This is the time of year when most homeowners are too busy installing storm windows, planning for the holidays and savoring the football season to give a moment`s thought to next April 15.
After all, there are still 160 days left until the day of reckoning. And for most people, the thought of wrestling with taxes a day sooner than necessary is even more loathsome than shoveling out of a pre-winter snowstorm. Yet homeowners who can squeeze in a little time over the next two months to engage in some year-end tax maneuvering will be well rewarded for their efforts.
There are numerous things homeowners can do between now and the end of the year to cut their 1992 income tax bill by hundreds or even thousands of dollars.
And there are steps some homeowners must take-including those who refinanced their mortgage or rented out a vacation home-to protect their real estate deductions and avoid getting hit with IRS penalties.
For the most part, these year-end tax maneuvers don`t require much time or effort. In most cases, you need do no more than write a few checks.
So as not to spoil the spirit of the upcoming holiday season, you can accomplish most of your end-of-year tax finagling while sipping hot cider in front of an open fire or, if you prefer, in front of a Sunday Bears game on TV.
– Pay January`s mortgage installment: Want to deduct an extra month`s worth of mortgage interest on your tax return? Just pay your January mortgage installment by Dec. 31.
Normally, taxpayers aren`t allowed to claim deductions for prepaid interest. But mortgage installments usually include an interest charge for the previous month. So if you mail your January installment before the end of the year, you`ll be able to deduct the December interest charge on your 1992 return.
– Pay property taxes early: Another way to beef up this year`s deductions is to pay your property taxes early. Pay them by Dec. 31 and they`ll qualify for a 1992 deduction even if the bill isn`t due until early next year.
If you don`t receive a property tax bill before year-end, tax advisers recommend making the payment in person. Prepayments sent in by mail have been known to get lost in the bureaucratic shuffle. ”It`s better to go down to the county clerk`s office to make your prepayment to make sure you get proper credit for it,” advises Sherwin Gilbert, a tax partner in the Chicago office of BDO Seidman, a national accounting firm.
Prepaying your property taxes won`t do you a bit of good if your tax payments are normally made along with your monthly mortgage installments to your lender. The reason: Lenders typically won`t turn your money over to the tax collector until the tax is due. So if your bank isn`t going to pay the tax authority until next year, there`s no benefit to paying early, since the payment won`t qualify for a deduction on your 1992 return.
Nor is there any benefit to paying early if you`re vulnerable to the alternative minimum tax, which reinflates the tax bills of higher-income individuals who try to take advantage of too many tax breaks. Property taxes aren`t deductible under the minimum tax computation.
– If you refinanced this year: If you were one of the many Americans who refinanced their mortgage this year to take advantage of lower interest rates, check how much tax is being withheld from your paychecks. If you don`t remember filing a new W-4 form with your employer after you refinanced, you`re probably having too little tax withheld.
There is still time to remedy the situation, but you`ll need to act quickly to avoid stiff IRS underpayment penalties.
Most people don`t realize there`s anything more to do after refinancing than ponder what to do with all the money they`ve saved on their monthly mortgage payments.
But there are tax consequences that require immediate attention. In a nutshell, the problem is this: Your smaller monthly payments will translate into a smaller mortgage interest deduction on your 1992 return. With less to deduct, your 1992 tax bill is going to be higher, which in turn requires more tax to be withheld during the year.
So, if you now claim extra withholding allowances for itemized deductions on your W-4 form, you`ll need to reduce the number to reflect the cutback in your deductible mortgage interest.
To determine whether you need to increase withholding for the rest of the year, and if so, by how much, complete the worksheet on your W-4 form. If a change is required, you`ll need to file a new withholding certificate with your employer.
– Earn extra home-office deductions: If you`re eligible to write off a home office, you can sneak in some extra deductions by making needed repairs around the house before year-end.
The cost of any repairs made to your home office, such as a new paint job, can be fully written off.
Even general home repairs can be partially written off as long as the work partly benefits your home office. Thus, you can partly deduct the cost of fixing the furnace (because it supplies heat to your office), patching the roof (to keep rain out of your office), or painting the exterior of your home (to prevent customers from thinking your business is as shabby as your home looks from the outside). If your home office occupies 20 percent of your house, 20 percent of such costs would qualify for the home office deduction.
A year-end shopping spree for new furniture or equipment for your home office is another way to substantially increase your 1992 business deductions. So this may be the time to splurge on that mahogany executive desk or the high-back leather swivel chair you`ve been coveting. The tax savings you`ll reap early next year will help pay for your home office refurnishing.
Also be sure to pay outstanding household bills by Dec. 31. A portion of your utilities, homeowner insurance premiums and other upkeep expenses, such as the wages you pay to a housekeeper to come in and clean every week, can be written off as a home office expense.
– Deferring taxes on year-end sales: If you expect to be stuck paying capital gains tax on a property you`ve put up for sale, consider waiting until after Dec. 31 to close the sale. By so doing, you`ll be able to postpone the tax another year.
Delaying the closing doesn`t mean putting off buyers until next year.
”You can lock in the sale with a contract before the end of the year,”
said BDO Seidman`s Gilbert. So long as you wait until after Dec. 31 for the closing, the IRS will consider the sale to have taken place in 1993.
Another option is to arrange an installment sale. You can give the buyer title and possession of the property this year, but arrange to delay receipt of part or all of the sale proceeds until after the end of the year. Rather than paying tax on your entire gain in the year of the sale, the installment sale method lets you report and pay tax on your profit as you receive the money year by year. The drawback is that you won`t get all your money upfront. Keep in mind that most homeowners can defer capital gains tax on a principal residence indefinitely if their replacement home costs at least as much as their old one. In addition, homeowners who have celebrated their 55th birthday can permanently escape tax on up to $125,000 in home-sale profits. However, vacation homes don`t qualify for either tax break. Nor do rental properties.
– Vacation home rentals: Own a summer cottage on the lake or a ski chalet in the mountains that you rent out part of the time? An important tax decision has to be made: whether you want it treated as a rental property or a second home. The distinction is critical and the wrong decision can cost you thousands of dollars in deductions.
Most upper-income individuals will find it pays to have their vacation retreat qualify as a second home, which may necessitate spending some time there during the holidays.
Everyone else will usually be better off treating their vacation home as a rental property, which may require steering clear of the place the rest of the year.
On a second home, you can generally write off all your mortgage interest and property taxes, but rental-related expenses-such as for depreciation, insurance and utilities-are limited to rental income.
On a rental property, most people can write off much more-up to $25,000 in expenses in excess of rental income. But this $25,000 allowance is reduced for landlords with adjusted gross income above $100,000 and is eliminated for those with adjusted incomes of more than $150,000.
Consequently, upper-income owners who classify their vacation homes as a rental property may not even be able to write off all their mortgage interest if it exceeds rental income from the property. In such situations, it`s better for the vacation home to qualify as a second home. At least you`ll usually be able to write off all your mortgage interest.
To qualify for the rental property designation, your personal use of the home can`t exceed 14 days a year or 10 percent of the number of days the property is rented out, whichever is greater. To qualify it as a second home, make sure your personal use of the property exceeds those limits.
– Start getting your records together: If you sold a home this year, you may want to start scavenging through your files for all the records you`ll need to report the sale on your tax return, including receipts for all the improvements made to your home while you owned it. While there`s no rush to get it done before year-end, it may be something you can do when a snowstorm hits. Plowing through your files may not seem as forbidding a task when compared to the prospect of plowing through a driveway buried in snow and ice.
