Tax Tips and Other Timely Advice
Kathy M. Kristof occasionally answers reader questions of general interest on personal finance. Here are some answers to recent questions:
Q: How much of refinancing fees and expenses are tax deductible? My tax preparer said that none of the costs are deductible and that the expenses just get deducted from the home’s capital gain when it is sold. Is this correct? -- T.C.
A: Not exactly. You can deduct points (a type of loan fee) over the life of the loan. In other words, if you paid $2,000 in points on a 30-year loan, you get to deduct $66.67 each year. The extra fees cannot be deducted and cannot be added to the cost of the house, according to Philip J. Holthouse, partner at the Los Angeles tax firm of Holthouse, Carlin & Van Trigt.
However, if you borrowed extra cash to improve the house, the points related to the additional amount are deductible in the first year. For example, say you got a $100,000 loan--$50,000 to pay off the existing mortgage and $50,000 to remodel--and paid $2,000 in points. One-half of the points, or $1,000, plus $33.33 (1/30th of the remaining $1,000) is deductible in the first year.
But if you are refinancing a refinance, you can write off the balance of the points related to the first refinance in the year you do the second refinance.
Q: After having good credit for 40 years, my daughter managed to ruin it practically overnight. I let her use a couple of my credit cards. Evidently those credit companies sold my name to other companies and they invited my daughter to use their credit cards. She charged to the limit and then couldn’t pay. The bills were in my name, but addressed to her.
I found out when I bought a home and the lending institution questioned me about my credit report. My daughter and her husband took out a large loan and paid everything off. However, my credit report shows all of the slow payments.
Do you have any suggestions on how I can get my good name back? -- I.W .
A: Your story graphically illustrates why you should never lend out your credit cards. Nonetheless, you can take some action to polish your credit record.
First request a copy of your credit report from all the major credit bureaus--TRW, Equifax and Trans Union. (Local offices are usually listed in the phone book, but you can also request a report through their main offices: TRW, 505 City Parkway West, Orange, Calif. 92668; Equifax, 1900 Peachtree St. N.W., Atlanta, Ga. 30302; Trans Union Corp., P.O. Box 119001, Chicago, Ill. 60611.)
If you have been turned down for credit, they must provide a copy of your credit report for free. Otherwise, there’s a charge that ranges from $8 to $20.
The second step is to dispute the late payments resulting from your daughter’s charges. You can make corrections directly on the reports and send them back to the bureaus. Because you freely loaned your cards, they may be unwilling to amend the records. Still, if you request it, they will include your statement of what happened when sending credit information to prospective lenders.
Q: My home is mortgaged for 15 years at 9.4% interest, with payments of $643.69 a month. I have a $60,000 balance on the loan. I am 35, unmarried and earn a yearly salary of $22,000, with no retirement benefits.
My question is, which is the better plan for both future financial advantage and security: 1) investing $1,000 or $1,200 in an individual retirement account yearly at 6% interest, or 2) paying down the mortgage by an additional $100 each month? -- J.O.
A: Invest in the IRA and consider refinancing your mortgage, possibly with an adjustable rate loan.
Why? Since you get a mortgage interest tax deduction, the net cost of the mortgage is less than 9.4%. And since you’d get an upfront deduction for the IRA plus tax-deferred interest earnings, the after-tax return on the IRA is better than 6%. In other words, the choices are similar financially.
So instead of focusing on pennies, consider diversification. My guess is that your home is your major--possibly only--investment. Therefore, by paying it off, you’re putting all your assets in one place. If you needed to get your hands on the equity in your home, you’d have to sell or borrow against it, which costs money and takes time.
Have some ready cash for emergencies. And even though you’d pay a tax penalty if you withdraw funds before retirement, an IRA provides some liquidity. However, consider refinancing your loan to get a lower interest rate.
