It’s tax time again, but DON’T PANIC…you can itemize your deductions without drawing the ire of the IRS. Tax experts have identified six of the most common homeowner tax mistakes they see. Here is the full scoop on these pitfalls and how to avoid them…
1. Forgetting To Deduct Your Mortgage Interest
Deducting the interest you pay on your mortgage can save a bundle on your taxes, but many people automatically take the standard deduction instead. Hang on to that nifty little Mortgage Interest Statement you receive from your lender and see if going the line-item deduction route might maximize your savings. Calculations can get complicated, so it’s a good idea to consult an accountant.
2. Assuming All Things House Related Are Deductible
Deductions are awesome, but make sure everything you’re writing off is, in fact, allowable. Examples of non-allowable deductions are homeowner/condo association fees and landscaping services. Over-deducting can raise red flags with the IRS and ultimately lead to audits, back taxes, penalties and interest.
Mortgage interest and points charged on the mortgage in the year you purchased your home are usually allowable. You may also be able to deduct mortgage insurance premiums and certain energy-efficiency upgrades. Get advice from your tax pro, and check out this article on legit home tax deductions you may be entitled to.
3. Forgetting About Your Home Office
Did you know there is a home office deduction you can take if you work from home, even just on a part-time basis? While there used to be challenging forms to fill out, now there’s a simplified option available: take $5/sq. ft. up to 300 feet (or $1,500). That’s it! Before you get too excited though, check with the accountant to make sure you wouldn’t save more using the old, long method. There are also strict rules about what counts as a home office. Learn more from this article on deduction options when you work from home.
4. Not Understanding Rental Income
Renting a portion of your house out changes how you can claim deductions. For example, you can only claim mortgage interest and property tax deductions on the part of your home that isn’t rented, BUT you can deduct rental expenses (such as proportionate utility and maintenance costs) for the area that was rented out during the time it was rented.
As an illustration, say you lived in a duplex and rented out the other half. In this particular year, it had been occupied by a tenant for 9 months. You could only deduct half of the total mortgage interest & property taxes on Schedule A (for your non-rental area). However, you could deduct utility and maintenance costs for the rental unit during the time it was occupied…or half of the total cost, multiplied by 0.75 since it was only occupied for 75% of the year. Make sense? No? Maybe this article on tax deductions for rental homes will help.
5. Paying a Relative’s Mortgage
Helping out someone in need by making their mortgage payments for them? Wow, you rock! Just make sure you help in a smart way that still allows the mortgage interest to be deducted. One great way is by gifting the beneficiary cash (up to $14,000 per year without incurring a gift tax) rather than paying the lender directlyówhich will still allow them to deduct the interest from their taxes. Depending on the situation, you may also be able to claim a relative who doesn’t live with you as a dependent and deduct the mortgage interest from your own taxes. Ask your tax expert what the best option is for you.
6. Never Challenging Your Property Tax Assessment
Property taxes represent a fairly large expense, and sometimes are even higher than they should be due to an overestimation of your home’s value. The problem is that property value reassessments are often done in bulk, meaning they are based on averages for the areaóand can vary a LOT from your home’s actual value. How can you make sure you’re not paying too much?
First, check the assessment data and make sure it’s correct; incorrect facts such as square footage and number of rooms can impact your assessed value. Begin the appeals process right away if you notice any errors.
From there, talk to me to see if the valuation seems reasonable. I can pull up market data to see how your property compares to others that have sold recently. Hiring an appraiser is another option if the $350-$600 cost is worth it to you.
You’ll find instructions for starting an appeal on your annual tax assessment notice. More info is also available on the King County Tax Advisor Office web page.