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Posts Tagged ‘itemized deductions’

Tax Tip: Mortgage Interest Deduction

If you have a mortgage on your personal residence, you’re probably well aware of the mortgage interest deduction, but like many tax provisions, a simple rule can be complex.  There are many factors involving the deductibility of mortgage interest. 

Generally, you are able to deduct the interest associated with $1 million of acquisition indebtedness and $100,000 of home equity debt.  The interest can relate to your principal residence (as defined) and one other residence you select. 

Some of the requirements for deducting the interest associated with acquisition indebtedness are as follows.

  • Acquisition debt is associated with acquiring, constructing or substantially improving a qualified residence.
  • The debt must be secured by the residence.  Not a problem if you borrowed money from a financial institution, since they will definitely secure their mortgage.  However, if you borrowed money from a family member, your loan document may not state that the loan is secured by the property.
  • You must own the property on the debt you are paying and must personally make the payments. For example, if parents pay the mortgage for their children, the interest isn’t deductible by either of them.

The following are some of the rules related to deducting interest on a home equity loan.

  • The home equity loan can’t exceed the equity in your house.  You generally can’t borrow more than the value of your home, but this could be problematic given the recent decline in real estate prices.
  • The proceeds from a home equity can be used for any purpose, except to purchase tax-exempt securities. 
  • Interest associated with proceeds used for purposes other than for a residence may be subject to the alternative minimum tax.

Mortgage points are generally deductible when paid for an initial loan to purchase a property.  Points paid upon the refinance of a mortgage must be amortized over the life of the new loan.

The IRS is very strict in apply the $1 million acquisition and $100,000 home equity debt limits.  However, the Service issued a ruling in 2009 in which they stated that acquisition indebtedness in excess of $1 million to acquire, construct or substantially improve a residence could be considered home equity interest.  Thus, taxpayers could deduct interest on $1.1 million of acquisition indebtedness without having to take out a separate home equity loan.

As you can see, a simple deduction has rather complex requirements.  If you have an unusual situation or are unclear about the tax rules, you should consult a tax professional.  A mortgage interest deduction can drastically reduce your tax bill, but it can also be quite costly if your deduction is disallowed.

2010 Tax Return Delay

The IRS has announced that it will delay the processing of certain 2010 tax returns as a result of the tax legislation passed by Congress on December 16, 2010.  As mentioned in a prior article, there is a cost to business owners and taxpayers for Congress’ delay in reaching a compromise.  You may be thrilled with the tax benefits of the legislation, but you may not be pleased about having to wait to file your 2010 tax return or receive your tax refund.

The following taxpayers are affected by this delay:

  • Anyone who files a Schedule A for itemized deductions
  • Taxpayers claiming a deduction for higher education tuition and fees
  • Teachers claiming a $250 deduction for educational supplies
  • Taxpayers claiming a casualty loss
  • Residents of the District of Columbia claiming a first-time homebuyer credit

The delay is a result of the time it will take the IRS to re-program their computer system to incorporate certain provisions enacted by the bill. The IRS expects to be able to process these returns by the end of February.

According to the IRS, approximately 142 million returns were filed in 2008 (the most recent statistics available), and 48 million taxpayers claimed itemized deductions.  Using these stats, one-third of taxpayers can’t file their return until mid to late-February, even if they have their returns complete.

Granted, many people claiming itemized deductions don’t have all of their information gathered or have their returns prepared by this date.  However, for those who do, this is an added aggravation to an already unpleasant task.

Unfortunately, there isn’t much you can do about it, except to wait and check the IRS website for updates.

There is more bad news.  Since many of the provisions from the tax bill will expire at the end of 2012 (another election year), this whole process will probably be repeated again in two years.  These tax provisions make great campaign fodder, so you can expect Congress to replicate this asinine behavior.  It’s sad commentary that once again, the American taxpayers are paying the price of political posturing.