Do You Make These 9 Preventable Mistakes
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. (for 2020 this date has changed.) We all try to maximize our tax write off without raising any red flags over at the IRS, because by doing so may cause an audit by the IRS. Being audited a few years back, I can say I would have preferred someone sticking needles in my eye over my visit to the IRS. Believe my you don’t want to go there. The IRS doesn’t have nice people working there.
As you go through your stack of receipts, consider individually every home deduction and credit you legally feel can be claimed. Some of the most common errors homeowners make is the underlining theme of this post. There are more than just the 9 listed below, but these are the 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 which your lender arranged with you 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 due for them) and you deduct what your lender has collected for your taxes and insurance. You are making a mistake by doing so, and it will raise a red flag over at the IRS. You see, your lender usually collects a “cushion” of funds in your impound account. They will “re-forecasted” every few years. That way 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, if you refinance your home, the points you paid to your lender are still deductible. However, now the points can only be amortized over the life of the new loan. For example, in a refinance you had to pay lender’s point in the amount of $5,000 on your new 15 year loan. The IRS will not allow the $5000 deduction in the year of your refinance. 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 correctly 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 to depreciate your home for a home office.
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 want you to repay the tax credit when you sell your home. So if you bought your first home in 2018 and lived in it for less than 3 years. From the date of the close of escrow you must repay the credit. This includes if you change your home to a rental property. And you sold 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. It shows 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 petty and insignificant they can get on their ruling. It’s down to the penny for the IRS! Be sure to save all receipts for all capital improvement including maintenance, and repairs for your home office. Save and file all credit for energy tax credits. Keep all property tax bills and your lender’s annual statements with your 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. You paid $750,000 initially for it then you will owe capital gains taxes. If you are single you’d get a $250,000 exclusion on your capital gain tax. This means 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. This 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. Be sure to check with your accountant or CPA.
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. 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. 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 $1,000,001 in mortgage interest. The IRS will only allow the first $1,000,000 of mortgage interest off on your taxes. There are no exceptions.
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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.
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