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.

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.

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!

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.

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.

Skylights are easy additions to your home that not only bring in light but add ventilation. Neat new styles include an electric one that has a rain sensor. It will shut itself off when rain begins.

Some have solar-power shades that you can operate with a remote control. Too much sun? Just press a button and the shade closes.

The two most common types are fixed, which don’t open or vent, and vented. Vented skylights open to allow air to come in from the outside. They have screens to keep out mosquitoes, but you still get a nice breeze in the evening.

Tubular skylights are small tubular openings, also known as sun tunnels. They are great for bathrooms and hallways. They are a good alternative if you want natural light but not the skylight effect.

Angie Hicks of Angie’s List recommends skylights that are double insulated with low emissivity (low-E) argon-filled glass. The low-E filters keep sunlight from penetrating the home, so it doesn’t fade the furniture and carpet.

A skylight can be installed in a day for about $500, depending on how much work is involved. It is important to get a qualified company to install the unit. The most common skylight complaint is leaking caused by poor installation.

If it happens, a more experienced installer should be called to correct the problem.

Many homeowners are replacing old bubble-style skylights with new ones that have great features.

2 Affordability is the highest in 20 years, since 1991. It’s defined as the ratio of the median priced home to median family income. Economists at Fiserv Case-Shiller, which tracks home prices, say the ratio is now 2.6, down from a peak of 4.1 in mid 2005. Renters considering homeownership are encouraged by the current difference between rent and the median monthly mortgage payment. It fell from $745 in 2005 to $102 now. Low vacancy rates will allow landlords to raise rents next year by up to 3.5 percent.

3 Mortgage interest rates are about as low as they can go. Recently, the national average 30-year fixed rate was 4.5 percent. Adjustable rate mortgages are even cheaper and rates for jumbo mortgages are down as well.

4 It’s a buyer’s market. With many choices, buyers can find properties in good school districts or near their jobs. And shopping takes less time. Some investors bought properties, remodeled, but can’t find buyers. They may be willing to make deals.

5 Distressed properties and bank-owned foreclosures are good buys. Bank-owned properties sell for an average discount of 35 percent off the per-square-foot price of other homes for sale, according to Realty-Trac. It could take two to six months to close on a short sale, but values are outstanding.

6 Homeownership is an attractive choice. It’s a financial decision but there’s more to it than that. When you own your home, you control your living environment, change the home as you see fit, and create a sense of rootedness in your community, according to Kiplinger’s Personal Finance. You don’t have to deal with a landlord, and with a fixed interest rate, your payment will not rise because of inflation or rent increases.

 1. Change your mortgage term

If you decrease the term of your mortgage in a refinance by going from a 30-year to a 15-year, you’ll pay a lower interest rate and shorten your total interest costs. You’ll build home equity more quickly, and pay off your loan sooner, even though your monthly payments go up.

2. Move from an adjustable rate to a fixed rate

ARMs offer low introductory rates, but they also offer long periods of uncertainty that make it hard to budget. It makes sense in a mortgage refinance to go from an ARM to a fixed-rate loan during a low-interest rate environment. You’ll get emotional security and your rate won’t fluctuate with changing economic conditions.

3. Take out cash

With a cash-out mortgage refinance, you can turn an intangible asset—accumulated home equity—into a tangible one—cash. It makes sense for a project that will generate long-term benefits, like a home improvement or funding a child’s college education. However, don’t do it for frivolous reasons. Unless you’re extremely disciplined, you could find yourself in even deeper debt.

4. Consolidate two mortgages

When interest rates are low, a mortgage refinance lets you consolidate your main mortgage and an outstanding home equity loan to realize a lower overall monthly payment. Plus, you’ll have only one mortgage payment to make each month.

5. Recover from divorce

If your home is jointly owned with your soon-to-be ex-spouse, a mortgage refinance will turn a joint obligation into the responsibility of the person keeping the home. Nothing is more frustrating than tracking down a former spouse who doesn’t keep up with his or her end of the mortgage payment.

Lay the groundwork

If one of these reasons resonates with you, contact your current lender to see if it’ll offer you preferred rates or reduced closing costs on a mortgage refinance. But don’t assume the current lender is best: Leave no stone unturned by searching for lenders online and calling community banks and local credit unions.

No matter which lender you choose, a mortgage refinance for the right reasons can save you lots of money—and that’s the best reason of all.

By: Barbara Eisner Bayer
Barbara Eisner Bayer has written about mortgages and personal finance for the past 16 years for the Motley Fool, Mortgages.com, and Nursevillage.com, and has been the Managing Editor of MortgageLoan.com, CompleteGrowth.com, and Credit-land.com. She has recently survived the challenge of refinancing her second home.

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