What are the Benefits of Married Filing Jointly?

There are many advantages to filing a joint tax return with your spouse. Joint filers receive one of the largest Standard Deductions each year. This lets couples deduct a significant amount when they calculate their taxable income.

Couples who file together can often more easily qualify for various tax credits, like:

• Earned Income Tax Credit
• American Opportunity and Lifetime Learning Education Tax Credits
• Exclusion or credit for adoption expenses
• Child and Dependent Care Credit

Joint filers usually have higher income thresholds for certain taxes and deductions—this means they can earn a higher income and still qualify for certain tax breaks.

What about Married Filing Separately?

On the other hand, couples who file separately typically get fewer tax benefits. Separate tax returns may result in more tax.

In 2024, Married Filing Separately taxpayers get a Standard Deduction of $14,600. Compare this to the $29,200 that those who filed jointly can get. These amounts increase to $15,000 and $30,000, respectively, for 2025. While when you add up the two separately filing Standard Deductions it equals the joint filing amount, there can be a significant difference when one spouse makes all or most of the family income. When filing jointly, the spouse with the higher income gets to use the other spouse’s Standard Deduction as well as using the more favorable jointly filing tax brackets as compared to filing separately.

There are other downsides to filing separate returns:

If you file a separate return from your spouse, you are often automatically disqualified from several of the tax deductions and credits mentioned earlier.

• Separate filers usually get a smaller IRA contribution deduction.
• Couples who file separate returns can't take the student loan interest deduction.
• The capital loss deduction limit is $1,500 each when filing separately, vs $3,000 on a joint return.

When should married couples file taxes separately?

Despite the numerous advantages of filing jointly, there are certain circumstances where filing separately could better serve your financial needs.

When It Makes Sense

• Medical expenses: If you or your spouse had a large amount of out-of-pocket medical bills, filing separately might help you surpass the IRS’s threshold to deduct these costs. That’s because the threshold is based on a percentage of your Adjusted Gross Income (AGI), which would be lower if only considering one income.
• Student loan payments: If your student loan repayment plan is determined by the income on your tax return, filing separately may help you keep your payments more manageable.
• Separated finances: In situations where couples prefer or need to keep their financial matters distinct—such as when preparing for a divorce — filing separately can provide that financial division. Filing separately can also limit your liability for your spouse’s tax matters.

Let’s look at an example of how filing separately could be a better choice. Say you have $10,000 in medical expenses and earned $50,000 from your job. That would meet the 7.5% threshold ($10,000 ÷ $50,000 = 20% of your income). But if you filed together with your spouse, your adjusted gross income jumps to $135,000. This would disqualify you from claiming these medical expenses ($10,000 ÷ $135,000 = 7.4% of your income). Source

What is Negative Cash Flow?

What is negative cash flow?

Negative cash flow is when more money is flowing out of a business than into the business during a specific period. Positive cash flow is simply the opposite — more money is flowing in than flowing out.

While the concept is straightforward, tracking the movement of money through a business can get complicated. If you have a small business accounting system in place, you can quickly generate a cash flow statement. Along with your balance sheet and profit and loss statement, these make up the main three financial statements for a business.

What is an example of negative cash flow?

Periods of negative cash flow are common and sometimes expected. As the saying goes, you have to spend money to make money.

For instance, a brand-new business might not make enough money to support itself at the start. Therefore, many entrepreneurs need business funding to start and grow their companies. Famously, some tech startups even can go years before making a profit.

It’s not as realistic for small businesses to last years without turning a profit. But hopefully the initial investments will pay off, and the company will become profitable. Seasonal businesses also commonly have predictable periods of negative cash flow. A well-known beach town restaurant might make most of its profits during the summer months. Once the busy season wraps up, the restaurant might have much lower labor and supply costs. However, it still may need to take out a business loan or dip into savings to cover the rest of its operating costs during the off-season.

How does negative cash flow affect a business?

Negative cash flow can make running a business more difficult in the short term. The pressure to cut corners can build if you’re watching your business bank account slowly dwindle — this can have long-term negative consequences on your finances.

