Tax

Tax

Deducting Mortgage Interest When Your Name Is Not On The Deed

Tax law has an amazing break for unconventional homeowners.

You can deduct your mortgage interest payments even when the deed to the house and the mortgage are in someone else’s name.

Here’s what happened to Sue Davis.

Sue could not personally qualify for a home loan. Her parents stepped in to help. They bought the house and signed the mortgage.

But Sue lives in the home and pays all the expenses of the property, including the property taxes and the mortgage.

Using a little-known tax rule, Sue deducts the mortgage interest payments she makes on her Form 1040.

What’s even more interesting is that Sue found out about this little-known rule after she had been making payments for a few years. Once she learned the rule, Sue amended three years of tax returns, claiming about $18,000 per year in deductions, and got a sizable tax refund.

If you are in a similar situation, you can get these tax breaks too. You simply need to prove that you are the “equitable owner” of the property.

If you make payments on a mortgage that is not in your name, you can deduct the interest as long as you are the legal or equitable owner of the property that secures the mortgage.

“Legal” title and “equitable” title are two different things. You just need one or the other to qualify for the interest deduction.

Legal title. This simply means legal ownership according to the real estate laws of your state. In general, legal title requires a deed of ownership that is properly recorded according to the laws of your state.

Equitable title. Under this doctrine, you prove that even though you do not have legal title, you bear the benefits and burdens of the property and are thus the true owner under the law for certain purposes.

When a court considers an equitable ownership claim, the judge looks at all the facts and circumstances of the situation. The factors the courts consider are

  • right to possess the property and enjoy its use, rents, or profits;
  • duty to maintain the property;
  • responsibility for insuring the property;
  • risk of loss on the property;
  • obligation to pay the property’s taxes, assessments, or charges;
  • right to improve the property without the legal owner’s consent; and
  • right to get legal title at any time by paying the balance of the purchase price.

You don’t have to prove every single element in the list, but you want to show as many as possible. The more elements you have on your side, the stronger your case will be.

If you would like to discuss legal or equitable title, please call me on my direct line at 408-778-9651.

Tax

Avoid This Payroll Tax Nightmare

Don’t let this happen to you.

Here’s what happened to Mr. Kazmi. First, a little background.

Urgent Care Center Inc., an Illinois corporation, employed Mr. Kazmi as a part-time hourly bookkeeper.

He had no ownership interest in Urgent Care.
He was not an officer of Urgent Care.
His name was not on any of Urgent Care’s bank accounts.
He did not have check-signing authority for Urgent Care or any power to make payments on behalf of Urgent Care.

At all times, Mr. Kazmi worked under the authority and direction of Dr. Senno, the sole owner of Urgent Care, an S corporation.

Problem

Urgent Care did not pay its payroll taxes. The IRS claimed that Mr. Kazmi was a responsible person—meaning that he was now on the hook for the unpaid taxes and the 100 percent trust fund penalty. Mr. Kazmi’s amount at risk: $10,375.

He took his case to court, where we pick up his story.

IRS Interview

In this case, the record before the court included IRS Form 4180, “Report of Interview with Individual Relative to Trust Fund Recovery Penalty or Personal Liability for Excise Taxes.”

During that interview with the IRS revenue officer, Mr. Kazmi described his job title as “bookkeeper” and his duties as “to take care of payroll.” On the form, he indicated the following:

He did not determine financial policy for Urgent Care.
He did not authorize payments of bills or to creditors.
He did not authorize payroll.

During the interview, he indicated that he was authorized to transmit payroll tax returns and make federal tax deposits. He was also aware that Urgent Care did not remit the employees’ withheld taxes.

So here we have the part-time, hourly paid bookkeeper who could not sign a check or authorize payments with $10,375 of payroll tax trouble—attributable entirely to Dr. Senno.

Missed Opportunity

The IRS sent by certified mail IRS Letter 1153 to Mr. Kazmi. He signed the postal service form signifying he had received the letter.

Letter 1153 set forth that the IRS considered Mr. Kazmi a person responsible for the unpaid payroll tax and subject to the 100 percent trust fund penalty—the $10,375. Mr. Kazmi had 60 days to challenge by submitting a written appeal. He did not.

Result

The court ruled that Mr. Kazmi had to pay $10,375 (Mohammad A. Kazmi v Commr., T.C. Memo. 2022-13).

But you can see in this opinion that the court does not rule that Mr. Kazmi was a responsible person. Instead, the court ruled that the IRS did its job correctly and that Mr. Kazmi owes the money because he failed to respond to Letter 1153.

Key point. Had Mr. Kazmi responded to Letter 1153, the IRS likely would not have considered him a responsible person based on his facts and circumstances.

Takeaways

Do not work for or deal with taxpayers who do not remit the payroll taxes to the government. What happened to Mr. Kazmi could happen to you.

By all accounts, you know that Mr. Kazmi is a victim of Dr. Senno’s failure to pay the payroll taxes. He’s pretty much an innocent bystander—but despite his innocence, he is now out of pocket $10,375.

Think about this: How many part-time bookkeeping hours will it take for Mr. Kazmi to pay $10,375 to the IRS? And keep in mind that the $10,375 is not tax-deductible.

One final thought: Don’t ignore IRS notices.

If you have a payroll tax issue and would like to discuss it, please call me on my direct line at 408-778-9651.

Tax

IRAs for Kids

Working at a tender age is an American tradition. What isn’t so traditional is the notion of kids contributing to their own IRA, especially a Roth IRA. But it should be a tradition, because it’s a really good idea. 

Here’s what you need to know about IRAs for kids. Let’s start with the Roth IRA option. 

Roth IRA Contribution Basics 

The only federal-income-tax-law requirement for a child to make an annual Roth IRA contribution is to have enough earned income during the year to cover the contribution. Age is completely irrelevant. 

So if a child earns some cash from a summer job or part-time work after school, he or she is entitled to make a Roth contribution for that year. 

For both the 2021 and 2022 tax years, your working child can contribute the lesser of

  • his or her earned income for the year, or 
  • $6,000. 

While the same $6,000 contribution limit applies equally to Roth IRAs and traditional IRAs, the Roth option is usually better for kids.

Key point. A contribution for your child’s 2021 tax year can be made as late as April 15, 2022. So, there’s still time for that.

Modest Contributions to Child’s Roth IRA Can Amount to Big Bucks by Retirement Age

By making Roth contributions for a few years during the teenage years your kid can potentially accumulate quite a bit of money by retirement age. 

But realistically, most kids won’t be willing to contribute the $6,000 annual maximum even when they have enough earnings to do so. 

Say the child contributes $2,500 at the end of each of the four years. Assuming a 5 percent return, the Roth account would be worth about $82,000 in 45 years. Assuming an 8 percent return, the account value jumps to a whopping $259,000. Wow! 

You get the idea. With relatively modest annual contributions for just a few years, Roth IRAs can be worth eye-popping amounts by the time your “kid” approaches retirement age.

If you would like to discuss earned income and IRS options for your child, please call me on my direct line at 408-778-9651.

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