December, 2007

HELOC or Home Equity Line of Credit

Mortgage Interest is ALWAYS deductible…isn’t it?

Well, no Virginia, it isn’t.

The IRS has indicated they’ve been slack in enforcing limits on the deduction of mortgage interest in the past, and now the party is over. They’re turning on the lights, turning off the music, and closing the bar.

If you’ve refinanced over the years as the underlying value of your home has escalated, you may be surprised. If you’ve pulled money out for upgrades to your home, that’s OK. But if you’ve “blown the money” on things like food and clothing, or college tuition, the interest deduction is limited to the first $100,000 of principal over and above your original purchase loan amount, as reduced by payments made.

A college facetiously suggested buying the house next door (presuming it is of equivalent value AND you can sell your original house) because it would ‘reset the counter’ on original purchase price. And if you buy and sell sometimes you can carry the Proposition 13 property tax value to the new house.

As I’ve hinted at above, deductibility depends on what you’ve done with the money. If you’ve spent it on frivol, as defined by the IRS, your deduction is limited. You can still borrow the money, you just can’t deduct the interest off your taxes. If you borrowed money on your home and put it in your business, we’ll use “tracing rules” to trace the deduction to your Schedule C. But it won’t go on your Schedule A-Itemized Deductions.

Upgrades to your home, like a new roof, remodeled bathroom, etc. count towards ‘original purchase price’ and will continue to be deductible as such on Schedule A. This would be another example of ‘resetting the counter’ for deductions.

Form 8919: 1099 Squealers

There’s a new form coming out of the IRS for 2007, Form 8919 that can be filed with an individual’s 1040. The form allows workers who have been determined to be employees who have NOT been treated as such by their employers to report their income and pay their share of FICA instead of self-employment tax (W-2 as opposed to independent contractors on 1099).

So what’s the big deal? If your 1099 contractor decides they are an employee (they may file their OWN Form SS-8 form and involve the IRS in a determination) and they don’t want to pay the 15% self-employment tax they can pay HALF, which would have come out of their paychecks anyway if they’d been employees on W-2’s. And it’s less expensive than incorporating!

Now where do you suppose the other half will come from?

Might the other half come from YOU? And if you should have been paying this all along, are you now late, implying penalties and interest?

This is part of a new IRS program called QETP or Questionable Employment Tax Program where they plan to start sharing info more actively with state agencies, including tax returns, to try to catch workers classified as 1099 independent contractors who should be W-2 employees.

This makes it an even better idea to come to one of my Basic Payroll classes (see below), plus we do a pretty good show even if we are talking about tax for five hours. If you have control over not only results, but also detail and means for a worker, you probably have an employee. There are 20 tests to determine 1099 vs.W-2 contained in Revenue Ruling 87-41 found at

Be sure to create 1099s for all your independent contractors, it’s a factor that MAY help with relief from an adverse determination but just filing the 1099 doesn’t relieve you from the requirements if you have misclassified workers as 1099 instead of W-2.

Classes – Basic Payroll, 'S' Corporation, and Schedule C for Sole Proprietors

In conjunction with the IRS and EDD, Andy's going to be doing some Basic Payroll seminars coming up in the near future. The next seminar will be in Oakland December 5th downtown on Clay Street and again in Oakland January 9th and February 13th

Basic Payroll in San Rafael is presented at 120 North Redwood Drive, 2nd floor, Redwood Room on December 13th. Reservations may be made at 866 873-6083 for the Federal/State Basic Payroll Tax Seminar, or on line at

These seminars have proven to be very popular, plus they’re free.

Andy will be doing a presentation on Why I love the “S” Corporation for the Solano/Napa EA Society Tuesday, January 22nd 2008 at 6 pm. More details at

How to Prepare your Own Schedule C will be showing again 6-8:30 pm on Friday January 25th in San Francisco and Monday January 28th in Oakland at the Women’s Initiative for Self Employment. Contact for more info at at (415) 641-3470.

We’ll also be at the US Small Business Administration offices in San Francisco at 455 Market Street, 6th Floor on February 25th, 6-8:30 pm.

This is also a free seminar, and just in time to work on your own tax return before the due date.

The Next Product(s)

We’re hard a work on two new products, a Video on CD about 1099s with a release date of January 1, 2008. This video can be ordered for $39 at after the next few days.

“The 8-Fold Path to Paying Less Tax and Avoid an Audit” includes chapters on Auto Expenses, Home Office Deduction, Business vs. Personal expenses, Meal and Travel receipts, Incorporation, Miscellaneous Deductions, Retirement Plan contributions, and When to Hire Professional Help. Release date is pending.

Your Questions in Future Newsletters

Feel free to e-mail questions you’d like answered. If we think it is a topic of general interest, we’ll include the answer in upcoming newsletters! Next issue we’ll look at putting money away for a child (strange that this should come up, no?) and 1099s.