Tag: Taxes

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What Homeowners Should Consider When Filing Taxes in 2023

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Last updated February 16, 2023

To quote Benjamin Franklin, “In this world, nothing can be said to be certain, except death and taxes.”

While there is a lot of truth to this quote, there can be a lot of uncertainty if you are filing taxes for the first time after you’ve purchased a home. But fear not; we have you covered. Here’s everything you need to know as a first-time homeowner filing federal taxes.

The Basics

When filing your taxes, you have the choice to claim the standard deduction, which reduces your income by a set amount, or itemize your deductions, which consists of a list of eligible expenses. Fortunately, you’re able to pick whichever option cuts your tax bill down the most. For taxes due this year, the standard deduction increased to $13,850 for single filers, $20,800 for heads of household, and $27,700 for married couples filing jointly.

While the majority of taxpayers claim the standard deduction, and it’s generally a faster and easier route, there are some instances that make itemized deductions a better option. For example, if you paid mortgage interest and real estate taxes, made significant charity donations, had major out-of-pocket medical bills, or experienced uninsured damage from a fire, flood, or theft, itemizing might work best for you.

Finally, it’s important to note the tax bracket that you fall into. There are seven brackets — 10%, 12%, 22%, 24%, 32%, 35%, and 37%, — and yours will depend on whether you’re filing as single, married, or head-of-household. The tax brackets for the 2022 tax season are the same as they were for 2021.

If You’re a New Homeowner…

As a new homeowner, you have the opportunity to save money on home-related expenses. This means that you may be able to deduct both the property taxes and interest paid on up to $750,000 of mortgage debt from your income taxes. However, it’s important to note that if you elect to itemize these deductions, you forego the standard deduction amount.

If you do decide to go this route, start by making a checklist of what you plan to itemize. You’ll need the following documents:

  • A 1098 form: Your mortgage lender is required to send you IRS Form 1098 after the end of each tax year if you paid more than $600 in mortgage interest. This form lists exactly how much mortgage interest you paid during the tax year, and you can use it to determine your deduction.
  • Property tax records: You can generally deduct up to $10,000 of state and local real estate taxes from your taxable income, with the exception of government assessments for improvements to your property, such as sidewalks or sewage lines. You must be legally responsible for the tax to take the deduction.

If You Sold Your Home Within the Past Year…

You’ll be happy to know that you can generally exclude the capital gain you received from the sale of your home in 2023(up to $250,000 for single filers and $500,000 for joint filers) if you meet the following criteria:

  • You must have maintained the home as your principal residence in two out of the five years prior
  • You must not have claimed the capital gains exclusion for the sale of another home during the previous two years

If You’re a Business Owner…

In many cases, as a business owner, you’re eligible to deduct home office expenses. But fortunately, those aren’t the only deductions you may be eligible for. Other potential deductions include:

  • Advertising and promotion
  • Business insurance
  • Education
  • Rent expenses
  • Salaries and benefits

If You Made Energy-Efficient Upgrades…

Good news! Solar panels, efficient windows, and hybrid cars are all deductible this year, so make sure you save your receipts.

Some new electric and plug-in hybrid cars are eligible for a nonrefundable $7,500 tax credit, and if you’ve added a fueling station for a green car at your primary residence, you may be able to receive 30% of the installation cost, for a maximum of $1,000.

In addition, if you’ve made select energy-efficient home improvements, like heating, air conditioning, or water heater systems, you may qualify for a credit of up to 30% of the cost of the improvement (for a max of benefit of $8,000). If you’ve installed a photovoltaic, or solar power system, in 2022, you can get a 30% tax credit. If it was installed in 2020 or 2021, that number drops to 26%. It’s important to note that you can only claim this credit once.

Owe more than you anticipated in taxes? Learn what options you have>>

You can also consider tapping into your home’s equity to pay off debts without adding another monthly bill. A Hometap Investment can give you access to up to 30% of your equity, without any monthly payments or interest. It only takes five minutes to find out if it might be a fit for you.

YOU SHOULD KNOW…
We do our best to make sure that the information in this post is as accurate as possible as of the date it is published, but things change quickly sometimes. Hometap does not endorse or monitor any linked websites. Individual situations differ, so consult your own finance, tax or legal professional to determine what makes sense for you.

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Owe the IRS? Your Home Equity Could Help with Your 2022 Taxes

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This article was last updated on February 10, 2023.

