Wisdom from The Action Wisdom In Action

Updated: Uncle Sam is Glad You Refinanced!

Originally written back in 2005.
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So you did your darndest to secure a lower rate, grab some of that equity, or cash out all together—now get ready for the consequences.

The good:
1. Some points are deductible, but not all, unless you used your proceeds to make home improvements (backed by receipts, of course).
2. If you’ve “serial refinanced”, then you likely have some unamortized points.
3. You put cash in your pocket one way or another.

The bad:
1. The reduced deduction may put you below the itemization cutoff.
2. Some points are not deductible in the year they were incurred.

The ugly:
1. Now you owe taxes on that extra money. Have you held enough aside to pay the extra “income”?
2. This “extra income” may be enough to bump you up into another tax bracket, possibly triggering the dreaded AMT.

The possible bright spot:
1. You may still come out ahead even after paying the taxes on this “income.”

You may want to give your TurboTax a preliminary workout to see if you’ll owe the IRS this year. If so, then you still have some time to make adequate adjustments elsewhere to offset this new income. Making increased payments to a taxable retirement account, an adjustment to your withholding, or merely making January’s mortgage payment in December may be enough to save you from owing Uncle Sam this year.

UPDATE: This is what they aren't telling you about the foreclosure rescue programs, and the same sort of thing goes for mortgage renegotiation, credit card debt renegotiation, and other debt settlement programs. The money you "saved" is still taxable as income, even though you didn't actually make any money from it. Welcome to the world of phantom income!

Posted by Cute at 8:04 PM

Labels: financial (non-tax), taxes