Are You Maximizing Your Tax Deductions?
Thursday, March 17, 2011
At tax time, it’s critical to know what you’re entitled to, so you can claim it. So, here are four essential need-to-knows about home-related income tax tips to help you get the most tax-reducing bang out of your home-owning buck – and to avoid hefty home ownership-related tax traps.
1. You Have to Itemize Your Return to Claim Your Deductions
During the recent debate on Capitol Hill about whether the mortgage interest deduction should be eliminated (it won’t be, not anytime soon), it came out that nearly 40% of homeowners lose out on their major tax advantages every year when they fail to itemize their income taxes. Make sure you answer the questions on tax software like TurboTax, which will automatically do the math on whether itemizing or taking the standard deduction will result in the lowest tax bill – or the highest tax refund – for you.
2. Don’t Forget Those Closing Costs
If you bought or refinanced your home in 2010, you may be so focused on your mortgage interest and property tax deductions that you forget all about your closing costs. Any origination fees or discount points that were paid to your mortgage lender at closing are tax deductible on your 2010 return, get this – even if the seller paid your closing costs. If you can’t figure out exactly what you paid, look for your HUD-1 settlement statement. Can’t find it, drop your real estate agent or loan officer an email; they can usually get a copy to you quickly.
3. Plan Ahead and Be Strategic When Taking a Home Office Deduction
According to the Small Business Administration, the average home office deduction is $3,686 – multiply that by your tax bracket – 15%, 20%, 30% or whatever it is, and that’s what you’ll save on your taxes by writing off your home office. Consult with a tax advisor on how claiming a home office can have capital gain consequences at time of sale when you have a gain though- it may not always be best to take this deduction.
4. Tax Relief for Loan Modifications, Short Sales and Foreclosures Is Only Around Through 2012
While the long-term housing outlook is beginning to look up, 2011 is projected to be the peak year for foreclosures during this market cycle. Distressed homeowners who are on the brink of a short sale, loan modification or foreclosure should be aware that normally, any mortgage balance that is wiped out by one of these outcomes is taxed as what the IRS calls Cancellation of Debt Income, or CODI.
Under the Mortgage Debt Forgiveness Relief Act of 2007, the IRS is currently not charging income taxes on CODI incurred through a loan mod, short sale or foreclosure on most primary residences through 2012. But right now, banks are taking many months, or even years, to work out mortgages in all of these ways; the average foreclosure in New York state right now occurs only after 22 months of missed mortgage payments. If you foresee any of these outcomes in your future, don’t put things off. Do what you can to get to closure on your distressed home and loan, ASAP, while you won’t have income taxes to add as the insult on top of your significant housing injury.
Thanks to Greg Long, Area Sales Manager at FirstCal for sharing this great information with us!!!!!