Fourth in a series
The tax filing season is when homeowners get a clear view of just how cozy a tax shelter their house can be.
Most homeowners will be able to write off all their mortgage interest and property taxes on 1996 income tax returns. Some can even deduct an office in their home. And most people who sold a home last year won't need to pay a cent in tax on their home-sale profits.
Congress did nothing to spoil any homeowner benefits for 1996 returns. In fact, some homeowners will find this tax season a bit more rewarding.
The new tax law will make it possible for people who sell products out of their homes to claim extra home-office deductions this filing season.
Some home sellers might even be helped on their 1996 returns by a tax proposal that has yet to be enacted. President Clinton's proposal to exempt virtually all home sales from capital gains tax would only apply to sales after 1996. But its fate in Congress could affect decisions some older home sellers will need to make on their 1996 returns.
And some homeowners who took advantage of last year's low interest rates to refinance their mortgage a second time might be due some extra deductions on their 1996 returns.
By now, you should have received from your mortgage lender a year-end tax statement - Form 1098 - to help you figure your mortgage interest deduction. The lender lists the amount of mortgage interest you paid last year.
It's worth checking the tax statement against your own records. If you mailed a payment in late December, such as for early payment of your January installment, check to see if the payment was included.
Payments mailed in late December often arrive too late for the lender to process and post on the 1098 form. But you still might be able to claim a deduction for part of the payment.
A traditional year-end tax-saving tactic is to pay January's mortgage installment by Dec. 31 in order to deduct the interest sooner.
The tax law generally doesn't allow individuals to claim deductions for prepayments of a future year's interest charges. But mortgage installments usually include an interest charge for the previous month. Thus, your January 1997 installment probably included an interest charge for December 1996. So if you mailed your January installment by last Dec. 31, you can deduct the December interest charge included in that installment on your 1996 return.
If your payment wasn't included on the 1098 form, attach a brief statement to your return explaining the discrepancy between the amount of mortgage interest you're deducting and the lesser amount your lender reported on the 1098 form.
Exemption decision
Home sellers age 55 and older are eligible for a special break that allows them to permanently escape capital gains tax on up to $125,000 in profits from the sale of a principal residence.
Because the exemption can be claimed only once in a lifetime, sellers who had only a small gain on a sale had incentive in the past not to claim the exemption if they thought they could make better use of it on a future sale. An example would be someone who had only a $5,000 gain and was buying a replacement residence that he expected to sell later at a much bigger profit.
But sellers who sold a home last year and don't plan to claim the exemption might want to wait to see what transpires on Capitol Hill in the months ahead before making a final decision. If Mr. Clinton is able to push his home-sale proposal through Congress, it might pay to claim the $125,000 exemption on 1996 returns no matter how small your gain.
The reason is that you would be covered on future sales by the president's proposed exemption. His proposal would sharply increase the home-sale exemption and allow homeowners of any age to claim it for a home sale every two years.
''If necessary, it may pay to request a filing extension to see if anything happens with the proposal,'' said David Rhine, a New York tax partner at the accounting firm of BDO Seidman.
No matter what your age, current law allows home sellers to indefinitely defer capital gains tax on the sale of a principal residence as long as they buy a replacement residence within two years that costs at least as much as they realized from the sale of their old home.
Home-office deductions
For people who sell products out of their homes, the new tax law might provide a chance to claim some extra home-office deductions on 1996 returns.
Home-office deductions can now be claimed for a space in the home, such as a corner of the basement, that is used to store product samples or inventory - even if the storage area is sometimes used for other purposes. In the past, storage deductions were allowed only for inventory - not product samples.
Usually, a space used even occasionally for personal purposes doesn't qualify for home-office deductions. But storage areas are exempt from the ''exclusive-use'' requirement.
To qualify for storage deductions, you must be in the business of selling products at retail or wholesale and your home must be the only fixed location of your business.
Refinancing questions
If you refinanced your mortgage last year, one complication you might face is figuring deductions for any ''points'' paid to your lender. Points are the one-time fees routinely assessed on mortgage loans to boost the effective yield to the lender.
When you buy a principal residence, points usually can be written off in full in the year they are paid. But in a refinancing, points generally must be deducted gradually during the life of the loan.
One exception is if you used some of the proceeds to pay for home improvements. Points on that portion of the loan can be deducted in full - provided you paid the points out of your own private money rather than out of the proceeds of the loan.
If this wasn't the first time you refinanced the mortgage, you might be able to write off some extra points on your return. Any points paid in connection with your previous refinancing that you haven't yet written off can be deducted in full.
The tax law permits undeducted points remaining on a mortgage to be written off in a lump-sum when the loan is paid off - either when you refinance a second time or you sell the home.
