When a consumer considers purchasing or selling a home, they should consider the fact that there are many tax benefits that could potentially make owning a home quite profitable. By far, the buying of a home can be one of a consumers biggest investments. Due to various tax benefits put in place by the government to encourage consumers to purchase homes, buying a home could be a very wise decision. Ultimately, the consumer taking advantage of these tax benefits could save a great deal of money either at the time of purchase or the time of sell. Due to the various restrictions and conditions regarding these tax benefits, it is important to consult with one’s financial advisors or accountants to fully understand the benefits and opportunities of tax benefits to those who own homes.
|Tax Rate||Married Filing Jointly or Qualified Widow(er)||Single||Head of Household||Married Filing Separately|
|10%||$0 - $19,900||$0 - $9,950||$0 - $14,200||$0 - $9,950|
|12%||$19,901 - $81,050||$9,951 - $40,525||$14,201 - $54,200||$9,951 - $40,525|
|22%||$81,051 - $172,750||$40,526 - $86,375||$54,201 - $86,350||$40,526 - $86,375|
|24%||$172,751 - $329,850||$86,376 - $164,925||$86,351 - $164,900||$86,376 - $164,925|
|32%||$329,851 - $418,850||$164,926 - $209,425||$164,901 - $209,400||$164,926 - $209,425|
|35%||$418,851 - $628,300||$209,426 - $523,600||$209,401 - $523,600||$209,426 - $314,150|
|37%||Over $628,300||Over $523,600||Over $523,600||Over $314,150|
The above rates are separate from Federal Insurance Contributions Act (FICA) taxes which fund Social Security and Medicare. Employees and employers typically pay half of the 12.4% Social Security & 1.45% Medicare benefit each, for a total of 15.3%.
Self-employed people pay self-employment taxes, which had them paying both halves of the tax.
For 2020 the FICA limit is on the first $137,700 of income. On his Presidential campaign, Senator Joe Biden proposed also imposing the payroll tax on every dollar of income above $400,000.
On August 28, the IRS issued Notice 2020-65 which allowed employers to suspect witholding and paying Social Security payroll taxes for salaried employees earning under $104,000 per year through the remainder of 2020. As originally proposed these are not forgiven payments but rather deferred payments which need to be paid in half by the end of 2021 and in whole by the end of 2022.
Gains on asset sales from assets which are held for at least a year are taxed at lower rates than ordinary income.
|Tax Rate||Married Filing Jointly or Qualified Widow(er)||Single||Head of Household||Married Filing Separately|
|0%||$0 - $80,800||$0 - $40,400||$0 - $54,100||$0 - $40,400|
|15%||$80,801 - $501,600||$40,401 - $445,850||$54,101 - $473,750||$40,401 - $250,800|
|20%||Over $501,600||Over $445,850||Over $473,750||Over $250,800|
A new year has rolled around and you are finally ready to sit down and take a look at those tax forms. If it is near the end of January or the beginning of February, you might have already received a W-2 form in the mail from your employer. This is a form that lists all of the wages you earned and taxes taken out of those wages throughout the year. HOLD ON TO THIS FORM!! It will become necessary to file your taxes going forward.
The W-2 form has all of the information you will need to plug in when you file your 1040 or 1040EZ with the government. It is all neatly printed out in organized boxes so that you can follow instructions on the other forms as you fill it out. Remember, it is up to you as a taxpayer to file your taxes on time. This applies even if you are not expecting to receive a refund. You have until April 15th each year to file.
If you are paid as a contractor you may receive compensation on a 1099-MISC form. Interest payments from banks are recorded on 1099-INT forms.
Tax deductions are a beautiful thing. You can deduct money from the amount you owe (or the amount you should have paid in) by claiming certain recognized deductions from your bill. It is not something that is kept a secret even. In fact, the IRS itself features some of the deductions that you can take right on its own website.
There are some deductions which are more common than others. The truth is that the tax code is written in such a way that some deductions just apply to more individuals. Some that you should be on the lookout for are:
If any of these situations apply, it is easy to take some deductions from the taxes that you have to pay. Given this, you will want to make sure that you are gaining the maximum amount of value that you can out of these cuts to your tax bill.
