A Tax Return Deduction That Hurts California Homebuyers.

Pic credit Arvind Balaraman

 

 

 

 

 

 

 

 

It’s hard enough to find tax deductions these days, and everyone wants to pay less in taxes but there is a tax return deduction that hurts California homebuyers.  The problems is that lowering your taxable income or adjusted gross income, takes away from your purchasing power when qualifying for a California home loan and the California first time homebuyer, or a home loan in any state for that matter.

There’s one deduction in particular for wage earners, the schedule A unreimbursed expenses, that can create a problem for those trying to qualify for a home loan.  I’m not an accountant so I’ll give a readers digest version of this deduction.  The schedule A unreimbursed employee expense covers items that are bought with your personal funds that are necessary for your job that your employer won’t reimburse.  Things can range from clothes, to mileage, car repair, and many other things.

Here’s where it hurts.  If you have $5,000 in unreimbursed employee expenses on your 1040 for the year 2010 for example, the lender will take that sum and divide it by 12 months, in this case $416.67 per month and include this payment into your debt to income ratios.  Normally the lender will average the past two years in schedule A unreimbursed employee expense or in some cases if the most recent year was much higher than the prior year, they will use that figure for a worse case example.

Assuming a 30 year fixed rate of 4% that $416.67 per month is a loss in purchasing power of over $87,000 for a new home purchase or a shortage in loan amount for a refinance! Breaking it down further, assuming the information above, per $100 you pay to your creditors in minimum monthly payments, you lose $21,000 in purchasing power!

How does one fix this?  I’ve had people file an amendment to their tax return, but it can mean that you may end up owing the federal government money after removing this deduction and there may be a penalty involved.

Since it’s the beginning of a new year and most people have not got their taxes done yet, a W2 wage earner who is looking to buy a home in 2012 may want to scale back their schedule A unreimbursed expenses for the year 2011 or eliminate it altogether.  Most home buyers that I run into with this expense have no idea how it affects them when it comes to qualifying for a home loan.  Eliminating the deduction may bring less of an anticipated tax refund, or even have you owing taxes depending on your situation but on the other side it definitely helps you qualify for a larger home loan.

If your income can absorb the additional payment created by the schedule A itemization, than you’re okay, but there are many people out there who are unable to purchase or refinance for their loan amount desired simply because they didn’t know how the schedule A unreimbursed employee expense affects them on the other side of the equation.

A sharp Loan Originator should be able to catch this before they run your credit report.  The Originator should ask several questions in regards to the type of industry you work it.  Many sales professionals, nurses, building subcontractors among others have this expense and are entitled to it.  Hopefully the income is sufficient to absorb your monthly obligations, new housing payment as well as your schedule A unreimbursed employee expense (if there is one) and you’ll be able to qualify for your new California home loan.

If you have any questions in regards to this article, a tax return deduction that hurts California homebuyers click here to let me know your scenario!

Best,

Kevin Walton

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