For example, you might not be able to invest in quality equipment, resulting in spending more money to replace or repair the equipment later. Or you might decide to wait to hire more staff or launch a marketing campaign, which might perpetuate the problem if you then run into staffing shortages or struggle to increase sales.

If you continue to lose money, you may have to lay off employees, forgo your own paychecks, fall behind on payments to vendors and creditors — or even shut down.

Is it OK to have negative cash flow?

Operating with negative cash flow isn’t necessarily a bad thing. Even giant, international and world-famous corporations operate at a loss for some months or years. Sometimes, they even lose money and experience negative cash flow on purpose to invest in something that will produce massive profits in the future.

Here are a few situations that can cause a company to experience negative cash flow, even though the company isn’t necessarily in a bad place:

• Purchasing large business
• Spending money to open a new
• Creating a new product line or service
• Launching a marketing
• Ramping up for a busy season

In these cases, the companies are following a plan that requires an initial investment. If they’re measuring their cash flow over a given month or quarter, they might record negative cash flow for that period. But it’s a strategic decision to invest in the business.

In contrast, negative cash flow can become an issue when you don’t have a plan or strategy. If you’re unexpectedly in the red due to declining sales, unpaid invoices or increased expenses, you’ll need to figure out how to improve cash flow

How long can you operate with negative cash flow?

You can operate with negative cash flow so long as you have cash reserves or access to small business funding to continue operations. Startups, which commonly operate at a loss initially, often track their cashflow runway, meaning how long they can last with negative cash flow until they run out of money. They also track their burn rate, which is how quickly they’re losing money.

To find these for your own business, you can:

• Figure out how much cash you have on
• Calculate how much money you’re losing each month (your burn rate).
• Divide your cash by your burn

For example, if you’re burning $5,000 a month and have $60,000 in reserves, your runway is about 12 months.

However, your burn rate and runway aren’t set in stone. If you’re worried about running out of money, you may be able to extend your runway or completely switch things around and have positive cash flow by increasing your income or lowering your expenses. Source

How to Be More Productive

 

 

There’s a huge amount of productivity systems and time management strategies out there. But what actually works, and why?

Innovation Editor Christine Liu test-drove a handful of promising productivity methods: the classic Pomodoro Technique and two online platforms, Caveday and Focusmate. Then we talked to productivity expert Chris Bailey, author of “The Productivity Project,” on what successful methods all share, how best to manage your time, and what “being productive” even means.

4 Benefits of an IRA

When it comes to saving for retirement, you might already be on your way with automatic contributions into a . But that’s not your only retirement account option. An individual retirement account (IRA) offers a unique way to save for the future. You can choose a traditional IRA, a Roth IRA or work with both. If you’re self-employed or own a small business, you have, And the best part? All IRAs give you a leg up when it comes to funding a healthy retirement.

Here are four benefits of a traditional or Roth IRA;

1. IRAs are accessible and easy to set up

Most people are eligible to open and contribute to an IRA. To open and make contributions to a traditional IRA, you (or your spouse) just need to earn taxable income.

There’s no age limit for opening or contributing to a Roth IRA , but your ability to contribute may be reduced based on your tax filing status and the amount of your modified adjusted gross income. You can open an IRA through many banks or brokerage firms in a matter of minutes. And most financial institutions make managing your account easy to do.

You can manage your investments on your own or work with a financial professional to help guide your strategy. You can also choose an automated approach, where your investments are automatically monitored and rebalanced to help you meet your goals. Keep in mind that your combined contribution to traditional and Roth IRAs is $7,000 for the 2025 tax year. You can contribute an additional $1,000 if you’re age 50 or older.

2. Traditional IRA benefits include a tax break right now

Traditional IRAs offer the key advantage of tax-deferred growth, meaning you won’t pay taxes on your untaxed earnings or contributions until you’re required to start taking minimum distributions (RMDs) at age 73. The more you invest now (and over the years), the more you may have to withdraw in retirement (considered to be age 59 ½). Your traditional IRA contributions may also be tax deductible, depending on your income level and whether you (or your spouse if you’re married) have an employer-sponsored retirement plan.

