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1040x site efile com 23. 1040x site efile com   Interest Expense Table of Contents Introduction Useful Items - You may want to see: Home Mortgage InterestAmount Deductible Points Mortgage Insurance Premiums Form 1098, Mortgage Interest Statement Investment InterestInvestment Property Allocation of Interest Expense Limit on Deduction Items You Cannot DeductPersonal Interest Allocation of Interest How To ReportMore than one borrower. 1040x site efile com Mortgage proceeds used for business or investment. 1040x site efile com Introduction This chapter discusses what interest expenses you can deduct. 1040x site efile com Interest is the amount you pay for the use of borrowed money. 1040x site efile com The following are types of interest you can deduct as itemized deductions on Schedule A (Form 1040). 1040x site efile com Home mortgage interest, including certain points and mortgage insurance premiums. 1040x site efile com Investment interest. 1040x site efile com This chapter explains these deductions. 1040x site efile com It also explains where to deduct other types of interest and lists some types of interest you cannot deduct. 1040x site efile com Use Table 23-1 to find out where to get more information on various types of interest, including investment interest. 1040x site efile com Useful Items - You may want to see: Publication 936 Home Mortgage Interest Deduction 550 Investment Income and Expenses Home Mortgage Interest Generally, home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). 1040x site efile com The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan. 1040x site efile com You can deduct home mortgage interest if all the following conditions are met. 1040x site efile com You file Form 1040 and itemize deductions on Schedule A (Form 1040). 1040x site efile com The mortgage is a secured debt on a qualified home in which you have an ownership interest. 1040x site efile com (Generally, your mortgage is a secured debt if you put your home up as collateral to protect the interest of the lender. 1040x site efile com The term “qualified home” means your main home or second home. 1040x site efile com For details, see Publication 936. 1040x site efile com )  Both you and the lender must intend that the loan be repaid. 1040x site efile com Amount Deductible In most cases, you can deduct all of your home mortgage interest. 1040x site efile com How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds. 1040x site efile com Fully deductible interest. 1040x site efile com   If all of your mortgages fit into one or more of the following three categories at all times during the year, you can deduct all of the interest on those mortgages. 1040x site efile com (If any one mortgage fits into more than one category, add the debt that fits in each category to your other debt in the same category. 1040x site efile com )   The three categories are as follows: Mortgages you took out on or before October 13, 1987 (called grandfathered debt). 1040x site efile com Mortgages you took out after October 13, 1987, to buy, build, or improve your home (called home acquisition debt), but only if throughout 2013 these mortgages plus any grandfathered debt totaled $1 million or less ($500,000 or less if married filing separately). 1040x site efile com Mortgages you took out after October 13, 1987, other than to buy, build, or improve your home (called home equity debt), but only if throughout 2013 these mortgages totaled $100,000 or less ($50,000 or less if married filing separately) and totaled no more than the fair market value of your home reduced by (1) and (2). 1040x site efile com The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home. 1040x site efile com   See Part II of Publication 936 for more detailed definitions of grandfathered, home acquisition, and home equity debt. 1040x site efile com    You can use Figure 23-A to check whether your home mortgage interest is fully deductible. 1040x site efile com Figure 23-A. 1040x site efile com Is My Home Mortgage Interest Fully Deductible? Please click here for the text description of the image. 1040x site efile com Figure 23-A. 1040x site efile com Is My Interest Fully Deductible? Limits on deduction. 1040x site efile com   You cannot fully deduct interest on a mortgage that does not fit into any of the three categories listed earlier. 1040x site efile com If this applies to you, see Part II of Publication 936 to figure the amount of interest you can deduct. 1040x site efile com Special Situations This section describes certain items that can be included as home mortgage interest and others that cannot. 1040x site efile com It also describes certain special situations that may affect your deduction. 1040x site efile com Late payment charge on mortgage payment. 1040x site efile com   You can deduct as home mortgage interest a late payment charge if it was not for a specific service performed in connection with your mortgage loan. 1040x site efile com Mortgage prepayment penalty. 1040x site efile com   If you pay off your home mortgage early, you may have to pay a penalty. 1040x site efile com You can deduct that penalty as home mortgage interest provided the penalty is not for a specific service performed or cost incurred in connection with your mortgage loan. 1040x site efile com Sale of home. 1040x site efile com   If you sell your home, you can deduct your home mortgage interest (subject to any limits that apply) paid up to, but not including, the date of sale. 1040x site efile com Example. 1040x site efile com John and Peggy Harris sold their home on May 7. 1040x site efile com Through April 30, they made home mortgage interest payments of $1,220. 1040x site efile com The settlement sheet for the sale of the home showed $50 interest for the 6-day period in May up to, but not including, the date of sale. 1040x site efile com Their mortgage interest deduction is $1,270 ($1,220 + $50). 1040x site efile com Prepaid interest. 1040x site efile com   If you pay interest in advance for a period that goes beyond the end of the tax year, you must spread this interest over the tax years to which it applies. 1040x site efile com You can deduct in each year only the interest that qualifies as home mortgage interest for that year. 1040x site efile com However, there is an exception that applies to points, discussed later. 1040x site efile com Mortgage interest credit. 1040x site efile com   You may be able to claim a mortgage interest credit if you were issued a mortgage credit certificate (MCC) by a state or local government. 