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Avoid These Property Tax Mistakes
Did you know making even a minor mistake on your property tax can lead to serious debt?
Confusing Your Escrow Amount for the Actual Taxes Paid
If your escrow lender funds pay for your property taxes, ensure that you are not deducting the overall escrowed amount. The usual amount that you are paying into your escrow account every month for the purpose of covering property taxes is generally a little more or less than the property tax bill you receive.
To realign the two, your lender will adjust the amount annually, so ensure that you speak with the agency that collects the property tax to figure out how much you are going to need to pay if you are not sure.
Deductions for the Wrong Year in Property Taxes
Either you or the holder of your escrow account takes a property taxes tax deduction in the year when you actually pay them. Some taxing authorities work from a year behind, which means you won't be billed for your taxes in 2014 until 2015, but to the feds, that is irrelevant.
Entering the actual amount paid during that tax year on your federal forms, regardless of the date that is on the bill for your taxes. Those who work in tax departments, especially managers, have seen multiple homeowners confuse payments constantly when it comes to claiming the incorrect amount for different years.
If you are a first-time homeowner, then know this; multiple taxing authorities work a year behind for taxes, which means that you will need to file for 2015 when filing for 2016, for example. If you file the wrong year, however, be prepared for a low refund, or an audit.
Not Itemizing How You Should
If you have been renting for years prior to the purchase of your current home, and have been working at one job for years as well, you need to be careful. File your taxes using the 1040EZ form, depending on where you live, because it's the simplest and easiest form to file under.
However, once you're a homeowner, it could cost you to use the simplest forms.
Therefore, you should speak with a tax adviser to figure out which option is the better deal for you personally. Homeowners receive benefits and tax deductions which may lower the tax obligation while increasing the refund, but to do so, you will have to file longer forms to obtain the majority of the benefits that are offered.
Deduction of Points Paid to Refinance
Deducting the points that you had paid to your lender in order to secure your mortgage in full for the year when you bought your home is extremely important. Once you refinance, make certain that if you have purchased points on the new loan that you deduct those on your tax forms as well.
For example, if you are paying approximately $2000 in points for the purpose of refinancing a mortgage that goes for 15 years, your tax deduction will be $2000 divided by 15, which comes out to $133 every year.
Not Repaying Your Homebuyer Tax Credit
If you have used the homebuyer tax credit during 2008, you are expected to repay 1/15th for the credit over a period of 15 years. However, if you used the tax credit during 2009 or 2010, then you sold your home or stopped using it as a primary residence within 36 months, you will also need to repay the credit.
If you are unsure of what you need to pay and exactly what you owe, the IRS has a special tool that you can use to help you figure it out.
Misjudging the Deduction for Home Office Tax
It is no secret that tax deductions are notoriously complicated. Generally, the amount is not much of a deduction, but it needs to be recaptured if you are looking to have a profit once you sell your home, and get the IRS's interest in the return.
However, there is a silver lining to this. With the latest simplified home office deduction as an option, you will not have to claim the actual costs if you do not want to, but you must be eligible.
If you are eligible, you are able to deduct $5 per square foot and up to 300 feet of total office space resulting in a possible deduction of $1500 a year.
To avoid any mistakes, speak to a tax professional to help you, or to help you in opting for the new deduction of simplified home office.
This deduction will allow you to skip over the more complicated aspects of the deduction of home office, such as calculating the total amount of office space.
Forgetting to Track Your Capital Gains
If you have sold your primary home during the last year, ensure that you pay your capital gain taxes on any profits you may have received. Generally, you can exclude up to $250,000 from the taxes or even $500,000 if you are married filing jointly.
There are minimal time limits, however. When it comes to taking full advantage of exclusions and the limits for holding property, you should always know and take into account the finer details.
Consulting the IRS Publication 523 with your lender is the best way to be on time. If you are a high-income earner, then you may get dumped with an additional tax if you wait too long.
Failing to Track Your Home-Related Expenses
If you don't have everything recorded, filed and documented within your home, and the IRS comes for a visit, you could be in big trouble, especially if you get an irritable agent.
If you miss something or don't have something documented properly, you could screw a payment up and go straight into debt before you know what happened.
Therefore, having receipts for home and home office improvements, for example, and any other home-related documents must be filed and documented properly at all times.
