Paying a mortgage? These tax breaks can save homeowners thousands

Owning a home can help you build wealth but it also comes with expenses like mortgage payments, maintenance costs and property taxes. Fortunately, some these costs are deductible and can shave thousands off your taxable income.

Below, CNBC Select walks you through the deductions and credits available to homeowners, including who is eligible and how much you can deduct.

To claim deductions on your home, you'll have to itemize your deductions, which takes more time and effort than claiming the standard deduction. In addition, most free filing services don't process itemized returns.

These are the standard deduction for tax year 2023 (returns being filed in 2024):

• $13,850 for single filers and married couples filing separately.
• $27,700 for married couples filing jointly
• $20,800 for heads of households.

If all of your itemized deductions total up to less than this, it probably doesn't make sense to claim the tax breaks on your home. If they're more than the standard deduction, you may want to hire a tax professional or purchase an online filing program to ensure your return is done correctly and you get the maximum refund.

The paid tiers of H&R Block, TurboTax and TaxAct all allow you to itemize your return.

You can deduct the interest you pay on your mortgage each month, lowering your taxable income for the year. This can be especially valuable for new homeowners, since most of the payments in the first few years goes toward interest, not the principal.

Your mortgage servicer should provide you with a Form 1098 each year indicating how much interest you have paid. Single people or married couples filing jointly can deduct the interest on the first $750,000 of their home, while the cap for married couples filing separately is $375,000 each.

If you took out your mortgage between Oct. 13, 1987, and Dec. 16, 2017, the limit is $1 million for single people and married couples filing jointly or $500,000 for couples filing separately.

There is no cap for mortgages taken out before Oct. 13, 1987.

If you want to save even more money, it may be time to look into refinancing your mortgage. SoFi originates mortgages in all 50 states through its partner Spring EQ, with loans ranging from $5,000 to $100,000. A rebate of up to $500 is available for existing customers and there are also discounts for setting up direct deposit and for autopay.

SoFi reports its closing time for refinancing averages 28 days, compared to the national average of 42 days as determined by ICE Mortgage Technology.

Ally Bank is another of CNBC's top mortgage refinance providers, offering fixed and adjustable rate mortgages and jumbo loans, all with no application fees, processing or other lender fees. While Ally doesn't offer FHA, VA or USDA refinancing, borrowers with government-backed mortgages can refinance to a conventional loan.

Ally Home reports that its online application process enables borrowers to close 10 days faster than the industry average.

Homeowners who buy discount points can get a lower interest rate over the life of their mortgage. Depending on your circumstances, you may be able to deduct the cost of these points as a kind of mortgage interest.

According to the IRS, you can deduct discount points in full in the year you pay them if you meet these conditions:

1. You use the mortgage loan to buy or build your primary residence.
2. Your primary residence is the loan's collateral.
3. Paying points is a common business practice in your area.
4. The points paid weren't higher than what's typically charged in your area.
5. You use the cash method of accounting, which means you report income in the year you receive it and deduct expenses in the year you pay them.
6. The points paid weren't for items usually listed separately on the settlement sheet (like appraisal fees, inspection fees, title fees, attorney fees or property taxes.)
7. The funds paid at or before closing, including any points the seller paid, were at least as much as the points you bought. You can't have borrowed the funds from your lender or mortgage broker to pay for the points.
8. The points were calculated as a percentage of the principal mortgage amount.
9. The amount shows clearly as points on your settlement statement.

If you don't meet any of these requirements, you might still be able to deduct the points on your taxes over the life of the loan.

As a homeowner, you can deduct state and local property taxes from your federal return up to a total of $10,000. ($5,000 if married filing separately.)

According to the IRS, you can also deduct state and county taxes for the maintenance or repair of streets, sidewalks, sewer lines and other local benefit taxes.

Both home equity loans and home equity lines of credit (HELOC) allow homeowners to borrow money against the equity they have in their house so far. If you've taken out a home equity loan or HELOC and used the funds to make home improvements (or to buy or build another home) you can claim the interest on your return.

You can deduct up to $750,000 if you're single or a married couple filing jointly, or $375,000 if you're married filing separately.

If you took out the loan before Dec. 16, 2017, the limit is $1 million for single people and married filing jointly, or $500,000 for married filing separately.

Bank of America provides HELOCs up to $1,000,000, with no application or account fees and typically no closing costs. There are discounts for autopay and Bank of America Preferred Rewards members, and each $10,000 of your initial withdrawal receives a 0.10% interest rate discount (up to a maximum discount of 1.50%).

You can also claim a tax break for certain home improvements.

Medical home improvements

You can deduct the cost of home improvements as a medical expense if they were intended to help a member of your household. Examples include adding ramps and handrails, lowering kitchen cabinets and adding a porch or stair lift.

If the improvement raised the fair market value of your property, however, you have to deduct the amount of that increase from your deduction. You can find more information on IRS Publication 502

Energy-efficient improvements

If you made qualified energy-efficient improvements on an existing property that is your primary residence after Jan. 1, 2023, you may qualify for a tax credit worth up to $3,200.

The credit equals 30% of qualified expenses, which include the purchase of solar water heaters and geothermal heat pumps, and the cost of home energy audits performed by a qualified home energy auditor. 

Use the instructions for Form 5695 to check which home improvements qualify. (For improvements installed before 2023, use previous versions of Form 5695.)

The maximum credit you can claim each year is:

• $1,200 for energy property costs and certain energy-efficient home improvements, with limits on doors ($250 per door and $500 total), windows ($600) and home energy audits ($150)
• $2,000 per year for qualified heat pumps, biomass stoves or biomass boilers

The credit is nonrefundable, so you can't get back more than you owe in taxes.

If you're need a loan to pay for these improvements, LightStream and PenFed are both on CNBC Select's list of best home improvement loans.

Homeowners have access to some generous tax breaks. It's important to understand which, if any you are eligible and that you're claiming the right amount. When in doubt, consult with a tax professional.

At CNBC Select, our mission is to provide our readers with high-quality service journalism and comprehensive consumer advice so they can make informed decisions with their money. Every tax article is based on rigorous reporting by our team of expert writers and editors with extensive knowledge of the tax system and products. While CNBC Select earns a commission from affiliate partners on many offers and links, we create all our content without input from our commercial team or any outside third parties, and we pride ourselves on our journalistic standards and ethics. See our methodology for more information on how we choose the best financial products.

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