New dwelling? What it’s worthwhile to know to file your subsequent tax return

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New home? What you need to know to file your next tax return

If you purchased a home last year, your income tax return may look different this year.  Here is an introduction to what you need to know as a new homeowner filing your income taxes for the first time after your purchase.

Basics of itemized vs. standard deduction

When you file your tax return, you have the choice of claiming a standard deduction or itemizing deductions.  A standard deduction allows you to deduct a set amount of money from taxes.  When you claim itemized deductions, you lower your income from a list of qualifying expenses approved by the IRS.  Taxpayers usually claim the option that lowers their tax bill the most.

When you buy a house, you can receive a myriad of tax deductions.  These include mortgage interest and points you paid to receive a lower interest rate.  You can also deduct the property tax you paid during the year as well as any mortgage insurance premiums the lender required if you didn’t make a large down payment.  First-time home buyers may be able to receive credits that can increase their income tax refund.

The following documents will be helpful as you get organized for tax season:

  • Buyer’s Final Settlement Statement – This 2-4 page legal-sized form (called a HUD-1 form before Oct. 2015) is an itemized list of fees and credits summarizing the finances of an entire real estate transaction. It serves as a record showing how all the money has changed hands line by line. It details the funds owed to real estate agents collecting commission from the sale, local governments owed taxes and recording fees, and final charges going to the lender. At the bottom of the statement, you’ll see your net proceeds in the seller credit column, as well as what’s due from the buyer. Think of this document as a formal receipt for your home sale. You can reference this form now and when you sell your property.  Some costs you can deduct when you buy, others when you sell.

 

  • Form 1098-Mortgage Interest Statement. This IRS form reports the amount of mortgage interest, points, and mortgage insurance premiums that were paid during the tax year. Be sure the form includes any pro-rated interest you paid from the date you closed on the home to the end of that month. This amount should be listed on your settlement sheet for the home purchase.

 

  • Property Tax Statement – You can deduct the local property tax you paid during the year and any prorated property taxes you paid at closing. If your mortgage includes escrow for taxes and insurance, your lender will report how much they paid on your behalf on form 1098. If you pay them directly to the municipality, go through your checkbook to find the amount paid.  In the year you purchased your residence, you probably reimbursed the seller for real estate taxes he or she had prepaid for the time you owned the home.  If so, that amount will be shown on your settlement sheet. Include this amount in your real estate tax deduction 

Additional Thoughts 

  • Home Improvements – You will want to start a home improvements file and keep this for as long as you own the property. Here you should keep a running list of all improvements, what you did, who did the work, how much it cost.  Be sure to keep all receipts (the more detailed the better), especially if you have a contractor working on your home.  For example, if you replace your windows.  The cost of the windows can count toward your capital improvement basis when you sell, but the trash disposal fee to get rid of your old windows won’t.  So, the more detailed the receipts, the better your tax preparer can figure the cost basis when you sell.

 

  • Tax Withholding – If your new home will increase the size of your mortgage interest deduction or make you an itemizer for the first time, you don’t have to wait until you file your tax return to see the savings. You can start collecting the savings right away by adjusting your federal income tax withholding at work, which will boost your take-home pay. The IRS website has a calculator to estimate the optimal withholdings for most taxpayers. Visit irs.gov to find the IRS Withholding Calculator and Form W-4.

 

  • Should you hire a tax professional? – It depends! If your tax situation is simple and you have the time and patience, you may be able to prepare your tax return using one of many tax preparation software programs. A tax pro is likely to be your best bet in several situations, including the following:
    • You are self-employed.
    • You’ve experienced a major life event (getting married, divorced, buying a home, receiving an inheritance, or moving to a different state).
    • You own rental property.
    • You have foreign accounts or investments or are an active stock trader.

If you have questions about buying a home or how it may affect your taxes, please speak with your financial advisor or tax professional.



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