Taxes are a certainty in life, and when it comes to your home, making errors on your tax returns can lead to unnecessary expenses and potentially unwanted attention from the IRS. As you prepare your 2024 tax returns for income earned in 2023, it's crucial to steer clear of common pitfalls, particularly with property tax and mortgage interest deductions. Here are the mistakes to watch for and how to avoid them.
Incorrect Deduction Year for Property Taxes: You should deduct property taxes in the year they were actually paid, regardless of the billing period. Incorrectly attributing payments to the wrong year can lead to discrepancies and potential audits.
Mistaking Escrow Amount for Actual Taxes Paid: The amount escrowed by your lender for property taxes may not match the actual taxes paid. Ensure you deduct the correct amount as indicated on Form 1098 sent by your lender or confirmed by your local taxing authority.
Misunderstanding Points Deduction for Refinancing: While points paid on a new mortgage can often be deducted in full if you itemize, points paid on refinancing must be spread out and deducted over the life of the loan.
Overlooking the Home Office Tax Deduction: Choose between the simplified method and the regular method for calculating the home office deduction carefully. The simplified method may offer ease and less IRS scrutiny, but the regular method could provide a larger deduction if you accurately calculate actual expenses.
Not Repaying the First-Time Homebuyer Tax Credit: If you claimed the first-time homebuyer tax credit in 2008, you need to repay it incrementally over 15 years. Additionally, if you claimed the credit in 2009 or 2010 and then sold or stopped using the property as your primary residence within 36 months, repayment is required.
Neglecting to Track Home-Related Expenditures: Keep thorough records of home office costs, home improvements, and other significant expenses. Proper documentation can save you from headaches if the IRS questions your deductions.
Forgetting to Report Capital Gains: If you sold your main home, remember to report any capital gains exceeding the IRS exclusion limits. Properly calculate your cost basis and the final sale price to determine your taxable gain.
Overclaiming the Mortgage Interest Deduction: Understand the limits of the mortgage interest deduction (MID). For new loans, the limit is $750,000; for older loans, it may be up to $1 million. Additionally, the deduction for home equity loans and second mortgages applies only if the funds were used for home-related expenses.
By avoiding these common mistakes, you can navigate your home-related taxes more confidently and avoid potential pitfalls. Always consult with a tax professional if you're unsure about specific deductions or scenarios related to your home and taxes. With the right approach, you can maximize your deductions while staying compliant with IRS regulations.
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