3. Roth IRA benefits include a tax break in retirement

While a traditional IRA may yield an upfront tax break, a Roth IRA hands you that perk when you’re ready to retire. Since you contribute after-tax dollars, your earnings and withdrawals are not taxed in retirement.That’s a serious advantage to investors, particularly if you’re in your 20s or 30s, because of the potential to compound tax-free funds over your working years. At age 59 ½, you can withdraw contributions and earnings without penalty as long as the Roth IRA has been open for at least 5 years.

If flexibility is a priority, a Roth IRA might be best for you. With tax-free withdrawals in retirement, no RMDs and the ability to withdraw your contributions at any time, Roth IRAs make cashing out easy. 

4. Your IRA is exclusively yours

In 2024, the Bureau of Labor Statistics reported that 75% of Americans have access to employer-sponsored retirement benefits, such as a 401(k). Even if you do have one, an IRA is a great addition or supplement to a 401(k).

For example, with a 401(k), you’re only a participate in the plan. Your employer can change plans or limit your plan’s investment options without your say-so. And leaving your job means losing the ability to contribute further to that 401(k).

An IRA, however, is yours to keep. Your access is unchanged if you ever switch jobs, and you can even rollover those old 401 (k) funds into your IRA. IRA accounts allow you to invest in thousands of investment options, including stocks, bonds, mutual funds, exchange-traded funds (ETFs) and more. With an IRA of your own, you can manage your portfolio to work with your financial needs, risk profile and retirement goals.

Source

What is Equity?

Equity is ownership, or more specifically, the value of an ownership stake after subtracting for any liabilities (meaning debts). For example, if your home (an asset) is worth $500,000 and you have an outstanding mortgage (a liability) of $400,000, you have $100,000 equity in your home. In other words, equity is the theoretical cash you'd get in your pocket if you completely liquidated an asset less any applicable costs and liabilities. That asset could be a car, a home, a business, or something else.

Equity comes in several forms, and the words "equity" or "equities" can be used in a few ways. Here are some of the ways you might encounter the term in the investing and financial worlds:

• Equities: This word can be used as a synonym for stocks, or for a specific company's stock. Remember that "equity" describes ownership, and stocks are essentially small positions of ownership in a company.
• Home equity: This is the value of your ownership stake in your home. It's sort of like the amount of net worth you have in your home.
• Private equity: Private companies are ones that are owned privately. You can contrast them with public companies, meaning ones with stocks that anyone can buy and sell (i.e., companies that are owned by the public). Ownership in a private company is called "private equity." Some investing vehicles, called "private equity funds" specialize in investing in private companies.
• Shareholder equity (aka owners' equity): This is shareholders', or owners', residual interest in a company after subtracting for its liabilities. It's the value of all the company's assets, minus the value of all the company's liabilities.

While it can be confusing to see or hear the term used in so many ways, always remember that equity is fundamentally about ownership, and the value of ownership.

The value of equity is based primarily on the value of the underlying asset, so it fluctuates. The simplest way to think about equity in any asset is with a single question: "If I sold this asset today and paid off any related debts, how much cash would I have in my pocket?"

Let's look at that example of home equity again. Suppose you buy a home for $500,000, with a $100,000 down payment and a $400,000 mortgage. Your equity is the value of the asset (the $500,000 home) minus the value of any associated liabilities (the $400,000 mortgage). This means, when you first buy it, your equity in the home is $100,000, based on this formula:

Asset – liabilities = equity

$500,000 – $400,000 = $100,000

Now let's suppose that several years later, you've paid down part of the mortgage and now only have $300,000 outstanding. Furthermore, let's suppose that your home has risen in value to $650,000. In that case, your equity in the home would have risen to $350,000, based on this formula:

$650,000 – $300,000 = $350,000

Your equity has increased as the value of your home has risen and as you've paid down the mortgage.

