New Program to Help Home Owners Has Great Benefits, But Tough Rule

By: Dona DeZube

Published: June 21, 2011

If you’re having trouble making your mortgage payment, there are a billion reasons to check out the latest federal government mortgage assistance program. The U.S. Department of Housing and Urban Development’s Emergency Homeowners Loan Program, now running in 27 states and Puerto Rico, will dole out $1 billion in interest-free loans to about 30,000 home owners who are unemployed, under-employed, or suffering financially due to a medical crisis.

If you’re having trouble making your mortgage payment, there are a billion reasons to check out the latest federal government mortgage assistance program. The U.S. Department of Housing and Urban Development’s Emergency Homeowners Loan Program, now running in 27 states and Puerto Rico, will dole out $1 billion in interest-free loans to about 30,000 home owners who are unemployed, under-employed, or suffering financially due to a medical crisis.

It’s a federal program, so of course there’s paperwork. And you only have until July 22 to get it filled out and over to one of the counseling agencies helping to run the program. Call 855-346-3345 for information about participating agencies in your area.

You’ll know by Oct. 1 if you’ve been approved for EHLP because the money has to be obligated before the federal government’s fiscal year ends on Sept. 30th.

The toughest thing about the program may be the eligibility rules. If you want to be approved for EHLP, you can’t:

Have federal tax liens
Have past-due student loans (deferments and forbearance are OK)
Have more than one 60-day late mortgage payment in the past two years
Be in bankruptcy
Have family income of more than $75,000 or 120% of the area median income
Then there are things you must have to get into EHLP:

Be a minimum of three months late on your mortgage payment.
Income that’s at least 15% less than what you were earning in 2009.
The ability to make your full mortgage payment again in two years, because you’re likely to be working or have another source of income again by then.
That last requirement will be hard for HUD to prove; it’ll likely be up to an underwriter to decide who qualifies.

But if you can meet those requirements (as well as a bunch more that the credit counselors running the program will tell you about), EHLP is a sweet deal.

You have to agree to pay 31% of your family’s monthly income toward the mortgage payment (minimum payment is $150). The federal government loans you the money to pay the rest of your mortgage payment.

You can keep getting that subsidy for two years, or until you’ve borrowed $50,000.

The best part is that if you make your mortgage payments on time, the government forgives 20% of the EHLP loan every year. So in five years, your loan is completely forgiven.

If you think there’s even the slightest possibility you’d qualify for the program, you should go for it. You’ve got nothing to lose and a lot of mortgage payment help to gain.

What do you think of this program and its requirements? Do you think many home owners will be able to meet those stringent requirements — especially the student loan and tax lien rules — and do so within a month?

Mit

Schedule A Form: 6 Home Deduction Traps

By: Barbara Eisner Bayer

Published: January 27, 2011

Get an “A” on your Schedule A Form: Dodge these tax deduction pitfalls to save time, money, and an IRS investigation.

 

Trap #1: Line 6 – real estate taxes

Your monthly mortgage payment often includes money for a tax escrow, from which the lender pays your local real estate taxes.

The money you send the bank may be more than what the bank pays for your taxes, says Julian Block, a tax attorney and author of Julian Block’s Home Seller’s Guide to Tax Savings. That will lead you to putting the wrong number on Schedule A.

Example:

  • Your monthly payment to the lender: $2,000 for mortgage + $500 escrow for taxes
  • Your annual property tax bill: $5,500

Now do the math:

  • Your bank received $6,000 for real estate taxes, but only paid $5,500. It may keep the extra $500 to apply to the next tax bill or refund it to you at some point, but meanwhile, you’re making a mistake if you enter $6,000 on Schedule A.
  • Instead, take the number from Form 1098—which your bank sends you each year—that shows the actual taxes paid.

Trap #2: Line 6 – tax calculations for recent buyers and sellers

 

If you bought or sold a home in the middle of 2010, figuring out what to put on line 6 of your Schedule A Form is tricky.

