You may fully deduct the mortgage interest paid on loan proceeds used to buy, build, or substantially renovate a home, but only if the loans are secured by either your principal residence or one other home, such as a vacation home.
A You may fully deduct the mortgage interest paid on loan proceeds used to buy, build, or substantially renovate a home, but only if the loans are secured by either your principal residence or one other home, such as a vacation home. The total principal amount of the acquisition debt cannot exceed $1 million.
When it is permitted by individual state law, you also may fully deduct the interest on home equity loans secured by a qualified residence, with the total amount for such a loan limited to $100,000. In addition, these amounts cannot exceed your equity in the residence, which is defined as the home's value minus any outstanding loans. With a home equity loan, you can use the loan proceeds for anything you would like, without restrictions.
When comparing mortgage rates, you will also need to recognize the cost and taxability associated with extra costs, such as "points." One point is equal to 1% of the new loan amount. Many mortgages require you to pay points up front. The points are currently deductible as mortgage interest only if paid to purchase, build, or improve a home. As an example, if you pay points on a home equity loan used to buy a new boat, the points must be deducted over the loan period. But if the proceeds are used to finish your basement, the points are considered currently deductible. When refinancing an existing mortgage, any points you pay must be deducted over the life of the loan.
There are also income limitations to deal with. If your adjusted gross income (AGI) for the year exceeds a specific threshold-$150,500 based on your 2006 tax return-your total itemized deductions, other than those for medical expen-ses, casualty, and theft losses, gambling losses, and investment interest, are reduced.
The reduction generally is equal to 3% of your AGI above the threshold, but in no case can the overall reduction exceed 80%. With regard to the alternative minimum tax (AMT), only mortgage interest is de-ductible for AMT purposes. Home equity loan interest, on the other hand, can subject you to the AMT in certain circumstances. Be sure to consult with your tax adviser to determine how the specific issues relating to mortgage interest deductions apply to your own situation.
Q I am confused by the myriad designations used in the financial planning industry. What are the most common designations, what do they mean, and what is really required to obtain them?
A A number of types of financial advisers may be in a position to assist you in many of the financial planning areas. The following list of professionals should serve as a guide in your search for advice.