Many taxpayers overlook the long list of deductions that they may take when completing and filing their tax returns. The IRS has estimated that millions of taxpayers overpay their taxes each year because they fail to avail themselves of all of the possible deductions. Here is the second part of our multi-part blog on the most overlooked tax deductions:
INVESTMENT RELATED DEDUCTIONS
Amortizing Bond Premiums
The IRS offers assistance for taxpayers who purchase taxable bonds for more than face value. The purpose of such a purchase is to capture a yield higher than any offered by current market rates. Down the road, the IRS will tax the extra interest that this higher yield produces.
Taxpayers have two options in treating the premium. One option is to amortize it over the life of the bond by taking each year’s share of the premium and subtracting it from the amount of taxable interest from the bond reported in a return. The bond’s tax basis is reduced by the amount of the taxable year’s amortization. The other option is to ignore the premium until the bond is sold or redeemed. At this time, the full premium will be included in the bond’s basis which will reduce any taxable gain.
An experienced tax attorney may help a taxpayer keep track of a declining basis, which is not an easy task. Tax-free municipal bonds purchased at a premium must be amortized and basis must be reduced yearly. Of course, the amount amortized is not deductible, but then any interest on the bond isn’t taxed.
HOME-RELATED DEDUCTIONS
Credits for Energy-Saving Home Improvements
A tax credit no longer exists which encourages homeowners to save energy by making improvements such as the installation of insulation and storm windows. However, qualified residential alternative energy equipment, including geothermal heat pumps and properties involving solar electric, solar water heating, fuel cell, and small wind-energy may reduce taxes. These may amount to a tax credit 30% of total cost (including labor). However, each type of energy system has its own set of deadlines. The assistance of an experienced tax attorney is vital to understanding and tracking all of these deadlines.
Mortgage Refinancing Points
Points paid to obtain a mortgage are deductible. When refinancing, the points must be deducted over the life of the new loan. This means that for thirty-year mortgages, 1/30th of the points may be annually deducted. This amounts to an annual deduction of roughly $33 for each $1,000 of points paid. It’s better than nothing. More importantly, in the tax year that the loan is paid-off due to sale or another loan refinancing, all points not then used may be deducted, unless the loan is refinanced with the same lender. In such case, points paid on the latest loan must be added to the remaining points on the previously refinanced loan, and deducted over the life of the new loan. This is somewhat complicated and another situation which requires the assistance of a knowledgeable tax professional.
If you live in the New York or the Tri-State area and have any questions about any possible tax deductions, call THE TAX EXPERTS at the Thorgood Law Firm www.thorgoodlaw.com. For a FREE consultation, call 212-490-0704.
