Second Thoughts on a 2nd Home
QUESTION: I have been shopping around for a vacation home for two years, off and on. I came close to buying one a little over a year ago, just as the first tax reform plan came out. My financial adviser urged me to hold off until it became more certain how this tax reform push would shake out. When it all seemed to be dying down, I started looking again. I am very interested in two places, each only a few hours’ drive from Los Angeles. But now, all of a sudden, tax reform seems like a serious threat again. Would I be foolish, from a tax point of view, to go ahead with my plans?--L. A. C.
ANSWER: If you’re worried about the prospect of losing your tax deduction for mortgage interest on a vacation home, don’t be. Both the House and the Senate Finance Committee tax reform plans are much less taxing on the real estate industry than was the original Treasury Department proposal. Neither embraces the Treasury proposals that would have killed the tax breaks for mortgage interest on vacation homes and for property taxes.
So, your only financial concern is whether the lower proposed tax rates will diminish the appeal of the investment. The lower your tax rate, the less the tax value of the investment. In light of this, be sure to shop around for the cheapest interest rate you can find if you do decide to buy that second home and finance the purchase.
For the same reason, mortgage refinancing--which, with interest rates at their lowest levels in many years, is popular among homeowners right now--is likely to become even more attractive if the tax laws are reformed and rates substantially lowered.
While the interest that you pay on a home loan would survive as a tax deduction, most other interest expenses would not under the reform proposals now being debated in Washington. Interest on car loans, credit cards and other types of consumer debt would gradually be phased out as a tax deduction, for example.
Q: Is it necessary to file for a tax refund? My broker fouled up a sale, which led to one correction after another. The upshot is I overpaid federal taxes for the year. But after everything I’ve already been through, I would really rather just let it go and not bother to file an amended return. Am I doing anything illegal if I don’t file for a refund?--L. E. P.
A: The answer--no--shouldn’t surprise you. The Internal Revenue Service isn’t eager to fork over money, and especially not to someone who isn’t particularly interested in receiving it. In order to get a tax refund, you have to file for one. But no one’s going to twist your arm.
Q: I am thinking about switching jobs and one of the incentives the new company is offering is to pay my half of the Social Security taxes due on my income. Is there anything illegal about that?--T. M.
A: As long as someone pays the taxes owed, no one is breaking the law. But be sure your prospective employer continues to have the Social Security taxes deducted from your wages and then reimburses you for that amount. If the employer chooses to pay your half of the tax by simply not having it deducted from your wages, your wages effectively have been increased. That means you are likely to get a bill for more Social Security taxes than your employer paid, and you could have some run-ins with the IRS, which is likely to think your wages are higher than you reported.