Federal tax breaks rank among the most important financial perks that come with owning a home.
Yet many homeowners don’t claim deductions for their mortgage interest, property taxes or the points they paid when they originated a mortgage, all things that can be itemized on a tax return.
As a result, they collectively could be overpaying their federal taxes by as much as $1 billion a year.
“There are a lot of people who could have qualified and didn’t take full advantage,” said Bob Walters, chief economist at Quicken Loans in Livonia, Mich.
The Government Accountability Office, the research arm of Congress, reports that about 2.2 million homeowners who took the standard deduction on their tax returns rather than itemizing paid $945 million more in federal taxes than they needed to.
They overpaid, on average, $438 apiece, according to a GAO study of 1998 tax returns.
More recent data from other government agencies supports the phenomenon.
About seven of every 10 American households owned their own homes at the end of last year, according to the U.S. Census Bureau. Yet only one of every three federal taxpayers – about four of every 10 in Colorado – itemized their deductions, according to the Internal Revenue Service.
Last year, 859,345 Colorado taxpayers itemized their deductions, while 1.2 million took the standard deduction, said Jean Carl, a local IRS spokeswoman.
The standard deduction is $10,000 for a couple filing jointly, and $5,000 for a single taxpayer.
The disparity surprises Larry Cox, an owner of several Jackson Hewitt Tax Service franchises in the Denver area.
“Most people know that home mortgage interest is deductible. I don’t know why that would be missed so much,” he said.
Experts suggest a number of reasons. Homeowners may not think they have enough write-offs to overcome the standard deduction. But if their mortgages are large or fairly new, they’re probably wrong.
With metro Denver’s median home price at $247,500, for example, a couple who took out a standard new 30-year, fixed rate mortgage at 6.5 percent with no down payment would rack up $15,000 in deductible interest payments.
If their adjusted gross income is $50,000, the couple would pay $2,300 in state income tax, also deductible. Add another $2,000 in property taxes, and they would be eligible to claim $19,300, almost twice the standard deduction.
The scenario is different for older households.
Aging baby boomers who are close to paying off their mortgages may no longer qualify, said Robert Burke, a CPA and tax expert based in Jacksonville, Fla.
That’s because more of each mortgage payment goes to principal than interest as a traditional mortgage matures.
“In my situation, I have no mortgage, and my real estate taxes are very low. I won’t be able to itemize,” Burke said.
For others, ignorance, disorganization and laziness may be keeping them from claiming the deductions they have coming.
Walters and other experts offer the following tips for homeowners interested in making the most of their investment at tax time:
Mortgage companies must provide borrowers with a form 1098 showing the amount of interest paid. Save these important notices.
Buyers can claim the points or prepaid interest they paid when they closed on their mortgages. Points are deductible to the buyer even if the seller paid them.
In slowing markets, homebuilders and other sellers often give concessions. For the best tax advantage, take a seller’s offer to prepay interest over granite countertops or carpet upgrades.
Buy early in the year to guarantee that enough deductions accumulate to itemize.
Lastly, don’t overlook the property taxes you pay, which don’t go away even after the mortgage does.
Staff writer Aldo Svaldi can be reached at 303-820-1410 or asvaldi@denverpost.com.
