 Income tax 2021-2022. Interest, you paid part number one. Get ready to get refunds to the max. Diving into income tax 2021-2022. Most of this information can be found on the Schedule A 2021 tax year instructions found on the IRS website at irs.gov, irs.gov. We're looking at the itemized deductions, keeping those straight in our mind or distinct from the adjustments to income or the above the line deductions, the Schedule One deductions, deductions for adjusted gross income. Also noting, the itemized deductions will always be compared to the standard deduction typically taking the one that is higher because that will have the biggest tax benefit. So we're down here in line number 12, first page of the form 1040, standard deduction or itemized deduction. We're only gonna be taking the one that is greater, standard deductions listed on the left-hand side, itemized deductions needing to clear those items and those amounts in order to take the itemized deductions. Here's the Schedule A itemized deductions. We have the itemized items on the left-hand side, the general groups or categories, the sum of all these items then, if greater than the standard deduction would flow through to the line 12A of the first page of the form 1040. Here's just a list of the standard deductions you wanna have a general idea of so you can get a feel for when itemizing will be necessary and when it will not possibly be necessary due to taking the standard deduction. So now we're talking about interest that is paid. So certain types of interest then may be deductible, the most prominent of them most likely being the mortgage interest. So remember that that's one of the big ones. So when you're thinking about whether or not someone's gonna itemize or not, one of the things you want to ask is do you own a home? Most people that own a home have a mortgage on the home and there's gonna be a significant amount of interest most likely paid on that and there's property taxes that will be tied to it. So that's gonna be one of the biggest types of deductions. So the rules for deducting interest vary depending on whether the loan proceeds are used for business, personal or investment activities. Now note that if we have a loan that's gonna be taken out normally, that the normal thing that you would think about for an income tax would be that if you have something that was gonna be business related or you needed an expense in order to help you to generate revenue, then you would think it'd be kind of a deductible item. If you have something that is for personal use, you would think it not be deductible. So in general, if you had a car that was used, for example, for your personal use, then you would think that that would not be deductible because the car in that case is not something that you're using in order to help you to generate revenue. However, if you think about a car that's being used specifically within your business, in order to generate revenue, you would think that the costs of the car might be something that would be deductible like the gas and the depreciation and so on and so forth. Similar with financing, which is basically what the interest is. If your financing is for the business, for example, like on a schedule C type of business, for example, possibly, and you got the financing, the purchasing power of the money, which is what you needed to get in order to say, buy inventory, buy equipment for your business, you would think that would be a deductible expense needed in order to generate revenue. If on the other hand, the interest was for something that was for purely personal use, you got a loan to buy a sports car that's just a car for your personal use, then you would think that the interest would not be deductible because it's a personal type of expense in that case. And of course, the exception to that is the residence. The primary residence is that unusual kind of acceptance or exception because the government wanted to kind of incentivize people to purchasing homes, or at least that was the argument. You might say that there was lobbyists involved as well all over the home production and so on and everything that's related to that. But general idea then would be we want to incentivize people to have a home. One way to do that is possibly to give the deduction for the loan, possibly allowing them to take a larger loan out. So that then is an exception because you would think that for the personal use of the home, it wouldn't be something that would be deductible because it's not a loan specifically, the interest not being used specifically to generate revenue, but for the personal side. But of course that personal deduction is one of those big ones that is kind of an exception to what you would think would be the normal rule. So we have business, personal investment activities, investment activities are similar in that if you took out a loan in order to generate revenue, if it was investment revenue, you would think it still possibly could be something that would be deductible as a normal practice under just an income tax. Okay, so you could see publication 535 for more information about deducting that business interest expenses. So you can get into the business interest expenses there. The rules you would think would be a little bit more straightforward there. Obviously if you took out a loan and it was for business related items, then you would think you'd be able to deduct the interest. There's rules with regards to timing and so on as to when you can deduct the interest and that kind of stuff. However, so see publication 550 for more information about deducting investment interest expenses. You can't deduct personal interest, so that would be the general rule if it was personal use, if you had any kind of expense that you expended for personal use, if you went to Disneyland or something like that, you can't typically deduct it. The same if you took a loan out in order to pay for the going to Disneyland, you would think that you can't really deduct that typically. However, you can deduct qualified home mortgage interest on your Schedule A. So there's the exception, big exception for a personal use type of thing that you might get a deduction for on the Schedule A and interest on certain student loans. So