There are several tax credits and deductions set to expire at the end of the year, and given the federal deficit problem, there's a good chance they won't be extended. If you want to take advantage of them, you need to act before Jan. 1, 2012.
Mortgage Insurance Premium Deduction
If you itemize deductions, you may deduct the premiums you pay for mortgage insurance, just like you do mortgage interest. However, this deduction is phased out if your income exceeds certain levels. To qualify for the full deduction, a couple or a single taxpayer must have an adjusted gross income of $100,000 or less. The deduction is phased out completely if AGI exceeds $109,000.
This deduction, which was first enacted for 2007, is scheduled to expire at the end of 2011. Thus, your payments are deductible only if you pay them during 2011; a payment after 2011 is not deductible.
Education Expenses Deduction
A deduction of up to $4,000 for qualified education expenses is available for 2011. All or part of the amount you pay can be for classes beginning in 2012. But you must make your payments during 2011, because the deduction expires at the end of the year. This deduction is not available if your modified adjusted gross income is more than $80,000 ($160,000 if filing a joint return). Nor is it available if any of education tax credits are claimed.
Home Energy Credit
First, any homeowner may qualify for an energy credit of up to $500. You can qualify for the credit if you purchase during 2011 solar panels to generate electricity or for water heating, or install wind energy equipment, a geothermal heat pump, or certain types of fuel cells to generate electricity. The credit is up to 30 percent of the amount you spend, up to the $500 limit. This credit is not available for purchases in 2012.
Sales Tax Deduction
If you itemize, you can deduct either your state and local taxes or your sales taxes paid during the year. This deduction is a boon for people who live in states with no or low income taxes. However, the deduction for sales and use taxes instead of state income taxes is scheduled to expire at the end of 2011. To maximize this deduction, you should make any large purchases before the end of the year.
A tax credit for adoption expenses (adoption fees, court costs, attorney fees, travel, etc.) has been available for many years. However, an enhanced adoption credit is available for adoptions finalized before 2012. The credit is up to $13,360 of adoption expenses. For 2011, this is a nonrefundable credit, meaning you qualify for it even if it exceeds the amount of your 2011 tax liability. This means that you could qualify for a tax refund even if you did not have federal income tax withheld.
Homeowners: Take Advantage of Expiring Tax Deductions
Your home is where the refund is. Whether they are home office deductions, tax credits for new purchases, renovations, or "green" tax incentives, Uncle Sam is able to help you recoup some of your expenses you've put into your home. That is, provided you have all the receipts, manufacturer's certificates and other required paperwork for any deduction or credit you plan to claim on your tax return. Homeowners have lots to wade through to determine what all they might juggle when it comes to tax planning. To make tax preparation easier, we have outlined the following tips to help homeowners navigate tax season this year.
You can deduct lawn maintenance if you fit the "business use" test, says Bay Area tax expert Gary Price, of accounting firm Sensiba San Flippo (ssfllp.com). Lawn care and landscaping expenses are deductible if the taxpayer's client's regularly visit the home office, or where the lawn is used as part of the business, as in a daycare provider with children going out on the lawn for play area. Yes, this even applies to snow removal. Use form 8829.
If you primarily work from home, you should be able to deduct a percentage of your mortgage interest, real estate taxes, casualty losses, home repairs and maintenance, utilities, house insurance, security system and even garbage removal based on the square footage of your home office space compared to the overall square footage of your home. "In order to qualify as a home office in the eyes of the IRS," says tax attorney Roni Deutch, CEO of the Roni Deutch Tax Center, "you need to have a separate room or designated space that is used exclusively for business purposes. If it is not a room, then the space needs to be separated by a room divider of some sort. Additionally, the IRS is very strict about the exclusive use rule, so if your children play in the office or your spouse uses the room as a home gym then it will not qualify." Use IRS Form 8829 if you are self-employed. Download Publication 587 for IRS rules. And if turned an old bedroom into an office space using California Closets or other remodeling project, you should be able to deduct that expense too for work, if you itemize.
Did an adult child, other relative or friend move in with you after a job or home loss or for another reason? If so, and you've been charging them rent, you can deduct a portion of their living space, says CPA Brenda Schafer, CFP, from the Tax Institute at H&R Block in Kansas City, MO. "Depreciation is allowed only for areas used exclusively by the renter, such as a bedroom and separate bathroom. If total allowed deductions exceed the rental income, a loss is generally allowed up to certain limitations."
If you converted a basement, attic, garage or other space into rental quarters, Uncle Sam gives you a break on the remodeling costs. "Converting a basement to a separate rental unit is treated as a "regular" rental. Mostly, that means that depreciation on the rental portion of the home is allowed. Expenses to remodel the basement would be added to the depreciable basis of the basement of the house and would be depreciated," Schafer told HousingWatch.
Windows, storm windows, certain fuel stoves, doors, and storm doors, all qualify, says John Egan. "The neat thing about the credit is that you could replace just a few windows in your home or even put a window in an area of your home where there is not one." Perhaps put a skylight in the kitchen. "A very simple skylight can give a whole new look to a kitchen or family room and get a big discount," he says. File form 5695 with your tax return.
Even replacing your window shades or adding a window film to the glass can get you a tax credit. Duette Architella shades by Hunter Douglas (previous picture) qualify for the tax credit, as does Panorama solar control window film (pictured). Homeowners can receive a 30 percent credit on the cost of qualifying window coverings, up to $1,500. Installation costs do not apply. This tax credit applies only to improvements made to a primary residence from Jan. 1, 2009 through Dec. 31, 2010. Complete IRS form 5695.
Qualified biomass stoves and furnaces heat a home or water by burning biomass fuel, such as corn, cherry pits, wood pellets, plants and fibers. The tax credit covers the product and in some cases the installation, which is a good thing because the larger products are not cheap. The inexpensive models can cost $700, but the larger units go for $4,000 or more. The Harman PC45 Corn/Pellet Stove (pictured) runs about $3,500, a spokesperson for the company told AOL Real Estate. Installation fees can add another $500. Some biomass fireplace inserts, which are heating units that retrofit into an existing fireplaces, might qualify for the tax credit.
Energy-saving home upgrades also qualify for tax deductions, says John Egan, a certified financial planner with JM Egan Wealth Advisors in Madison, NJ. "The government-sponsored energy credit is the easiest one to qualify for and the most practical one to get tremendous savings on needed home improvements," he told AOL Real Estate. "It can only be used in your primary residence and offers 30% as a tax credit up to $1,500,. That's a dollar-for-dollar credit as long as you have some income tax of at least $1,500. That means you can get a 30% savings on a $5,000 home improvement." From lightbulbs to spray-on insulation like Icynene that helps cut down on air leakage, there are many products and upgrades that qualify, helping you increase energy efficiency. Some other products have no max on the credit and for some you can even carry forward the tax credit over several years until 2016.
Adding on a new reflective roof could qualify you for a tax deduction if you choose the right product, reports the Metal Roofing Alliance. Asphalt roofs with appropriate cooling granules meet the requirements, as do metal roofs with certain pigmented coatings. Metal roofs can resemble slate, shake and tile, such as the one pictured of an Allmet Roofing Products. If your house is shaded and the roof is not exposed to much sun, or your attic is well insulated, this might not be the product for you.