Whether you just handed over the keys to your home for sale in Cincinnati, OH, or you’ve bought and sold several houses, filing taxes as a homeowner is anything but simple. While there are some basic deductions you will qualify for, there are plenty of others that aren’t as obvious — and mistakes could potentially put you in hot water with the IRS. If you want to maximize your tax benefit while avoiding an audit, you’ll want to steer clear of these rookie tax mistakes.
Tax Mistake #1: Being too aggressive with the home office deduction
In years past, taking the home office deduction was like tiptoeing past a sleeping lion: If you didn’t want to be faced with an audit, it was sometimes better to leave that tax benefit on the table. Now, with a larger portion of the workforce working from home, this deduction doesn’t raise flags like it used to, but it still requires you to stick to a strict set of stipulations. For instance, the space cannot serve a dual purpose: It must be used exclusively for your business. In addition, it must be the primary space in which your business operates. Whether you choose to use the simplified deduction or the regular method to determine your deduction amount, make sure you adhere to these rules and use an accurate measure of the space in question.
Tax Mistake #2: Deducting the full escrow balance
If you pay your property taxes through an escrow account established by your lender, you most likely paid an amount that was either higher or lower than what your property taxes actually were. The amount you deduct on your taxes must match your bill — therefore, you cannot simply deduct your full escrow amount. The amount you are allowed to deduct should be located in box 4 of the 1098 Mortgage Interest Statement given to you by your lender.
Tax Mistake #3: Not deducting private mortgage insurance (PMI)
While being forced to make up for a low down payment with monthly PMI payments isn’t ideal, many homeowners can at least use their PMI expense as a write-off on taxes. You can qualify for a portion of the deduction if your loan was established in 2007 or later, the home is your primary residence, and your adjusted gross income (AGI) isn’t above $109,000. If your AGI is under $100,000 (married filing jointly), you could qualify for the full deduction.
Tax Mistake #4: Deducting the wrong year for property taxes
Don’t try to match up your 2015 property tax bill with your 2015 taxes. The tax deduction is only for the property taxes you paid in that year. Some taxing authorities are a year behind, so it’s possible you paid your 2014 taxes in 2015. Or, you could have prepaid your 2016 property taxes in 2015. Whatever the situation is for you, it’s important to check and double-check that you’re making the correct property tax deduction.
Tax Mistake #5: Treating home improvements and repairs the same
While home improvements and repairs can both be considered money spent to make your home better for you (and future owners!), they aren’t exactly the same thing in the eyes of the IRS. Generally, home improvements that increase the value of your home aren’t deductible, unless those home improvements were used to make your home more accessible for someone with a disability. So no, you can’t write off those new windows or fiber cement siding. But down the line, you could potentially claim the work as a capital improvement, which could adjust your tax liability when you sell your home.
Defined as something that returns your home to its previous condition, repairs are also not easily deductible, unless they are directly related to a natural disaster (like repairing your roof because of a hurricane). In that case, they could be deducted as a casualty or loss. Bottom line? Know what you did, why you did it, and then carefully determine how it fits into these tricky tax rules. It can’t hurt to consult a tax professional if you’re still not sure.
Tax Mistake #6: Not following the rules for energy tax credits
If you made energy-efficient upgrades or improvements to your home, you could qualify for a tax benefit — but there are plenty of boxes to check off first. With the nonbusiness energy property tax credit, you can write off 10% of the cost to make energy-efficiency improvements or 100% of the cost to purchase certain energy-efficient items, like electric heat pumps or natural gas, propane, or oil furnaces. However, these improvements must meet guidelines established by the U.S. Department of Energy, and the credit cannot exceed $500 for all tax years since 2006. Beware: This is a lifetime limit and other restrictions can apply.
Tax Mistake #7: Not keeping track of home-expense records
Do you file your taxes and keep your fingers crossed that the IRS doesn’t ask for thorough documentation of your deductions? Big mistake! Instead, gather, organize, and file all appropriate receipts and paperwork so you can rest assured your bases are covered should you face an audit. This includes all receipts for energy tax credits, home-related charitable contributions, home improvements, and documentation proving PMI payments, property tax payments, etc. If it relates to your taxes, hold on to it — if for no other reason than to put your mind at ease.
