So you won an employment lawsuit. What does that mean for your tax return come April? How do the tax laws relate to the tax on money settlements and damage awards? Employment legal actions are complex and can sometimes seem unfair. The following factors help to determine the actual taxation of the award: Continue reading
Many of us have taken out a home loan. It is not uncommon for individuals to loan money to relatives to help them buy a home. In those situations, it is also not uncommon for a loan to be undocumented or documented with an unsecured note. The unintended result is that the home buyer cannot claim a tax deduction for the home loan interest paid on the loan given by their helpful relative.
The tax code describes qualified residence interest as interest paid or accrued during the tax year. This is on acquisition indebtedness or home equity indebtedness with respect to any qualified residence of the taxpayer. It also provides that the term “acquisition indebtedness” means any indebtedness that is incurred in acquiring, constructing, or substantially improving any qualified residence of the taxpayer, and is secured by such residence. There are also limits on the amount of debt and number of qualified residences that a taxpayer may have for purposes of claiming a home mortgage interest tax deduction. For the purchase of this article, those details are not covered. This article focuses on the requirement that the debt be secured.
Secured debt means a debt that is on the security of any instrument. These include a mortgage, deed of trust, or land contract:
- that makes the interest of the debtor in the qualified residence-specific security of the payment of the debt,
- under which, in the event of default, the residence could be subjected to the satisfaction of the debt with the same priority as a mortgage or deed of trust in the jurisdiction in which the property is situated, and
- that is recorded, where permitted, or is otherwise perfected in accordance with applicable state law.
In other words, the home is put up as collateral to protect the interest of the lender.
Thus, interest paid on undocumented loans, or documented but unsecured notes, is not deductible by the borrower. Yet it is fully taxable to the lending individual. The IRS is always skeptical of family transactions. Do not get trapped in this type of situation. Take the time to have a note drawn up and recorded or perfected in accordance with state law.
Do you have questions about Home Loan Interest?
If you have questions related to this situation or other issues related to the deduction of home mortgage interest, please give call our office at 781-849-7200.
Tax Season is Here – Only 2 Weeks Left!
Interest on your vehicle loan, did you wonder how to claim it on your taxes? Is it tax deductible? That depends, how is the vehicle is being used? Is it for business or personal use, the tax form on which the expenses are being deducted, and the type of loan you secured.
If the loan were a consumer loan secured by the vehicle, then the following rules would apply:
- If the vehicle is being used partially for business and the expenses are being deducted on your self-employed business schedule. Only then is the business portion of the interest deductible as business interest. The personal portion of the interest will not be deductible.
- If the vehicle is being used in part for business as an employee and the expenses are being deducted as an itemized deduction. In this case, neither the business portion nor the personal portion of the interest will be deductible.
- If the vehicle is entirely for personal use. None of the interest will be deductible. This is because the only interest that is still deductible as an itemized deduction is home mortgage interest and investment interest.
Other Alternatives for Deductible Interest on a Consumer Loan
As an alternative to a nondeductible consumer loan, you might consider purchasing that vehicle with a home equity line of credit. Generally, current law allows individual taxpayers to borrow up to $100,000 of home equity and deduct the interest on that loan as home mortgage interest. This would also apply to the purchase of a vehicle or motor home. Using a home equity line will generally make the interest tax deductible.
Before borrowing against the home, you should consider the following:
- Treat the home equity loan like a consumer loan and pay it off over the same period of time you would have had to pay the consumer loan. Otherwise, you may reach retirement age without having the home paid for.
- When buying a car, you can sometimes get very favorable interest rates or a rebate. To determine which is best, compare the difference in total loan payments over the life of the loans to the rebate amount.
- It is also good practice to make sure the benefit of making the interest deductible is greater by using the home equity line of credit than the benefit of the low interest consumer loan or the rebate.
- If there is any chance of defaulting on the loan, the repercussions from defaulting on a home loan are far more serious than on consumer debt.
Were you hoping to deduct your vehicle loan interest?
Do you need assistance deciding what coarse of action is best for you and your business? There are less than three weeks to go to file your taxes. Do you have questions about filing your tax refund? If you have thoughts, questions or concerns about a strategy, contact us or visit any one of our locations. We have an ultra-convenient service and can schedule an appointment for you. You may also leave your comments below or post on our Facebook, Google+ or LinkedIn pages.
Tax Season is Here!
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