This post follows the insanely popular NJ Real Estate Today Blog Talk Radio Show where I offer tax tips for homeowners for your 2010 returns, which includes common tax deductions and several energy tax credits you can claim.
First, I have to give two major disclaimers before I hand out my tax tips. The opinions that I share on the NJ Real Estate Today Radio Show and the NJRETODAY Blog are that of my own and not that of Weichert, Realtors. Second, as this topic is called TAX TIPS for Homeowners, I provide them casually and can not in any way, shape or form guarantee your right to claim certain tax deductions/credit or provide advice on how to file your 2010 taxes returns. I’m a real estate agent, not a CPA. Please confer all tips below with your certified tax professional.
Whew! I am glad I got that disclaimer out of the way! Next, it would not be fair to for me to say that these are “My Tax Tips.” The National Association of Realtors (NAR) provided agents like me articles to share with clients each year on various topics. This year there were 5 different articles on Tax Tips for Homeowners and all were confusing to me partly because I generally do not prepare my own taxes. I let a CPA do it for me, despite watching a thousand Turbo Tax commericals. I have always felt that filing your taxes is a tricky thing and I don’t want to ask the box a question (so, I guess I buy into the H&R Block marketing campaign as many others do). Also, that confusion stems off the fact that there are way too many forms to fill out when you file your taxes and its hard to know which dedections you qualify for. Then again, I’ve never even looked at the Turbo Tax Software. It could be as easy as, if you answered yes to ___________, ___________, proceed to ___________. Subtract ________ from _____________.
Yeah! I rather let a pro handle it, but meanwhile, I have summarized what homeowners are generally entitled to in the following post. This is what you have to be mindful of in case you have not filed your taxes yet for this year. With this information, I hope you will be anbe to file your tax returns confidently. But before I get into the tax Tips for Homeowners, we may want to review the difference between a credit and deductions.
A tax deduction lowers your “taxable income” amount while a tax credit takes a set amount right off the taxes you owe. So If you make $30,000 per year and you get a $1,000 tax deduction then the government is really only taxing you on $29,000. The amount you get back from a tax deduction depends on your income tax bracket. If you’re in the 30% income tax bracket then a $1,000 tax deduction means you’d “get back” about 30% of that money in a tax refund. In this case it would be about $300.
If you get a $1,000 tax credit then are are still being taxed on $30,000 but you get to take $1,000 off the amount you owe the government (if you are getting a tax refund then you might get an extra $1,000 back!). Now, let’s get into the meat of it all.
Top 10 Tax Tips For Homeowners-2010 Returns
1. Record Your TRUE Real Estate Tax Amount and Not Your Escrow Balance
Your monthly mortgage payment often includes money for a tax escrow, from which the lender pays your local real estate taxes. The money you send the bank may be more than what the bank pays for your taxes. This will lead you to putting the wrong number on Schedule A.
- Your monthly payment to the lender: $1800 for mortgage, which included $500 escrow for taxes and your annual property tax bill: $5,500
- Your bank received $6,000 for real estate taxes, but only paid $5,500. It may keep the extra $500 to apply to the next tax bill or refund it to you at some point, but meanwhile, you’re making a mistake if you enter $6,000.
- Instead, take the number from Form 1098—which your bank sends you each year—that shows the actual taxes paid and account for this deduction.
- If you are a new homeowner and you purchased your home mid-year for example, please refer back to your Hud-1 statement, which will show if your credited the seller an amount for taxes that were prepaid. This amount would be considered your prorated taxes+your actual taxes paid, which is generally provided by your lender. If you are a home seller, you are entitle to claim your deduction within that tax year for actual taxes paid. Generally, depending on the local tax cycle and settlement date, 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.
