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Filing State Taxes

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The Filing State Taxes

Filing state taxes 3. Filing state taxes   Investment Expenses Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Limits on DeductionsPassive activity. Filing state taxes Other income (nonpassive income). Filing state taxes Expenses. Filing state taxes Additional information. Filing state taxes Interest ExpensesInvestment Interest Limit on Deduction Bond Premium AmortizationSpecial rules to determine amounts payable on a bond. Filing state taxes Basis. Filing state taxes How To Figure Amortization Choosing To Amortize How To Report Amortization Expenses of Producing IncomeFees to buy or sell. Filing state taxes Including mutual fund or REMIC expenses in income. Filing state taxes Nondeductible ExpensesUsed as collateral. Filing state taxes Short-sale expenses. Filing state taxes Expenses for both tax-exempt and taxable income. Filing state taxes State income taxes. Filing state taxes Nondeductible amount. Filing state taxes Basis adjustment. Filing state taxes How To Report Investment Expenses When To Report Investment Expenses Topics - This chapter discusses: Limits on Deductions , Interest Expenses , Bond Premium Amortization , Expenses of Producing Income , Nondeductible Expenses , How To Report Investment Expenses , and When To Report Investment Expenses . Filing state taxes Useful Items - You may want to see: Publication 535 Business Expenses 925 Passive Activity and At-Risk Rules 929 Tax Rules for Children and Dependents Form (and Instructions) Schedule A (Form 1040) Itemized Deductions 4952 Investment Interest Expense Deduction See chapter 5, How To Get Tax Help , for information about getting these publications and forms. Filing state taxes Limits on Deductions Your deductions for investment expenses may be limited by: The at-risk rules, The passive activity loss limits, The limit on investment interest, or The 2% limit on certain miscellaneous itemized deductions. Filing state taxes The at-risk rules and passive activity rules are explained briefly in this section. Filing state taxes The limit on investment interest is explained later in this chapter under Interest Expenses . Filing state taxes The 2% limit is explained later in this chapter under Expenses of Producing Income . Filing state taxes At-risk rules. Filing state taxes   Special at-risk rules apply to most income-producing activities. Filing state taxes These rules limit the amount of loss you can deduct to the amount you risk losing in the activity. Filing state taxes Generally, this is the cash and the adjusted basis of property you contribute to the activity. Filing state taxes It also includes money you borrow for use in the activity if you are personally liable for repayment or if you use property not used in the activity as security for the loan. Filing state taxes For more information, see Publication 925. Filing state taxes Passive activity losses and credits. Filing state taxes   The amount of losses and tax credits you can claim from passive activities is limited. Filing state taxes Generally, you are allowed to deduct passive activity losses only up to the amount of your passive activity income. Filing state taxes Also, you can use credits from passive activities only against tax on the income from passive activities. Filing state taxes There are exceptions for certain activities, such as rental real estate activities. Filing state taxes Passive activity. Filing state taxes   A passive activity generally is any activity involving the conduct of any trade or business in which you do not materially participate and any rental activity. Filing state taxes However, if you are involved in renting real estate, the activity is not a passive activity if both of the following are true. Filing state taxes More than one-half of the personal services you perform during the year in all trades or businesses are performed in real property trades or businesses in which you materially participate. Filing state taxes You perform more than 750 hours of services during the year in real property trades or businesses in which you materially participate. Filing state taxes  The term “trade or business” generally means any activity that involves the conduct of a trade or business, is conducted in anticipation of starting a trade or business, or involves certain research or experimental expenditures. Filing state taxes However, it does not include rental activities or certain activities treated as incidental to holding property for investment. Filing state taxes   You are considered to materially participate in an activity if you are involved on a regular, continuous, and substantial basis in the operations of the activity. Filing state taxes Other income (nonpassive income). Filing state taxes    Generally, you can use losses from passive activities only to offset income from passive activities. Filing state taxes You cannot use passive activity losses to offset your other income, such as your wages or your portfolio income. Filing state taxes Portfolio income includes gross income from interest, dividends, annuities, or royalties that is not derived in the ordinary course of a trade or business. Filing state taxes It also includes gains or losses (not derived in the ordinary course of a trade or business) from the sale or trade of property (other than an interest in a passive activity) producing portfolio income or held for investment. Filing state taxes This includes capital gain distributions from mutual funds (and other regulated investment companies) and real estate investment trusts. Filing state taxes   You cannot use passive activity losses to offset Alaska Permanent Fund dividends. Filing state taxes Expenses. Filing state taxes   Do not include in the computation of your passive activity income or loss: Expenses (other than interest) that are clearly and directly allocable to your portfolio income, or Interest expense properly allocable to portfolio income. Filing state taxes However, this interest and other expenses may be subject to other limits. Filing state taxes These limits are explained in the rest of this chapter. Filing state taxes Additional information. Filing state taxes   For more information about determining and reporting income and losses from passive activities, see Publication 925. Filing state taxes Interest Expenses This section discusses interest expenses you may be able to deduct as an investor. Filing state taxes For information on business interest, see chapter 4 of Publication 535. Filing state taxes You cannot deduct personal interest expenses other than qualified home mortgage interest, as explained in Publication 936, Home Mortgage Interest Deduction, and interest on certain student loans, as explained in Publication 970. Filing state taxes Investment Interest If you borrow money to buy property