I recently wrote this letter to a client of mine who purchased a house and wanted to know what to deduct:

Q:  I bought a house – what do I deduct?

A:  “Dear Andrew…

Congratulations on your home purchase.   Your home mortgage interest and property taxes are tax-deductible so you are now going to be able to itemize deductions instead of claiming the standard deduction on your tax return.  You must attach Schedule A to your tax return.  You should go to www.irs.gov and print out Part Five of IRS Publication 17 to familiarize yourself with what is deductible.  Here are the categories of itemized deductions:

Medical Expenses– Most likely your will not qualify for a medical expense deduction because unless you are self-employed (and therefore can deduct health insurance premiums), medical expenses must exceed 10% of your income before they trigger a deduction.  Health insurance premiums paid by your employer with pre-tax dollars or with HAS funds cannot be deducted – only your after-tax out-of-pocket expenses qualify. But save your cancelled checks just in case they add up to enough.

Taxes – This category includes state and local income tax withheld from your paycheck, any amounts you paid the state when you filed your return last year, and any state estimated tax payments made.  You also get to deduct property taxes on your home and the VLF portion of the DMV registration fee on your cars.  Be sure to look on your escrow closing statement to find the amount of pro-rated property tax you were charged when you bought (or sold) your home.  If your taxes are paid by a mortgage impound, deduct the amount paid by the mortgage company to the county, not the amount you paid to the mortgage company.  Unique to some cities in California is a deductible 6.5% ‘utility user tax” on the PG&E bill.   This tax is not a sales tax, but goes to the City so it is deductible.

Interest – Your mortgage interest on your principal and one second residence is deductible here.  There are some limits – if you borrowed more than $1.1 Million to buy your home or you have refinanced your home and taken out more than $100,000 in equity, you may only be able to deduct a portion of your interest.  Points paid to purchase a principal residence are usually deductible in the year of purchase, but points on a re-finance must be deducted ratably over the life of the loan.   Any remaining points on a previous re-finance are written off when you re-finance a second time.  You also may deduct investment interest (like on a margin account) to the extent of your investment income.

Charity – Cash and non-cash contributions to 501(c)(3) organizations are deductible.  Make regular trips to the thrift store to build your deductions.  Check the IRS Publication for record-keeping requirements.

Miscellaneous – This is the catch-all category of itemized deductions.  Included are unreimbursed business and investment expenses, education in your profession, and your tax-preparation fees.   The instructions for Schedule A describe these deductions in detail.   Only expenses in excess of 2% of income generate a deduction, but if you keep good records you will be surprised how easy it is to exceed 2%.   Business expenses for self-employed individuals are claimed elsewhere, but since you are an employee and you work in internet multimedia, you should be able to reasonably deduct some of your home computer expenses, internet access, purchases of software, CDs, and DVDs, and attendance at concerts and movies.   You may also qualify for office-in-home deductions if you maintain the office for the convenience of your employer.

Home Improvements – Alas, except possibly as medical expenses, home improvements are not tax-deductible.  They do, however, add to the basis of your home.  The basis is used to calculate your capital gain when you sell your house.  You are entitled to an exclusion of capital gain up to $250,000 per person provided you meet certain requirements, but anything over that would be subject to tax, so it is best to save your receipts for home improvements until 3 years after you sell your house.


Congratulations on your new tax-deduction.  Now how about some grandchildren?


Love, Dad”

Welcome to the  first of what I plan to be a long series of Question and Answer posts.  More than anything else, I love answering your questions.  I hope that you find these to be of value and if you have questions you would like to see featured here, please email me at Rob@TaxOasis.com.

Q:  So, John and I have a question for you.  We did not put any money into our retirement account and we aren’t sure if we should.  As you may or may not be aware, we are looking to purchase a home.  We would like to put a large down payment with the hopes of paying it off as quickly as  possible.  Is this a wise choice or should we deposit some money into our retirement account instead.  Since we aren’t sure mathematically what is more beneficial, we figured we’d ask the math guru.  What is your expert recommendation? Our income is about the same as the previous year. I can put about $12,500 into my retirement account, but I’m not sure if that money would be better dumped into a home down payment since our plan is to pay it off as quickly as possible. Any thoughts?

A:  In general, I do not recommend paying down your mortgage. Our economy revolves around the principle residence mortgage – it is the cheapest way to borrow money. In most metropolitan markets, you can get a long term rate that is less than the average annual appreciation.

By financing a large percentage of the purchase price, you are leveraging your investment and increasing the rate of return on your money. Your house will appreciate at the same rate whether you have a mortgage or not. So the key factor should be “what else can we do with the money, and how much return do we get on that?”

Investing in your retirement plan provides you with an immediate tax savings of 37%. So $12,500 into your retirement plan saves you $4,625. That means it only cost you $7,875 to have $12,500. That’s a gain of $4,625 on an investment of $7,875 which equals 58% return on the first day. Plus you get the appreciation on the investment over time. Compare that with saving only 3 or 4% per year on mortgage interest if you paid down the mortgage with that money.



Rob Kirby, CPA
1220 N Dutton #103
Santa Rosa, CA 95401
707-545-8297 (appointments)
707-888-3676 (mobile)
707-541-2381 (fax)

Effective Jun 12, 2014, the IRS has changed the rules for written tax advice and the previous circular 230 disclosure is no longer appropriate. So now I can tell you that my advice must be based upon reasonable assumptions about the facts or the law, and reasonable representations, statements, findings or agreements. I am required to make reasonable efforts to ascertain and consider all relevant facts. When evaluating a tax matter, I may not take into account the likelihood of an audit or settlement. I hope you feel better about this, too.