The following table lists the 2021 Federal income tax standard deductions. Itemizing deductions generally only makes sense if your total deductions exceed these thresholds.
|Filing Status||Standard Deduction|
|Married Filing Joint||$25,100|
|Heads of Household||$18,800|
|Married Filing Separately||$12,550|
By far, the deduction of mortgage interest stands to be one of the most advantageous tax benefits. The interest paid on a mortgage of the primary residence can often be deducted if the consumer ops to itemize deductions on their federal Income Tax Return. It is possible that the consumer could potentially claim a deduction for any interest that they have paid on mortgages for building, purchasing a home or even a mortgage taken for home improvement, but many different factors can restrict a consumer from the opportunity to deduct this interest, so it is an absolute necessity to speak with one’s financial advisor or accountant. In the new tax bill for 2018 interest paid on HELOCs and home equity loans is no longer tax deductible unless the associated debt is obtained to build or substantially improve the homeowner's dwelling. The limit for equity debt used in origination or home improvement is $100,000. Interest on up to $750,000 of first mortgage debt is tax deductible.
Not all interest paid toward a mortgage is tax deductable. Typically, as long as the amount of the mortgage does not surpass $750,000, the interest paid towards the mortgage qualifies as a deduction. Any interest that exceeds these amounts typically does not qualify to be tax deductable.
Upon purchasing a home, it is easy for the consumer to become quite confused with the situation, let alone the handling of settlement charges when it is time to file income tax returns. More often than not, when a consumer takes a mortgage to buy a house, or to refinance their current home loan, the incurring of closing costs will be inevitable. Typically, these closing costs are comprised of fees to process the sale, fees to check the title, Points charged by the lender, fees to have the property appraised, fees to draft the contract, and fees to record the sale. It is important to be aware of the deductibility of these fees, as some could be attributed to the cost basis of the new home, whereas some can be deducted partially or completely on the consumer’s Federal Tax Return.
When a consumer takes out a mortgage, they are often charged costs by the lender called origination points. 1% of the mortgage taken out equals one point. Most often, discount points can be deducted as long as it is within the year that you bought the home and your deductions are itemized. If the consumer wishes to do this, requirements must be met to ensure eligibility. It is also possible that points may be deducted if they have been paid by the person selling the home.
It is also important to consider that mortgages made to refinance a home are handled by different standards. These points can only be deducted in portions yearly. Typically, the only exception to this rule is that if a portion of the mortgage is used for means of improvements made to the principle residence of the consumer, a certain amount of points can be deducted only in the year that the points have been paid.
Typically, it is not possible for the consumer to claim other closing fees on their income tax return. Tax basis adjustment in the home is the only alternative to the consumer in this regard.
Generally speaking, repairs or improvements made on the home cannot be deducted; however, home improvements made can make the house last longer, change it to be acceptable for a different use, or simply increase the home’s value, resulting in the consumer’s home becoming more tax valuable if the improvement is funded through refinancing. Simply by adding features like an additional bathroom, swimming pool or covered porch, consumers can add value to their homes. At the same time, it is quite important to note that the costs associated with maintaining a home cannot be considered to be home improvements and thus cannot be claimed as a tax deduction. If repairs made become extensive thus becoming a remodel, the work performed could potentially be considered a home improvement and eligible for tax deduction. Some locations also offer benefits for improving the energy efficiency of your home. Speak with your accountaint or tax planner in advance to make sure your project is classified correctly and you use the right kind of funding to qualify for any eligible deductions.
When a consumer decided to sell their home, there are other implications to consider in terms of taxes. If the home is sold at a loss, typically it is not possible to claim the loss as a deduction on income tax returns. Upon selling the principal residence and making money on it, it becomes possible to either partially or completely exclude the capital gain from being applicable to being taxable.
Capital gain or loss on the sale of the consumer’s primary residence is equal to the subtracted adjusted basis in the property from the sale of the primary residence. The cost of the property is the adjusted basis in addition to any amounts paid in for home improvements, minus casualty losses and property depreciation that have been claimed as income tax deductions.
It is also possible for a consumer, regardless of age, filing single to exclude up to $250,000 of capital gain resulting from the selling of a primary residence from federal income tax upon meeting certain requirements. If the consumer is married and filing a joint return, up to $500,000 can be excluded barring certain requirements are met. Typically, whether the consumer is an individual or filling a joint return with a spouse, this exclusion can only be used every other year. As long as the home has been used at least 2 out of 5 years as the primary residence before the sale took place, the consumer may be eligible for this exclusion.
It is possible that while some consumers might not be eligible for the exclusion because they have not met the two out of five years rule, the consumer could possibly still have the opportunity to exclude a portion of the hain as long as the sale of the primary residence was because of changes in employment location, unforeseen situations and circumstances, or reasons of health. In situations like this, the exclusions of gain could potentially not be given completely, instead prorated.
It is also important to consider that there are different rules that could apply if circumstances are different.
Real estate investors also have numerous tax-advantaged options including programs like the IRC 1031 like-kind exchange.