1040x site efile com Figure the credit on Form 8396, Mortgage Interest Credit. 1040x site efile com If you take this credit, you must reduce your mortgage interest deduction by the amount of the credit. 1040x site efile com   For more information on the credit, see chapter 37. 1040x site efile com Ministers' and military housing allowance. 1040x site efile com   If you are a minister or a member of the uniformed services and receive a housing allowance that is not taxable, you can still deduct your home mortgage interest. 1040x site efile com Hardest Hit Fund and Emergency Homeowners' Loan Programs. 1040x site efile com   You can use a special method to compute your deduction for mortgage interest and real estate taxes on your main home if you meet the following two conditions. 1040x site efile com You received assistance under: A State Housing Finance Agency (State HFA) Hardest Hit Fund program in which program payments could be used to pay mortgage interest, or An Emergency Homeowners' Loan Program administered by the Department of Housing and Urban Development (HUD) or a state. 1040x site efile com You meet the rules to deduct all of the mortgage interest on your loan and all of the real estate taxes on your main home. 1040x site efile com If you meet these tests, then you can deduct all of the payments you actually made during the year to your mortgage servicer, the State HFA, or HUD on the home mortgage (including the amount shown on box 3 of Form 1098-MA, Mortgage Assistance Payments), but not more than the sum of the amounts shown on Form 1098, Mortgage Interest Statement, in box 1 (mortgage interest received from payer(s) / borrower(s)), box 4 (mortgage insurance premiums) and box 5 (real property taxes). 1040x site efile com However, you are not required to use this special method to compute your deduction for mortgage interest and real estate taxes on your main home. 1040x site efile com Mortgage assistance payments under section 235 of the National Housing Act. 1040x site efile com   If you qualify for mortgage assistance payments for lower-income families under section 235 of the National Housing Act, part or all of the interest on your mortgage may be paid for you. 1040x site efile com You cannot deduct the interest that is paid for you. 1040x site efile com No other effect on taxes. 1040x site efile com   Do not include these mortgage assistance payments in your income. 1040x site efile com Also, do not use these payments to reduce other deductions, such as real estate taxes. 1040x site efile com Divorced or separated individuals. 1040x site efile com   If a divorce or separation agreement requires you or your spouse or former spouse to pay home mortgage interest on a home owned by both of you, the payment of interest may be alimony. 1040x site efile com See the discussion of Payments for jointly-owned home in chapter 18. 1040x site efile com Redeemable ground rents. 1040x site efile com   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct them as mortgage interest. 1040x site efile com   Payments made to end the lease and to buy the lessor's entire interest in the land are not deductible as mortgage interest. 1040x site efile com For more information, see Publication 936. 1040x site efile com Nonredeemable ground rents. 1040x site efile com   Payments on a nonredeemable ground rent are not mortgage interest. 1040x site efile com You can deduct them as rent if they are a business expense or if they are for rental property. 1040x site efile com Reverse mortgages. 1040x site efile com   A reverse mortgage is a loan where the lender pays you (in a lump sum, a monthly advance, a line of credit, or a combination of all three) while you continue to live in your home. 1040x site efile com With a reverse mortgage, you retain title to your home. 1040x site efile com Depending on the plan, your reverse mortgage becomes due with interest when you move, sell your home, reach the end of a pre-selected loan period, or die. 1040x site efile com Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable. 1040x site efile com Any interest (including original issue discount) accrued on a reverse mortgage is not deductible until the loan is paid in full. 1040x site efile com Your deduction may be limited because a reverse mortgage loan generally is subject to the limit on Home Equity Debt discussed in Publication 936. 1040x site efile com Rental payments. 1040x site efile com   If you live in a house before final settlement on the purchase, any payments you make for that period are rent and not interest. 1040x site efile com This is true even if the settlement papers call them interest. 1040x site efile com You cannot deduct these payments as home mortgage interest. 1040x site efile com Mortgage proceeds invested in tax-exempt securities. 1040x site efile com   You cannot deduct the home mortgage interest on grandfathered debt or home equity debt if you used the proceeds of the mortgage to buy securities or certificates that produce tax-free income. 1040x site efile com “Grandfathered debt” and “home equity debt” are defined earlier under Amount Deductible. 1040x site efile com Refunds of interest. 1040x site efile com   If you receive a refund of interest in the same tax year you paid it, you must reduce your interest expense by the amount refunded to you. 1040x site efile com If you receive a refund of interest you deducted in an earlier year, you generally must include the refund in income in the year you receive it. 1040x site efile com However, you need to include it only up to the amount of the deduction that reduced your tax in the earlier year. 1040x site efile com This is true whether the interest overcharge was refunded to you or was used to reduce the outstanding principal on your mortgage. 1040x site efile com    If you received a refund of interest you overpaid in an earlier year, you generally will receive a Form 1098, Mortgage Interest Statement, showing the refund in box 3. 1040x site efile com For information about Form 1098, see Form 1098, Mortgage Interest Statement , later. 1040x site efile com   For more information on how to treat refunds of interest deducted in earlier years, see Recoveries in chapter 12. 1040x site efile com Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. 1040x site efile com Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. 1040x site efile com A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. 1040x site efile com See Points paid by the seller , later. 1040x site efile com General Rule You generally cannot deduct the full amount of points in the year paid. 1040x site efile com Because they are prepaid interest, you generally deduct them ratably over the life (term) of the mortgage. 