Tax season can be one of the most stressful times of year for people, but consumers who know they will receive a tax refund tend to be a bit happier than those who fear they will face a tax bill.
Homeowners can reap the benefit of federal incentives to buy homes that may reduce their tax bite for 2012.
Of course, every individual’s tax situation is different. You should consult with a tax professional regarding your specific tax issues.
“Fiscal cliff” and Taxes
At the end of 2012, Congress negotiated a temporary resolution to avoid going over the “fiscal cliff” and increasing taxes on many Americans. As part of the resolution, many tax deductions that impact homeowners were extended and restored.
IRS Publication 530 provides details about taxes and homeownership.
• Mortgage interest. While politicians have mentioned the possibility of reducing or eliminating the deductibility of mortgage interest, this deduction is safe for your 2012 tax bill. In 2013, single taxpayers with an adjusted gross income above $250,000 and married taxpayers with an adjusted gross joint income above $300,000 will begin to see a slight phase-out of several deductions, including mortgage interest.
• Mortgage insurance. If you pay mortgage insurance on an FHA loan, VA or USDA Rural Housing loan or private mortgage insurance (PMI) on a conventional loan, you can deduct the amount of your mortgage insurance payments off your tax bill. The fiscal cliff resolution reinstated this tax deduction and made it retroactive to cover your mortgage insurance payments in 2012 as well as your insurance payments in 2013. One caveat: this deduction phases out if your household income exceeds $110,000.
• Property taxes. If you pay your property taxes directly to the state of Maryland, be sure to save your tax bill and keep records of your payments so you can deduct them off your federal income tax. Many homeowners pay their property taxes as part of their escrow payments to their mortgage company. Your mortgage company’s end of the year statement should include the property taxes you paid.
• Energy efficient home improvements. You may qualify for a tax credit of up to $500 if you made a home improvement in 2012 that increased your home’s energy-efficiency. For example, if you added insulation, energy-saving windows or doors, energy-efficient roofing materials or replaced your water heater or HVAC with an energy-efficient model you should look into the details of this credit. The credit will also apply to 2013 taxes if you plan to improve your home this year.
Buyers and Sellers
If you bought or sold a home in 2012, be sure to have your settlement papers, particularly your HUD-1 document, available when you work on your tax return.
As a buyer, if you paid discount points to reduce your mortgage interest rate to below-market rates, you can deduct the points in full from your taxes. The IRS treats points as “prepaid mortgage interest” which makes them tax deductible.
You can also deduct mortgage interest and property taxes you paid in 2012. You should receive a form from your mortgage company that shows the amount of taxes and interest paid. Compare this to your HUD-1 to make sure the portion you paid at the closing is reflected on your statement.
If you refinanced in 2012, you should also keep your HUD-1 close at hand because you should make sure you have the full amount of your mortgage interest and property taxes from your current mortgage and your previous mortgage to deduct from your taxes. If you paid points to refinance into a lower mortgage rate, you will have to amortize the amount of the point over the life of the loan, such as 1/30 each year for a 30-year fixed-rate home loan.
As a seller, your profits from the sale of your home are tax-exempt (as long as you have lived in the home as your primary residence during the past two years) up to $250,000 for single taxpayers and up to $500,000 for married taxpayers. If your profit was larger than $250,000 (or $500,000 for married taxpayers), then you must pay a capital gains tax of 15 percent on the amount of profit above the limit. However, the new tax law raises that capital gains tax to 20 percent on single taxpayers who earn more than $400,000 and married taxpayers who earn more than $450,000 for 2013.
If you sold your home as a short sale in 2012, you do not have to pay taxes on the difference between your mortgage balance and the lower amount your lender accepted as the short sale.
The Mortgage Forgiveness Debt Relief Act has been extended for 2013, too, so borrowers who complete a short sale this year can also avoid paying taxes on the amount of their mortgage balance forgiven during the sale.
Be sure to consult a tax professional for your individual tax situation.