When preparing your tax returns for the past year, be careful not to make any of these eight common tax mistakes, especially when it comes to property tax or mortgage interest deduction.
Tax professionals say these home-related tax mistakes can cost you money or drag the IRS on your doorstep.
No. 1 Wrong Year Deduction for Property Taxes. You will receive a withholding tax on property tax for the year that you (or the holder of your escrow account) actually paid it. Some tax authorities work a year later – that is, you won’t be billed for this year’s property taxes until next year. But that is irrelevant to the government.
# 2 Confusing escrow amount for taxes actually paid. When your lender deposits money to pay your property taxes, you’re not just deducting the deposited amount. The regular amount you put into your escrow account each month to cover property taxes is likely a little more or a little less than your actual property tax bill. Your lender will adjust the amount every year or so to realign the two. For example, your tax bill could be $ 1,200, but your lender may have raised $ 1,100 or $ 1,300 in escrow during the year. Withdraw only $ 1,200 or the actual amount of property tax recorded on the Form 1098 that your lender submits. If you don’t get Form 1098, contact the agency that collects property tax to find out how much you paid.
No. 3 deduction points for refinancing. In many cases, you can fully deduct the points you paid your lender to secure your mortgage for the year you bought your home. However, if you pay points in connection with a refinancing, you must deduct the points over the life of your new loan. For example, if you paid $ 2,000 in points to refinance a 15 year mortgage, your tax deduction would be $ 2,000 divided by 15 years, or $ 133 per year.
No. 4 Misjudgment of the tax deduction for the home office. There are two ways to calculate the home office deduction. One is complicated, has to be partially retaken if you make a profit on the sale of your home, and can pique the interest of the IRS in your return. But it can also mean more deduction than the simpler method. If you don’t want to claim an actual cost, which is what the more complicated method does, you can use the simplified home office deduction. If eligible, you can deduct $ 5 per square foot up to 300 feet of office space, or up to $ 1,500 per year.
No. 5 Non-refund of tax credit for first-time buyers. If you used the original homebuyer tax credit in 2008, you’ll need to repay 1/15 of the tax credit over a 15-year period. If you used the 2009 or 2010 tax credit and then sold your home or stopped using it as your primary residence within 36 months, you will need to repay the tax credit as well. The IRS has a tool that can help you find out what you owe.
# 6 Failure to Record Home Expenses Common tax errors are often neglected: Don’t keep records. If the IRS knocks, don’t try to compile your records. Archive or scan and save receipts for home office and home improvement expenses and other home-related documents on the go.
No. 7 forgets to keep an eye on capital gains. If you sold your home in the past year, don’t forget to report capital gains for gains in excess of the amounts excluded. You can typically exclude $ 250,000 from profits from your income (or $ 500,000 if you’re married and filing together). If your cost base for your home is $ 100,000 (what you paid for it plus any improvements) and you sold it for $ 400,000, your capital gain is $ 300,000. If you’re single, you owe $ 50,000 in taxes on winnings. However, there are minimum property holding periods to take advantage of the exclusions and other details. See IRS Publication 523. And some high income earners may face an additional tax.
# 8 Claiming Too Much for the Mortgage Interest Deduction. If you are eligible to be listed, the MID limit is $ 750,000. Prior to December 16, 2017, the limit was $ 1 million. Make sure your loan is grandfathered under the previous tax law before claiming the old limit. Interest on home equity loans and second mortgages are deductible, but only if the proceeds from those loans are used to make significant improvements to the home that the loan secures. You can’t deduct interest on home equity loans that have been used on things like student loans or cars. And all mortgage loans (first, second, home equity, and home loan) cannot exceed the limits of $ 750,000 or $ 1 million. This article provides general information about tax laws and consequences, but should not be relied on as tax or legal advice for any particular transaction or circumstance. Consult a tax advisor for such advice.
Article by House Logic and GM Filisko