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Smiling season: Tax time doesn’t always have to be stressful. This time of year can bring forth a number of deductions ranging from interest paid on loans to the costs of energy-efficient home improvements.
Owning property can be a taxing effort – considering the mortgage payments, maintenance and miscellaneous minutiae required. But when tax time comes around, homeownership can provide many perks in the form of write-offs, credits and deductions that can yield a more favorable return and keep Uncle Sam out of your pocket. That’s why it’s imperative to know the home-related tax benefits you’re eligible for, many of which change from year to year.
“Owning a property is one of the best things you can do to cash in on a number of tax breaks,” says Bob Meighan, a CPA and and vice president at TurboTax, San Diego. “For starters, one can claim an itemized deduction on mortgage debt for a primary residence. For most homeowners, the majority of their monthly mortgage payment goes toward paying down the interest on the loan. The entire interest amount is deductible.” However, if the mortgage loan is more than $1 million the interest is not deductible.
What’s more, interest on a home-equity line or loan of up to $100,000 also is deductible, he says, provided the money loaned was used to pay for capital improvements (not just ordinary repairs) that increase your property’s value or extend its life.
And unless you’ve been living under a rock instead of the roof of your own home, you’re also probably aware that any real-estate taxes paid on your dwelling can be claimed as an additional itemized deduction.
Those are the obvious real-estate-related tax advantages. But there are many other IRS-approved loopholes that homeowners can capitalize on, as well. For example, if you purchased a home in the previous tax year for which you are now filing, any points charged by your mortgage lender are fully deductible, as are refinanced mortgage points that are amortized over the life of the loan.
Other tax benefits that recent buyers may be able to claim include moving costs, which can be partially deductible if you purchased in order to take a job that is at least 50 miles farther away than your old job was, says Robert Klein of the tax firm BDO Seidman, LLP, Woodbridge, N.J.
And if you sold a home in the past tax year, you may be able to reduce your taxable capital gain by the amount of your selling costs, which can include title insurance, inspection fees, real-estate broker’s commissions, legal fees and more. Your taxable gain is the home’s selling price after subtracting closing costs, selling costs and “basis,” which is the original purchase price plus the cost of any capital improvements, minus any depreciation.
Further, if you are required to pay primate mortgage insurance, the good news is that Congress recently passed new legislation extending a tax provision that allows borrowers with adjusted gross incomes below $100,000 to deduct 100 percent of their PMI premiums from their federal income tax returns until 2010. (Deductions are phased out in 10-percent increments for adjusted gross incomes between $100,000 and $109,000.)
If you devote a portion of your abode exclusively to business reasons, you also may be eligible for a home-office deduction on items like a percentage of your repair costs, depreciation and insurance. Many stipulations may apply, however.
Eligible homeowners can be rewarded for improving their home’s energy efficiency in the past year, as well, says Teri Kaye, a CPA and principal at Friedman Cohen Taubman and Co. in Plantation, Fla. For tax years 2006 and 2007, “homeowners can claim a personal tax credit equal to the sum of 10 percent of expenditures for qualifying energy-efficient improvements installed during the year, plus 100 percent of the residential-energy property expenditures paid or incurred by the taxpayer during the year. The items must be new, installed on or in the principal residence and meet the federal guidelines for energy efficiency.”
These improvements can include insulation material or systems to reduce heat loss or gain; exterior windows and doors, and specially coated metal roofs (10 percent of the cost of each item is eligible for a credit worth up to $500, depending on the item); and an electric water heater or water pump, a natural gas, propane or oil furnace or hot water boiler, and an advanced main-air circulating fan (100 percent of the cost of each item is eligible for a credit worth up to $300).
Kaye says that for tax years 2006 through 2008, there is also a personal residential energy-efficient property credit equal to 30 percent of the cost of the following qualified items: solar water-heating equipment, electricity-generating solar energy panels and fuel cell properties (the latter up to a $500 maximum credit for each 0.5 kilowatt of capacity; the former two up to a maximum credit of $2,000).
“Homeowners who unfortunately incur a casualty loss, including damage from fire, storm or flooding, may be entitled to a limited deduction,” Klein says. “No deduction is allowed to the extent the loss is reimbursed by insurance, however.”
Here’s a tip to help the tax-challenged property owner: If you do not qualify for certain tax benefits because your itemized deductions are too low, “consider doubling up on your real estate taxes,” Kaye says. “Instead of paying them every November, wait until January and pay two years worth in one calendar year to get you over the standard deduction threshold.”
While many taxpayers utilize tax software to prepare their returns, “the hiring of a professional is always a good idea, especially if you have more than just a W-2 from wages and some interest and dividend income. A software program cannot interpret tax law nor make decisions nor provide expert review of the finished product,” Berger says.
Kaye says that it’s important for taxpayers to have documentation saved that supports their deductions. “The IRS is questioning many more deductions than it used to. Now, taxpayers are being subjected to ‘mail audits,’ where they get a letter asking them to send proof of certain expenses to the IRS. Employee business expenses and charitable contributions are being targeted, and schedules C and F are other favorite areas for the IRS to target for income and expenses.”
Regardless of what you’re planning to write off, always remember that expenses that qualify for a deduction need to be spent before the end of that tax year for which you’re filing, says Scott Berger, tax principal, Kaufman, Rossin & Co., Miami, Fla.
As a rule of thumb, tax planning “should be done throughout the year. As you are contemplating major transactions, talk to your CPA,” Kaye says.
The timing of your deductions should also be considered carefully, Berger says. “Tax planning should span two tax years to see which tax year you will receive the biggest benefit, as many deductions may be phased out and credits limited.”