Don’t simply enter the number from your property tax bill on line 6 as you would if you owned the house the whole year. If you bought or sold a house in midyear, you should instead use the property tax amount listed on your HUD-1 closing statement, says Phil Marti, a retired IRS official.

Here’s why: Generally, depending on the local tax cycle, either the seller gives the buyer money to pay the taxes when they come due or, if the seller has already paid taxes, the buyer reimburses the seller at closing. Those taxes are deductible that year, but won’t be reflected on your property tax bill.

Trap #3: Line 10 – properly deducting points

You can deduct points paid on a refinance, but not all at once, says David Sands, a CPA with Buchbinder Tunick & Co LLP. Rather, you deduct them over the life of your loan. So if you paid $1,000 in points for a 10-year refinance, you’re entitled to deduct only $100 per year on your Schedule A Form.

Trap #4: Line 10 – HELOC limits

If you took out a home equity line of credit (HELOC), you can generally deduct the interest on it only up to $100,000 of debt each year, says Matthew Lender, a CPA with EisnerLubin LLP.

For example, if you have a HELOC for $200,000, the bank will send you Form 1098 for interest paid on $200,000. But you can deduct only the interest paid on $100,000. If you just pull the number off Form 1098, you’ll deduct more than you’re entitled to.

Trap #5: line 13 – Private mortgage insurance

You can deduct PMI on your Schedule A Form, as long as you started paying the insurance after Dec. 31, 2006. (Also, this is also a good time to review your PMI: You might be able to cancel your PMI altogether because you’ve had a change in loan-to-value status.)

Trap #6: line 20 – casualty and theft losses

You can deduct part or all of losses caused by theft, vandalism, fire, or similar causes, as well as corrosive drywall, but the process isn’t always obvious or simple:

  • Only deduct losses that are greater than 10% of your adjusted gross income (line 38 of Form 1040).
  • Fill out Form 4684, which involves complex calculations for the cost basis and fair market value.  This form gives you the number you need for line 20.

Bottom line on line 20: If you’ve got extensive losses, it’s best to consult a tax pro. “I wouldn’t do it myself, and I’ve been dealing with taxes for 40 years,” says former IRS official Marti.

Barbara Eisner Bayer has written about personal finance for the past 17 years. She works hard to translate IRSese into plain English. She has unbounded respect for CPAs.


10 Common Errors Home Owners Make When Filing Taxes

By: G. M. Filisko

Published: January 25, 2011

Don’t rouse the IRS or pay more taxes than necessary—know the score on each home tax deduction and credit.

Sin #1: Deducting the wrong year for property taxes
You take a tax deduction for property taxes in the year you (or the holder of your escrow account) actually paid them. Some taxing authorities work a year behind—that is, you’re not billed for 2010 property taxes until 2011. But that’s irrelevant to the feds.

Enter on your federal forms whatever amount you actually paid in 2010, no matter what the date is on your tax bill. Dave Hampton, CPA, tax manager at the Cincinnati accounting firm of Burke & Schindler, has seen home owners confuse payments for different years and claim the incorrect amount.

Sin #2: Confusing escrow amount for actual taxes paid
If your lender escrows funds to pay your property taxes, don’t just deduct the amount escrowed, says Bob Meighan, CPA and vice president at TurboTax in San Diego. The regular amount you pay into your escrow account each month to cover property taxes is probably a little more or a little less than your property tax bill. Your lender will adjust the amount every year or so to realign the two.

For example, your tax bill might be $1,200, but your lender may have collected $1,100 or $1,300 in escrow over the year. Deduct only $1,200. Your lender will send you an official statement listing the actual taxes paid. Use that. Don’t just add up 12 months of escrow property tax payments.

Sin #3: Deducting points paid to refinance
Deduct points you paid your lender to secure your mortgage in full for the year you bought your home. However, when you refinance, says Meighan, you must deduct points over the life of your new loan. If you paid $2,000 in points to refinance into a 15-year mortgage, your tax deduction is $133 per year.

