Real Estate Investments and Tax Talk: Year End Tax Reduction Tips
RISMEDIA, December 12, 2006—It’s not too late: Reduce your 2006 and/or 2007 tax bill. Here’s a bakers dozen year end tax saving strategies you should consider:
1. Consider refinancing your mortgage this year. Loan fees (i.e. points) are supposed to be deducted over the projected life of mortgage, but when the loan is paid off early in order to refinance, any remaining points not yet deducted can be deducted in that year. Mortgage refinancing can be a smart move for those of us with higher mortgage interest rates and/or who want to replace an adjustable mortgage with a fixed rate product while rates are still low. In addition, if your home has appreciated since its purchase and you are currently paying for private mortgage insurance, you may no longer be required to carry it if your refinanced loan amount is less than 80% of the home’s current appraised value. Also, if you have had your current loan for some time, a larger portion of your monthly payment applies to the principle, so you have less interest to deduct than you had when you first got the mortgage. If you are among the fortunate who could use additional tax deductions, refinancing your home will mean you’ll have a bigger interest deduction every month, even if your payments stay about the same.
2. Make your January mortgage payment in December. You’ll be able to deduct the interest on that payment in 2006. Keep in mind that you’ll have less mortgage interest to deduct in 2007, however. This can also work for your 2007 property tax payments, if they are not paid by your mortgage lender and your local real estate tax authority allows early payment.
3. Take deductions for any casualty or theft losses that were not covered by insurance or paid by others.
4. Take deductions for moving expenses that aren't reimbursed if you or your spouse changed jobs and moved to another home in 2006. To qualify the new place of business must be at least 50 miles from your old place of business. The commuting distance from your old home to your old job must be added to that amount.
5. Consider starting a full or part time home-based business in 2006. Working at home sure beats commuting, and technology tools such as the Internet are making the physical location of the business less relevant (millions of homeowners are now earning a full or part time income as eBay merchants for example). Portions of the home used in business may be depreciated and portions of the cost of maintenance may be deducted. Additionally, section 179 of the Internal Revenue Code allows home based and other small businesses to expense capital equipment costs in their year of purchase (up to $108,000 in 2006). If, for example, you will need to make capital investments in computers, software, a vehicle, etc. to get your business off the ground, you’ll be able to write off the entire amount that year even if you finance the purchases. Keep in mind however that other IRS regulations require that your new business show an annual profit with sufficient frequency, or else you may lose the tax deduction retroactively.
6. Review your 2006 medical expenses and consider those likely to come up next year. If you have medical insurance and have used up your deductible, or have a medical reimbursement plan and haven't spent as much as you'd planned, consider visiting your doctor, dentist, optometrist and/or ophthalmologist before the end of the year. You may also be able to prepay some of the costs of future elective surgery this year and take the deduction for those payments in 2006.
7. Review your federal and state tax withholding. If you have been getting big tax refunds every year there is a hidden downside. It means that you have been lending the government your money throughout the year at a 0% interest rate. If you ask your employer to increase the number of your deductions, you will have more cash in future paychecks throughout the year to save or invest. Be sure that you don’t take too many additional deductions however - there is a stiff tax penalty if you underpay your tax by more than a modest amount. The best strategy may be to take enough deductions to approximately break even on your annual federal and state taxes. That way you will minimize the amount you lend Uncle Sam interest free and also limit the risk that you’ll be in a penalty situation if your estimates are a little off.
8. Think about making more charitable deductions in 2006. In 2007 documentation requirements will be greater and there are new limitations on the valuation of charitable gifts like automobiles and artwork to reduce abuses in that area.
9. Review your employer’s benefits. This is open enrollment time for many corporate and government employees. Review your coverages and options, and update your benefit choices based on your current personal and family needs. Remember to take into account any changes you're expecting in your life next year, such as a family addition or specific major medical needs. And make sure you don't miss your employer's deadline.
10. Review your investments. Is it time to change things around? Capital losses offset capital gains, so if it’s time to take your profits in one capital investment, such as a rental property or stock held more than a year, consider offsetting the profits by selling other capital investment s which have lost value.
11. If you can afford it, make sure to maximize your 2006 annual contributions to your IRA, 401k, or Roth account, at least up to the tax deductible ceiling for that account. Also many older workers are also eligible for additional “catch up” contributions beyond those ceilings.
12. Use Google to find numerous additional year end tax tips on a variety of topics. Several related to homeownership include: Tips on Deducting Loan Points - The Motley Fool; Divorce and home sale gains - Bankrate.com; Don't overlook the tax breaks of home mortgage points - Bankrate.com; and Computing the basis of a personal residence - Bankrate.com.
13. A final word of caution: the alternative minimum tax (AMT) is affecting more and more taxpayers. In some cases year end tax reduction strategies may not be effective because of deduction limitations in the AMT. Before implementing end of year tax reduction steps, do a preliminary 2006 tax calculation to see if you will already fall under the AMT in 2006. If you do many otherwise useful tax avoidance techniques will be useless. The AMT law is complex, so see your tax advisor or call IRS for advice (800- 829-1040) if you’re not sure what to do.
For more information, visit www.irs.gov.