Equity can also be negative. To see how, let's suppose that instead of a $100,000 down payment on that house you were only able to put $50,000 down, and that you took on a $450,000 mortgage. Let's also imagine that shortly after buying the home for $500,000, home prices decline and the value of the home falls to $430,000. In that case, your equity would be negative $20,000, based on this formula:

$430,000 – $450,000 = –$20,000

Having negative equity is not ideal, but it can also reverse itself. For example, if you kept paying your mortgage and waited it out, the home's value might recover and start to rise again. Source

5 Bookkeeping Tips for Businesses

Patience and attention to detail are key to better bookkeeping. While there is no one-size-fits-all checklist, there are some standards you can adhere to which will ensure that you constantly stay on top of your finances.

1. Have a Phased Approach

If you’re in the process of moving from manual bookkeeping to a digital system, take a step-by-step approach. Rapidly shifting all at once can be overwhelming to your employees and can also discourage them. Taking baby steps ensures you are also in control of your organization as they adjust to a new system. 

2. Ensure Your General Ledger Is Up-to-date

A general ledger has all the information needed regarding a company’s financial transactions. It includes the balance sheet (equity, assets, and liabilities), and income statement accounts. General ledger accounts normally include:

• Assets like cash, accounts receivable, land, investments, and inventory.
• Liabilities like accounts payable and customer deposits. 
• Stockholder accounts like treasury stock, common stock, and retained earnings. 

3. Plan Taxes For The Year

Maintaining your business’s financial records and expenses throughout the year can ensure you are well-prepared when it’s time to file taxes. Without the usual hiccups or last-minute runs, you will be able to enter tax season confidently. 

4. Be Aware of Seasonal Trends

Seasonality is a part of any job in the world. For bookkeepers, seasonality means periods when payments come flying in through the roof, where having outstanding work can become a serious blocker. It becomes critical to anticipate these moments beforehand and to complete any backlog before the pressure period hits. 

5. Keep Your Business And Personal Expenses Separate

It might be tempting to blur the lines between personal and business expenses when you go deep into your bookkeeping process, but it’s never the best idea. Avoiding this will reduce the risk of triggering an IRS audit as it provides an accurate representation of your finances. 

Some common to keep your personal and business finances separate are

• Using a business credit card for all your business expenses
• Having separate checking accounts
• Keeping receipts for personal and business expenses separate

Source

Why is Personal Finance Important?

What is Personal Finance?

Personal finance is the comprehensive management of one's financial activities and decision-making. It involves a broad spectrum of financial aspects, including budgeting, saving, investing, and planning for the future. At its core, personal finance is about understanding and efficiently managing your income, expenses, investments, and savings to achieve financial stability and security. This discipline not only focuses on the practical aspects of money management but also emphasizes the importance of setting short-term and long-term financial goals.

Aspects of Personal Finance

Personal finance includes several important elements that are key to managing your money effectively. By balancing these elements, you can build a solid foundation for your personal financial health:

• Income:  This is the money you receive from your job, investments, or other sources. It serves as the foundation for your financial planning.
• Spending:  This involves how you use your income to pay for everyday needs, including bills, groceries, and entertainment. Smart spending ensures that your expenses don't exceed what you earn.
• Saving:  This is about setting money aside from your income for future needs or goals. Saving helps you prepare for both expected and unexpected life events.
• Investing:  Investing is the process of putting your money into ventures like stocks, bonds, or real estate to grow your wealth over time. It's crucial for meeting long-term financial objectives such as retirement or creating a financial legacy.

The Benefits of Managing Your Personal Finances

• Financial Security:  Effective management of your finances ensures that you have a safety net for emergencies and the confidence to face unforeseen financial challenges.
• Achieving Financial Goals:  Whether it's buying a home, funding education, or planning a dream vacation, managing your finances helps turn these dreams into achievable goals.
• Reduced Stress:  Understanding your financial situation and having a plan in place can significantly reduce anxiety and stress related to money matters.
• Wealth Accumulation:  Smart financial management involves not just saving money but also investing wisely, which can lead to wealth accumulation and a comfortable retirement.
• Informed Decision-Making:  With a solid grasp of personal finance, you can make more informed decisions about investments, loans, and other financial products, avoiding pitfalls and maximizing opportunities.

