Owning a home is a significant milestone for many individuals and families, offering stability, security, and a sense of accomplishment. Beyond the obvious advantages, homeownership can also bring several tax benefits when it comes time to file.
These benefits are designed to incentivize homeownership and alleviate some financial burdens, both big and small. To help you prepare for tax season, we are delving into the tax benefits specific to Michigan, shedding light on how they can positively impact your finances as a homeowner.
NOTE: As state and federal tax laws are constantly changing, we suggest consulting a licensed tax professional to provide the most up-to-date, personalized information about taxes in Michigan. This material is designed for informational purposes only, and is not considered tax, legal or accounting advice.
1. Mortgage Interest Deduction
One of the primary tax benefits of owning a home in Michigan is the ability to deduct mortgage interest paid on your primary residence. This deduction can significantly reduce your taxable income, ultimately lowering your overall tax liability. Michigan follows federal guidelines in allowing homeowners to deduct interest on mortgage debt up to $750,000, subject to certain conditions. However, it’s important to consult a tax professional or refer to the Michigan Department of Treasury for up-to-date information on deduction limits and eligibility criteria.
2. Property Tax Deduction
Another notable tax benefit in Michigan is the property tax deduction. Homeowners can deduct a portion of the property taxes paid on their primary residence or second home. This deduction helps to offset the annual property tax burden, putting more money back in the pockets of homeowners. It is worth noting that the amount eligible for deduction may have specific limitations, which can vary year to year (for now, it is a limit of $10,000). Staying informed about any changes in the tax laws or consulting a tax professional can help you maximize this benefit.
3. Principal Residence Exemption (PRE)
Michigan also provides a Principal Residence Exemption (PRE) that can lead to substantial property tax savings. A PRE exempts a residence from the tax levied by a local school district for school operating purposes up to 18 mills. The PRE reduces the taxable value of your primary residence, thus lowering your property tax liability. To qualify for the PRE, you must declare the property as your principal residence and file the necessary paperwork with your local assessor’s office. It’s essential to ensure you meet all eligibility requirements and file the PRE claim by the deadline each year to maintain this valuable exemption.
4. Homestead Property Tax Credit
The Homestead Property Tax Credit is another valuable tax benefit for Michigan homeowners. It is designed to help lower-income homeowners manage their property tax expenses. Eligible homeowners can receive a credit that directly reduces their property tax bill or provides a refund if the credit exceeds the tax liability. The credit amount depends on several factors, including income, property taxes, and household size. Michigan’s Department of Treasury provides detailed guidelines and forms to determine eligibility and calculate the credit.
5. Energy-Efficient Home Improvement Tax Credit
The Energy-Efficient Home Improvement Tax Credit, introduced as part of the Inflation Reduction Act of 2022, offers homeowners a unique opportunity to earn a tax credit by enhancing their home’s energy efficiency. By making energy-efficient home improvements, you can qualify for a generous tax credit of up to 30%, with a maximum value of $1,200. This credit applies to various energy-saving upgrades, including home insulation, solar panels, energy-efficient heating and cooling systems, and more, making it an attractive option for environmentally conscious homeowners. The primary aim of this tax credit is to encourage more widespread adoption of energy-efficient practices, contributing to reduced energy consumption and greenhouse gas emissions. By taking advantage of this incentive, homeowners not only improve their properties but also alleviate the financial burden of energy-saving upgrades, all while contributing to a more sustainable future.
6. Points Deduction
If you paid “points” or “loan origination fees” when obtaining your mortgage, there’s good news — you might be eligible to deduct these fees on your tax return. Mortgage points are essentially fees paid to your lender during the loan closing to secure a lower interest rate on your mortgage. Each point represents 1% of your total mortgage amount; for instance, if your mortgage is $200,000, one point would equal $2,000. The advantage of paying mortgage points lies in the potential to lower your interest rate, leading to reduced monthly mortgage payments and potential savings of thousands of dollars in interest over the loan’s lifespan. It’s important to note that mortgage points are tax-deductible in the year you pay them, but certain restrictions and limitations apply. The Internal Revenue Service (IRS) treats mortgage points as prepaid interest, enabling you to list them as itemized deductions on Schedule A of Form 1040, which can help reduce your taxable income and potentially result in a lower tax liability.
7. Michigan First-Time Home Buyer Savings Program
If you’re not ready to make the leap into homeownership just yet, we have good news for you too! In 2022, the state launched the Michigan First-Time Home Buyer Savings Program, which allows future first-time home buyers the opportunity to contribute to a savings account for the purchase of their first single-family residence. All contributions made, plus accrued interest and qualified withdrawals, are all exempt from taxation. Single filers may claim up to $5,000 and joint filers can claim up to $10,000 on their taxes. But you must act quickly, as this program is only available for tax years 2022 through 2026, unless the state legislature decides to extend the law.
Happy Filing!
By taking advantage of these beneficial deductions, homeowners can reduce their taxable income and overall tax liability.
While our post provides an overview of the tax benefits of owning a home in Michigan, it is important to note that tax laws can change, and individual circumstances may vary. To ensure you fully understand and take advantage of these benefits, it is advisable to consult with a qualified tax professional or refer to the Michigan Department of Treasury for the most accurate and up-to-date information.
