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2019 taxes

Standard vs. Itemized Deduction: Which One Should You Take?

April 1, 2020

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Standard versus itemized deduction: Which one should you claim? If this question is weighing heavily on your mind as you file your taxes, now that all the new tax reforms have taken effect, let this guide help you decide.

Itemizing your deductions—particularly if you’ve bought a home recently—could save you major bucks when you file. But, more than ever, you need to understand what you can and can’t do. We’ll break it down to help you make the decision on whether to select a standard or an itemized deduction.

What is the standard deduction?

The standard deduction is essentially a flat-dollar, no-questions-asked reduction to your adjusted gross income. When you file your tax return, you can deduct a certain amount right off the bat from your taxable income.

For 2019, the standard deduction is $12,000 for single filers and $24,000 for married couples filing jointly. (The standard deduction nearly doubled as a result of the Tax Cuts and Jobs Act, which went into effect in 2018.)

Here are some of the benefits to taking a standard deduction:

  • It allows you a deduction even if you have no expenses that qualify as itemized deductions.
  • It eliminates the need to keep records and receipts of your expenses in case you’re audited by the IRS.
  • It lets you avoid having to track medical expenses, charitable donations, and other itemizable deductions throughout the year.
  • It saves you the trouble of needing to understand the fine nuances of tax law.

 

What are itemized deductions?

Although claiming the standard deduction is easy and convenient, choosing to itemize can potentially save you thousands of dollars, says Mark Steber, chief tax officer at the Jackson Hewitt tax service.

“Don’t be lulled into thinking the standard deduction is always a better answer,” Steber says. That advice especially applies to homeowners.

“Buying a home has the single largest impact on your tax return,” he adds, noting that a home purchase is “an anchor item that can move someone into the itemized taxpayer category.”

Itemizing your deductions may enable you to deduct these expenses:

  • Home mortgage interest (note the exceptions below)
  • Real estate and personal property taxes (note the cap below)
  • State and local income taxes or sales taxes (but not both)
  • Gifts to charities
  • Casualty or theft losses
  • Unreimbursed medical and dental expenses
  • Unreimbursed employee business expenses

 

Why itemizing often makes sense for homeowners

Under the new law, current homeowners can continue to deduct interest on a total of $1 million of mortgage debt for a first and second home. But new buyers can deduct interest on only $750,000 for a first and second home.

It’s still possible that if you own a home, your mortgage interest alone might exceed the standard deduction, says Steve Albert, director of tax services at the CPA wealth management firm Glass Jacobson. In this case, it’s a no-brainer to itemize your deductions.

This is particularly true if you bought a house recently, since most mortgages are front-loaded to pay mortgage interest rather than whittle down the principal (which is the amount you borrowed).

For instance: If you have a 30-year loan for $400,000 at a fixed 5% interest rate, in the first year of your mortgage, you’ll pay off only $5,901 in principal and a whopping $19,866 in interest.

That alone exceeds an individual’s standard deduction of $12,000 deduction for 2019. So if you’re filing taxes this year, itemizing would make total sense.

Plus: If you bought your house in 2019 and paid points—which are essentially a way to prepay interest upfront to lower your monthly mortgage bills—these points count as mortgage interest, too, amounting to more tax savings.

On the other hand, if you’ve owned your home for a while, then your mortgage interest may not amount to much. By the 25th year of that same $400,000 loan, you’ll pay only $6,223 in interest.

However, keep in mind that your property taxes of up to $10,000 are an itemized deduction, too—and combined with mortgage interest and other deductions, could push you over the top into itemizing territory.

Itemized vs. standard deduction: Which is right for you?

Not sure how much you paid in mortgage interest and property taxes last year? To get a ballpark, you can punch your info into an online mortgage calculator.

Also, early in the new year, your mortgage lender should have mailed you a mortgage interest statement (Form 1098) showing the total you paid during the previous year.

“And if you had your property taxes impounded in your loan, your taxes will appear on your 1098 as well,” says Lisa Greene-Lewis, a CPA and tax expert at TurboTax.

Another DIY approach for seeing whether your combined itemized tax deductions are higher than your standard tax deduction is to fill out the IRS Schedule A form, which outlines all federal itemized deductions line by line.

