It’s that time of year again. We are all preparing and getting our income taxes done, both for personal and business, with the goal being to get as much cash back or pay the least amount in taxes possible.
Heck! If your CPA or tax preparer doesn’t try to help you get all the deductions there are available to you then they aren’t doing their job, right?
It’s all great UNLESS you plan on getting a home loan or buying investment property within the next 2 years. You should be aware that the banks count deductions against you and sometimes will say you don’t qualify because of them.
Here is a typical scenario of an affluent couple in LA getting turned down for a home loan: They have an interest rate of 6.0%, are making all their monthly payments on time and are now trying to lower their payments with an interest rate of 3.875%.
Frank and Heather are the normal LA couple who both work, have kids and a home they have lived in for more than 10 years. They also have healthy retirement accounts of 100K+ in each at least 3 months’ worth of cash reserves in the bank. Oh, and their credit is stellar at 720+, they are never late with payments and always pay their credit cards off every month. (okay, maybe they are more perfect than most, yet you get the idea)
Here they sit with their income crossing over that 6-figure mark with ease, their home has a lot of equity and more than half the loan they are seeking is in a retirement account or sitting in reserves. Their credit score, is well over 720, YET they do not qualify for a home loan. Why? Because of how their taxes look and what they show as taxable income. That’s it, “taxable income”.
This is how it looks: Both Frank and Heather claimed unreimbursed business expenses for $5,500 each per year. Franks’ employer did not pay for the repairs on the vehicle that he used for work. In addition, Heather went to school to get her Master’s degree and the company did not pick it up the tuition. Both deductions qualify and were legitimate, yet had they not taken them they would have qualified for their loan.
This deduction of $11,000 per year averages out to $916.67 per month. The banks will claim that this is the cost for them to earn their salary, and remove if from their monthly income,
Therefore, because of these deductions, they do not qualify for a “lower payment” than what they currently have, even though they have NEVER been late on those payments. I don’t know about you, but I think that this is a private tax on the middle class.
Yet that is the law of our land after the 2010 Dodd-FrankAct. These new guidelines are in place and require the banks to hold these items against you. Basically, requiring you to not take the deductions so you can qualify and forcing you to pay more taxes than needed. Like I said, I think it’s a private tax on the middle class.
So… this year as you sit with your CPA or Turbo-taxsoftware, ask yourself this question: Do I currently qualify for a home loan with the income I showed in my 2016 and 2017 tax returns?
The reason for writing this article is that I began to realize how few people actually don’t have a good certified mortgageplanner as part of their professional team. Those people end up frustrated because they do not qualify for a home loan. If they had been advised differently before they filed their taxes, they would have qualified without any issues.
A good CPA will make sure that you pay the least amount of taxes and save you as much as possible. However, a GREAT CPA will consult with you and a Certified Mortgage planner to review your goals about refinancing or purchasing property within the next 2 years. This will insure that you can take advantage of historic low rates and save thousands of dollars per year in payments, or help you to qualify and get that excellent investment property that you have been planning to buy.
My advice is to meet with a Certified Mortgage planner like myself and have them review your income and tax returns to confirm if you qualify or not. If you don’t qualify, they can help you determine what you will need to claim on your taxes to qualify for that loan you want. You can then take this information to your CPA and instruct them on how you would like your taxes filed.
If you find info helpful, or not, and want to hear more on this topic please let me know by commenting on this blog. Additionally, please feel free to share it with friends, family and co-workers.