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Free 2012 tax help Index A Adopted child, Adopted child. Free 2012 tax help Adoption taxpayer identification number (ATIN), Married child. Free 2012 tax help Age test (see Qualifying child) Alaska Permanent Fund dividends, Rule 6—Your Investment Income Must Be $3,300 or Less Alimony, Income That Is Not Earned Income Annuities, Income That Is Not Earned Income Armed forces, Nontaxable military pay. Free 2012 tax help , Military personnel stationed outside the United States. Free 2012 tax help , Temporary absences. Free 2012 tax help , Joint Return Test, Military personnel stationed outside the United States. Free 2012 tax help , Nontaxable combat pay. Free 2012 tax help Assistance (see Tax help) B Basic Allowance for Housing (BAH), Nontaxable military pay. Free 2012 tax help Basic Allowance for Subsistence (BAS), Nontaxable military pay. Free 2012 tax help C Child Adopted child, Adopted child. Free 2012 tax help Birth or death of, Birth or death of child. Free 2012 tax help Foster child, Relationship Test, Foster child. Free 2012 tax help , Rule 10—You Cannot Be a Qualifying Child of Another Taxpayer, Kidnapped child, Kidnapped child. Free 2012 tax help Married child, Married child. Free 2012 tax help Child support, Income That Is Not Earned Income Clergy, Clergy. Free 2012 tax help Combat zone pay, Nontaxable combat pay. Free 2012 tax help Community property, Community property. Free 2012 tax help , Community property. Free 2012 tax help D Detailed examples, Chapter 6—Detailed Examples Disability benefits, Disability Benefits Disallowance of the EIC, Chapter 5—Disallowance of the EIC Dividend income, Income That Is Not Earned Income Divorced parents, special rule, Special rule for divorced or separated parents (or parents who live apart). Free 2012 tax help Domestic partner, Nevada, Washington, and California domestic partners. Free 2012 tax help E Earned income, Rule 7—You Must Have Earned Income, Earned Income Earned income credit (EIC), EIC Table EITC Assistant, Is There Help Online? Extended active duty, Extended active duty. Free 2012 tax help , Military personnel stationed outside the United States. Free 2012 tax help F Figuring EIC yourself, Chapter 4—Figuring and Claiming the EIC, How To Figure the EIC Yourself Filing status: Head of household, Rule 3—Your Filing Status Cannot Be Married Filing Separately Married filing separately, Rule 3—Your Filing Status Cannot Be Married Filing Separately Forms: 1040, Do I Need This Publication?, Adjusted gross income (AGI). Free 2012 tax help , No SSN. Free 2012 tax help , Form 1040. Free 2012 tax help 1040A, Adjusted gross income (AGI). Free 2012 tax help , No SSN. Free 2012 tax help , Form 1040A. Free 2012 tax help 1040EZ, Adjusted gross income (AGI). Free 2012 tax help , No SSN. Free 2012 tax help , Form 1040EZ. Free 2012 tax help 1040X, Rule 2—You Must Have a Valid Social Security Number (SSN), Filing deadline approaching and still no SSN. Free 2012 tax help 2555, Rule 5—You Cannot File Form 2555 or Form 2555-EZ 2555–EZ, Rule 5—You Cannot File Form 2555 or Form 2555-EZ 4029, Minister's housing. Free 2012 tax help , Approved Form 4361 or Form 4029, Form 4029. Free 2012 tax help 4361, Minister's housing. Free 2012 tax help , Approved Form 4361 or Form 4029, Form 4361. Free 2012 tax help 4797, Do I Need This Publication? 4868, Filing deadline approaching and still no SSN. Free 2012 tax help 8814, Do I Need This Publication? 8862, Chapter 5—Disallowance of the EIC, Form 8862 Foster care payments, Income That Is Not Earned Income Foster child, Relationship Test, Foster child. Free 2012 tax help , Rule 10—You Cannot Be a Qualifying Child of Another Taxpayer, Fraud, Exception 2. Free 2012 tax help , Are You Prohibited From Claiming the EIC for a Period of Years? Free tax services, Free help with your tax return. Free 2012 tax help H Head of household, Community property. Free 2012 tax help , Spouse did not live with you. Free 2012 tax help , Community property. Free 2012 tax help , Rule 9—Your Qualifying Child Cannot Be Used by More Than One Person To Claim the EIC, Applying Rule 9 to divorced or separated parents (or parents who live apart). Free 2012 tax help Help (see Tax help) Home Homeless shelter, Rule 14—You Must Have Lived in the United States More Than Half of the Year Military, Rule 14—You Must Have Lived in the United States More Than Half of the Year United States, Rule 14—You Must Have Lived in the United States More Than Half of the Year Homeless, Homeless shelter. Free 2012 tax help , Homeless shelter. Free 2012 tax help I Income that is not earned income, Income That Is Not Earned Income Individual taxpayer identification number (ITIN), Other taxpayer identification number. Free 2012 tax help , Married child. Free 2012 tax help Inmate, Earnings while an inmate. Free 2012 tax help , Figuring earned income. Free 2012 tax help Interest, Income That Is Not Earned Income Investment income, Rule 6—Your Investment Income Must Be $3,300 or Less IRS can figure EIC for you, IRS Will Figure the EIC for You J Joint return test (see Qualifying child) K Kidnapped child, Kidnapped child. Free 2012 tax help M Married child, Married child. Free 2012 tax help Married filing a joint return, Rule 4—You Must Be a U. Free 2012 tax help S. Free 2012 tax help Citizen or Resident Alien All Year Married filing separately, Spouse did not live with you. Free 2012 tax help Military Combat pay, Nontaxable military pay. Free 2012 tax help Nontaxable pay, Nontaxable military pay. Free 2012 tax help Outside U. Free 2012 tax help S. Free 2012 tax help , Military personnel stationed outside the United States. Free 2012 tax help Minister, Net earnings from self-employment. Free 2012 tax help , Minister's housing. Free 2012 tax help , Church employees. Free 2012 tax help N Net earnings, self-employment, Net earnings from self-employment. Free 2012 tax help Nonresident alien, Rule 4—You Must Be a U. Free 2012 tax help S. Free 2012 tax help Citizen or Resident Alien All Year, Step 1. Free 2012 tax help O Online help EITC Assistant, Is There Help Online? P Parents, divorced or separated, Married child. Free 2012 tax help , Examples. Free 2012 tax help , Special rule for divorced or separated parents (or parents who live apart). Free 2012 tax help Passive activity, Worksheet 1. Free 2012 tax help Investment Income If You Are Filing Form 1040 Pensions, Income That Is Not Earned Income Permanently and totally disabled, Permanently and totally disabled. Free 2012 tax help Prisoner, Figuring earned income. Free 2012 tax help Publications (see Tax help) Q Qualifying child, Can I Claim the EIC?, Do I Have To Have A Child To Qualify For The EIC?, Chapter 2—Rules If You Have a Qualifying Child Age test, Rule 8—Your Child Must Meet the Relationship, Age, Residency, and Joint Return Tests, Age Test Home, Residency Test Joint return test, Rule 8—Your Child Must Meet the Relationship, Age, Residency, and Joint Return Tests Permanently and totally disabled, Permanently and totally disabled. Free 2012 tax help Relationship test, Rule 8—Your Child Must Meet the Relationship, Age, Residency, and Joint Return Tests Residency test, Residency Test United States, Residency Test R Railroad retirement benefits, Income That Is Not Earned Income Registered domestic partner, Nevada, Washington, and California domestic partners. Free 2012 tax help Relationship test (see Qualifying child) Reminders, Reminders Residency test (see Qualifying child) S Salaries, wages, and tips, Earned Income, Wages, salaries, and tips. Free 2012 tax help , Earned Income Schedules: C, EIC Worksheet A. Free 2012 tax help , EIC Worksheet B. Free 2012 tax help C-EZ, EIC Worksheet A. Free 2012 tax help , EIC Worksheet B. Free 2012 tax help EIC, Chapter 2—Rules If You Have a Qualifying Child, Kidnapped child. Free 2012 tax help , Figuring earned income. Free 2012 tax help , Nontaxable combat pay. Free 2012 tax help , How To Figure the EIC Yourself, When to use the optional methods of figuring net earnings. Free 2012 tax help , Schedule EIC SE, Figuring earned income. Free 2012 tax help , Clergy. Free 2012 tax help , Church employees. Free 2012 tax help , EIC Worksheet A. Free 2012 tax help , EIC Worksheet B. Free 2012 tax help , Net earnings from self-employment $400 or more. Free 2012 tax help , When to use the optional methods of figuring net earnings. Free 2012 tax help , When both spouses have self-employment income. Free 2012 tax help School, School defined. Free 2012 tax help Self-employed persons, Rule 7—You Must Have Earned Income, Figuring earned income. Free 2012 tax help , EIC Worksheet B. Free 2012 tax help Self-employment income, Earned Income Self-employment tax, Net earnings from self-employment $400 or more. Free 2012 tax help Separated parents, special rule, Married child. Free 2012 tax help Social security benefits, Income That Is Not Earned Income Social security number (SSN), Rule 2—You Must Have a Valid Social Security Number (SSN), Valid for work only with INS authorization or DHS authorization. Free 2012 tax help , No SSN. Free 2012 tax help , Getting an SSN. Free 2012 tax help , Married child. Free 2012 tax help , Exception for math or clerical errors. Free 2012 tax help Statutory employee, Statutory employee. Free 2012 tax help , Figuring earned income. Free 2012 tax help , EIC Worksheet A. Free 2012 tax help , Statutory employees. Free 2012 tax help Strike benefits, Strike benefits. Free 2012 tax help Student, Student defined. Free 2012 tax help T Tax help, How To Get Tax Help Taxpayer identification number Adoption identification number (ATIN), Married child. Free 2012 tax help Individual taxpayer identification number (ITIN), Other taxpayer identification number. Free 2012 tax help Social security number (SSN), Other taxpayer identification number. Free 2012 tax help Tiebreaker rules, Tiebreaker rules. Free 2012 tax help Tips, wages, and salaries, Earned Income, Wages, salaries, and tips. Free 2012 tax help , Earned Income TTY/TDD information, How To Get Tax Help U Unemployment compensation, Income That Is Not Earned Income United States, United States. Free 2012 tax help V Veterans' benefits, Income That Is Not Earned Income W Wages, salaries, and tips, Earned Income, Wages, salaries, and tips. Free 2012 tax help , Earned Income Welfare benefits, Income That Is Not Earned Income Workers' compensation benefits, Income That Is Not Earned Income Workfare payments, Workfare payments. Free 2012 tax help Worksheet 1, Worksheet 1. Free 2012 tax help Investment Income If You Are Filing Form 1040 Worksheet 2, Worksheet 2. Free 2012 tax help Worksheet for Line 4 of Worksheet 1 Prev  Up     Home   More Online Publications
