9 Preventable Mistakes You May Make On Your Taxes
With tax season just around the corner most homeowners are preparing their tax so they can file them on April 15th deadline. We all try, as homeowners, to maximize our tax write off without raising any red flags over at the IRS, which may cause an audit by them. Being audited a couple of years back, I can say I would have preferred someone sticking needles in my eye than visit the IRS. You don’t want to go there. Continuing to read the 9 Preventable Mistakes You May Make On Your Taxes.
As you go through you stack of receipts consider every home deduction and credit that you feel can be claimed. Some of the most common errors homeowners are the theme of this article. There are more than just the 9 listed below but these are ones most tax preparers agreed are the most common.
Mistake #1: Using past year’s receipts for this year’s return.
For example you may take a deduction for Property Tax in a different year than the one you actually paid them. You may be working a year behind on your taxes, but the Feds don’t care! You’re method of doing taxes are irrelevant to them. Only enter what you paid in the year of your return NO MATTER what year is on your tax bill.
Mistake #2: Confusing what is on your HUD-1 statement with real taxes owed.
For example, if you have an impound account for your mortgage, (an impound account is an account with your lender arranged when you bought your home or refinance it. It is where the lender collects taxes and insurance and then pays your taxes and insurance when the time comes for them) and you deduct what your lender has collected. You are making a mistake and it will raise a red flag over at the IRS. You see there is usually always a “cushion” of funds in your impound account and they are “re-forecasted” every few years so you don’t have too big of a “cushion”.
Mistake #3: On a refinance to deduct points your bank charged you.
When you first bought your home lender’s point in the year you purchased your home we able to be deducted. However, when you refinance your home, the points you paid to your lender are deductible. However, now the points can only be amortized over the life of the loan. To show; in a refinance you have to pay lender point in the amount of $5,000 on your new 15 year loan. The IRS will not allow the $5000 deduction all at one time. Instead they will allow you to deduct $333.33 every year for 15 years.
Mistake #4: Not calculating the home office tax deduction correctly.
Though allowed, this tax deduction is hard to calculate and may not give you enough of a write off to make it worth the trouble. It automatically calls for a second look by the IRS as most people do NOT calculate the deduction properly. Additionally, if you make a profit on the sale of your house in the future these deductions may be recaptured, (meaning you paid tax on the amount your deducted off your taxes, at the current tax rate). Avoid this unless there is a real tax advantage to you.
Mistake #5: If you received a first-time buyer tax credit you have to repay it.
If you used the first-time buyer tax credit when you purchased your home the IRS will need you to repay the credit when you sale. So if you bought your first home in 2008 and lived in it for less than 3 years from the close of escrow you must repay the credit. This includes if you change your home to a rental and you still own it less than 36 months after your close of escrow date. The IRS has a tool on their site to help you calculate the amount of the credit you will need to repay.
Mistake #6: Not keeping accurate records.
When you get an IRS audit notice you better be ready. It’s amazing how insignificant they can get on their ruling. It down to the penny for the IRS! Be sure to save all receipts for maintenance, and repairs for your home office. Save and file all credit for energy tax credits, property tax bills and your lender’s annual statements with paid receipt.
Mistake #7: Not reporting capital gains.
If you sold your home this year for $ 1,100,000 and owned it for more than a year and paid $750,000 initially for it you will owe capital gains taxes. If you are single you’d get a $250,000 exclusion on your capital gain tax meaning you owe taxes on $100,000, which is your capital gain ($1,100,000 – $750,000 – $250,000= $100,000). For married couples, the exclusion is $500,000. So $1,100,000 minus $500,000 minus $750,000 equals $1,250,000, which is less than your selling price so you would not owe any capital gains tax. But beware as the IRS and Congress are talking about changing this rule. These IRS rules may be different in the future.
Mistake #8: Getting Energy Tax Credit and filing it improperly
It was a great idea to install energy-efficient windows and doors where you’re given a 10% tax credit up to $500.00. This is a credit that can only be taken one time. So if you took an energy tax credit in the past you can only deduct up to the $500 from the previous tax credit. If you are taking energy tax credit for energy-efficient system like geothermal heat pumps the largest amount allowed is higher. To figure the extra deduction is not easy. To do so takes incredible complex and involves cross checking with 6 or more other IRS forms. They don’t make it easy for us so be careful!
Mistake #9: Deducting over $1,000,000 in mortgage interest paid.
It does not matter if you paid $3,000,000 or $1,010,000 in mortgage interest the IRS will only allow the first $1,000,000 off your taxes. There are no exceptions.
This article is written as an informational purposes only. It is not proper tax or legal advice. If you are looking to find an answer to your particular facts and needs you should consult an Attorney or your Certified Public Accountant. Please do not rely on this article as valid tax law or what their consequences may imply.