Did You Claim Everything?
It’s that time again. Here, we note 6 checklist items, to help ensure your ducks are in a row for Monday, April 18, 2022 (or Tuesday, April 19 if you live in Maine or Massachusetts).
1. Do It Online.
It helps everyone. “Filing electronically with direct deposit and avoiding a paper tax return is more important than ever” in 2022, IRS Commissioner Chuck Rettig has said.
“The pandemic continues to create challenges,” notes Rettig. But we can all help smooth out the process.
To get through its workload, the Internal Revenue Service relies on direct deposit channels to our IRS online accounts. We can also use our online accounts to check our stimulus amounts. Taxpayers may claim their third stimulus payments if they received less than the full $1,400 per person in 2021. Use Form 1040 (1040-SR for seniors). In January, taxpayers slated to receive a third payment in 2021 were mailed Letter 6475 — recipients can check the letter to be sure the bank deposits match.
2. Prepare to Itemize Deductions.
The standard deduction is easy enough to claim. It’s even higher for the 2021 tax year, to account for inflation. Nevertheless, homeowners may have good reason to itemize. Namely, deductions for mortgage interest and home-based business expenses over the 2021 tax year.
Important note if you work from home: If you’re a remote employee and not self-employed, you may not take the federal home office deduction in 2021. Some states do allow this, but the federal return does not allow for it at this time.
The mortgage loan borrower’s year-end Form 1098, showing paid mortgage interest, arrives by mail early each year. It is also found on a borrower’s online mortgage portal. That’s the source of the mortgage interest claimed on Schedule A of Form 1040.
Recent home buyers: Don’t miss mortgage points, and the interest you paid in your first ownership month, as stated on the settlement document issued at closing.
Homeowners who bought or refinanced after 2006: If you pay monthly for private mortgage insurance (PMI), that cost is deductible. The deduction was cut by 2018 tax changes but restored in 2020, so homeowners can claim it now, and get back what they couldn’t claim in 2018 and 2019.
Homeowners can deduct the local property taxes they pay each year, too, as part of the $10K deduction allowance. (When mortgage companies pay taxes out of the borrower’s escrow money, that amount is written on the year-end mortgage statement.)
The key piece of information? Form 1098, to be filed with the federal tax return. Those who need to file a state tax return may be able to deduct mortgage interest there too.
3. Be Ready for Higher Income Tax for Funds Pulled From an IRA.
Although home buyers who’ve tapped their traditional IRA retirement accounts for down payments may be exempt from the penalties that apply to people under age 59 ½, watch out at tax time. Withdrawals of retirement money are added back into the homeowner’s taxable income. Buyers should check with their tax experts before pulling money from an IRA to anticipate the consequences.
As a general rule, to avoid penalties, withdraw less than $10,000. That’s a lifetime cap for drawing money, free of taxes and penalties, for a home purchase. The withdrawn funds have to move from the IRA into the home purchase within 120 days.
Speaking of IRAs: Recent tax changes are rewarding retirement account holders who contribute to their accounts with a retirement saver’s credit. Credits are powerful! They decrease the amount you’ll need to pay in taxes.
4. Don’t Sweat a Recent Home Sale.
Did you sell a home last year? As long as you occupied the home for 2+ out of the last five years you owned it, there are no capital gains. You can make up to $250,000 in profit (double that for a couple filing jointly) and you’re fine.
To learn more about taxation and home sales, see the IRS fact sheet on capital gains and losses.
Even if you do have a taxable gain through your sale, you can offset it by adding the cost of qualifying home improvements to the tax basis. What’s a qualifying home improvement? It’s a change you’ve made in order to:
- Modify at least part of the home for a new use.
- Add years to the home’s useful lifespan.
- Raise the home’s market value.
If you substantially renovated the home, then what you paid for it counts. Routine maintenance that doesn’t raise your home’s market value does not count. Receipts for materials and from contractors are necessary, because they corroborate the higher cost basis. DIY home improvement hours cannot be factored in.
