Last-Minute Reminders: Mortgage Interest & FBAR

Update on Home Mortgage Interest Deductions

For 2016, the IRS Form 1098 – “Mortgage Interest Statement” – you received from your lender with information used to claim an itemized deduction for qualified residence interest should include additional information this year.

A qualified residence includes your principal residence and up to one additional personal residence. Qualified residence interest is defined as interest on up to $1 million of “acquisition debt” plus interest on up to $100,000 of “home equity debt.”

Acquisition debt is debt that is:

  • Incurred to acquire, construct, or substantially improve a qualified residence, and
  • Secured by a qualified residence

Home equity debt is debt (other than acquisition debt) that is:

  • secured by a qualified residence
  • used for any purpose
  • deductible under the alternative minimum tax (AMT) rules only to the extent the debt proceeds are used to acquire, construct or substantially improve a qualified residence

Important note: If you’re married and file separately from your spouse, you can deduct half of the eligible mortgage interest paid on your separate returns.

Additional information is required to be included in Form 1098 this year to allow the IRS to more easily identify taxpayers who attempt to deduct interest on loan balances above the combined $1.1 million limit for acquisition debt and home equity debt, as well as those taxpayers who attempt to claim mortgage interest deductions for more than two residences. That information is:

  • Mortgage origination date
  • Outstanding principal balance as of the beginning of the calendar year for which the Form 1098 is provided
  • Address of the property that secures the mortgage (or a description if the property doesn’t have an address)

Note: You also may raise a red flag if the amount of your qualified residence interest deduction differs from the combined mortgage interest reported on your Form(s) 1098. This sometimes legitimately happens if, for example, you have more than $1.1 million of combined acquisition debt or own more than two homes.

New FBAR Filing Deadline

If you have an interest in — or authority over — a foreign financial account, the IRS wants you to provide information about the account by filing a form called the “Report of Foreign Bank and Financial Accounts” (FBAR).

The annual deadline for filing FBARs has been changed. It now coincides with the tax filing deadlines for individuals, under the Surface Transportation and Veterans Health Care Choice Improvement Act of 2015. So, for accounts held in 2016, you must generally file FBARs by April 18, 2017. (Formerly, the deadline was June 30, excluding weekends and holidays.)

Important note: If you fail to meet the annual FBAR due date, the Financial Crimes Enforcement Network (FinCEN) will grant an automatic extension to October 15. Accordingly, specific requests for this extension aren’t required.

Reporting Requirements
FBARs are not filed with federal tax returns. Each year, citizens and resident aliens of the United States, as well as domestic partnerships, corporations, estates and trusts, must generally file an FBAR form electronically with the FinCEN if:

  1. They have a direct or indirect financial interest in — or signature authority over — one or more accounts in a foreign country. This includes bank accounts, brokerage accounts, mutual funds, trusts or other types of foreign financial accounts, and
  2. The total value of the foreign accounts exceeds $10,000 at any time during the calendar year.

Taxpayers also may be subject to FBAR compliance if they file an information return related to certain foreign corporations, foreign partnerships, foreign disregarded entities, or transactions with foreign trusts and receipt of certain foreign gifts.

Exceptions to the Rules
FBAR filing exceptions are available for the following U.S. taxpayers or foreign financial accounts:

  • Certain foreign financial accounts jointly owned by spouses
  • United States persons included in a consolidated FBAR
  • Correspondent/nostro accounts
  • Foreign financial accounts owned by a governmental entity
  • Foreign financial accounts owned by an international financial institution
  • IRA owners and beneficiaries
  • Participants in and beneficiaries of tax-qualified retirement plans
  • Certain individuals with signature authority over — but no financial interest in — a foreign financial account
  • Trust beneficiaries (but only if a U.S. person reports the account on an FBAR filed on behalf of the trust)
  • Foreign financial accounts maintained on a United States military banking facility
  • Important note: Filers living abroad may coordinate FBAR filing with their tax return deadline (June 15, 2017)

Penalties for Noncompliance
Take the FBAR requirement seriously. Failing to file an FBAR can result in the following penalties if assessed after August 1, 2016, and associated violations occurred after November 2, 2015:

  • An inflation-adjusted civil penalty of as much as $12,459 per violation, if the failure wasn’t willful. This penalty may be waived if income from the account was properly reported on the income tax return and there was reasonable cause for not reporting it.
  • A civil penalty equal to the greater of: 1) 50% of the account, or 2) $124,588 per violation, if the failure to report was willful.
  • Criminal penalties and time in prison.

For Assistance

Consult with a tax professional if you have questions about any of this. Your tax advisor can ensure you meet the requirements for reporting mortgage interest and foreign accounts and help avoid penalties for noncompliance.

 

Feel free to contact us for more information rsibley@abcpa.com, bbailey@abcpa.com, dchandler@abcpa.com, or cmozingo@abcpa.com.