[TEXT OMITTED FROM SOURCE] Loans Best Used as 'Last Resource' for Funds By E. M. Abramson

A new car? I thought we couldn't afford a new car now." "No problem -- we have a home equity loan from our friendly neighborhood banker."

How many times have you seen or heard this pitch? Don't believe it -- if you can't afford a new car without the home equity loan, you still can't afford it with the loan.

A home equity loan is nothing more than an ordinary loan using the equity you have built up in your house as collateral. To get the loan, you sign what is in effect a second mortgage on your house. No matter the sugar-coated words with which the offer is wrapped -- miss a couple of payments and you could lose your home.

I'm not saying that a home equity loan in itself is a bad thing. If you have built up considerable equity in your home over a period of years, that equity is a valuable asset which can be tapped if you run into an urgent need for cash.

For example, if you have unexpected medical expenses you can't otherwise manage, or if you need to finance a child's college education, then a home equity loan is a good source of funds.

But I object to a sales pitch that suggests you use that "last-resource" money for short-term needs like a car or a vacation trip. These are things you can often do without -- for a while, at least -- or can finance from other sources.

The bottom line is that if you can't afford to make the payments on a car loan from the dealer, or from your bank or credit union, why would you think that it will be any easier meeting the payments on a home equity loan?

Our economy is built on credit, and I certainly do not disparage the contributions creative credit techniques have made to the growth of our system. But individual restraint is most important, and I get rather unhappy with ads that tell us how easy it is to get the money without also pointing out that it will have to be repaid.

Q: I am generally conservative in estimating my state income tax liability, and usually have a refund due. Instead of taking a cash refund, I have the overpayment credited to my estimated tax for the following year. I don't report the credit as income, nor do I include the credit as a basis for taking the following year's deduction for state tax paid. But earlier this year I received a Form 1099-G from the District for the credit taken against my 1983 tax; and I then found that the 1040 instructions require the reporting of a credit as well as a cash refund. Should I now claim the amount of the credit as state income tax paid, and file an amended federal return for 1983?

A: No, you shouldn't take any action at all; you have been handling the reporting (or in this case the nonreporting) exactly right.

Unfortunately, the instruction booklet for Form 1040 doesn't have the complete story. It does say, as you learned, that you "may" have to report as income the amount of any refund, credit or offset for state income taxes received in 1983. But then it only cites one case where the refund does not have to be reported -- when it was for tax paid in a year in which you did not itemize deductions.

You have to go to IRS Publication 17 ("Your Federal Income Tax") for 1983, where you find the statement, in the first column of page 59, "If the refund . . . and the deductible tax . . . occur in the same year, the refund or recovery reduces the deduction and is not reported as income."

When you authorize the D.C. government to apply the refund to your tax estimate for the following year, you are in effect paying the tax at the same time as you are "receiving" the refund. Therefore, they cancel each other, and you neither report the credit as income nor claim the payment as a deduction.

So you can disregard the 1099-G sent to you by the local government. However, I suggest you keep it in your tax file so that, in the event of an audit, you can show that the amount reported on the 1099-G matches the amount shown on your state tax return as a credit against the following year's tax.