1040x site efile com See Deduction Allowed Ratably , next. 1040x site efile com For exceptions to the general rule, see Deduction Allowed in Year Paid , later. 1040x site efile com Deduction Allowed Ratably If you do not meet the tests listed under Deduction Allowed in Year Paid , later, the loan is not a home improvement loan, or you choose not to deduct your points in full in the year paid, you can deduct the points ratably (equally) over the life of the loan if you meet all the following tests. 1040x site efile com You use the cash method of accounting. 1040x site efile com This means you report income in the year you receive it and deduct expenses in the year you pay them. 1040x site efile com Most individuals use this method. 1040x site efile com Your loan is secured by a home. 1040x site efile com (The home does not need to be your main home. 1040x site efile com ) Your loan period is not more than 30 years. 1040x site efile com If your loan period is more than 10 years, the terms of your loan are the same as other loans offered in your area for the same or longer period. 1040x site efile com Either your loan amount is $250,000 or less, or the number of points is not more than: 4, if your loan period is 15 years or less, or 6, if your loan period is more than 15 years. 1040x site efile com Deduction Allowed in Year Paid You can fully deduct points in the year paid if you meet all the following tests. 1040x site efile com (You can use Figure 23-B as a quick guide to see whether your points are fully deductible in the year paid. 1040x site efile com ) Your loan is secured by your main home. 1040x site efile com (Your main home is the one you ordinarily live in most of the time. 1040x site efile com ) Paying points is an established business practice in the area where the loan was made. 1040x site efile com The points paid were not more than the points generally charged in that area. 1040x site efile com You use the cash method of accounting. 1040x site efile com This means you report income in the year you receive it and deduct expenses in the year you pay them. 1040x site efile com (If you want more information about this method, see Accounting Methods in chapter 1. 1040x site efile com ) The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes. 1040x site efile com The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. 1040x site efile com The funds you provided are not required to have been applied to the points. 1040x site efile com They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. 1040x site efile com You cannot have borrowed these funds from your lender or mortgage broker. 1040x site efile com You use your loan to buy or build your main home. 1040x site efile com The points were computed as a percentage of the principal amount of the mortgage. 1040x site efile com The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. 1040x site efile com The points may be shown as paid from either your funds or the seller's. 1040x site efile com Figure 23-B. 1040x site efile com Are My Points Fully Deductible This Year? Please click here for the text description of the image. 1040x site efile com Figure 23-B. 1040x site efile com Are My Points Fully Deductible This Year? Note. 1040x site efile com If you meet all of these tests, you can choose to either fully deduct the points in the year paid, or deduct them over the life of the loan. 1040x site efile com Home improvement loan. 1040x site efile com   You can also fully deduct in the year paid points paid on a loan to improve your main home, if tests (1) through (6) are met. 1040x site efile com Second home. 1040x site efile com You cannot fully deduct in the year paid points you pay on loans secured by your second home. 1040x site efile com You can deduct these points only over the life of the loan. 1040x site efile com Refinancing. 1040x site efile com   Generally, points you pay to refinance a mortgage are not deductible in full in the year you pay them. 1040x site efile com This is true even if the new mortgage is secured by your main home. 1040x site efile com   However, if you use part of the refinanced mortgage proceeds to improve your main home and you meet the first 6 tests listed under Deduction Allowed in Year Paid , earlier, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. 1040x site efile com You can deduct the rest of the points over the life of the loan. 1040x site efile com Example 1. 1040x site efile com In 1998, Bill Fields got a mortgage to buy a home. 1040x site efile com In 2013, Bill refinanced that mortgage with a 15-year $100,000 mortgage loan. 1040x site efile com The mortgage is secured by his home. 1040x site efile com To get the new loan, he had to pay three points ($3,000). 1040x site efile com Two points ($2,000) were for prepaid interest, and one point ($1,000) was charged for services, in place of amounts that ordinarily are stated separately on the settlement statement. 1040x site efile com Bill paid the points out of his private funds, rather than out of the proceeds of the new loan. 1040x site efile com The payment of points is an established practice in the area, and the points charged are not more than the amount generally charged there. 1040x site efile com Bill's first payment on the new loan was due July 1. 1040x site efile com He made six payments on the loan in 2013 and is a cash basis taxpayer. 1040x site efile com Bill used the funds from the new mortgage to repay his existing mortgage. 1040x site efile com Although the new mortgage loan was for Bill's continued ownership of his main home, it was not for the purchase or improvement of that home. 1040x site efile com He cannot deduct all of the points in 2013. 1040x site efile com He can deduct two points ($2,000) ratably over the life of the loan. 1040x site efile com He deducts $67 [($2,000 ÷ 180 months) × 6 payments] of the points in 2013. 1040x site efile com The other point ($1,000) was a fee for services and is not deductible. 1040x site efile com Example 2. 1040x site efile com The facts are the same as in Example 1, except that Bill used $25,000 of the loan proceeds to improve his home and $75,000 to repay his existing mortgage. 1040x site efile com Bill deducts 25% ($25,000 ÷ $100,000) of the points ($2,000) in 2013. 1040x site efile com His deduction is $500 ($2,000 × 25%). 1040x site efile com Bill also deducts the ratable part of the remaining $1,500 ($2,000 − $500) that must be spread over the life of the loan. 1040x site efile com This is $50 [($1,500 ÷ 180 months) × 6 payments] in 2013. 