Copyright © CTW Features
Owning property can be a taxing effort – considering the mortgage payments, maintenance and miscellaneous minutiae required. But when tax time comes around, homeownership can provide many perks in the form of write-offs, credits and deductions that can yield a more favorable return and keep Uncle Sam out of your pocket. That’s why it’s imperative to know the home-related tax benefits you’re eligible for, many of which change from year to year.
“Owning a property is one of the best things you can do to cash in on a number of tax breaks,” says Bob Meighan, a CPA and and vice president at TurboTax, San Diego. “For starters, one can claim an itemized deduction on mortgage debt for a primary residence. For most homeowners, the majority of their monthly mortgage payment goes toward paying down the interest on the loan. The entire interest amount is deductible.” However, if the mortgage loan is more than $1 million the interest is not deductible.
What’s more, interest on a home-equity line or loan of up to $100,000 also is deductible, he says, provided the money loaned was used to pay for capital improvements (not just ordinary repairs) that increase your property’s value or extend its life.
And unless you’ve been living under a rock instead of the roof of your own home, you’re also probably aware that any real-estate taxes paid on your dwelling can be claimed as an additional itemized deduction.
Those are the obvious real-estate-related tax advantages. But there are many other IRS-approved loopholes that homeowners can capitalize on, as well. For example, if you purchased a home in the previous tax year for which you are now filing, any points charged by your mortgage lender are fully deductible, as are refinanced mortgage points that are amortized over the life of the loan.
Other tax benefits that recent buyers may be able to claim include moving costs, which can be partially deductible if you purchased in order to take a job that is at least 50 miles farther away than your old job was, says Robert Klein of the tax firm BDO Seidman, LLP, Woodbridge, N.J.
And if you sold a home in the past tax year, you may be able to reduce your taxable capital gain by the amount of your selling costs, which can include title insurance, inspection fees, real-estate broker’s commissions, legal fees and more. Your taxable gain is the home’s selling price after subtracting closing costs, selling costs and “basis,” which is the original purchase price plus the cost of any capital improvements, minus any depreciation.
Further, if you are required to pay primate mortgage insurance, the good news is that Congress recently passed new legislation extending a tax provision that allows borrowers with adjusted gross incomes below $100,000 to deduct 100 percent of their PMI premiums from their federal income tax returns until 2010. (Deductions are phased out in 10-percent increments for adjusted gross incomes between $100,000 and $109,000.)
If you devote a portion of your abode exclusively to business reasons, you also may be eligible for a home-office deduction on items like a percentage of your repair costs, depreciation and insurance. Many stipulations may apply, however.
Eligible homeowners can be rewarded for improving their home’s energy efficiency in the past year, as well, says Teri Kaye, a CPA and principal at Friedman Cohen Taubman and Co. in Plantation, Fla. For tax years 2006 and 2007, “homeowners can claim a personal tax credit equal to the sum of 10 percent of expenditures for qualifying energy-efficient improvements installed during the year, plus 100 percent of the residential-energy property expenditures paid or incurred by the taxpayer during the year. The items must be new, installed on or in the principal residence and meet the federal guidelines for energy efficiency.”
These improvements can include insulation material or systems to reduce heat loss or gain; exterior windows and doors, and specially coated metal roofs (10 percent of the cost of each item is eligible for a credit worth up to $500, depending on the item); and an electric water heater or water pump, a natural gas, propane or oil furnace or hot water boiler, and an advanced main-air circulating fan (100 percent of the cost of each item is eligible for a credit worth up to $300).
Kaye says that for tax years 2006 through 2008, there is also a personal residential energy-efficient property credit equal to 30 percent of the cost of the following qualified items: solar water-heating equipment, electricity-generating solar energy panels and fuel cell properties (the latter up to a $500 maximum credit for each 0.5 kilowatt of capacity; the former two up to a maximum credit of $2,000).
“Homeowners who unfortunately incur a casualty loss, including damage from fire, storm or flooding, may be entitled to a limited deduction,” Klein says. “No deduction is allowed to the extent the loss is reimbursed by insurance, however.”
Here’s a tip to help the tax-challenged property owner: If you do not qualify for certain tax benefits because your itemized deductions are too low, “consider doubling up on your real estate taxes,” Kaye says. “Instead of paying them every November, wait until January and pay two years worth in one calendar year to get you over the standard deduction threshold.”
While many taxpayers utilize tax software to prepare their returns, “the hiring of a professional is always a good idea, especially if you have more than just a W-2 from wages and some interest and dividend income. A software program cannot interpret tax law nor make decisions nor provide expert review of the finished product,” Berger says.
Kaye says that it’s important for taxpayers to have documentation saved that supports their deductions. “The IRS is questioning many more deductions than it used to. Now, taxpayers are being subjected to ‘mail audits,’ where they get a letter asking them to send proof of certain expenses to the IRS. Employee business expenses and charitable contributions are being targeted, and schedules C and F are other favorite areas for the IRS to target for income and expenses.”
Regardless of what you’re planning to write off, always remember that expenses that qualify for a deduction need to be spent before the end of that tax year for which you’re filing, says Scott Berger, tax principal, Kaufman, Rossin & Co., Miami, Fla.
As a rule of thumb, tax planning “should be done throughout the year. As you are contemplating major transactions, talk to your CPA,” Kaye says.
The timing of your deductions should also be considered carefully, Berger says. “Tax planning should span two tax years to see which tax year you will receive the biggest benefit, as many deductions may be phased out and credits limited.”
Copyright © CTW Features
