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Owning a home can be expensive. The federal government knows this, which is why it allows taxpayers to deduct some of those expenses when they file their tax returns.
Unfortunately, homeowners insurance (aka home insurance) isn’t tax deductible. But, if you qualify, there are other home expenses you can deduct to help you save money on your taxes. Keep reading to learn more about those $$$-saving deductions!
How Does a Tax Deduction Work?
In case you’re wondering what a tax deduction is, a tax deduction is an expense you can deduct (hint: subtract) from your income. Tax deductions lower the amount of income you’re taxed on before you’re taxed.
Let’s say you earned $75,000 in taxable income. If you could take advantage of a tax deduction(s) and lower your income (aka taxable income) by $10,000, you’d only get taxed on $65,000.
That said, you’ll want to pick the deduction that maximizes your tax savings.
For single filers, the standard deduction is $13,850 ($27,700 for married couples filing together). So make sure your itemized deductions total more than the standard deduction.
Now that you have a better understanding of how tax deductions work, let’s see what you can deduct.
Is Homeowners Insurance Tax Deductible …
For my primary residence?
Homeowners insurance is not tax deductible. The IRS considers it a cost of homeownership, like paying for utilities, so it isn’t a deductible expense.
You also can’t deduct losses that aren’t covered by your homeowners insurance. If someone breaks into your home and steals $5,000 worth of stuff, but your insurance only covers up to $4,000, you can’t deduct the remaining $1,000.
If I run a business out of my home?
You may be able to deduct homeowners insurance if you own and run a business out of your home. Working from home for someone else doesn’t count.
To qualify, you must have a dedicated space of a certain size that functions as a dedicated home office where you meet with clients or a dedicated workspace that you use to assemble and sell products from your home.
If you’ve got a space like this in your home, you may have to pay an extra percentage on your homeowners insurance. If you pay an extra 15% on your homeowners insurance to cover your home business, you can deduct that extra 15% from your taxes.
If there’s a disaster?
You can only deduct losses from damage to your home if your area is declared a federal disaster area.
If you live in a community that gets hit with a massive hurricane (or other disaster) and it’s declared a disaster area by the federal government, you should file a claim with your insurance company for any damage.
If your insurance doesn’t cover all the damages, you might be able to deduct the difference. One more thing, you can only deduct what it costs to repair the damage, not the cost of upgrades.
Other Home Deductions You Can (and Should) Take
Property insurance tax
The difference between homeowners insurance and property insurance is whether you live on the property.
If you own a rental property that you use as an investment property (a second home or vacation home doesn’t count), you can deduct the “ordinary and necessary expenses for managing, conserving and maintaining your rental property.”
This includes expenses like maintenance, utilities and property insurance.
This deduction also applies if you live in a home and rent out a portion of it all year. The portion of homeowners insurance you pay to cover the portion of the home that you rent out is also tax deductible.
If you made less than a 20% down payment when you bought your home, you’re probably paying private mortgage insurance (PMI).
If you took out a government-backed mortgage, like a Federal Housing Administration (FHA) loan, you’re probably paying mortgage insurance premiums (MIPs).
How much mortgage insurance you can deduct is based on your adjusted gross income (AGI). AGI is your annual income after taxes and other pretax deductions (like 401(k) deposits) are deducted.
If your AGI is $109,000 or less, you can deduct all or part of your mortgage insurance payments for the year. Mortgage insurance may be deductible on your 2021 taxes, but this deduction isn’t guaranteed every year.
Home improvements can be tax deductible, but not right away. You can deduct the cost of home improvements from your taxes when you sell your home – though there are some exceptions to this rule.
The residential renewable energy tax credit
The residential renewable energy tax credit lets you deduct up to 26% of what it cost you to upgrade and make your home more energy efficient. Upgrades can include solar-powered water heaters, solar panels, wind turbines and geothermal heat pumps.
Medical upgrade tax credit
If you need to make home improvements or upgrades for medical reasons – like adding ramps and elevators, widening doorways, installing handrails and more – you may qualify for this tax deduction.
You’ll have to prove that you or someone living in the home needed the upgrade for medical reasons. But you can only claim medical improvement expenses if they exceed 7.5% of your AGI.
If the improvement ends up increasing your home’s value, you’ll have to subtract the increase in value from the amount you want to deduct.
Home Sweet Deduction
Homeowners insurance isn’t deductible, but there are other ways to use your home sweet home to lower your tax bill.
To loosely paraphrase Benjamin Franklin: Taxes are guaranteed. What isn’t guaranteed are the rules that dictate what can and can’t be deducted. The rules can change from year to year. It’s a good idea to talk to a tax professional to see what kinds of deductions you’re qualified to claim.
Take the first step toward buying a home.
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Internal Revenue Service. “IRS provides tax inflation adjustments for tax year 2023.” Retrieved January 2023 from https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2023
Internal Revenue Service. “Small business owners should see if they qualify for the home office deduction.” Retrieved November 2021 from https://www.irs.gov/newsroom/small-business-owners-should-see-if-they-qualify-for-the-home-office-deduction
Internal Revenue Service. “Publication 547 (2020), Casualties, Disasters, and Thefts.” Retrieved November 2021 from https://www.irs.gov/publications/p547
Internal Revenue Service. “Tips on Rental Real Estate Income, Deductions and Recordkeeping.” Retrieved November 2021 from https://www.irs.gov/businesses/small-businesses-self-employed/tips-on-rental-real-estate-income-deductions-and-recordkeeping
Internal Revenue Service. “2020 Publication 936.” Retrieved November 2021 from https://www.irs.gov/pub/irs-pdf/p936.pdf
U.S. Department of Energy. “Homeowner’s Guide to the Federal Tax Credit for Solar Photovoltaics.” Retrieved November 2021 from https://www.energy.gov/eere/solar/homeowners-guide-federal-tax-credit-solar-photovoltaics
Internal Revenue Service. “Publication 502 (2020), Medical and Dental Expenses.” Retrieved November 2021 from https://www.irs.gov/publications/p502