1040x site efile com The total amount Bill deducts in 2013 is $550 ($500 + $50). 1040x site efile com Special Situations This section describes certain special situations that may affect your deduction of points. 1040x site efile com Original issue discount. 1040x site efile com   If you do not qualify to either deduct the points in the year paid or deduct them ratably over the life of the loan, or if you choose not to use either of these methods, the points reduce the issue price of the loan. 1040x site efile com This reduction results in original issue discount, which is discussed in chapter 4 of Publication 535. 1040x site efile com Amounts charged for services. 1040x site efile com   Amounts charged by the lender for specific services connected to the loan are not interest. 1040x site efile com Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. 1040x site efile com You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. 1040x site efile com Points paid by the seller. 1040x site efile com   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. 1040x site efile com Treatment by seller. 1040x site efile com   The seller cannot deduct these fees as interest. 1040x site efile com But they are a selling expense that reduces the amount realized by the seller. 1040x site efile com See chapter 15 for information on selling your home. 1040x site efile com Treatment by buyer. 1040x site efile com    The buyer reduces the basis of the home by the amount of the seller-paid points and treats the points as if he or she had paid them. 1040x site efile com If all the tests under Deduction Allowed in Year Paid , earlier, are met, the buyer can deduct the points in the year paid. 1040x site efile com If any of those tests are not met, the buyer deducts the points over the life of the loan. 1040x site efile com   For information about basis, see chapter 13. 1040x site efile com Funds provided are less than points. 1040x site efile com   If you meet all the tests in Deduction Allowed in Year Paid , earlier, except that the funds you provided were less than the points charged to you (test (6)), you can deduct the points in the year paid, up to the amount of funds you provided. 1040x site efile com In addition, you can deduct any points paid by the seller. 1040x site efile com Example 1. 1040x site efile com When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). 1040x site efile com You meet all the tests for deducting points in the year paid, except the only funds you provided were a $750 down payment. 1040x site efile com Of the $1,000 charged for points, you can deduct $750 in the year paid. 1040x site efile com You spread the remaining $250 over the life of the mortgage. 1040x site efile com Example 2. 1040x site efile com The facts are the same as in Example 1, except that the person who sold you your home also paid one point ($1,000) to help you get your mortgage. 1040x site efile com In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). 1040x site efile com You spread the remaining $250 over the life of the mortgage. 1040x site efile com You must reduce the basis of your home by the $1,000 paid by the seller. 1040x site efile com Excess points. 1040x site efile com   If you meet all the tests in Deduction Allowed in Year Paid , earlier, except that the points paid were more than generally paid in your area (test (3)), you deduct in the year paid only the points that are generally charged. 1040x site efile com You must spread any additional points over the life of the mortgage. 1040x site efile com Mortgage ending early. 1040x site efile com   If you spread your deduction for points over the life of the mortgage, you can deduct any remaining balance in the year the mortgage ends. 1040x site efile com However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. 1040x site efile com Instead, deduct the remaining balance over the term of the new loan. 1040x site efile com    A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. 1040x site efile com Example. 1040x site efile com Dan paid $3,000 in points in 2002 that he had to spread out over the 15-year life of the mortgage. 1040x site efile com He deducts $200 points per year. 1040x site efile com Through 2012, Dan has deducted $2,200 of the points. 1040x site efile com Dan prepaid his mortgage in full in 2013. 1040x site efile com He can deduct the remaining $800 of points in 2013. 1040x site efile com Limits on deduction. 1040x site efile com   You cannot fully deduct points paid on a mortgage unless the mortgage fits into one of the categories listed earlier under Fully deductible interest . 1040x site efile com See Publication 936 for details. 1040x site efile com Mortgage Insurance Premiums You can treat amounts you paid during 2013 for qualified mortgage insurance as home mortgage interest. 1040x site efile com The insurance must be in connection with home acquisition debt and the insurance contract must have been issued after 2006. 1040x site efile com Qualified mortgage insurance. 1040x site efile com   Qualified mortgage insurance is mortgage insurance provided by the Department of Veterans Affairs, the Federal Housing Administration, or the Rural Housing Service, and private mortgage insurance (as defined in section 2 of the Homeowners Protection Act of 1998 as in effect on December 20, 2006). 1040x site efile com   Mortgage insurance provided by the Department of Veterans Affairs is commonly known as a funding fee. 1040x site efile com If provided by the Rural Housing Service, it is commonly known as a guarantee fee. 1040x site efile com These fees can be deducted fully in 2013 if the mortgage insurance contract was issued in 2013. 1040x site efile com Contact the mortgage insurance issuer to determine the deductible amount if it is not reported in box 4 of Form 1098. 1040x site efile com Special rules for prepaid mortgage insurance. 1040x site efile com   Generally, if you paid premiums for qualified mortgage insurance that are allocable to periods after the close of the tax year, such premiums are treated as paid in the period to which they are allocated. 1040x site efile com You must allocate the premiums over the shorter of the stated term of the mortgage or 84 months, beginning with the month the insurance was obtained. 1040x site efile com No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term. 1040x site efile com This paragraph does not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service. 1040x site efile com See the Example below. 1040x site efile com Example. 1040x site efile com Ryan purchased a home in May of 2012 and financed the home with a 15-year mortgage. 