It’s tax time…again. And even though things get a little (or a lot) hectic, you want to know that everything you do will reflect a true picture of your financial situation. As long-time or new home owners there are some areas you should make sure you are crystal clear on. It is very easy to overlook important items on your tax return that can cost you greatly down the road. Here are some of them.
Don’t Deduct the Wrong Year for Your Property Taxes
This is something I’ve talked to several of my clients about – especially new home buyers. It sounds simple, but you would be surprised how many clients take a tax deduction for property taxes in the year you (or the holder of your escrow account) actually paid them. I know some tax authorities actually work a year behind. In other words, you’re not invoiced for 2016 property taxes until 2017. The truth is, the Federal Government doesn’t care. I suggest entering on your federal forms whatever amount you actually paid in 2016, regardless of what the date on your bill says.
Don’t Confuse Impounds for Escrow With the Amount for Actual Taxes Paid
If you closed on a property this past year, the Lender may be obligated to impound taxes at closing. This may confuse you as a buyer. I recommend keeping it as simple as possible. If your tax bill for 2016 is $8,200, but your lender may have collected $8,100 or $8,500 in escrow over the course of the year, deduct only $8,200. The lender is obligated to provide you an official statement clarifying the actual taxes paid. I always tell my clients (when asked) to use that. Adding up the total of 12 months of escrow property tax payments may be incorrect and open you up to unnecessary penalties.
Don’t Forget to Deduct Private Mortgage Insurance
In California, lenders require home buyers with a down payment of less than a certain amount (given loans today it can be as low as 5%) must purchase private mortgage insurance (PMI). Avoid the common mistake of forgetting to deduct your PMI payments. This can get a little tricky as the deduction begins to phase out once your adjusted gross income reaches $100,000. The ability to deduct PMI insurance disappears completely when your AGI surpasses $109,000. Every so often, congress threatens to eliminate the PMI deduction. It hasn’t happened as far as I can recall.
Keep a Very Close Eye On What You Deduct for Your Mortgage Interest Tax Deduction
Here in Long Beach and other areas where home prices are competitively in the millions of dollars, home owners need to know that the ceiling for the mortgage interest deduction is $1 million of mortgage debt. If you have outstanding loans on your home above that, you would only be able to deduct based on the first million dollars, Anything above that is not eligible.
Track Home-related Expenses
If you are one of the “lucky ones” (and I do mean that sarcastically) to get a knock on the door from the Internal Revenue Service (IRS)If the IRS comes a-knockin’, be prepared. I will tell you from experience that not having your expenses in order will cost you time, energy and especially “grey hairs”. Many people I work with either forget to track home expenses or purposely don’t track them. This includes things like Home office and home supplies, repairs and maintenance. The best way to do this is to have some type of yearly filing system to categorize and easily access invoices, documents and other important information. This includes things like energy tax credits, manufacturer’s certification, insurance statements, PMI or lender statements and property tax confirmation payment documents
Don’t Deduct Points paid for a Refinance
If you’ve completed purchase of a home sometime within a the tax year, make sure you deduct the points you paid your lender to secure your mortgage in full for the year you bought your home. However, if you refinanced your home, the correct path to take is to deduct points over the life of your new loan. For instance, if you paid $3,500 in points to refinance into a 15-year mortgage, your tax deduction is $233 per year.
Keep A Close Eye On Your Capital Gains
If you sold your primary residence within the past year, you may need to pay taxes on capital gains above a certain amount – if it is above $250,000 (or $500,000 if you’re a married couple). Please keep in mind there may be a minimum time frame in which you need keep a property in order to take advantage of any of these capital gain exclusions. At this point, most point to 24 months. This is definitely worth talking to your accountant about.
New Energy Tax Credits Can Be Tricky
If you’ve improved your home with energy efficient improvements, you may be eligible for an energy tax credit. Be extra careful however. Certain improvements that may sound like they fit in this box, may not. Certain improvements are relatively simple, such as windows and insulation. But more complex items, such as geothermal heat pumps, involve additional forms from the IRS. Which can lead to a paperwork nightmare.
Dave Harbison has been a Real Estate Practitioner in Long Beach and surrounding communities for over 10 years. He regularly contributes to blogs, news outlets and other media, providing insight to home owners, buyers and sellers in the Long Beach, Seal Beach, Lakewood, Sunset Beach, Huntington Beach, Newport, Cypress and Cerritos. Dave Harbison Long Beach REALTOR® Main Street Realtors (562)618-9770 firstname.lastname@example.org DRE:#01475840 — Long Beach Realtor® / Real Estate Agent Long Beach Homes for Sale, Condos and Investment Properties