Acc 307 Tax Research Problem 1

Running Head: RESEARCH PROBLEM 1 Research Problem 1 ACC 307 February 24, 2010 Deduction interest has been an arguable topic since 1913. The four types of allowed qualified interest are as followed. a) Interest on Qualified Student Loans b) Investment Interest c) Qualified Residence Interest (home mortgage) d) Business Interest Interest on Qualified Student Loans Interest on qualified student loan can deduct the interest as a deduction for AGI. This deduction is permitted if the money borrowed was used to finance qualified education expense.

In order to deduct the interest on Qualified Student Loan the money must have been paid qualified education expense. The maximum deduction is $2,500 and is phased out for taxpayers with modified AGI in excess of certain amounts. The deduction is not allowed for taxpayers who are claimed as dependents or for married taxpayers filing separately (Willis, Maloney, Raabe, & Young, 2010 page 10-14). Investment Interest The course of action a Taxpayer must take to be able to deduct Investment Interest is that he or she borrows funds to acquire investment assets.

Therefore, a significant tax benefit can occur, when the interest expense is high in comparative to the income from the investment. “However, Congress has limited the deductibility of interest on funds borrowed for the purpose of purchasing or continuing to hold investment property” (Willis, Maloney, Raabe, & Young, 2010) page 11-25 Qualified Residence Interest (home mortgage) What is Qualified Residence Interest? And what are the categories under Qualified Residence Interest?

Qualified residence interest is interest paid or accrued on indebtedness (subject to limitations) secured by a qualified residence of the taxpayer. (Willis, Maloney, Raabe, & Young, 2010) pg10-15. The two categoriez under Qalified Residence Interest are interest on acquisition indebtedness and interest on home equity loans. The qualified residence is the principal residence of tax payer and one additional residence of tax payer or spouse. Qualified interest is completely deductible.

However, Interested paid or accrued in the same tax year on aggregate acquisition indebtedness of $1 million or less ($500,000 for married persons filling separate returns). Home equity loan is like when tax a payer takes out personal loan as second mortgage using their home as a security. Since a home equity loan can be used for any personal use for which in that situation the interest would not be deductable the only way the interest is deductible is if the least of the residence fair market value, less the acquisition indebtedness or $100,00 ($50,000 for married filling persons filling separate returns).

The Section of the IRS code that the IRS will use to support the case against Donald would be Section 163 Interest and Section 1041 Transfer of property between spouses or incident to divorce. Section 163(h)(1) General rule – There shall be allowed as a deduction all interest paid or accrued within the taxable year on indebtedness. Section 1041(a) General rule- No gain or loss shall be recognized on a transfer of property from an individual to (or in trust for the benefit of) (1)   a spouse, or (2)   a former spouse, but only if the transfer is incident to the divorce. http://www. fourmilab. ch/ustax/www/t26-A-1-O-III-1041. html