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Free 2012 tax help Publication 530 - Main Content Table of Contents What You Can and Cannot DeductHardest Hit Fund and Emergency Homeowners' Loan Programs Real Estate Taxes Sales Taxes Home Mortgage Interest Mortgage Insurance Premiums Mortgage Interest CreditFiguring the Credit BasisFiguring Your Basis Adjusted Basis Keeping Records How To Get Tax HelpLow Income Taxpayer Clinics What You Can and Cannot Deduct To deduct expenses of owning a home, you must file Form 1040, U. Free 2012 tax help S. Free 2012 tax help Individual Income Tax Return, and itemize your deductions on Schedule A (Form 1040). Free 2012 tax help If you itemize, you cannot take the standard deduction. Free 2012 tax help This section explains what expenses you can deduct as a homeowner. Free 2012 tax help It also points out expenses that you cannot deduct. Free 2012 tax help There are four primary discussions: real estate taxes, sales taxes, home mortgage interest, and mortgage insurance premiums. Free 2012 tax help Generally, your real estate taxes, home mortgage interest, and mortgage insurance premiums are included in your house payment. Free 2012 tax help Your house payment. Free 2012 tax help   If you took out a mortgage (loan) to finance the purchase of your home, you probably have to make monthly house payments. Free 2012 tax help Your house payment may include several costs of owning a home. Free 2012 tax help The only costs you can deduct are real estate taxes actually paid to the taxing authority, interest that qualifies as home mortgage interest, and mortgage insurance premiums. Free 2012 tax help These are discussed in more detail later. Free 2012 tax help   Some nondeductible expenses that may be included in your house payment include: Fire or homeowner's insurance premiums, and The amount applied to reduce the principal of the mortgage. Free 2012 tax help Minister's or military housing allowance. Free 2012 tax help   If you are a minister or a member of the uniformed services and receive a housing allowance that is not taxable, you still can deduct your real estate taxes and your home mortgage interest. Free 2012 tax help You do not have to reduce your deductions by your nontaxable allowance. Free 2012 tax help For more information see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers, and Publication 3, Armed Forces' Tax Guide. Free 2012 tax help Nondeductible payments. Free 2012 tax help   You cannot deduct any of the following items. Free 2012 tax help Insurance (other than mortgage insurance premiums), including fire and comprehensive coverage, and title insurance. Free 2012 tax help Wages you pay for domestic help. Free 2012 tax help Depreciation. Free 2012 tax help The cost of utilities, such as gas, electricity, or water. Free 2012 tax help Most settlement costs. Free 2012 tax help See Settlement or closing costs under Cost as Basis, later, for more information. Free 2012 tax help Forfeited deposits, down payments, or earnest money. Free 2012 tax help Hardest Hit Fund and Emergency Homeowners' Loan Programs 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. Free 2012 tax help 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. Free 2012 tax help 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. Free 2012 tax help 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), box 4 (mortgage insurance premiums) and box 5 (real property taxes). Free 2012 tax help 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. Free 2012 tax help Real Estate Taxes Most state and local governments charge an annual tax on the value of real property. Free 2012 tax help This is called a real estate tax. Free 2012 tax help You can deduct the tax if it is assessed uniformly at a like rate on all real property throughout the community. Free 2012 tax help The proceeds must be for general community or governmental purposes and not be a payment for a special privilege granted or service rendered to you. Free 2012 tax help Deductible Real Estate Taxes You can deduct real estate taxes imposed on you. Free 2012 tax help You must have paid them either at settlement or closing, or to a taxing authority (either directly or through an escrow account) during the year. Free 2012 tax help If you own a cooperative apartment, see Special Rules for Cooperatives , later. Free 2012 tax help Where to deduct real estate taxes. Free 2012 tax help   Enter the amount of your deductible real estate taxes on Schedule A (Form 1040), line 6. Free 2012 tax help Real estate taxes paid at settlement or closing. Free 2012 tax help   Real estate taxes are generally divided so that you and the seller each pay taxes for the part of the property tax year you owned the home. Free 2012 tax help Your share of these taxes is fully deductible if you itemize your deductions. Free 2012 tax help Division of real estate taxes. Free 2012 tax help   For federal income tax purposes, the seller is treated as paying the property taxes up to, but not including, the date of sale. Free 2012 tax help You (the buyer) are treated as paying the taxes beginning with the date of sale. Free 2012 tax help This applies regardless of the lien dates under local law. Free 2012 tax help Generally, this information is included on the settlement statement you get at closing. Free 2012 tax help   You and the seller each are considered to have paid your own share of the taxes, even if one or the other paid the entire amount. Free 2012 tax help You each can deduct your own share, if you itemize deductions, for the year the property is sold. Free 2012 tax help Example. Free 2012 tax help You bought your home on September 1. Free 2012 tax help The property tax year (the period to which the tax relates) in your area is the calendar year. Free 2012 tax help The tax for the year was $730 and was due and paid by the seller on August 15. Free 2012 tax help You owned your new home during the property tax year for 122 days (September 1 to December 31, including your date of purchase). Free 2012 tax help You figure your deduction for real estate taxes on your home as follows. Free 2012 tax help 1. Free 2012 tax help Enter the total real estate taxes for the real property tax year $730 2. Free 2012 tax help Enter the number of days in the property tax year that you owned the property 122 3. Free 2012 tax help Divide line 2 by 365 . Free 2012 tax help 3342 4. Free 2012 tax help Multiply line 1 by line 3. Free 2012 tax help This is your deduction. Free 2012 tax help Enter it on Schedule A (Form 1040), line 6 $244   You can deduct $244 on your return for the year if you itemize your deductions. Free 2012 tax help You are considered to have paid this amount and can deduct it on your return even if, under the contract, you did not have to reimburse the seller. Free 2012 tax help Delinquent taxes. Free 2012 tax help   Delinquent taxes are unpaid taxes that were imposed on the seller for an earlier tax year. Free 2012 tax help If you agree to pay delinquent taxes when you buy your home, you cannot deduct them. Free 2012 tax help You treat them as part of the cost of your home. Free 2012 tax help See Real estate taxes , later, under Basis. Free 2012 tax help Escrow accounts. Free 2012 tax help   Many monthly house payments include an amount placed in escrow (put in the care of a third party) for real estate taxes. Free 2012 tax help You may not be able to deduct the total you pay into the escrow account. Free 2012 tax help You can deduct only the real estate taxes that the lender actually paid from escrow to the taxing authority. Free 2012 tax help Your real estate tax bill will show this amount. Free 2012 tax help Refund or rebate of real estate taxes. Free 2012 tax help   If you receive a refund or rebate of real estate taxes this year for amounts you paid this year, you must reduce your real estate tax deduction by the amount refunded to you. Free 2012 tax help If the refund or rebate was for real estate taxes paid for a prior year, you may have to include some or all of the refund in your income. Free 2012 tax help For more information, see Recoveries in Publication 525, Taxable and Nontaxable Income. Free 2012 tax help Items You Cannot Deduct as Real Estate Taxes The following items are not deductible as real estate taxes. Free 2012 tax help Charges for services. Free 2012 tax help   An itemized charge for services to specific property or people is not a tax, even if the charge is paid to the taxing authority. Free 2012 tax help You cannot deduct the charge as a real estate tax if it is: A unit fee for the delivery of a service (such as a $5 fee charged for every 1,000 gallons of water you use), A periodic charge for a residential service (such as a $20 per month or $240 annual fee charged for trash collection), or A flat fee charged for a single service provided by your local government (such as a $30 charge for mowing your lawn because it had grown higher than permitted under a local ordinance). Free 2012 tax help    You must look at your real estate tax bill to decide if any nondeductible itemized charges, such as those listed above, are included in the bill. Free 2012 tax help If your taxing authority (or lender) does not furnish you a copy of your real estate tax bill, ask for it. Free 2012 tax help Contact the taxing authority if you need additional information about a specific charge on your real estate tax bill. Free 2012 tax help Assessments for local benefits. Free 2012 tax help   You cannot deduct amounts you pay for local benefits that tend to increase the value of your property. Free 2012 tax help Local benefits include the construction of streets, sidewalks, or water and sewer systems. Free 2012 tax help You must add these amounts to the basis of your property. Free 2012 tax help   You can, however, deduct assessments (or taxes) for local benefits if they are for maintenance, repair, or interest charges related to those benefits. Free 2012 tax help An example is a charge to repair an existing sidewalk and any interest included in that charge. Free 2012 tax help   If only a part of the assessment is for maintenance, repair, or interest charges, you must be able to show