Homeowners may enjoy a whole slew of tax breaks, but let’s be clear: Uncle Sam does not always make it easy to collect. In fact, tax time for homeowners can be so mind-numbingly complex, many end up taking a pass on many deductions that are, in fact, open to them. And the most common tax mistakes homeowners make risk bringing on the pain once the IRS finds out.
So be sure to avoid these common homeowner tax blunders to avoid an audit, fines, and other IRS-related headaches.
Mistake No. 1: Deducting the wrong year for property taxes
Yes, property taxes are deductible—but some tax authorities work a year behind, meaning you won’t be billed for 2016 property taxes until 2017. This can be surprisingly confusing.
Dave Hampton, CPA and tax manager at Cincinnati’s Burke & Schindler, has seen homeowners confuse payments for different years and claim the incorrect amount—an innocent mistake that can nonetheless land them in scalding-hot IRS water.
Bottom line: On your federal forms, enter whatever amount you actually paid in property taxes in 2016.
Mistake No. 2: Confusing escrow amount for actual taxes paid
If your lender funds your property taxes through an escrow account, you can’t simply deduct the amount in escrow, says Bob Meighan, CPA and vice president at TurboTax in San Diego. That’s because the regular amount you pay into your escrow account each month to cover property taxes is usually a little more or less than your property tax bill. (The lender realigns the bill every year or so.)
Confused? Let’s say your tax bill is $1,200, but your lender may have collected $1,100 or $1,300 in escrow over the year. Whatever you actually paid into escrow, you can deduct only $1,200. To help clarify things, your lender will send you an official statement listing the actual tax you paid. So use the amount on that statement instead of adding up the 12 months of escrow property tax payments.
Mistake No. 3: Forgetting to deduct refinancing points
You can deduct the points you paid your lender to secure your mortgage in full for the year you bought your home. But when and if you refinance, you must deduct points over the life of your new loan, according to Meighan. So if you paid $2,000 in points to refinance into a 15-year mortgage, your tax deduction is $133 per year.
Mistake No. 4: Not taking the home office tax deduction
This deduction used to be overly complicated and scared off people who thought it would ding their return for an audit. But it’s time to rejoice if you work at home!
“The home office deduction is no longer the red flag it used to be,” says Abby Eisenkraft, a tax and financial expert and the author of “101 Ways to Stay Off the IRS Radar.” And the new, simplified home office deduction does away with what used to be a difficult calculation. Now you can claim up to 300 square feet of your home office at $5 per square foot, for a maximum deduction of $1,500.
Mistake No. 5: Failing to repay the first-time buyer tax credit
If you bought a home between April 8, 2008, and May 1, 2010, you may have opted to receive a first-time home buyer tax credit—essentially a zero-interest loan, worth up to $7,500. Starting in 2010, this debt must be repaid, yearly for the next 15 years, in increments that amount to one-fifteenth of the loan amount. If you sold your home, you still have to pay back what you owe; luckily the IRS has a tool you can use to help figure out how much (phew).
Mistake No. 6: Failing to track home-related expenses
Many people own their homes for a long time, but they don’t keep the necessary receipts to prove their expenses for renovations and additions. But if the IRS comes a-knockin’, you don’t want to scramble to compile your records. Your best bet is to scan these documents and keep them in a safe place, says Eisenkraft. You will need them one day to calculate the cost basis (i.e., the value) of your property when you sell (more on that next).
Mistake No. 7: Forgetting to keep track of capital gains
If you sold your home last year, you may have to pay capital gains tax on any profits beyond $250,000 per individual ($500,000 if married filing jointly).
“But many people cheat themselves by not properly calculating the cost basis of the property,” says Eisenkraft.
Let’s say you and your significant other bought a home for $400,000 then sold it last year for $1 million. That means your capital gains total $600,000; so minus the $500,000 exemption you have as a couple, you’ll have to pay taxes on $100,000 of those profits. However, let’s say you alsomade $100,000 worth of improvements on your home in the time you owned it. What then? That would raise your cost basis, or value in the home, to $500,000—and whittle your capital gains down to $500,000, meaning you’ll face no capital gains tax at all. In other words, home improvements truly do pay off once you sell!
Mistake No. 8: Taking too many tax credits on eco-friendly improvements
If you made any eligible “green” improvements in 2016, such as installing energy-efficient windows and doors, you can take a 10% tax credit (up to $500). This is great, but keep in mind it’s a lifetime credit. So if you already claimed up to $500, you’ve already hit your limit and can’t double dip.
Mistake No. 9: Claiming too much mortgage interest tax deduction
Taxpayers are allowed to deduct mortgage interest, but that deductible does have its limit, which is $1.1 million. Plus, new tax laws say that the limit is per person—not property—for those who are not married. So, while a married couple’s limit would be $1.1 million, an unmarried couple’s would be twice that, at $2.2 million.
· Don’t forget to set your clocks forward this Sunday, March 12th at 2:00 AM EST in observance of Daylight Savings Time.
· Unless of course, you are a resident of Arizona or Hawaii!
· Every hour in the United States: 649 homes are sold, 177 homes regain equity (meaning they are no longer underwater on their mortgage), and the median home price rises $1.86!
We hope you found this information helpful. Please contact The DiPeso Group for all your Jersey Shore real estate needs!
courtesy of realtor.com