#1: Deducting the wrong year for property taxes
You take a tax deduction for property taxes in the year you (or the holder of your escrow account) actually paid them. Some taxing authorities work a year behind — that is, you’re not billed for last year’s property taxes until this year. In most of the local counties this is done Feb and June but that is not relevant to the feds. You can only claim what you PAID and when you paid it. Enter on your federal forms whatever amount you actually paid last year, no matter what the date is on your tax bill.
#2: Confusing escrow amount for actual taxes paid
If your lender escrows funds to pay your property taxes, don’t just deduct the amount escrowed. The regular amount you pay into your escrow account each month to cover property taxes is probably a little more or a little less than your property tax bill. Your lender will adjust the amount every year or so to realign the two.
For example, the tax bill paid might be $4,000, but your lender may have collected $3,300 or $4,300 in escrow over the year. Deduct only the actual amount paid towards the tax bill, not what you paid to your lender in escrow. Your lender will send you an official statement listing the actual taxes paid. Use that. Don’t just add up 12 months of escrow property tax payments.
#3: Deducting points paid to refinance
Deduct points you paid your lender to secure your mortgage in full for the year you bought your home. However, when you refinance,you must deduct points over the life of your new loan. If you paid $2,000 in points to refinance into a 15-year mortgage, your tax deduction is $133 per year.
#4: Failing to deduct private mortgage insurance
Lenders require home buyers with a down payment of less than 20% to purchase private mortgage insurance (PMI). Avoid the common mistake of forgetting to deduct your PMI payments. However, note the deduction begins to phase out as your adjusted gross income reaches increases and eventually disappears. Tax laws are always changing too so be sure to confirm PMI is still deductible when you file.
#5: Misjudging the home office tax deduction
This deduction may not be as good as it seems. It’s complicated, often doesn’t amount to much of a deduction, has to be recaptured if you turn a profit when you sell your home, and can pique the IRS’s interest in your return. Claim it only if it’s worth those drawbacks.
#6: Failing to track home-related expenses
If the IRS comes a-knockin’, don’t be scrambling to compile your records. Many people forget to track home office and home maintenance and repair expenses. File away documents as you go. For example, save each manufacturer’s certification statement for energy tax credits, insurance company statements for PMI, and lender or government statements to confirm property taxes paid.
#8: Forgetting to keep track of capital gains
If you sold your primary home last year, don’t forget to pay capital gains taxes on any profit. However, you can exclude $250,000 (or $500,000 if you’re a married couple) of any profits from taxes. So if you bought a home for $100,000 and sold it for $400,000, your capital gains are $300,000. If you’re single, you owe taxes on $50,000 of gains. However, there are minimum time limits for holding property to take advantage of the exclusions, and other details. Consult IRS Publication 523.
#9: Filing incorrectly for energy tax credits
If you made any eligible improvement, fill out Form 5695. Part I, which covers the 30%/$1,500 credit for such items as insulation and windows, is fairly straightforward. But Part II, which covers the 30%/no-limit items such as geothermal heat pumps, can be incredibly complex and involves crosschecking with half a dozen other IRS forms. Read the instructions carefully.
#10: Claiming too much for the mortgage interest tax deduction
You can deduct mortgage interest up to $1 million of mortgage debt for homes purchased prior to 1/1/2018. The limit drops to $750,000 in mortgage debt for homes purchase after 12/31/2018.
This article provides general information about tax laws and consequences, but shouldn’t be relied upon by readers as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice; tax laws may vary by jurisdiction.