Homeowners may be able to deduct this from their taxes

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The end of the year means it’s time for celebrations and fun, but it’s also when we start thinking about our finances. We set resolutions to get things in order but also about how we can save when tax time rolls around. One way you can do that is through tax deductions — and there may be some you are overlooking. If you’re a homeowner, there may be certain situations where you’re able to deduct your homeowners insurance

Now, it’s important to note, that under most circumstances, you can’t deduct homeowners insurance from your taxes, but there are some exceptions, so it’s important to know if you qualify. 

What is a tax deduction?

Every year, you pay taxes on your taxable income — your salary, wages or tips, and your tax burden is a percentage of your taxable income within your tax bracket.

When you claim deductions, you’re not subtracting the deducted amount from your taxes; you’re simply reporting less income than you were thought to earn. If you earn $60,000 a year, and you claim $3,000 in tax deductions, that doesn’t mean you get to pay $3,000 less in taxes, but that you only pay tax on $57,000 in income. 

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There are a lot of options for tax deductions, like charitable donations or your home mortgage interest. You can also claim deductions for health insurance (if it’s paid for with after-tax dollars) as well as renters insurance if it qualifies as a business expense.

Homeowners insurance is similar to renters insurance in that regard — the amount you pay in premiums and deductibles can be deducted if you rent out your home, and you can get a break on your premiums if you work from home. There are also extenuating circumstances where you can receive tax breaks, not deductions, if your insurer denies you coverage. 

Deductions for renting out your home

If you invest in real estate and rent out your home, you can deduct your rental house’s homeowners insurance from your taxes. That’s because renting out a home is considered work — the income you generate is taxable — and thus, spending money on a rental house would count as a business expense, even if that expense is homeowners insurance.

At tax time, you file a Schedule E (Supplemental Income and Loss) form, where you provide how much rent you collected that year and whether or not you lived at the property yourself during the year (for tax reasons, its best if you didn’t), and, if so, for how long.

Deductions if you work from home

If you’re prone to working from home, you may be able to deduct a portion of your homeowners insurance premiums from your taxes. The amount you deduct is calculated by determining what percentage of your home (in square footage) is used for business. If 15% of your house’s square footage is used for work, then 15% of the amount you paid in premiums for the year would be deducted from your taxable income.

However, certain conditions must be met, otherwise you could easily write off every desk and swivel chair you own. In order for deduction criteria to be met, your workstation must be in a condensed, specified area of the home.

If you have losses … 

A loss is any circumstance where your property or assets lose value. When your homeowners insurance denies you coverage on something that had value, you incur a loss, as whatever was stolen or damaged is a depreciated asset and you may have to pay out-of-pocket to cover the loss because your insurer won’t cover it.

In the event of a loss, it pays to be tax savvy, and there are a few important rules and nuances you must meet and be cognizant of in order to get what you’re properly owed.

First, in order to receive a deduction on a loss — home, personal belongings, or otherwise — you must file a claim with your home insurance company in a timely manner, in most cases within 30 days of the incident. Only then can you deduct the denied claim amount from your taxes.

There’s also quite a bit of subtraction to do when you file losses. Each individual loss immediately has $100 taken off the top. From there, 10% of your adjusted gross income (AGI) is subtracted from the combined loss amount. For example, if you file itemized losses of $1,000 and $3,000, your loss amounts are actually $900 and $2,900, so $3,800 in total. If your AGI is $35,000, the 10% threshold would be $3,500, meaning you only get to reduce your taxable income by $300.

The exception to this is when you suffer a loss to property used for business, like a rental property. In this case, you’re not required by the IRS to reduce the loss amount by $100, and the 10% of adjusted gross income rules don’t apply.

Tax breaks for damage & theft

Victims of theft or casualty losses can also claim a deduction when they receive an insurance payment that doesn’t cover the entire loss. To better illustrate, if you receive a home insurance payment or reimbursement that’s less than your property’s property’s current value at the time that it’s damaged, destroyed, or stolen, you can deduct the difference from your taxes.

If that antique urn that was stolen from your mantelpiece was worth $6,000, and the insurer paid out $5,000 to cover your losses, you can claim a $1,000 loss on your taxes. On the flip side, if the insurance payment for a loss exceeds the property’s current value, you may have to report that amount as a taxable gain — the amount you make on an asset — on your income taxes.

You can also get deductions on your homeowners insurance deductibles — the amount you pay to an insurer before they pay out a claim — but the $100 / 10% rule must be met in order to do so. There are also extenuating circumstances where you may be able to add the paid insurance deductible to the amount the insurer didn’t cover on the loss or losses, and deduct that from your taxes.

Having a budget in place will give you a great idea of where your finances stand and hopefully help prevent any (or most) surprises come tax season. If you don’t have one, here’s an easy budgeting spreadsheet that can help you get started.

This article originally appeared on Policygenius and was syndicated by MediaFeed.org.

Featured Image Credit: monkeybusinessimages.

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