Insurance Cost Deductions on Home Warranties
A home warranty is a form of insurance against the malfunctioning, breakdown, or replacement of home systems and appliances. According to the US tax code, many forms of ‘insurance’ can serve as tax-deductible items. For example, US taxpayers are entitled to contribute $18,500 per annum to their 401(k) retirement accounts.
This means that $18,500 of all income earned during the year is effectively removed from your taxable income, and only taxed after the money is removed from the 401(k) account at retirement. Various other forms of insurance are also tax-deductible items, such as mortgage interest, property taxes, and the like. These items are part of the basket of tax exemptions that are currently available to anyone with a Social Security number, EIN number, or alien registration number with work authorization.
Are Home Warranty Plans Tax Deductible Items?
Homeowners across the United States may be wondering where the $300 – $600 (average rates) of home warranty plans are tax-deductible items. If the expense item under consideration is a home warranty, and it is your primary residence, a home warranty is not regarded as a valid tax deduction. However, if a home warranty is being considered for a home office, or for a rental property, it is a tax deduction. There are currently hundreds of different plans available for homeowners when it comes to home warranty coverage. Some are basic plans that cover essential items, while others are comprehensive plans covering the whole 9 yards. Costs depend on the level of coverage selected.
Here are some other tax exemptions and tax deductions that homeowners should be aware of:
- Home insurance is not a valid tax deduction on your primary residence, however if you have a home office, or you rent out your property it is a valid tax deduction.
- Mortgage interest is always a valid tax deduction whether the property is for business purposes, rental purposes, or personal use.
- Mortgage premiums are also valid tax deductions for primary residences, rentals, and home office space.
- Real estate taxes are valid tax deductions for primary residences, home offices, and rentals.
- Uninsured losses due to crimes and disaster are always valid tax deductions – for primary residences, rentals, and home office.
Home Warranties and Home Insurance and their Tax Implications
Home warranties are service contracts. They are agreements between a service company and a client to provide replacement, or repair work for systems and appliances at discount rates. Homeowners will not be given tax exemption for the premiums paid on home warranties if it is your primary place of residence. However, as stated above, it is a tax-deductible item if you’re generating income from your home and you have a home warranty plan in place.
For example, if you’re a freelancer, or you run a home-based business (baking, cooking, call center etc.), the premium paid for the home warranty plan is tax-deductible. Much the same is true if you have multiple properties, and you’re renting one of them out with home warranty coverage in place. If the property is for personal use, the premiums cannot be deducted from your tax payments.
According to the IRS, there are a set number of tax-deductible items that you can be included in your filing:
- Real Estate Taxes
- Mortgage Insurance Premium Payments
- Interest-Related Payments on Your Mortgage
- Uninsured Losses through Crimes or Hazards
It is always recommended that homeowners opt for home warranty coverage if the systems and appliances are older than 4 years old. While never mandatory, the cost savings generated through a home warranty plan are substantial. New systems and appliances can cost thousands of dollars, severely denting the family nest egg.