WHAT CONGRESS SHOULD DO, BUT PROBABLY WON’T

What the idiots in Congress fail to do when they add “tax expenditures” to the Tax Code is take into consideration the special record-keeping requirements that apply to specific deductions and credits.

Thankfully they did recently require basis reporting on Form 1099-B.  Surprisingly, for Congress, that was a step in the right direction.

Here is one example –

Interest on home equity debt (money not used to buy, build, or substantially improve real estate) is deductible only on principal up to $100,000.  Form 1098 is used to report mortgage interest paid, but it does not differentiate between acquisition debt and home equity debt.  The taxpayer must internally keep track of the difference between their home equity debt and home equity debt over the life of the debt. 

This is easy if there is one acquisition mortgage and one separate home equity line of credit, and never the twain shall meet.  But in reality, taxpayers refinance and consolidate debt multiple times, often more than once in a single year, co-mingling acquisition and home equity debt, and the treatment of closing costs on mortgage refinance or consolidation is an issue.  I do not personally know of one single taxpayer who keeps records of the separate allocation of acquisition debt and home equity debt.

I would expect that as much as half of the Schedule A deductions for mortgage interest could be incorrect – due to complexity and not intentional fraud.  

In rewriting the Tax Code the idiots in Congress must take into consideration the real world requirements of complying with whatever “tax expenditures” they deem appropriate to keep.

I have recommended limiting the mortgage interest deduction to acquisition debt on a principal primary residence. This would require special new rules and regulations for banks and mortgage companies for issuing home-secured loans.

For example -

A “mortgage” loan would only be permitted for “acquisition debt”. Interest on a “mortgage” for a taxpayer’s primary personal residence would be fully deductible, up to the current acquisition debt limitations. “Home equity debt” would have to be a totally separate loan, and interest on this type of loan would not be deductible. A Form 1098 would only be issued for interest paid on a “mortgage” loan, and the bank or mortgage company would be required to report only interest paid on up to $1 Million of principal, and indicate if the mortgage was secured by a primary personal residence.

One would not be able to refinance a home-secured loan to include both types of debt in one loan. Therefore a homeowner could not refinance a “mortgage” to get additional money in hand unless he/she could substantiate to the lender that the money is used to “substantially improve” the secured residence. One would have to refinance the “mortgage” for the exact same principal, adding perhaps related closing costs, and take out a separate “home equity” loan to get any money in hand.

By instituting these requirements as part of federal law a taxpayer, or his/her preparer, would truly be able to just take the amount of mortgage interest reported on the Form 1098 for the primary personal residence and transfer it to Schedule A.

While this is what the idiots in Congress “should” do – remember that they are idiots, and lazy idiots at that, so don’t hold your breath.

TTFN