 Managing your personal finances doesn't have to be overwhelming. With the right approach, you can gain control over your money and work towards financial security. Here are five practical tips that can help you get on track with your finances;

1. Understand Your Financial Goals

The first step in effective money management is to define your financial goals. These could range from short-term objectives like saving for a vacation to long-term plans like retirement. Understanding your goals gives you a clear direction for your financial decisions and helps you prioritize where and how to use your money.

2. Create a Budget

Creating a budget is one of the first steps to managing your finances. It involves tracking your income and expenses to understand your spending habits. A well-planned budget helps you control your spending, ensures you're saving enough, and keeps you on track to meet your financial goals.

3. Reduce and Manage Debt

Debt can be a major obstacle to achieving financial freedom. Work on reducing and managing your debts, whether they're credit card balances, loans, or mortgages. Paying off high-interest debts first and avoiding unnecessary borrowing are key steps to becoming debt-free.

4. Open a Savings Account

Opening a savings account is a simple yet effective way to save regularly. Choose an account that suits your needs and set aside a portion of your income consistently. This habit not only builds your savings over time but also prepares you for emergencies and future financial needs.

5. Use Financial Tools and Apps

In today's digital age, many financial tools and apps are available to help you manage your finances. These tools can assist in budgeting, tracking expenses, monitoring investments, and even providing financial advice. Utilizing these resources can simplify financial management and help you make informed decisions. Source

10 Commonly Overlooked Tax Deductions and Credits

Each year, tax time rolls around before you know it. A great way to prepare is by being proactive and keeping track of any potentially tax deductible items throughout the year. A great way to do that is by gathering your receipts now. By making sure you don’t miss any potential deductions, this will help you increase your tax refund or lower the amount of taxes you owe.
Here are some examples of sometimes overlooked tax deductions and credits...

1.) Education Expenses

There are two education credits available — the American Opportunity Tax Credit and the Lifetime Learning Credit. The American Opportunity Tax Credit is a credit worth up to $2,500 for the expenses you paid for the first four years of college. The Lifetime Learning Credit, worth up to $2,000 per tax return, is available even if you aren’t pursuing a degree. Make sure you count books and lab fees. This includes the books you rent on sites such as Chegg and others.

2.) Camp for Your Kids

You may be entitled to the Child and Dependent Care Credit if your children are under the age of 13, and you took them to a before and after school care program, daycare, or day camp so that you can work or actively look for work. However, overnight and sleepover camps are not eligible for child tax credits.

For tax year 2024, the maximum amount of care expenses you’re allowed to claim is $3,000 for one child or $6,000 for two or more children. The percentage of your qualified expenses that you can claim ranges from 20% to 35%, so you can claim up to $1,050 (35% x $3,000) for one child and up to $2,100(35% x $6,000) for two or more kids. The American Rescue Plan made some major changes to the Child and Dependent Care Credit for tax year 2021 only. For 2021, the expense limit increased from $3,000 for one qualifying individual to $8,000 and from $6,000 for more than one qualifying individual to $16,000. For tax year 2021, the credit was fully refundable, meaning you could  get the credit even if you didn’t  owe any taxes.

3.) Health Insurance

If you are self-employed, you can take a tax deduction for the health insurance premiums you pay for yourself and your family. If you are not self-employed, health insurance premiums paid after taxes may be tax deductible, but only if you can itemize your deductions.

4.) Medical Expenses

Medical expenses, including miles driven for medical reasons (at 21 cents per mile), may be tax-deductible if they exceed 7.5% of your adjusted gross income in 2024 and only if you are able to itemize your tax deductions. The cost of exercise equipment or purchasing and maintaining a spa or swimming pool may be tax-deductible as medical expenses, but only if your doctor recommends them to mitigate a medical condition.

5.) Charitable Contributions

If you made any donations, no matter how small, remember to have your receipts ready since you may be able to deduct them. It’s easy to forget the smaller amounts you contributed to various walks or races, but they add up quickly. You can’t deduct the value of your time when you volunteer, but you can deduct your travel at 14 cents per mile as well as any parking and tolls you paid. Only charitable contributions to qualified charities are tax deductible.

6.) State Income or Sales and Local Tax Deduction

You are permitted to deduct either the state income tax paid or the state sales tax paid, if you itemize your tax deductions. If you live in a state without a state income tax, you would choose to deduct the state sales taxes paid during the year. 

