Chapter 16 - Individual Concepts

Updates

• Chapter 16 Update: Home Mortgage Interest Expense: (page 578) A clarification is needed to the first paragraph dealing with home mortgage interest expense. The text states that if debt incurred to acquire a residence exceeds $1,000,000, the interest associated with the excess debt is not deductible qualified residence interest. However, after you read the description of home equity debt, you might be wondering why up to $100,000 of the debt in excess of $1,000,000 can't be home equity debt generating deductible interest expense. If so, you are right. For example, assume that Mr. and Mrs. Glenn purchase a home for $1,600,000 and incur $1,100,000 of debt to acquire it. Also assume that they own no other residences. While the entire debt was used to acquire the home, only $1,000,000 can be acquisition debt. However, the remaining $100,000 of debt meets the definition of home equity debt. Thus, the Glenns may deduct all of the interest incurred on the $1,100,000 of home mortgage debt.

• Health insurance deduction (page 593): The Tax and Trade Relief Extension Act of 1998, enacted on October 21, 1998, accelarated the date at which self-employed individuals are able to deduct 100% of their health insurance costs. The new deductibility schedule provides that for 1999 through 2001, 60% is deductible for AGI, 70% in 2002, and in 2003 and thereafter, 100%. Prior to this change, the 100% deductibility percentage was scheduled to be effective in the year 2007.

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