As you prepare your tax returns for the last year, be careful not to commit any of these eight common tax mistakes, especially when it comes to the property tax deduction or the mortgage interest deduction. Don’t pay more taxes than necessary — know the score to avoid common tax mistakes.
1. Deducting the Wrong Year for Property Taxes
You take a tax deduction for property tax in the year you (or the holder of your escrow account) paid them. Some taxing authorities work a year behind — that is, you’re not billed this year's property taxes until next year. But that’s irrelevant to the feds. Enter on your federal forms whatever amount you paid in that tax year, no matter what the date is on your tax bill.
2. Confusing Escrow Amount for Actual Taxes Paid
Here's another property tax issue that results in common tax mistakes. If your lender escrows funds to pay your property taxes, don’t just deduct the amount escrowed. The regular amount you pay into your escrow account each month to cover property taxes is probably a little more or a little less than your actual property tax bill. Your lender will adjust the amount every year or so to realign the two.
3. Deducting Points Paid to Refinance
In many cases, you can deduct in full the points you paid your lender to secure your mortgage for the year you bought your home if you itemize. However, if you pay points in connection with a refinance, you must deduct the points over the life of your new loan.
4. Misjudging the Home Office Tax Deduction
There are two ways to calculate the home office deduction. One is complicated, has to be partially recaptured if you turn a profit when you sell your home and can pique the IRS’s interest in your return. But it also can amount to more of a deduction than the simpler method.
5. Failing to Repay the First-Time Homebuyer Tax Credit
If you used the original homebuyer tax credit in 2008, you must repay 1/15th of the credit over 15 years. If you used the tax credit in 2009 or 2010 and then within 36 months you sold your house or stopped using it as your primary residence, you also have to pay back the credit.
6. Failing to Track Home-Related Expenses
Common tax mistakes are often of omission: not keeping records. If the IRS comes a-knockin’, don’t be scrambling to compile your records. File or scan and store home office and home improvement expense receipts and other home-related documents as you go.
7. Forgetting to Keep Track of Capital Gains
If you sold your main home last year, don’t forget to report capital gains on any profit above the excluded amounts. You can typically exclude $250,000 of any profits from your income (or $500,000 if you’re married filing jointly).
8. Claiming Too Much for the Mortgage Interest Deduction
Interest on home equity loans and second mortgages is deductible, but only if the proceeds of such loans are used to substantially improve the home that secures the loan. You can’t deduct interest on home equity loans that were used for things like student loans or cars.
If you have more real estate-related questions just click here.