Tax Tips Archives

Here you will find past tips for handling taxes that are still relevant and valuable today. These gems can save you time and money when making important financial decisions.

• Own a home? You may be eligible for special tax deductions.
• Income taxes: Don't pay them before you must

To read other great stories and learn useful tips for financial management, check out our online newsletter and Financial Tips page!

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Own a home? You may be eligible for special tax deductions come April 15th. 
By Annelena Lobb, Money Magazine

NEW YORK (CNN/Money) - The U.S. tax code is set up to encourage one well-known American dream: owning your own home. Come April 15, homeowners get the chance to take certain special tax deductions that renters don't.

The biggest tax advantage you get as a homeowner is the chance to deduct both the interest on your mortgage payments and the amount you pay in property taxes. But there are other deductions that work in your favor as well. Just make sure you understand the details before you jump in.

If you own a home or are thinking about buying or selling, take a look at some of the perks the IRS offers so you can squeeze out those extra dollars.

1) Paying a mortgage? Deduct the interest.
Homeowners can deduct all of the interest they pay on their mortgages from acquisition indebtedness on mortgage balances of $1 million or less ($500,000 if married filing separately).

Tax director John Battaglia, of Deloitte & Touche's New York City-based Private Client Advisors Group, gave this example when explaining why this deduction is an important consideration when you're looking to buy.

Here's the situation: You're in a 30 percent tax bracket, including federal and state taxes, and you can afford $1,000 a month for your home before you take mortgage interest into account.

Well, if $800 of that $1,000 payment is mortgage interest - and when you first buy a house, most of what you pay will be interest - then you can afford a lot more. You'll get 30 percent of that $800 back from the IRS, or $240. So you can actually afford a $1,240 payment.

2) Consider prepaying your January mortgage installment. 
"If my clients are looking to get a little extra deduction, I tell them to pay their January mortgage installment in early December, so that it's credited by Dec. 31," said enrolled agent Tony Bardi, of Gresham, Ore. "That way they can deduct the interest on that payment as well."

But you can't just mail a check by the 31st - the payment needs to be processed by that time. To ensure that you can take this deduction, call your lender and ask by when you'll need to mail it in order for them to process it by the end of the year.

3) Ensure your property tax payment is processed by Dec. 31. 
In most states, you pay your property taxes one of three ways, Bardi said - in one annual payment, in halves or in thirds. If you pay in halves, for example, pay the second half of the remaining part of your property taxes and make sure it is processed before the end of the year.

"Just make sure they've deposited your check by Dec. 31," Bardi cautioned. "Call them and ask by when you'd have to mail it in order for that to happen."

4) Maximize your home office deductions.
If you have your own business and run it regularly and exclusively from your home, you can deduct certain home office costs, according to enrolled agent Frank Degen, of Setauket, N.Y.

Normally, you can't deduct your utilities - but if your home is your office, go right ahead. Same goes for repairs, maintenance and other upkeep-related expenses. These can all be taken on IRS Schedule C.

Take a look around - if you need to buy new furniture or equipment for the office, these costs are deductible also. But they need to be physically installed (not just purchased) by Dec. 31.

5) Deduct any interest you pay on a home equity loan.
Battaglia said the amount of interest you pay on a home equity loan up to $100,000 is always deductible.

"It doesn't matter what you spend that loan on," Battaglia said. "You can go out and borrow $100,000 against your home, spend it on anything, even a vacation - and you can deduct the full amount of interest you pay on that loan."

6) If you refinanced your mortgage, deduct points.
After the Federal Reserve's 10 interest rate cuts, and another cut expected at its next meeting Dec. 11, it should be no surprise there's a refinancing spree going on.

"This is one of the ones people don't think of too often," Bardi said. "It's not so much what you get to deduct on the new loan, but the fact that when you refinance, you may end up paying a mortgage point - and that amount is fully deductible, spread out over the life of the loan."

"Points" are chunks of the mortgage interest that you pay up front, rather than over the life of the loan. Lenders typically offer an opportunity to pay points in exchange for a lower interest rate overall.

Battaglia added that if you previously refinanced your mortgage and were deducting points over the life of the loan, you can deduct the remaining amount in the year you refinanced again.

And mortgage points you've paid in any way - not just through refinancing - are fully deductible (again, over the life of the loan). If you sell the house, the old loan gets paid off entirely and you can deduct any remaining mortgage points you had.

7) Consider a 1031 property swap.
This has to do with investment properties and business properties, rather than homes, but it's good to know. According to IRS Code 1031, you can swap similar properties and defer any tax payment.

If you have a rental property worth $200,000 and want to exchange it for someone else's rental property worth about the same, you can do so without paying taxes as long as there's no cash exchange between you.

Income Taxes
Don't Pay Them Before You Must

More than 90 million Americans make interest-free loans to the federal government every year by overpaying their income taxes.

Don't be one of them.

One quick way to put cash in your pocket is by adjusting your income tax withholding to closely approximate the taxes you'll owe at the end of the year.

According to the most recent full-year statistics, the IRS in 1999 refunded money to 72% of taxpayers. Refunds averaged $1,600. That means on a biweekly paycheck, the average refund recipient was overpaying by $62.00.

Wage earners can make withholding adjustments at any time by filing a new IRS Form W-4 with their employer.

John Roth of tax publisher CCH says many people unwisely view tax withholding as a forced savings plan. They're losing money they could be investing, he says.

Although taxpayers are subject to interest and penalties when their tax withholding falls far short of their eventual tax bill, Roth says most wage earners will be safe by gauging withholding to their previous year's tax liability.

"You should actually end up owing a few hundred dollars," Roth says. "That leaves the money in your pocket during the year."

IRS Publication 919 provides guidance on matching withholding to anticipated tax liability. "How Do I Adjust My Tax Withholding?" is available at www.irs.gov or by calling 800-829-3676.

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