How to Legally Pay Less Taxes

Must-Know Tips for Homeowners

Buying a home is a significant financial step, and while it can feel overwhelming, it offers numerous benefits. One major advantage of owning a home is the tax benefits associated with paying a mortgage. We've consulted with our tax expert to help you understand these benefits better and to show you how to maximize your savings on taxes.

Mortgage Interest Deduction

One of the most significant tax benefits for homeowners is the mortgage interest deduction. If you have a mortgage on your primary residence or a second home, you can deduct the interest you pay on the loan, subject to certain limits.

Deduction Limits: For mortgages taken out after December 15, 2017, you can deduct interest on up to $750,000 of mortgage debt ($375,000 if married filing separately). For mortgages taken out before this date, the limit is $1 million ($500,000 if married filing separately).
Qualified Residences: This deduction applies to both your primary residence and a second home.
Property Tax Deduction

Homeowners can also deduct property taxes paid on their primary residence and any other real estate they own. This can provide substantial savings.

Deduction Limits: You can deduct up to $10,000 ($5,000 if married filing separately) of combined state and local property taxes, income taxes, and sales taxes.

Points Deduction

When you buy a home, you may pay points to lower your mortgage interest rate. These points, also known as loan origination fees, are typically deductible.

Upfront Deduction: You can deduct the full amount of points paid in the year you buy the home if you meet certain criteria, such as using the home as your primary residence and the points being a customary practice in your area.
Spread Out Deduction: If you don’t meet the criteria for an upfront deduction, you can still deduct points over the life of the loan.

Home Equity Loan Interest Deduction

Interest on home equity loans or lines of credit (HELOCs) is deductible if the loan is used to buy, build, or substantially improve your home. This can provide additional tax savings.

Deduction Limits: You can deduct interest on up to $100,000 of home equity debt ($50,000 if married filing separately), provided the loan is used for home improvements.

Mortgage Insurance Premiums Deduction

If your down payment was less than 20%, you might be paying for private mortgage insurance (PMI). The good news is that these premiums are deductible.

Income Limits: This deduction is available for taxpayers with an adjusted gross income (AGI) of $100,000 or less ($50,000 if married filing separately). The deduction phases out between $100,000 and $109,000.

Energy-Efficient Home Improvements

Homeowners who make energy-efficient improvements to their homes can qualify for various tax credits. These credits directly reduce your tax bill.

Residential Energy Efficient Property Credit: This credit is available for solar panels, solar water heaters, wind turbines, and other renewable energy installations. It covers 26% of the cost of installation for 2020-2022 and 22% for 2023.
Nonbusiness Energy Property Credit: This credit is available for energy-efficient windows, doors, insulation, and more. It covers 10% of the cost, up to $500.

Capital Gains Exclusion

When you sell your primary residence, you may be able to exclude a significant portion of the gain from your taxable income.

Exclusion Limits: You can exclude up to $250,000 of capital gains ($500,000 if married filing jointly) if you’ve owned and lived in the home for at least two of the five years before the sale.

Example! How Much Can a Homeowner Save in Philadelphia?

Let's take a look at an example to see how much a homeowner in Philadelphia can save through these tax benefits:

Home purchase price: $400,000
Down payment: 20% ($80,000)
Mortgage amount: $320,000
Mortgage interest rate: 4%
Annual property taxes: $7,000
Points paid: 1% of the mortgage amount ($3,200)
Annual PMI: $1,200 (assuming no PMI due to 20% down payment)

Total Potential Deductions:

By combining the mortgage interest, property tax, and points deductions, the homeowner can potentially deduct:

Mortgage Interest Deduction: $12,800
Property Tax Deduction: $7,000
Points Deduction: $3,200
Total Deductions: $23,000

Tax Savings:

Assuming the homeowner is in the 24% federal tax bracket, their total tax savings would be calculated as follows:

Total Savings: $23,000 x 0.24 = $5,520

In this example, a Philadelphia homeowner can save approximately $5,520 in taxes in the first year of homeownership by leveraging mortgage interest, property tax, and points deductions. These savings can make a significant difference, helping to offset the costs associated with buying a home and making homeownership more affordable.

By understanding and utilizing these tax benefits, you can maximize your savings and enjoy the financial perks of owning a home in Philadelphia. Don't forget to consult with a tax professional to ensure you're taking full advantage of all the deductions and credits available to you. Happy home owning and happy tax saving!

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