Boy, was I surprised. Here I am advising all of you (but especially my clients) of all the changes that happened to affect tax filings this year. And, I missed one. A big one.

 

Several of my clients (including me, although I am a pro bono client of my firm) provide mortgages to individuals and companies. And, some more actually share mortgage payments with other parties, so when they receive a 1098 (the form that denotes the mortgage interest paid) as the principal borrower, they need to provide a 1098 to their co-borrowers so that they may also declare their portion of the deductible mortgage interest paid.

Well, the 1098 this year is a far more detailed document. For years, it transmitted to the borrower (and, of course, to the IRS), how much interest was paid, was any interest overpaid (and, therefore, refunded), and points paid on the loan. Basically, a breeze for me to complete for my clients.

Not this year. That highway bill that affected our taxes? (I discussed it here, among other places.) It changed Form 1098 in a very big way. Now, the information really helps the IRS determine if you have the right to deduct your mortgage interest- and how much of it may be deductible.

As you can see from the new form, the IRS (and you) now knows the outstanding principal (as of the beginning of the year), the date you took the loan out- and the address of the property being mortgaged.

I am sure you’ve heard a certain party always complain that the mortgage interest deduction should be eradicated; at the very least, it wanted the IRS to make sure folks were not “over-deducting”. You do recall that one is not allowed to deduct more than $ 1 million in “home acquisition debt” (that’s read as mortgage principal for us common folks), with an additional $ 100,000 that can be accrued as “home equity debt” (the familiar “HELOC” or home equity line of credit, among other terms).

Here’s the kicker. You know that refinance you just finessed? Oh, there’s a problem with that. Or, maybe not. Because that refinancing- the one that brought you a check as you increased your debt? You better be able to prove that you used that money to improve your home, putting on an extension, etc. Because if you used it to buy a car, pay down credit card debt, or similar pursuits- the IRS considers that to be generally non-deductible. So, only part of your mortgage interest is going to be deductible on Schedule A (Itemized Deductions).

Two examples may make this rule clearer.

Example 1: You bought your home some years ago for $ 750K and put down $ 150 K to purchase it. So, Your $ 600K mortgage has been paid down to $ 293K. And, now you just borrowed $ 440K. This covered the student loan debt for your kids, your credit card debt, leaving you with a fresh start.

Um. Not quite. You see your “acquisition debt” is still $ 293K (the balance of the original mortgage). And, you can only use up to $ 100K for home equity. So, that debt you took on over $ 393K is not deductible. Only 89.3% of your mortgage interest is deductible.

Example 2: Same house, same payment. But, you only borrowed $ 366K, using the excess to pay for a new car ($44,300), pay down credit card debt )$25K), and pay points on the new mortgage ($3.7K). As you can determine, your “acquisition debt” is the same ($293K), but the total extra amount borrowed is less than $100K. Since your additional home equity debt does not exceed $ 100K,  your entire mortgage is still deductible.

Maybe it’s time you read Publication 936. Or call 703.548.1343 and ask for me.

Because it’s your money at risk.

 

 

 

File Your Income Taxes 2016: Changes that affect Individual and Business tax returns this year