Tax Deductions For Interest Payments
Because many of our clients deduct interest payments from their taxable income, we want to explain the current law, at the Federal level, for doing so... be careful here, as many people are getting in trouble for doing this incorrectly, and the costs of penalties and interest to the IRS can be high...
Current Law: In order to take mortgage interest deductions (MID), taxpayers must comply with the following rules, where applicable.
- Debt on a principal residence and a second home, combined, may not exceed million. (If mortgage debt exceeds million, interest on the increment above million is not deductible.)
- Debt on home equity loans (or lines of credit) may not exceed 0,000.
- All debt (mortgage debt and home equity debt) must be secured by the principal residence or the second home for which the deduction is claimed.
- Only debt used to acquire, construct or substantially improve a residence qualifies for a deduction. (This debt is referred to as acquisition indebtedness.)
- MID on refinancings is allowed only to the extent that the amount of debt on the refinancing does not exceed the amount of outstanding debt that is refinanced.
- Points (or prepaid interest) on refinanced debt is not deductible but must be amortized over the term of the loan.
- Interest on acquisition debt is deductible for purposes of computing both the regular income tax and the alternative minimum tax (AMT). Interest on home equity debt, however, is not deductible in computing the AMT.
Take a look at number 5 above. Do you know anyone who refinanced their home in the last few years...not for improvements, but just to pull out cash at favorable interest rates, taking advantage of the appreciation in the market? If you know anyone who falls into this situation, and there are many who do, are they taking a mortgage interest deduction in an amount that they are not entitled to take? Interest deductions on loan amounts exceeding the acquisition loan payoff plus 0,000 are not allowable. We know that there are many who are taking interest deductions they are not entitled to take. Please be careful!
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