federal tax advice wanted for new homeowner

geepondy

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Hey everybody. I bought a condo this past fall and was hoping for a greater tax write off then I apparently will get. Here is a copy and paste of a email I sent to a friend. Tell me I'm missing the boat somewhere. Thanks for any input.

I received my W2 form today and was trying to roughly figure out my returns for now and the future and would like your opinion on the following.

Because I have only paid two months worth of mortgages and taxes, I don't think I have enough to itemize for 2004 and therefore would be best to take the standard 1040EZ deduction of $7950. On my closing costs, I only paid fees (appraisal, title search, etc.), save three months of pre-paid property tax (no points or anything like that) so I don't think I can claim anything on that. If you think otherwise, I can send an itemized list of the fees paid.

But I was playing around and assuming I had paid a full year of mortgage payments to find out how much more I would get. From looking at the 1040 schedule A, I believe I can deduct

-mortgage interest
-state income tax
-property tax

I don't see anything else significant unless you really have a large amount of medical expenses. Based on that I come up with deductions totalling about $10400. This is not a great deal more then the standard deduction of $7950 and only results in about four hundred dollars extra on the return. I was hoping for much more as everyone kept telling me about the great tax write-off of owning a home. Am I missing something here?

Also what is confusing is that for the 1040EZ, the standard deduction is $7950 but when looking at the regular 1040 form, I see the standard deduction if not itemizing is $4850 (both numbers are for single guys). Why the difference? I assume if I itemize I can't take both the standard deduction plus the itemized items. Also because I bought a home, can I still use the 1040EZ?
 

BIGIRON

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Yes, there's always been misconceptions about the tax benefits of home ownership. Basically, as you've learned, you only benefit when the deduction for taxes and interest help you exceed the standard deduction. Many of my fellow Realtors badly overstate the "advantages".

Home ownership is not for everybody -- there're situations when renting makes more sense.

You should be OK for several reasons: you have to have shelter and it costs, whether you rent or own. You might as well accrue some equity and have a little to show for your monthly payment instead of just a rent receipt. You probably got a really good interest rate. Home ownership helps your credit score and gives an overall better inpression if you're ever job hunting, etc. You deal directly with your taxes and insurance -- you pay them in rent -- you just don't see them. With any luck at all, you'll realize some unearned appreciation when you sell, particularly if you own for more than 2 or 3 years.

Best of all -- it belongs to you not a faceless landlord.
 

turbodog

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You sound like you need to bone up on some commonly-missed deductions. That may help you push it over the threshold so to speak.

charitable contributions
car mileage accrued during volunteer work
cost of repairs to your home
car tags/taxes
medical expenses: see footnote 1
home based business?
child care

note 1: this is not just doctor bills. This includes most any "medical" item: q-tips, bandaids, asprin, dental bills, toothpaste, doctor bills. You might also check to see if your health insurance payments are deductible.

Through moderate deductions, I lowered my tax rate last year down to about 4%. Now I just need to work on my wife's rate.

But, you may look, and you may be right to keep the std deduct. You can file a 1040ez yourself, but itemization will likely cost you cpa fees.

If you're this interested in your financial well being I'd suggest something more important: saving and investing.


Looking at your numbers makes me think of something. The write off is proportional to the interest paid. Well, duh, that's not rocket science. But!.... rates are extremely low right now. In past years rates were much higher, and so was the deduction. So there you go. /ubbthreads/images/graemlins/tongue.gif

Also, if you're single with no kids you don't have many write-offs anyway. Wait till you marry and whip out a few young-uns.
 

NeonLights

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A lot of it (obviously) depends on how much interest you're paying on your mortgage every month. Back when we owned a condo, our monthly mortgage interest payments were only about $350-400 per month. Now that we bought a house out in the country, we're paying close to $1000 a month in interest on our mortgage. That and having two kids definitely makes a difference on our federal tax return deductions.

-Keith
 

Minjin

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[ QUOTE ]
turbodog said:
note 1: this is not just doctor bills. This includes most any "medical" item: q-tips, bandaids, asprin, dental bills, toothpaste, doctor bills. You might also check to see if your health insurance payments are deductible.



[/ QUOTE ]

This is extremely misleading. Medical expenses are NOT tax deductible UNTIL you exceed 7.5% of your AGI. In other words, if your adjusted gross income is 40k, you need to spend 3k to meet the requirement. And THEN, you can start deducting. So if you pay 4k, you only get to claim 1k of that.

As for health insurance, for most people its already tax free because its subtracted from your paychecks before taxes are pulled.

And, yes, buying a house for supposed tax benefits is very foolish.

