Did you know that there are events in life that may have a significant tax impact? |
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The 10 Most Common Errors Home Owners Make When Filing Taxes (even when someone does it for them)!
Home owners have additional tax deductions, that renters do not have, however making a mistake on how to use them can either hurt you in the pocket because you missed the deduction, or get you called in for an audit if applied incorrectly.
Mistake 1: Deducting the wrong year for property taxes
You take a tax
deduction for property taxes in the year you (or the holder of your escrow
account) actually paid them. Some taxing authorities work a year behind — that
is, you’re not billed for 2011 property taxes until 2012. But that’s irrelevant
to the feds.
Enter on your federal forms whatever amount you actually paid in 2011, no matter
what the date is on your tax bill.
Mistake 2: Confusing escrow amount for actual taxes paid
If your lender escrows
funds to pay your property taxes, don’t just deduct the amount escrowed. The
regular amount you pay into your escrow account each month to cover property
taxes is probably a little more or a little less than your property tax bill.
Your lender will adjust the amount every year or so to realign the two.
For example, your tax bill might be $1,200, but your lender may have collected
$1,100 or $1,300 in escrow over the year. Deduct only $1,200. Your lender will
send you an official statement listing the actual taxes paid. Use that. Don’t
just add up 12 months of escrow property tax payments.
Mistake 3: Deducting points paid to refinance
Deduct points you paid your lender to secure your mortgage in full for the year you bought your home. However, when you refinance, you must deduct points over the life of your new loan. If you paid $2,000 in points to refinance into a 15-year mortgage, your tax deduction is $133 per year.
Mistake 4: Failing to deduct private mortgage insurance
Lenders require home buyers with a down payment of less than 20% to purchase private mortgage insurance (PMI). Avoid the common mistake of forgetting to deduct your PMI payments. However, note the deduction begins to phase out once your adjusted gross income reaches $100,000 and disappears entirely when your AGI surpasses $109,000. Also, unless Congress acts to extend the PMI deduction again, 2011 is the last tax year for which you can take this deduction.
Mistake 5: Misjudging the home office tax deduction
This deduction may not be as good as it seems. It's complicated, often doesn’t amount to much of a deduction, has to be recaptured if you turn a profit when you sell your home, and can pique the IRS’s interest in your return. Claim it only if it’s worth those drawbacks.
Mistake 6: Missing the first-time home buyer tax credit
While the original home buyer tax credit deadline passed in April 2010 (and isn’t available in 2012), military families and some government workers on assignment outside the U.S. were given an extension until April 30, 2011, to get a home under contract and take advantage of up to $8,000 in tax credits for first-time buyers and $6,500 in credits for repeat buyers.
It applies to any individual (and, if married, the individual’s spouse) who serves on qualified official extended duty service outside of the United States for at least 90 days during the period beginning after Dec. 31, 2008, and ending before May 1, 2010.
Mistake 7: Failing to track home-related expenses
If the IRS comes a-knockin’ at your door, don’t be scrambling to compile your records. Many people forget to track home office and home maintenance and repair expenses. File away documents as you go. For example, save each manufacturer's certification statement for energy tax credits, insurance company statements for PMI, and lender or government statements to confirm property taxes paid.
Mistake 8: Forgetting to keep track of capital gains
If you sold your main home last year, don’t forget to pay capital gains taxes on any profit. However, you can exclude $250,000 (or $500,000 if you’re a married couple) of any profits from taxes. So if you bought a home for $100,000 and sold it for $400,000, your capital gains are $300,000. If you’re single, you owe taxes on $50,000 of gains. However, there are minimum time limits for holding property to take advantage of the exclusions, and other details. Also, this exclusion does not apply to investment property. Finally be careful when determining if there was a capital loss.
Mistake 9: Filing incorrectly for energy tax credits
If you made any eligible improvement, fill out Form 5695. Part I, which covers the 30%/$1,500 credit for such items as insulation and windows, is fairly straightforward. But Part II, which covers the 30%/no-limit items such as geothermal heat pumps, can be incredibly complex and involves crosschecking with half a dozen other IRS forms.
Mistake 10: Claiming too much for the mortgage interest tax deduction
You can deduct mortgage interest only up to $1 million of mortgage debt. If you have $1.2 million in mortgage debt, for example, deduct only the mortgage interest attributable to the first $1 million.
Your best bet is to discuss your situation with your tax professional. For a free consultation, give me a call
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