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Tax Deduction on Home Equity Loan
Home equity interest is tax deductible under certain circumstances. Interest is an itemized deduction if you paid the interest, where legally responsible for the loan, and secured the loan with your home. If you don't meet these conditions, you can still deduct the interest, just under another category.
Basic Requirements To Deduct Mortgage Interest
The IRS has three basic requirements that you must meet in order to deduct mortgage interest. First, you have to be legally responsible for the loan. You can't deduct interest you pay for someone else's loan.
The home equity loan also has to be a secured debt for a qualified home. It either has to be your main home or second property. It cannot be rented out or used for business purposes. If you do use a room as a business office, that part of the house can be written off as a business expense.
The final requirement is that you file a 1040 with itemized deductions.
Fully Deductible Interest Has Caps
In most cases, you will be able to fully deduct the interest you paid on a qualifying loan. The loan has to be for the fair market value of the property or less. Loans originating prior to October 13, 1987 are automatically grandfathered in.
Loans after 1987 have caps on qualifying loan amounts. If the home equity loan was taken out to purchase, construct, or improve a home, then it qualifies for the entire deduction up to $1 million when filing jointly. Home equity loans used for other purposes qualify for deductions up to $100,000.
Special Cases For Interest Deductions
The IRS has also made provisions for military personal and ministers. If you receive a non-taxed housing allowance, you can still deduct your mortgage interest.
You can also deduct early payment fees for selling or refinancing your home. In some cases, late payment fees can also be itemized.
Tax Laws Change
Before taking any actual tax deduction, double check with IRS regulations to be sure you are in compliance. Each year tax laws change, so check either with the IRS publications or an accountant. They will be able to give you the most up to date information and possibly point out additional deductions.
Where should an individual taxpayer deduct tax preparation fees? The obvious answer might be on Schedule A of Form 1040 as a miscellaneous deduction. Are tax preparation fees deductible only on Schedule A for all taxpayers? Thankfully, the answer is no.
Deducting tax preparation fees on Schedule A will provide little or no benefit for most taxpayers because the total miscellaneous deductions must exceed two percent of the taxpayer's adjusted gross income to provide any benefit. In addition, the taxpayer's total itemized deductions must usually exceed the standard deduction amount to provide any tax benefit.
The IRS ruled in Rev. Rul. 92-29 that taxpayers may deduct tax preparation fees related to a business, a farm, or rental and royalty income on the schedules where the taxpayer reports such income.
A taxpayer who is self-employed may deduct the portion of the tax preparation fees related to the business, including schedules such as depreciation schedules, on Schedule C of Form 1040 as a business expense. The tax preparation fees deducted on Schedule C save the taxpayer income tax and self-employment tax.
A taxpayer who is self-employed as a farmer would deduct the portion of the tax preparation fees related to the farm on Schedule F of Form 1040. The tax preparation fees deducted on Schedule F save the taxpayer income tax and self-employment tax.
A taxpayer who has rental and/or royalty income reported on Schedule E of Form 1040 would deduct the portion of the tax preparation fees related to the rental and/or royalty income on Schedule E. The tax preparation fees deducted on Schedule E save the taxpayer income tax. However, the tax preparation fees deducted on Schedule E do not save the taxpayer any self-employment tax because the rental and/or royalty income reported on Schedule E is not subject to self-employment tax.
A taxpayer may not deduct all of the tax preparation fees on Schedules C, E, and F of Form 1040. The tax preparer should provide a statement to the taxpayer that indicates how much of the tax preparation fee was related to the taxpayer's business, farm, and/or rental and/or royalty income. The taxpayer may deduct the remainder of the tax preparation fee only on Schedule A.
If the tax preparer does not provide the taxpayer with a detailed statement showing how much of the tax preparation fee was for the taxpayer's business, farm, and/or rental and/or royalty income, the taxpayer shoud ask the tax preparer for an itemized statement. If the tax preparer will not provide an itemized statement, the taxpayer should use a reasonable allocation. In that case, the taxpayer should seriously consider using a different tax preparer next year.
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