The IRS has an entire decade to collect your taxes. So, whether you owe $5,000 or $50,000 it’s best to start paying down your bill as soon as possible. Avoiding payment can lead to the IRS taking money directly from your wages or bank account, or even putting a federal tax lien against your property, which may impact your ability to take out loans, access your home equity, and more.
If you owe money this year or from prior years—don’t panic. Here are some important updates and options to get your finances back on track.

What’s New for 2023 Tax Season (for the 2022 tax year)

Important Tax Dates:

  • April 18: Filing deadline for most U.S. residents
  • October 16: Filing deadline if you were granted an extension

2022 Tax Bracket Updates

The federal income tax brackets have changed for 2022, so your first step should be understanding what bracket you fall into this year.
2022 tax bracket, single

2022 tax bracket, married filing jointly

2022 tax bracket, married filing separately

Form 1099-K Reporting Changes

If you received any third party payments in 2022 for goods or services that exceeded $600, you’ll get a Form 1099-K for payment card and third party transactions that you’ll need to fill out. However, personal reimbursements or gifts from family or friends received through third party platforms are not taxable. In previous years, Form 1099-K was only issued if a taxpayer completed more than 200 transactions in a year that totalled more than $20,000.

Smaller Returns

Overall, largely due to the scaling back of tax credits to 2019 levels — including the Child Tax Credit, Earned Income Tax Credit, and the Child and Dependent Care Credit — you can expect a lower return than in previous years.

No Above-the-Line Charitable Deductions

Another change for the 2022 tax season is that taxpayers are no longer able to deduct up to $600 for charitable donations like they were in 2021.

Premium Tax Credit Updates

While many of the adjustments for this tax season have restricted or narrowed eligibility and credit amounts, the premium tax credit may actually be available to more 2022 taxpayers due to the expanded criteria. For 2022, to be eligible, you must:

Clean Vehicle Credit Updates

You may be eligible for a nonrefundable credit of up to $7,500 if you purchased a qualifying, new plug-in electric vehicle for your own use in 2022 or prior.

Child Tax Credit Updates

For the 2022 tax year, the child tax credit has reverted to $2,000 per child under age 17 who is claimed as a dependent on your return. Note that if your modified adjusted gross income (AGI) exceeds $400,000 on a joint return or $200,000 on a single/head-of-household return, your credit amount will be reduced by $50 for each $1,000 you earn beyond this threshold.
Finally, the credit is no longer fully refundable in most cases — except for select lower-income taxpayers, for whom up to $1,500 may be refunded.

If you owe more than you expected this tax season, there are a few things you can do to alleviate the financial burden.

1. File—Even if You Can’t Pay in Full

As you get ready to prep your 2022 taxes—and any back taxes you still need to file—remember that filing can help reduce the amount of money you owe in the long run. As H&R Block notes, the IRS imposes a hefty “failure to file” penalty, equal to 5% of the unpaid balance each month, up to 25% of your unpaid taxes. With the added penalties, that means the interest accruing on your unpaid taxes will be higher, too.

2. Request an Extension

If you need more time to organize files for your taxes, or come up with a game plan because you know you owe more than you can pay, you can file for a six-month extension.

While filing an extension for your 2022 taxes doesn’t buy you more time for paying taxes (you still need to estimate the amount you owe and pay it), it does ensure you won’t begin to accrue late-filing or late payment penalties right away. As TurboTax explains, “if you pay less than 90% of the tax you owe, you’ll end up owing a penalty of 0.5% of the underpayment every month” until your balance is paid.

3. Explore IRS Payment Options

The IRS allows multiple options for paying your taxes. You may even be able to temporarily delay collection of your taxes based on your financial situation. You can also set up a short- and long-term payment plan. Each has an application fee that varies depending on your plan and financial status. However, note that interest and other penalties that will continue to add up for either of these options as long as you have an outstanding balance. The IRS interest rates are subject to change quarterly.

Another option may be to file an Offer in Compromise that allows you to settle your IRS debt for an amount that’s less than the total you owe. If you’re a homeowner, you may find your home — likely your biggest asset — disqualifies you. Since you have equity in your home, the IRS sees that as means to pay your taxes.

4. Access Your Home Equity to Help with Taxes

Not paying your taxes can result in a lien on your home, making it harder — if not impossible—to access your home equity. But you can access your home equity to settle your debt before a lien is placed on your home.

Paying off your taxes with a home equity loan, especially if you owe more than you can pay off in a single credit card payment, allows you to avoid taking on bad debt. Unlike credit cards that average more than 16% interest, a home equity loan only averages 5.82%. When you file, you’ll know the lump sum you owe, which may make a home equity loan more appealing than a home equity line of credit (HELOC). With either, you’ll want to make sure you can afford payments, as you risk foreclosure if you can’t make your payments.

