Listen to Bob's Tax Advice or You May be Kickin Yourself in the Head
Is there anything can we do to keep some of that hard earned money? Robert Hockensmith thinks there is. In fact, these 3 simple ideas Bob talks about are so simple that any homeowner can do them.
If you pass on taking advantage of these ideas and you may be kickin yourself in the head. Ouch! Don't do that. Be smart and save yourself a few bucks. After all, owning a home allows us to access some tax benefits that are otherwise off the table.
Homeowners - Need some Tax Advice?
You can call Mr. Hockensmith's office at 1-602-264-9331. He will be glad to help you with navigating your personal or business tax strategies. Your tax burden will be lessened and your wallet widened.
JOHN: What are the top three things you can do as a homeowner to reduce your taxes before the year-end? I'm John Cunningham; Phoenix real estate agent with eXp Realty and he's Robert Hockensmith; the AZ Money Guy. Robert is a local CPA who has great answers to all your tax questions. Now, Mr. Hockensmith personally represented me 18 years ago in a rather nasty tax error, which ones aren't nasty, right. But at the end of the day, my $25,000 debt was cut down to a few hundred dollars, thanks to Bob's hard work. And Robert, thanks for joining me today, how are you man?
ROBERT: I'm doing well, thanks, John.
JOHN: Awesome, let's just quickly skim the three tops for today's conversation. What Bob's going to do is, he's going to share some ideas that will save us some money. Robert, this is the part where I hand off the batton. What are the top three things homeowners can do to reduce their taxes before year end?
ROBERT: John, what I'd like to do is explain to people that we've got about seven and half weeks to go before the end of the year and there are some things that will be done to help people, especially in line with the new tax law, that by the way was passed by the house today. So the new tax law was in fact passed by the house, it goes on to the Senate, we expect that it's actually going to be in front of President Trump's desk before Christmas. We'll find out what that upset says, the house will have a conference, then the final bill will be put before President Trump and we know he's going to sign it. The reason why I tell you all that is because you need to care of some things into 2017, because chances are you will not be able to do these things in 2018 or you will choose not to do these things in 2018 because of the new tax law. So this is like last chance effort before the end of the year.
#1 Prepay your real estate tax: Most people know that the real estate taxes paid by their mortgage to an Escrow account. But often times, if you don't have a mortgage or you can actually choose to pay your real estate taxes not through an Escrow account but directly. You pay your real estate taxes in May and then October each year typically. What you can do is in October or now until the end of the year, you can actually prepay your taxes that are going to become due in March of next year. The government says that, if you write the check and you actually pay the tax ahead of time, you will get a tax reduction on the Federal and the state of Arizona of tax return. So often times I have people that literally prepay their real estate taxes. Now if you start this process you're going to need to keep doing this, but like we said, that may not be the case with the new tax law.
JOHN: Okay so Bob, what you're saying is, if I have an annual tax bill of $3,000, I can pay the whole thing before March and I'll get credit for that is that right?
ROBERT: You want to pay the whole thing before December 31st.
JOHN: Oh I see, okay, got yah.
ROBERT: You pay the whole thing before December 31st, the government says cash, business taxpayers which is, all individuals get the deduction at the time they write the check. So paying your taxes for real estate purposes early actually gives you a better tax reduction in one year and if the new law goes through like we think it will, you're not going to need to prepay next year.
JOHN: I see, very good to know, that's definitely a money saver.
ROBERT: Absolutely, in fact, to give you an example; your number was pretty average; $3,000 is what the average homeowner pays in real estate taxes for their home. About a $200,000 home and about $3,000 is the average real estate tax per year. If somebody prepays that, and you're in the 25% tax bracket which is what most family taxpayers are in, they would literally save 25% of $3,000 or about $850 on their Federal taxes for 2017 and they will save another $100-$150 on their state taxes for making that check written.
The second thing that they can do between now and the end of the year is, actually make another mortgage payment. Now, this may sound counter-intuitive, but if you make another mortgage payment between now and the end of the year, that additional mortgage payment will mostly be interest and you’ll be able to take an additional mortgage interest deduction on that payment. We found that again, the average mortgage payment for the average home runs about $1,000 a month. If you assume that about 75% of that $1,000 is interest, which is pretty average, as the first 10 years of a 30-year mortgage, it's 3/4 a time interest and less than 25% for principles typically.
JOHN: So for all those guys listening right now, I think Bob just found enough money for you to buy your wife a really nice Christmas present.
ROBERT: So $1,000, you figure 75% is interest, that's $750, you are saving yet again about $200 in taxes for doing that on the federal side and you're saving another $50 in taxes on the state side for doing it. And here’s the bonus, here's the plus, you've just added an extra home payment to your mortgage which then reduces the amount of interest you're going to pay the following year, so it's a win-win-win.
JOHN: Actually while we were talking, I looked up my tax records and of course they went up again, they are $3,700, so I guess I'll be making that payment before December 31st.
ROBERT: Let me explain the reason why it went up, two years ago we had a bill ''proposition 206'', it's not 206 I'm sorry, that was passed that basically said; we will not raise real estate taxes for the next five years, that was Proposition 187. Everybody jumped on the bandwagon and voted it in and unfortunately few people actually read the fine print. What it said was, we will not raise our real estate taxes for the next five years for businesses. Homeowners are making up the difference; it means literally that in the next five years you may see your real estate taxes double because they have to make up the difference for losing the real estate taxes from businesses. So we homeowners, we taxpayers, individual are going to actually see our real estate taxes almost double in the next five years.
JOHN: So we're going to catch up to California pretty quicker.
JOHN: I don't like that.
ROBERT: Here's the bad part, the bad part is, with the new tax bill, you're only allowed to write off up to $10,000 worth of property taxes which is certainly going to be, we're going to be paying less than $10,000, most of us, which is good. But those of us who have more expensive homes might, in fact, find that we lose the tax duction when these taxes go up again.
JOHN: So far we've talked about prepaying the 2018 property taxes for homeowners, we've talked about making one extra payment, do you have anything else that homeowners can do to save a little money?
ROBERT: Yes. Absolutely, John, there are some things that are going to go away it this new tax bill goes through, which again we believe it will happen. Renewable energy credits for your home such as solar, or a water heater, or a new roof, or new windows like the double pane windows or triple pane windows. These are actual tax credits that if you enter into the contract between now and the end of the year, you're going to actually get a tax credit rather than a tax deduction for those expenditures. Now let me explain the difference between a tax credit and a tax deduction. A tax credit actually knocks you taxes down dollar for dollar. A tax deduction reduces your net income and then we compute taxes based on your net income. But credits are always better than deductions because typically $1 in tax credit is equivalent to about $3 in tax deduction. So you can go to Ross and buy a clothing item for $1 instead of $3, you would save a lot of money, that's the reason why tax credits are so valuable.
JOHN: Awesome, that's excellent Bob. Well, you know today we've got some good ideas to help us with our tax burden and keep it to a minimum and thanks Bob for all your answers today. If someone wants to speak with you about their tax matters, what’s the best way for them to get in touch with you?
JOHN: That's fantastic. Thanks everyone for listening, I'm Phoenix real estate agent with my special guest, Robert Hockensmith signing off until next time, thank you for joining us.
ROBERT: Thank you.