student loans, another big exception that government carving out these exceptions for things that it likes so it wants to incentivize or thinks it's gonna be beneficial. So you could argue whether or not it has actually had a positive impact or if it just subsidized the market and adjusted the prices and made things more complex from an economic standpoint. But that's the argument. So that's on Schedule 1, Form 1040, Line 21 as explained in Publication 936 and Publication 970. If you use the proceeds of a loan for more than one purpose, for example, personal and business, you must allocate the interest on the loan to each use. So you don't typically want to do that but sometimes you can't really avoid it doing that. So for example, if we took a loan out on the home and then we use the home in order to conduct our personal business like a Schedule C business, you might have a situation where you need to allocate then between the amount that would be deductible possibly on a Schedule C and the amount that would be deductible possibly on the Schedule A. You can't double dip they're taking the same two deductions for the same amount that was paid but possibly there would be more beneficial deductions on one or the other taking them on the Schedule C or the Schedule A. Interest you paid, you allocate interest on a loan in the same way as the loan is allocated. You do this by tracing disbursements of the debt proceeds to specific uses. So you might ask, well, how am I going to do that? Well, we're gonna try to say, well, how are the loan proceeds used? The loan, so if you borrowed $100,000, how were the proceeds of that used and use that same kind of ratio analysis to allocate the loan when we get to the Schedule C business, we might talk about a home loan, I'm sorry, home business deduction or a deduction of the home office. And in that case, we'll get into that in a little bit more detail where you might apply kind of a ratio type of analysis to try to figure out how much of the home is used for personal versus business. For more information on allocating interest, you can see publication 535. In general, if you paid interest in 2021 that applies to any period after 2021, you can deduct only amounts that apply for 2021. So we get into the same kind of cutoff type of thing because we're basically on a cash basis method for taxes, but a cash basis method can be abused if people have cash flow because they could try to start to prepay things. So you might say, well, what if I tell the bank, I'll prepay all the interest and I'll pay it right now and I'll try to get the deduction today because I need the deduction. Maybe I'm in a higher tax bracket this year or something like that. Well, the IRS is going to be skeptical of that kind of thing to do that. So you can't, so they're going to have to put limits on. They're going to say it's a cash basis method and in order to take the deduction, you have to have actually spent the cash generally and you're going to get the deduction when you spend the cash generally, but we have to put in safeguards so people don't abuse a cash basis method by basically possibly prepaying a large amount in one time period to even out their income, and get possibly deductions earlier than they otherwise would under, you know, what you would think with normal or fair conditions with regards to a loan. So schedule A, you schedule A to deduct qualified home mortgage interest and investment interest. That's going to be the itemized deductions, home mortgage interest. So here's the big one, home mortgage interest. This is the one that it usually has documentation for. It's usually pretty easy after the first initial purchase of the home. The first purchase can be a little, little confusing in the year of the purchase because you might want to look at the closing documentation to see that everything lines up. But after that, you should get documentation on it and it's pretty easy to do the data input, but it's going to be one of those big itemized deductions that might push people over to itemizing as opposed to standard deduction. So if you are a homeowner who received assistance under a state housing finance agency, hardest hit fund program or an emergency homeowners loan program, you could see publication 530 for the amount you can deduct online 8A or 8B. A home mortgage is any loan that is secured by your main home or second home regardless of how the loan is labeled. So it could be, so we're talking about something that is secured, meaning when you take out the loan, you're taking out the loan and the home is security. Now that's a little bit different than a lot of people kind of think about it. They think about like the bank owns part of your home, right? They say the equity, you talk about equity, how much equity do you have in the home? And people tend to use this terminology like how much does the bank own of the home? That's not exactly the right way you might think of it because you actually own the home. It would be kind of like you took out the loan and then you took the loan to pay off the purchase of the home. But if you were to default on the loan, then that's when the home could be used then to pay off that the lender can come back and have recourse possibly for the home in order to pay off the loan. The reason it's different, by the way, the reason it's not like, well, the bank owns part of your home in that case is because the bank doesn't have any say of what you do with the home until and unless you default, you stop making the payments. So it's not like the bank's gonna say, hey, I own 70% of the home because you have this big loan that's out on it. And therefore I would like you to paint the home blue or something like that. And you're like, no, I wanna paint it brown. And they're like, no, that's not how it is, right? They don't own the home. They have no rights over the use of the home. They only have recourse to not paying back the debt in the event that there's a default under specific circumstances. So it's a little bit different. But in any case, that's gonna be the idea and that would be the thing that would allow it to be possibly deductible. It includes first and second mortgages, home equity loans, and refinancing mortgages. A home can be a