you hold for investment, the interest you pay is investment interest. Filing state taxes You can deduct investment interest subject to the limit discussed later. Filing state taxes However, you cannot deduct interest you incurred to produce tax-exempt income. Filing state taxes See Tax-exempt income under Nondeductible Expenses, later. Filing state taxes You also cannot deduct interest expenses on straddles discussed under Interest expense and carrying charges on straddles , later. Filing state taxes 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. Filing state taxes Investment property. Filing state taxes   Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. Filing state taxes 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). Filing state taxes Investment property also includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity). Filing state taxes Partners, shareholders, and beneficiaries. Filing state taxes   To determine your investment interest, combine your share of investment interest from a partnership, S corporation, estate, or trust with your other investment interest. Filing state taxes 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. Filing state taxes Only the interest expense on the part of the debt used for investment purposes is treated as investment interest. Filing state taxes The allocation is not affected by the use of property that secures the debt. Filing state taxes Example 1. Filing state taxes You borrow $10,000 and use $8,000 to buy stock. Filing state taxes You use the other $2,000 to buy items for your home. Filing state taxes Since 80% of the debt is used for, and allocated to, investment purposes, 80% of the interest on that debt is investment interest. Filing state taxes The other 20% is nondeductible personal interest. Filing state taxes Debt proceeds received in cash. Filing state taxes   If you receive debt proceeds in cash, the proceeds are generally not treated as investment property. Filing state taxes Debt proceeds deposited in account. Filing state taxes   If you deposit debt proceeds in an account, that deposit is treated as investment property, regardless of whether the account bears interest. Filing state taxes But, if you withdraw the funds and use them for another purpose, you must reallocate the debt to determine the amount considered to be for investment purposes. Filing state taxes Example 2. Filing state taxes Assume in Example 1 that you borrowed the money on March 1 and immediately bought the stock for $8,000. Filing state taxes You did not buy the household items until June 1. Filing state taxes You had deposited the $2,000 in the bank. Filing state taxes You had no other transactions on the bank account until June. Filing state taxes You did not sell the stock, and you made no principal payments on the debt. Filing state taxes You paid interest from another account. Filing state taxes The $8,000 is treated as being used for an investment purpose. Filing state taxes The $2,000 is treated as being used for an investment purpose for the 3-month period. Filing state taxes Your total interest expense for 3 months on this debt is investment interest. Filing state taxes In June, when you spend the $2,000 for household items, you must begin to allocate 80% of the debt and the interest expense to investment purposes and 20% to personal purposes. Filing state taxes Amounts paid within 30 days. Filing state taxes   If you receive loan proceeds in cash or if the loan proceeds are deposited in an account, you can treat any payment (up to the amount of the proceeds) made from any account you own, or from cash, as made from those proceeds. Filing state taxes This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. Filing state taxes   If you received the loan proceeds in cash, you can treat the payment as made on the date you received the cash instead of the date you actually made the payment. Filing state taxes Payments on debt may require new allocation. Filing state taxes   As you repay a debt used for more than one purpose, you must reallocate the balance. Filing state taxes You must first reduce the amount allocated to personal purposes by the repayment. Filing state taxes You then reallocate the rest of the debt to find what part is for investment purposes. Filing state taxes Example 3. Filing state taxes If, in Example 2 , you repay $500 on November 1, the entire repayment is applied against the amount allocated to personal purposes. Filing state taxes The debt balance is now allocated as $8,000 for investment purposes and $1,500 for personal purposes. Filing state taxes Until the next reallocation is necessary, 84% ($8,000 ÷ $9,500) of the debt and the interest expense is allocated to investment. Filing state taxes Pass-through entities. Filing state taxes   If you use borrowed funds to buy an interest in a partnership or S corporation, then the interest on those funds must be allocated based on the assets of the entity. Filing state taxes If you contribute to the capital of the entity, you can make the allocation using any reasonable method. Filing state taxes Additional allocation rules. Filing state taxes   For more information about allocating interest expense, see chapter 4 of Publication 535. Filing state taxes When To Deduct Investment Interest If you use the cash method of accounting, you must pay the interest before you can deduct it. Filing state taxes If you use an accrual method of accounting, you can deduct interest over the period it accrues, regardless of when you pay it. Filing state taxes For an exception, see Unpaid expenses owed to related party under When To Report Investment Expenses, later in this chapter. Filing state taxes Example. Filing state taxes You borrowed $1,000 on August 26, 2013, payable in 90 days at 12% interest. Filing state taxes On November 26, 2013, you paid this with a new note for $1,030, due on February 26, 2014. Filing state taxes If you use the cash method of accounting, you cannot deduct any part of the $30 interest on your return for 2013 because you did not actually pay it. Filing state taxes If you use an accrual method, you may be able to deduct a portion of the interest on the loans through December 31, 2013, on your return for 2013. Filing state taxes Interest paid in advance. Filing state taxes   Generally, if you pay interest in advance for a period that goes beyond the end of the tax year, you must spread the interest over the tax years to which it belongs under the OID rules discussed in chapter 1. Filing state taxes You can deduct in each year only the interest for that year. Filing state taxes Interest on margin accounts. Filing state taxes   If you are a cash method taxpayer, you can deduct interest on margin accounts to buy taxable securities as investment interest in the year you paid it. Filing state taxes You are considered to have paid interest on these accounts only when you actually pay the broker