Sobering but true: The new, improved, shortened and moreunderstandable Form 1040 and Schedule A are rolling off the pressesby the millions, ready for their yearly Christmas flight to yourdoorstep.
Here's a sneak peek at what's under the wrappings for homeownerswho can't stand the suspense, not to mention the bills. The peek wasprovided to this reporter by friendly IRS elves.
The good news: The 1989 forms continue the trend toward clarityand simplicity inaugurated last year. The home-mortgage instructionssection for the 1040 package now take up less than a page - down froma record four pages in 1987 - and generally are written in plainEnglish.
The rules for 1989 treatment of mortgage interest on yourprimary and secondary homes, including "first and second mortgages,home-equity loans and refinanced mortgages" are as follows:
Rule No. 1: If your mortgage and-or line-of-credit equity loanswere taken out before Oct. 13, 1987, you can deduct all your mortgageinterest, no matter what the total amount. Whether the loans total$15,000 or $15 million, you're home free.
Rule No. 2: On mortgages you took out on your main residence after Oct. 13, 1987, to "buy, buildor improve your home," you can deduct all your interest as long asthe aggregate amount totaled $1 million or less throughout 1989. Theloan limit is $500,000 or less if you're married filing separately.
Rule No. 3: On mortgages that you took out after Oct. 13, 1987,that were used for purposes "other than to buy, build or improve"your homes, you can write off all your interest, "but only if thesemortgages totaled $100,000 or less ($50,000 or less if married filing separately) throughout 1989." Examples of such loans arehome-equity lines drawn to pay off credit-card bills, purchasing anauto or paying your kids' tuition charges.
Note in Rules 2 and 3 the reference to "throughout" 1989. Ifyou discover that you went beyond the dollar limits at some pointduring calendar 1989, IRS advises you to get hold of its revisedPublication 936 (Limits on Home Mortgage Interest Deductions).
Special rule on 1989 mortgage refinancings: The forthcominginstructions make note of a key limitation on interest deductions on home-mortgage financings thatmany property owners did not understand in 1988. The rule affectsall refinancings on home mortgages taken out before Oct. 13, 1987.
The rule works like this: If you refinanced during 1989 for anamount no larger than the balance on the existing mortgage, you cancontinue to deduct all the interest on it.
But if you "refinanced it for more than the balance of the oldmortgage, only the part of the new mortgage equal to the amount youowed on the old mortgage at the time you refinanced it" qualifies forfederal interest write-offs.
That refinancing limitation comes with an important asterisk,however. If you pull out "extra" money beyond your mortgage balanceas much as $100,000 of that extra can be deductible. It's simplytreated as the equivalent of a home-equity loan, carrying a $100,000ceiling as in Rule 3 above.
The instructions also describe how to handle deductions on"mixed-use mortgages" - an exotic-sounding but commonplace form offinancing you may have, but never would have guessed. Mixed-useloans are mortgages whose proceeds went for buying, building orrepairing your house as well as for "other" purposes, such asbusiness investments, education or travel.
The 1989 rules conclude with the traditional IRS holidayentreaty for taxpayer purity on the subject of mortgage "points." Inthe words of the Great Grinch at the Treasury, home-loan points(including loan-origination fees paid in 1989) generally are notdeductible. They must be written off pro-rata year-by-year over thecourse of the loan.
The Grinch's sole exception, in characteristic holiday spirit:"Points may be deducted (if paid in 1989) if the loan was used to buyor improve your main home, the loan was secured by that home, thepoints were paid with funds other than those obtained from thelender, it is customary to charge points in the area where the loanwas made and the points paid did not exceed the points usuallycharged in that area."
If you can pass that test before New Year's, you can write offall your 1989 points. Good luck.
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