WAIST-DEEP AND PADDLING HARDER

Sorry, it's been a few days since my last blog. It is that time of year!! The incoming returns have gained a steady pace and keeping up is increasingly more challenging. The hours are longer (no kidding!), but the company is good. We are all trying to keep our sense of humor. I took time out Thursday night to attend a fundraiser for Gov. Deval Patrick. I told the organizers ahead of time that I had no funds to give, but they told me to come anyway. It was a small gathering and the Governor was nice enough to give everyone who wanted a one-on-one.  Believe it or not, when I got my turn I did not talk about tax reform or how horrible Taxachusetts is.   I took my shot at education reform for the gifted student - the one who is out-pacing the standard curriculum. Maybe then they won't all turn out to be tax preparers (just kidding!).

What surprises me is that there has been no major tax scandal making the headlines. It seems as if the IRS always waited until February or March to announce that some major star was under indictment for failure to pay their taxes. I just loved the scare tactic! It hasn't happened this year. Maybe we really do have a nicer, gentler IRS.

Mortgage Interest

My feeling is that people are getting this one wrong. Over the past few years, as interest rates dropped and then stayed low, many people have refinanced their mortgages.  This is a good thing. We all want our monthly nut to be as low as possible. Be careful here. There is a trap for the unwary. The general rule is that you can deduct 100% of the mortgage interest on what is called acquisition indebtedness up to $1 million of debt. In its simplest form, acquisition indebtedness is the mortgage you take out when you buy your house. Once that amount is established, you cannot deduct the interest on a greater amount, unless you use the greater amount to improve your house.

Vacations are not deductible

Suppose, for example, that you purchased your modest $400,000 house and took out a $360,000 mortgage. Over the next period of years, you paid that $360,000 down to $300,000. When mortgage rates fell, you jumped at the chance to refinance. But you didn't just refinance the $300,000, you took an extra $20,000 to go on vacation. The bad news is that the interest on that extra $20,000 is not deductible. The good news is that you probably took the deduction anyway. Here's why: 1) you had no clue that some piece of mortgage interest might not be nondeductible; 2) the mortgage holder issued you a form 1098 reporting the full amount of interest you paid during theyear and you believed that was a good number to report on your taxes.  I'm sure many preparers unknowingly do this wrong because we simply do not have the information to do it right. If all the mortgage holders were required (they currently are not) to report the ending balance along with the interest paid, then we would have a shot at seeing that you refinanced and for how much.

Home Equity Indebtedness

This is your second bite at the apple.  There is a second rule that says you can deduct the interest on up to $100,000 of home equity indebtedness.  Assuming you have sufficient equity in your home, this is a line of credit you can use for anything you want. It does not have to be used to improve your home.  What makes it deductible is that it is secured by your home. If you want that vacation to be tax deductible, borrow from your home equity line. Actually, I'm not saying you should do that at all. It is just an example. You should save for your vacations, not go into debt for them. The point is that you could use that $100,000 for anything you needed, such as college tuition or catastrophic medical bills - and the interest is fully deductible.

Communication

Once again, it comes down to this. There has to be a dialogue. The preparer needs to know you refinanced and what the balances were. The preparer also needs to know if you are drawing on the home equity line. Have a conversation. Be proactive. Call me before you do something financial. Let's talk.