First-Time Homeowner Tax Guide (2022)

New to homeownership and wondering how this will change your taxes? We’re here to help.

You did it! You secured a new home in the hottest seller’s market we’ve ever seen. Now what? Tax season is here and you’re wondering how this new purchase will change how you file. We’re here to help. Here are a few things to keep in mind as you head into your first tax season as a homeowner. Note, this article has been prepared for informational purposes only and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

Understand standard vs. itemized deductions.

Being a homeowner has tax perks! However, you might not see them right away. When filing taxes, there is a threshold for deductions which changes depending on your situation. Unless your deductions exceed this threshold, you will be receiving the standard deduction, which means you won’t have the opportunity to deduct many of the write-offs homeowners can enjoy, at least not yet. Unless your deductions exceed $12,550 (single) or $25,510 (married/joint), you will be getting the standard deduction. But that’s not a bad thing! Receiving the standard deduction makes it easier to file your taxes since you won’t need to itemize your deductions and it takes some of the pressure off you to have proof of expenses - which, as a new homeowner, may be just what you need. You’re more likely to deal with itemized deductions your second year of homeownership (or beyond) than you are your first, so if you aren’t experiencing tax benefits now, this information is still pertinent to you.

What qualifies as a write-off?

To know if your deductions exceed the threshold mentioned above, you’ll need to know what counts as a write-off. Let’s look at what will and will not increase that number as seen on the Schedule A form:

Medical and Dental Expenses

Deductions for medical and dental are more common with age. Many first-time homeowners will not incur enough medical expenses to earn deductions from this category. To get a deduction from medical and dental expenses, your total medical and dental expenses for the year must exceed 7.5 percent of your adjusted gross income (AGI). If your expenses do exceed that amount, you may deduct anything over 7.5 percent. (e.g. If 7.5 percent of your AGI is $5,000 and you incurred $8,000 in medical and dental expenses, $3,000 will count towards your deductions).

Taxes (including property taxes)

As a homeowner, you are now paying property taxes, which qualify as a tax write-off, as do your other State and Local Taxes (S.A.L.T.). One change to be aware of is that in 2017, former President Trump placed a $10,000 limit on the S.A.L.T. deductions. This means you can no longer deduct more than $10,000 in this category of your write-offs.

Interest (including mortgage interest, points and insurance premiums)

This is one category where homeowners will see many of their deductions. Interest paid includes, of course, mortgage interest… but it also includes any mortgage points you purchased and any mortgage insurance premiums you paid. We’ve mentioned how you’re more likely to itemize your deductions in the later years of homeownership but take note of this exception. Mortgage insurance is required when you have less than 20 percent equity in your home (which is likely for your first several years of homeownership). Once 20 percent equity accumulates, many homeowners opt to cancel their mortgage insurance, which will eliminate that tax deduction.

Gifts to Charity

Gifts to charity is another category to itemize deductions. This is a fairly straightforward deduction; however, there is something worth noting for 2022. The Coronavirus Aid, Relief and Economic Security (CARES) Act could impact what you are able to deduct, even if you expect to take a standard deduction. For example, an unmarried individual could deduct up to $300 donations to qualifying charities even if they are taking a standard deduction. That number is double for joint-filers.

Casualty and Theft Losses

We hope you did not suffer any loss during your very first year of homeownership, but if you did, this deduction can help in your recovery. This section includes losses from a federally declared disaster - so losses from the Marshall and Middle Fork Fires would qualify. Theft losses would require proof that the property was, in fact, stolen and not just lost. With any luck, you won’t have to worry about this category.

Other (including home office space, some IRA fees and some home improvements)

Various other expenses could qualify you for a deduction. For example, the pandemic created a shift in work culture, and now many people are using space in their home as a home office. While you may no longer deduct unreimbursed work expenses such as office equipment, you may be able to earn a deduction for space in your home that is “regularly and exclusively” used for your employment. Another possible expense that may impact your taxes is if you dipped into your IRA to make a down payment. Usually, this will result in a 10 percent penalty, but not in this case. You could take up to $10,000 without incurring the penalty. Finally, a common question you’re probably asking yourself is: do home improvements count as a write-off? Unfortunately, no, not usually. There are exceptions though, such as if your improvement contributes to the energy efficiency of your home, increases your capital or is being rented out to tenants or your own business.

Conclusion and final comments.

You can see how this can start to add up, especially after your first year when all 12 months of payments contribute to the sum. There are great tax benefits to be had if you qualify for an itemized deduction. It is important to remember, ever if you do not currently qualify for these special homeownership perks, there are many others! Homeownership is one of the best things you can do to build your wealth, with or without those tax deductions.