Mark
 

NeonLights

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[ QUOTE ]
Minjin said:And, yes, buying a house for supposed tax benefits is very foolish.

[/ QUOTE ]

But there are a lot of benefits besides tax benefits for most people. In most areas of the country buying a home is a good investment, our property value has gone up $40-50k in three years. At least part of your monthly mortgage can be recovered when you sell the house, when you rent, the money is gone forever.

-Keith
 

Minjin

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[ QUOTE ]
NeonLights said:
[ QUOTE ]
Minjin said:And, yes, buying a house for supposed tax benefits is very foolish.

[/ QUOTE ]

But there are a lot of benefits besides tax benefits for most people. In most areas of the country buying a home is a good investment, our property value has gone up $40-50k in three years. -Keith

[/ QUOTE ]

There's a term for this. Its called buying at the top. /ubbthreads/images/graemlins/wink.gif

I hear that Beanie Babies are a good investment, too. They went up in value for a few years... /ubbthreads/images/graemlins/tongue.gif

Yes, there are many good reasons to own a house. And yes, buying one as an investment is a good one. But expecting that because value has rapidly gained over the past couple years that it will continue to do so is ALSO foolish.


Mark
 

NeonLights

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[ QUOTE ]
Minjin said:
There's a term for this. Its called buying at the top. /ubbthreads/images/graemlins/wink.gif

I hear that Beanie Babies are a good investment, too. They went up in value for a few years... /ubbthreads/images/graemlins/tongue.gif

Yes, there are many good reasons to own a house. And yes, buying one as an investment is a good one. But expecting that because value has rapidly gained over the past couple years that it will continue to do so is ALSO foolish.


Mark

[/ QUOTE ]

Wow, comparing real estate to Beanie Babies. Get a clue. /ubbthreads/images/graemlins/rolleyes.gif

My father is a real estate broker and appraiser and has been involved in buying and selling land for over 20 years in this area. I listen to what he says when it comes to real estate, he knows what he's talking about. Around here real estate has been a very safe investment (and usually very profitable) for as long as he has been involved. The growth of the last few years has been a little higher than normal, its usually around 5% per year for most properties where I live, it has been a very good investment here even when the economy isn't doing very well.

-Keith
 

StuU

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[ QUOTE ]
NeonLights said:
In most areas of the country buying a home is a good investment, our property value has gone up $40-50k in three years. At least part of your monthly mortgage can be recovered when you sell the house, when you rent, the money is gone forever.

[/ QUOTE ]
The Federal Reserve has over-reacted after the stock market crash of the early 2000s. Greenspan & company have flooded the US markets with liquidity in order to avoid a Japanese-style deflation. In the process, a huge housing bubble has been created. Be careful in purchasing real estate at this time especially with an adjustable mortgage. Of course, some local housing markets-like Pittsburg PA and Houston TX are not that far out of line(yet).

A recent survey of homeowners on both coasts revealed that the average expectation of home appreciation over the next ten years was around 20%/year. Of course, at a 20% yearly appreciation rate, the value of the home quadruples in 10 years. This means that a modest 2 bedroom home in Califonria that is now selling at the inflated price of $800,000 would sell for $3,200,000 in 10 years. These sort of expectations are not uncommon in an over-extended bubble market.
 

geepondy

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So the jist is that I did not overlook any standard big time deductions then. I am still curious as to why the differences in standard deductions between the 1040 and 1040EZ unless I overlooked something. I'm very disappointed that I am not realizing a bigger tax write off but no one to blame but myself for not investigating more thoroughly before purchasing.

For me personally I think I will have to live here for several years in order for the "investment" part to be profitable. The difference in the mortgage cost versus what I pay in rent is significant enough so I bet I could bank more then the combination of the place appreciating and the mortgage getting paid down.
 

sjb269

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I seem to remember being in your position a few years back. My answer was to put more in my 457 plan at work(it's like a 401k)it will reduce your taxable income dollar for dollar.
I bought my first house in 2001 and when I sell this march, I will net from the sale significantly more than I paid in total mortgage in the last 3 1/2 years. As kathy lee Crosby used to say, That's Incredible. Although I do expect things to return to normal.
 

Sierra_Bill

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[ QUOTE ]
geepondy said:
So the jist is that I did not overlook any standard big time deductions then. I am still curious as to why the differences in standard deductions between the 1040 and 1040EZ unless I overlooked something. I'm very disappointed that I am not realizing a bigger tax write off but no one to blame but myself for not investigating more thoroughly before purchasing.



[/ QUOTE ]

The standard deduction is $4,850. The personal exemption is $3,100. The 1040EZ lumps them together to give you $7,950 of income you can deduct.

