12 Mistakes to Avoid when Filing your Taxes
Tax season is fast approaching and as it nears one has to decide which deductions they are allowed this year. As you consider each home tax deduction and credit you are - and are not - allowed, keep in mind The 13 Home-Related Mistakes which tax pros say are especially common and will cost you money or draw the IRS to your doorstep.
#1 Real Estate Taxes
Your monthly mortgage payment often includes money for a tax escrow, from which the lender pays your local real estate taxes. However, the money you send the bank may be more than what the bank pays for your taxes which can lead to you putting the wrong number on Schedul A.
- Your monthly payment to the lender: $2,000 for mortgage + $500 escrow for taxes
- Your annual property tax bill: $5,500
Now do the math:
- Your bank received $6,000 for real estate taxes, but only paid $5,500. It may keep the extra $500 to apply to the next tax bill or refund it to you at some point, but meanwhile, you’re making a mistake if you enter $6,000 on Schedule A.
- Instead, take the number from Form 1098—which your bank sends you each year—that shows the actual taxes paid.
You can get into further complications if you bought or sold a home in the middle of a year. You can not simply enter the number from your property tax bill as you would if you owned the house the entire year. If you bought or sold a house in midyear, you should instead use the property tax amount listed on your HUD-1 closing statement.
Here’s why: Generally, depending on the local tax cycle, either the seller gives the buyer money to pay the taxes when they come due or, if the seller has already paid taxes, the buyer reimburses the seller at closing. Those taxes are deductible that year, but won’t be reflected on your property tax bill.
#2 Deducting the Wrong Year for Property Taxes
You take a tax deduction for property taxes in the year you actually paid them. Some taxing authorities work a year behind — that is, you’re not billed for 2013 property taxes until 2014. But that’s irrelevant to the feds.
Enter on your federal forms whatever amount you actually paid in 2013, no matter what the date is on your tax bill.
#3 Properly Deducting Points
You can deduct points paid on a refinance, but not all at once. Rather, you deduct them over the life of your loan. So if you paid $1,000 in points for a 10-year refinance, you’re entitled to deduct only $100 per year on your Schedule A Form.
#4 HELOC Limits
If you took out a home equity line of credit (HELOC), you can generally deduct the interest on it only up to $100,000 of debt each year.
For example, if you have a HELOC for $200,000, the bank will send you Form 1098 for interest paid on $200,000. But you can deduct only the interest paid on $100,000. If you just pull the number off Form 1098, you’ll deduct more than you’re entitled to.
#5 Private Mortgage Insurance
You can deduct PMI on your Schedule A Form, as long as you started paying the insurance after Dec. 31, 2006. Congress renewed the PMI deduction for 2012 and 2013 for people making less than $110,000. Read further about PMI deductions affecting you for 2014 though as this tax deduction is likely ending.
Since you’re thinking about it, this is also a good time to review your PMI: You might be able to cancel your PMI altogether because you’ve had a change in loan-to-value status.
#6 Casualty and Theft Loss
You can deduct part or all of losses caused by theft, vandalism, fire, or similar causes, as well as corrosive drywall, but the process isn’t always obvious or simple: Only deduct losses that are greater than 10% of your adjusted gross income (line 38 of Form 1040). Fill out Form 4684, which involves complex calculations for the cost basis and fair market value. This form gives you the number you need for line 20.
Bottom line on line 20: If you’ve got extensive losses, it’s best to consult a tax pro. “I wouldn’t do it myself, and I’ve been dealing with taxes for 40 years,” says former IRS official Marti.
#7 Misjuding 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 so its recommended to claim only if it’s worth those drawbacks.
#8 Failing to Repay the First-time Home Buyer Tax Credit
If you used the original home buyer tax credit in 2008, you must repay 1/15th of the credit over 15 years. If you used the tax credit in 2009 or 2010 and then sold your house or stopped using it as your primary residence, within 36 months of the purchase date, you also have to pay back the credit.
The IRS has a tool you can use to help figure out what you owe.
#9 Failing to track home-related expenses
If the IRS comes a-knockin’, don’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 manufacturer’s certification statement for energy tax credits and lender or government statements to confirm property taxes paid.
#10 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. You can exclude $250,000 (or $500,000 if you’re a married couple) of any profits from taxes. So if your cost basis for your home is $100,000 (what you paid for it plus any improvements) and you 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. Consult IRS Publication 523.
#11 Filing incorrectly for energy tax credits
If you made any eligible improvements — such as installing energy-efficient windows and doors, you may be able to take a 10% tax credit (up to $500; with some systems your cap is even lower than $500). But keep in mind, it’s a lifetime credit. If you claimed the credit in any recent years, you’re done. Fill out Form 5695.
The first part of the form, which covers systems eligible for a larger tax credit through 2016, such as geothermal heat pumps, can be complex and involves crosschecking with half a dozen other IRS forms. Read the instructions carefully.
#12 Claiming too much for the mortgage interest tax deduction
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 shouldn’t be relied upon as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice.
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