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 -
TAXES AND ACCOUNTING, INC
MORTGAGE INTEREST GUIDE,
POST OFFICE BOX A
HAWLEY PA 18428
So, what are your thoughts on the
deduction for mortgage interest?
TTFN
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