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Your Deduction....Your Choice

by John Riggins

 

Your Deduction...Your Choice

Taxpayers are allowed to decide each year whether to take the standard deduction or to itemize their deduction when filing their personal income tax returns.  Roughly, 75% of households with more than $75,000 income and most homeowners itemize their deductions.

Itemized Deductions.png

The 2012 standard deduction, available to all taxpayers, regardless of whether they own a home, is $11,900 for married filing jointly and $5,950 for single taxpayers.

Let's look at an example of a homeowner couple with a $150,000 mortgage at 3.5%.  The standard deduction would give them $2,650 more than the total of their interest paid and property taxes of approximately $9,250.  If they were in the 28% tax bracket, the actual tax savings would be $742.00.

When mortgage rates were considerably higher, many people expected the interest and property taxes to easily exceed the standard deduction but with today's low rates, a comparison is certainly justified.

There are other things that could come into consideration like charitable contributions, medical expenses and casualty losses.  Tax professionals will compare available alternatives to find the one that will benefit the taxpayer most.

For more information, see www.IRS.gov and consult a tax advisor.

Second Homes Treated Differently

by John Riggins

 

Second Homes Treated Differently

While a principal residence and a second home have some similar benefits, they have some major differences. A principal residence is the primary home where you live and a second home is used for personal enjoyment while limiting possible rental activity to a maximum of 14 days per year.

The Mortgage Interest Deduction allows a taxpayer to deduct the qualified interest and property taxes on a principal residence and a second home. The interest is limited to a maximum of $1,000,000 combined acquisition debt and a combined $100,000 home equity debt for both the first and second homes.

The gain on a principal residence has a significant exclusion for taxpayers meeting the requirements. The gains on second homes must be recognized when sold. Even if you sell a smaller second home and invest all of the proceeds into a larger second home, you'll need to pay tax on the gain.

Tax-deferred exchanges are not allowed for properties having personal use including second homes.

If the home is owned for more than 12 months, the gain is taxed at the long-term capital gains rate. If the home is owned for less than 12 months, the gain is taxed as ordinary income which would be a considerably higher rate.

The article is intended for informational purposes. Advice from a tax professional for your specific situation should be obtained prior to making a decision that can have tax implications.

Displaying blog entries 1-2 of 2

Contact Information

Photo of John Riggins REALTOR RB11175 Real Estate
John Riggins REALTOR RB11175
John Riggins Real Estate
1003 Bishop Street, suite 2700
Honolulu HI 96813
808.523.7653
808.341.0737
Fax: 888.369.3210