Taxpayer Identification Numbers; Loan "Points" and Residency Exclusion

This column, in slightly different format, originally appeared in The San Francisco Examiner Newspaper, July 26, 1998

Copyright 1998 Robert L. Sommers, all rights reserved.

Question:  My business paid $10,000 for consulting services from a man who now refuses to give me his tax identification number. Can I get into trouble?

Answer: Yes, you must obtain the social security number or tax identification number (TIN) from employees and independent contractors who perform services for your business. Use Form W-9. Otherwise, the tax burden shifts to you and then, under the "back-up withholding rules," you are required to withhold 31% of the gross payments made and send the amount withheld directly to IRS. Any failure permits IRS to collect the 31% tax, plus penalties and interest, directly from you!

In your case, you might have obtained a TIN or withheld $3,100 from payments made to your consultant. Since you've already paid him the full $10,000, it's too late to withhold.

Note: If you obtain his TIN, but fail to file an information form (Form1099-MISC), there is a $50 penalty, but you are not liable for any back-up withholding. You must file Form 1099-MISC if you pay an independent contractor (other than a corporation) $600 a year or more, for rents or services for your business.

Question: I'm confused about when I can deduct points paid on a loan.

Answer: Points paid on a loan to purchase or improve a principal residence are, in general, deductible as an itemized deduction, to the extent it is customary to charge points in that geographical location and the points are a reasonable amount. Also, the loan must be secured by your principal residence.

The IRS will not challenge the deductibility of points meeting the above requirements when, in addition, they are calculated as a percentage of the total loan, are designated as points or loan origination fees, and are paid directly by the borrower and not derived from loan proceeds. Earnest money deposits, escrow deposits, down payments and points paid by or charged to the seller are considered direct borrower payments.

Points paid on a refinance of a principal residence are not currently deductible, but may be deducted ratably over the period of the loan. The same is true for points paid on second or vacation homes, home-equity loans or lines of credit.

Question: While I live in Japan, may I use my U.S. vacation home as my principal residence?

Answer: No. Your principal residence is the dwelling where you live.

To qualify for the principal residence exclusion, your home must have been owned and used as your principal residence for 2 of the 5 years prior to its sale ("ownership and use tests"). The residence exclusion applies to the profit from the sale of a principal residence, to a maximum of $250,000 for individuals and $500,000 for joint filers. If you meet the ownership and use tests, it does not matter whether you are currently living in Japan.

Note: A partial exclusion is available if you move because of work or unforeseen circumstances. The partial exclusion is determined by: the number of months that you have owned and used your home as your principal residence divided by 24. For example, if you are single and have owned and lived in your home for 8 months before moving, your exclusion would be $83,333 (8/24 = 33.33%; $250,000 exclusion x 33.33% = $83,333).

If you meet the ownership and use tests, you qualify for the exclusion, even though your home is located outside the U.S. The residency exclusion is not available to those who sacrificed their U.S. citizenship for tax-avoidance purposes.

Remember: If you sold your prior residence under old law (the rollover provisions of IRC Section 1034) and replaced it, you may add on ownership and use periods of your former residence to your current residence.


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**NOTE: The information contained at this site is for educational purposes only and is not intended for any particular person or circumstance. A competent tax professional should always be consulted before utilizing any of the information contained at this site.**