In the previous post I talked about using points, property tax and interest to maximize your deductions at tax time.  Now we need to discuss something that’s equally important.  Timing.

Timing is Everything for Mortgages in Michigan… and Taxes

When it comes to taxes, timing is everything.  While most first-time home buyers will benefit in itemizing deductions, you have to consider the timing of when you actually closed on the property, as this has some significant impact on the deduction method you wind up using.

For example:  If you closed on your home later in the year, you would have far fewer deductions than someone who closed on their home in say February, or March.  In a situation where you closed in the latter part of the year, it’s probably better to use the standard deduction.  Since interest, taxes and the size of mortgages can vary, there’s no dividing line on the calendar for choosing itemized deductions or standards deductions.  The best approach is to run it both ways and see which provides the better return.

Keep in mind that if you do switch over to itemized deductions, you have other non-home related deductions that you can begin to include.  If you make charitable contributions for example, they may not have been enough to itemize, but when mixed with your housing deductions they can allow you to come up with a larger itemized deduction amount.

If the timing isn’t right to itemize things like your points that were paid the year you bought the home, you can shift the numbers around an amortize them, spreading the points over the life of the loan and deducting the appropriate amount in each future year that you do itemize your deductions.

Other Home Deductions for First Time Buyers

The purchase of your home isn’t the only thing you can deduct come tax time.  There are a lot of people in Southeast Michigan taking the bootstrapping, entrepreneur route and working from home.  If you or your spouse are self-employed and working out of your new house, then there are deductions for home offices and business use.

Improvements that are made for medical conditions, like installing central air to allergies or asthma or a ramp for handicap access, are deductible and can help you improve your itemized deduction amount.

Any loan you take out that is tied to your home can also be considered.  It doesn’t matter what you use the money for (new furniture, finish the basement for your own personal man-cave, landscaping, a new car, college courses, etc.), as long as the loan is secured by your home then the interest is deductible at tax time.

Not self-employed and relocating to or around southeast Michigan for a new job?  You might even be able to write off some of the relocation expenses.

Things that Aren’t Deductible After Buying a New Home

While you want to take advantage of every deduction possible in order to save when tax time rolls around, there are some things that simply are not deductible.  According to Bankrate.com, many things you’ll see listed on your HUD-1, such as appraisal charges, title insurance, credit report fees, and state and local “recordation” transfer taxes (as some states call them), are not deductible on your federal tax return.

Some new subdivisions and communities also have a homeowners association.  If you purchase a home or have a new one built in an area with a homeowners association, you likely have fees that you pay either monthly or annually.  Homeowners association fees are not deductible either.  The only exception is if the homeowners association actually covers some of the property taxes for common areas.  If so, then you can usually deduct pro rata portions of these taxes.  It might only be $60, but money is money when you’re trying to save at tax time.

Planning for the Future

After your first tax year is through, don’t just let it roll by to come around and surprise you again next year. Use this first tax season to prepare yourself for round 2 and beyond.  Ask yourself if you need more deductions, if you’re going to make more money or make less.  Ask yourself if you have the ability to prepay your payments or property taxes by the end of the year.

If you bought a standing home, consider if the home needs any improvements this year and plan on whether or not those have the potential to be deducted.

If you’re still not sure how to approach your taxes with the new investment you’ve got on your hands, then don’t hesitate to talk to a tax professional who can help you determine the best deduction method for the coming tax season.