Qualified Home Mortgage Interest and 8829

[SunTaxMan]

Some of taxpayer's interest paid on refinancing used for college expenses and does not meet "qualified" for Schedule A.

Can I use it for 8829?

I am thinking I would use ALL interest paid before applying the 8829 %, and would then reduce the Schedule A portion by the "unqualified" $.

[jainen]

>>I would use ALL interest paid before applying the 8829 %, and would then reduce the Schedule A portion by the "unqualified" $.<<

It might be possible to find a way to structure such payments; not what you are describing, though. You should discuss this with a tax professional who can put it in perspective for your specific circumstances, research possible authority, and advise you of the chances for success and possible penalties.

You can elect to treat a home mortgage as not qualified, but it is doubtful (or at least highly controversial) that you can do so for a partial debt. A similar controversy surrounds taking a direct business expense for a home office. You can do that with a whole mortgage, but probably not with just part of a mortgage.

I didn't understand about the college expenses. They would presumably come under the $100,000 equity limit, and be eligible for any available education credit or deduction as well.

[SunTaxMan]

What I was looking for was an opinion as to whether 8829 Mortgage Interest is limited in the same was as Schedule A Mortgage Interest, i.e., "qualified." For example, "telephone" expense is limited on Schedule C to "business use", but on 8829 ALL telephone expense, even the base billing each month, is included in the "Utility" entry.

Re: "college expenses." Taxpayer used Home Equity loan proceeds to pay for college for his children. $100,000 limit is not relevant because the loan is already in excess of both $100,000 and original acquisition/improvement debt limits - thus the 1098 Interest does not qualify for Schedule A.

As far as eduction credits, I was not aware that the "source" of the funds used to pay for college was a relevant issue for the credits, i.e., doesn't matter if taxpayer got funds used for college expenses from W-2 wage, savings account, piggy bank, or lottery winnings.

[jainen]

>>on 8829 ALL telephone expense, even the base billing each month, is included in the "Utility" entry<<

There is no statutory authority for this treatment. No part of the base rate for a first phone is allowable as a home office or business expense. A telephone is not "utilities" in either tax law or common usage. In fact, the instructions to Form 8829 (page 2) specifically prohibit ANY telephone expense.

Your educational costs give perspective to this issue. At least for this purpose there can be no doubt that even when a home mortgage exceeds "qualified" limits it can not be traced to another tax benefit. Section 221 clearly states that you can't deduct student loan interest unless the debt was incurred "solely to pay qualified higher education expenses." But you are correct that the actual expenses, other than interest, can be used to claim education credits.

[SunTaxMan]

You said.......

>>on 8829 ALL telephone expense, even the base billing each month, is included in the "Utility" entry<<

There is no statutory authority for this treatment. "

My reaction. I didn't think there WAS any "statute authority." I couldn't recall any. What this means to me is there is no "restriction" on this application. Correct? In the absence of spcification in the regs, etc., I don't even need to "disclose" this, just take the deduction - BECAUSE I am not taking a positon that IS in contradiction to the regs. Correct?

The question that remains -- IS including "unqualified" mortage interest in the "mortgage interest" figure used on the 8829 a "position" that has a "more than likely" chance of acceptance (in audit). Schedule A "qualified" mortage interst HAS the specified restriction, so to take the deduction on Schedule A is in contradiction to the regs. Taking the deduction on 8829 is NOT in contradiction to the regs, indeed is not even ADDRESSED in the regs. The further consideration -- on 8829 the figure would be included in "utilities" - ALL utilities, not just those utilities that would be bonafide Schedule C, E, 1120, 1065, etc., "utilities" for business expense deduction. Correct? 8829 is not addressing "tax deduction" but "costs" of maintaining the home office (which includes "utilities."

You said.......

"No part of the base rate for a first phone is allowable as a home office or business expense."

My reaction. I agree - in general terms. For example, for the Minister of Religion, the base cost of the house phone is never a tax deduction, BUT for purposes of "Housing Allowance" the total cost of the phone (not JUST toll calls) IS included in the "Actual Cost" of maintaining the home. Different situation, different perspective. Here, we are not addressing the base cost of the telephone as a direct, specified "telephone" deduction, but its inclusion in the term "utilities" for the cost of maintaining the home (part of which is the home office).

You said..........

"A telephone is not "utilities" in either tax law or common usage."

My reaction. I beg to differ as that "telephone" IS a normal inclusion in "utilities" To illustrate. http://en.wikipedia.org/wiki/Utilities for one. A simple dictionary definition for another.

[jainen]

>>In the absence of specification in the regs, etc., I don't even need to "disclose" this, just take the deduction - BECAUSE I am not taking a position that IS in contradiction to the regs. Correct?<<

Well, no, that is NOT correct, not a bit of it. Don't get all Jeffersonian about being able to do anything not expressly prohibited; the old Sage of Monticello never got audited by the IRS. The tax code is exceedingly clear that ALL income is taxable unless expressly EXEMPTED--you simply can not make up your own deductions.

I won't argue about how a wiki database might define telephones (your link is to "Public Utilities," a somewhat different topic). Although I brought up "common usage" myself, telephones are pretty well covered under actual tax regs and rulings. You are flat wrong on that point.

It's always harder to do retroactive tax planning. If the taxpayer had taken a second mortgage, he might have had a chance to trace it to college costs. There is no chance as part of a large first mortgage.

In my opinion, a similar restriction applies to a home office. It can only take a percentage of the otherwise deductible mortgage amount (unless you elect the ENTIRE mortgage out). That's why Form 8829 separates it from insurance and repairs, and an employee can't deduct it at all. Carefully research Reg Sec. 1.163-10T and any related case law. It says the tracing rules only kick when you have greater than 100% loan-to-value. Some people may suggest a more aggressive interpretation, but I don't know that anyone has ever succeeded with it.

[joanmcq]

I agree with jainen on both the phone and the interest. The first phone line into the house is not deductible, on either the 8829 or anywhere else. If your only phone is a cell, too bad, its considered the first phone line, and not deductible. Period.

As to the interest, if a second was taken solely for the college costs, the tracing rules might apply. However, it seems your taxpayers have probably topped out the student loan interest deduction income limits. But they didn't. They just took out a big bunch of cash over and above aquisition debt, so the $100,000 limit on home equity would apply. And it would apply to the 8829 as well.

[Booger]

Let's see.......average monthly phone bill 125.00.

125 x 12=1500

Say Home Office square footage is 5% of total square footage.

5% x 1500 = 75

Tax savings on 75 deduction (Assuming 20% rate) = 15.

Doubt if IRS Agent would bother looking at it.

Booger

[Julie]

Not for that alone. But if they have reason to audit the 8829, they just might.

Let's see.......average monthly phone bill 125.00.

125 x 12=1500

Say Home Office square footage is 5% of total square footage.

5% x 1500 = 75

Tax savings on 75 deduction (Assuming 20% rate) = 15.

Doubt if IRS Agent would bother looking at it.

Booger