or when payment becomes available to the broker through your account. Filing state taxes Payment may become available to the broker through your account when the broker collects dividends or interest for your account, or sells securities held for you or received from you. Filing state taxes   You cannot deduct any interest on money borrowed for personal reasons. Filing state taxes Limit on interest deduction for market discount bonds. Filing state taxes   The amount you can deduct for interest expense you paid or accrued during the year to buy or carry a market discount bond may be limited. Filing state taxes This limit does not apply if you accrue the market discount and include it in your income currently. Filing state taxes   Under this limit, the interest is deductible only to the extent it is more than: The total interest and OID includible in gross income for the bond for the year, plus The market discount for the number of days you held the bond during the year. Filing state taxes Figure the amount in (2) above using the rules for figuring accrued market discount in chapter 1 under Market Discount Bonds . Filing state taxes Interest not deducted due to limit. Filing state taxes   In the year you dispose of the bond, you can deduct any interest expense you were not allowed to deduct in earlier years because of the limit. Filing state taxes Choosing to deduct disallowed interest expense before the year of disposition. Filing state taxes   You can choose to deduct disallowed interest expense in any year before the year you dispose of the bond, up to your net interest income from the bond during the year. Filing state taxes The rest of the disallowed interest expense remains deductible in the year you dispose of the bond. Filing state taxes Net interest income. Filing state taxes   This is the interest income (including OID) from the bond that you include in income for the year, minus the interest expense paid or accrued during the year to purchase or carry the bond. Filing state taxes Limit on interest deduction for short-term obligations. Filing state taxes   If the current income inclusion rules discussed in chapter 1 under Discount on Short-Term Obligations do not apply to you, the amount you can deduct for interest expense you paid or accrued during the year to buy or carry a short-term obligation is limited. Filing state taxes   The interest is deductible only to the extent it is more than: The amount of acquisition discount or OID on the obligation for the tax year, plus The amount of any interest payable on the obligation for the year that is not included in income because of your accounting method (other than interest taken into account in determining the amount of acquisition discount or OID). Filing state taxes The method of determining acquisition discount and OID for short-term obligations is discussed in chapter 1 under Discount on Short-Term Obligations . Filing state taxes Interest not deducted due to limit. Filing state taxes   In the year you dispose of the obligation, or, if you choose, in another year in which you have net interest income from the obligation, you can deduct any interest expense you were not allowed to deduct for an earlier year because of the limit. Filing state taxes Follow the same rules provided in the earlier discussion under Limit on interest deduction for market discount bonds , earlier. Filing state taxes Limit on Deduction Generally, your deduction for investment interest expense is limited to your net investment income. Filing state taxes You can carry over the amount of investment interest you could not deduct because of this limit to the next tax year. Filing state taxes The interest carried over is treated as investment interest paid or accrued in that next year. Filing state taxes 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. Filing state taxes Net Investment Income Determine the amount of your net investment income by subtracting your investment expenses (other than interest expense) from your investment income. Filing state taxes Investment income. Filing state taxes   This generally includes your gross income from property held for investment (such as interest, dividends, annuities, and royalties). Filing state taxes Investment income does not include Alaska Permanent Fund dividends. Filing state taxes It also does not include qualified dividends or net capital gain unless you choose to include them. Filing state taxes Choosing to include qualified dividends. Filing state taxes   Investment income generally does not include qualified dividends, discussed in chapter 1. Filing state taxes However, you can choose to include all or part of your qualified dividends in investment income. Filing state taxes   You make this choice by completing Form 4952, line 4g, according to its instructions. Filing state taxes   If you choose to include any 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. Filing state taxes Choosing to include net capital gain. Filing state taxes    Investment income generally does not include net capital gain from disposing of investment property (including capital gain distributions from mutual funds). Filing state taxes However, you can choose to include all or part of your net capital gain in investment income. Filing state taxes   You make this choice by completing Form 4952, line 4g, according to its instructions. Filing state taxes   If you choose to include any 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. Filing state taxes   For more information about the capital gains rates, see Capital Gain Tax Rates in chapter 4. Filing state taxes    Before making either choice, consider the overall effect on your tax liability. Filing state taxes Compare your tax if you make one or both of these choices with your tax if you do not. Filing state taxes Investment income of child reported on parent's return. Filing state taxes   Investment income includes the part of your child's interest and dividend income you choose to report on your return. Filing state taxes 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. Filing state taxes Include it on line 4a of Form 4952. Filing state taxes Example. Filing state taxes Your 8-year-old son has interest income of $2,200, which you choose to report on your own return. Filing state taxes You enter $2,200 on Form 8814, lines 1a and 4, and $200 on lines 6 and 12 and complete Part II. Filing state taxes Also enter $200 on Form 1040, line 21. Filing state taxes Your investment income includes this $200. Filing state taxes Child's qualified dividends. Filing state taxes   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. Filing state taxes However, you can choose to include all or part of it in investment income, as explained under Choosing to include qualified dividends , earlier. Filing state taxes   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). Filing state taxes Child's Alaska Permanent Fund