Q: Our monthly mortgage payment is due at the start of each month. If we made our payment that is due on Jan. 1 now, would we be able to deduct the mortgage-interest portion of the payment on our 2009 income-tax return?
A: Yes, making the payment now would be an easy way to boost your year-end tax deductions. I’m devoting this column to answering some of the most common questions asked by readers who want to beef up their 2009 real estate-related write-offs.
Q: How would making my January mortgage payment today reduce my upcoming tax bill?
A: Because you are entitled to deduct any mortgage-interest charges that you pay during the year that you paid them, even if the bill isn’t due until the following year.
Let’s say that the interest portion of your loan over the course of a year averages $1,000 per month. If you made 12 monthly payments, you’d have $12,000 in mortgage write-offs at the end of the year, which would trim $3,000 off your upcoming federal tax bill if you’re in the typical 25 percent bracket ($12,000 x .25 equals $3,000).
If you paid your January bill now, you would get to deduct an extra $1,000 in interest on your 2009 tax return — thereby gaining an additional $250 in federal tax savings. Just make sure that the payment is made soon enough for the lender to process it by the end of the month: If the check doesn’t clear until January, the early payment won’t do you any good on this year’s return.
Q: Does this strategy also work if we want to pay the second half of our property taxes, which is due next February, this month instead?
A: Yes. Property taxes — like mortgage-interest charges — are deductible in the year that you actually pay them. So, paying the February bill now will push your 2009 deductions even higher.
Q: We spent about $50,000 in materials to add a new bedroom to our home this summer. Can we deduct the cost of the material on our upcoming return?
A: No, home-improvement expenses generally cannot be deducted in the year they are incurred. But the amount you spent on the remodeling project can be added to the “cost basis” of your home when you sell, which would help reduce or eliminate any taxes that might be owed on your eventual resale profit.
You may, however, be able to deduct the sales taxes you paid for the wood, cement and other material used for the remodel on your 2009 return. But the Internal Revenue Service forces taxpayers to choose between either deducting their state income taxes or their state sales taxes, so choosing the latter would probably only make sense if you live in a state that levies no income taxes.
Q: I moved several hundred miles in March of this year to take a job in a new city. Are any of my moving expenses deductible?
A: Most or all of the expenses should be deductible. Except for a few exceptions, taxpayers can usually write off unreimbursed moving costs as long as their new home is at least 50 miles away from their old one.
If eligible, your deductions would include the “reasonable” cost of food and lodging incurred while the move was in progress, as well as the fee charged by a moving company. If you drove your own vehicle, you’re entitled to a 24-cent-per-mile deduction and also can write off any tolls or parking fees.
Q: I purchased my first home in August. How do I claim the $8,000 “first-time buyer” tax credit?
A: You have to file the recently revised IRS Form 5405, “First-Time Homebuyer Credit,” as part of the package that must be sent to the government by April 15.
The government defines a “first-time buyer” rather loosely: You may qualify for this valuable tax-break as long as you didn’t own a home three years prior to the purchase. That’s a great loophole for people who may have sold their home (or lost it to foreclosure) several years ago but were able to buy again this year.
Also, a new credit worth up to $6,500 is now available to those who don’t meet the first-time buyer requirements. Under the program, you may qualify if you purchased a home in 2009 and lived in your previous home for at least five consecutive years of the previous eight.
Both credits are set to expire on April 30 of next year, unless they are extended by Congress.
Tax laws are complicated. You might think that you’re entitled to one particular tax break, but the fine print in the 20,000-page federal code could make you ineligible. That’s why it’s so important to talk with an accountant or other tax professional: The pro might even find some deductions that you didn’t even know you had the right to claim.