The federal tax law signed by President Donald Trump Dec. 22, 2017, may affect home ownership tax benefits described in this article. The new law goes into effect for the 2018 tax year and generally doesn’t affect tax filings for the 2017 tax year. Here’s a detailed summary of the changes.
Schedule A is the part of Form 1040 where you list your deductions, and the more deductions you claim, the more chances you have to misinterpret IRS rules.
To save you the heartache of having a deduction disallowed, we asked four tax experts to weigh in on the six most common home-related Schedule A mistakes taxpaying do-it-yourselfers make.
Trap #1: Line 6 - Real Estate Taxes
Your monthly mortgage payment often includes money that goes into your escrow account, from which the lender pays your local real estate taxes.
Your lender keeps up to a two-month payment cushion, so the money you sent the bank last year may be more than what the bank pays for your property taxes, says Julian Block, a tax attorney and author of “Julian Block’s Home Seller’s Guide to Tax Savings.”
The lender sends you a 1099 showing how much it paid for your property taxes. Use that number to avoid putting the wrong number on Schedule A.
- Your monthly payment to the lender: $2,000 for mortgage + $500 escrow for taxes
- Your annual property tax bill: $5,500
Now do the math:
- Your bank received $6,000 for real estate taxes, but only paid $5,500. It may keep the extra $500 to apply to the next tax bill or refund it to you at some point, but meanwhile, you’re making a mistake if you enter $6,000 on Schedule A.
- Instead, take the number from Form 1098 — which your bank sends you each year — that shows the actual taxes paid.
Trap #2: Line 6 - Tax Calculations for Recent Buyers and Sellers
If you bought or sold a home in the middle of the year, figuring out what to put on line 6 of your Schedule A Form is tricky.
Don’t simply enter the number from your property tax bill on line 6 as you would if you owned the house the whole year. Instead, use the property tax amount listed on your HUD-1 closing statement, says Phil Marti, a retired IRS official.
Here’s why: You only get to deduct what you actually owed in property tax. If the sellers lived in the property part of the year, they’ll give you money to pay their share of the property tax bill, but you don’t get to deduct their share, only yours.
Trap #3: Line 10 - Properly Deducting Points
You can deduct points paid on a refinance, but not all at once, says David Sands, a CPA with Buchbinder Tunick & Co LLP. Rather, you may be able to deduct them over the life of your loan. So if you paid $1,000 in points for a 10-year refinance, you may be entitled to deduct only $100 per year on your Schedule A Form.
To deduct points on a home purchase, you have to follow different rules.
Trap #4: Line 10 - HELOC Limits
If you took out a home equity line of credit (HELOC), and used it for something other than improving your home, you can generally deduct the interest on it only up to $100,000 of debt each year (married filing jointly), says Matthew Lender, a CPA with Elliot Horowitz & Company.
If your HELOC was used to improve your home, you may deduct interest on lines up to $1 million ($500,000 married filing separately).
For example, if you take out a $115,000 home equity loan to pay your kids’ tuition, you can deduct the interest on the first $100,000 but not on the $15,000 that exceeds the limit. Use the same $115,000 to add a new bedroom, however, and the full amount is allowable under the $1 million cap.
Trap #5: Line 13 - Private Mortgage Insurance
You can deduct PMI on your Schedule A Form.
Since you’re thinking about it, this is also a good time to see if you have to continue paying PMI: You might be able to cancel your PMI if your home value has risen and the amount your owe on your mortgage has gone down.
Trap #6: Line 20 - Casualty and Theft Losses
You can deduct part or all of losses caused by theft, vandalism, fire, or similar causes, as well as corrosive drywall, but the process isn’t always obvious or simple:
- Only deduct losses that are greater than 10% of your adjusted gross income and exceed $100.
- Fill out Form 4684, which involves complex calculations for the cost basis and fair market value. When you’re done, you’ll know the amount you can deduct on line 20 of your Schedule A.
Bottom-line on line 20: If you’ve got extensive losses, it’s best to consult a tax pro. “I wouldn’t do it myself, and I’ve been dealing with taxes for 40 years,” says former IRS official Marti.
This article provides general information about tax laws and consequences, but shouldn’t be relied upon as tax or legal advice applicable to particular transactions or circumstances. Consult a tax professional for such advice.