dividends. Filing state taxes   If part of the amount you report is your child's Alaska Permanent Fund dividends, that part does not count as investment income. Filing state taxes 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. Filing state taxes 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. Filing state taxes Subtract the result from the amount on Form 8814, line 12. Filing state taxes Example. Filing state taxes Your 10-year-old child has taxable interest income of $4,000 and Alaska Permanent Fund dividends of $2,000. Filing state taxes You choose to report this on your return. Filing state taxes You enter $4,000 on Form 8814, line 1a, $2,000 on line 2a, and $6,000 on line 4. Filing state taxes You then enter $4,000 on Form 8814, lines 6 and 12, and Form 1040, line 21. Filing state taxes You figure the amount of your child's income that you can consider your investment income as follows: $4,000 − ($4,000 × ($2,000 ÷ $6,000)) = $2,667 You include the result, $2,667, on Form 4952, line 4a. Filing state taxes Child's capital gain distributions. Filing state taxes   If part of the amount you report is your child's capital gain distributions, that part (which is reported on Schedule D (Form 1040), line 13, or Form 1040, line 13) generally does not count as investment income. Filing state taxes However, you can choose to include all or part of it in investment income, as explained in Choosing to include net capital gain , earlier. Filing state taxes   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). Filing state taxes Investment expenses. Filing state taxes   Investment expenses are your allowed deductions (other than interest expense) directly connected with the production of investment income. Filing state taxes 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. Filing state taxes Use the smaller of: The investment expenses included on Schedule A (Form 1040), line 23, or The amount on Schedule A (Form 1040), line 27. Filing state taxes See Expenses of Producing Income , later, for a discussion of the 2% limit. Filing state taxes Losses from passive activities. Filing state taxes   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). Filing state taxes See Publication 925 for information about passive activities. Filing state taxes Example. Filing state taxes Ted is a partner in a partnership that operates a business. Filing state taxes However, he does not materially participate in the partnership's business. Filing state taxes Ted's interest in the partnership is considered a passive activity. Filing state taxes Ted's investment income from interest and dividends (other than qualified dividends) is $10,000. Filing state taxes His investment expenses (other than interest) are $3,200 after taking into account the 2% limit on miscellaneous itemized deductions. Filing state taxes His investment interest expense is $8,000. Filing state taxes Ted also has income from the partnership of $2,000. Filing state taxes Ted figures his net investment income and the limit on his investment interest expense deduction in the following way: Total investment income $10,000 Minus: Investment expenses (other than interest) 3,200 Net investment income $6,800 Deductible investment interest expense for the year $6,800 The $2,000 of income from the passive activity is not used in determining Ted's net investment income. Filing state taxes His investment interest deduction for the year is limited to $6,800, the amount of his net investment income. Filing state taxes Form 4952 Use Form 4952 to figure your deduction for investment interest. Filing state taxes See Form 4952 for more information. Filing state taxes Exception to use of Form 4952. Filing state taxes   You do not have to complete Form 4952 or attach it to your return if you meet all of the following tests. Filing state taxes Your investment interest expense is not more than your investment income from interest and ordinary dividends minus any qualified dividends. Filing state taxes You do not have any other deductible investment expenses. Filing state taxes You have no carryover of investment interest expense from 2012. Filing state taxes   If you meet all of these tests, you can deduct all of your investment interest. Filing state taxes    Bond Premium Amortization If you pay a premium to buy a bond, the premium is part of your basis in the bond. Filing state taxes If the bond yields taxable interest, you can choose to amortize the premium. Filing state taxes This generally means that each year, over the life of the bond, you use a part of the premium to reduce the amount of interest includible in your income. Filing state taxes If you make this choice, you must reduce your basis in the bond by the amortization for the year. Filing state taxes If the bond yields tax-exempt interest, you must amortize the premium. Filing state taxes This amortized amount is not deductible in determining taxable income. Filing state taxes However, each year you must reduce your basis in the bond (and tax-exempt interest otherwise reportable on Form 1040, line 8b) by the amortization for the year. Filing state taxes Bond premium. Filing state taxes   Bond premium is the amount by which your basis in the bond right after you get it is more than the total of all amounts payable on the bond after you get it (other than payments of qualified stated interest). Filing state taxes For example, a bond with a maturity value of $1,000 generally would have a $50 premium if you buy it for $1,050. Filing state taxes Special rules to determine amounts payable on a bond. Filing state taxes   For special rules that apply to determine the amounts payable on a variable rate bond, an inflation-indexed debt instrument, a bond that provides for certain alternative payment schedules (for example, a bond callable prior to the stated maturity date of the bond), or a bond that provides for remote or incidental contingencies, see Regulations section 1. Filing state taxes 171-3. Filing state taxes Basis. Filing state taxes   In general, your basis for figuring bond premium amortization is the same as your basis for figuring any loss on the sale of the bond. Filing state taxes However, you may need to use a different basis for: Convertible bonds, Bonds you got in a trade, and Bonds whose basis has to be determined using the basis of the person who transferred the bond to you. Filing state taxes See Regulations section 1. Filing state taxes 171-1(e). Filing state taxes Dealers. Filing state taxes   A dealer in taxable bonds (or anyone who holds them mainly for sale to customers in the ordinary course of a trade or business or who would properly include bonds in inventory at the close of the tax year) cannot claim a deduction for amortizable bond premium. Filing state taxes   See section 75 of the Internal Revenue Code for the treatment of bond premium by a dealer in tax-exempt bonds. Filing state taxes How To Figure