It’s that time of year! Tax season is upon us! We all want to get the most return possible on our taxes, but sometimes we may not have all of the answers. Take a look at this article from Trulia.com and make sure that you are getting the most out of the 2015 Tax Season!
Minimize what you’ll owe and maximize what you’ll get back at tax time.
After you’ve been in the real estate business for a while, you start to identify certain patterns at various times in the year. For instance, like clockwork at the beginning of each new year, it seems that folks start making plans to either buy a home, move up or downsize, or simply spruce up and upgrade their current home as part of aNew Year’s resolution.
And then, of course, there’s tax season. Prep work begins as soon as those big envelopes start arriving in the mail, containing an assortment of tax forms — documenting everything from what we earned last year to what we paid out for mortgage interest.
As soon as we slice those statements open, our thinking starts to shift to tax time and tax issues: Will we owe? If not, what will we get back? What does our tax picture look like now — and how can we improve it for next year?
People are always making moves (real estate and otherwise) to minimize what they owe and maximize what they can get back on their taxes.
The first step is to make sure you’re not actually missing any tax deductions and breaks. The tax code is 4 million words and more than 70,000 pages long. But here’s a dirty little secret: most Americans tap into fewer than 15 pages of it.
To ensure you’re not missing out on anything you’re due, consider these three real estate–related tax breaks that are often missed, overlooked, and underused.
1. State and local tax breaks for green home improvements
Most of us focus on federal income tax deductions, because these taxes seem like the biggest bank account drain. In fact, some state tax rates can reach as high as 15 percent of annual income!
As the recession recovery made its way into full swing back in 2013, many homeowners began embarking down a path of improving their home’s energy efficiency for a variety of reasons, including cash savings on utility bills.
Many of those improvements are eligible for state, county, and/or city tax credits — or tax breaks. If you’ve installed dual-paned windows, insulation, low-flow plumbing appliances, tankless water heaters, or solar panels last year, dig up your receipts. (Trust us, it’s worth the time.)
Then talk with your tax preparer or visit your state, county, and city government websites to research tax advantages for which you might already be eligible.
2. Mortgage interest tax break
Many homebuyers expressly call out the mortgage interest tax deduction as a major motivation behind their desire to own a home.
The ability to write off interest on up to $1 million of mortgage debt shifts the affordability equation and makes buying more financially compelling than renting for thousands of homeowners every year.
So it’s a shock and surprise every time I read the numbers of homeowners who simply don’t take the mortgage interest deduction every year. According to the American Institute for Economics Research, only about 63% of homeowners itemize deductions — a prerequisite to taking the mortgage interest deduction and its cousin, the property tax deduction.
Now, there are a number of owners whose income tax liability is simply so low that itemizing their tax deductions doesn’t add up. That just means that some people’s holistic financial picture, including the income they earn and the mortgage interest they deduct, renders the standard deduction larger than the tax break they would receive by virtue of the mortgage interest and other itemized deductions.
However, many homeowners who could be eligible for great benefits from itemizing don’t fully appreciate what they stand to gain or simply don’t feel up to the task of determining whether they have sufficient non-mortgage-related deductions to itemize, so they do their own taxes and take the standard interest deduction to minimize the work.
If you have a high mortgage or property tax bill, it might be obvious that itemizing makes sense. But if not, you owe it to yourself — and your bank account — to at least try working with a tax preparer or committing to spend the time and energy it takes to explore the question of whether itemizing makes sense.
Even an extra thousand dollars or two in tax savings can make a huge difference to your savings and your financial future.
3. COD tax exemptions
Normally, defaulted mortgage debt that is forgiven through a foreclosure, short sale, deed in lieu of foreclosure, or settlement via partial payment is actually charged to a taxpayer as income. It’s called cancellation of debt, or COD.
Under the 2007 Mortgage Debt Forgiveness Relief Act, though, the IRS has temporarily exempted COD from incurring income tax liability for as many as 100,000 homeowners a year, to avoid penalizing homeowners for these sorts of settlements and resolutions to upside-down home mortgages.
The act originally was set to expire on December 31, 2013, but was extended to 2014. If you were one of the hundreds of thousands of American homeowners who were able to close a short sale or settle a defaulted home loan in 2014, chances are good that you are eligible to take advantage of the COD tax break when you file your 2014 return.
Since becoming a homeowner, what real estate tax advantages have you been able to realize? Tell us in the comments!