21 Common Tax Deduction Myths con't...

11.  My mortgage interest will reduce my tax bill...

Usually true but not always.

To take tax advantage of your home loan's interest, you must itemize and come up with a total that exceeds your standard amount.

Additionally, if you have lived in your home for many years, you are likely paying more toward your loan's principal instead of interest. Homeowners at the end of a loan term don't get much, if any tax break because the interest paid is so little.

12.  All costs related to my home are deductible...

No way. You can’t write off Association fees, property insurance, private mortgage insurance, maintenance, repairs or improvements or that wet bar on the patio.

If you try to write these off you will definitely be audited and possibly pay penalties and interest.

But even though you can’t deduct them you should keep track of any expenses you incur. If you convert the home to rental property or sell it, these costs will affect the property's tax basis.

13.  I must use money from my home sale to buy another residence...

In the old days that was partially true but in 1997, home-sale tax law changed. If the property you sold was your principal residence for at least two out of the last five years, then you can exclude from tax as much as $250,000 in gain (and $500,000 on a joint return).

14.  If I take a capital loss when I sell my home, I can write it off...

Not true!  Just because the value of your home goes down, you get no tax benefit from that loss.

Your residence, under tax law, is considered personal property. You cannot deduct a loss on personal property. Now here’s the punch in the face:

You do have to pay tax on the gains you make when selling personal property. So if you loose on the house, too bad, but if you make a good profit, you pay. Not real fair, is it?

15.  I won't get audited because I received my refund...

Simply because you received your refund check doesn't mean that the IRS has reviewed your return and has given its blessing. And that's true regardless of whether you file a paper return or file electronically. Sure, the IRS checks for obvious errors and suspicious deductions and may hold up your refund check while it investigates. But simply receiving a refund doesn't mean that you're home free.

In fact, the decision to audit you is made long after the refund check is issued. After your return has been filed and you've received your refund, your tax return goes through another computer check in order to compare the return to a computer model. Then the return receives a DIF (Discrimination Information Function) score. That score determines your chance of an audit.

The IRS calculates the DIF score by using a very closely guarded formula. Returns with high DIF scores are then pulled and reviewed by an experienced IRS agents who determines which tax returns have the greatest potential for getting additional taxes, interest, and penalties.

Generally speaking, the IRS has three years from the time a return is filed to perform an audit. While the IRS likes to begin the audit process three to four months after the tax return filing deadline, many returns aren't audited until 18 and even 24 months later. If fraud is involved the IRS has FOREVER to audit you.

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