You can also consult an accountant (you can search for a tax professional in your area using the IRS directory of tax return preparers). But as a general rule, if you bought a home recently, you could be a prime candidate for itemizing, so don’t let these potential savings pass you by without checking!

The post Standard vs. Itemized Deduction: Which One Should You Take? appeared first on Real Estate News & Insights | realtor.com®.

Do I Need an Accountant This Year? 5 Signs the Answer Is Heck, Yes!

March 10, 2020

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“Do I need an accountant?” might be a question weighing on you as you prepare to file your taxes this year.

Given the 2018 Tax Cuts and Jobs Acts delivered the biggest overhaul to the tax code in decades, having an accountant help you navigate these new rules might be a smart investment. Still, your own personal circumstances should factor into this decision, too.

Basically, if you’re a W-2 wage earner with few assets who filed as a single last year, then you can probably do your own taxes this year as well.

“If you only have a W-2 and some bank interest with no life changes coming soon, then a DIY program may be fine for you,” says Beth Logan of MA’s Kozlog Tax Advisers and author of “Divorce and Taxes After Tax Reform.”

But if your financial life was a bit more complicated—think filing jointly and owning a home—then you’re a prime candidate to get some professional help. Plus: Accountants also know that certain expired provisions that are helpful for homeowners are back!

To help you decide whether you need an accountant, here are five instances where hiring one could save you a whole heap of headaches.

1. You bought or own a house

Many homeowner deductions—such as mortgage debt, property taxes, and home equity line of credit interest—have radically changed since the Tax Cuts and Jobs Act. Here’s quick rundown:

  • Mortgage debt: The new law limited deductible mortgage debt to $750,000 for homes bought after Dec. 15, 2017. (Homes bought before then are grandfathered in at a $1 million cap.)
  • Property taxes: State, city, and property taxes will be limited to a total deduction of $10,000.
  • Home equity debt: The chance to deduct up to $100,000 of HELOC interest is only for those who used the money to specifically to buy, build, or improve a property.

The big thing to look out for is whether itemizing the above is worth it now that the standard deduction has almost doubled—$12,000 if filing single and $24,000 if filing married. An accountant can help you figure that out.

2. You sold a house

If you sold a property in 2019, congrats! There are tons of write-offs available to you that a tax pro can make sure you’re taking advantage of.

For example, you can deduct any costs you racked up selling your home, including legal fees, escrow fees, home inspection fees, the cost of title insurance, and your real estate agent’s commission, says Joshua Zimmelman, president of Westwood Tax & Consulting in Rockville Centre, NY.

And if you had to do any renovations in order to complete the sale—say, repairing a faulty furnace found during a home inspection—you can deduct those expenses as long as they were made within 90 days of the closing. You can also add your 2019 property taxes for the portion of the year that you still owned the home. (You’ll add these costs to your itemized list to see if it supersedes the standard deduction.)

Here’s another factor to sit and discuss with an accountant: capital gains, which could mean you owe taxes on the profits from your sale.

Under current tax law, homeowners can exclude up to $250,000 (single) or $500,000 (married) of the profits from a sale, but you’ll have to have lived in the home for at least two of the past five years.

3. You made energy-friendly home improvements

You may have heard that the Residential Energy Efficient Property Credit—a tax incentive for installing alternative energy equipment in a home—expired after December 2016. But not entirely: Accountants know that homeowners can still claim a 30% credit for solar electric and solar water equipment installed through Dec. 31, 2019.

And surprise! The recently enacted Secure Act retroactively reinstated certain deductions and credits for 2018 and 2019 that had expired at the end of 2017.

“These include nonbusiness energy credits for things such as exterior windows, doors, and insulation,” says Laura Fogel, a certified public accountant at Lillian Gonzalez & Associates in Massachusetts. The savings could add up to $500.

An accountant can help you see if it makes sense to amend your 2018 tax return to take advantage of these tax breaks.

4. You worked from home

If you’re self-employed with no other office to go to, you can take a home office deduction. Just remember, if you’re an employee with another office you can work from, this deduction no longer exists.

“This complicated deduction is for sure something I would certainly contact an accountant about,” says Ralph DiBugnara, vice president at Residential Home Funding.

By definition, you need to use a portion of your home exclusively for business to claim the deduction. But there are a few different ways you can qualify (you run a small business from your home) or be disqualified (your office doubles as a guest room).