1040x site efile com Ryan also prepaid all of the $9,240 in private mortgage insurance required at the time of closing in May. 1040x site efile com Since the $9,240 in private mortgage insurance is allocable to periods after 2012, Ryan must allocate the $9,240 over the shorter of the life of the mortgage or 84 months. 1040x site efile com Ryan's adjusted gross income (AGI) for 2012 is $76,000. 1040x site efile com Ryan can deduct $880 ($9,240 ÷ 84 × 8 months) for qualified mortgage insurance premiums in 2012. 1040x site efile com For 2013, Ryan can deduct $1,320 ($9,240 ÷ 84 × 12 months) if his AGI is $100,000 or less. 1040x site efile com In this example, the mortgage insurance premiums are allocated over 84 months, which is shorter than the life of the mortgage of 15 years (180 months). 1040x site efile com Limit on deduction. 1040x site efile com   If your adjusted gross income on Form 1040, line 38, is more than $100,000 ($50,000 if your filing status is married filing separately), the amount of your mortgage insurance premiums that are otherwise deductible is reduced and may be eliminated. 1040x site efile com See Line 13 in the instructions for Schedule A (Form 1040) and complete the Mortgage Insurance Premiums Deduction Worksheet to figure the amount you can deduct. 1040x site efile com If your adjusted gross income is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. 1040x site efile com Form 1098, Mortgage Interest Statement If you paid $600 or more of mortgage interest (including certain points and mortgage insurance premiums) during the year on any one mortgage, you generally will receive a Form 1098 or a similar statement from the mortgage holder. 1040x site efile com You will receive the statement if you pay interest to a person (including a financial institution or a cooperative housing corporation) in the course of that person's trade or business. 1040x site efile com A governmental unit is a person for purposes of furnishing the statement. 1040x site efile com The statement for each year should be sent to you by January 31 of the following year. 1040x site efile com A copy of this form will also be sent to the IRS. 1040x site efile com The statement will show the total interest you paid during the year, any mortgage insurance premiums you paid, and if you purchased a main home during the year, it also will show the deductible points paid during the year, including seller-paid points. 1040x site efile com However, it should not show any interest that was paid for you by a government agency. 1040x site efile com As a general rule, Form 1098 will include only points that you can fully deduct in the year paid. 1040x site efile com However, certain points not included on Form 1098 also may be deductible, either in the year paid or over the life of the loan. 1040x site efile com See Points , earlier, to determine whether you can deduct points not shown on Form 1098. 1040x site efile com Prepaid interest on Form 1098. 1040x site efile com   If you prepaid interest in 2013 that accrued in full by January 15, 2014, this prepaid interest may be included in box 1 of Form 1098. 1040x site efile com However, you cannot deduct the prepaid amount for January 2014 in 2013. 1040x site efile com (See Prepaid interest , earlier. 1040x site efile com ) You will have to figure the interest that accrued for 2014 and subtract it from the amount in box 1. 1040x site efile com You will include the interest for January 2014 with the other interest you pay for 2014. 1040x site efile com See How To Report , later. 1040x site efile com Refunded interest. 1040x site efile com   If you received a refund of mortgage interest you overpaid in an earlier year, you generally will receive a Form 1098 showing the refund in box 3. 1040x site efile com See Refunds of interest , earlier. 1040x site efile com Mortgage insurance premiums. 1040x site efile com   The amount of mortgage insurance premiums you paid during 2013 may be shown in box 4 of Form 1098. 1040x site efile com See Mortgage Insurance Premiums, earlier. 1040x site efile com Investment Interest This section discusses interest expenses you may be able to deduct as an investor. 1040x site efile com If you borrow money to buy property you hold for investment, the interest you pay is investment interest. 1040x site efile com You can deduct investment interest subject to the limit discussed later. 1040x site efile com However, you cannot deduct interest you incurred to produce tax-exempt income. 1040x site efile com Nor can you deduct interest expenses on straddles. 1040x site efile com Investment interest does not include any qualified home mortgage interest or any interest taken into account in computing income or loss from a passive activity. 1040x site efile com Investment Property Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. 1040x site efile com It also includes property that produces gain or loss (not derived in the ordinary course of a trade or business) from the sale or trade of property producing these types of income or held for investment (other than an interest in a passive activity). 1040x site efile com Investment property also includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity). 1040x site efile com Partners, shareholders, and beneficiaries. 1040x site efile com   To determine your investment interest, combine your share of investment interest from a partnership, S corporation, estate, or trust with your other investment interest. 1040x site efile com Allocation of Interest Expense If you borrow money for business or personal purposes as well as for investment, you must allocate the debt among those purposes. 1040x site efile com Only the interest expense on the part of the debt used for investment purposes is treated as investment interest. 1040x site efile com The allocation is not affected by the use of property that secures the debt. 1040x site efile com Limit on Deduction Generally, your deduction for investment interest expense is limited to the amount of your net investment income. 1040x site efile com You can carry over the amount of investment interest that you could not deduct because of this limit to the next tax year. 1040x site efile com The interest carried over is treated as investment interest paid or accrued in that next year. 1040x site efile com You can carry over disallowed investment interest to the next tax year even if it is more than your taxable income in the year the interest was paid or accrued. 1040x site efile com Net Investment Income Determine the amount of your net investment income by subtracting your investment expenses (other than interest expense) from your investment income. 