Taxes are complicated. Besides being complicated, they are bills that we would rather not pay if we can help it. However, it becomes even worse news when we find out that many of us have actually been paying too much tax, or that we have been making other mistakes that may make us look as if we are swindling our tax return
1 – Putting Taxes in the Wrong Year
This is one of the most common mistakes of all.
“Where people get mixed up is that some tax jurisdictions they bill a year behind – that is, you’re not billed for 2012 property taxes until 2013.”
However, the IRS doesn’t actually care which year the payment applies to, but rather in which year you have paid the taxes. This is where things get complicated again, because it means we commonly claim the wrong amount. Naturally, if this is done in favor of the IRS, it is unlikely that you will ever hear about this.
2 – Forgetting to Pay Capital Gains Tax at All
This is also very common and is completely due to the fact that taxes are so incredibly complicated. Capital gains taxes are paid on profits you have made when you sold your property. This means you only need to be concerned with them if you did indeed sell. As a result, capital gains taxes are, in the current climate, mainly paid by investors, since many people still aren’t selling their property and certainly not at a profit.
“Capital gains are the amount that you gained on the property’s value – so if you bought it for $150,000 and sold it for $300,000, your capital gains are $150,000.”
The IRS allows for a certain degree of exclusions, which presently stands at $250,000 for a single person or $500,000 for a married couple. These were the levels in 2012 and they have not changed this tax year either. It is because of these exclusions and because people haven’t sold at profit for such a long time that it is quite easy to actually forget to pay anything.
3 – Deducting Too Much Interest
This is a really costly mistake. There are certain levels at which point you can deduct interest and above that, the interest deduction changes. Right now, you only have to deduct mortgage interest for mortgages up to $1 million. If your mortgage debt is above that, you only deduct your interest up to that first million. Considering the large amounts that are being discussed here, it becomes clear how these mistakes can be very costly indeed.
4 – Confusing Taxes Paid and Escrow
Last but not least, the IRS have made sure that they have used terms that are very easy to leave us completely confused. They discuss escrow and taxes paid, and it is really difficult to understand exactly which one of the two means what and how much you actually still have to pay – or or claim back for that matter – at the end of the tax year.
“If your lender escrows funds to pay your property taxes, don’t just deduct the amount escrowed. […] Your lender will adjust the amount every year or so to realign the two.”
Hopefully, this information will have assisted you in avoiding some of the most common tax mistakes on property gains taxes. Taxes are complicated field of finance and law and it is best to have an accountant deal with these appropriately. Do make sure you have regular meetings with your accountant so you gain a basic level of understanding of the ins and outs of your tax return as well.