5 Things Your Accountant Wishes You Knew About Owning a Home
By Jamie Wiebe
What’s not to love about tax season? The chill you get when you realize you owe the IRS thousands, the fear that you may be getting a bit too aggressive on your deductions, the fleeting hope you’re due for a big return … that’s dashed when you end up with $2…
OK, so maybe only accountants love tax season. And here’s another thing they love: wielding their vast knowledge of the tax code to help their clients save cash! Lots of it! If you own a home, there’s plenty they can do to ease the burden of what you owe.
Of course, if you haven’t hired an accountant to do your taxes already, you may not be able to talk to one until sometime after April 15, when they dig out from under their mountain of returns. Still, we know a few people, so we went ahead and nagged them for their prime pearls of wisdom. Check them out!
1. Having a home office does not automatically trigger an audit
Few things scare the pants off taxpayers (or accountants, for that matter) like the threat of an audit. Can you imagine pulling together all those receipts? As a result, many people avoid making claims on their taxes that they think will attract unwanted attention from the IRS. Among the most notorious of these supposed red flags is the home office deduction. Why tempt fate?
Yet accountants insist that having a home office does not automatically make you audit material. They also contend that avoiding this deduction, if you deserve it, is a huge mistake—particularly since it allows you to also deduct portions of your utilities, maintenance, and other expenses, dramatically lowering your tax burden. In short, you could save big.
“What drives me crazy is when people don’t take a home office deduction when it’s so easy to do and when they are entitled to it,” says Tom Wheelwright, a CPA and founder of ProVision Wealth Strategists.
To avoid missing out, know the rules. To determine if a home office is deductible, make sure it is an area of the home you exclusively use for business, and that it is your principal place of business (that means you don’t have a second office supplied by your company). Note: In the eyes of the IRS, everything in a home office area needs to be justified as serving a business need. Ditch the PS2 and the lava lamps.
2. Moving is an overlooked money saver
Another easy tax break that homeowners often toss out the window is the cost of a job-related move.
“People never save the receipt,” complains Craig McCullough, a Realtor® and accountant in Washington, DC. And that’s a missed opportunity, since moving fees can be hefty and are usually deductible.
A few caveats: You qualify only if you’ve moved more than 50 miles for your job (or to a new job) and work full-time for at least 39 weeks of the subsequent year. Plus, if your job pays for moving expenses, the reimbursed costs are not tax-deductible.
3. Selling a home too quickly comes at a price
Selling a house comes with its own set of pitfalls—especially if you’re doing so less than two years after purchase.
“You have to be really careful, because if you live in a house for less than two years that’s appreciated in value, the profit of the sale is subject to capital gains taxes,” McCullough says.
So, say you purchase a home in downtown Denver that appreciates nearly 20% over almost two years (totally possible, according to current home pricing trends). If you buy at $200,000 and sell at $240,000, you’ll be subject to capital gains taxes on that $40,000.
“It’s one of the biggest things sellers don’t know about,” he says. “Sellers end up calling their brokerage really mad when they get their capital gains bill.”
4. Deducting your mortgage interest is really worth it
Odds are you’ve heard that you can deduct the interest you pay on your mortgage from your taxes. And maybe you’ve thought, “Why bother? My interest is only 4%, which is a measly amount to deduct.” But here’s what you’re missing: For fixed-rate mortgages, the amount of money you pay per month may stay the same, but the proportion paid to interest changes a lot. In fact, in the early years of a mortgage, “the bulk of that check goes toward interest,” says Elmwood, WI, accountant.
To find out how much of your mortgage payment is going toward interest, check your monthly statement for a breakdown. But whatever you do, don’t assume it’s too small to be worth mentioning on your taxes. And it’s not just mortgage interest that can help you out come April: If you refinanced your home or received a home equity loan or line of credit, you can deduct interest on up to $100,000 of that debt.
5. Home improvements can lower your tax bill, too
If you’ve made any significant renovations to your home in the past year—or plan to begin a new construction project—make sure to keep an eye on any energy-efficient upgrades you make. You can get a tax credit for improvements such as energy-efficient windows, reflective roofs, and extra insulation, so be sure to talk to your tax accountant about them. While there is a $500 cap on the credit, keep in mind a tax credit directly reduces the amount you owe, compared with a deduction, which simply reduces your taxable income. So this is not something you want to pass up. Trust us.