the amount of that part to claim the deduction. Free 2012 tax help If you cannot show what part of the assessment is for maintenance, repair, or interest charges, you cannot deduct any of it. Free 2012 tax help   An assessment for a local benefit may be listed as an item in your real estate tax bill. Free 2012 tax help If so, use the rules in this section to find how much of it, if any, you can deduct. Free 2012 tax help Transfer taxes (or stamp taxes). Free 2012 tax help   You cannot deduct transfer taxes and similar taxes and charges on the sale of a personal home. Free 2012 tax help If you are the buyer and you pay them, include them in the cost basis of the property. Free 2012 tax help If you are the seller and you pay them, they are expenses of the sale and reduce the amount realized on the sale. Free 2012 tax help Homeowners association assessments. Free 2012 tax help   You cannot deduct these assessments because the homeowners association, rather than a state or local government, imposes them. Free 2012 tax help Special Rules for Cooperatives If you own a cooperative apartment, some special rules apply to you, though you generally receive the same tax treatment as other homeowners. Free 2012 tax help As an owner of a cooperative apartment, you own shares of stock in a corporation that owns or leases housing facilities. Free 2012 tax help You can deduct your share of the corporation's deductible real estate taxes if the cooperative housing corporation meets the following conditions: The corporation has only one class of stock outstanding, Each stockholder, solely because of ownership of the stock, can live in a house, apartment, or house trailer owned or leased by the corporation, No stockholder can receive any distribution out of capital, except on a partial or complete liquidation of the corporation, and At least one of the following: At least 80% of the corporation's gross income for the tax year was paid by the tenant-stockholders. Free 2012 tax help For this purpose, gross income means all income received during the entire tax year, including any received before the corporation changed to cooperative ownership. Free 2012 tax help At least 80% of the total square footage of the corporation's property must be available for use by the tenant-stockholders during the entire tax year. Free 2012 tax help At least 90% of the expenditures paid or incurred by the corporation were used for the acquisition, construction, management, maintenance, or care of the property for the benefit of the tenant-shareholders during the entire tax year. Free 2012 tax help Tenant-stockholders. Free 2012 tax help   A tenant-stockholder can be any entity (such as a corporation, trust, estate, partnership, or association) as well as an individual. Free 2012 tax help The tenant-stockholder does not have to live in any of the cooperative's dwelling units. Free 2012 tax help The units that the tenant-stockholder has the right to occupy can be rented to others. Free 2012 tax help Deductible taxes. Free 2012 tax help   You figure your share of real estate taxes in the following way. Free 2012 tax help Divide the number of your shares of stock by the total number of shares outstanding, including any shares held by the corporation. Free 2012 tax help Multiply the corporation's deductible real estate taxes by the number you figured in (1). Free 2012 tax help This is your share of the real estate taxes. Free 2012 tax help   Generally, the corporation will tell you your share of its real estate tax. Free 2012 tax help This is the amount you can deduct if it reasonably reflects the cost of real estate taxes for your dwelling unit. Free 2012 tax help Refund of real estate taxes. Free 2012 tax help   If the corporation receives a refund of real estate taxes it paid in an earlier year, it must reduce the amount of real estate taxes paid this year when it allocates the tax expense to you. Free 2012 tax help Your deduction for real estate taxes the corporation paid this year is reduced by your share of the refund the corporation received. Free 2012 tax help Sales Taxes Generally, you can elect to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction on Schedule A (Form 1040). Free 2012 tax help Deductible sales taxes may include sales taxes paid on your home (including mobile and prefabricated), or home building materials if the tax rate was the same as the general sales tax rate. Free 2012 tax help For information on figuring your deduction, see the Instructions for Schedule A (Form 1040). Free 2012 tax help If you elect to deduct the sales taxes paid on your home, or home building materials, you cannot include them as part of your cost basis in the home. Free 2012 tax help Home Mortgage Interest This section of the publication gives you basic information about home mortgage interest, including information on interest paid at settlement, points, and Form 1098, Mortgage Interest Statement. Free 2012 tax help Most home buyers take out a mortgage (loan) to buy their home. Free 2012 tax help They then make monthly payments to either the mortgage holder or someone collecting the payments for the mortgage holder. Free 2012 tax help Usually, you can deduct the entire part of your payment that is for mortgage interest, if you itemize your deductions on Schedule A (Form 1040). Free 2012 tax help However, your deduction may be limited if: Your total mortgage balance is more than $1 million ($500,000 if married filing separately), or You took out a mortgage for reasons other than to buy, build, or improve your home. Free 2012 tax help If either of these situations applies to you, see Publication 936 for more information. Free 2012 tax help Also see Publication 936 if you later refinance your mortgage or buy a second home. Free 2012 tax help Refund of home mortgage interest. Free 2012 tax help   If you receive a refund of home mortgage interest that you deducted in an earlier year and that reduced your tax, you generally must include the refund in income in the year you receive it. Free 2012 tax help For more information, see Recoveries in Publication 525. Free 2012 tax help The amount of the refund will usually be shown on the mortgage interest statement you receive from your mortgage lender. Free 2012 tax help See Mortgage Interest Statement , later. Free 2012 tax help Deductible Mortgage Interest To be deductible, the interest you pay must be on a loan secured by your main home or a second home. Free 2012 tax help The loan can be a first or second mortgage, a home improvement loan, or a home equity loan. Free 2012 tax help Prepaid interest. Free 2012 tax help   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. Free 2012 tax help Generally, you can deduct in each year only the interest that qualifies as home mortgage interest for that year. Free 2012 tax help An exception (discussed later) applies to points. Free 2012 tax help Late payment charge on mortgage payment. Free 2012 tax help   You can deduct as home mortgage interest a late payment charge if it was not for a specific service in connection with your mortgage loan. Free 2012 tax help Mortgage prepayment penalty. Free 2012 tax help   If you pay off your home mortgage early, you may have to pay a penalty. Free 2012 tax help 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. Free 2012 tax help Ground rent. Free 2012 tax help   In some states (such as Maryland), you may buy your home subject to a ground rent. Free 2012 tax help A ground rent is an obligation you assume to pay a fixed amount per year on the property. Free 2012 tax help Under this arrangement, you are leasing (rather than buying) the land on which your home is located. Free 2012 tax help Redeemable ground rents. Free 2012 tax help   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct the payments as mortgage interest. Free 2012 tax help The ground rent is a redeemable ground rent only if all of the following are true. Free 2012 tax help Your lease, including renewal periods, is for more than 15 years. Free 2012 tax help You can freely assign the lease. Free 2012 tax help You have a present or future right (under state or local law) to end the lease and buy the lessor's entire interest in the land by paying a specified amount. Free 2012 tax help The lessor's interest in the land is primarily a security interest to protect the rental payments to which he or she is entitled. Free 2012 tax help   Payments made to end the lease and buy the lessor's entire interest in the land are not redeemable ground rents. Free 2012 tax help You cannot deduct them. Free 2012 tax help Nonredeemable ground rents. Free 2012 tax help   Payments on a nonredeemable ground rent are not mortgage interest. Free 2012 tax help You can deduct them as rent only if they are a business expense or if they are for rental property. Free 2012 tax help Cooperative apartment. Free 2012 tax help   You can usually treat the interest on a loan you took out to buy stock in a cooperative housing corporation as home mortgage interest if you own a cooperative apartment, and the cooperative housing corporation meets the conditions described earlier under Special Rules for Cooperatives . Free 2012 tax help In addition, you can treat as home mortgage interest your share of the corporation's deductible mortgage interest. Free 2012 tax help Figure your share of mortgage interest the same way that is shown for figuring your share of real estate taxes in the Example under Division of real estate taxes, earlier. Free 2012 tax help For more information on cooperatives, see Special Rule for Tenant-Stockholders in Cooperative Housing Corporations in Publication 936. Free 2012 tax help Refund of cooperative's mortgage interest. Free 2012 tax help   You must reduce your mortgage interest deduction by your share of any cash portion of a patronage dividend that the cooperative receives. Free 2012 tax help The patronage dividend is a partial refund to the cooperative housing corporation of mortgage interest it paid in a prior year. Free 2012 tax help   If you receive a Form 1098 from the cooperative housing corporation, the form should show only the amount you can deduct. Free 2012 tax help Mortgage Interest Paid at Settlement One item that normally appears on a settlement or closing statement is home mortgage interest. Free 2012 tax help You can deduct the interest that you pay at settlement if you itemize your deductions on Schedule A (Form 1040). Free 2012 tax