Tax return filing season is looming, which can be a stressful time for many Americans. Income taxes are a big part of the mortgage pre-qualification process, whether buying or refinancing, so before you visit your tax preparer, you may want to evaluate your financial situation with a loan officer you trust.
If you’re self employed and generally take a loss on your business, this can mean less of a tax liability overall, but your loan officer will have to subtract those losses as well. If, after expenses/deductions are taken out, your profit is, say, $20,000, that is the amount the loan officer will have to use. It can be more complex than this, which is why it’s best to consult a qualified mortgage professional for a complete income analysis.
Similar to business income losses, mortgage lenders also need to examine unreimbursed employee business expenses on Form 2106, which are typically subtracted from a borrower’s income. Examples of these expenses are when borrowers pay out of pocket for uniforms, mileage, cell phones, marketing or advertising and other costs. If you’re not sure whether or not to include these expenses on your 2014 return because you are looking to get pre-qualified for a mortgage, it’s best to speak with a qualified loan officer to go over what is needed.
If you obtained a mortgage in 2014, you will want to bring your mortgage interest statement and your Settlement Statement to your tax preparer so he or she can determine whether or not you have enough deductions to itemize. Don’t worry if you don’t – it just means that your standard deduction is higher, which is the case a lot of times for married couples filing jointly.
Credits versus Deductions
Deductions and credits are similar, but not the same – they both reduce your tax liability, but in different ways. A deduction is subtracted from your taxable income; a credit is subtracted from your tax liability. For instance, if your taxable income is $100,000 and you have $30,000 in deductions, your taxable income become $70,000. If you have a tax liability of $7,000 (money you owe the IRS) and you have $5,000 in credits, your tax liability becomes $2,000.
If you’re trying to pre-qualify for a mortgage and expect to be qualified on your $100,000 income, this is where the deductions and credits may have an adverse affect.
Knowledge Is Power
Most people know to tell tax preparers about life events, such as marriage, divorce or buying a house, but having a conversation with your tax preparer about future events or letting them know about off-beat scenarios can also be important. A tax preparer once told me she had a client for years and one day, the woman mentioned a foster child. It turned out the client had been fostering children for years, but never told her preparer, and the preparer had no way of knowing without the client’s disclosure. After filing amended returns, the preparer was able to get her client more than $10,000 in back refunds.