Sin #4: Failing to deduct private mortgage insurance
Lenders require home buyers with a downpayment of less than 20% to purchase private mortgage insurance (PMI). Avoid the common mistake of forgetting to deduct your PMI payments. However, note the deduction begins to phase out once your adjusted gross income reaches $100,000 and disappears entirely when your AGI surpasses $109,000.

Sin #5: Misjudging the home office tax deduction
This deduction may not be as good as it seems. It often doesn’t amount to much of a deduction, has to be recaptured if you turn a profit when you sell your home, and can pique the IRS’s interest in your return. Hampton’s advice: Claim it only if it’s worth those drawbacks.

Sin #6: Missing the first-time home buyer tax credit
If you met the midyear 2010 deadlines, don’t forget to take this tax credit into account when filing.

Even if you missed the 2010 deadlines, you still might be in luck: Congress extended the first-time home buyer credit for military families and other government workers on assignment outside the United States. If you meet the criteria, you have until June 30, 2011, to close on your first home and qualify for the tax credit of up to $8,000.

Sin #7: Failing to track home-related expenses
If the IRS comes a-knockin’, don’t be scrambling to compile your records. Many people forget to track home office and home maintenance and repair expenses, says Meighan. File away documents as you go. For example, save each manufacturer’s certification statement for energy tax credits, insurance company statements for PMI, and lender or government statements to confirm property taxes paid.

Sin #8: Forgetting to keep track of capital gains
If you sold your main home last year, don’t forget to pay capital gains taxes on any profit. However, you can exclude $250,000 (or $500,000 if you’re a married couple) of any profits from taxes. So if you bought a home for $100,000 and sold it for $400,000, your capital gains are $300,000. If you’re single, you owe taxes on $50,000 of gains. However, there are minimum time limits for holding property to take advantage of the exclusions, and other details. Consult IRS Publication 523.

Sin #9: Filing incorrectly for energy tax credits
If you made any eligible improvement, fill out Form 5695. Part I, which covers the 30%/$1,500 credit for such items as insulation and windows, is fairly straightforward. But Part II, which covers the 30%/no-limit items such as geothermal heat pumps, can be incredibly complex and involves crosschecking with half a dozen other IRS forms. Read the instructions carefully.

Sin #10: Claiming too much for the mortgage interest tax deduction
You can deduct mortgage interest only up to $1 million of mortgage debt, says Meighan. If you have $1.2 million in mortgage debt, for example, deduct only the mortgage interest attributable to the first $1 million.

This article provides general information about tax laws and consequences, but is not intended to be relied upon by readers as tax or legal advice applicable to particular transactions or circumstances. Readers should consult a tax professional for such advice, and are reminded that tax laws may vary by jurisdiction.

G.M. Filisko is an attorney and award-winning writer who was once mortified to receive a letter from the IRS—but relieved to learn the IRS had simply found a math error in her favor. A frequent contributor to many national publications including AARP.org, Bankrate.com, and the American Bar Association Journal, she specializes in real estate, business, personal finance, and legal topics.

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Can You Get the Home Buyer Tax Credit?

February 4, 2011

By Sandra Block

If you bought a home last year, you may be eligible for a tax credit of up to $8,000 when you file your 2010 tax return. But before you start shopping for hardwood floors, make sure you qualify. And even if you’re eligible, you’ll need to take extra steps to prove that your claim is legitimate.

Congress first enacted a home buyer’s tax credit in 2008 in an effort to revitalize the housing market. Since then, the credit has been revised and extended several times. Here are the factors that will determine your eligibility for the credit:

  • When you signed the contract to buy your home. To claim the credit on your 2010 tax return, you must have signed a contract to purchase your primary residence before May 1, 2010.
  • When you closed. Home buyers who closed as late as Sept. 30, 2010, qualify for the credit, as long as their original contract called for the purchase to be completed by June 30. Congress added the extension because many of last year’s home purchases involved short sales or homes in foreclosure, and banks have been slow to process those transactions, says John W. Roth, analyst for tax publisher CCH.
  • Where you lived before you bought the home. For homes purchased Nov. 7, 2009, to April 30, 2010, there are two tax credits: a first-time home buyer credit and a repeat home buyer credit.