1040x site efile com Investment income. 1040x site efile com    This generally includes your gross income from property held for investment (such as interest, dividends, annuities, and royalties). 1040x site efile com Investment income does not include Alaska Permanent Fund dividends. 1040x site efile com It also does not include qualified dividends or net capital gain unless you choose to include them. 1040x site efile com Choosing to include qualified dividends. 1040x site efile com   Investment income generally does not include qualified dividends, discussed in chapter 8. 1040x site efile com However, you can choose to include all or part of your qualified dividends in investment income. 1040x site efile com   You make this choice by completing Form 4952, line 4g, according to its instructions. 1040x site efile com   If you choose to include any amount of your qualified dividends in investment income, you must reduce your qualified dividends that are eligible for the lower capital gains tax rates by the same amount. 1040x site efile com Choosing to include net capital gain. 1040x site efile com   Investment income generally does not include net capital gain from disposing of investment property (including capital gain distributions from mutual funds). 1040x site efile com However, you can choose to include all or part of your net capital gain in investment income. 1040x site efile com    You make this choice by completing Form 4952, line 4g, according to its instructions. 1040x site efile com   If you choose to include any amount of your net capital gain in investment income, you must reduce your net capital gain that is eligible for the lower capital gains tax rates by the same amount. 1040x site efile com    Before making either choice, consider the overall effect on your tax liability. 1040x site efile com Compare your tax if you make one or both of these choices with your tax if you do not. 1040x site efile com Investment income of child reported on parent's return. 1040x site efile com    Investment income includes the part of your child's interest and dividend income that you choose to report on your return. 1040x site efile com If the child does not have qualified dividends, Alaska Permanent Fund dividends, or capital gain distributions, this is the amount on line 6 of Form 8814, Parents' Election To Report Child's Interest and Dividends. 1040x site efile com Child's qualified dividends. 1040x site efile com   If part of the amount you report is your child's qualified dividends, that part (which is reported on Form 1040, line 9b) generally does not count as investment income. 1040x site efile com However, you can choose to include all or part of it in investment income, as explained under Choosing to include qualified dividends , earlier. 1040x site efile com   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured next under Child's Alaska Permanent Fund dividends). 1040x site efile com Child's Alaska Permanent Fund dividends. 1040x site efile com   If part of the amount you report is your child's Alaska Permanent Fund dividends, that part does not count as investment income. 1040x site efile com To figure the amount of your child's income that you can consider your investment income, start with the amount on Form 8814, line 6. 1040x site efile com Multiply that amount by a percentage that is equal to the Alaska Permanent Fund dividends divided by the total amount on Form 8814, line 4. 1040x site efile com Subtract the result from the amount on Form 8814, line 12. 1040x site efile com Child's capital gain distributions. 1040x site efile com    If part of the amount you report is your child's capital gain distributions, that part (which is reported on Schedule D, line 13, or Form 1040, line 13) generally does not count as investment income. 1040x site efile com However, you can choose to include all or part of it in investment income, as explained in Choosing to include net capital gain , earlier. 1040x site efile com   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured under Child's Alaska Permanent Fund dividends , earlier). 1040x site efile com Investment expenses. 1040x site efile com   Investment expenses are your allowed deductions (other than interest expense) directly connected with the production of investment income. 1040x site efile com Investment expenses that are included as a miscellaneous itemized deduction on Schedule A (Form 1040) are allowable deductions after applying the 2% limit that applies to miscellaneous itemized deductions. 1040x site efile com Use the smaller of: The investment expenses included on Schedule A (Form 1040), line 23, or The amount on Schedule A, line 27. 1040x site efile com Losses from passive activities. 1040x site efile com   Income or expenses that you used in computing income or loss from a passive activity are not included in determining your investment income or investment expenses (including investment interest expense). 1040x site efile com See Publication 925, Passive Activity and At-Risk Rules, for information about passive activities. 1040x site efile com Form 4952 Use Form 4952, Investment Interest Expense Deduction, to figure your deduction for investment interest. 1040x site efile com Exception to use of Form 4952. 1040x site efile com   You do not have to complete Form 4952 or attach it to your return if you meet all of the following tests. 1040x site efile com Your investment interest expense is not more than your investment income from interest and ordinary dividends minus any qualified dividends. 1040x site efile com You do not have any other deductible investment expenses. 1040x site efile com You have no carryover of investment interest expense from 2012. 1040x site efile com If you meet all of these tests, you can deduct all of your investment interest. 1040x site efile com More Information For more information on investment interest, see Interest Expenses in chapter 3 of Publication 550. 1040x site efile com Items You Cannot Deduct Some interest payments are not deductible. 1040x site efile com Certain expenses similar to interest also are not deductible. 1040x site efile com Nondeductible expenses include the following items. 1040x site efile com Personal interest (discussed later). 1040x site efile com Service charges (however, see Other Expenses (Line 23) in chapter 28). 1040x site efile com Annual fees for credit cards. 1040x site efile com Loan fees. 1040x site efile com Credit investigation fees. 1040x site efile com Interest to purchase or carry tax-exempt securities. 1040x site efile com Penalties. 