Tuesday, October 17, 2017


According to the cocktail napkin scribblings that is the “framework” for tax reform currently being touted by arrogant demagogue Donald T Rump, one of the very few itemized deductions that will remain will be the deduction for home mortgage interest.
I do believe that the deduction for acquisition debt interest (but not home equity debt interest) for a taxpayer’s primary principal residence should be kept (as well as the deduction for state and local income and property taxes).  Not to support the housing market, but as part of an attempt at “geographical equalization”.
What do I mean?  Americans are taxed based on income measured in pure dollars.  But the “value” of one’s level of income differs, sometimes greatly, based on one’s geographical location.  A family living in the northeast (New York, New Jersey, Massachusetts, and Connecticut) or California with an income of $150,000 may be just getting by, while a similar family that resides in “middle America” lives like royalty on $150,000. Many components of the Tax Code are indexed for inflation, but nothing is indexed for geography.
It costs an awful lot to live in the northeast and California. State and local income and property taxes are the highest in the country. The cost of real estate is also excessively high, and so acquisition debt is higher. As a result, one must earn a lot more money to be able to live in these states – and so salaries are arbitrarily increased to reflect the higher cost of living.  Since we pay taxes on “net income” after deductions, allowing an itemized deduction for these items would help to somewhat geographically equalize the tax burden.
In my opinion, the current deduction for mortgage interest – both on Schedule A and Form 6251 (Alternative Minimum Tax) is perhaps the area of the Tax Code where proper documentation and strict adherence to the law is the most overlooked (or actually ignored). 
Let’s take a look at the current deduction for mortgage interest.
“Qualified residence interest” on debt secured by a residence, aka mortgage interest, that is paid on your primary and secondary residences may be deductible on Schedule A.  But just how much can you deduct?  It depends. 
There are three types of qualified residence interest debt -
1) Grandfathered debt – debt acquired on or before October 13, 1987, that was secured by a main residence or a qualified second home.  It does matter what the proceeds of the loan were used for, as long as the debt was secured by the property.  The interest deduction is not limited.  Interest on grandfathered debt is deductible in full as mortgage interest.  
2) Acquisition debt - debt acquired after October 13, 1987, that was used to buy, build, or substantially improve a main residence or a qualified second home. A “substantial improvement” is one that adds value to the home, prolongs the home’s useful life, or adapts the home to new uses.  You can deduct the interest on up to $1 Million in principal ($500,000 if Married Filing Separately). Qualified acquisition debt cannot exceed the cost of the home and any substantial improvements. 
3) Home equity debt – debt acquired after October 13, 1987, that is secured by a main residence or a qualified second home that is not used to buy, build, or substantially improve the property.  There is no restriction or limitation on what the money can be used for; you can use it to buy a car, to pay for college, or to pay down credit card balances.  You can deduct the interest on up to $100,000 ($50,000 if married filing separately).
Only grandfathered debt interest and acquisition debt interest is deductible in calculating the dreaded Alternative Minimum Tax (AMT).  Home equity debt interest is NOT deductible for AMT. 
Taxpayers are required to keep separate track of acquisition debt and home equity debt, to make sure that the deduction on Schedule A does not include interest on debt principal that exceed the statutory maximums, and to determine what interest deduction to add back on Form 6251 when calculating Alternative Minimum Taxable Income.  However, I firmly believe that 99.5% of taxpayers do not do this.  I do not know of any taxpayer who does.  And I expect that the majority of tax preparers do not do this for their taxpayer clients.
The cocktail napkin scribblings do not indicate if the entire current deduction for mortgage interest – both acquisition debt and home equity debt – or the current limitations based on debt principal will be kept.
I have created a MORTGAGE INTEREST GUIDE.  In it I explain just about everything you need to know about deducting qualified residence interest on your Form 1040.  It includes two worksheets – one for Acquisition Debt Activity and one for Home Equity Debt activity – and a detailed example of how to use the worksheets.
My MORTGAGE INTEREST GUIDE is only $2.00 delivered as a pdf email attachment - or $3,00 for a print version sent via postal mail.  Order your copy by sending your check of money order payable to TAXES AND ACCOUNTING, INC, and your email or postal address, to -
So, what are your thoughts on the deduction for mortgage interest?

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