Tax Time Is Here: Homeowners Should Brush Up on Taxes
"The avoidance of taxes is the only intellectual pursuit that carries any reward."
-- John Maynard Keynes
The parties are over, the children are enjoying their new toys, and you are looking at your bank statement and thinking ahead to tax time.
Should you file your federal income tax return now, to get an early refund, or should you wait and file on April 15? How about requesting the automatic extension, so while you will have to pay any tax you owe in April, the final return does not have to be filed until Oct. 15?
No matter when you file, you should start preparing now. According to the IRS, the average time required to complete and file the commonly used Form 1040 this year should be 26.4 hours -- an alleged decrease from last year's 33.5 hours. The bulk of this time -- 15.1 hours -- will involve record keeping.
By the end of this month, you will be receiving forms from your employer and from your lender. By law, any lender (private or commercial) that receives $600 or more in mortgage interest must send the borrower Form 1098. For many homeowners, the Form 1098 from their mortgage lender is the most significant pieces of paperwork they will be receiving because this is the form that details deductible interest. In recent years, most mortgage borrowers haven't paid points, or upfront fees, to buy down loan rates, but if you did pay points, your Form 1098 should include those.
When you get your mortgage Form 1098, don't just put it in your tax file. Review it carefully, because the same information has been transmitted to the IRS. Get an amortization table -- available on the Internet or in bookstores -- and make sure that all your payments have been properly credited. This is especially important for those who have been making extra principal payments over the years so they can reduce their loan obligation as quickly as possible.
Did you buy your first home after April 8, 2008? If you did not own any other principal residence during the three years ending on the date of purchase, you may want to consider taking the up-to-$7,500 tax credit. But unless Congress changes this, there are strings attached to the credit -- it ultimately has to be repaid. There are also income limitations. If your modified adjusted gross income is $95,000 or more (or $170,000 for married couples filing a joint tax return) you cannot take advantage of this credit.
Note that if you plan to buy that first home before July 1 of this year, you have the option to take the credit on either your 2008 or 2009 tax return. Thus, you have to do the numbers to determine if it's even worth taking the credit, and if so, which tax year works best for you.
If you live in the District and just bought your first home last year, you also have the option of taking a full $5,000 District-only tax credit -- and this does not have to be repaid. You can't take both. If you're eligible for the D.C. credit, it's the better deal.
Every year, there is something new in the tax law. Sometimes, it will cost you more money. For example, the credit for non-business energy property has expired and does not apply in 2008.