Generally, homeowners insurance premiums are not tax-deductible. However, in some exceptional circumstances, for instance, when you rent out your property or work from home, you may be able to claim a tax deduction on your homeowner’s insurance premiums.
What Is a Tax Deduction?
You’re obligated to pay taxes annually on your wages, salary, or other forms of income. When claiming tax deductions, you don’t subtract the deducted sum from your taxes; instead, you remove the deduction from taxable income. For instance, if your annual taxable income is $50,000, and you’re eligible for a $5,000 tax deduction, you’ll only need to pay taxes on $45,000.
Tax Deductions for Rental Property
If you rent your house, you can subtract the property’s homeowners insurance costs from your taxes. Renting out a property is considered work, and rental income is taxable. Therefore, any money spent on the property, including condo insurance and homeowners insurance, is a business cost.
Tax Deductions for Home-based Businesses
If you work or run your business from home, you may be eligible for filing a tax deduction for part of your condo or homeowners insurance premiums. The amount you’re required to subtract from your taxable income is hinged on the percentage of your property (in square footage) that you use for business. For example, if you use 20% of your home’s square footage for work, you can deduct 20% of your annual insurance premiums from your annual taxable income.
Tax Breaks for Claims Not Fully Covered by Your Insurance Company
If your property is damaged and your insurer denies your claim, the damage may be considered a casualty loss, and so you may file it as a tax deduction. This also applies to personal property. Likewise, if your insurance company denies your personal property claim, you may record it as a tax deduction. However, the tax reform laws passed in the last couple of years, such as the Tax Cuts and Jobs Act of 2017, have restricted the conditions in which you can claim casualty-loss deductions. As a result, you can only claim casualty-loss deductions if your property was damaged in an area that has been declared a disaster area by the federal government. Examples of casualty losses include earthquakes, floods, accidental fire, government-mandated relocation or demolition, sonic booms, mine cave-ins, storms, terrorism, vandalism, and volcanic eruptions.
What You Should Know about Deducting Losses
If your insurer denies your claim after your property has been damaged or stolen, then according to the IRS, that’s a loss that you have to pay out of your taxable income. When filing a loss, $100 is immediately taken off. From there, 10 percent of your AGI (adjusted gross income) is deducted from the total loss amount. The exception is when you incur a loss to business property, for example, a rental house. In this case, the $100 and 10% AGI rule doesn’t apply.
Tax Breaks When an Insurance Claim Is Accepted
You can claim a tax deduction even when your insurer accepts your insurance claim. For instance, if you receive condo or homeowners insurance reimbursement or payment more petite than the losses incurred, you can subtract the difference from your taxable income. Thus, if an expensive antique piece of furniture worth $ 5,000 is damaged, and your insurer reimburses $4,000, you can file a $ 1,000 tax-deductible. Conversely, if your insurance payment exceeds the damaged property’s value, the extra amount may be considered as taxable income. You may also get tax deductions on your insurance deductibles. This means there are exceptional circumstances in which homeowners insurance is tax-deductible.
Regardless of whether you’re eligible for the tax deductions or not, a homeowners insurance policy is essential for protecting your home and belongings against liability, theft, inclement weather, or fire. At Singh Agency, we will help you find a homeowners insurance policy that suits your needs and budget. So call us at (516) 605-1010 to get started today!