What are Homeowner Tax Credits ?

Published on 2023-07-28


How tax breaks work for homeowners

Most income tax breaks for homeowners are tax deductions, which are reductions in your taxable income. The less of your income that is taxed, the less money you pay in taxes.

When you file your tax return, you must decide whether to take the standard deduction – $12,950 for single tax filers, $25,900 for joint filers or $19,400 for heads of household or married filing separately — or itemize deductions, such as gifts to charity and state taxes.

To take advantage of homeowner tax deductions, you’ll need to itemize your deductions using Form 1040 Schedule A. Your decision to itemize will depend on whether your itemized deductions are greater than your standard deduction. All of the best tax software can quickly help you decide whether to itemize or not (as well as help you fill out all of the tax forms mentioned in this article).

Tax credits for homeowners don’t require you to itemize. They directly reduce the amount of taxes you owe, and you can usually get those credits whether or not you itemize deductions.

Mortgage interest is the biggest tax break for homeowners

Mortgage interest or the amount of interest you pay on your home loan yearly is one of the most common tax deductions for homeowners. It’s also often the most lucrative, particularly for new homeowners whose payments generally go more toward loan interest during the first years of a mortgage.

Homeowners filing taxes jointly can deduct all payments for mortgage interest on loans up to $1 million, or loans up to $750,000 if made after Dec. 15, 2017. Single filers get half those amounts $500,000 or $375,000, respectively.

To deduct your mortgage interest, you’ll need to fill out IRS Form 1098, which you should receive from your lender in early 2023. You can then enter the amount from Line 1 on that Form 1098 into Line 8 of 1040 Schedule A.

Energy Efficient Home Improvement Credit

The Non-business Energy Property Credit expired at the end of 2021. However, the Inflation Reduction Act revives, enhances, and renames the credit—now the Energy Efficient Home Improvement Credit. The bill also extends the credit to Dec. 31, 2032, with the new rules applying to property placed in service after Dec. 31, 2022 (the old rules apply for the 2022 tax year).

The credit is equal to 30% of what you spend on: Qualified energy efficiency improvements—These include insulation, energy-efficient windows, and energy-efficient exterior doors. Residential energy property—These are energy-efficient versions of appliances that heat or cool your home, including heat pumps, central air conditioners, biomass stoves and boilers, and oil furnaces. It also includes energy-efficient water heaters and boilers and electric panel upgrades installed in conjunction with qualified energy property improvements.

Home energy audits—A home energy auditor helps you determine how much energy your home uses, where your home is inefficient, and which improvements you should prioritize to save energy (and money). Annual credit caps apply to specific items—such as an aggregate $600 limit for exterior windows and skylights, $2,000 for heat pumps and water heaters, and $150 for home energy audits.

Residential Clean Energy Credit

The current Residential Energy Efficient Property Credit was set to expire in 2024. However, the Inflation Reduction Act extends it through 2034, rebrands it as the Residential Clean Energy Credit, and boosts the credit amounts to 30% for 2022 to 2032, 26% for 2033, and 22% for 2034.

The credit helps offset the costs of installing qualifying systems using solar, wind, geothermal, biomass, or fuel-cell power to generate electricity, heat water, or regulate home temperatures. The credit also applies to battery storage technology with a capacity of at least three kilowatt-hours starting in 2023.

HOMES Rebate Program

The HOMES Rebate program rewards homeowners who cut home energy consumption through energy-efficient upgrades, such as insulation and HVAC installations. You’re eligible for a maximum rebate of $2,000 or half of the upgrade cost—whichever is less—if you reduce home energy use by 20%. The rebate jumps to the lesser of $4,000 or half of the upgrade cost if you cut energy by at least 35%. The rebates double to $4,000 or $8,000, respectively, if your income is 80% or less of your area’s median income.

High-Efficiency Electric Home Rebate

The High-Efficiency Electric Home Rebate program gives refunds to low- and moderate-income families who buy energy-efficient electric appliances. Qualifying families can get rebates up to a certain amount for:

  • An electric stove, cooktop, range, or oven—$840
  • An electric heat pump clothes dryer—$840
  • Insulation, air sealing, and ventilation—$1,600
  • A heat pump water heater—$1,750
  • Electric wiring—$2,500
  • An electric load service center upgrade—$4,000
  • A heat pump for space heating or cooling—$8,000

The rebates are available to households earning less than 150% of the area’s median income. If your household income falls:

  • Below 80% of the area median income, you can claim rebates for 100% of your upgrades, up to a $14,000 limit.
  • From 80% to 150% of the area median income, you can claim rebates for 50% of your costs, up to $14,000.

Author: Sapna Parmar, Staff Consultant, Parsons CPA, PLLC

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