If you sold your home in 2021, a portion of the home’s property’s taxes is deductible. Can the cost of having your home appraised be deducted? Unfortunately, no — at least not for 2021.
5. Add Up Those Home Office and Business Travel Expenses.
if you run a home-based business, a portion of your home expenses are deductible. That portion relates to the percentage of the home that’s wholly dedicated to business use.
Other deductible expenses are business-related meal and entertainment costs, travel expenses, a portion of your mileage costs, and car inspection and maintenance costs. Read more from the IRS about deductions for travel expenses and meals.
Internet, mobile devices, data plans, and business equipment costs also represent tax breaks. If your work depends on tech, it’s normally deductible.
Rental use of part of your home (or daycare use) is an acceptable home-based business deduction.
Keeping records is a good habit. (There are phone apps today for taking pictures of receipts and uploading them into personal accounting software.) It’s also good to be consistent. Avoid changing the amount of any given expense from year to year without an explicable reason.
6. Certain Home Modifications Qualify for Deductions.
Certain types of modifications can be deductible. Here are three leading examples:
- Those who borrow money against their home equity to remodel the house can check out the tax deduction for home equity loans and home equity lines of credit.
- Home renovations for medical necessity (not property value enhancement) are deductible. Eligible installations are stairway and entranceway modifications, support bars, and so forth. A number of home healthcare expenses are deductible, and so are home improvements that comprise an integral part of medical care.
- Some energy-saving improvements can earn $500 energy tax credits. Other credits for the 2021 tax year include as much as 26% of installation expenses for qualifying generators and solar-powered energy.
Generally, home improvements aren’t tax deductions. Unless the work fits into a specific category as it’s defined by the revenue code, don’t claim it.
What Else Is New This Year?
First, let’s hear it for generous donors! Itemizers may affirmatively choose to deduct donations to qualified charities up to 100% of adjusted gross income for the 2021 tax year. And taxpayers who don’t itemize can still claim deductions of up to $300 per person for charitable donations.
As you likely already know, there are boosts for childcare credits, and the Earned Income Tax Credit offers a bigger break for people with modest incomes. The IRS mailed out Letter 6419 to state the total childcare payments parents received. Those eligible for a larger (or smaller) child tax credit than received can claim their due (or repay an overpayment) on their 2021 tax returns.
And then there’s cryptocurrency. Platforms are getting much better about providing tax reports this year. But as blockchain enters the real estate market, tax rules continue to evolve. Before entering into a blockchain real estate transaction, consult with a financial adviser who can spot potential tax implications.
Haven’t Started Yet? Self-Employed Homeowners Can File Efficiently With Better-Than-Ever Online Options.
Today’s tax software makes filling out forms and filing them easier. This is especially helpful for self-employed taxpayers who need to file federal and state tax returns. These taxpayers might appreciate TaxSlayer, H&R Block, TurboTax, or Cash App Taxes. The latter option is (really) free.
Finally, don’t forget to plan out your estimated state and federal taxes for the 2022 tax year if you’re self-employed.
We hope this checklist helps ready our readers for filing taxes on time, but we do not provide tax advice. Choose a good platform or make an appointment with your local tax pro to get into the details of your own tax declarations and deductions. This too shall pass — and faster, if you get right on it!
Supporting References
U.S. Internal Revenue Service News Release: 2022 Tax Filing Season Begins Jan. 24; IRS Outlines Refund Timing and What to Expect in Advance of April 18 Tax Deadline (Jan. 10, 2022).
U.S. Internal Revenue Service: Get Ready for Taxes: What’s New and What to Consider When Filing in 2022 (IR-2021-243, Dec. 7, 2021).
Cynthia Myers for Zacks.com: Does Repainting the Interior of My Home Add to the Cost Basis?
Stewart Title: A Homeowner’s Guide to Preparing for Tax Season (Jan. 20, 2022).
Cornerstone Home Lending, Inc.: 9 Must-Know Homeowners Tax Breaks for 2022 – Including a COVID Rebate (Dec. 29, 2021).
Photo credits: Nataliya Veitkevitch, via Pexels.