Gear Up for Tax Season with These Tips

It’s time to gear up for tax season. We’ve got a little something for every tax-paying citizen here ranging from:

  • Guidance for first-time homebuyers
  • Commonly missed deductions for DIYers
  • Choosing the best accountant to do them for you

First Time Homebuyers

Owning a home has many tax advantages. There are a number of expenses associated with buying a home and paying down your mortgage that can now be deducted from your taxable income thus decreasing what you owe in taxes. The difference in the amount of taxes that you owe can be significantly less. It’s up to you to adjust your payroll tax withholding amount and utilize the funds for other purposes or keep the withholding level the same and enjoy the refund. For many first time homebuyers this means no longer using the 1040-EZ form where you claimed the standard deduction of $6,300 and instead itemizing individual deduction under Schedule A of the standard 1040 form. Here’s a list of line items. You will want to reference your Closing Disclosure form provided to you during closing to review figures.

  • Loan Costs & Fees – this is a one-time deduction. Loan cost will often be referred to as “application” or “underwriting” fee. Any costs associated with “buying down” percentage points to achieve a lower interest rate on your loan are also deductible. 

  • Mortgage Interest – this is a recurring deduction every year. The interest portion of your mortgage payment it deductible. 

  • Property Taxes – this is a recurring deduction every year. You should only itemize the portion of taxes that you as the buyer pay in the first year as the seller will deduct the portion of taxes that they covered. From year two and on though, fully deduct this line item. Reference your Closing Disclosure and look for “adjustments for items paid by seller” or “adjustments for items unpaid by seller” to identify this amount.

  • Private Mortgage Insurance - this is a recurring deduction every year. This line item is a cost paid by homeowners that put down less than 20% (typically) on the purchase of their home and are required to carry mortgage insurance by their lender. In order to claim this deduction, your adjusted gross income (AGI) must be no more than $109,000.

  • Working from Home – this is a recurring deduction every year. Take advantage of the “home office deduction” at $5 per square foot. 

These items are not deductible:

  • Change of title transfer fees
  • Recordation fees
  • HOA fees

Commonly Missed Deductions for DIYers

Do you like to prepare your own taxes? Here is a list of lesser-known items that equate to additional deductions.

  • Home Equity Line of Credit – The interest on your home equity line of credit may be deducted. See this helpful article for qualifiers.

  • Vacation Home – There are three scenarios associated with realizing tax deductions on vacation homes.

    • Scenario #1 The mortgage interest and property taxes on your vacation home are fully deductible if you do not rent it out more than 14 days per year. 

    • Scenario #2 If you rent your home out more than 14 days and use it less than 15 days OR 10% of total days rented (whichever is greater) then Schedule E should be used to list income and expenses as the property is now considered a “rental”. 

    • Scenario #3 If you rent your home out for a portion of the year and use it more than 14 days OR 10% of total days rented (whichever is greater) than you are responsible for tracking income & expenses and allocating these amounts accordingly.

  • Nonbusiness energy tax credit – You may be eligible to claim up to a $500 tax credit on energy efficiency upgrades done to your home through the 2016 Energy Star Federal Tax Credit Program. Basically, you may be eligible to recognize up to 10% of your upgrade costs as a credit with a lifetime limit of $500. For example, in order to recognize a $500 tax credit, you need to spend $5,000. View complete information about the program here. Also, note that the 2017 federal tax credits for solar panels amount to 30% of the cost with no upper limit. The solar panel credit expires in Dec 2021 but the percentage return decreases gradually from 30% to 22% by 2021. Are you considering investing in a solar system? See our related article here

Choosing the best accountant to do them for you

Is it time to hand off the baton to a professional to prepare your taxes? If your finances have grown more complex and/or you value time doing things other than preparing your own taxes then it may be time to hire a tax expert. Here are some point of differentiation to consider when selecting the right person for the job:

Not all accountants are the same:

  • Certified Public Accountants (CPA) – CPAs are accountants who pass testing from their state’s board on a regular basis. A CPA can legally represent a client in dealings with the IRS. Expect to pay between $200 - $400 dollars.

  • Enrolled Agent (EA) – An accountant with the EA designation is not necessarily a CPA but has received IRS certification. A CPA can legally represent a client in dealings with the IRS. Expect to pay between $200 - $400 dollars.

  • Tax Preparation Companies – Personnel at companies like H&R Block and Jackson Hewitt are required to have either CPA or EA designations. They are trained to assist clients with filing through the use of their tax software programs. Expect to pay between $100 - $200 dollars.

Disclaimer: Boulder County Realty Company is not in the business of tax accounting.  Consult your tax professional for guidance.

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