Ending One Tax Year and Preparing for the Next
If you had a Permanent Change of Station in 2020, you may have sold an existing home, turned your home into a rental, bought a new home, some combination of the three! Chances are your taxes as they relate to homeownership may be more complex than the average person, especially if you owned property in multiple states during the year. If you have a PCS coming in 2021 with a projected home sale or purchase, you will want to be proactive with your own tax planning and organization.
Getting Personally Organized
Taxes, codes, and laws can be difficult to understand for many homeowners. While you may not complete and file your own taxes, you can create a system of organization to be prepared to aid your tax professional. Here are a few suggestions for maximum efficiency:
Create and maintain a physical or digital file for documents like W2s, 1099s, and all interest-earning statements from your bank, mortgage company, and any retirement or investment brokerages. Be sure to label the files with the current or future year and as these documents arrive (either by mail on paper, or digitally) you will have a dedicated landing space for them.
If you own investment or rental property, you’ll want to make a separate filing system for that home to additionally include statements of property management fees collected, receipts and work orders for maintenance and repairs, as well as proof you may have paid for homeowners’ association fees. Even if you include this residence on your personal (not business) tax filing it will simplify your process to give each property its own file.
Getting Professional Opinions
If you happen to have a very simple and straightforward income tax situation there are plenty of online platforms where you can DIY your own taxes. Most of these are reliable and systematically walk users through a step-by-step for a nominal processing fee. However, as tax codes continue to change and if you have a complex situation due to living in multiple states during a tax year with differing tax laws, seeking the help of a professional is recommended. Some even offer special help at special rates to active duty military service members.
A CPA or trained tax professional can help you get a firmer grasp on mortgage interest deductions (especially in the case of rental or income-generating property), state and local property taxes, mortgage insurance and short sales, home improvement deductions, and capital gains taxes.
In 2020, the pandemic has added complexities like the potential loss of income, stimulus money, and certain tax breaks. For some, the potential to itemize and deduct home office expenses may be an option for those who began working remotely from home. If someone in your home started a side business this year, be sure to collect proof of any business expenses. While you may not closely follow changes in tax reform and tax law, your tax professional is up to date on all new changes for 2020 and 2021.
One of the biggest investments most people will ever make is owning a home. With this great financial responsibility comes the opportunity to have it pay you back! By creating and maintaining a documentation system, you will be more apt to claim all of the tax deductions and exemptions to which you are entitled.