2. Don’t Forget To Deduct Your PMI Payments
You can deduct PMI on your Schedule A Form, as long as you started paying the insurance after Dec. 31, 2006. Lenders generally require home buyers with a down-payment of less than 20% to purchase private mortgage insurance (PMI). Avoid the common mistake of forgetting to deduct your PMI payments. However, note the deduction begins to phase out once your adjusted gross income reaches $100,000 and disappears entirely when your AGI surpasses $109,000. For some home buyers, you may have paid a PMI premium at closing or your loan officer said that your PMI payments have been rolled into the loan. Ask your certified tax professional how to correctly claim this deduction, assuming your AGI does not surpass the latter thresholds.
3. Deduct Your Discount Points On Your Home Purchase or Refinance
You can deduct points you paid your lender to secure your mortgage in full for the year you bought your home. However, when you refinance, you must deduct points over the life of your new loan. For Example, if you paid $2,000 in discount points to refinance into a 15-year mortgage, your tax deduction is $133 per year.
4. Record Your Capital Gains Tax
If you sold your primary residence last year, don’t forget you may be responsible for capital gains taxes on any profit. However, you can exclude $250,000 (or $500,000 if you’re a married couple) of any profits from taxes. For example, if you purchased a home for $100,000 and sold it for $400,000, your capital gains are $300,000. If you’re single, you owe taxes on $50,000 of gains. There are ways to defer capital gains taxes. Consult your CPA or real estate attorney.
5. Military Personnel and Foreign Nationals Tax Credits
Military Personnel and Anyone Servicing Outside the U.S. for 90 days or More May Qualify for Additional Tax Credits. In salute to members of the armed forces serving overseas who want to purchase a home, the IRS is extended a lucrative tax perk for military personnel. If you spent at least 90 days abroad performing qualified duty between Jan. 1, 2009, and April 30, 2010, you have an extra year to earn a homebuyer tax credit. In addition to uniformed service members, workers in the Foreign Service and in the intelligence community are eligible.
Thanks to this extension of the homebuyer tax credit, qualifying military personnel have until April 30, 2011, to sign a contract on a new home. The deal must close before July 1, 2011. Just like non-military buyers, first-time homebuyers can earn a tax credit worth up to $8,000, and longtime homeowners can earn a credit of up to $6,500. The same income restrictions and $800,000 cap on home prices apply.
Here are the Restrictions: The home buyer tax credit is only available to purchasers at certain income levels: yearly incomes of $125,000 for single taxpayers or $225,000 for married couples filing jointly. The tax credit starts to phase out above those levels, with partial tax credits available for taxpayers whose income is within $20,000 of the limits. The income level limits are the same for both the first-time home buyer tax credit and the longtime homeowner tax credit, so if your income is above those levels, you will not be eligible for either credit. Normally, the homebuyer tax credit needs to be repaid if you sell your home within three years, but this requirement is waived for uniformed service members, Foreign Service workers, and intelligence community personnel if duty calls. The new extended duty posting doesn’t need to be overseas, but it must be at least 50 miles from your principal residence.
The partial tax credit is computed based on the amount of income you earn within the $20,000 phase-out range. For example, if your income is $135,000 for a single taxpayer, you would have $5,000 of income in that phase-out range (i.e., $5,000 above the $125,000 limit). That would “use up” 25% of the $20,000 phase-out range, so your partial tax credit would be the remaining 75%. So if you were otherwise eligible for the first-time home buyer tax credit of $8,000, your tax credit would be $6,000 (75% of $8,000).
The qualifying income levels are based on your “modified adjusted gross income” (“MAGI”), which includes your wages, salary, interest income, dividends, capital gains, and certain foreign investment income. Your MAGI is determined after making certain “above the line” deductions such as health savings account deductions, alimony, and others, but before the “itemized deductions” such as charitable contributions, state and local taxes, and home interest. Determining your qualifying income can be a complicated issue, so you should consult with your accountant before making any decisions.
