Bigger Tax Refunds = Bigger Down Payments
A Tax Refund is an easy way to come up with at least part of the money for a down payment, closing costs or the cash reserves needed to buy that home of your dreams. Just be sure you have a minimal emergency fund to pay any unexpected bills. If you do, then your refund can be a great way to put you on a faster track to homeownership. You won’t be alone. Mortgage professionals say that during Tax Season, many first-time homebuyers turn to their tax refunds as a down payment option.
Most mortgage programs require that the money you use for your down payment be “sourced and seasoned.” When using your tax refund, a copy of the treasury check and a bank receipt showing the deposit are all the proof you need to prove the funds are sourced and seasoned, making a tax refund a little easier to use than other resources.
2018 – 2019 Tax Laws
The Tax Cuts and Jobs Act took effect Jan. 1, 2018. The new tax law capped state and local tax deductions at $10,000, doubled estate tax exemptions, put new limits on the deductibility of home equity debt, and changed the tax brackets. With so many changes to the forms and numbers to keep track of, many Americans are still unclear about how much their refund will be. For a simple summary of the 2018 changes, see our article “How Does the 2018 Tax Law Affect New Homeowners?”
There are also a few changes that took effect in 2019 and could affect your refund:
- Nonbusiness Energy Property Credit –An additional credit may be taken for 10% of the amount incurred in 2019 for qualified energy efficiency improvements and any residential energy property costs paid or incurred in 2019.
- Residential Energy Efficient Property Credit –You may be able to claim a credit of 30% of the costs of energy-saving improvements to more than one home you used as a residence in 2019.
- The standard deduction amounts increased slightly – The increased standard deduction will allow even more individuals to file without itemizing deductions on Schedule A.
- The penalty (individual mandate) for not having health insurance no longer applies for 2019 federal tax returns. However, some states do require health coverage—or charge a fee.
- The threshold for medical expenses on Schedule A has reverted back to 10% of your AGI.
- Alimony deduction eliminated —The payer will not be allowed a deduction for payments made, nor will the payee be required to claim the alimony as income on their respective tax returns.
- 401K and IRA Contribution limits have increased. 401K contributions limits have been increased to $19,000 and $6,000 for taxpayers over age 50 making catch-up contributions. IRA contribution limits have increased to $6,000 with a $1,000 catch-up amount for those over age 50.
Tips to Increase Your Refund this Year
Home ownership deductions: Current and future homeowners should check to see if they will qualify for these money-saving tax deductions, per the 2018 tax laws*:
- Mortgage Interest: The interest on a new mortgage of up to $750,000 can be deducted.
- Property Tax + State and Local Taxes: Starting last year, you can only take a total deduction or combined limit of $10,000 on property, state and local taxes on your federal return.
- Home Equity Loan Interest: Interest on home equity loans is deductible only if the loan was used for the purpose of improving the residence, effective through the end of 2025, including existing home equity loans.
- Home Sale Gain Exclusion: You are allowed to potentially exclude from federal income tax up to $500,000 of gain from a qualified home sale, if you are married filing jointly.
- Home Office Deduction: If you use a portion of your home exclusively as an office, you can write off a percentage of the expenses based on the square footage of the office compared to the total area of the house.
Earned income tax credit: You can reduce the amount owed on your tax bill if you qualify for common credits like Child and Dependent Care Credit, the American Opportunity Tax Credit, the Premium Tax Credit, and the Save’s tax Credit.
Review Possible Deductions: – Because the Tax Cuts and Jobs Act raised the standard deduction and placed new limits on some deductions, it’s less likely that itemizing makes sense. Financial planners often recommend “bunching” deductions to exceed the thresholds, if possible. “Bunching” means timing expenses so you can push deductible expenses into the same calendar year. For example, doubling charitable contributions, property taxes or medical bills into one year, plus other itemized deductions, may allow a person to be over the standard deduction and itemize every other year.
Review the remaining itemized deductions in the Schedule A instructions and look for the “above the line” deductions on Form 1040 – these deductions subtract from your adjusted gross income and you don’t have to itemize to take them. For other tips, see our article, Tax Tips: Things to Think About When Filing Your Taxes.”
One Way to Increase Your Refund Next Year
Double-check the withholding stub on your paycheck. Are you sure the correct amount of tax is being withheld from your paycheck? Use the IRS’ tax withholding estimator and adjust your withholding for 2020, if necessary. If you’re not having enough tax withheld, you will owe money at tax time. If too much tax is being withheld, you’ll get a refund. Some people would rather have that money in their pocket on payday to help meet every-day expenses.
Use the IRS’ tax withholding estimator, especially if you fit any of these scenarios:
- Two-income families
- People working two or more jobs or who work only part of the year
- People with children who claim credits such as the Child Tax Credit
- People with older dependents, including children age 17 or older
- People who itemized deductions in 2018
- People with high incomes and more complex tax returns
If you had major changes in your life in 2019 —e.g., you got married or divorced or started your own business — your taxes will be more complicated. As a result, you might need to hire a CPA or other tax professional to prepare and file your taxes. Just don’t wait until April to make that decision, because it could end up costing you more, and it could be hard to find someone who’s not too busy to help you. Also, don’t “shop” to find a preparer who promises to get you a bigger refund. The tax preparer who makes promises like that could be unscrupulous.
Shield yourself from tax scams and fraud
More and more frequently, people are getting phone calls, emails and text messages from entities claiming to be the IRS. The U.S. mail is the only way the IRS will correspond with you, so don’t respond or give these people any of your personal information. For other tax tips see our article “Things to Think About When Filing Your Taxes.
*Contact a tax professional about your specific circumstances to find out more details about the tax benefits of homeownership and how to get the biggest tax refund possible to use as a down payment.