Home Interest Deduction

• The largest deduction for most homeowners is the mortgage interest deduction. Because most mortgages are amortized over the term of your loan, your monthly mortgage payment includes both mortgage interest and a principal payment. The interest portion of this payment is tax deductible so long as the property is your primary residence and your total mortgage does not exceed $1 million dollars. If your mortgage exceeds $1 million dollars, only the first million is eligible for this deduction. The tax deduction you will actually receive depends on your marginal tax rate, so the higher your tax rate the more money you will save through the mortgage interest deduction.
  
  

Home Business

• If you have an office in your primary residence, you can also receive a deduction for your home office. To claim this deduction, the IRS requires you to complete Form 8829 and list your actual home office expenses, such as phone, utilities and the prorated mortgage expense. To qualify for this deduction, you must use the home office as the principal place you conduct business. The IRS will scrutinize this deduction if your business does not produce any profit to offset the expense you claim on your tax return.
  
  

Medical Deductions

• If you modify your home to make it more accessible for a handicapped person, you can deduct the home improvement expenses associated with the modification on your tax return. The IRS only allows you to claim this deduction if your total medical expenses, including these modifications, exceeds 7.5 percent of your adjusted gross income. You can deduct equipment, improvements or upgrades needed to accommodate you or your dependent that lives in your primary residence. If the modification is an improvement to the house, the IRS requires you to reduce the cost of the improvement by the amount the improvement increased the value of your home. If the modification did not increase the value of the property, you can deduct the entire amount as a medical expense.
  
  

Property Taxes and Energy Improvements

• You can also deduct most of the property taxes you pay to your local and state governments. In order to qualify, any taxes paid must be based on the assessed value of the property. If the tax relates to a levy, such as street renovation, you cannot deduct the tax. The IRS also offers a tax deduction for making your home more environmentally friendly. This includes improvements such as the installation of energy efficient products, insulation and solar power.