Transcription
Welcome back to Taxes Made Simple. I'm your host, Carlton Dennis, and in today's video, we are going to go over new homeowner tax write-offs. Maybe you're someone who's thinking about getting into a home. We're in the year of 2021. Interest rates are at an all-time low. We just had all this printing of money go out last year in 2020 with COVID-19, and people are swooping up properties left and right. It is the most competitive time to try to buy a property, but it's also a time where most people need to get into a property. And if you're someone who's considering becoming a homeowner, you're going to want to know your write-offs. Let's dive in.
[Music]
Becoming a homeowner is exciting. Going through the home buying process can be a headache, but once you get into the property, you're happy. You have your own roof over your head, and most importantly, you're not paying someone else rent. You're paying now your own mortgage off. Yes, and this is what gets a lot of people excited. But what really can get you excited is understanding some of those tax benefits. And in this video, we're going to dive into what tax benefits do homeowners actually get? Is it enough that would require you to want to buy a home? Is it enough that would require you to want to go into a primary residence over an investment property, or should you possibly stay in your own primary home now that you're getting all these tax benefits, or think about renting it back out? These may be some questions that are coming up inside of your head as you're thinking about getting into your own property. But I want you guys to understand the tax benefits that you qualify for when you decide to buy a primary residence. So let's dive in.
In order for us to understand the tax benefits that we receive when we decide to buy a primary residence, we have to understand the difference between the standard deduction and the itemized deduction. But, but, but, the reason why we have to understand the difference between the standard deduction and the itemized deduction is because unless we have items that exceed the standard deduction, us purchasing a home is not going to matter. Because the standard deduction is a number that is given to us by the government. What I'm getting at is, when you become a taxpayer, which means that you have a pulse and you make over about $12,500, you're going to have a filing requirement. But the government is going to give you a tax incentive for becoming a taxpayer. And the tax incentive they give you is called the standard deduction. The beauty in understanding the difference between the standard deduction and the itemized deduction puts you in a position to always know what your tax benefits are. I remember early on when I was studying tax law, that the standard deduction was very confusing to me. Why was the government just giving this deduction away? It's free real estate. And then I realized that in order for you to itemize your deductions, the government wants you to own certain things. If you own a house, you get to write off property taxes and mortgage interest. But if you don't own a house, maybe you don't have itemized deductions yet, such as property taxes and mortgage interest. But the government still wants to help you, so they give you what's called the standard deduction. The standard deduction for a single filer is $12,550, and for married filing joint is $25,510. So that's a lot of money that the government's just saying, "Hey, here's your deduction if you don't qualify to itemize."
But in order for us to really understand when it will make sense to itemize our deductions, we have to understand that the standard deduction are truly thresholds. What thresholds mean in the tax world is that unless you have deductions that exceed the standard deduction of $12,550 for single filers or $25,510 for married filing joint, then you do not get to take the itemized deduction. You'll just take the standard deduction that's already provided to you. But when you grow and you start building your finances, you may decide to invest in a property, or when you get older, you may have more medical or dental expenses, or more money that you're giving away to charity. And this is when we start to look to the itemized deduction because now you may have gotten to a place where you are spending more than the standard deduction of $25,510, or if you're single, the standard deduction of $12,550.
So let's discuss what are our itemized deductions and how we can take them. The IRS has on their website the thresholds for the standard deduction, but then they also put on the website the form that shows us all of the itemized deductions. And if you guys are ever wondering what are the itemized deductions, all of your itemized deductions will be found on a Schedule A form. Schedule A just means itemized deductions, and it goes inside of your personal tax returns anytime you qualify to take itemized deductions.
So let's go over the itemized deductions that we could qualify for. Itemized deduction number one: medical and dental expenses. This is a very common deduction for a lot of taxpayers who are getting older because most taxpayers who are in their mid-20s to 30s, they don't have a lot of medical and dental expenses. They're not running to the dentist office or performing a bunch of surgeries or getting veneers. So if you don't have a lot of medical and dental expenses, maybe you will not take a whole lot of itemized deductions for medical and dental. But if you do, then the government says that any itemized deductions that's medical and dental related, as long as it exceeds 7.5% of your adjusted gross income, then you can take that medical or dental expense. So let's do some quick math. If my adjusted gross income is $100,000 and I spent $15,000 in the year of 2020 on medical and dental expenses, the government tells me that I can only take 7.5% in excess of my AGI. Okay, so 7.5% of my AGI of $100,000, that's $7,500. So I can only take what's in excess of $7,500. So if I had $15,000 in medical and dental expenses in 2020, I'll be able to take a $7,500 deduction. Now, you can see though that I would have to spend a lot of money though to be able to get that deduction.