help This amount should be included in the mortgage interest statement provided by your lender. Free 2012 tax help See the discussion under Mortgage Interest Statement , later. Free 2012 tax help Also, if you pay interest in advance, see Prepaid interest , earlier, and Points , next. Free 2012 tax help Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Free 2012 tax help Points also may be called loan origination fees, maximum loan charges, loan discount, or discount points. Free 2012 tax help A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. Free 2012 tax help See Points paid by the seller , later. Free 2012 tax help General rule. Free 2012 tax help   You cannot deduct the full amount of points in the year paid. Free 2012 tax help They are prepaid interest, so you generally must deduct them over the life (term) of the mortgage. Free 2012 tax help Exception. Free 2012 tax help   You can deduct the full amount of points in the year paid if you meet all the following tests. Free 2012 tax help Your loan is secured by your main home. Free 2012 tax help (Generally, your main home is the one you live in most of the time. Free 2012 tax help ) Paying points is an established business practice in the area where the loan was made. Free 2012 tax help The points paid were not more than the points generally charged in that area. Free 2012 tax help You use the cash method of accounting. Free 2012 tax help This means you report income in the year you receive it and deduct expenses in the year you pay them. Free 2012 tax help Most individuals use this method. Free 2012 tax help 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. Free 2012 tax help The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. Free 2012 tax help The funds you provided are not required to have been applied to the points. Free 2012 tax help They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. Free 2012 tax help You cannot have borrowed these funds. Free 2012 tax help You use your loan to buy or build your main home. Free 2012 tax help The points were computed as a percentage of the principal amount of the mortgage. Free 2012 tax help The amount is clearly shown on the settlement statement (such as the Uniform Settlement Statement, Form HUD-1) as points charged for the mortgage. Free 2012 tax help The points may be shown as paid from either your funds or the seller's. Free 2012 tax help Note. Free 2012 tax help If you meet all of the tests listed above and you itemize your deductions in the year you get the loan, you can either deduct the full amount of points in the year paid or deduct them over the life of the loan, beginning in the year you get the loan. Free 2012 tax help If you do not itemize your deductions in the year you get the loan, you can spread the points over the life of the loan and deduct the appropriate amount in each future year, if any, when you do itemize your deductions. Free 2012 tax help Home improvement loan. Free 2012 tax help   You can also fully deduct in the year paid points paid on a loan to improve your main home, if you meet the first six tests listed earlier. Free 2012 tax help Refinanced loan. Free 2012 tax help   If you use part of the refinanced mortgage proceeds to improve your main home and you meet the first six tests listed earlier, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. Free 2012 tax help You can deduct the rest of the points over the life of the loan. Free 2012 tax help Points not fully deductible in year paid. Free 2012 tax help    If you do not qualify under the exception to deduct the full amount of points in the year paid (or choose not to do so), see Points in Publication 936 for the rules on when and how much you can deduct. Free 2012 tax help Figure A. Free 2012 tax help   You can use Figure A, next, as a quick guide to see whether your points are fully deductible in the year paid. Free 2012 tax help    Please click here for the text description of the image. Free 2012 tax help Figure A. Free 2012 tax help Are my points fully deductible this year? Amounts charged for services. Free 2012 tax help   Amounts charged by the lender for specific services connected to the loan are not interest. Free 2012 tax help Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. Free 2012 tax help You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. Free 2012 tax help For information about the tax treatment of these amounts and other settlement fees and closing costs, see Basis , later. Free 2012 tax help Points paid by the seller. Free 2012 tax help   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. Free 2012 tax help Treatment by seller. Free 2012 tax help   The seller cannot deduct these fees as interest. Free 2012 tax help However, they are a selling expense that reduces the seller's amount realized. Free 2012 tax help See Publication 523 for more information. Free 2012 tax help Treatment by buyer. Free 2012 tax help   The buyer treats seller-paid points as if he or she had paid them. Free 2012 tax help If all the tests listed earlier under Exception are met, the buyer can deduct the points in the year paid. Free 2012 tax help If any of those tests are not met, the buyer must deduct the points over the life of the loan. Free 2012 tax help   The buyer must also reduce the basis of the home by the amount of the seller-paid points. Free 2012 tax help For more information about the basis of your home, see Basis , later. Free 2012 tax help Funds provided are less than points. Free 2012 tax help   If you meet all the tests listed earlier under Exception 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. Free 2012 tax help In addition, you can deduct any points paid by the seller. Free 2012 tax help Example 1. Free 2012 tax help When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). Free 2012 tax help You meet all the tests for deducting points in the year paid (see Exception , earlier), except the only funds you provided were a $750 down payment. Free 2012 tax help Of the $1,000 you were charged for points, you can deduct $750 in the year paid. Free 2012 tax help You spread the remaining $250 over the life of the mortgage. Free 2012 tax help Example 2. Free 2012 tax help 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. Free 2012 tax help In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). Free 2012 tax help You spread the remaining $250 over the life of the mortgage. Free 2012 tax help You must reduce the basis of your home by the $1,000 paid by the seller. Free 2012 tax help Excess points. Free 2012 tax help   If you meet all the tests under Exception , earlier, except that the points paid were more than are generally charged in your area (test 3), you can deduct in the year paid only the points that are generally charged. Free 2012 tax help You must spread any additional points over the life of the mortgage. Free 2012 tax help Mortgage ending early. Free 2012 tax help   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. Free 2012 tax help A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. Free 2012 tax help Example. Free 2012 tax help Dan paid $3,000 in points in 2006 that he had to spread out over the 15-year life of the mortgage. Free 2012 tax help He had deducted $1,400 of these points through 2012. Free 2012 tax help Dan prepaid his mortgage in full in 2013. Free 2012 tax help He can deduct the remaining $1,600 of points in 2013. Free 2012 tax help Exception. Free 2012 tax help   If you refinance the mortgage with the same lender, you cannot deduct any remaining points for the year. Free 2012 tax help Instead, deduct them over the term of the new loan. Free 2012 tax help Form 1098. Free 2012 tax help   The mortgage interest statement you receive should show not only the total interest paid during the year, but also your deductible points paid during the year. Free 2012 tax help See Mortgage Interest Statement , later. Free 2012 tax help Where To Deduct Home Mortgage Interest Enter on Schedule A (Form 1040), line 10, the home mortgage interest and points reported to you on Form 1098 (discussed next). Free 2012 tax help If you did not receive a Form 1098, enter your deductible interest on line 11, and any deductible points on line 12. Free 2012 tax help See Table 1 below for a summary of where to deduct home mortgage interest and real estate taxes. Free 2012 tax help If you paid home mortgage interest to the person from whom you bought your home, show that person's name, address, and social security number (SSN) or employer identification number (EIN) on the dotted lines next to line 11. Free 2012 tax help The seller must give you this number and you must give the seller your SSN. Free 2012 tax help Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. Free 2012 tax help Failure to meet either of these requirements may result in a $50 penalty for each failure. Free 2012 tax help Table 1. Free 2012 tax help Where To Deduct Interest and Taxes Paid on Your Home See the text for information on what expenses are eligible. Free 2012 tax help IF you are eligible to deduct . Free 2012 tax help . Free 2012 tax help . Free 2012 tax help THEN report the amount  on Schedule A (Form 1040) . Free 2012 tax help . Free 2012 tax help . Free 2012 tax help real estate taxes line 6. Free 2012 tax help home mortgage interest and points reported on Form 1098 line 10. Free 2012 tax help home mortgage interest not reported on  Form 1098 line 11. Free 2012 tax help points not reported on Form 1098 line 12. Free 2012 tax help qualified mortgage insurance premiums line 13. Free 2012 tax help 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 to a mortgage holder in the course of that holder's trade or business, you should receive a Form 1098 or similar statement from the mortgage holder. Free 2012 tax help The statement will show the total interest paid on your mortgage during the year. Free 2012 tax help If you bought a main home during the year, it also will show the deductible points you paid and any points you can deduct that were paid by the person who sold you your home. Free 2012 tax help See Points , earlier. Free 2012 tax help The interest you paid at settlement should be included on the statement. Free 2012 tax help If it is not, add the interest from the settlement sheet that qualifies as home mortgage interest to the total shown on Form 1098 or similar statement. Free 2012 tax help Put the total on Schedule A (Form 1040), line 10, and attach a