Q: Your June 2 column contained what I believe is an inaccuracy. In answer to a question regarding refinancing a mortgage, you stated that points associated with a VA mortgage never may be deducted as interest, but that this restriction does not apply to FHA loans. My understanding is that this restriction does apply to FHA loans; I enclose photocopies from the 1984 Commerce Clearing House Tax Guide indicating that this was determined by Revenue Ruling 68-650 (1968-2CB78). "Points" cause a great deal of confusion, and I hope you will clarify this matter in a future column.
A: The writer of this letter is a certified public accountant, and I have a great deal of respect for the technical competence and general intelligence of members of the accounting profession (having been one myself).
On this occasion, however, the CPA was led astray by incorrect and confusing statements in the Commerce Clearing House guide, from which she sent me several abstracts. On one page, for example, CCH says that "FHA and VA loan points are service charges and not deductible as interest."
On another of the pages my reader sent, however, a distinction is made between points paid by the buyer and points paid by the seller. The text correctly states that points paid by the borrower to obtain a VA mortgage are a service charge and are not deductible as interest.
Similarly, points paid by the seller as a condition for obtaining FHA financing for the buyer are not considered an interest expense, but rather a selling expense that reduces the amount of gain (or increases the loss). But no such restriction of deductibility is stated or implied for the buyer who borrows on an FHA mortgage.
Indeed, in the 1986 CCH Tax Guide the distinction is made clearer in paragraph 2400 (page 786): "Interest does not include . . . the following: . . . loan origination fees . . . on a VA loan (incurred by the buyer) . . . (or) points on an FHA loan (incurred by the seller). . . . " So my comment in the June 2 column, as cited in the question, was correct.
This may seem to some readers to be an esoteric discussion. But I agree with the letter writer that the whole issue of points is confusing; and with the large number of transients in this area, and the correspondingly large number of real estate transactions, I think this clarification may be important to a large number of people.
Q: I paid a substantial fee to an attorney for the preparation of my will, which included two trusts. I know personal legal fees may not be claimed; but can the fee (or any part of it) be deducted on Schedule A as an investment expense, given that the bulk of my estate consists of stocks and bonds?
A: Part of an attorney's fee may be claimed as an investment expense only if the attorney did in fact give investment advice apart from the legal services provided, and the fee for that investment advice was specified separately on an itemized bill.
Arithmetic lesson for today: From time to time -- usually in connection with an IRA or Keogh investment -- people will ask how fast their money will grow, or how much they can expect to have at a particular age.
The "rule of 72" is a quick and simple way to estimate the growth of your dollars if invested at a particular rate of return. If you divide the expected rate into 72, the answer is the number of years it will take for the dollars to double at that rate if compounded annually.
Let's look at an example: If you invest, say, $1,000 at 9 percent, divide 72 by nine. The answer is, of course, eight -- which tells you that your $1,000, if invested at 9 percent compounded annually, will double in eight years. At 8 percent, it will take nine years, and at 10 percent 7.2 years.
If compounding is done more frequently, the money will grow faster. I don't have a rule for those cases, but if you use the rule of 72, you can at least come up with a starting point, then make a fairly accurate guess from there. And, of course, the effect of income taxes is not considered, so this technique is best applied to some form of tax-deferred savings.
Abramson is a family financial counselor and tax adviser. Questions of general interest on tax matters, insurance, investments, estate planning and other aspects of family finances will be answered in this column. Advice cannot be given on an individual basis. Address all questions to E. M. Abramson, The Washington Post, Business News, 1150 15th St. NW, Washington, D.C. 20071.