Watch out for the common tax-filing errors, and you'll get a maximum return without raising any red flags with the IRS. Image: David Sacks/Lifesize/Getty Images
As you calculate your tax returns, consider each home tax deduction and credit you areâ€”and are notâ€”entitled to. Running afoul of any of these 10 home-related tax mistakesâ€”which tax pros say are especially commonâ€”can cost you money or draw the IRS to your doorstep.
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 behindâ€”that is, youâ€™re not billed for 2010 property taxes until 2011. But thatâ€™s irrelevant to the feds.
Enter on your federal forms whatever amount you actually paid in 2010, no matter what the date is on your tax bill. Dave Hampton, CPA, tax manager at the Cincinnati accounting firm of Burke & Schindler, has seen home owners confuse payments for different years and claim the incorrect amount.
If your lender escrows funds to pay your property taxes, donâ€™t just deduct the amount escrowed, says Bob Meighan, CPA and vice president at TurboTax in San Diego. 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. Donâ€™t just add up 12 months of escrow property tax payments.
Deduct points you paid your lender to secure your mortgage in full for the year you bought your home. However, when you refinance, says Meighan, 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.
Lenders require home buyers with a downpayment 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.
This deduction may not be as good as it seems. It often doesnâ€™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 IRSâ€™s interest in your return. Hamptonâ€™s advice: Claim it only if itâ€™s worth those drawbacks.
If you met the midyear 2010 deadlines, donâ€™t forget to take this tax credit into account when filing.
Even if you missed the 2010 deadlines, you still might be in luck: Congress extended the first-time home buyer credit for military families and other government workers on assignment outside the United States. If you meet the criteria, you have until June 30, 2011, to close on your first home and qualify for the tax credit of up to $8,000.
If the IRS comes a-knockinâ€™, donâ€™t be scrambling to compile your records. Many people forget to track home office and home maintenance and repair expenses, says Meighan. File away documents as you go. For example, save each manufacturerâ€™s certification statement for energy tax credits, insurance company statements for PMI, and lender or government statements to confirm property taxes paid.
If you sold your main home last year, donâ€™t forget to pay capital gains taxes on any profit. However, you can exclude $250,000 (or $500,000 if youâ€™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 youâ€™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. Consult IRS Publication 523.Â Â
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. Read the instructions carefully.
You can deduct mortgage interest only up to $1 million of mortgage debt, says Meighan. If you have $1.2 million in mortgage debt, for example, deduct only the mortgage interest attributable to the first $1 million.
This article provides general information about tax laws and consequences, but is not intended to be relied upon by readers as tax or legal advice applicable to particular transactions or circumstances. Readers should consult a tax professional for such advice, and are reminded that tax laws may vary by jurisdiction.
G.M. Filisko is an attorney and award-winning writer who was once mortified to receive a letter from the IRSâ€”but relieved to learn the IRS had simply found a math error in her favor. A frequent contributor to many national publications including AARP.org, Bankrate.com, and the American Bar Association Journal, she specializes in real estate, business, personal finance, and legal topics.