1040x site efile com   You cannot deduct fines and penalties paid to a government for violations of law, regardless of their nature. 1040x site efile com Personal Interest Personal interest is not deductible. 1040x site efile com Personal interest is any interest that is not home mortgage interest, investment interest, business interest, or other deductible interest. 1040x site efile com It includes the following items. 1040x site efile com Interest on car loans (unless you use the car for business). 1040x site efile com Interest on federal, state, or local income tax. 1040x site efile com Finance charges on credit cards, retail installment contracts, and revolving charge accounts incurred for personal expenses. 1040x site efile com Late payment charges by a public utility. 1040x site efile com You may be able to deduct interest you pay on a qualified student loan. 1040x site efile com For details, see Publication 970, Tax Benefits for Education. 1040x site efile com Allocation of Interest If you use the proceeds of a loan for more than one purpose (for example, personal and business), you must allocate the interest on the loan to each use. 1040x site efile com However, you do not have to allocate home mortgage interest if it is fully deductible, regardless of how the funds are used. 1040x site efile com You allocate interest (other than fully deductible home mortgage interest) on a loan in the same way as the loan itself is allocated. 1040x site efile com You do this by tracing disbursements of the debt proceeds to specific uses. 1040x site efile com For details on how to do this, see chapter 4 of Publication 535. 1040x site efile com How To Report You must file Form 1040 to deduct any home mortgage interest expense on your tax return. 1040x site efile com Where you deduct your interest expense generally depends on how you use the loan proceeds. 1040x site efile com See Table 23-1 for a summary of where to deduct your interest expense. 1040x site efile com Home mortgage interest and points. 1040x site efile com   Deduct the home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 10. 1040x site efile com If you paid more deductible interest to the financial institution than the amount shown on Form 1098, show the larger deductible amount on line 10. 1040x site efile com Attach a statement explaining the difference and print “See attached” next to line 10. 1040x site efile com    Deduct home mortgage interest that was not reported to you on Form 1098 on Schedule A (Form 1040), line 11. 1040x site efile com If you paid home mortgage interest to the person from whom you bought your home, show that person's name, address, and taxpayer identification number (TIN) on the dotted lines next to line 11. 1040x site efile com The seller must give you this number and you must give the seller your TIN. 1040x site efile com A Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. 1040x site efile com Failure to meet any of these requirements may result in a $50 penalty for each failure. 1040x site efile com The TIN can be either a social security number, an individual taxpayer identification number (issued by the Internal Revenue Service), or an employer identification number. 1040x site efile com See Social Security Number (SSN) in chapter 1 for more information about TINs. 1040x site efile com    If you can take a deduction for points that were not reported to you on Form 1098, deduct those points on Schedule A (Form 1040), line 12. 1040x site efile com   Deduct mortgage insurance premiums on Schedule A (Form 1040), line 13. 1040x site efile com More than one borrower. 1040x site efile com   If you and at least one other person (other than your spouse if you file a joint return) were liable for and paid interest on a mortgage that was for your home, and the other person received a Form 1098 showing the interest that was paid during the year, attach a statement to your return explaining this. 1040x site efile com Show how much of the interest each of you paid, and give the name and address of the person who received the form. 1040x site efile com Deduct your share of the interest on Schedule A (Form 1040), line 11, and print “See attached” next to the line. 1040x site efile com Also, deduct your share of any qualified mortgage insurance premiums on Schedule A (Form 1040), line 13. 1040x site efile com   Similarly, if you are the payer of record on a mortgage on which there are other borrowers entitled to a deduction for the interest shown on the Form 1098 you received, deduct only your share of the interest on Schedule A (Form 1040), line 10. 1040x site efile com You should let each of the other borrowers know what his or her share is. 1040x site efile com Mortgage proceeds used for business or investment. 1040x site efile com    If your home mortgage interest deduction is limited, but all or part of the mortgage proceeds were used for business, investment, or other deductible activities, see Table 23-1. 1040x site efile com It shows where to deduct the part of your excess interest that is for those activities. 1040x site efile com Investment interest. 1040x site efile com    Deduct investment interest, subject to certain limits discussed in Publication 550, on Schedule A (Form 1040), line 14. 1040x site efile com Amortization of bond premium. 1040x site efile com   There are various ways to treat the premium you pay to buy taxable bonds. 1040x site efile com See Bond Premium Amortization in Publication 550. 1040x site efile com Income-producing rental or royalty interest. 1040x site efile com   Deduct interest on a loan for income-producing rental or royalty property that is not used in your business in Part I of Schedule E (Form 1040). 1040x site efile com Example. 1040x site efile com You rent out part of your home and borrow money to make repairs. 1040x site efile com You can deduct only the interest payment for the rented part in Part I of Schedule E (Form 1040). 1040x site efile com Deduct the rest of the interest payment on Schedule A (Form 1040) if it is deductible home mortgage interest. 1040x site efile com Table 23-1. 1040x site efile com Where To Deduct Your Interest Expense IF you have . 1040x site efile com . 1040x site efile com . 1040x site efile com THEN deduct it on . 1040x site efile com . 1040x site efile com . 1040x site efile com AND for more information go to . 1040x site efile com . 1040x site efile com . 1040x site efile com deductible student loan interest Form 1040, line 33, or Form 1040A, line 18 Publication 970. 1040x site efile com deductible home mortgage interest and points reported on Form 1098 Schedule A (Form 1040), line 10 Publication 936. 