Tax Time Advice--Watch those deductions

Well not exactly tax advice but a caution on how taking deductions can limit your ability to borrow later on.

As most self employed folks know conventional lending can be a challenge. Taking all the deductions you are allowed tends to limit your borrowing ability. Even though someone can be bringing in literally hundereds of thaousands of dollars a year if they follow the rules they can avoid paying taxes on that income. The issue is that these deductions are a "hit" to the borrower's income in an underwriter's eye. The solution is to limit your use of deductions ( yes pay the damn taxes, it's a quality problem to have ) so as to not box yourself out of the ability to borrow down the road.


For those that are W2 employees there is a tax deduction trap that many don't know about, 2106 unreimbursed employee expenses. Any of these deductions are looked at just like an ongoing debt obligation like a car payment, student loan or credit card payment. These can be a killer for a potential borrwer because they don't expect it to be a hit to income. As an example, I had a borrower take 43,000 miles in unreimbursed expenses at .55 a mile. The effect on the tax return was no doubt a positive one, Uncle Sam gave the borrower back every dime that had been taken in withholding. But...the underwriter hit them for $1182 a month for the "ongoing" obligation basically wiping out 1/2 of the income to qualify for a loan. Yes the underwriter gave back .22 a mile in their analysis but it was too great an obstacle to overcome.

The tax time advice?  You should be talking to your mortgage professional about the implications of taking ALL of your allowed deductions BEFORE you file. Once the IRS has your information it is set in stone.