statement to your return explaining the difference. Free 2012 tax help Write “See attached” to the right of line 10. Free 2012 tax help A mortgage holder can be a financial institution, a governmental unit, or a cooperative housing corporation. Free 2012 tax help If a statement comes from a cooperative housing corporation, it generally will show your share of interest. Free 2012 tax help Your mortgage interest statement for 2013 should be provided or sent to you by January 31, 2014. Free 2012 tax help If it is mailed, you should allow adequate time to receive it before contacting the mortgage holder. Free 2012 tax help A copy of this form will be sent to the IRS also. Free 2012 tax help Example. Free 2012 tax help You bought a new home on May 3. Free 2012 tax help You paid no points on the purchase. Free 2012 tax help During the year, you made mortgage payments which included $4,480 deductible interest on your new home. Free 2012 tax help The settlement sheet for the purchase of the home included interest of $620 for 29 days in May. Free 2012 tax help The mortgage statement you receive from the lender includes total interest of $5,100 ($4,480 + $620). Free 2012 tax help You can deduct the $5,100 if you itemize your deductions. Free 2012 tax help Refund of overpaid interest. Free 2012 tax help   If you receive a refund of mortgage interest you overpaid in a prior year, you generally will receive a Form 1098 showing the refund in box 3. Free 2012 tax help Generally, you must include the refund in income in the year you receive it. Free 2012 tax help See Refund of home mortgage interest , earlier, under Home Mortgage Interest. Free 2012 tax help More than one borrower. Free 2012 tax help   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. Free 2012 tax help Show how much of the interest each of you paid, and give the name and address of the person who received the form. Free 2012 tax help Deduct your share of the interest on Schedule A (Form 1040), line 11, and write “See attached” to the right of that line. Free 2012 tax help Mortgage Insurance Premiums You may be able to take an itemized deduction on Schedule A (Form 1040), line 13, for premiums you pay or accrue during 2013 for qualified mortgage insurance in connection with home acquisition debt on your qualified home. Free 2012 tax help Mortgage insurance premiums you paid or accrued on any mortgage insurance contract issued before January 1, 2007, are not deductible as an itemized deduction. Free 2012 tax help Qualified Mortgage Insurance Qualified mortgage insurance is mortgage insurance provided by the Veterans Administration, the Federal Housing Administration, or the Rural Housing Administration, and private mortgage insurance (as defined in section 2 of the Homeowners Protection Act of 1998 as in effect on December 20, 2006). Free 2012 tax help Prepaid mortgage insurance premiums. Free 2012 tax help   If you paid premiums that are allocable to periods after 2013, you must allocate them over the shorter of: The stated term of the mortgage, or 84 months, beginning with the month the insurance was obtained. Free 2012 tax help The premiums are treated as paid in the year to which they were allocated. Free 2012 tax help If the mortgage is satisfied before its term, no deduction is allowed for the unamortized balance. Free 2012 tax help See Publication 936 for details. Free 2012 tax help Exception for certain mortgage insurance. Free 2012 tax help   The allocation rules, explained above, do not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or Rural Housing Service. Free 2012 tax help Home Acquisition Debt Home acquisition debt is a mortgage you took out after October 13, 1987, to buy, build, or substantially improve a qualified home. Free 2012 tax help It also must be secured by that home. Free 2012 tax help If the amount of your mortgage is more than the cost of the home plus the cost of any substantial improvements, only the debt that is not more than the cost of the home plus improvements qualifies as home acquisition debt. Free 2012 tax help Home acquisition debt limit. Free 2012 tax help   The total amount you can treat as home acquisition debt at any time on your home cannot be more than $1 million ($500,000 if married filing separately). Free 2012 tax help Discharges of qualified principal residence indebtedness. Free 2012 tax help   You can exclude from gross income any discharges of qualified principal residence indebtedness made after 2006 and before 2014. Free 2012 tax help You must reduce the basis of your principal residence (but not below zero) by the amount you exclude. Free 2012 tax help Principal residence. Free 2012 tax help   Your principal residence is the home where you ordinarily live most of the time. Free 2012 tax help You can have only one principal residence at any one time. Free 2012 tax help Qualified principal residence indebtedness. Free 2012 tax help   This is a mortgage that you took out to buy, build, or substantially improve your principal residence and that is secured by that residence. Free 2012 tax help If the amount of your original mortgage is more than the cost of your principal residence plus the cost of substantial improvements, qualified principal residence indebtedness cannot be more than the cost of your principal residence plus improvements. Free 2012 tax help   Any debt secured by your principal residence that you use to refinance qualified principal residence indebtedness is qualified principal residence indebtedness up to the amount of your old mortgage principal just before the refinancing. Free 2012 tax help Additional debt incurred to substantially improve your principal residence is also qualified principal residence indebtedness. Free 2012 tax help Amount you can exclude. Free 2012 tax help   You can only exclude debt discharged after 2006 and before 2014. Free 2012 tax help The most you can exclude is $2 million ($1 million if married filing separately). Free 2012 tax help You cannot exclude any amount that was discharged because of services performed for the lender or on account of any other factor not directly related either to a decline in the value of your residence or to your financial condition. Free 2012 tax help Ordering rule. Free 2012 tax help   If only a part of a loan is qualified principal residence indebtedness, you can exclude only the amount of the discharge that is more than the amount of the loan (immediately before the discharge) that is not qualified principal residence indebtedness. Free 2012 tax help Qualified Home This means your main home or your second home. Free 2012 tax help A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities. Free 2012 tax help Main home. Free 2012 tax help   You can have only one main home at any one time. Free 2012 tax help This is the home where you ordinarily live most of the time. Free 2012 tax help Second home and other special situations. Free 2012 tax help   If you have a second home, use part of your home for other than residential living (such as a home office), rent out part of your home, or are having your home constructed, see Qualified Home in Publication 936. Free 2012 tax help Limit on Deduction If your adjusted gross income (AGI) 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 deductible is reduced and may be eliminated. Free 2012 tax help 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. Free 2012 tax help If your AGI is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. Free 2012 tax help Form 1098. Free 2012 tax help   The amount of mortgage insurance premiums you paid during 2013 should be reported in box 4. Free 2012 tax help See Form 1098, Mortgage Interest Statement in Publication 936. Free 2012 tax help Mortgage Interest Credit The mortgage interest credit is intended to help lower-income individuals afford home ownership. Free 2012 tax help If you qualify, you can claim the credit on Form 8396 each year for part of the home mortgage interest you pay. Free 2012 tax help Who qualifies. Free 2012 tax help   You may be eligible for the credit if you were issued a qualified Mortgage Credit Certificate (MCC) from your state or local government. Free 2012 tax help Generally, an MCC is issued only in connection with a new mortgage for the purchase of your main home. Free 2012 tax help The MCC will show the certificate credit rate you will use to figure your credit. Free 2012 tax help It also will show the certified indebtedness amount. Free 2012 tax help Only the interest on that amount qualifies for the credit. Free 2012 tax help See Figuring the Credit , later. Free 2012 tax help You must contact the appropriate government agency about getting an MCC before you get a mortgage and buy your home. Free 2012 tax help Contact your state or local housing finance agency for information about the availability of MCCs in your area. Free 2012 tax help How to claim the credit. Free 2012 tax help   To claim the credit, complete Form 8396 and attach it to your Form 1040 or Form 1040NR, U. Free 2012 tax help S. Free 2012 tax help Nonresident Alien Income Tax Return. Free 2012 tax help Include the credit in your total for Form 1040, line 53, or Form 1040NR, line 50; be sure to check box c and write “Form 8396” on that line. Free 2012 tax help Reducing your home mortgage interest deduction. Free 2012 tax help   If you itemize your deductions on Schedule A (Form 1040), you must reduce your home mortgage interest deduction by the amount of the mortgage interest credit shown on Form 8396, line 3. Free 2012 tax help You must do this even if part of that amount is to be carried forward to 2014. Free 2012 tax help Selling your home. Free 2012 tax help   If you purchase a home after 1990 using an MCC, and you sell that home within 9 years, you may have to recapture (repay) all or part of the benefit you received from the MCC program. Free 2012 tax help For additional information, see Recapturing (Paying Back) a Federal Mortgage Subsidy, in Publication 523. Free 2012 tax help Figuring the Credit Figure your credit on Form 8396. Free 2012 tax help Mortgage not more than certified indebtedness. Free 2012 tax help   If your mortgage loan amount is equal to (or smaller than) the certified indebtedness amount shown on your MCC, enter on Form 8396, line 1, all the interest you paid on your mortgage during the year. Free 2012 tax help Mortgage more than certified indebtedness. Free 2012 tax help   If your mortgage loan amount is