The beginning of February means just one thing: Tax time is here again. For homeowners, there are a whole bunch of tax breaks just waiting to be picked.
In his new book, “J.K. Lasser’s Homeowner’s Tax Breaks” (Wiley, $16.95), Gerald Robinson walks the reader though every conceivable scenario that could result in a lower tax bill.
A tax attorney in New York City who once worked in the IRS office of the chief counsel, Robinson clearly knows his stuff. And, he has organized it clearly into four parts: Sheltering your income with home deductions; sheltering your income when you sell your home; sheltering income from homeowner loopholes and vacation homes; and, ways to benefit tax-wise in retirement from your home and with your estate.
In the first section of the book, Robinson reminds us to make sure real estate taxes are properly pro-rated in the year of sale. (“Pro-rated” means you pay the portion of taxes that represents your ownership during the year, and the seller pays the rest. So if you bought the house July 1, your pro-rata share would be one-half the tax bill) These taxes are generally deductible, as are the points you pay (one point equals 1 percent of the loan) to get your loan.
If you move more than 50 miles to take a new job and have to sell a home because of that, your moving expenses may be deductible as well. A reminder to keep good records of your purchase, and any capital improvements you make to your home is nice – although you can now keep a substantial amount of profits tax-free when you sell your home, profit is determined by taking the sales price and subtracting the costs of purchase, sale and any capital improvements.
Those records will come in handy, someday.
Robinson also helpfully lists the recurring deductions you can expect to take every year you own your home. Experienced homeowners know you can write off the mortgage interest and real estate taxes you pay, as long as you itemize on your federal income tax form.
But if you took advantage of historically low interest rates last year and refinanced your mortgage several times, and you paid points to the lender, “the unamortized balance of points remaining on the first refinancing become deductible in the full year when the mortgage for the first refinancing is paid off,” writes Robinson.
With so many hurricanes, major storms and flood damage last year, many homeowners ended up footing a substantial bill for renovating their property. Some or all of that cost may be deductible, according to Robinson.
“You can deduct losses from an insured ‘casualty’ to your home – but there are limits. Losses from casualties are deductible only to the extent that your total casualty losses during the taxable year exceed 10 percent of your adjusted gross income as figured on your Form 1040,” he writes.
Another point to consider: If you have homeowner’s insurance and you could have made a claim, but didn’t want to because you were afraid of having your policy terminated, you cannot deduct your loss. Why? According to Robinson, no deduction for an insured casualty loss is allowed unless you file a timely insurance claim for the loss and the claim is rejected or your loss exceeds the insurance benefit t which you’re entitled.
The book is equally thorough with its discussion of home office deductions, and gives advice on what homeowners should do if seeking that tax break: Set aside a specific portion of your house to be your office, keep records that show that portion of the house was used on a regular basis for your business, make a proper allocation of expenses, and, keep records that will help you show your activities in the space constitute a business.
(In other words, it helps if you make a profit or at least break even.)
If you were in one of the marriages that broke up last year, you might find Robinson’s discussion of how to treat marital assets enlightening. The most important point he makes is to think about the potential tax liability of each piece of property before you decide how to split it.
“The more desirable property is the property with the smallest built-in taxable gain,” he writes. That may not necessarily be the house with the highest price tag.
The book includes dozens of helpful examples, some clearly taken from IRS cases. Robinson also includes copies of tax returns, worksheets, and has reprinted in the Appendix a copy of IRS Publication 521 “Moving Expenses” and Publication 530 “Tax Information for First-Time Homeowners.” Although the date on the publications is for 2002 taxes, you’re filing 2003 taxes on April 15th.
To get the newest versions of these, and other helpful IRS publications for free, you can visit the IRS’s website (www.irs.gov).
Published: Jan 23, 2004
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