Are homeowners insurance tax exempt? The answer to whether or not homeowners insurance is tax-deductible is kind of a mixed bag of good news/bad news.
Aside from a few exceptions that we’ll cover here, homeowner’s insurance isn’t tax-exempt. Nor are there other property insurance policies you might purchase, such as flood insurance or earthquake insurance.
If you work from home or run your business from home, you will be able to deduct a portion of your property insurance costs. If you are a landlord and have rental property, you will be able to deduct most of the property insurance costs.
Homeowners who work from home can deduct some insurance costs
More Americans are working from home than ever before. The Work From Home (WFH) movement was changing the employment landscape, even before COVID-19. If you’re a homeowner now working remotely for the first time and looking to learn how your home owner’s insurance relates to income taxes, you’ve come to the right place.
Let’s start with a better understanding of income tax deductions.
What are income tax deductions?
The federal government requires you to pay taxes each year on your income. Your tax burden is a percentage of your taxable income. Depends on your gross earnings (your tax bracket) and your family size/number of dependents.
Deductions are demonstrable expenses that reduce your taxable income. For individuals, it includes interest paid on education loans, mortgage interest, and some medical expenses. It also includes some hiring expenses, like commuting costs, and even smaller expenses like work shoes.
- Deductible expenses are not income tax credits. It lowers your taxable income. They don’t return X dollars.
For example, let’s say you earned $75,000 in 2022. You had to move permanently for work and spent $5,000 to do so. Your taxable income will drop from $75,000 to $70,000. You will owe taxes on this lower amount.
If you are wondering if certain expenses are deductible, you better do itCheck with the IRS or your tax professional.
Now, let’s get back to the topic of the homeowners insurance tax deduction.
Homeowners insurance discounts for home offices
If you use part of your home to run your business, or work from home due to isolation or social distancing requirements, you may be able to write off a portion of your HO insurance. You will need to know:
- Dimensions of your home office
- The number of months or weeks you worked from home
For example, let’s imagine you’ve been working from home all year:
- I’ve dedicated one small bedroom entirely to work.
- Room dimensions are 10 x 12 inches or 120 square feet.
- To make the calculations easier, we’ll say the entire house has an area of 1,200 square feet.
- Therefore, you have dedicated 10% of your home to office space.
- You will be able to deduct 10% of your home owner’s premiums.
Keeping the math simple, we’ll say homeowner insurance costs $1,000 a year, 10% of $1,000 is $100, and by claiming this homeowner insurance deduction, your taxable income will be reduced by $100. That could equal $25 less in taxes you ultimately owe.
- In addition to, The IRS will apply About $5 per square foot as a direct deduction, regardless of homeowner’s insurance expenses.
- In this case, it will equal about $600 of your taxable income. Every cent adds tax time!
If this is your first time seeking discounts for your home office, know that you can add more quickly! You will be able to get discounts for utilities you used in the course of work, such as phone service, Internet service, and equipment purchases. If you buy a new computer or desk, be sure to let the tax preparer know.
You can find out more about home office discounts at IRS Publications 587.
How to claim homeowners insurance discounts
The good news is that any tax professional will know the details of homeowners insurance and income tax. All of the modern income tax software that many people use (such as TurboTax) will also charge you for your insurance costs as they relate to your income taxes.
If you are submitting income taxes manually, you will need to use IRS Form 1040.
Home businesses may need additional insurance
We should also point out that a home business may need additional insurance or small business insurance. If you’re stockpiling, keeping a lot of cash on hand, providing childcare services, or building a lab in your garage, you should tell your insurance agent.
In the event of a fire, for example, a standard homeowner’s insurance policy will likely cover your computer, office, and home office needs for even a few thousand dollars. It will not cover inventory or expensive equipment.
Deduction of homeowners insurance as the owner
The IRS says that property insurance is a cost of doing business. If you are using real estate to earn income, it is likely insured under an owner protection policy or at least a home protection policy. You need to report these earnings to the IRS, but you can claim a deduction for your insurance costs on rentals.
If you rent out part of your home — the basement, for example — you can also deduct a portion of your homeowner’s insurance. Again, you’ll need to know the square foot of the rental space. If the basement is 30% of the square footage of your home, you can deduct 30% of the homeowner’s insurance premium.
Once again, we suggest that you bring all of these documents to a professional tax preparer to ensure that you receive all the income tax benefits you deserve.
In the end, know that homeowner’s insurance is not directly tax-deductible unless you work from home or earn money through your property. However, with changes in our modern employment landscape, we expect more homeowners to be able to take these deductions in 2022 and beyond.
If you’d like to learn more about home insurance, property insurance, or small business insurance, get in touch!