Note that following the 2017 Tax Cuts and Jobs Act, the interest you pay on a home equity loan or HELOC is no longer tax deductible if you use it for paying off taxes. Interest on these loans, as U.S. News & World Report explains, only qualifies for a tax deduction if you use the loans to make home improvements.

Read HELOCs & Home Equity Loans: What’s the Difference and Is Either Right for You? for more on how these two differ >>

Another option is accessing your home equity via a home equity investment. Unlike a loan, a home equity investment gives you cash now in exchange for a share of the future value of your home.

Since it’s an investment, rather than a loan, there are no monthly payments and there is no interest. Instead, you settle the investment when you sell your home or buy out the investment. Plus, with home equity investments from companies like Hometap, your debt-to-income ratio isn’t a qualification factor as it is with home equity loans.

You should always do the research and the math to find out which payment method works best for your financial situation. You may find accessing your equity is a more affordable way to pay off your taxes than the IRS payment plan—or vice versa.

See if you pre-qualify for a Hometap Investment in less than 30 seconds.

YOU SHOULD KNOW…

The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, consult with a licensed advisor.

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5 Steps Divorced Women Need to Take for Financial Security

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With the end of a marriage—especially a long one—there are emotional costs and potentially difficult transitions, not to mention the practical side of splitting up: legal fees, division of assets, endless paperwork, and new plans to make. It often seems every new consideration in a divorce comes with a hefty price tag.

And while divorce is often expensive for all involved, women are especially financially vulnerable during and after a divorce, especially women older than 50. If you’re a recently divorced woman of any age—or are planning to divorce soon—here are five key steps to add to your divorce financial checklist to safeguard your financial future.

1. Revise Your Budget

“A realistic post-divorce budget is critical to meeting your short-term needs and achieving your long-term financial goals,” says Kristin Capalbo, Esq., a family law attorney based in New Jersey.

Transitioning from a two-income household to a single-income budget is a major sea change. Everything will need to be re-evaluated, from your monthly spending to your long-term planning, based on your revised income. Go over all line items and tally up your specific figures. The more you know, the better prepared you’ll be for your new lifestyle.

“If you’re now paying alimony and/or child support, how will you readjust your short-term budget and long-term savings goals to address these extra payments?” asks Capalbo. “If you’re the recipient of alimony and/or child support, what is expected (and reliable) each month? How much will you need to contribute to dependent expenses, such as work-related child care or college costs? What is your plan for when your alimony period is up or when your children are out of the house?”

Speaking with a financial advisor can help you adjust your budget to meet your obligations, while also safeguarding your assets or rebuilding them.

2. Update Your Insurance

During a divorce, all your insurance coverage may change. Review your existing insurance policies (health, home, auto, life, disability, long-term care) to see where updates are needed and what the cost changes will be. If you are receiving alimony and/or child support, make sure your life insurance addresses the possibility of your ex-spouse not being able to continue to pay. Factor all monthly insurance changes into your revised budget.

3. Keep Your Credit Cards—but Remove Your Ex’s Access

If you had joint credit cards with your ex, you may not necessarily want to close the accounts completely as this could impact your credit score. Instead, include the joint cards in your divorce negotiation and determine who gets to keep the accounts. For the credit cards you keep, reach out to the respective issuing banks to remove your former spouse as an authorized user.

4. Know What Will and Won’t Be Taxed

“Recent changes to the tax code can have a major impact on your post-divorce finances, especially when it comes to the treatment of alimony, itemized deductions, the child tax credit, and valuation of businesses,” says Capalbo.

In the middle of a divorce, many adults will get an unpleasant surprise at tax time when they learn what now counts as taxable income. For example, depending on when your divorce was finalized, if you’re receiving alimony, this may no longer count as taxable income; if you’re paying alimony, this may no longer be taken as a tax deduction. Child support is not taxable or deductible.

As many situations are unique, it’s essential that you consult an accountant or tax professional to determine how this new tax reform will affect you post-divorce.

5. Revise Your Goals

Many married couples have held long-term plans: far-flung travel, saving for their child’s college education, a vacation home, retirement. Now that you’re single, the goals themselves don’t have to change but the strategy to reach them does. Look at your new budget and your obligations, now and in the future. How can you revise your timeline post-divorce to make sure you’re working toward the life you want?

“Life after divorce can be intimidating,” Capalbo says, “but with proper planning and the right tools, your finances don’t have to suffer.”