1040x site efile com deductible home mortgage interest not reported on Form 1098 Schedule A (Form 1040), line 11 Publication 936. 1040x site efile com deductible points not reported on Form 1098 Schedule A (Form 1040), line 12 Publication 936. 1040x site efile com deductible mortgage insurance premiums Schedule A (Form 1040), line 13 Publication 936. 1040x site efile com deductible investment interest (other than incurred to produce rents or royalties) Schedule A (Form 1040), line 14 Publication 550. 1040x site efile com deductible business interest (non-farm) Schedule C or C-EZ (Form 1040) Publication 535. 1040x site efile com deductible farm business interest Schedule F (Form 1040) Publications 225 and 535. 1040x site efile com deductible interest incurred to produce rents or royalties Schedule E (Form 1040) Publications 527 and 535. 1040x site efile com personal interest not deductible. 1040x site efile com Prev  Up  Next   Home   More Online Publications
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1040x site efile com Publication 547 - Introductory Material Table of Contents What's New Reminders IntroductionOrdering forms and publications. 1040x site efile com Tax questions. 1040x site efile com Useful Items - You may want to see: What's New Section C of Form 4684 for Ponzi-type investment schemes. 1040x site efile com  Section C of Form 4684 is new for 2013. 1040x site efile com You must complete Section C if you are claiming a theft loss deduction due to a Ponzi-type investment scheme and are using Revenue Procedure 2009-20, as modified by Revenue Procedure 2011-58. 1040x site efile com Section C of Form 4684 replaces Appendix A in Revenue Procedure 2009-20. 1040x site efile com You do not need to complete Appendix A. 1040x site efile com For details, see Losses from Ponzi-type investment schemes , later. 1040x site efile com Reminders Future developments. 1040x site efile com   For the latest information about developments related to Publication 547, such as legislation enacted after it was published, go to www. 1040x site efile com irs. 1040x site efile com gov/pub547. 1040x site efile com Photographs of missing children. 1040x site efile com  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. 1040x site efile com Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. 1040x site efile com You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. 1040x site efile com Introduction This publication explains the tax treatment of casualties, thefts, and losses on deposits. 1040x site efile com A casualty occurs when your property is damaged as a result of a disaster such as a storm, fire, car accident, or similar event. 1040x site efile com A theft occurs when someone steals your property. 1040x site efile com A loss on deposits occurs when your financial institution becomes insolvent or bankrupt. 1040x site efile com This publication discusses the following topics. 1040x site efile com Definitions of a casualty, theft, and loss on deposits. 1040x site efile com How to figure the amount of your gain or loss. 1040x site efile com How to treat insurance and other reimbursements you receive. 1040x site efile com The deduction limits. 1040x site efile com When and how to report a casualty or theft. 1040x site efile com The special rules for disaster area losses. 1040x site efile com Forms to file. 1040x site efile com   Generally, when you have a casualty or theft, you have to file Form 4684. 1040x site efile com You may also have to file one or more of the following forms. 1040x site efile com Schedule A (Form 1040). 1040x site efile com Form 1040NR, Schedule A (for nonresident aliens). 1040x site efile com Schedule D. 1040x site efile com Form 4797. 1040x site efile com For details on which form to use, see How To Report Gains and Losses , later. 1040x site efile com Condemnations. 1040x site efile com   For information on condemnations of property, see Involuntary Conversions in chapter 1 of Publication 544, Sales and Other Dispositions of Assets. 1040x site efile com Workbooks for casualties and thefts. 1040x site efile com   Publication 584, Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property), is available to help you make a list of your stolen or damaged personal-use property and figure your loss. 1040x site efile com It includes schedules to help you figure the loss on your home and its contents, and your motor vehicles. 1040x site efile com   Publication 584-B, Business Casualty, Disaster, and Theft Loss Workbook, is available to help you make a list of your stolen or damaged business or income-producing property and figure your loss. 1040x site efile com Comments and suggestions. 1040x site efile com   We welcome your comments about this publication and your suggestions for future editions. 1040x site efile com   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. 1040x site efile com NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. 1040x site efile com Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. 1040x site efile com   You can send your comments from www. 1040x site efile com irs. 1040x site efile com gov/formspubs/. 1040x site efile com Click on “More Information” and then on “Comment on Tax Forms and Publications”. 1040x site efile com   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. 1040x site efile com Ordering forms and publications. 1040x site efile com   Visit www. 1040x site efile com irs. 1040x site efile com gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. 1040x site efile com Internal Revenue Service 1201 N. 1040x site efile com Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. 1040x site efile com   If you have a tax question, check the information available on IRS. 1040x site efile com gov or call 1-800-829-1040. 1040x site efile com We cannot answer tax questions sent to either of the above addresses. 1040x site efile com Useful Items - You may want to see: Publication 523 Selling Your Home 525 Taxable and Nontaxable Income 550 Investment Income and Expenses 551 Basis of Assets 584 Casualty, Disaster, and Theft Loss Workbook (Personal-Use Property) 584-B Business Casualty, Disaster, and   Theft Loss Workbook Form (and Instructions) Schedule A (Form 1040) Itemized Deductions Form 1040NR, Schedule A Itemized Deductions (for nonresident aliens) Schedule D (Form 1040) Capital Gains and Losses 4684 Casualties and Thefts 4797 Sales of Business Property See How To Get Tax Help near the end of this publication for information about getting publications and forms. 1040x site efile com Prev  Up  Next   Home   More Online Publications