Avoid these tax deduction pitfalls to save time, money, and an IRS investigation.
Blunder #1: Line 6 – real estate taxes Your monthly mortgage payment often includes escrows. This is the money for property taxes and fire and hazard insurance, from which the lender pays these bills.
The money you send the bank may be more than what the bank pays for your taxes, says Julian Block, a tax attorney and author of Julian Block’s Home Seller’s Guide to Tax Savings. That will lead you to putting the wrong number on Schedule A. The number from Form 1098—which your bank sends you each year shows the actual taxes paid, regardless of what amount you have sent the bank.
Blunder #2: Line 6 – tax calculations for recent buyers and sellers If you bought or sold a home in the middle of 2011, figuring out what to put on line 6 of your Schedule A Form is tricky.
Don’t simply enter the number from your property tax bill on line 6 as you would if you owned the house the whole 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. 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.
Blunder #3: Line 10 – 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.
Blunder #4: Line 10 – 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.
Blunder#5: line 13 – Private mortgage insurance. You can deduct PMI on your Schedule A Form, as long as you started paying the insurance after Dec. 31, 2006. Unless Congress acts to extend the PMI deduction, however, 2011 is the last year for which you can take this deduction. 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.
Blunder #6: line 20 – casualty and theft losses. 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. You can 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. If you’ve got extensive losses, it’s best to consult a tax pro.
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; tax laws may vary by jurisdiction.
For expert advice on real estate in the Highlands and Cashiers area consult a a professional at Meadows Mountain Realty. We know the local market and can give you the benefit of our local knowledge. Call us at 828-526-1717 or 828-526-4101. Email us at [email protected] and visit our website at www.meadowsmtnrealty.com.