Amortization For bonds issued after September 27, 1985, you must amortize bond premium using a constant yield method on the basis of the bond's yield to maturity, determined by using the bond's basis and compounding at the close of each accrual period. Filing state taxes Constant yield method. Filing state taxes   Figure the bond premium amortization for each accrual period as follows. Filing state taxes Step 1: Determine your yield. Filing state taxes   Your yield is the discount rate that, when used in figuring the present value of all remaining payments to be made on the bond (including payments of qualified stated interest), produces an amount equal to your basis in the bond. Filing state taxes Figure the yield as of the date you got the bond. Filing state taxes It must be constant over the term of the bond and must be figured to at least two decimal places when expressed as a percentage. Filing state taxes   If you do not know the yield, consult your broker or tax advisor. Filing state taxes Databases available to them are likely to show the yield at the date of purchase. Filing state taxes Step 2: Determine the accrual periods. Filing state taxes   You can choose the accrual periods to use. Filing state taxes They may be of any length and may vary in length over the term of the bond, but each accrual period can be no longer than 1 year and each scheduled payment of principal or interest must occur either on the first or the final day of an accrual period. Filing state taxes The computation is simplest if accrual periods are the same as the intervals between interest payment dates. Filing state taxes Step 3: Determine the bond premium for the accrual period. Filing state taxes   To do this, multiply your adjusted acquisition price at the beginning of the accrual period by your yield. Filing state taxes Then subtract the result from the qualified stated interest for the period. Filing state taxes   Your adjusted acquisition price at the beginning of the first accrual period is the same as your basis. Filing state taxes After that, it is your basis decreased by the amount of bond premium amortized for earlier periods and the amount of any payment previously made on the bond other than a payment of qualified stated interest. Filing state taxes Example. Filing state taxes On February 1, 2012, you bought a taxable bond for $110,000. Filing state taxes The bond has a stated principal amount of $100,000, payable at maturity on February 1, 2019, making your premium $10,000 ($110,000 − $100,000). Filing state taxes The bond pays qualified stated interest of $10,000 on February 1 of each year. Filing state taxes Your yield is 8. Filing state taxes 07439% compounded annually. Filing state taxes You choose to use annual accrual periods ending on February 1 of each year. Filing state taxes To find your bond premium amortization for the accrual period ending on February 1, 2013, you multiply the adjusted acquisition price at the beginning of the period ($110,000) by your yield. Filing state taxes When you subtract the result ($8,881. Filing state taxes 83) from the qualified stated interest for the period ($10,000), you find that your bond premium amortization for the period is $1,118. Filing state taxes 17. Filing state taxes Special rules to figure amortization. Filing state taxes   For special rules to figure the bond premium amortization on a variable rate bond, an inflation-indexed debt instrument, a bond that provides for certain alternative payment schedules (for example, a bond callable prior to the stated maturity date of the bond), or a bond that provides for remote or incidental contingencies, see Regulations section 1. Filing state taxes 171-3. Filing state taxes Bonds Issued Before September 28, 1985 For these bonds, you can amortize bond premium using any reasonable method. Filing state taxes Reasonable methods include: The straight-line method, and The Revenue Ruling 82-10 method. Filing state taxes Straight-line method. Filing state taxes   Under this method, the amount of your bond premium amortization is the same each month. Filing state taxes Divide the number of months you held the bond during the year by the number of months from the beginning of the tax year (or, if later, the date of acquisition) to the date of maturity or earlier call date. Filing state taxes Then multiply the result by the bond premium (reduced by any bond premium amortization claimed in earlier years). Filing state taxes This gives you your bond premium amortization for the year. Filing state taxes Revenue Ruling 82-10 method. Filing state taxes   Under this method, the amount of your bond premium amortization increases each month over the life of the bond. Filing state taxes This method is explained in Revenue Ruling 82-10, 1982-1 C. Filing state taxes B. Filing state taxes 46. Filing state taxes Choosing To Amortize You choose to amortize the premium on taxable bonds by reporting the amortization for the year on your income tax return for the first tax year you want the choice to apply. Filing state taxes You should attach a statement to your return that you are making this choice under section 171. Filing state taxes See How To Report Amortization, next. Filing state taxes This choice is binding for the year you make it and for later tax years. Filing state taxes It applies to all taxable bonds you own in the year you make the choice and also to those you acquire in later years. Filing state taxes You can change your decision to amortize bond premium only with the written approval of the IRS. Filing state taxes To request approval, use Form 3115. Filing state taxes For more information on requesting approval, see section 5 of the Appendix to Revenue Procedure 2011-14 in Internal Revenue Bulletin 2011-4. Filing state taxes You can find Revenue Procedure 2011-14 at www. Filing state taxes irs. Filing state taxes gov/irb/2011-04_IRB/ar08. Filing state taxes html. Filing state taxes How To Report Amortization Subtract the bond premium amortization from your interest income from these bonds. Filing state taxes Report the bond's interest on Schedule B (Form 1040A or 1040), line 1. Filing state taxes Under your last entry on line 1, put a subtotal of all interest listed on line 1. Filing state taxes Below this subtotal, print “ABP Adjustment,” and the total interest you received. Filing state taxes Subtract this amount from the subtotal, and enter the result on line 2. Filing state taxes Bond premium amortization more than interest. Filing state taxes   If the amount of your bond premium amortization for an accrual period is more than the qualified stated interest for the period, you can deduct the difference as a miscellaneous itemized deduction on Schedule A (Form 1040), line 28. Filing state taxes    But your deduction is limited to the amount by which your total interest inclusions on the bond in prior accrual periods is more than your total bond premium