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Monday, November 16, 2009
Form 1098 not needed for interest tax deduction
By James Hamill
For the Journal
Q: I bought a house in March 2008 and the seller financed the majority of the purchase. I sold my old home and when I did my 2008 return I had an IRS Form 1098 from the mortgage holder of my former home that said how much interest and taxes I had paid. The seller of my current home did not provide me with a Form 1098 so my tax preparer suggested that I do my own mortgage amortization schedule for the note that I now have. I found a Web site that made this very easy to do and we used the interest figure that the amortization schedule developed. My question is whether I will have a problem with the IRS because I deducted interest that was not reported to them on a Form 1098?
A: No, there is no requirement that you receive a Form 1098 in order to deduct the interest paid. Not all interest is tax deductible, but what you describe is qualified residence interest that is fully deductible.
Form 1098 is required to be filed by a lender who receives at least $600 in mortgage interest but only if the lender is in the trade or business of lending money.
A trade or business requires some level of regular, continuous activity, and a seller who finances a single sale of a house is not in the trade or business of lending money. As a result, the seller of your current home did not need to provide you with a Form 1098.
Assuming the inputs in the amortization schedule that you prepared were correct, I see no concerns with you claiming a deduction for the interest that you calculated was paid in 2008, and in future years.
Because you do not have a conventional lender, you would also have to pay property taxes directly to the county. You may deduct the payments actually made in 2009 without regard to any Form 1098 reporting.
A final reminder: Since you both purchased and sold a home during 2009, you will need to examine the closing statements for each transaction to see how the property taxes were allocated.
You should have been charged for any accrued but unpaid taxes on your former home and you may deduct the amount shown as charged to you. Similarly, you probably received a credit on the purchased home for the seller's unpaid property tax, which will reduce your 2009 deduction.
Q: I have an IRA with Vanguard and because my wife lost her job this year we will have to take money out of the IRA. We are not age 59 1/2 and the Vanguard site says a there will be a "10% federal penalty tax on withdrawals before age 59 1/2 unless an exception applies." I expect to pay tax, but I don't understand the Vanguard statement. Does this mean I pay only 10% tax? My other income is taxed at a higher rate and I can't believe that I get a break on the IRA.
A: The penalty tax that Vanguard refers to is in addition to the tax due as a result of including the distribution in your 2009 income. That is, if your marginal income tax rate is 25 percent you will end up with a 35 percent total federal tax on the early IRA distribution.
I checked the Web site for Vanguard, and you are reading only on part of their explanation. A few lines above the statement that you quote is another statement that explains that the distribution is included in your taxable income for the year.
As you note, there are some exceptions that allow you to avoid the 10 percent penalty (but not the regular tax due). A few relates to a financial hardship, but only to distributions used for specific needs.
For example, a distribution used to pay medical costs in excess of 7.5 percent of your adjusted gross income escapes the penalty, as does a distribution made to an unemployed person to pay health insurance premiums.
You must prepare and file Form 5329 to compute the penalty tax. This form is required even from taxpayers whose income for the year is so low that they owe no regular income tax.
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