It’s one of those questions that you gloss over if the answer is no, and one that may send you into a panic if the answer is yes, never really having comprehended why it’s being asked of you in the first place.
We’re talking about your taxes and that little question that inquires: Did you move last year?
When that answer happens to be yes, it can lead to a far longer list of questions, greatly affecting how much you may owe or get back from the IRS.
Let’s look at three possible scenarios that could happen and what they mean to Uncle Sam:
#1. You moved to a new state. Congrats!
Just make sure to file a part-year tax return. Even if you transferred to a new location with the same company, you still need to take this step. Don’t worry, you’ll receive W-2 forms that provide your income information for each state that you resided in during the year.
If you moved for work purposes, there’s a possibility you’ll be able to deduct moving expenses like storage, the moving company, and your travel to get to where you’re moving, like gas or a plane ticket.
#2. You bought a house (or condo, or apartment, or whatever, you get it). Congrats!
Although you’re in for a world of pain with your new property expenses, there are also many tax benefits to owning a house. Prorated mortgage interest is deductible and prorated real estate taxes from the point of purchase and loan origination fees – or “points” – are also tax-deductible.
If you purchased your home with a mortgage, one key piece of paperwork you’ll need is the 1098 form from your mortgage company. It reports deductible mortgage interest (points) if you paid any deductible points and real estate taxes out of escrow as well as mortgage insurance premiums that may also be deductible.
If you purchased your home with cash, good for you, big spender! None of this applies to you, but real estate taxes are still deductible. Just keep the receipt from the tax assessment to prove you’re paying your real estate taxes.
When it’s time to file taxes, other important pieces of paperwork for new homeowners are the closing statement (drawn up by an attorney or title insurance company), and the Closing Disclosure, which is legally required to be provided by your lender at least three days before closing. These forms lay out the financial details of the deal you made, including dollar amounts paid by both parties, the mortgage interest rate, and any points paid, so you can easily find the necessary numbers to report to the IRS for potential deductions.
#3. You sold your house (or whatever you owned and dwelled in). Congrats!
In most cases, you can keep the profit from the sale tax-free! Profit of up to $250,000 for individuals and $500,000 for couples filing jointly doesn’t have to be reported to the IRS as long as it was your primary residence for at least two of the last five years. Also, if you did any renovations to help sell your house, like replacing the roof or updating the kitchen, keep the receipts. Those costs may be used to subtract from the total profit as expenses incurred for the home. Sidenote: If you didn’t live in the place you sold for the required 2 years, you may avoid paying taxes on a portion of the profit if factors outside of your control, such as a job transfer or illness, required you to move. You might be able to get half of the exclusion based on unforeseen circumstances like these. But pro-tip: don’t lie. The IRS has a tendency to find these things out, and we’d need a whole new blog to get into that mess.
I hope this gives you an overview of what to expect with your taxes!