Paying a mortgage? These 5 tax breaks can save homeowners thousands of dollars (2024)

Homeownership is one of the more reliable ways to build wealth — but it typically comes with costs like mortgage payments, property taxes, maintenance and other expenses. Luckily, it also gives you valuable tax breaks that can shave thousands of dollars off your taxable income.

Below, CNBC Select lists tax deductions and credits for homeowners and explains how to make sure you take advantage of each tax break your home can get you.

Filing taxes can be a complicated process. It's one thing when you have a single W-2 and use the standard deduction. It's a different matter when you're planning to itemize your deductions, which you'll need to do if you want to claim deductions as a homeowner.

Tax credits vs. tax deductions

Note that tax credits and deductions are two different things. Tax credits directly reduce the amount of tax you owe, while tax deductions decrease how much of your income is subject to taxes.

To clarify, itemizing your deductions is optional — and not always worth it. If your itemized deductions are less than the standard deduction, opting for the latter makes more sense.

As a reminder, the 2022 standard deduction is:

• $12,950 for single filers and those married filing separately
• $25,900 for joint filers
• $19,400 for heads of household

If you find that itemizing your deductions is a better option, you then have to decide whether to file taxes on your own or hire a tax professional. Working with an accountant can help you ensure you get the maximum tax refund and that your taxes are done correctly. Plus, it can save you time. On the other hand, filing yourself can save you money. Typically, itemizations for homeowners are available with paid plans on tax software such as H&R Block, TurboTax and TaxAct.

If you're paying a mortgage on your home, interest charges may account for a sizable portion of your monthly payment. One benefit to those interest payments is that they qualify you for the mortgage interest deduction, which will lower your taxable income. This can be especially valuable for new homeowners since during the first few years of the mortgage loan, most of the mortgage payment goes toward interest (as opposed to the principal).

Currently, you can deduct mortgage interest on the first $750,000 of your mortgage debt as a single filer or married couple filing jointly. If you're married and filing separately, the limit is $375,000 for each party. Or, if you bought the house before Dec. 16, 2017, you can deduct the interest you paid during the year on the first $1 million of the mortgage or $500,000 if married and filing separately.

Crunching the numbers

Let's say you had taken out a $400,000 mortgage loan in 2021. Last year, you paid $20,000 in mortgage interest, which you deduct from your income tax liability. You're paying taxes at an individual income tax rate of 24%. This means your deducted mortgage interest will reduce the amount you owe in taxes by $4,800 ($20,000 x 24%).

Buying discount points allows you to lower your mortgage interest rate — and your monthly payment. Plus, you might be able to deduct them as mortgage interest.

You can deduct discount points in full in the year you pay them if you meet all of the following conditions:

1. You use the mortgage loan to buy or build your primary residence.
2. Your primary residence is the loan's collateral.
3. Paying points is a common business practice in your area.
4. The points paid weren't higher than what's typically charged in your area.
5. You use the cash method of accounting, which means you report income in the year you receive it and deduct expenses in the year you pay them.
6. The points paid weren't for items that are usually listed separately on the settlement sheet. Examples include appraisal fees, inspection fees, title fees, attorney fees and property taxes.
7. The funds paid at or before closing, including any points the seller paid, were at least as much as the points you bought. You can't have borrowed the funds from your lender or mortgage broker to pay for the points.
8. The points were calculated as a percentage of the principal mortgage amount.
9. The amount shows clearly as points on your settlement statement.

If you don't meet any of these requirements, you might still be able to deduct the points on your taxes over the life of the loan.

Deducting discount points over the life of the loan

If you own property and pay taxes on it, you're eligible for the property tax deduction.

You can deduct up to $5,000 in property taxes if you're single or married filing separately. And if you're married and filing jointly, the limit increases to $10,000.

A home equity loan and home equity line of credit (HELOC) allow you to tap into the equity you have in your house to borrow money. If you've taken out a home equity loan or HELOC and used the funds to buy or build a home (or improve your existing one), you can claim the interest on your taxes.

You can deduct up to $750,000 if you're single or a married couple filing jointly, or $375,000 if you're married filing separately. If you took on the debt before Dec. 16, 2017, the limits are even higher — $1 million or $500,000, respectively.

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You can also claim a tax break for home improvements. Unfortunately, not all home improvements qualify. It would be fantastic if you could renovate your kitchen or install hardwood floors in your home and then write the expenses off your taxes, but only the following improvements qualify:

• Medical home improvements: If someone in your household needs special accommodations and you install equipment such as exit ramps or handrails or modify your home to make it safe and usable, you may claim the home improvement deduction on your taxes. You can find more examples in the "Capital Expenses" section of Publication 502.
• Energy-efficient improvements: If your home improvements meet certain energy-efficiency standards, you may claim residential energy-efficient property credit equal to a certain percentage of the cost of the improvement. Eligible improvements include solar water heaters, geothermal heat pumps, small wind turbines and others. You can use the instructions for Form 5695 to check which home improvements qualify.

Homeownership comes with unique costs — but it also may allow for generous tax breaks. Make sure you take advantage of all the tax breaks your home can offer to avoid missing out on valuable deductions and credits. When in doubt, consult with a tax professional.

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