By Andrew D. Schwartz, CPA

Tax season is always interesting. Each winter, I have 45-minute conversations about taxes and financial planning issues with more than 500 clients. With some clients, I’ve maintained an ongoing dialog for more than 20 years. For others, this winter was the first time that we’ve ever talked.

Speaking with so many taxpayers each winter helps me keep current with what’s on people’s radar with respect to taxes and basic financial planning. Below are some interesting observations I made during the 2012 Tax Season.

Mortgage Interest Rates are Down

This year’s hot topic by far is that home mortgage rates are extremely low. I would say that pretty much all my clients with mortgages refinanced last year. Some even refinanced multiple times.

Lower interest rates means lower itemized deductions. Many people who refinanced earlier in the year saw a sizable decrease in the mortgage interest they paid in 2011, which translated into either a smaller tax refund or a larger balance due.

Higher taxes due to lower mortgage interest is okay, though. Your goal is to pay as little mortgage interest as possible. While the mortgage deduction is most taxpayer’s largest deduction, please remember that $1 in mortgage interest paid only saves you at most $.35 in federal income taxes. Wouldn’t you are better off paying less interest, remitting higher taxes due to the reduced deduction, and then pocketing the difference?

If you did refinance last year, make sure to account for all the interest paid during the year. You’ll get this information from the multiple 1098 forms that you receive from
the various lenders.

For a sanity check, compare the mortgage deduction you claimed on your 2011 Schedule A with what you claimed in 2010. Or, if you refinanced early in the year, multiply your outstanding mortgage balance by your new mortgage rate to get a good approximation of the total mortgage interest you should have paid last year.

For your real estate taxes, you need to be even more careful. When you refinance, often times you pay real estate taxes as part of the closing on the new loan. Even though the interest paid at the closing would generally be picked up on the 1098, the real estate taxes are not.

For that reason, when you gather your tax info, compare the real estate taxes you paid last year with what you claimed on the prior year’s tax return. If the total taxes reflected on all the 1098s appear to be too low, then dig up the HUD1 Settlement Statement from the refinancing, and you’ll probably find the missing real estate taxes on that document.

Low Interest Loan From the Government

Tax returns are due April 17th this year. Prior to that date, you can file for an extension, which gives you until October 15th to submit your tax returns. The government also lets you borrow up to 10% of your total tax liability for these six months and will only charge you interest on the taxes you owe.

Let’s say that you report $200k of income and your total federal tax liability is $40k. In this case, you would be able to hold off paying $4k of your federal taxes until October. The higher your tax liability, therefore, the more you can borrow. Expect the IRS to charge you interest at 3% on the amount you owe, but they should not charge you any penalties.

What happens if the amount you owe exceeds 10% of your total tax liability In this instance, you will owe interest plus a .5% per month penalty. For that reason, please don’t cut your extension payment too close to 10% of your total tax liability in case you made an error in your calculations.

Get Interested In the Election

Many of the 2001 Bush Tax Cuts plus the current AMT patch are expiring at the end of 2012. And it doesn’t appear that Congress can get anything done in the near future. To complicate matters further, we are in the middle of a national election cycle.

What does this mean to you and your colleagues? Anyone paying any amount of federal income taxes should take some interest in the current political landscape. However, with the election not until November, and then the new Congress and the (new or current) President not being sworn in until January, who knows when the uncertainty surrounding the current tax code will be addressed?

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