7.) Home Office

If you use part of your home regularly and exclusively to perform administrative or managerial activities for your self-employed business, you can claim a home office deduction for a portion for home expenses such as utilities, rent, mortgage interest, depreciation, and maintenance. The deductible amount will be based upon the square footage of your home that used exclusively for your business. Many people who are employees worked from home in 2024 and wonder if they can deduct at-home expenses. Following tax reform, you can no longer deduct at home expenses on your federal taxes if you are an employee.

8.) Miscellaneous itemized tax deductions

Miscellaneous itemized deductions like unreimbursed job expenses and tax preparation expenses, unless it’s tax preparation for your self-employment taxes, are no longer available on your federal taxes following tax reform. Uninsured losses due to fire, storms, shipwreck or theft more than 10% of adjusted gross income are tax-deductible only if they are the consequence of a federally declared natural disaster.

9.) Other Dependent Credit

If you are caring for someone other than a child dependent, you can take advantage of this tax credit which equals $500 per non-child dependent that you support.

10.) Mileage Expenses

If you use your vehicle for business and you are self-employed, you can deduct your mileage at 67 cents per business mile driven in 2024. If you work for multiple clients, the cost of traveling between job locations is tax-deductible as well.  Be sure to keep a log of your business mileage throughout the year to help ensure you take advantage of this deduction. Keeping track of these expenses throughout the year will ensure you don’t miss out on any tax deductions or credits when it comes to filing your taxes.

Source

What Is a Family Trust, and How Do You Set One Up?

What Is a Family Trust?

There are three parties in a family trust: a grantor, a trustee and the beneficiaries. The grantor makes the trust and transfers their assets into it. The trustee manages the assets in the trust on behalf of the beneficiaries, who receive some type of financial benefit from the trust. A family trust lists your family members as the beneficiaries, and can also include spouses. Family trusts are a type of living trust that takes effect during your lifetime, and can be revocable or irrevocable. Revocable trusts can be altered or terminated at any time, while irrevocable trusts are permanent. With a revocable family trust, you can act as your own trustee, naming successor trustees to take over if you become incapacitated or pass away. With an irrevocable trust, you must name someone else to act as the trustee.

What Are Family Trusts Used For?

A family trust could help ensure your assets are managed according to your wishes on behalf of your beneficiaries. The trust specifies when beneficiaries can access their share of your assets and under what terms. Family trusts can be useful in estate planning if you want to avoid probate for your family. Probate is the legal process of distributing the assets in an estate, due to the decedent dying intestate (without a will) or having an estate larger than their respective state government’s limit. Anything that happens in probate is part of the public record and it can be a time-consuming and expensive process. You could use an irrevocable family trust to insulate assets from creditors. Most importantly, a family trust could potentially help minimize estate taxes once the trust grantor passes away.

How to Set Up a Family Trust

The first step in creating a family trust is typically talking with an estate planning attorney or financial advisor to help find the trust option that could best suit your needs.

Next, you’ll designate a trustee – yourself or you could name someone else. Then, decide which family members you want to benefit from the trust and determine exactly what they’ll get.

From there, you’d create the trust agreement. This is when it could be better to work with a professional, especially if you have substantial assets.

Next, you’ll fund the trust by transferring assets to the ownership of the trustee. So if you want to place a home inside a family trust, you’d transfer the deed to the trustee.

Be sure to check the local legal requirements for a family trust. Otherwise, your heirs might run into issues when it’s time to access trust assets. This is another area where a financial advisor's advice could potentially be beneficial. Source

What Are The Tax Benefits Of Homeownership?

The tax code provides several benefits for people who own their homes. The main benefit is that the owners do not pay taxes on the imputed rental income from their own homes. They do not have to count the rental value of their homes as taxable income, even though that value is just as much a return on investment as are stock dividends or interest on a savings account. It is a form of income that is not taxed.

