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Wallstreet Esq.
Wallstreet Esq., Tax Attorney
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Experience:  10 years experience
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In 2014 Wells Fargo reduced my home mortgage interest rate

Customer Question

In 2014 Wells Fargo reduced my home mortgage interest rate due to my Military service under the Service Members Civil relief Act (SCRA). This resulted in a refund of $95,000 in overpaid interest. The reason it is so much is they went all the way back to the start of military orders which was in April of 2008. For 2014 the 1098 applied 67,000 in overpaid interest and the rest was deducted from the interest paid that year as the 95,000 was give December 24, 2014. The problem is when I add the 67,000 to income in 2014 it results in a huge tax bill of over $26,000 in Federal taxes and $8,000 in state. This is due to the income putting me in the next tax bracket and losing deductions as my joint income with my spouse is right at $300,000. I simply want to go back to my 2012 & 2013 tax returns and amend to remove the deduction of mortgage interest as each year it was close to $33,000. This would put me in a better position and would I simply be paying the taxes that the mortgage interest deduction actually gave me. To pay it 2104 I end up paying way more in taxes than I originally received when deducting the mortgage interest in my taxes. My tax guy says I can't do that.. Is he right, is there a better solution or do I know kidding have to pay more taxes than the tax break the mortgage interest deduction gave me?
Submitted: 1 year ago.
Category: Tax
Expert:  emc011075 replied 1 year ago.

Hi. My name is ***** ***** I will be happy to help you.

Your tax pro is correct. Amending your prior years returns will not help you. Reporting deductions are optional but reporting income is mandatory. You are not required to take the deduction. You cannot shift income received in one year to another year by removing the deduction.

Did you received any tax form for that income? 1099Int? 1099C maybe?

Customer: replied 1 year ago.
It's a 1098 box c - it's a refund of overpaid interest. Not interest income. Please research this further because I know I would not have to claim it as income if I didn't previously claim the deduction
Expert:  emc011075 replied 1 year ago.

You can reduce the over payment with the current year interest. For the prior years, you can only reduce by the amount the deduction didn't reduced your taxes. It depends on how much of the interest you paid and your amount of your itemized deduction. You do the analyses but you do not amend prior year returns or claim the refund.

... If you receive a refund of interest in the same tax year you paid it, you must reduce your interest expense by the amount refunded to you. If you receive a refund of interest you deducted in an earlier year, you generally must include the refund in income in the year you receive it. However, you need to include it only up to the amount of the deduction that reduced your tax in the earlier year. This is true whether the interest overcharge was refunded to you or was used to reduce the outstanding principal on your mortgage. If you need to include the refund in income, report it on Form 1040, line 21....

95K is lot of interest. How many years are we talking here?

Customer: replied 1 year ago.
This didn't help - I already read that.. I know that. Where specifically does it say I can't amend previous year tax deduction. The interest overpayment is from 8 years of overpaid interest. The tax benefit I received is no where near the amount of taxes I am expected to pay due to the large amount paid in one lump sum.
Expert:  emc011075 replied 1 year ago.

Amending your returns will not make any difference. First you will only be able to claim the refund for 2013 and 2014 and you will still not be able to exclude the entire amount of your 2015 return: only the amount of the deduction that didn't increase your tax. If take out the interest and your total deductions fall bellow the standard deduction amount, you will automatically get standard deductions.

I am sorry to say, but taxes are not always fair.

Customer: replied 1 year ago.
what do u mean by refund I am sure I didn't receive a refund in 2012 & 2013 but I only really need to reduce the amount to put me back in my normal tax bracket & then I would come out the same regardless of of amend other taxes
Expert:  emc011075 replied 1 year ago.

I am sorry, I was thinking about the deduction. Forget the refund. If you amend your prior years returns and remove the deduction, you will increase your taxable income, your taxes and you actually may owe more taxes for that year plus penalties and interest. I am saying "may" because I do not know your overall tax situation. You may have certain credits that you couldn't take because your tax was low. But removing the interest will still not change the fact that you can only exclude the amount that didn't increase your tax liability. The IRS doesn't say that if you didn't claim the interest you can exclude the entire amount of the interest you didn't claim.

Expert:  emc011075 replied 1 year ago.

You will have to look at your prior year returns and calculate the difference between the standard deduction and your itemize deduction and this will be about what you have to claim as income in 2015.

For instance, if your claimed 18K in itemize deduction in 2014 and the standard deduction was 12,400, you will have to claim the lower of 5.600 (18K - 12,400) or actual interest for that year. That will be by how much claiming the interest reduced your taxable income. If you claimed standard deduction for that year you will not need to include anything for that year. You will do the calculation for every year in question and than you total your numbers. That will be the amount you will need to claim as income in 2015.

Also, the IRS doesn't have to accept your amendments for the closed year (2012 and earlier) if they figure out the reason.

Customer: replied 1 year ago.
just to clarify I can amend prior years? I will come out better.
1. First I am only increasing taxable income by 30,000 in 2012 & 2013. It doesn't change my tax bracket & I don't lose normal deduction. At over 300,000 My standard deduction goes from 20,000 to 10,000. I lose child care credits etc..I think penalties and interest are covered under the SCRA benefits..
Expert:  emc011075 replied 1 year ago.

You can amend how far you want but it doesn't mean IRS will accept it. If you suddenly amend 8 years of returns removing a large deduction that you were entitled to somebody will notice and start asking question and even reopen returns from six years and audit it.

If you have 30K increase in 2012 and 2013, what about the other years? You have to account for all 8 years. Plus you will owe back taxes, interest and penalties. It is really up to you what you want to do but I think it is a bad idea.