5. You have private mortgage insurance

Another deduction that had expired—namely the one for private mortgage insurance—was also retroactively reinstated for tax year 2019 thanks to the Secure Act.

“The deduction for private mortgage insurance premiums is back on Schedule A,” says Fogel. “And just in time for the 2019 tax season, you can amend your 2018 tax return to take advantage of these tax breaks.”

So while you can’t deduct the cost of tax preparation help from your 2019 taxes (that deduction went away in 2018), here’s yet another reason to hire an accountant this year: “I can almost guarantee you alone are not doing everything you can to save on taxes in the 2019 year,” says Stacy Caprio, financial blogger at FiscalNerd.com. “So talking to an expert will be well worth the return on investment.”

The post Do I Need an Accountant This Year? 5 Signs the Answer Is Heck, Yes! appeared first on Real Estate News & Insights | realtor.com®.

5 Sweet Tax Deductions When Selling a Home: Did You Take Them All?

February 24, 2020

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You may be wondering if there are tax deductions when selling a home. And the answer is: You bet!

Sure, you may remember 2018’s new tax code—aka the Tax Cuts and Jobs Act—changed some rules for homeowners. But rest assured that if you sold your home last year (or are planning to in the future), your tax deductions when you file with the IRS can still amount to sizable savings.

Want a full rundown of all the deductions (as well as tax exemptions or other write-offs) at a home seller’s disposal? Check out this list to make sure you miss none of them.

1. Selling costs

These deductions are allowed as long as they are directly tied to the sale of the home, and you lived in the home for at least two out of the five years preceding the sale. Another caveat: The home must be a principal residence and not an investment property.

“You can deduct any costs associated with selling the home—including legal fees, escrow fees, advertising costs, and real estate agent commissions,” says Joshua Zimmelman, president of Westwood Tax and Consulting in Rockville Center, NY.

This could also include home staging fees, according to Thomas J. Williams, a tax accountant who operates Your Small Biz Accountant in Kissimmee, FL.

Just remember that you can’t deduct these costs in the same way as, say, mortgage interest. Instead, you subtract them from the sales price of your home, which in turn positively affects your capital gains tax (more on that below).

2. Home improvements and repairs

Score again! If you renovated a few rooms to make your home more marketable (and so you could fetch a higher sales price), you can deduct those upgrade costs as well. This includes painting the house or repairing the roof or water heater.

But there’s a catch, and it all boils down to timing.

“If you needed to make home improvements in order to sell your home, you can deduct those expenses as selling costs as long as they were made within 90 days of the closing,” says Zimmelman.

3. Property taxes

This deduction is capped at $10,000, Zimmelman says. So if you were dutifully paying your property taxes up to the point when you sold your home, you can deduct the amount you paid in property taxes this year up to $10,000.

4. Mortgage interest

As with property taxes, you can deduct the interest on your mortgage for the portion of the year you owned your home.

Just remember that under the 2018 tax code, new homeowners (and home sellers) can deduct the interest on up to only $750,000 of mortgage debt, though homeowners who got their mortgage before Dec. 15, 2017, can continue deducting up to the original amount up to $1 million, according to Zimmelman.

Note that the mortgage interest and property taxes are itemized deductions. This means that for it to work in your favor, all of your itemized deductions need to be greater than the new standard deduction, which the Tax Cuts and Jobs Act nearly doubled to $12,200 for individuals, $18,350 for heads of household, and $24,400 for married couples filing jointly. (For comparison, it used to be $12,700 for married couples filing jointly.)

5. Capital gains tax for sellers

The capital gains rule isn’t technically a deduction (it’s an exclusion), but you’re still going to like it.

As a reminder, capital gains are your profits from selling your home—whatever cash is left after paying off your expenses, plus any outstanding mortgage debt. And yes, these profits are taxed as income. But here’s the good news: You can exclude up to $250,000 of the capital gains from the sale if you’re single, and $500,000 if married. The only big catch is you must have lived in your home at least two of the past five years.

However, look for the rules of this exemption to possibly change in a future tax bill.

Ralph DiBugnara, vice president at Cardinal Financial, says lawmakers might push to change this so that homeowners would have to live in the property for five of the past eight years, instead of two out of five.

The post 5 Sweet Tax Deductions When Selling a Home: Did You Take Them All? appeared first on Real Estate News & Insights | realtor.com®.