6. Mortgage Interests Tax Deductions
Becareful not to claim too much for the mortgage interest tax deduction. You can deduct mortgage interest only up to $1 million of mortgage debt. For Example, if you have $1.2 million in mortgage debt, deduct only the mortgage interest attributable to the first $1 million.
7. HELOC Tax Deductions
If you took out a home equity line of credit (HELOC), you can generally deduct the interests on it only up to $100,000 of debt each year, says Matthew Lender, a CPA with EisnerLubin LLP.
For example, if you have a HELOC for $200,000, the bank will send you Form 1098 for interests paid on $200,000. But you can deduct only the interest paid on $100,000.
8. Max Out Your Tax Benefits of Your Vacation Home
Use a vacation home wisely, and it’ll provide a break from taxes as well as the hustle and bustle of everyday life. The rules on tax deductions for vacation homes can get a bit tricky, but understanding and adhering to them can yield many happy tax returns.
If your vacation home is truly a vacation home meant for your personal enjoyment, as opposed to a rental-only income property, you can usually deduct mortgage interest and real estate taxes, just as you would on your main home. You can even rent out the home for up to 14 days during the year without getting taxed on the rental income. Not bad.
Now, let’s say you want to rent out your vacation home for more than 14 days in 2010, but also use it yourself from time to time. To maximize the tax benefits, you need to keep tabs on how many days you use your vacation home. By restricting your annual personal use to fewer than 15 days (or 10% of total rental days, whichever is greater), you can treat your vacation home as a rental-only income property for tax purposes.
Why is that a big deal? In addition to mortgage interest and real estate taxes, rental-only income properties are eligible for a slew of other tax deductions for everything from utilities and condo fees to housecleaning and repairs. Deductions are limited once personal use exceeds 14 days (or 10% of total rental days), so get out your calendar now to strategically plot your vacations.
9. Claim Any Remaining Residential Energy Tax Credit 2009-2010
If you undertook any of the following projects in 2009 or 2010 (new windows and doors, insulation, roofing, water heaters, HVAC, and biomass stoves), you may be entilted up to a $1500 tax deduction depending on when the project was complete. Some projects deductions can exceed the $1500 cap such as residential wind turbines and solar energy systems, which have no upper limits and are good through 2016. You are considering undertaking any of the above projects in 2011, you should know that the 2011 energy tax credits went from the generous $1,500 to $500 max and if the total of your credits surpassed the $500 new limit, you have already exhausted your credit.
10. Tax Credits and Deductions for Home Improvements versus Repairs
General Rule of Thumb: Homeowners can receive a tax credit or claim home improvement tax deductions on certain projects, but not repairs while ivestors or homeowners of rental income properties, might receive deductions on repairs.
Here are three ways a home improvement might benefit you financially come tax time. You may be eligible for some sort of income tax relief if:
•Your home improvements are being performed for medical reasons
•Your home improvements include certain energy-efficient upgrades to your home, which I covered briefly above.
•You are going to be using a home equity loan or home equity line of credit to actually pay for your home improvements
Home Repair vs. Home Improvement:
First, it’s important to remember that there is a difference between home repair and home improvements, especially from an income tax perspective. Simply fixing things that are broken or worn out around your home are generally considered “home repairs” and generally do not count towards any sort of tax deduction or tax credit. However, if you replace something that is worn or broken with something new (such as more energy efficient windows or doors), then that may be seen as a home upgrade or home improvement and contribute to your tax refund.
The good news is that if you need to perform a home repair at the same time or in the same area of your home as the home improvement, then you may be able deduction the cost of the home repair on your taxes. The difference between a repair and an improvement on your home is not always cut and dry so your specific situation may dictate exactly how you can count certain home projects on your taxes. It’s also important to remember that there are different ways to increase your income tax refund with home improvement projects. In some cases you may be eligible for a tax deduction and in other cases you may be eligible for a tax credit. The difference could be substantial.
Well, I think I’ve exhausted the tax topic for now. I hope that the above tips were helpful. PLEASE DO share the following information.
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