The 1040 allows you to itemize deductions (line 39) AND deduct the $3,100 personal exemption (line 41). So, if you can deduct $10,400, you will also be subtracting the personal exemption for a total of $13,500, vs. $7,950 if you don't itemize. That cuts your taxable income by $5,550, or more than twice what you had figured. You'll be better off than you thought. :)

Bill D.
 

Minjin

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[ QUOTE ]
NeonLights said:
Wow, comparing real estate to Beanie Babies. Get a clue. /ubbthreads/images/graemlins/rolleyes.gif

My father is a real estate broker and appraiser and has been involved in buying and selling land for over 20 years in this area. I listen to what he says when it comes to real estate, he knows what he's talking about. Around here real estate has been a very safe investment (and usually very profitable) for as long as he has been involved. The growth of the last few years has been a little higher than normal, its usually around 5% per year for most properties where I live, it has been a very good investment here even when the economy isn't doing very well.

-Keith

[/ QUOTE ]

Try a google search on the terms "housing bubble". You might educate yourself. And for your information, houses HAVE dropped in value in the past. Do I expect that they will appreciate in the long term? Of course. But at around 2-5%, not the ridiculous 30-50% that some areas have been seeing. And that is NOT a good investment for a large portion of your income (i.e. paying down early) unless you have no idea of how to manage your money and want something safe. Factor in home maintenance and repairs and you can see that homes often are NOT the big money gainers that people think they are.

Once again, just because something has BEEN a good investment does not mean that it will BE a good investment. Investing 101.

Mark
 

Brock

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geepondy another thing to keep in mind if you don't itemize this year don't pay your property tax right away. That is pay it in Jan and July if you can split it (most states do allow this) and then pay next years (or this year really) in December. Then you will be way over the top for itemizing a year from now. So the most your out then is the 2 months on 04 and not the property taxes as well.

This is quite common for people that own their property. They basically end up itemizing every other year. Something else to keep in mind for all the other possible deductions as well.
 

turbodog

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[ QUOTE ]
Minjin said:
[ QUOTE ]
turbodog said:
note 1: this is not just doctor bills. This includes most any "medical" item: q-tips, bandaids, asprin, dental bills, toothpaste, doctor bills. You might also check to see if your health insurance payments are deductible.



[/ QUOTE ]

This is extremely misleading. Medical expenses are NOT tax deductible UNTIL you exceed 7.5% of your AGI. In other words, if your adjusted gross income is 40k, you need to spend 3k to meet the requirement. And THEN, you can start deducting. So if you pay 4k, you only get to claim 1k of that.

As for health insurance, for most people its already tax free because its subtracted from your paychecks before taxes are pulled.

And, yes, buying a house for supposed tax benefits is very foolish.

Mark

[/ QUOTE ]

Ahhh, my bad.

We can take this deduction, whereas most can't.
 

NeonLights

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Minjin, as I mentioned several times, I was speaking specifically to the housing situation in my area, not in central PA, not in California, not in Florida, in my area (although there are many other places in the US where the situation is similar). I know what real estate has done in my area for the last 20 years or more. I realize property values have dropped (at times) in the past, just not often and not much around here. I still stand by my statement that buying your own home is a better investment than renting, believe what you want. As with any kind of investment or large purchase a person would be very well served to carefully study the current and past real estate trends in their area, since those trends could vary drastically depending on the location.

-Keith
 

PlayboyJoeShmoe

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We rented the same home for 19 years! That money is gone!

Only about 15K less than the 20year mortgage on our "new" place in the country will cost!

The one thing that isn't being made anymore is land...

We are buying for stability. If it helps with the taxes, cool. But if not, it will be OUR house, not the landlords!

What does this have to do with your question? Nothing.

Sorry, back to your regularly scheduled thread!
 

geepondy

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No I did not include my personal exemption for $3100 (thanks Bill D for pointing that out). That makes the numbers much better. Another question. I just paid a $4800 assessment for condo roof repair. Can I somehow claim that in 2005 tax return?
 

BIGIRON

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Wow. A $4,800 surprise. You bought the condo in the fall? Did you (or your agent) talk to the management or association about proposed future costs, deferred maintenece, etc. If that was planned, or even if there were discussions underway regarding the possibility an assessment would be levied, when you were negotiating, it should have been disclosed.

I think the assessment fee would be considered as plain vanilla repairs by IRS, but it might be worth checking with a tax pro.
 

geepondy

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I knew the roof was in trouble going in. I naively thought it wasn't that bad but a couple of months later it was found out that it was. We may get some of it back from the original developers as they were converted into condos just two years ago.
 
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