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Top 5 Most Common Tax Mistakes New Homeowners Make

The majority of people agree that doing taxes is not an exciting process. You have to get your paperwork together, pay attention to details, and fill out documents. There is a fear of making a mistake, stress to finish it on time, and exhaustion as you try to file taxes on top of everything else you have going on. If you purchased a home in 2014, there is going to be additional paperwork that you will have to fill out. A positive aspect of the tax process this year is that after purchasing a home, you will receive more benefits than you did as a renter. But as you go through filing your taxes, here are the top 5 most common tax mistakes new homeowners make:

  1. Not documenting improvements.

    Ideally, a new homeowner is gong to have purchased a home with the exact style, appliances, and size that they want. Unfortunately, we do not live in an ideal world where we always get what we want. People purchase homes that need improvements. As you spend money to make those improvements, be sure to keep record of what changes you make and how much they each cost. The majority of home improvements will not qualify for a tax deduction. Ones that do qualify are needed medically or are an energy generating system.

    • Medically
      Renovations that make a home wheelchair accessible: wider doorways, a ramp for an entrance, and lower cabinets, are all features that have a medical purpose and can be deducted during taxes. If the renovations made in the home increase the value of the home, the improvements cannot be considered a medical expense for tax deduction purposes.
    • Energy efficient
      Investing your money in making your home more energy efficient is a more simple method of receiving tax deductions. Until December 31st of 2016, homeowners can receive a 30% tax credit for specific energy efficient improvements. The 30% is taken from the cost of the appliance and the labor and expense of having it installed. A few of the renovations applicable include: adding solar panels, a small wind turbine, or fuel cells. Except with fuel cells, there is no maximum on the amount spent to receive a 30% tax credit.

    If the home improvement you made does not qualify for a tax deduction, all is not in vain. The improvements you made could be beneficial when it comes to selling your home in the future.

  2. Misusing the home office tax deduction benefit.

    As the number of people working from home increases, so does the number of people trying to receive tax deductions for their home office. Unfortunately, as more people attempt to do this, the number of people being caught for incorrectly using it has also risen. The home office deduction can be a complicated system. There are two forms available: a short and long.

    The short form, known as the simplified method, is a much simpler process. A few limitations of using this method are:

    • If your business uses more than one home office, only one of the home offices can be deducted using this form. The others will have to use the long form.
    • You cannot deduct actual expenses. The homeowner will have to use a standard measurement for a home office: 300 square feet, and multiply it with the standard rate: $5.

    The long form, or standard method, is a more thorough process. It ensures you receive accurate deductions as it deducts actual expenses. The homeowner is required to provide the measurement of the office and the entire home. With these measurements, a more accurate depiction of the expenses directly related to the office can be determined. With this method, you will be able to take the percentage of the home used for your office and use it to for the home expenses of: mortgage interest, utilities, maintenance, and insurance.

    By using the simplified method, your odds of making a mistake in the tax filing process are smaller. If you choose to use the standard method, it would be wise to use a tax professional’s services, especially your first time going through the process.

  3. Choosing the wrong year.

    This seems like a foolish, naïve mistake, but it is common. As people file their taxes, it is easy to accidentally deduct taxes for the wrong year. Your tax bill could come the year after you actually paid them. For example, if you paid your property taxes last year, in 2014, you may not receive the actual bill until sometime this year, in 2015. Tax authorities will sometimes work a year behind. Meaning, you should not wait until you receive your tax bill to deduct the amount you paid. You should deduct the taxes for the year that you paid them. Filing the wrong year could cause you to either not receive the amount you were supposed to or go through an audit.

  4. Deducting the wrong escrow amount.

    Typically, as a homeowner makes their mortgage payments each month, they also pay into an escrow account. The lender determines whether or not an escrow account is a requirement. The money in an escrow account is used to pay bills: primarily property taxes and insurance. Without realizing the implications of their actions, homeowners try to deduct their entire escrow balance. However, the only amount that you can deduct from your escrow balance is the amount that was used to pay taxes. In order to know how much of the balance was used to pay property taxes, contact the company responsible for your escrow account. That is the amount that you should include when filing your taxes.

  5. Keeping with the simple tax form.

    In the past, the 1040EZ form may have worked for you. It is the simplest tax form available. If you kept a consistent job, did not have to claim any dependents, were renting a home, and were married, filing jointly, or single, this was the form for you. However, after you become a homeowner, you should change the form you are using. If you do not, there are benefits of homeownership that you will miss out on, as the 1040EZ is not equipped to provide those benefits. Other forms should either reduce the amount of taxes you have to pay or provide you with a better refund. Though the form may be longer and more complicated than the 1040EZ, the benefits are worth the task. Talk to a tax adviser to know which form is going to be best for you and your situation.

If you avoid making these 5 mistakes in your first tax process as a new homeowner, you are on your way to receiving more tax benefits than you ever have in the past. Being a homeowner can be hard on your finances, don’t make it any harder by not properly filing your taxes.

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