless your mortgage interest, property tax, and home equity interest deductions exceed the new standard deductions above, these home-related deductions might not even apply. But that’s ok. Since the standard deductions are higher, you’re still getting more than you would if you itemized the home-related deductions on your taxes!
However, if the amount of property taxes, mortgage interest, and any home equity loan interest that you’ve paid is close to your standard deduction, ask a tax professional if there are other deductions you may be able to take in order to surpass the standard deduction.
Being prepared for tax season isn’t always breezy, but with a little preparation, organization, and understanding, you can be ready for your first tax season experience as a homeowner.