10 Common Home Owner Tax Filing Errors
10 Common Errors Home Owners Make When Filing Taxes
By: G. M. Filisko
Published: January 5, 2012
Don’t rouse the IRS or pay more taxes than necessary — know the score on each home tax deduction and credit.
Sin #1: Deducting the wrong year for property taxes
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 behind — that is, you’re not billed for 2011 property taxes until 2012. But that’s irrelevant to the feds.
Enter on your federal forms whatever amount you actually paid in 2011, 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.
Sin #2: Confusing escrow amount for actual taxes paid
If your lender escrows funds to pay your property taxes, don’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. Don’t just add up 12 months of escrow property tax payments.
Sin #3: Deducting points paid to refinance
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.
Sin #4: Failing to deduct private mortgage insurance
Lenders require home buyers with a down payment 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. Also, unless Congress acts to extend the PMI deduction again, 2011 is the last tax year for which you can take this deduction.
Sin #5: Misjudging 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. Hampton’s advice: Claim it only if it’s worth those drawbacks. If so, here’s what to know about what you can write off.
Sin #6: Missing the first-time home buyer tax credit
While the original home buyer tax credit deadline passed in April 2010 (and isn’t available in 2012), military families and some government workers on assignment outside the U.S. were given an extension until April 30, 2011, to get a home under contract and take advantage of up to $8,000 in tax credits for first-time buyers and $6,500 in credits for repeat buyers.
It applies to any individual (and, if married, the individual’s spouse) who serves on qualified official extended duty service outside of the United States for at least 90 days during the period beginning after Dec. 31, 2008, and ending before May 1, 2010.
Sin #7: 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, insurance company statements for PMI, and lender or government statements to confirm property taxes paid.
Sin #8: 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. However, you can exclude $250,000 (or $500,000 if you’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 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.
Sin #9: Filing incorrectly for energy tax credits
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.
Sin #10: 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 by readers as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice; tax laws may vary by jurisdiction.
Estate Planning
Estate Planning Can Protect Your Family
Your estate consists of the property you own outright and jointly, including bank accounts, real estate, stocks and bonds, vehicles, jewelry, and retirement accounts.
When you add up the value of these assets, it’s easy to see that you need a plan for how you want them distributed after you’re gone. Estate planning is not just for the rich or those who have a great deal of money or property.
Making a will is the first step. It should tell what property you wish to leave to family members, friends and organizations. It should tell who will act as guardian to manage property for dependent children. It will name an executor to manage your estate, pay debts and taxes, and distribute property according to your wishes.
For some people, a will is enough, but those with more assets or special situations should consult an estate planning attorney. They include people who want control of what happens to property after their death, parents who have a child with a disability or special needs, couples with children from first, second or third marriages, or those who fear someone might declare their will to be invalid.
If you’re worried about how much an attorney’s services will cost, bring up the subject when you make the appointment. Many questions you have can be answered quickly, while others may take an hour for a meeting and more time for research. Some attorneys offer a free first visit and fixed estimate for legal work involved.
Estate plans should include who will make decisions about your medical care and final arrangements, such as whether you want to be cremated or buried.
This planning also involves finalizing one or more documents that give legal force to your wishes for property management and medical care.
The good news is that your plan can be updated as time goes by. Your wishes at age 45 or 50 will probably change in the next 10 or 15 years.
Tax Time Mortgage Interest Deduction
It’s that time again when Uncle Sam picks your pocket for taxes and, if you are writing out a check this year, you might want to ask yourself if a nice, fat mortgage interest deduction would come in handy next year. For many people it certainly will. Mortgage interest is tax deductible. This means it is one of the expenses that reduces the amount of income on which you pay taxes.
Many, if not most, people who do not own houses, also do not itemize their deductions. That makes sense because if they added up all their potential deductions, the deductions would not be greater than the standard deduction. In 2011, the standard deduction for single people is $5,800. The standard deduction for married people is $11,600.
The beauty of the mortgage interest deduction is that it allows you to deduct all the interest you pay on your home loan. During the first years you pay on a home loan, nearly everything you pay is interest — up to 75 percent of your payment. That nice deduction can reduce the taxes you owe, while allowing you to live in the house you want.
In this economy, owning a home also offers you some subtle protection from inflation. Inflation is an increase in the general level of prices for goods and services over time. So you notice that your grocery bill is going up and your dollars buy less, that is inflation, according to investopedia.com
According to inflationdata.com, in 2011 inflation was trending well over 3 percent while mortgage interest rates were the lowest in history at about 4.3 percent (30-year fixed.)
If you buy a home this year, and inflation continues to increase, you’ll soon be paying off your home with cheaper dollars. Your food will cost more; your luxuries will cost more; rent will cost more. But your mortgage is going to stay the same.
Meanwhile, inflation will also have some effect on home prices, forcing prices up. Right now, in most parts of the country, home prices are low because there are a lot of houses on the market and fewer buyers than five years ago. That means, right now you can get a lot of house for fewer dollars. In coming years, however, as the supply of houses for sale decreases, the pressure of inflation plus a reduced supply of houses, will force home prices up. In 10 years, your home purchase today will be a bargain and you will be living in a home you love while paying prices locked in the past!
It’s like being a financial time traveler!
New Year Health Tips
Staying Well
Adults: Is it a cold hanging on, or is it a touch of asthma?
Your doctor could have an unexpected diagnosis for that pesky cough or bronchitis that won’t go away.
The Centers for Disease Control and Prevention say one in 12 adults are now diagnosed with asthma. Symptoms can develop at any age.
Diagnosis is important, because you can then get the right treatment. Inhaled corticosteroids are the most common anti-inflammatory medications. Sometimes a quick-relief inhaler is prescribed for asthma attacks.
Avoid triggers, which commonly include allergens such as pet dander, dust mites and mold (wash your sheets in hot water every week). Tobacco smoke can be a trigger as well.
Your doctor will develop an action plan designed to help you know whether your treatment is working or has to be changed.
Get Out of the Easy Chair
Experts have long known that physical activity decreases the risk of heart disease, diabetes and obesity. New research by the American Institute for Cancer Research indicates that long periods of sitting may be responsible for 90,000 new cancer cases each year in the United States.
Their study indicates that about 49,000 cases of breast cancer and 43,000 cases of colon cancer could have been avoided if people got up and walked around occasionally.
Ideally, brisk 30-minute walks would lower these risks over time. But even among individuals who were regularly active, the risk of dying prematurely was higher among those who spent a great deal of time sitting.
People should avoid prolonged sitting without moving. They need to get out of the easy chair and take breaks.
News From Home
New Item On Your Phone Bill
The federal government is letting phone companies put another fee on monthly bills. The goal is to stop subsidizing phone service and start helping to spread access to broadband, which isn’t available to 18 million households.
The new levy is allowed to begin at 50 cents a month, but some companies could charge less or as little as 10 cents a month, depending on what fees companies charge each other for delivering phone calls.
Smarter, More Creative Kids
If you have the time and resources to usher your kids to special events, museums and botanical gardens, that’s great. But there are plenty of ways to develop engaged and more creative children that require less time and money.
Have an age-appropriate kids’ dictionary. Encourage them to look up words and read definitions to you. Add an insight about how the word is used.
Create a spot for them to solve jigsaw puzzles, which builds visualization skills, memory and pattern recognition.
Build a puzzle library. Challenge them with crossword puzzles, mazes and brain teasers.
Play dominoes. The game aids number skills. Show them how to build knock-down walls to enhance creativity.
Put up a world map. Help them locate states and countries as names come up, say the editors of Disney FamilyFun.