The first-time home buyer credit is worth 10% of the purchase price of the home, up to a maximum of $8,000. The law defines a first-time home buyer as someone who hasn’t owned a principal residence in the three years before the purchase.

The repeat home buyer credit is worth up to 10% of the purchase price, up to a maximum of $6,500. The law defines a repeat buyer as someone who has owned and lived in the same home for at least five consecutive years of the eight years. If you’re married, both spouses must meet the residency test.

  • How much you paid for the home. The first-time and repeat home buyer credits are limited to homes purchased for less than $800,000.
  • Your income. The full credit is available to taxpayers with a modified adjusted gross income of up to $125,000, or $225,000 for joint filers. (Those limits apply to homes purchased after Nov. 6, 2009; there are lower cutoffs for homes purchased before that date.) A reduced credit is available for home buyers with MAGI of up to $145,000, or $245,000 for married home owners.

Payback time

Now comes the bad news for taxpayers who claimed the home buyer’s credit in 2008. Starting this year, they’ll have to pay it back.

That’s because the original first-time home buyer’s tax “credit” was in fact an interest-free loan that had to be paid in equal installments over 15 years. The law gave home buyers who claimed the credit a two-year grace period, which means the first installment is due this year. H&R Block estimates that more than 950,000 taxpayers claimed the credit in 2008.

The maximum 2008 “credit” was $7,500, so if you claimed the full amount, you’ll have to pay $500 when you file your 2010 tax return, Roth says. “A lot of people will end up owing a fair amount of taxes this year because of the additional $500 they’ll have to repay,” he says.

If you bought a house in 2008 then sold it, you could owe even more, because in that instance, you’re required to repay the entire amount of the credit all at once.

Tax credits claimed for homes purchased in 2009 and 2010 don’t have to be repaid, as long as the home remains your primary residence for three years. If you sell the home within 36 months after the purchase, you’ll have to repay the credit. The repayment can’t exceed the gain on the sale, so if you didn’t make any profit on the sale, you may not owe anything.

However, your “basis” for purposes of calculating the loss or gain on the sale is the amount you paid for the home minus your tax credit, says Kathy Pickering, executive director of H&R Block’s Tax Institute. For example, if you bought your house for $100,000 and claimed an $8,000 first-time home buyer’s credit, your basis is $92,000.

Be prepared to wait

The IRS is requiring taxpayers who claim the home buyer’s tax break to provide documents proving that they purchased a home within the required time frame. To meet that requirement, you must file your tax return by mail.

The IRS imposed the requirement to deter fraud. The Treasury Department’s inspector general reported last year that thousands of individuals, including nearly 1,300 prison inmates, had fraudulently claimed the tax credit.

Documents you may need to include:

  • A copy of your settlement statement. For most home buyers, that’s the HUD-1 provided at closing. Sign the settlement statement, even if the document doesn’t have a line for your signature.
  • For newly constructed homes, a dated copy of the certificate of occupancy that shows your name and the address of the home.
  • For repeat buyers, copies of documents showing that you lived in your previous residence for five consecutive years during the past eight years. Acceptable documents include mortgage interest statements, property tax records, or home owners insurance statements. You don’t need to provide five years of the same documents, the IRS says. You can use a combination of documents to verify the years you were in the home.

Paper-filed returns take the IRS up to six weeks to process, vs. less than two weeks for e-filed returns.

Returns that claim the credit may get extra scrutiny from the IRS, which could also delay your refund. “It’s worth it to get the credit,” Pickering says, “but people need to be patient.”

(c) Copyright 2011 USA TODAY, a division of Gannett Co.

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