deductions on the bond in prior periods. Filing state taxes Any amount you cannot deduct because of this limit can be carried forward to the next accrual period. Filing state taxes Pre-1998 election to amortize bond premium. Filing state taxes   Generally, if you first elected to amortize bond premium before 1998, the above treatment of the premium does not apply to bonds you acquired before 1988. Filing state taxes Bonds acquired before October 23, 1986. Filing state taxes   The amortization of the premium on these bonds is a miscellaneous itemized deduction not subject to the 2%-of-adjusted-gross-income limit. Filing state taxes Bonds acquired after October 22, 1986, but before 1988. Filing state taxes    The amortization of the premium on these bonds is investment interest expense subject to the investment interest limit, unless you choose to treat it as an offset to interest income on the bond. Filing state taxes Expenses of Producing Income You deduct investment expenses (other than interest expenses) as miscellaneous itemized deductions on Schedule A (Form 1040). Filing state taxes To be deductible, these expenses must be ordinary and necessary expenses paid or incurred: To produce or collect income, or To manage property held for producing income. Filing state taxes The expenses must be directly related to the income or income-producing property, and the income must be taxable to you. Filing state taxes The deduction for most income-producing expenses is subject to a 2% limit that also applies to certain other miscellaneous itemized deductions. Filing state taxes The amount deductible is limited to the total of these miscellaneous deductions that is more than 2% of your adjusted gross income. Filing state taxes For information on how to report expenses of producing income, see How To Report Investment Expenses , later. Filing state taxes Attorney or accounting fees. Filing state taxes   You can deduct attorney or accounting fees that are necessary to produce or collect taxable income. Filing state taxes However, in some cases, attorney or accounting fees are part of the basis of property. Filing state taxes See Basis of Investment Property in chapter 4. Filing state taxes Automatic investment service and dividend reinvestment plans. Filing state taxes   A bank may offer its checking account customers an automatic investment service so that, for a charge, each customer can choose to invest a part of the checking account each month in common stock. Filing state taxes Or a bank that is a dividend disbursing agent for a number of publicly-owned corporations may set up an automatic dividend reinvestment service. Filing state taxes Through that service, cash dividends are reinvested in more shares of stock after the bank deducts a service charge. Filing state taxes   A corporation in which you own stock also may have a dividend reinvestment plan. Filing state taxes This plan lets you choose to use your dividends to buy more shares of stock in the corporation instead of receiving the dividends in cash. Filing state taxes   You can deduct the monthly service charge you pay to a bank to participate in an automatic investment service. Filing state taxes If you participate in a dividend reinvestment plan, you can deduct any service charge subtracted from your cash dividends before the dividends are used to buy more shares of stock. Filing state taxes Deduct the charges in the year you pay them. Filing state taxes Clerical help and office rent. Filing state taxes   You can deduct office expenses, such as rent and clerical help, you incurred in connection with your investments and collecting the taxable income on your investments. Filing state taxes Cost of replacing missing securities. Filing state taxes   To replace your taxable securities that are mislaid, lost, stolen, or destroyed, you may have to post an indemnity bond. Filing state taxes You can deduct the premium you pay to buy the indemnity bond and the related incidental expenses. Filing state taxes   You may, however, get a refund of part of the bond premium if the missing securities are recovered within a specified time. Filing state taxes Under certain types of insurance policies, you can recover some of the expenses. Filing state taxes   If you receive the refund in the tax year you pay the amounts, you can deduct only the difference between the expenses paid and the amount refunded. Filing state taxes If the refund is made in a later tax year, you must include the refund in income in the year you received it, but only to the extent that the expenses decreased your tax in the year you deducted them. Filing state taxes Fees to collect income. Filing state taxes   You can deduct fees you pay to a broker, bank, trustee, or similar agent to collect investment income, such as your taxable bond or mortgage interest, or your dividends on shares of stock. Filing state taxes Fees to buy or sell. Filing state taxes   You cannot deduct a fee you pay to a broker to acquire investment property, such as stocks or bonds. Filing state taxes You must add the fee to the cost of the property. Filing state taxes See Basis of Investment Property in chapter 4. Filing state taxes    You cannot deduct any broker's fees, commissions, or option premiums you pay (or that were netted out) in connection with the sale of investment property. Filing state taxes They can be used only to figure gain or loss from the sale. Filing state taxes See Reporting Capital Gains and Losses , in chapter 4, for more information about the treatment of these sale expenses. Filing state taxes Investment counsel and advice. Filing state taxes   You can deduct fees you pay for counsel and advice about investments that produce taxable income. Filing state taxes This includes amounts you pay for investment advisory services. Filing state taxes Safe deposit box rent. Filing state taxes   You can deduct rent you pay for a safe deposit box if you use the box to store taxable income-producing stocks, bonds, or other investment-related papers and documents. Filing state taxes If you also use the box to store tax-exempt securities or personal items, you can deduct only part of the rent. Filing state taxes See Tax-exempt income under Nondeductible Expenses, later, to figure what part you can deduct. Filing state taxes State and local transfer taxes. Filing state taxes   You cannot deduct the state and local transfer taxes you pay when you buy or sell securities. Filing state taxes If you pay these transfer taxes when you buy securities, you must treat them as part of the cost of the property. Filing state taxes If you pay these transfer taxes when you sell securities, you must treat them as a reduction in the amount realized. Filing state taxes Trustee's commissions for revocable trust. Filing state taxes   If you set up a revocable trust and have its income distributed to you, you can deduct the commission you pay the trustee for managing