Tom Kelly: Double-check a couple of deductions before April 15

One of the biggest financial advantages of owning a home is the mortgage interest deduction, but the amount many taxpayers submit is often greater than the allowed limit.

And, while home offices have become more popular because of convenience and the downturn in the economy, many homeowners may be better off not taking the deduction because of the depreciation recapture upon sale.

Both the mortgage interest and home office topics need to be double-checked before the April 15 deadline. The past two years, the deadline was extended because April 15 fell on a weekend.

Taxpayers requesting an extension will have until Oct. 15 to file their 2018 tax returns. Remember that an extension of time to file is not an extension of time to pay. You will owe interest on any past-due tax and you may be subject to a late-payment penalty if timely payment is not made

In a recent column, we discussed the benchmark for the mortgage interest deduction, or MID, is set at acquisition debt – the amount of debt in place when the home is acquired. For example, if you buy a $200,000 home with a $50,000 down payment, your acquisition debt is $150,000.

Many consumers stay in their homes for years, accumulate appreciation and then refinance to put a child through school, mom into a nursing home or attend a much-anticipated family reunion. The new debt on the refinance will qualify as home acquisition debt only up to the amount of the balance of the old mortgage principal just before the refinancing.

For example, let’s assume your home is now worth $300,000 and you need to take cash out for a college tuition. The balance of your loan before you refinance is $135,000 and you take $100,000 “cash back” for a new loan balance of $235,000. However, the maximum allowable mortgage interest deduction remains $135,000 – the acquisition debt, not the bigger number from the refinance.

You can deduct the loan fees (“points”) paid to buy or improve your main home in the year of purchase. You cannot deduct these fees in the year you refinanced if you refinanced only to obtain a lower interest rate on your loan.

According to Rob Keasal, real estate tax specialist in the accounting firm of Peterson Sullivan LLP, the deduction for home equity debt is no longer deductible after 2017. And, there is no grandfather provision. So the interest on debt, up to $100,000, that was in place in 2017 is no longer deductible for home equity debt.

While the perception of the MID is monumental, the actual impact of MID is not as far reaching as most assume. Only 42 percent of households currently benefit from the MID. About 67 percent of households own a home, and of those owners, less than 63 percent pay enough interest to justify itemizing deductions. In fact, 29 percent of homeowners, many of whom are retired, don’t even have a mortgage.

The mortgage-interest deduction is not a dollar-for-dollar tax deduction; it reduces taxable income. Before 1987, mortgage interest on all residences could be deducted without limit. Since then, consumers with more than two residences are required to choose two “qualified” residences for which mortgage interest could be deducted, but the selected residences are allowed to be juggled into the “qualified” category from year to year.

Some accountants have jokingly referred to the concept of deducting interest on two homes as the “Congressman’s Rule” because some of our lawmakers have a residence in the nation’s capital and another in their home state.