W FORM 1098
Have you ever read your Form 1098? This is the form that reports interest you paid on your mort- gage. Have you really read it closely — not just checked the amounts of interest and property taxes but read the “Notes, Warnings and Cautions”? I pulled out mine from last year. Here is what it says: “Caution. The amount shown may not be fully deductible by you. Limits based on the loan amount and the cost and value of the secured property may apply.” How can this be? Well, your mortgage holder reports all interest you pay and does not account for the fact that some of the interest might not be deductible. This can occur due to three different rules when it comes to deducting mortgage interest. First, you can only deduct mortgage interest on up to $1 million ($500,000 if married filing separately) of
residential-acquisition debt. Acquisition debt is debt used to purchase or improve the residence. The $1 mil- lion limit applies not only to your primary residence but also to a second home. So, if you have $600,000 mortgage balances on both your primary residence and your beach house, you can’t deduct all interest re- ported on your Form 1098. (Under certain circumstances, you can consider up to $100,000 above $1 million as home-equity debt). If you don’t tell your tax preparer the size of the mortgages or correct the amount you input into your computer tax program, you’ll get garbage out. Second, you are limited on how much interest you can deduct on home equity loans as well. You can only
deduct interest on $100,000 of home-equity debt. If you refinance your house and pull out equity, your Form 1098 won’t segregate your equity and acquisition interest. You can produce some garbage here if you refi- nance your home, take $150,000 of equity out, and then input the total interest reported on your Form 1098 into your tax preparation software or don’t tell your tax preparer you refinanced and took out equity. Finally, interest on home-equity debt taken as a deduction on Schedule A (Itemized Deductions) must be
added back to your income when determining whether you owe the Alternative Minimum Tax (AMT). In other words, no home-equity debt interest is deductible when calculating AMT.
58 MILITARY OFFICER FEBRUARY 2016
WE’VE ALL HEARD THE SAYING “GARBAGE IN, GARBAGE OUT.”
While the saying originates in computer programming, it holds true when it comes to your taxes — whether you do your taxes yourself or pay someone to do them for you. Forms and statements you receive to complete your taxes often are incomplete or not the fi nal answer. And if you rely on incorrect informa- tion (garbage in) to fi le your return, the results might not be what they should be (garbage out).
The tax code is complicated. Even automation or bringing in a “pro from Dover” won’t guarantee the right an- swer if you start with incorrect data. If you take a moment to think through your situation and look for times you got “creative” or something was ab- normal, and you let your tax preparer know or check your numbers before you put them into your tax program, you’ll make sure you’re not putting garbage in. Here are three examples.
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