If you’re going through a financially draining divorce and want to avoid the stress, debt, and interest of a personal loan or credit card balance, consider a Hometap Home Equity Investment to offset the cost without taking on debt.

Take our 5-minute quiz to see if a home equity investment is a good fit for you.

LEGAL DISCLAIMER

The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, consult with a licensed advisor.

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Have a Home Office? What You Need to Know Before Filing 2020 Taxes

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Operating your small business from your home can not only improve your bottom line but also pay off in real dividends around tax season. Read on for guidance on tax-deductible expenses you can claim—and can’t claim—for 2020.

Make Sure Your Home Office Qualifies for Tax Deductions

In 2018, the IRS updated its guidelines for small businesses and the self-employed who work from home.

First things first, is it a true home office? According to the IRS, a home office must be used solely for business purposes. That means any activity of a personal nature—surfing the web, paying bills, watching TV—cannot occur inside your home office.

Whose home office qualifies this year has also changed. Remote employees can no longer claim home office and non-reimbursable expenses from their employer. If you’re self-employed, however, you’re still eligible to deduct home office expenses.

How to Claim Home Office Deductions: Simplified and Regular Methods

There are two ways to claim your home office tax deductions. It’s important to note that you can choose one method for 2020 and switch the following year.

The Simplified Method is aptly named and best suited to those with a small home office. HouseLogic explains that all you need is the square footage of your home office—up to 300 square feet—to arrive at your deduction in seconds. Here’s the formula:

Home office square footage x $5 = Deduction

For example, if your home office is 300 square feet, your total tax deduction is $1,500 (300 x $5).

By contrast, the Regular Method can result in a higher tax deduction but requires careful tracking of expenses. On the upside, as NerdWallet points out, you can deduct mortgage interest, maintenance, utilities, insurance, and other expenses. If your home office occupies a significant portion of your home, the traditional method may be a better bet. If you’d like to use this method for 2020, start logging those expenses now to save time next April.

Tax Deductions Dos & Don’ts

If you’ve decided to go the traditional route, take a look around your home and office because there may be more tax savings than you realized. For a complete list of tax-deductible expenses, download the “Business Use of Your Home” from the IRS. Here are a few of the more surprising expenses that do and don’t qualify.

Tax-Deductible Expenses

  •  Home office décor. You can claim your desk, chair, coffee table, and even the carefully chosen wall art. Be sure that whatever you do deduct lives in your home office exclusively to avoid an audit down the road. The same goes for any equipment you use in your home office although it may qualify for depreciation. Read the guidelines carefully.
  •  Snow removal. If you live in a wintry climate, not only can you deduct paying the kid down the street to shovel but you can also deduct the shovel. Check the rules around square footage of your home office to ensure you qualify for this break.
  •  General home expenses. Everything that goes into the upkeep of your home may also impact your home office. Tax-deductible expenses may include utilities, cleaning services, trash removal, water, gas, and more.

Nondeductible Expenses

  •  Landscaping and lawn care. Unlike snow removal, taking care of your lawn is not tax-deductible. The only caveat is if your small business is in this sector. Investing in your curb appeal is still a good idea, however. It increases the value of your home and presents a desirable first impression when clients visit.
  •  Home office spillover. As mentioned above, the IRS has drawn a clear line between office use and personal enjoyment. For example, if the dining room table doubles as your meet-and-greet area for new clients, it doesn’t qualify.
  •  Home office renovations. Small home repairs may qualify but major renovations like new flooring typically don’t. If an upgrade can boost your business (and your happiness), explore how some homeowners fund those plans with a Hometap investment.

Building Your Business Year-Round

Home office tax deductions are one way to save on overall business expenses. Who doesn’t look forward to a refund check? Keep in mind, though, that tax rules are unpredictable and cash back is not a sure thing. The good news for small business owners is that there are a number of other ways to secure the funds needed to grow your business.

Taking out a loan may seem an obvious, if scary, choice. Weigh the pros and cons of a small business loan versus a home equity loan before you sign.

For the risk-averse, taking on an additional loan may be a nonstarter. This is where owning your home can come in handy and more helpful than you realize. With a Hometap Investment, you can tap into your equity without any interest or monthly payments. That translates into near-immediate access to the funds you need now in exchange for a share in the future value of your home.

Take our 5-minute quiz to see if a home equity investment is a good fit for you.

LEGAL DISCLAIMER

The opinions expressed in this post are for informational purposes only. To determine the best financing for your personal circumstances and goals, consult with a licensed advisor.