Even if a certain home improvement does not qualify immediately for a tax deduction, it can still help you gain more profit when you sell your home. In fact, under the exemption of home sale, home improvements overall will the increase the home's basis, which will lower the taxable amount for the sale price.
Such an exemption can save you quite a bit of money, but you will need all of the records and receipts to prove that you were the one who made the upgrades to the home.
Filing Your Energy Tax Credits Incorrectly
This can be a huge problem. If you were eligible for improvements during 2015 and now, 2016, which include installations of energy-efficient cooling and heating systems, you could take up to $500, which is a 10 percent tax credit. With a few particular systems, your cap goes lower than $500, however.
For example, if you only claim up to $200 on windows, your cap will be a lot lower than the $500. Keep in mind that this is a credit for a lifetime, so if you have already claimed it during recent years, then you are finished with it, and can get into a lot of debt if you do it again.
You are eligible for the Residential Energy Efficient Property Credit only if you install a solar water heater, solar panels, small wind energy, or geothermal energy system. This credit does not apply to an energy-efficient cooling and heating system.
But in order to claim such a deduction, you will need to use Form 5695, which can be quite complicated, and get a cross check through other IRS forms.
Claiming Too Much On Your Mortgage Interest Tax Deduction
If you claim too much for your mortgage interest tax deduction, you're going to be in big trouble. Taxpayers are only allowed to deduct their mortgage interest on their home acquisition debt up to $1 million.
They can also deduct approximately up to $100,000 when it comes to home equity debt. However, claiming too much for this type of tax deduction can be serious, and will grant you a visit from the IRS.
If the costs basis for the home is around $100,000, based on what you originally paid for the home plus any improvements that were made, and if you sold it for around $400,000, the capital gains would be $300,000. If you are single and not married, common law does not count in this case, you will owe a tax of $50,000 gains.
If you pay your taxes late, you may have late fees that no one will tell you about, and you'll quickly find yourself listed as a delinquent. There have been literally thousands of cases where people have fought for their homes for years over tax mishaps, and even hundreds of people losing their homes.
This has continued to occur even though people have paid their taxes but did not realize that they had a late fee that went unaccounted for.
Over the past six years 9,000 homes have gone up for auction. However, 1,900 of these homes were put up for auction by mistake, which is an incredibly scary number. Commercial buildings, land, and homes have all been shown to be at risk.
Therefore, always paying your taxes on time and keeping in touch with a tax agent to let you know whether or not you are in the negative, will ensure that you stay one step ahead and will not lose your home, no matter what happens.
Making Too Many Math Errors
If your taxes are full of errors and are a complete mess, the IRS is not going to be happy, and you will most likely be penalized for it big time. The IRS is used to math errors when it comes to paying taxes, considering they see them quite a bit on the general tax returns each year, and they generally correct them themselves.
If you are going to file your property taxes on paper, ask for help from a tax agent and always check your math a couple of times before you send it in for filing.
If you are going to use an e-filer instead, specific tax software will be able to do the math for you, so you won't have to worry about it. E-filers are highly recommended when it comes to filing taxes, both general returns and property taxes.
However, this will delay the process, and your refund could even be denied because of it, if they have to put too much work in to figuring out what is on the forms. This is also the same for property tax.
If your property taxes are a complete mess that no one can figure out, then you will be required to pay an additional amount, which does not include interest and will be given separately. Everything will be totaled and sent to you, and the amount of interest will be accrued up to the due date for your property tax return.
If you mess up on that payment as well, be prepared to get a visit from the IRS and a crazy amount of funds that you will need to pay immediately, or the IRS will be forced to take you, and your property, into court and push for a foreclosure, unless you make an agreement and pay.
You may still be able to save your home, and your line of credit but the process of foreclosure sees almost no successes, and can last from twelve months to years.
Therefore, it's always important to ensure that you do not make too many mistakes on any type of return whatsoever, especially a property tax return, or you could seriously regret it further on down the road. Should you need any help whatsoever, always speak with a tax agent if you are unsure of anything? Asking the right questions could literally save your home.
Cathy is a staunch advocate for her real estate clients, always focusing on a win-win scenario during negotiations. She began her real estate career in 2013 after working for over 20 years as a nurse ....