Next is our state and local tax (SALT) tax. SALT stands for state and local tax, but it also includes your property taxes. When you become a taxpayer in a state that taxes you, you get to take a deduction based on the amount of money that you're paying into state taxes. But you also get to take a deduction on the amount of property taxes that you pay for being a homeowner. Now, one of the changes that Donald Trump implemented that did not help us was that he decided to create a limit on the SALT tax deduction. What Donald Trump said was, if you have state and local taxes, including property taxes, that exceed $10,000, you do not get to deduct any of those items in excess of $10,000. Which means if we have property taxes that we're paying into, plus we're in a state that taxes us, we only get to deduct $10,000 in an itemized deduction. So that's important for us to know.
Next, we have our mortgage interest. Most new homeowners are going to take on a loan, which means that they're going to have the interest that they're paying back to the bank on that loan that they receive. And the interest that you have on the loan is deductible for tax purposes. The government says that if you are going to go get into a home, I'm going to benefit you for becoming a taxpayer and paying us property taxes. I'll let you write off the property taxes only up to $10,000, but I'll also let you write off your mortgage interest. But Donald Trump changed the tax codes too. He limited the mortgage interest deduction. He stated that you can only deduct mortgage interest up to $750,000 on a loan after the year of 2018. So if you purchased a new home recently, then you are only able to deduct mortgage interest up to $750,000 on the loan. So for some of my clients who are higher income earners who can afford more expensive properties, they're being capped here. They're only able to write off a certain amount of their mortgage interest. Maybe their property taxes are far greater than that $10,000, and this is what restricts some of my taxpayers.
Next, we have gifts to charity. Now, this is when you are feeling philanthropic. The government allows for you to take charitable donations as an itemized deduction. They're reported here as an itemized deduction. Now, in this year of 2021, you are able to take a little bit more itemized deductions because of the CARES Act that was implemented due to coronavirus. Please make sure that you speak with your tax providers so you are aware of exactly what you can take in charitable contributions for the year of 2021.
Last but not least is casualty and theft loss. So if you happen to have any casualty or theft that's occurred, whether on your property or in an incident that was reported to the police, there are losses that get to be taken on your tax return due to theft or a world disaster, hurricane, floods, things of that nature. But guys, these are itemized deductions.
Now, there is one very important itemized deduction that's missing on this list. And part of the reason why it's missing is because in the year of 2018 was the year that the Tax Cuts Jobs Act went into place. And in 2018, Donald Trump removed unreimbursed employee business expenses. This was a big, big shock to a lot of taxpayers. And the reason why it was a big shock is because many taxpayers are paying for their own supplies, items, and gear to perform business for their employers. Maybe you're a schoolteacher, you buy your own crayons, Crayolas, and rulers. Maybe you're a police officer, you buy your own gun and gloves. Maybe you're a firefighter, you buy your own boots. These items used to be deducted on your tax return as itemized deductions because your employer isn't reimbursing you for these expenses. So if you decide to go spend money on your own to be better at your job, the government used to give you a deduction for that. But in 2018, Donald Trump got rid of unreimbursed employee business expenses.
So now that we know all of the itemized deductions: medical and dental expenses, state and local taxes (SALT), which includes property taxes, mortgage interest, gifts to charity, we now can determine if we have items that exceed the standard deduction threshold that we discussed previously. If you have more items that exceed the standard deduction of $25,510, or $12,550 if you're single, now you're in a position where itemized deductions being a homeowner actually serves you tax-wise. But if you're married and you aren't paying high mortgage interest or high property taxes, you don't have medical and dental expenses, and you're not giving gifts to charity, you may not be in a place yet where your home is actually giving you a deduction on your tax returns. And so it's so important that we do the math ahead of time before we decide to just jump into becoming a homeowner trying to save ourselves money on our taxes.
If you are going to become a homeowner, then you want to set the intention from the beginning. Becoming a homeowner is a way to build wealth, but have your game plan in mind when you decide to go into buying a home that's going to be a primary residence because any type of improvements that you make on the home aren't going to be written off because they're not considered an itemized deduction unless you have a business where you're renting out a portion of that space either back to your own business or to a tenant. That's when you'll be able to get to take deductions based on renovations that you make on your primary residence.
I hope this video helped you guys, and I hope that you're able to find tons of value. My name is Carlton Dennis. I'd love for you guys to like, comment, subscribe, share this video to someone who you know is getting ready to become a homeowner so they're aware of all the deductions that they qualify for. And here in 2021, I'll see you on the next video.
[Music]