Wednesday, February 26, 2014

Prep for Taxes: Mortgage Tax Deduction

Death and Taxes

Forever, the adage, "Only sure things in life are Death and Taxes", has been bandied about pundits, those that hate to pay taxes and congressman extolling the need to cut taxes.

Yet, the reality hits about about this time every year that paying our taxes are the best of the two "sure things" in life.

As I tell prospective buyers and tenants questioning why to buy a home, the Mortgage Tax Deduction is an item that you will come to appreciate.

Though only 65% or so homeowners take advantage of this deduction, it doesn't lessen its value to those who do reduce his/her tax burden.  Buyers and tenants are always surprised by the increase in their tax return or reduction in taxes paid.  They love the cheaper "rent"!!!

Typically, as I understand the data, the 35% of the population that don't get the tax deduction is due to one cause:  Not Itemizing Deductions.

Newsflash:  Only having the Mortgate Tax Deduction could be reason alone to itemize when completing taxes.

Yes, Turbo Tax can handle as can H.R. Block or whoever files your taxes can handle.  It may cost a tad more due to the extra form(s) but why leave money on the table?   

I am not an accountant so do check with yours regarding your particular situation.  It is worth the time and the question.

I believe in always paying our fair share of taxes.
But why give money to the government that is totally legal to keep???

Homeowner Tax Tips For Your Best Return
courtesy Al Clark HomeAgain Newsletter
First in a four-part series

If you're among the taxpayers who itemize your deductions on Schedule A of Form 1040, you can include the interest you paid on your home mortgage of up to $1 million ($500,000 for married, filing separately), as long as you used the loan to buy, build or improve your home.

You can generally deduct the interest on a home equity loan of up to $100,000 ($50,000 for married, filing separately) used for any purpose, as long as the home equity debt and your purchase mortgage amount don't add up to more than the value of your home, the Internal Revenue Service explains in Publication 936.

Here are 10 more things you need to know to claim your mortgage interest deduction:
1. In general, you have to be legally obligated to pay the mortgage. In other words, you can't deduct mortgage interest paid, for example, on your parents' home unless you have a legal duty to pay their mortgage.

2. If you have a high income, the Alternative Minimum Tax can affect your ability to deduct mortgage interest.

3. Your mortgage must be a secured debt, meaning your lender can foreclose on your home if you don't pay your mortgage.

4. Your home can also be a boat, mobile home, house trailer, condominium, cooperative or similar property, which has cooking, sleeping and toilet facilities. 

5. You can deduct late payment charges as though they were interest as long as your lender didn't perform a specific service in exchange for the fee.

6. If you pay off your home mortgage early and you have to pay a prepayment penalty, that amount also counts as interest, as long as your lender doesn't charge the fee in exchange for a specific service performed or to cover the cost of something connected to your mortgage (like giving you a payoff statement).

7. If you make annual or periodic rental payments on a redeemable ground rent, you can generally deduct them as mortgage interest. Payments made to end the ground lease and payments for nonredeemable ground rent aren't deductible as mortgage interest.

8. Reverse mortgage interest generally isn't deductible until it's paid ? and you don't usually pay interest on a reverse mortgage until you (or your heirs) sell your home and pay off the reverse loan.

9. If you own a cooperative apartment, you'll get a Form 1098 from the co-op telling you how much interest you paid on any building-wide mortgages. You can deduct that amount along with the interest you paid on your individual unit loan (if you got a mortgage to buy your shares in the co-op).

10. The rules change if you got your mortgage on or before Oct. 13, 1987.

Getting a headache from thinking about all the different rules? 

You can use tax software or an online tax service to prepare your return. PC Magazine says TurboTax is the best tax software program. Consumer Reports Magazine offers advice on selecting online tax preparation help.
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