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2023 homebuyer tax deductions and credits

What we'll cover

  • How buying a home affects tax filing

  • Deductions and credits for homeowners

  • Tax benefits for homebuyers

Are you thinking about buying a new home this year? In addition to the price of a home and the mortgage loan rate, you should also be aware of the tax advantages that come with homeownership. Whether you’re purchasing a home for the first time or you already own a home, take a closer look at the deductions and credits that may potentially give you a break come tax season.

Does buying a house help with taxes?

Homeownership won’t help you file your taxes, but it may increase your deductions and credits. If you rent an apartment, condo or house your monthly payment goes to a landlord or property management company — and none of that money comes back to you at tax time. Homeowners, on the other hand, may receive various tax breaks, often in the form of deductions and credits. It can make for a more complicated filing process, but the extra time can lower your tax payment.

The difference between tax deductions and tax credits

Tax deductions and tax credits for homeowners can potentially lower your tax bill, but it’s important to understand the key differences:

  • Deductions can lower your taxable income, therefore decreasing the amount of taxes due.

  • Credits can take money off of your tax bill.

What are the standard deduction amounts for 2023?

If you have no other qualifying deductions or credits, you can take what is called the standard deduction — a standardized dollar amount that reduces your taxable income based on your filing status. In 2023, the standard deductions are:

  • Single filers or married individuals filing separately: $13,850

  • Joint filers: $27,700

  • Head of household: $20,800

When it comes time to file, you can either take the standard deduction or if you’re eligible for other deductions you may choose to itemize them (but you cannot do both). Bear in mind, that if you take the standard deduction, you may not be able to deduct your home mortgage interest.

Who should itemize deductions?

If the standard deduction value is less than your collective itemized deductions, you’ll save more money by taking the time to itemize. You may also benefit from itemizing deductions if you:

  • Can’t use the standard deduction (see below)

  • Had large uninsured medical and/or dental expenses

  • Paid mortgage interest or real property taxes on your home

  • Had large uninsured casualty or theft losses from a federally-declared disaster

  • Made large contributions to qualified charities

  • Qualify for other large itemized deductions, such as impairment-related work expenses or unrecovered investment in a pension

As noted above, certain taxpayers are not allowed to take the standard deduction. That includes:

  • Married individuals who are filing as married but separately from their spouse who is itemizing deductions

  • Individuals who file a tax return for a period of less than 12 months due to a change in their annual accounting period

  • Any estate or trust, common trust fund or partnership

  • Individuals who were a nonresident alien or dual-status alien at some point during the year*

When going through your itemized deduction, be sure to find receipts and any other record that can prove your claimed deductions.

*Nonresident aliens who are married to a U.S. citizen or resident alien and choose to be treated as a U.S. resident for tax purposes can take the standard deduction.

Tax deductions for buying a house in 2023

If you choose to itemize your deductions, there are various ways you can lower your taxable income. Below we’ve spelled out the most common deductions for homeowners, but whichever one you choose, be sure to read the fine print and properly fill out tax forms to determine whether you qualify for these deductions and how much you can deduct. Working with a qualified tax advisor is the best way to determine what deductions you might qualify for and how other tax benefits may apply to you.

Mortgage points deduction

When you purchase a home using a loan, there are fees — called mortgage points — you typically have to pay to the lender. Each point purchased costs one percent of the mortgage amount. So, for example, one point on a $400,000 mortgage would cost $4,000. And while there are exceptions, most of the time, the points paid may be fully deductible in the year you purchased them.

Mortgage interest deduction

When itemizing their return, homeowners can also deduct interest on the first $750,000 of their mortgages when itemizing their return. Maintaining thorough records is key here, as you’ll need to add up the amount you’ve paid in mortgage interest during the taxable year.

Home-office expense deduction

If you work from home, you may also qualify for a home-office expense deduction. Your home office could be an extra room, garage, barn or studio, but it must be a part of the home exclusively and regularly used as a place of business. To deduct this from your taxes, you can use the simplified option, with a rate of $5 per square foot, maximum size of 300 square feet and maximum deduction of $1,500.

Property tax deduction

All homeowners pay an annual property tax based on assessments by the state and/or local government. These state and local property taxes are typically eligible for deduction in federal income taxes. The maximum amount you can deduct is $10,000 ($5,000 if married filing separately).

Take care to ensure you qualify for any deductions you take.

Tax credits for buying a house in 2023

In addition to these tax deductions for homeowners, if you’re thinking of buying a home in 2022 (or bought a home in 2021) you may also qualify for one of the following tax credits.

Mortgage interest credit

The mortgage interest credit is intended to help lower-income taxpayers afford a home. Those who claim this credit are given a mortgage credit certificate from the state or local government. This credit converts a portion of mortgage interest you pay into a non-refundable tax credit.

Take care to ensure you qualify for any deductions you take.

Residential energy credit

With even more tax credits available for homes using clean energy solutions, many homebuyers are updating their new homes to be more energy efficient. If you make certain improvements to your new home to increase its energy efficiency, you may also be eligible
for this type of tax credit. These updates may include:

  • Energy-efficient windows, doors, and/or skylights

  • Insulation

  • Roofs and roofing products

  • Alternative energy equipment (solar panels, geothermal heat pumps, etc.)

If your new home renovations included any of these, be sure to check IRS guidance to determine how much you can claim as a credit.

First-time homebuyer tax credits

If you have never owned a home, you qualify as a first-time homebuyer. You can additionally qualify if you fit under any of the following:

  • You haven’t owned a principal residence in the last three years

  • You are a single parent or displaced homemaker who has only shared ownership of a home with a spouse while married

  • You have only owned a home that isn’t permanently connected to a foundation

  • You have only owned property that didn’t fit state, local or model building codes and could not be fixed to comply with those codes for less than the cost of a new residence

As a first-time homebuyer, you may be able to take advantage of the same deductions and credits listed above. You may also have the benefit of withdrawing funds from a traditional IRA to buy, build or rebuild a home. As a first-time homebuyer, you have the option to withdraw up to $10,000 without paying the 10% early withdrawal penalty. Keep in mind that you will still have to pay taxes on these withdrawn funds.

Tax advantages for a comfortable future

The current housing market may feel like an enormous obstacle for your hopes of purchasing a home — but remember to keep the big picture in mind. If homeownership is one of your financial goals, these tax deductions and credits can help you make it a reality while still keeping your other finances on track.

Ally is here to help throughout your home buying journey. From budgeting and pre-approval all the way to closing on your new place, don’t let costs get in the way of landing your dream home.

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