Tax season is looming and homeowners everywhere should know the opportunities available to them for tax breaks and incentives. This info is also valuable for potential home buyers so they are aware of what expenses are deductible and the ins and outs of new tax laws, since there are so many nowadays! Thanks President Obama!
So here’s the skinny and how to save yourself some dough…and hopefully headaches. As always, if you need assistance, please contact your friendly and professional tax adviser.
- Deduct the interest you pay on your home loan on your tax return. A mortgage interest deduction reduces your taxable income. And because your mortgage payments for the first few years are heavily comprised of interest, they are almost entirely deductible.
- Deduct property taxes and points you paid to lower your loan?s interest rate. The IRS offsets the expense of your state and local property taxes by allowing you to deduct those fees from your itemized income tax return. You may also get a tax benefit if you paid points at closing to lower your mortgage interest rate.
- Take advantage of new laws in this challenging market. Look into new tax laws that may allow new home buyers to get an $8,000 tax credit, short-sellers to escape penalty for forgiven mortgage debt, and homeowners to contest property taxes in a struggling market. Note, the $8,000 tax credit for first-time home buyers is not immediately available. You must file your taxes to receive this credit and it’s only good on purchases from Jan. 1, 2009 to Dec. 31, 2009.
- Request a property tax reassessment if your home?s market value has declined. If your property value is significantly lower now than when you bought it, show proof of your home?s current market value and recent comparable sales in your neighborhood to your local tax assessor for a tax adjustment. Your real estate agent can provide you these values through comparable properties (often called comps) that have recently sold or are currently on the market. For a good barometer on how far back to research, most lenders will only accept appraisals based on 3 months prior activity since the housing market is currently so volatile.
- Research past and proposed assessments that may apply to your home. Understanding property taxes and assessments in your area will give you a more accurate homeownership cost, as well as help you predict and control your monthly expenses.
- Get a reliable estimate of your property tax bill. Don?t rely on the old tax data passed down from your home?s previous owners. Depending on the circumstances of the sale, your tax bill can differ from their bill. (Now living in Cook county, we all know this is easier said than done because our taxes are paid in arrears, or more put more simply, a year late).
- Wrap your property taxes into your monthly mortgage payment. If you?re daunted by that huge tax bill once or twice a year, consider setting up a convenient escrow account. (Because this also protects the lender, they are more than happy to do the work.)
- Understand how capital gains tax is calculated. When you sell your home, you?re taxed on any profit over $250,000 if you are single, $500,000 if married. But in calculating your gains, the IRS takes into account the money you put into improving the home. Remember to save receipts for any repairs and upgrades. Also see Tip #11 below for further home improvements tax credits.
- Know how your tax situation changes with every real estate move you make. Whether you?re buying or selling a home, refinancing, or renting your investment property, understand how these situations affect your taxes.
- See if homeownership lowers your tax liability. Your tax situation varies depending on your stage in life. Upon examining your payroll withholdings, opt to reduce them to be in line with your net tax liability, which will put more money in your pocket each pay period.
- Greening your home earns you a $500-$1500 tax credit; home improvement tax credits are now available for home improvements done from January 1, 2009 through December 31, 2010. Any qualified home improvements made in 2008 are not eligible for the tax credit.
Happy tax season and may this find you more merry and bright!
Tax tips info courtesy of FrontDoor.
Photo by Tony Pham under the Creative Commons License.Email This Post To a Friend.