home), tax credits like the American Opportunity Credit for education costs, or other credits that don’t apply to you. If your refund is strangely high, ask them how it got that way. Do not file a fraudulent tax return. If you do, the IRS will catch you. You will face all the original taxes, plus high penalties and interest on the taxes and penalties. The preparer? He or she will be long gone and impossible to find.
Tip #35:
Find a tax pro with whom you can establish a long-term relationship. Get to know this person and return to that firm year after year. In fact, since it’s difficult to do tax planning during the tax preparation appointment, schedule a planning appointment for May or June so you can discuss your financial goals, planned large purchases, or expenses (home, dental work, college, retirement, etc.).
Tip #36:
Always call your tax pro for a consultation before you take any large step financially. It breaks our hearts when you call after you have already done something. We can help guide you before the fact and often help you find a tax-free way to use your retirement funds or make investments or get credits. Once you’ve already taken the step, fixing it may be impossible—or time-consuming and expensive. Believe me, that one-hour consultation in advance may save you thousands of dollars later.
Deductions around the House
THE AMERICAN DREAM—OWN YOUR own home, a car or two, a big screen television, and several mobile communications devices. It’s true, not everyone ends up buying a home, but those who do are entitled to a whole raft of itemized deductions and, perhaps, even tax credits. First, let’s take them in the order they appear on Schedule A. Then we’ll explore the potential credits and how to snag them.
Tip #37:
Real property taxes. Deduct the real estate taxes you pay on all your properties, unless some of those taxes are deducted elsewhere. This split deduction might happen if you use a home partially for business (Form 8829) or rent out a room or half a duplex (Schedule E). Read your property tax bill carefully because not all the charges are deductible as property taxes. For instance, your bill might include special assessments for bonds, or might include sewer fees or payments for city or county improvements. While you pay for those things along with your property taxes, they are technically not deductions. (Shhh . . . I have never seen the IRS adjust for this on audit.) Some states might have special charges that look like nondeductible assessments or fees but are deductible. For instance, California has something called Mello-Roos fees. In February 2012, the IRS ruled that these are deductible as property taxes. Note: If you pay your taxes to your lender as part of your monthly payment, they will give you a year-end statement showing the taxes, property insurance, and PMI (mortgage insurance) paid on your behalf during the year.
Tip #38:
In order to deduct the property taxes, you must own the property and you must be the person making the payments. Gosh, that seems obvious, doesn’t it? Why bring it up? Because sometimes people don’t have enough of their own credit to buy their homes. Someone else needs to get the loan for them (like a parent, relative, or an amazingly good friend). So their name isn’t on title—or on the loan. Uh oh. That means the person on title doesn’t get the property tax deduction because they weren’t the ones paying the property tax. And you don’t get the deduction because you’re not on title. Is there a solution to this dilemma? Yes there is. Stay tuned to Tip #50, when we talk about mortgages.
Tip #39:
What are the most overlooked, but deductible, property taxes? Property taxes assessed as part of your time-share fees and as part of your community’s common area fees. Some sets of fees are pretty low. In other areas, common area fees are quite high, and you can pick up several hundred dollars (or thousands) by getting the reports from your management companies.
Tip #40:
Escrow is another source of real estate taxes paid. When buying or selling real estate, read the HUD-1 summary (or escrow closing statement). You may find that you have paid taxes through the escrow by repaying the sellers for taxes they paid for part of the year. On the other hand, you might learn that they are paying you in advance for their share of the taxes due later in year. For example, many states collect taxes around April and December. The April payment covers the period from January through June. The December payment covers taxes due from July through December. So if the sale takes place in September, the buyer ends up paying the June–September property taxes as part of the December bill. In escrow, the seller makes up for that by paying the buyer for those June–September property taxes. That means the buyer reduces his or her property tax expense at the end of the year. The opposite happens if the property is sold in the first half of the year. The buyer reimburses the seller for the taxes he or she paid in the beginning of the year and gets an extra property tax deduction as a result. Here’s where you find this information on the HUD 1 statement: http://portal.hud.gov/hudportal/documents/huddoc?id=1.pdf (see image).
Tip #41:
Personal property taxes. Typically, these are the annual fees you pay to your state’s department of motor vehicles based on the value of your auto, boat, ATV, Jet Ski–type things, motorcycles, snowmobiles, and other such toys and vehicles. If the fee is not based on value but is simply a processing-type fee—the cost is not deductible. Often your license fee includes such base fees or special fees for vanity plates. Those costs are not deductible either. Incidentally, in the many decades that I have been preparing tax returns, this is one of the most often overlooked deductions. For some folks, it may not be much. But for others, when you look at all the vehicles . . . it adds up. Especially since motor home and RV licenses can be deducted on this line (line 7 Schedule A). Note: If you use the car for business, only report the personal use percentage of these taxes. For instance, if you use the car 80 percent for business, and the tax is $75, only report $15 on Schedule A.
Tip #42:
Sales taxes. Although these aren’t around-the-house-type taxes, let’s talk about them anyway—especially since we buy things for the home and pay sales taxes. There’s a strategy to use with these deductions. If at all possible, deduct your sales taxes instead of your state income taxes. Why? There are several reasons:
• When you deduct your sales taxes, you don’t have to report your state income tax refund as income on the following year’s tax return.
• You don’t have to track all the sales taxes you paid. Just use the IRS’s Sales Tax Calculator: https://www.irs.gov/Individuals/Sales-Tax-Deduction-Calculator.
• Your tax software might even have the information for your state—just add in the extra sales tax percentage your county or parish charges.
• In addition to the sales tax tables, where the tax is based on your AGI, you can add the sales taxes paid on big-ticket items like cars, boats, RV, expensive electronics, Rolex watches, and so on.
• Some states don’t even have income taxes, so sales taxes are your only option.
Note:
