Tax Tips for Home Buyers

It's that time of the year again! Every year, on or before April 15, taxpayers must file their federal income taxes. There are a number of tax deductions available for home buyers that can significantly reduce one's taxable income.

Here are some things that home buyers need to know when filing their Income Tax:

1.Itemize your Return to Claim Your Deductions.
Not itemizing your income taxes may result to missing out on tax advantages. If you own a home and have a simple return, it's tempting to file for just the standard deduction. Sometimes, filing for standard deduction might outweigh your homeowner's deductions. But you'll never know if you're losing out on the tax advantages of itemizing unless you try. You can use tax software like Turbo Tax, which will automatically do the math on whether itemizing or taking the standard deduction will result in the lowest tax bill -- or the highest tax refund -- for you.

2. Tax Relief for Loan Modifications, Short Sales and Foreclosures is Only Around Through 2012.
While there is a positive outlook on the housing economy, 2011 is projected to be the peak year for foreclosures. Distressed homeowners who are on the brink of a short sale, loan modification or foreclosure should be aware that normally, any mortgage balance is taxed as what the IRS calls Cancellation of Debt Income or CODI. However, under the Mortgage Debt Foregiveness Relief Act of 2007, the IRS is currently not charging income taxes on CODI through 2012.

3. Some Closing Costs are Tax Deductible.
If you bought or refinanced your home in 2010, you may be eligible for tax deductions on your closing costs, even if the seller has paid for them.

Take note that not all closing costs are tax deductible. Some closing costs that are tax deductible are mortgage points; prepaid mortgage interest paid at closing; and transfer taxes for rental or investment property.

Mortgage Points is a percentage of the loan amount you pay your lender at closing to basically "buy down" your interest rate. If you are purchasing a home, the total amount of loan points are fully deductible for that year’s tax returns. If you are refinancing, the points can still be deducted, but the deductions must be amortized or spread out over the course of the loan.

If you prepaid any mortgage interest as part of your closing costs, that interest will be tax deductible. You may have to prepay if you close on any day other than the first of the month. This is typically the day your future mortgage payments will be due and if your home loan closes on the 15th perhaps, then your lender will require you to prepay interest for the 15 days before the next month begins. Since this is still interest, even though it is included in your closing costs you can deduct it from your yearly tax returns.

If the transfer taxes are part of your closing costs, it will be tax deductible too. Things like hazard insurance or association dues for rental properties are also tax deductbible.

4. Moving Costs Due to Job Relocation are Tax Deductible.
If you have purchased a home and are moving due to job relocation, you can deduct some of the moving expenses (I.e. storage expenses, hotels and travel expenses, moving services and other incidentals) from your tax. However, for you to qualify for the deduction, your new job must be 55 miles away from your old home. And the move must take place within a year of your job relocation.

If you encounter some problems, you may call the IRS toll-free number at 800-829-1040 or check out http://www.irs.gov.

If you have further questions or if you would like to get more information, you may consult with a tax accountant or a CPA. If you are looking for a CPA or a tax accountant, please contact me for a list of reputable companies.