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One of the main reasons people purchase a home is the psychological satisfaction in owning a home. Not only can owning a home be rewarding in its own right, owning a home can provide many tax benefits. Home ownership is one of the best tax planning strategies taxpayers can undertake.

In the year of purchase several items paid through escrow may be tax deductible. Points paid on the purchase of a new home are fully deductible in the year of purchase or if purchased late in the year, the points may be amortized in subsequent years. These points are generally identified on the escrow statement as “Loan Origination” fees. Other escrow items may also be tax deductible in the year of purchase. These may include real estate taxes or mortgage interest paid through escrow. Generally, the points and the mortgage interest paid through escrow are reflected on the annual Form 1098.

Because every year there are two items that may be deducted when itemizing deductions, owning a home will generally decrease the amount of income tax liability. Real estate taxes and mortgage interest are tax deductible, and can be quite substantial depending upon the cost of the home and the amount of the mortgage. Every year the mortgage company will issue a Form 1098 reporting the amount of mortgage interest and/or real estate taxes paid for that year. Form 1098 will include property taxes paid if those taxes are paid by the mortgage company out of an impound account. Whether impounded or paid separately, real estate taxes can be deducted as an itemized deduction each year.

Because these tax deductions lower a taxpayer’s overall tax bill every year, some taxpayers may decide to have less tax withheld from each paycheck. Depending on whether larger refund is desired or not, a tax advisor can calculate the proper number of withholding allowances to claim.

Although it is never a good idea to withdraw funds from retirement savings before reaching retirement age, first-time homebuyers can take advantage of an exception to the 10% early withdrawal penalty (before age 59 ½). First-time homebuyers can withdraw up to $10,000 from an IRA account without incurring the 10% early-withdrawal penalty. However, income taxes must still be paid on the funds withdrawn. Although never recommended, while 401(k)s do not qualify for the exception to the 10% penalty, certain plans allow borrowing from a 401(k) to help purchase a home.

While history demonstrates that real estate tends to be a sound investment, buying a home is rarely profitable unless the home is owned long-term. Over time, if real estate appreciates, the equity in a home increases. When it comes time to sell a home, if certain criteria are met, there are special tax breaks if there is a gain from the sale. Taxpayers are allowed to exclude tax-free up to $250,000 ($500,000 if married) of the gain on the sale of their home. The seller(s) must live in the home for two out of the previous five years (there are certain exceptions to this rule).

The tax information explained here is a brief overview of the tax advantages of owning a home. Since there are many complicated tax issues involved, you should always consult with me before buying, selling, or refinancing a home. As always, feel free to call our office if you have any questions.

For a free initial consultation regarding your tax issue contact Denny & Boulton, P.C. at:

Denny & Boulton, P.C. · 4020 N. 20th St., Ste. 217 · Phoenix, AZ 85016
Tel: (480) 382-4257 · Fax: (480) 447-6349

Download a PDF Copy of The Tax Advantages of Owning a Home

Whether you roll the dice, bet on the ponies, play cards or enjoy slot machines, you should know that as a casual gambler, your gambling winnings are fully taxable and must be reported on your income tax return. You can also deduct your gambling losses…but only up to the extent of your winnings.

Here are five important tips about gambling and taxes:

1.  Gambling income includes, but is not limited to, winnings from lotteries, raffles, horse races, and casinos. It includes cash winnings and the fair market value of prizes such as cars and trips.
2. If you receive a certain amount of gambling winnings or if you have any winnings that are subject to federal tax withholding, the payer is required to issue you a Form W-2G, Certain Gambling Winnings. The payer must give you a W-2G if you receive:
   • $1,200 or more in gambling winnings from bingo or slot machines;
   • $1,500 or more in proceeds (the amount of winnings minus the amount of the wager) from keno;
   • More than $5,000 in winnings (reduced by the wager or buy-in) from a poker tournament;
   • $600 or more in gambling winnings (except winnings from bingo, keno, slot machines, and poker tournaments) and the payout is at least 300 times the amount of the wager; or
   • Any other gambling winnings subject to federal income tax withholding.
3. Generally, you report all gambling winnings on the “Other income” line of Form 1040, U.S. Federal Income Tax Return.
4. You can claim your gambling losses up to the amount of your winnings on Schedule A, Itemized Deductions, under ‘Other Miscellaneous Deductions.’ You must report the full amount of your winnings as income and claim your allowable losses separately. You cannot reduce your gambling winnings by your gambling losses and report the difference. Your records should also show your winnings separately from your losses.
5. Keep accurate records. If you are going to deduct gambling losses, you must have receipts, tickets, statements and documentation such as a diary or similar record of your losses and winnings.

For a free initial consultation regarding your tax issue contact Denny & Boulton, P.C. at:

Denny & Boulton, P.C. · 4020 N. 20th St., Ste. 217 · Phoenix, AZ 85016
Tel: (480) 382-4257 · Fax: (480) 447-6349

Download a PDF Copy of Five Important Tips on Gambling Income and Losses

The term “capital asset” for tax purposes applies to almost everything you own and use for personal or investment purposes. A capital gain or loss occurs when you sell a capital asset.

1. Almost everything you own and use for personal purposes, pleasure or investment is a capital asset. Capital assets include your home, household furnishings, and stocks and bonds that you hold as investments.
   
2. A capital gain or loss is the difference between your basis of an asset and the amount you receive when you sell it. Your basis is usually what you paid for the asset.
   
3. You must include all capital gains in your income.
   
4. You may deduct capital losses on the sale of investment property. You cannot deduct losses on the sale of personal-use property.
   
5. Capital gains and losses are long-term or short-term, depending on how long you hold on to the property. If you hold the property more than one year, your capital gain or loss is long-term. If you hold it one year or less, the gain or loss is short-term.
   
6. If your long-term gains exceed your long-term losses, the difference between the two is a net long-term capital gain. If your net long-term capital gain is more than your net short-term capital loss, you have a “net capital gain.”
   
7. The tax rates that apply to net capital gains are generally lower than the tax rates that apply to other types of income. The maximum capital gains rate for most people is 15 percent. For lower-income individuals, the rate may be 0 percent on some or all of their net capital gains. Rates of 25 or 28 percent can also apply to special types of net capital gains.
   
8. If your capital losses are greater than your capital gains, you can deduct the difference between the two on your tax return. The annual limit on this deduction is $3,000, or $1,500 if you are married filing separately.
   
9. If your total net capital loss is more than the limit you can deduct, you can carry over the losses you are not able to deduct to next year’s tax return. You will treat those losses as if they occurred that year.

For a free initial consultation regarding your tax issue contact Denny & Boulton, P.C. at:

Denny & Boulton, P.C. · 4020 N. 20th St., Ste. 217 · Phoenix, AZ 85016
Tel: (480) 382-4257 · Fax: (480) 447-6349

Download a PDF Copy of Nine Facts about Capital Gains and Losses