Hooray — it’s tax time! OK, few people get quite that excited about filling out government forms, but there’s good reason to appreciate the annual ritual. Tax deductions are a serious perk for homeowners, and they can be a major boon to your family’s finances.
But unless you’re a CPA, it can be easy to miss these deductions, or worse: raise a red flag with the IRS because you got deduction happy. Here are the top six homeowner tax blunders accountants see the most.
1. Missing the Mortgage Interest Deduction
Itemized deductions can be a great way to lower your tax bill. But homeowners, particularly newbies, may be used to claiming the standard deduction because they haven’t had enough of the expenditures that qualify them for itemized filing.
The savings are at their maximum early on, when most of your mortgage payments go to interest, not principal. Over the years, the balance shifts, and for some it might seem that they lose the itemized advantage. But there’s a way to keep the savings maximized.
The trick is to use an alternating approach to filing, according to Chris Hardy, a certified financial planner with Paramount Investor Advisors in Suwanee, Ga. One year you maximize every deduction you can, including MID, and prepay whatever you can for the next year, such as property taxes and charitable contributions. The next year, you take the standard deduction. Overall, says Hardy, you may end up saving more money.
2. Assuming Everything House-Related is Deductible
Deductions are great, but you can’t write everything off on your taxes. And to stay in the good graces of the IRS, you don’t want to over-deduct.
Talk to your accountant or tax preparer to be straight on allowable deductions, which, for a homeowner, generally means mortgage interest and real estate taxes. You may also deduct points charged on the mortgage in the year you purchased the home.
“A lot of people will try to take homeowners association fees or condo association fees as deductions even though it’s not an allowable deduction,” Hardy says. “I see them try to deduct keeping up the yard as an expense.”
Although claiming unallowable deductions might not immediately flag you for an audit, according to Hardy, if you do get audited for something else, the IRS will look to see what else it can find. The result could then be back taxes, interest, and penalties. And the IRS will likely check as many back years as it legally can.
3. Neglecting Your Home Office
Many people fail to take the home office deduction for fear of being audited, or because it’s just plain hard to calculate if you don’t use the newer, simplified method. (More on that math-saving gem later.) However you compute this deduction, it’s a great way to save some cash.
To qualify for the deduction, your office space must be used regularly and only for business. If you work for someone else, says Hardy, there has to be documentation — it could be an email from a supervisor — that your work at home is required as part of the job and is for the employer’s convenience. In addition, employees can’t take the deduction if they rent any part of their home to their employers and use the rented portion to perform work for the employer.
If your use is legitimate, you can deduct a proportionate amount of a number of expenses, including insurance, repairs, utilities, services, and depreciation, which can really add up. Or you can use the uber-simple method of multiplying the square footage of the office by $5 for your total deduction. Check IRS Publication 587 for details.
And, better yet, if the home office is your base of business, you may get additional deductions from your business income, such as mileage for driving to and from your clients’ locations because now it’s considered a business expense rather than commuting.
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