house, condominium, cooperative, mobile home, boat, or similar property. So fairly expansive definition on what a home is. Basically, if you're living in it, it could be pretty much a home, right? It could be mobile, so on a boat and so on. So it must provide basic living accommodations, including sleeping space, toilet, and cooking facilities. So you gotta have that toilet in there. If you're going out to the outhouse, then may not qualify as the home. You gotta have the stuff in there typically. So home mortgage interest, check the box on line eight. If you had one or more home mortgage interest, home mortgages in 2021 with an outstanding balance, and you didn't use all of your home mortgage proceeds for those loans to buy, build, or substantially improve your home. So now we get kind of into the weeds with the home loans because now you can start to say, okay, I can imagine a situation where I wanted to purchase the home. I took out a loan in order to make the purchase of the home. But what if I take a secondary loan out? Like I take a loan out in the future. Well, if you refinanced it just basically to refinance and get a lower rate, then you would think you'd still be basically using the proceeds on the home. But what if like I took something that I used the home as the collateral, but I wanted to buy a sports car with it or with the money or something like that. Well, now it's a little bit different because now you didn't use the money to invest in the home either to just refinance it for better interest rates or increase the value of the home. You now basically use the home as collateral to finance a personal purchase. And so that gets a little bit, that's where the difference basically comes in here. So interest paid on home mortgage proceeds used for other purposes isn't deductible online 8A or 8B. So C limits on home mortgage interest later for more information about what interest you can include online 8A and 8B. If you use any home mortgage proceeds for a business or investment purpose, interest you paid that is allocable to these proceeds may still be deductible as a business or investment expense elsewhere on your return. So remember the categories that we have here. We're looking at the home at this point in time. And then you could also have the category of the business or investment, which are the categories which you would think would be kind of more natural in regards to taking out a loan, possibly getting the deduction because those things are used in order to try to generate revenue, whereas, you know, personal things are for personal, including the home, but the home is kind of that exception. So limit for loan proceeds not used to buy, build or substantially improve your home. You can only deduct home mortgage interest to the extent that the loan proceeds from your home mortgage are used to buy, build or substantially improve the home securing the loan qualifying debt. So it's going to be qualifying debt. Make sure to check the box on online eight. If you had one or more home mortgages in 2021 with an outstanding balance and you didn't use all the loan proceeds to buy, build or substantially improve the home. The only exception to this limit is for loans taken out or before October 13th, 1987. The loan proceeds for these loans are treated as having been used to buy, build or substantially improve the home. You can see publication 936. You can find that on the IRS website for more information about loans taken out on or before October 13th, 1987. Home Morgue Interest, line eight. Limit on loans taken out on or before December 15th, 2017 for qualifying debt taken out on or before December 15th, 2017. You can only deduct home mortgage interest up to $1 million, $500,000 if you are married, filing separately of that debt. The only exception for loans taken out on or before October 13th, 1987, see publication 936 for more information about loans taken out on or before October 13th, 1987. You could also see publication 936 to figure your deduction if you have loans taken out on or before December 15th, 2017 that exceed $1 million or $500,000 if married, filing separately. So you've got that limit. And then the question is, well, what happens if it's over the limit? How do I do that calculation? Limit on loans taken out after December 15th, 2017 for qualifying debt taken out after December 15th, 2017. You can only deduct home mortgage interest on up to $750,000, $375,000 if you are married, filing separately of that debt. So they adjusted the limit here. If you also have qualified debt subject to the $1 million limitation discussed under limit on loans taken out on or before December 15th, 2017, earlier the $750,000 limit for debt taken out after December 15th, 2017 is reduced by the amount of your qualifying debt subject to the $1 million limit. An exception exists for certain loans taken out after December 15th, 2017. But before April 1st, 2018, if the exception applies, your loan may be treated in the same manner as a loan taken out on or before December 15th, 2017. You can see publication 936 for more detail there. See publication 936 to figure your deduction if you have loans taken out after October 13th, 1987 that exceed $750,000, $375,000 if you are married, filing separately. So once again, you've got the question here being, let's take a look at the cap one more time. For qualifying debt taken out after December 15th, 2017, you can only deduct home mortgage interest on up to $750,000 of that debt. So you're talking about the debt not the interest of the $750,000. Now for most people that would be, that would be especially if you're not living in a high income area or a high cost of living area, that would be a substantial amount of debt because that's not the home purchase amount. That's the amount of the debt, right? That's not the interest, but it's the amount of the debt but it's not the purchase price either. It's the amount of the debt. So that would be a substantial amount of debt for most people. But if you go over that amount, then the question is, well now I've got debt that's over that amount. How do I calculate how much of the interest should I can take in the event that the debt is over the limit? And that's when you gotta go into the publications and see how you can make that.