larger than the certified indebtedness amount shown on your MCC, you can figure the credit on only part of the interest you paid. Free 2012 tax help To find the amount to enter on line 1, multiply the total interest you paid during the year on your mortgage by the following fraction. Free 2012 tax help Certified indebtedness amount on your MCC Original amount of your mortgage   The fraction will not change as long as you are entitled to take the mortgage interest credit. Free 2012 tax help Example. Free 2012 tax help Emily bought a home this year. Free 2012 tax help Her mortgage loan is $125,000. Free 2012 tax help The certified indebtedness amount on her MCC is $100,000. Free 2012 tax help She paid $7,500 interest this year. Free 2012 tax help Emily figures the interest to enter on Form 8396, line 1, as follows:   $100,000 = 80% (. Free 2012 tax help 80)       $125,000       $7,500 x . Free 2012 tax help 80 = $6,000   Emily enters $6,000 on Form 8396, line 1. Free 2012 tax help In each later year, she will figure her credit using only 80% of the interest she pays for that year. Free 2012 tax help Limits Two limits may apply to your credit. Free 2012 tax help A limit based on the credit rate, and A limit based on your tax. Free 2012 tax help Limit based on credit rate. Free 2012 tax help   If the certificate credit rate is higher than 20%, the credit you are allowed cannot be more than $2,000. Free 2012 tax help Limit based on tax. Free 2012 tax help   After applying the limit based on the credit rate, your credit generally cannot be more than your tax liability. Free 2012 tax help See the Credit Limit Worksheet in the Form 8396 instructions to calculate the limit based on tax. Free 2012 tax help Dividing the Credit If two or more persons (other than a married couple filing a joint return) hold an interest in the home to which the MCC relates, the credit must be divided based on the interest held by each person. Free 2012 tax help Example. Free 2012 tax help John and his brother, George, were issued an MCC. Free 2012 tax help They used it to get a mortgage on their main home. Free 2012 tax help John has a 60% ownership interest in the home, and George has a 40% ownership interest in the home. Free 2012 tax help John paid $5,400 mortgage interest this year and George paid $3,600. Free 2012 tax help The MCC shows a credit rate of 25% and a certified indebtedness amount of $130,000. Free 2012 tax help The loan amount (mortgage) on their home is $120,000. Free 2012 tax help The credit is limited to $2,000 because the credit rate is more than 20%. Free 2012 tax help John figures the credit by multiplying the mortgage interest he paid this year ($5,400) by the certificate credit rate (25%) for a total of $1,350. Free 2012 tax help His credit is limited to $1,200 ($2,000 × 60%). Free 2012 tax help George figures the credit by multiplying the mortgage interest he paid this year ($3,600) by the certificate credit rate (25%) for a total of $900. Free 2012 tax help His credit is limited to $800 ($2,000 × 40%). Free 2012 tax help Carryforward If your allowable credit is reduced because of the limit based on your tax, you can carry forward the unused portion of the credit to the next 3 years or until used, whichever comes first. Free 2012 tax help Example. Free 2012 tax help You receive a mortgage credit certificate from State X. Free 2012 tax help This year, your regular tax liability is $1,100, you owe no alternative minimum tax, and your mortgage interest credit is $1,700. Free 2012 tax help You claim no other credits. Free 2012 tax help Your unused mortgage interest credit for this year is $600 ($1,700 − $1,100). Free 2012 tax help You can carry forward this amount to the next 3 years or until used, whichever comes first. Free 2012 tax help Credit rate more than 20%. Free 2012 tax help   If you are subject to the $2,000 limit because your certificate credit rate is more than 20%, you cannot carry forward any amount more than $2,000 (or your share of the $2,000 if you must divide the credit). Free 2012 tax help Example. Free 2012 tax help In the earlier example under Dividing the Credit , John and George used the entire $2,000 credit. Free 2012 tax help The excess   John $1,350 − $1,200 = $150     George $900 − $800 = $100   $150 for John ($1,350 − $1,200) and $100 for George ($900 − $800) cannot be carried forward to future years, despite the respective tax liabilities for John and George. Free 2012 tax help Refinancing If you refinance your original mortgage loan on which you had been given an MCC, you must get a new MCC to be able to claim the credit on the new loan. Free 2012 tax help The amount of credit you can claim on the new loan may change. Free 2012 tax help Table 2 below summarizes how to figure your credit if you refinance your original mortgage loan. Free 2012 tax help Table 2. Free 2012 tax help Effect of Refinancing on Your Credit IF you get a new (reissued) MCC and the amount of your new mortgage is . Free 2012 tax help . Free 2012 tax help . Free 2012 tax help THEN the interest you claim on Form 8396, line 1, is* . Free 2012 tax help . Free 2012 tax help . Free 2012 tax help smaller than or equal to the certified indebtedness amount on the new MCC all the interest paid during the year on your new mortgage. Free 2012 tax help larger than the certified indebtedness amount on the new MCC interest paid during the year on your new mortgage multiplied by the following fraction. Free 2012 tax help         certified indebtedness  amount on your new MCC       original amount of your  mortgage   *The credit using the new MCC cannot be more than the credit using the old MCC. Free 2012 tax help  See New MCC cannot increase your credit above. Free 2012 tax help An issuer may reissue an MCC after you refinance your mortgage. Free 2012 tax help If you did not get a new MCC, you may want to contact the state or local housing finance agency that issued your original MCC for information about whether you can get a reissued MCC. Free 2012 tax help Year of refinancing. Free 2012 tax help   In the year of refinancing, add the applicable amount of interest paid on the old mortgage and the applicable amount of interest paid on the new mortgage, and enter the total on Form 8396, line 1. Free 2012 tax help   If your new MCC has a credit rate different from the rate on the old MCC, you must attach a statement to Form 8396. Free 2012 tax help The statement must show the calculation for lines 1, 2, and 3 for the part of the year when the old MCC was in effect. Free 2012 tax help It must show a separate calculation for the part of the year when the new MCC was in effect. Free 2012 tax help Combine the amounts from both calculations for line 3, enter the total on line 3 of the form, and write “See attached” on the dotted line next to line 2. Free 2012 tax help New MCC cannot increase your credit. Free 2012 tax help   The credit that you claim with your new MCC cannot be more than the credit that you could have claimed with your old MCC. Free 2012 tax help   In most cases, the agency that issues your new MCC will make sure that it does not increase your credit. Free 2012 tax help However, if either your old loan or your new loan has a variable (adjustable) interest rate, you will need to check this yourself. Free 2012 tax help In that case, you will need to know the amount of the credit you could have claimed using the old MCC. Free 2012 tax help   There are two methods for figuring the credit you could have claimed. Free 2012 tax help Under one method, you figure the actual credit that would have been allowed. Free 2012 tax help This means you use the credit rate on the old MCC and the interest you would have paid on the old loan. Free 2012 tax help   If your old loan was a variable rate mortgage, you can use another method to determine the credit that you could have claimed. Free 2012 tax help Under this method, you figure the credit using a payment schedule of a hypothetical self-amortizing mortgage with level payments projected to the final maturity date of the old mortgage. Free 2012 tax help The interest rate of the hypothetical mortgage is the annual percentage rate (APR) of the new mortgage for purposes of the Federal Truth in Lending Act. Free 2012 tax help The principal of the hypothetical mortgage is the remaining outstanding balance of the certified mortgage indebtedness shown on the old MCC. Free 2012 tax help    You must choose one method and use it consistently beginning with the first tax year for which you claim the credit based on the new MCC. Free 2012 tax help    As part of your tax records, you should keep your old MCC and the schedule of payments for your old mortgage. Free 2012 tax help Basis Basis is your starting point for figuring a gain or loss if you later sell your home, or for figuring depreciation if you later use part of your home for business purposes or for rent. Free 2012 tax help While you own your home, you may add certain items to your basis. Free 2012 tax help You may subtract certain other items from your basis. Free 2012 tax help These items are called adjustments to basis and are explained later under Adjusted Basis . Free 2012 tax help It is important that you understand these terms when you first acquire your home because you must keep track of your basis and adjusted basis during the period you own your home. Free 2012 tax help You also must keep records of the events that affect basis or adjusted basis. Free 2012 tax help See Keeping Records , below. Free 2012 tax help Figuring Your Basis How you figure your basis depends on how you acquire your home. Free 2012 tax help If you buy or build your home, your cost is your basis. Free 2012 tax help If you receive your home as a gift, your basis is usually the same as the adjusted basis of the person who gave you the property. Free 2012 tax help If you inherit your home from a decedent, different rules apply depending on the date of the decedent's death. Free 2012 tax help Each of these topics is discussed later. Free 2012 tax help Property transferred from a spouse. Free 2012 tax help   If your home is transferred to you from your spouse, or from your former spouse as a result of a divorce, your basis is the same as your spouse's (or former spouse's) adjusted basis just before the transfer. Free 2012 tax help Publication 504, Divorced or Separated Individuals, fully discusses transfers between spouses. Free 2012 tax help Cost