Homeowners may deduct both mortgage interest and property tax payments as well as certain other expenses from their federal income tax if they itemize their deductions. In a comprehensive income tax system, all income would be taxable and all costs of earning that income would be deductible. Thus, in such a system, there should be deductions for mortgage interest and property taxes. However, our current system does not tax the imputed rental income that homeowners receive, so the justification for giving a deduction for the costs of earning that income is not clear.

Finally, homeowners may exclude, up to a limit, the capital gain they realize from the sale of a home. All these benefits are worth more to taxpayers in higher-income tax brackets than to those in lower brackets.

Imputed Rent

Buying a home is an investment, part of the returns being the opportunity to live in the home rent free. Unlike returns from other investments, the return on homeownership—what economists call “imputed rent”—is excluded from taxable income. In contrast, landlords must count as income the rent they receive, and renters may not deduct the rent they pay. A homeowner is effectively both landlord and renter, but the tax code treats homeowners the same as renters while ignoring their simultaneous role as their own landlords. The US Department of the Treasury, Office of Tax Analysis (OTA) estimates that the exclusion of imputed rent reduced federal revenue by $128.9 billion in fiscal year 2022.

Mortgage Interest Deduction

Homeowners who itemize deductions may reduce their taxable income by deducting interest paid on a home mortgage even though the return on the home does not generate taxable income. Taxpayers who do not own their homes have no comparable ability to deduct interest paid on debt incurred to purchase goods and services.

The Tax Cuts and Jobs Act (TCJA) trimmed this important tax break for homeowners (although it expires at the end of 2025). Prior to the TCJA, the deduction was limited to interest paid on up to $1 million of debt incurred to purchase or substantially rehabilitate a home. Homeowners also could deduct interest paid on up to $100,000 of home equity debt, regardless of how they used the borrowed funds. The TCJA limited the deduction to interest on up to $750,000 of mortgage debt incurred after December 14, 2017, to buy or improve a first or second home.

The OTA estimates that the mortgage interest deduction cost about $34.4 billion in fiscal year 2022. Prior to enactment of the TCJA, OTA estimated that the cost of the mortgage interest deduction would have been $106.2 billion in fiscal year 2022. The estimated cost fell largely because other provisions of TCJA resulted in many fewer taxpayers itemizing their deductions and in small part because of the lower cap on deductible mortgage interest. The Urban-Brookings Tax Policy Center estimates that only about 8.5 percent of tax units benefited from the deduction in 2022, compared to about 20 percent in 2017, prior to the TCJA.

Property Tax Deduction

Homeowners who itemize deductions may also reduce their taxable income by deducting property taxes they pay on their homes. That deduction is effectively a transfer of federal funds to jurisdictions that impose a property tax (mostly local but also some state governments), allowing them to raise property tax revenue at a lower cost to their constituents. The OTA estimates that the deduction saved millions of homeowners a total of $5 billion in income tax in fiscal year 2022. The cost of that deduction went way down because of the TCJA, as many fewer homeowners itemized and because the TCJA put an overall cap of $10,000 on the state and local taxes that taxpayers can deduct.

Profits from Home Sales

Taxpayers who sell assets must generally pay capital gains tax on any profits made on the sale. But homeowners may exclude from taxable income up to $250,000 ($500,000 for joint filers) of capital gains on the sale of their homes if they satisfy certain criteria: they must have maintained the home as their principal residence in two out of the preceding five years, and they generally may not have claimed the capital gains exclusion for the sale of another home during the previous two years. The OTA estimates that the exclusion provision saved homeowners $49.2 billion in income tax in fiscal year 2022.

Effect of Deductions and Exclusions

The deductions and exclusions available to homeowners are worth more to taxpayers in higher tax brackets than to those in lower brackets. For example, deducting $2,000 for property taxes paid saves a taxpayer in the 37 percent top tax bracket $740, but saves a taxpayer in the 22 percent bracket only $440. Additionally, even though they only represent about 32 percent of all tax units, those with income of $100,000 or more received over 95 percent of the tax benefits from the mortgage interest deduction in 2022. That difference results largely from three factors: compared with lower-income homeowners, those with higher incomes face higher marginal tax rates, typically pay more mortgage interest and property tax, and are more likely to itemize deductions on their tax returns. Source