turano@silver.DEC (08/23/85)
** With regard to the comments about the deduction of mortgage interest prepaid in December being assignable to the current year: >If you want to deduct the Jan 1 payment this year, pay it on Dec. 30. >...As far as IRS is concerned, it's the date you actually PAID the >interest that counts. I believe this is not correct. Sec. 461(g)(1) of the Internal Revenue Code states: "(g) Prepaid Interest.- (1) In General.- If the taxable income of the taxpayer is computed under a cash receipts and disbursements method of accounting, interest paid by the taxpayer which, under regulations prescribed by the Secretary, is properly allocable to any period- (A) with respect to which the interest represents a charge for the use or forbearance of money, and (B) which is after the close of the taxable year in which paid, shall be charged to capital account and shall be treated as paid in the period to which so allocable. (2) Exception.- " { Deals with points paid and is not important in this discussion.} IRS Publication 17 (Rev. Nov. 84) in section 29, in the third paragraph on page 129 seems to interpret this: "Interest paid in advance. If you pay interest in advance for a period that goes beyond the end of the tax year, you must spread the interest over the tax years to which it applies. You may deduct in each year only the interest for that year." Together these would seem to imply that the interest payment for January of the following year must be allocated to the following year's deductions. The rationale being that the Congress does not wish individuals to manipulate their tax liability at random. If someone has another reference indicating that the mortgage payment for January for the following year is deductable for the current year, I'd like to see it. I am not a lawyer or an accountant and the above interpretation is strictly an opinion which should not be construed as a fact. Tom Turano
grl@charm.UUCP (George Lake) (08/26/85)
There has been much heat and no light over this issue. You are free to use a bookeeping method that counts things when they are owed or when they are paid-- you must be consistent. You can get taken down for using one method on inflow and the other on outlow. As for when the interest is accrued. The payment due on Jan 1 is the interest accrued for December!!! Do you all remember when you bought a house you had to pay the interest for the rest of the month you bought in, but then had that blessed state where there was no payment due for over a month. Many tax games are worth the trouble. Not this one. Cheers, George Lake
wjh@bonnie.UUCP (Bill Hery) (08/26/85)
> > With regard to the comments about the deduction of mortgage interest > prepaid in December being assignable to the current year: > > >If you want to deduct the Jan 1 payment this year, pay it on Dec. 30. > >...As far as IRS is concerned, it's the date you actually PAID the > >interest that counts. > > I believe this is not correct. Sec. 461(g)(1) of the Internal > Revenue Code states: > .... > IRS Publication 17 (Rev. Nov. 84) in section 29, in the third > paragraph on page 129 seems to interpret this: > .... > If someone has another reference indicating that the mortgage payment > for January for the following year is deductable for the current year, I'd > like to see it. > I don't remember the exact source, but it was from a book on personal financial planning (maybe Sylvia Porter's Money Book??) that I read several years ago. It could have been wrong, or changed shince then. Any accountants or lawyers out there know for sure what is corrct? If it is true that it can only be deducted in the year due, no the year paid, it seems to be inconsistant with other IRS rules that insist that deductions be taken in the year that the expense is actually incurred.
spp@ucbvax.ARPA (Stephen P Pope) (08/27/85)
Although in general prepaid interest is not deductible
other then in the tax year in which it would of been due,
for cash-basis taxpayers there is an exception for your
priciple residence, which allows prepayment of up to one year's
initerest. I don't have the reference off hand. The usual
application is if you have a mortgage from an individual, and
figure you're in a higher tax bracket at the moment then you
will be next year, he might agree to accept the interest
prepayment.
Prepaying more than a year in advance is a "material distortion
of income".
steve pope (..ucbvax!spp ; spp@berkeley)spp@ucbvax.ARPA (Stephen P Pope) (08/28/85)
I just read somewhere that the one-year prepayment deedutibility was eleiminated by the 1976 tax reform act. Now there is no possibility of deducting prepaid interest. Sorry! steve pope