as Basis The cost of your home, whether you purchased it or constructed it, is the amount you paid for it, including any debt you assumed. Free 2012 tax help The cost of your home includes most settlement or closing costs you paid when you bought the home. Free 2012 tax help If you built your home, your cost includes most closing costs paid when you bought the land or settled on your mortgage. Free 2012 tax help See Settlement or closing costs , later. Free 2012 tax help If you elect to deduct the sales taxes on the purchase or construction of your home as an itemized deduction on Schedule A (Form 1040), you cannot include the sales taxes as part of your cost basis in the home. Free 2012 tax help Purchase. Free 2012 tax help   The basis of a home you bought is the amount you paid for it. Free 2012 tax help This usually includes your down payment and any debt you assumed. Free 2012 tax help The basis of a cooperative apartment is the amount you paid for your shares in the corporation that owns or controls the property. Free 2012 tax help This amount includes any purchase commissions or other costs of acquiring the shares. Free 2012 tax help Construction. Free 2012 tax help   If you contracted to have your home built on land that you own, your basis in the home is your basis in the land plus the amount you paid to have the home built. Free 2012 tax help This includes the cost of labor and materials, the amount you paid the contractor, any architect's fees, building permit charges, utility meter and connection charges, and legal fees that are directly connected with building your home. Free 2012 tax help If you built all or part of your home yourself, your basis is the total amount it cost you to build it. Free 2012 tax help You cannot include in basis the value of your own labor or any other labor for which you did not pay. Free 2012 tax help Real estate taxes. Free 2012 tax help   Real estate taxes are usually divided so that you and the seller each pay taxes for the part of the property tax year that each owned the home. Free 2012 tax help See the earlier discussion of Real estate taxes paid at settlement or closing , under Real Estate Taxes, earlier, to figure the real estate taxes you paid or are considered to have paid. Free 2012 tax help   If you pay any part of the seller's share of the real estate taxes (the taxes up to the date of sale), and the seller did not reimburse you, add those taxes to your basis in the home. Free 2012 tax help You cannot deduct them as taxes paid. Free 2012 tax help   If the seller paid any of your share of the real estate taxes (the taxes beginning with the date of sale), you can still deduct those taxes. Free 2012 tax help Do not include those taxes in your basis. Free 2012 tax help If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. Free 2012 tax help Example 1. Free 2012 tax help You bought your home on September 1. Free 2012 tax help The property tax year in your area is the calendar year, and the tax is due on August 15. Free 2012 tax help The real estate taxes on the home you bought were $1,275 for the year and had been paid by the seller on August 15. Free 2012 tax help You did not reimburse the seller for your share of the real estate taxes from September 1 through December 31. Free 2012 tax help You must reduce the basis of your home by the $426 [(122 ÷ 365) × $1,275] the seller paid for you. Free 2012 tax help You can deduct your $426 share of real estate taxes on your return for the year you purchased your home. Free 2012 tax help Example 2. Free 2012 tax help You bought your home on May 3, 2013. Free 2012 tax help The property tax year in your area is the calendar year. Free 2012 tax help The taxes for the previous year are assessed on January 2 and are due on May 31 and November 30. Free 2012 tax help Under state law, the taxes become a lien on May 31. Free 2012 tax help You agreed to pay all taxes due after the date of sale. Free 2012 tax help The taxes due in 2013 for 2012 were $1,375. Free 2012 tax help The taxes due in 2014 for 2013 will be $1,425. Free 2012 tax help You cannot deduct any of the taxes paid in 2013 because they relate to the 2012 property tax year and you did not own the home until 2013. Free 2012 tax help Instead, you add the $1,375 to the cost (basis) of your home. Free 2012 tax help You owned the home in 2013 for 243 days (May 3 to December 31), so you can take a tax deduction on your 2014 return of $949 [(243 ÷ 365) × $1,425] paid in 2014 for 2013. Free 2012 tax help You add the remaining $476 ($1,425 − $949) of taxes paid in 2014 to the cost (basis) of your home. Free 2012 tax help Settlement or closing costs. Free 2012 tax help   If you bought your home, you probably paid settlement or closing costs in addition to the contract price. Free 2012 tax help These costs are divided between you and the seller according to the sales contract, local custom, or understanding of the parties. Free 2012 tax help If you built your home, you probably paid these costs when you bought the land or settled on your mortgage. Free 2012 tax help   The only settlement or closing costs you can deduct are home mortgage interest and certain real estate taxes. Free 2012 tax help You deduct them in the year you buy your home if you itemize your deductions. Free 2012 tax help You can add certain other settlement or closing costs to the basis of your home. Free 2012 tax help Items added to basis. Free 2012 tax help   You can include in your basis the settlement fees and closing costs you paid for buying your home. Free 2012 tax help A fee is for buying the home if you would have had to pay it even if you paid cash for the home. Free 2012 tax help   The following are some of the settlement fees and closing costs that you can include in the original basis of your home. Free 2012 tax help Abstract fees (abstract of title fees). Free 2012 tax help Charges for installing utility services. Free 2012 tax help Legal fees (including fees for the title search and preparation of the sales contract and deed). Free 2012 tax help Recording fees. Free 2012 tax help Surveys. Free 2012 tax help Transfer or stamp taxes. Free 2012 tax help Owner's title insurance. Free 2012 tax help Any amount the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, cost for improvements or repairs, and sales commissions. Free 2012 tax help   If the seller actually paid for any item for which you are liable and for which you can take a deduction (such as your share of the real estate taxes for the year of sale), you must reduce your basis by that amount unless you are charged for it in the settlement. Free 2012 tax help Items not added to basis and not deductible. Free 2012 tax help   Here are some settlement and closing costs that you cannot deduct or add to your basis. Free 2012 tax help Fire insurance premiums. Free 2012 tax help Charges for using utilities or other services related to occupancy of the home before closing. Free 2012 tax help Rent for occupying the home before closing. Free 2012 tax help Charges connected with getting or refinancing a mortgage loan, such as: Loan assumption fees, Cost of a credit report, and Fee for an appraisal required by a lender. Free 2012 tax help Points paid by seller. Free 2012 tax help   If you bought your home after April 3, 1994, you must reduce your basis by any points paid for your mortgage by the person who sold you your home. Free 2012 tax help   If you bought your home after 1990 but before April 4, 1994, you must reduce your basis by seller-paid points only if you deducted them. Free 2012 tax help See Points , earlier, for the rules on deducting points. Free 2012 tax help Gift To figure the basis of property you receive as a gift, you must know its adjusted basis (defined later) to the donor just before it was given to you, its fair market value (FMV) at the time it was given to you, and any gift tax paid on it. Free 2012 tax help Fair market value. Free 2012 tax help   Fair market value (FMV) is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and who both have a reasonable knowledge of all the necessary facts. Free 2012 tax help Donor's adjusted basis is more than FMV. Free 2012 tax help   If someone gave you your home and the donor's adjusted basis, when it was given to you, was more than the FMV, your basis at the time of receipt is the same as the donor's adjusted basis. Free 2012 tax help Disposition basis. Free 2012 tax help   If the donor's adjusted basis at the time of the gift is more than the FMV, your basis (plus or minus any required adjustments, see Adjusted Basis , later) when you dispose of the property will depend on whether you have a gain or a loss. Free 2012 tax help Your basis for figuring a gain is the same as the donor's adjusted basis. Free 2012 tax help Your basis for figuring a loss is the FMV when you received the gift. Free 2012 tax help If you use the donor's adjusted basis to figure a gain and it results in a loss, then you must use the FMV (at the time of the gift) to refigure the loss. Free 2012 tax help However, if using the FMV results in a gain, then you neither have a gain nor a loss. Free 2012 tax help Example 1. Free 2012 tax help Andrew received a house as a gift from Ishmael (the donor). Free 2012 tax help At the time of the gift, the home had an FMV of $80,000. Free 2012 tax help Ishmael's adjusted basis was $100,000. Free 2012 tax help After he received the house, no events occurred to increase or decrease the basis. Free 2012 tax help If Andrew sells the house for $120,000, he will have a $20,000 gain because he must use the donor's adjusted basis ($100,000) at the time of the gift as his basis to figure the gain. Free 2012 tax help Example 2. Free 2012 tax help Same facts as Example 1 , except this time Andrew sells the house for $70,000. Free 2012 tax help He will have a loss of $10,000 because he must use the FMV ($80,000) at the time of the gift as his basis to figure the loss. Free 2012 tax help Example 3. Free 2012 tax help Same facts as Example 1 , except this time Andrew sells the house for $90,000. Free 2012 tax help Initially, he figures the gain using Ishmael's adjusted basis ($100,000), which results in a loss of $10,000. Free 2012 tax help Since it is a loss, Andrew must now recalculate the loss using the FMV ($80,000), which results in a gain of $10,000. Free 2012 tax help So in this situation, Andrew will neither have a gain nor a loss. Free 2012 tax help Donor's adjusted