the trust to the extent it is to produce or collect taxable income or to manage property. Filing state taxes However, you cannot deduct any part of the commission used for producing or collecting tax-exempt income or for managing property that produces tax-exempt income. Filing state taxes   If you are a cash-basis taxpayer and pay the commissions for several years in advance, you must deduct a part of the commission each year. Filing state taxes You cannot deduct the entire amount in the year you pay it. Filing state taxes Investment expenses from pass-through entities. Filing state taxes   If you hold an interest in a partnership, S corporation, real estate mortgage investment conduit (REMIC), or a nonpublicly offered mutual fund, you can deduct your share of that entity's investment expenses. Filing state taxes A partnership or S corporation will show your share of these expenses on your Schedule K-1 (Form 1065) or Schedule K-1 (Form 1120S). Filing state taxes A nonpublicly offered mutual fund will indicate your share of these expenses in box 5 of Form 1099-DIV (or substitute statement). Filing state taxes Publicly-offered mutual funds are discussed later. Filing state taxes   If you hold an interest in a REMIC, any expenses relating to your residual interest investment will be shown on Schedule Q (Form 1066), line 3b. Filing state taxes Any expenses relating to your regular interest investment will appear in box 5 of Form 1099-INT (or substitute statement) or box 9 of Form 1099-OID (or substitute statement). Filing state taxes   Report your share of these investment expenses on Schedule A (Form 1040), subject to the 2% limit, in the same manner as your other investment expenses. Filing state taxes Including mutual fund or REMIC expenses in income. Filing state taxes   Your share of the investment expenses of a REMIC or a nonpublicly offered mutual fund, as described above, are considered to be indirect deductions through that pass-through entity. Filing state taxes You must include in your gross income an amount equal to the expenses allocated to you, whether or not you are able to claim a deduction for those expenses. Filing state taxes If you are a shareholder in a nonpublicly offered mutual fund, you must include on your return the full amount of ordinary dividends or other distributions of stock, as shown in box 1a of Form 1099-DIV (or substitute statement). Filing state taxes If you are a residual interest holder in a REMIC, you must report as ordinary income on Schedule E (Form 1040) the total amounts shown on Schedule Q (Form 1066), lines 1b and 3b. Filing state taxes If you are a REMIC regular interest holder, you must include the amount of any expense allocation you received on Form 1040, line 8a. Filing state taxes Publicly-offered mutual funds. Filing state taxes   Most mutual funds are publicly offered. Filing state taxes These mutual funds, generally, are traded on an established securities exchange. Filing state taxes These funds do not pass investment expenses through to you. Filing state taxes Instead, the dividend income they report to you in box 1a of Form 1099-DIV (or substitute statement) is already reduced by your share of investment expenses. Filing state taxes As a result, you cannot deduct the expenses on your return. Filing state taxes   Include the amount from box 1a of Form 1099-DIV (or substitute statement) in your income. Filing state taxes    A publicly offered mutual fund is one that: Is continuously offered pursuant to a public offering, Is regularly traded on an established securities market, and Is held by or for no fewer than 500 persons at any time during the year. Filing state taxes Contact your mutual fund if you are not sure whether it is publicly offered. Filing state taxes Nondeductible Expenses Some expenses that you incur as an investor are not deductible. Filing state taxes Stockholders' meetings. Filing state taxes   You cannot deduct transportation and other expenses you pay to attend stockholders' meetings of companies in which you have no interest other than owning stock. Filing state taxes This is true even if your purpose in attending is to get information that would be useful in making further investments. Filing state taxes Investment-related seminar. Filing state taxes   You cannot deduct expenses for attending a convention, seminar, or similar meeting for investment purposes. Filing state taxes Single-premium life insurance, endowment, and annuity contracts. Filing state taxes   You cannot deduct interest on money you borrow to buy or carry a single-premium life insurance, endowment, or annuity contract. Filing state taxes Used as collateral. Filing state taxes   If you use a single premium annuity contract as collateral to obtain or continue a mortgage loan, you cannot deduct any interest on the loan that is collateralized by the annuity contract. Filing state taxes Figure the amount of interest expense disallowed by multiplying the current interest rate on the mortgage loan by the lesser of the amount of the annuity contract used as collateral or the amount of the loan. Filing state taxes Borrowing on insurance. Filing state taxes   Generally, you cannot deduct interest on money you borrow to buy or carry a life insurance, endowment, or annuity contract if you plan to systematically borrow part or all of the increases in the cash value of the contract. Filing state taxes This rule applies to the interest on the total amount borrowed to buy or carry the contract, not just the interest on the borrowed increases in the cash value. Filing state taxes Tax-exempt income. Filing state taxes   You cannot deduct expenses you incur to produce tax-exempt income. Filing state taxes Nor can you deduct interest on money you borrow to buy tax-exempt securities or shares in a mutual fund or other regulated investment company that distributes only exempt-interest dividends. Filing state taxes Short-sale expenses. Filing state taxes   The rule disallowing a deduction for interest expenses on tax-exempt securities applies to amounts you pay in connection with personal property used in a short sale or amounts paid by others for the use of any collateral in connection with the short sale. Filing state taxes However, it does not apply to the expenses you incur if you deposit cash as collateral for the property used in the short sale and the cash does not earn a material return during the period of the sale. Filing state taxes Short sales are discussed in Short Sales in chapter 4. Filing state taxes Expenses for both tax-exempt and taxable income. Filing state taxes   You may have expenses that are for both tax-exempt and taxable income. Filing state taxes If you cannot specifically identify what part of the expenses is for each type of income, you can divide the expenses, using reasonable proportions based on facts and circumstances. Filing state taxes You must attach a statement to your return