How to avoid mistakes homeowners make on their taxes
While the tax deadline is still several months away, it is never too soon to start working on your taxes. Homeowners have a number of tax breaks and deductions they can take advantage of; however, there are a number of common mistakes many homeowners make when filing their taxes. Follow these five tips to maximize your deductions – and avoid a visit from the IRS.
1. Deducting property taxes from the wrong year
Homeowners are eligible for a tax deduction based on the property taxes paid over the year. However, some taxing authorities work a year behind; this means homeowners may not be billed the property taxes for the current year, but rather those for the previous year. Because of this, it is important to ensure you are only deducting the amount you paid in the tax year – not the amount billed if the years are different.
2. Confusing escrow amounts with taxes paid
Some lenders escrow funds to pay property taxes; however, this escrowed amount may not be the exact amount paid to cover property taxes. For example, the annual property taxes on a home may be $1,200, while the lender collected $1,300 in escrow over the year. Despite the differences in amounts being small, it’s important to only deduct the actual amount paid. The agency that collected your property tax should provide a Form 1098 with this information.
3. Misusing the home office tax deduction
The home office tax deduction is an appealing – and often misused – benefit for self-employed homeowners. With the simplified home office deduction, homeowners can deduct $5 per square foot of office space up to 300 square feet, or up to $1,500 per year. In order to qualify, the space must be regularly and exclusively used for business, as well as be the primary place of business; home offices for those who work remotely or telecommute may not qualify for this deduction.
4. Deducting the points paid to refinance a home
In most cases, homeowners can deduct the full points paid to the lender the year their home was purchased. When a home is refinanced, however, the points may not be deducted all at once; instead, the points are deducted over the life of the refinanced loan. For example, if homeowners paid $3,000 to refinance a 15-year mortgage, the tax deduction would be $200 per year.
5. Not keeping accurate records
Most tax mistakes are accidental. Despite this, if the IRS comes a-knockin’, it is important to have accurate records to support your tax documents. File, scan, or store records of home-related expenses including receipts, statements, and more. While it may seem like an unnecessary hassle to store paperwork for five years, it can save you thousands of dollars – or more – in the event you are audited.