basis equal to or less than the FMV. Free 2012 tax help   If someone gave you your home after 1976 and the donor's adjusted basis, when it was given to you, was equal to or less than the FMV, your basis at the time of receipt is the same as the donor's adjusted basis, plus the part of any federal gift tax paid that is due to the net increase in value of the home. Free 2012 tax help Part of federal gift tax due to net increase in value. Free 2012 tax help   Figure the part of the federal gift tax paid that is due to the net increase in value of the home by multiplying the total federal gift tax paid by a fraction. Free 2012 tax help The numerator (top part) of the fraction is the net increase in the value of the home, and the denominator (bottom part) is the value of the home for gift tax purposes after reduction for any annual exclusion and marital or charitable deduction that applies to the gift. Free 2012 tax help The net increase in the value of the home is its FMV minus the adjusted basis of the donor. Free 2012 tax help Publication 551 gives more information, including examples, on figuring your basis when you receive property as a gift. Free 2012 tax help Inheritance Your basis in a home you inherited is generally the fair market value of the home on the date of the decedent's death or on the alternative valuation date if the personal representative for the estate chooses to use alternative valuation. Free 2012 tax help If an estate tax return was filed, your basis is generally the value of the home listed on the estate tax return. Free 2012 tax help If an estate tax return was not filed, your basis is the appraised value of the home at the decedent's date of death for state inheritance or transmission taxes. Free 2012 tax help Publication 551 and Publication 559, Survivors, Executors, and Administrators, have more information on the basis of inherited property. Free 2012 tax help If you inherited your home from someone who died in 2010, and the executor of the decedent's estate made the election to file Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent, refer to the information provided by the executor or see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010. Free 2012 tax help Adjusted Basis While you own your home, various events may take place that can change the original basis of your home. Free 2012 tax help These events can increase or decrease your original basis. Free 2012 tax help The result is called adjusted basis. Free 2012 tax help See Table 3, on this page, for a list of some of the items that can adjust your basis. Free 2012 tax help Table 3. Free 2012 tax help Adjusted Basis This table lists examples of some items that generally will increase or decrease your basis in your home. Free 2012 tax help It is not intended to be all-inclusive. Free 2012 tax help Increases to Basis Decreases to Basis Improvements: Putting an addition on your home Replacing an entire roof Paving your driveway Installing central air conditioning Rewiring your home Assessments for local improvements (see Assessments for local benefits , under What You Can and Cannot Deduct, earlier) Amounts spent to restore damaged property Insurance or other reimbursement for casualty losses Deductible casualty loss not covered by insurance Payments received for easement or right-of-way granted Depreciation allowed or allowable if home is used for business or rental purposes Value of subsidy for energy conservation measure excluded from income Improvements. Free 2012 tax help   An improvement materially adds to the value of your home, considerably prolongs its useful life, or adapts it to new uses. Free 2012 tax help You must add the cost of any improvements to the basis of your home. Free 2012 tax help You cannot deduct these costs. Free 2012 tax help   Improvements include putting a recreation room in your unfinished basement, adding another bathroom or bedroom, putting up a fence, putting in new plumbing or wiring, installing a new roof, and paving your driveway. Free 2012 tax help Amount added to basis. Free 2012 tax help   The amount you add to your basis for improvements is your actual cost. Free 2012 tax help This includes all costs for material and labor, except your own labor, and all expenses related to the improvement. Free 2012 tax help For example, if you had your lot surveyed to put up a fence, the cost of the survey is a part of the cost of the fence. Free 2012 tax help   You also must add to your basis state and local assessments for improvements such as streets and sidewalks if they increase the value of the property. Free 2012 tax help These assessments are discussed earlier under Real Estate Taxes . Free 2012 tax help Improvements no longer part of home. Free 2012 tax help    Your home's adjusted basis does not include the cost of any improvements that are replaced and are no longer part of the home. Free 2012 tax help Example. Free 2012 tax help You put wall-to-wall carpeting in your home 15 years ago. Free 2012 tax help Later, you replaced that carpeting with new wall-to-wall carpeting. Free 2012 tax help The cost of the old carpeting you replaced is no longer part of your home's adjusted basis. Free 2012 tax help Repairs versus improvements. Free 2012 tax help   A repair keeps your home in an ordinary, efficient operating condition. Free 2012 tax help It does not add to the value of your home or prolong its life. Free 2012 tax help Repairs include repainting your home inside or outside, fixing your gutters or floors, fixing leaks or plastering, and replacing broken window panes. Free 2012 tax help You cannot deduct repair costs and generally cannot add them to the basis of your home. Free 2012 tax help   However, repairs that are done as part of an extensive remodeling or restoration of your home are considered improvements. Free 2012 tax help You add them to the basis of your home. Free 2012 tax help Records to keep. Free 2012 tax help   You can use Table 4 (at the end of the publication) as a guide to help you keep track of improvements to your home. Free 2012 tax help Also see Keeping Records , below. Free 2012 tax help Energy conservation subsidy. Free 2012 tax help   If a public utility gives you (directly or indirectly) a subsidy for the purchase or installation of an energy conservation measure for your home, do not include the value of that subsidy in your income. Free 2012 tax help You must reduce the basis of your home by that value. Free 2012 tax help   An energy conservation measure is an installation or modification primarily designed to reduce consumption of electricity or natural gas or to improve the management of energy demand. Free 2012 tax help Keeping Records Keeping full and accurate records is vital to properly report your income and expenses, to support your deductions and credits, and to know the basis or adjusted basis of your home. Free 2012 tax help These records include your purchase contract and settlement papers if you bought the property, or other objective evidence if you acquired it by gift, inheritance, or similar means. Free 2012 tax help You should keep any receipts, canceled checks, and similar evidence for improvements or other additions to the basis. Free 2012 tax help In addition, you should keep track of any decreases to the basis such as those listed in Table 3, earlier. Free 2012 tax help How to keep records. Free 2012 tax help   How you keep records is up to you, but they must be clear and accurate and must be available to the IRS. Free 2012 tax help How long to keep records. Free 2012 tax help   You must keep your records for as long as they are important for meeting any provision of the federal tax law. Free 2012 tax help   Keep records that support an item of income, a deduction, or a credit appearing on a return until the period of limitations for the return runs out. Free 2012 tax help (A period of limitations is the period of time after which no legal action can be brought. Free 2012 tax help ) For assessment of tax you owe, this is generally 3 years from the date you filed the return. Free 2012 tax help For filing a claim for credit or refund, this is generally 3 years from the date you filed the original return, or 2 years from the date you paid the tax, whichever is later. Free 2012 tax help Returns filed before the due date are treated as filed on the due date. Free 2012 tax help   You may need to keep records relating to the basis of property (discussed earlier) for longer than the period of limitations. Free 2012 tax help Keep those records as long as they are important in figuring the basis of the original or replacement property. Free 2012 tax help Generally, this means for as long as you own the property and, after you dispose of it, for the period of limitations that applies to you. Free 2012 tax help Table 4. Free 2012 tax help Record of Home Improvements Keep this for your records. Free 2012 tax help Also, keep receipts or other proof of improvements. Free 2012 tax help Remove from this record any improvements that are no longer part of your main home. Free 2012 tax help For example, if you put wall-to-wall carpeting in your home and later replace it with new wall-to-wall carpeting, remove the cost of the first carpeting. Free 2012 tax help (a) Type of Improvement (b) Date (c) Amount   (a) Type of Improvement (b) Date (c) Amount Additions:       Heating & Air  Conditioning:     Bedroom       Heating system     Bathroom       Central air conditioning     Deck       Furnace     Garage       Duct work     Porch       Central humidifier     Patio       Filtration system     Storage shed       Other     Fireplace       Electrical:     Other           Lawn & Grounds:       Lighting fixtures           Wiring upgrades     Landscaping       Other     Driveway       Plumbing:     Walkway           Fences       Water heater     Retaining wall       Soft water system     Sprinkler system       Filtration system     Swimming pool       Other     Exterior lighting       Insulation:     Other           Communications:       Attic           Walls     Satellite dish       Floors     Intercom       Pipes and duct work     Security system       Other     Other             Miscellaneous:       Interior  Improvements:     Storm windows and doors       Built-in appliances     Roof       Kitchen modernization     Central vacuum       Bathroom modernization     Other       Flooring             Wall-to-wall carpeting             Other     How To