showing how you divided the expenses and stating that each deduction claimed is not based on tax-exempt income. Filing state taxes   One accepted method for dividing expenses is to do it in the same proportion that each type of income is to the total income. Filing state taxes If the expenses relate in part to capital gains and losses, include the gains, but not the losses, in figuring this proportion. Filing state taxes To find the part of the expenses that is for the tax-exempt income, divide your tax-exempt income by the total income and multiply your expenses by the result. Filing state taxes Example. Filing state taxes You received $6,000 interest; $4,800 was tax-exempt and $1,200 was taxable. Filing state taxes In earning this income, you had $500 of expenses. Filing state taxes You cannot specifically identify the amount of each expense item that is for each income item, so you must divide your expenses. Filing state taxes 80% ($4,800 tax-exempt interest divided by $6,000 total interest) of your expenses is for the tax-exempt income. Filing state taxes You cannot deduct $400 (80% of $500) of the expenses. Filing state taxes You can deduct $100 (the rest of the expenses) because they are for the taxable interest. Filing state taxes State income taxes. Filing state taxes   If you itemize your deductions, you can deduct, as taxes, state income taxes on interest income that is exempt from federal income tax. Filing state taxes But you cannot deduct, as either taxes or investment expenses, state income taxes on other exempt income. Filing state taxes Interest expense and carrying charges on straddles. Filing state taxes   You cannot deduct interest and carrying charges allocable to personal property that is part of a straddle. Filing state taxes The nondeductible interest and carrying charges are added to the basis of the straddle property. Filing state taxes However, this treatment does not apply if: All the offsetting positions making up the straddle either consist of one or more qualified covered call options and the optioned stock, or consist of section 1256 contracts (and the straddle is not part of a larger straddle); or The straddle is a hedging transaction. Filing state taxes  For information about straddles, including definitions of the terms used in this discussion, see Straddles in chapter 4. Filing state taxes   Interest includes any amount you pay or incur in connection with personal property used in a short sale. Filing state taxes However, you must first apply the rules discussed in Payments in lieu of dividends under Short Sales in chapter 4. Filing state taxes   To determine the interest on market discount bonds and short-term obligations that are part of a straddle, you must first apply the rules discussed under Limit on interest deduction for market discount bonds and Limit on interest deduction for short-term obligations (both under Interest Expenses, earlier). Filing state taxes Nondeductible amount. Filing state taxes   Figure the nondeductible interest and carrying charges on straddle property as follows. Filing state taxes Add: Interest on indebtedness incurred or continued to buy or carry the personal property, and All other amounts (including charges to insure, store, or transport the personal property) paid or incurred to carry the personal property. Filing state taxes Subtract from the amount in (1): Interest (including OID) includible in gross income for the year on the personal property, Any income from the personal property treated as ordinary income on the disposition of short-term government obligations or as ordinary income under the market discount and short-term bond provisions — see Discount on Debt Instruments in chapter 1, The dividends includible in gross income for the year from the personal property, and Any payment on a loan of the personal property for use in a short sale that is includible in gross income. Filing state taxes Basis adjustment. Filing state taxes   Add the nondeductible amount to the basis of your straddle property. Filing state taxes How To Report Investment Expenses To deduct your investment expenses, you must itemize deductions on Schedule A (Form 1040). Filing state taxes Enter your deductible investment interest expense on Schedule A (Form1040), line 14. Filing state taxes Include any deductible short sale expenses. Filing state taxes (See Short Sales in chapter 4 for information on these expenses. Filing state taxes ) Also attach a completed Form 4952 if you used that form to figure your investment interest expense. Filing state taxes Enter the total amount of your other investment expenses (other than interest expenses) on Schedule A (Form 1040), line 23. Filing state taxes List the type and amount of each expense on the dotted lines next to line 23. Filing state taxes (If necessary, you can show the required information on an attached statement. Filing state taxes ) For information on how to report amortizable bond premium, see Bond Premium Amortization , earlier in this chapter. Filing state taxes When To Report Investment Expenses If you use the cash method to report income and expenses, you generally deduct your expenses, except for certain prepaid interest, in the year you pay them. Filing state taxes If you use an accrual method, you generally deduct your expenses when you incur a liability for them, rather than when you pay them. Filing state taxes Also see When To Deduct Investment Interest , earlier in this chapter. Filing state taxes Unpaid expenses owed to related party. Filing state taxes   If you use an accrual method, you cannot deduct interest and other expenses owed to a related cash-basis person until payment is made and the amount is includible in the gross income of that person. Filing state taxes The relationship, for purposes of this rule, is determined as of the end of the tax year for which the interest or expense would otherwise be deductible. Filing state taxes If a deduction is denied under this rule, this rule will continue to apply even if your relationship with the person ceases to exist before the amount is includible in the gross income of that person. Filing state taxes   This rule generally applies to those relationships listed in chapter 4 under Related Party Transactions . Filing state taxes It also applies to accruals by partnerships to partners, partners to partnerships, shareholders to S corporations, and S corporations to shareholders. Filing state taxes   The postponement of deductions for unpaid expenses and interest under the related party rule does not apply to OID, regardless of when payment is made. Filing state taxes This rule also does not apply to loans with below-market interest rates or to certain payments for the use of property and services when the lender or recipient has to include payments periodically in income, even if a payment has not been made. Filing state taxes Prev  Up  Next   Home   More Online Publications