Tax season can be a stressful time for everyone. No matter how much you prepare, it’s not unusual to get to February and learn that you owe the Government more than you originally thought. This year is particularly complicated in light of COVID-19 and the extension of the new tax deadline to July 15, 2020. 

While there is no way to avoid the stresses of tax season this year, there are ways that you can make it go a little smoother next year. One of the most impactful things that you can do in the year ahead is purchasing a home. 

There is a handful of tax benefits that Illinois homeowners see around tax season including deductions, credits, and tax-free profits. 

Deductions

When you are looking to legally lower your tax liability, a deduction is one of the easiest ways to do so. When looking to deduct, you should consider what expenses you have incurred over the year, and subtract it from your gross income. When you own a home, there are a variety of ways to achieve this. 

• Mortgage Interest Deduction

This allows you to deduct interest paid on your mortgage. There are different regulations and limits set on this depending on marital status and how you file. Taxpayers can deduct mortgage interest paid on up to $750,000 in principal. Investment property mortgages are not eligible for the mortgage interest deductions, although mortgage interest can be used to reduce taxable rental income. 

• Mortgage Point Deduction

Many homeowners also have eligibility to deduct paid mortgage points from their taxes.  Mortgage points are fees you pay in order to decrease the interest rate. Each of these points costs 1% of the overall loan amount. If you choose to pursue this route, you can deduct the points over the life of the loan or in the year they were paid.

• State and Local Taxes Deductions

When purchasing a home, it is important to consider the deductions for state and local taxes. This includes any property taxes that you pay on your home. There is a $10,000 limit per/household for these deductions. 

Many Illinois residents find this deduction cap to be a disadvantage because of the state’s higher property tax bills.

• Home Office Deductions

If Americans have learned anything from the latest COVID-19 pandemic, it is that many jobs can function remotely from the home. If you are considering adding a home office to a new home, then this is another valuable item that you can to write off. 

In order to qualify for this deduction, the space that you assign as the office must be used regularly for business. The space must also be exclusively for business. This means that you cannot just add a desk to a bedroom and write off the entire space. 

Credits

In addition to the tax deductions that you can receive when you own your own home, you can also be entitled to credits that reward you for making your home more energy-efficient. The residential energy-efficient property credit will offer 22% to 30% of the cost back to you if you make improvements in the home that follow a more Green living standard. It is an incentive set in place to help encourage homeowners to make eco-friendly changes to the home. Some of these changes might include but are not limited to, adding solar panels, a solar water heater, wind turbines, or geothermal heat pumps. 

Tax-Free Profit

If you are looking to sell your home, you can still receive tax benefits in the coming year. Unlike most profits, the capital gains accumulated when selling a house can be tax-free up to $250,000 (if you are single) or $500,000 (if you are married filing jointly). In order to qualify for this benefit. The house must have been your primary residence for at least two out of five years before the final sales date.

Remember to bring your Settlement Statement to your accountant if you purchased or sold a real estate during the tax year. If you are looking to purchase or sell a home or investment property and would like to know more about tax benefits and consequences, contact your accountant and Tannehill Law today.