This will include a memo and a client letter. The facts for the first assignment

Question

This will include a memo and a client letter.

The facts for the first assignment are as follow:

In 2009, Mr. Smith purchased a principal residence for $1,500,000. He made a down payment of $300,000 and financed the remainder by borrowing $1,200,000 through a loan secured by the residence. In 2009, Mr. Smith paid interest that accrued on the indebtedness during that year. He had no other debt secured by the residence. May he deduct the entire amount of interest which was paid on the home loan?

Your research assignment will be graded using the following criteria:

Recognition of the important facts and issues

Correct conclusion

Proper citation of relevant sources

Format, Spelling & Grammar

Explanation / Answer

Solution :

Interest deduction on home loans are only allowed for interest which has accrued and been paid , called qualified interest . Interest on home loans is deducted from an owner's adjusted gross income (AGI) as an itemized deduction .

If you are paying EMIs for a home loan you took to buy a house, the interest component in the EMI can be claimed as deduction. This deduction can be claimed starting the year in which the construction of the house is completed. The interest payments for the year shall result in a loss under the head 'income from house property'. This loss can be adjusted against in the same year against other heads of income in your income tax return including salary. Therefore, it reduces your total taxable income and the tax you pay thereon.

During the first years of a long term loan ,almost all of the annual payments will be interest , with very little left to reduce the principle , while the opposite occurs towards the end of the loan . The tax benefits of interest payments varies year by year . In addition to the tax benefit of deductible interest , there may be local , state & federal incentives .

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