Home Equity Line of Credit

[WhiteOleander]

.

In this case as far as I can tell from the preliminaries, Mom won't be able to wash the Schedule B Interest, as she is Standard Deduction and won't be filing a Schedule A. Thereby Mom could possibly be subject to Phantom Income on her tax return, for giving this wonderful opportunity to her son!

Sandy

Then figure the tax paid by Mom on the interest income and have the son pay it back to her. He can gift it to her.

[S T]

1098

Thanks for you input,

I am not worried about the 1098 computer matching to Mom's return and Mom not deducting. I am not even worried about the Son deducting on his tax return which I have nothing to do with, except in case the Son is audited!

What I am worried about is if the Son issues a 1099 INT form to Mom for the amount of interest that he paid on this "D****d" loan. Son's name is NO Where on the HELOC loan and not responsible, he is just making the payments, as Mom doesn't want to be bothered with it.

I had this happen a few years back and IRS basicially stated that the t/p that had the mortgage interest loan had to claim on Schedule A and then claim the income from the relative on Schedule B and it should be a wash. IRS had audited the relative and then it downstreamed.

In this case as far as I can tell from the preliminaries, Mom won't be able to wash the Schedule B Interest, as she is Standard Deduction and won't be filing a Schedule A. Thereby Mom could possibly be subject to Phantom Income on her tax return, for giving this wonderful opportunity to her son!

Sandy

[BHoffman]

Sandy - the IRS computer matching isn't going to apply in this case. The 1098 information is not to be entered anywhere on Sonny's business return. It's just interest expense. IRS is not going to come calling on your client because Mom didn't deduct it.

[S T]

Therein

yes Jesse, I agree, I don't like that the Son is paying the Bank direct.

I still say no matter what this is a Personal Loan, I don't care what the Son used the funds for. He should have obtained his "own Bank Credit Line" and dealt with it.

Sandy

[Jesse]

Grasping at straws, does it make a difference that Sonny didn't pay Mom, he paid the bank?

Mom would have been responsible only if Sonny did not make the payments.

[S T]

I can see where you are going

However, the IRS computer matching? The form 1098 HELOC interest is in MOM's name and social security number only, if Mom can't have the benefit of the Schedule A deduction, it creates phantom income for Mom, and Son still has the benefit of the deduction.

Is there another way to report this so it doesn't impact Mom's tax return?

Rely on another preparer to report it correctly so it doesn't impact Mom? I am not sure! I see CP 2000 notices downstream!

Sandy

[BHoffman]

Sandy - I think you might just give Sonny the 1098 with a memo attached stating that Mom filed her 1040 and did not claim this interest on her return and let his tax preparer deal with how to deduct it on Sonny's return.

[S T]

further thoughts

I only prepare the parent's tax return. Thanks for the posts, and yes I know she doesn't have to claim on Schedule A, we can ignore.

However, something to think about, what if the son's tax preparer says that the son has to 1099 INT Mom for the interest, so Son has the benefit of the tax deduction on his tax return, which then MOM has to claim as income on Schedule B, and then since her deductions are not enough to exceed the Standard Deduction, Schedule A is of no value. Then MOM is effectively paying tax on interest income without the benefit of the Interest Deduction (100K credit line on personal residence). Mom now effectively has Phantom Income for trying to lend assistance to the Son!

Another one of those client nightmares! And the family wants me to give them the outline, which I can't because I only prepare the taxes for the MOM, and she is of my utmost concern as my client.

Ugly!

Sandy

[Bucky]

Did they have a written loan agreement with son? One way you may be able to do this is write the loan to son up as interest free demand loan. As long as the imputed interest is less than the $12000 allowable gift per year your client would not have income to report. The son would not be able to write off the interest but he should be glad his parents helped him out. Just a thought.

[BHoffman]

Ok then, I remember a discussion about itemizing deductions:

http://www.thetaxbook.com/forums/showthread.php?t=9289&highlight=itemize

Can you just leave the 1098 HELOC interest off Mom's return entirely?

[S T]

My only Client

My only Client in this mess is MOM, the parent that went into debt for her Son. I have no accounting or tax relationship with the Son.

Sandy

[BHoffman]

Sandy - do you also prepare Sonny's tax returns - business and/or personal? Or is Mom your only client in this mess?

[S T]

It is Amazing

When you advise a client that the interest deduction might not be deductible, because they are not forthcoming with all of the facts.

Finally, the total HELOC is $100,000 which was all loaned by the parent (on her residence) to the son. The son used the funds for legal expenses incurred for his Trucking Business (I don't prepare the son's accounting or tax returns).

Thinking of the reporting, the parent will receive the 1098 form for the HELOC interest, however, the son is making the payments direct. Wouldn't the son have to issue a 1099 INT form to the parent, the son deducts on his Business return, the parent claims the interest on Schedule B as income and then deducts the interest on Schedule A?

The only problem I see with this scenario, is that the parent probably will not have enough deductions for schedule A to exceed the standard deduction, and then all of the interest that the son paid would be included as income on the parent return.

Any thoughts or suggestions.

Thanks

Sandy

[BHoffman]

Can't the son report it on Sch A line 11? Can he satisfy interest tracing rules by proving he used her money as a downpayment on his house?

[S T]

More

The loan was for $55,000. The parents home was free and clear with NO debt, and the Mom took out a HELOC loan and proceeds were given as a loan to her son.

Sorry, This is more than a gift. The son is making payments, not sure how timely, but he is making payments directly to the HELOC lender.

S