Wednesday, December 20, 2017


One vote down, and one to go (or actually two, as the House must vote again) – as of this writing! Two votes down - one to go.

Complying with the changes in the Tax Cuts and Jobs Act will create a new nightmare for both taxpayers and tax preparers.

On one hand there is some reduced required recordkeeping.  Doing away with the deduction for employee business expenses means that taxpayers who are not reimbursed for expenses by employers under an accountable plan will no longer need to keep track of business mileage and other expense during the year.

But on the other hand, there is the new limitation on the mortgage interest deduction.  

Only interest on $750,000 of “acquisition debt” – money borrowed to buy, build or “substantially improve” a property - can be deducted on new mortgage loans initiated after December 15, 2017.  For existing mortgages, the $1 Million limitation is “grandfathered”. 

Home equity interest is no longer deductible.  Period.  The House bill had grandfathered all existing mortgage debt, including home equity debt, under the “old” law – but I believe the final bill does not grandfather home equity debt.  I actually support limiting the tax deduction to acquisition debt.  Personal interest, like credit card finance charges and auto and pension loan interest, is not deductible.  Home equity interest is personal interest.  Home equity loans may be used to finance capital improvements, but then the debt is actually acquisition debt.   

Under the current law taxpayers are required to keep separate track of acquisition of home equity debt.  Taxpayers frequently refinanced existing mortgages either to get additional money for non-acquisition purposes or to consolidate existing acquisition and equity debt loans.  The Form 1098 issued by banks and mortgage companies did not differentiate between the two types of interest.  I expect at least 80% of homeowners did not separately track the two types of debt.  This was not a problem in many cases, considering the $100,000 principle limitation on the home equity interest deduction.  But now this is truly essential.

Going forward, taxpayers can maintain, or banks and mortgage companies can be required to issue, separate loans for acquisition debt and home equity debt.  And keep these types of debt separate by avoiding the combining of, or not being allowed to combine, the two types of debt instruments when refinancing.  But what about existing mortgage loans?  Here is where the real nightmare will truly occur.

It is the taxpayer, and not the tax preparer, who is required to keep track of the two types of debt.  But what is the tax preparer’s responsibility when the majority of taxpayers do not do this?    

A new Form 1098 should be created to separately report –

1. Total mortgage interest received for the year on all ‘grandfathered’ mortgage debt.

2. Year-beginning principle balance of all ‘grandfathered’ mortgage debt.

3. Total mortgage interest received for the year on ‘new’ acquisition debt on the purchase of, and capital improvement to, the mortgagee’s primary personal residence on up to $500,000 {now $750,000 – rdf} in principle.

4. Points paid on the first $500,000 of principle on the purchase of a primary personal residence.

The form would not report any “new” home equity debt interest.

Mortgage lenders should be required to identify the purpose of the borrowing – acquisition debt or home equity debt – via taxpayer certification, and keep separate internal track of the two types of debt.  Perhaps mortgage lenders should create two separate debt instruments and not combine acquisition and home equity debt in the same loan.  Going forward, for simplicity sake, the closing costs on the refinancing of “new” acquisition debt, where the borrower does not take additional money for anything other than capital improvements to the residence, should be included in acquisition debt.” 

As I look back on this earlier post I think the first 2 items on the list of what should be on the new Form 1098 shouldn't be limited to “grandfathered" debt, but just report the total interest paid for the year and the total year-beginning principle balance.  This information is needed for rental properties, which could include a portion of a taxpayer’s personal primary residence.  There is no limitation on the acquisition interest deduction on Schedule E for rental property.

The new GOP Tax Act obviously provides more complexity than simplification – and truly increases the workload of tax professionals.  Like the Tax Reform Act of 1986, it can also be called the “Accountants Full Employment Act”.


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