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Free Tax Filing For Low Income Families

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Free Tax Filing For Low Income Families

Free tax filing for low income families 3. Free tax filing for low income families   Investment Expenses Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Limits on DeductionsPassive activity. Free tax filing for low income families Other income (nonpassive income). Free tax filing for low income families Expenses. Free tax filing for low income families Additional information. Free tax filing for low income families Interest ExpensesInvestment Interest Limit on Deduction Bond Premium AmortizationSpecial rules to determine amounts payable on a bond. Free tax filing for low income families Basis. Free tax filing for low income families How To Figure Amortization Choosing To Amortize How To Report Amortization Expenses of Producing IncomeFees to buy or sell. Free tax filing for low income families Including mutual fund or REMIC expenses in income. Free tax filing for low income families Nondeductible ExpensesUsed as collateral. Free tax filing for low income families Short-sale expenses. Free tax filing for low income families Expenses for both tax-exempt and taxable income. Free tax filing for low income families State income taxes. Free tax filing for low income families Nondeductible amount. Free tax filing for low income families Basis adjustment. Free tax filing for low income families 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 . Free tax filing for low income families 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. Free tax filing for low income families 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. Free tax filing for low income families The at-risk rules and passive activity rules are explained briefly in this section. Free tax filing for low income families The limit on investment interest is explained later in this chapter under Interest Expenses . Free tax filing for low income families The 2% limit is explained later in this chapter under Expenses of Producing Income . Free tax filing for low income families At-risk rules. Free tax filing for low income families   Special at-risk rules apply to most income-producing activities. Free tax filing for low income families These rules limit the amount of loss you can deduct to the amount you risk losing in the activity. Free tax filing for low income families Generally, this is the cash and the adjusted basis of property you contribute to the activity. Free tax filing for low income families 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. Free tax filing for low income families For more information, see Publication 925. Free tax filing for low income families Passive activity losses and credits. Free tax filing for low income families   The amount of losses and tax credits you can claim from passive activities is limited. Free tax filing for low income families Generally, you are allowed to deduct passive activity losses only up to the amount of your passive activity income. Free tax filing for low income families Also, you can use credits from passive activities only against tax on the income from passive activities. Free tax filing for low income families There are exceptions for certain activities, such as rental real estate activities. Free tax filing for low income families Passive activity. Free tax filing for low income families   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. Free tax filing for low income families However, if you are involved in renting real estate, the activity is not a passive activity if both of the following are true. Free tax filing for low income families 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. Free tax filing for low income families You perform more than 750 hours of services during the year in real property trades or businesses in which you materially participate. Free tax filing for low income families  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. Free tax filing for low income families However, it does not include rental activities or certain activities treated as incidental to holding property for investment. Free tax filing for low income families   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. Free tax filing for low income families Other income (nonpassive income). Free tax filing for low income families    Generally, you can use losses from passive activities only to offset income from passive activities. Free tax filing for low income families You cannot use passive activity losses to offset your other income, such as your wages or your portfolio income. Free tax filing for low income families Portfolio income includes gross income from interest, dividends, annuities, or royalties that is not derived in the ordinary course of a trade or business. Free tax filing for low income families 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. Free tax filing for low income families This includes capital gain distributions from mutual funds (and other regulated investment companies) and real estate investment trusts. Free tax filing for low income families   You cannot use passive activity losses to offset Alaska Permanent Fund dividends. Free tax filing for low income families Expenses. Free tax filing for low income families   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. Free tax filing for low income families However, this interest and other expenses may be subject to other limits. Free tax filing for low income families These limits are explained in the rest of this chapter. Free tax filing for low income families Additional information. Free tax filing for low income families   For more information about determining and reporting income and losses from passive activities, see Publication 925. Free tax filing for low income families Interest Expenses This section discusses interest expenses you may be able to deduct as an investor. Free tax filing for low income families For information on business interest, see chapter 4 of Publication 535. Free tax filing for low income families 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. Free tax filing for low income families Investment Interest If you borrow money to buy property you hold for investment, the interest you pay is investment interest. Free tax filing for low income families You can deduct investment interest subject to the limit discussed later. Free tax filing for low income families However, you cannot deduct interest you incurred to produce tax-exempt income. Free tax filing for low income families See Tax-exempt income under Nondeductible Expenses, later. Free tax filing for low income families You also cannot deduct interest expenses on straddles discussed under Interest expense and carrying charges on straddles , later. Free tax filing for low income families 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. Free tax filing for low income families Investment property. Free tax filing for low income families   Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. Free tax filing for low income families 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). Free tax filing for low income families Investment property also includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity). Free tax filing for low income families Partners, shareholders, and beneficiaries. Free tax filing for low income families   To determine your investment interest, combine your share of investment interest from a partnership, S corporation, estate, or trust with your other investment interest. Free tax filing for low income families 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. Free tax filing for low income families Only the interest expense on the part of the debt used for investment purposes is treated as investment interest. Free tax filing for low income families The allocation is not affected by the use of property that secures the debt. Free tax filing for low income families Example 1. Free tax filing for low income families You borrow $10,000 and use $8,000 to buy stock. Free tax filing for low income families You use the other $2,000 to buy items for your home. Free tax filing for low income families Since 80% of the debt is used for, and allocated to, investment purposes, 80% of the interest on that debt is investment interest. Free tax filing for low income families The other 20% is nondeductible personal interest. Free tax filing for low income families Debt proceeds received in cash. Free tax filing for low income families   If you receive debt proceeds in cash, the proceeds are generally not treated as investment property. Free tax filing for low income families Debt proceeds deposited in account. Free tax filing for low income families   If you deposit debt proceeds in an account, that deposit is treated as investment property, regardless of whether the account bears interest. Free tax filing for low income families 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. Free tax filing for low income families Example 2. Free tax filing for low income families Assume in Example 1 that you borrowed the money on March 1 and immediately bought the stock for $8,000. Free tax filing for low income families You did not buy the household items until June 1. Free tax filing for low income families You had deposited the $2,000 in the bank. Free tax filing for low income families You had no other transactions on the bank account until June. Free tax filing for low income families You did not sell the stock, and you made no principal payments on the debt. Free tax filing for low income families You paid interest from another account. Free tax filing for low income families The $8,000 is treated as being used for an investment purpose. Free tax filing for low income families The $2,000 is treated as being used for an investment purpose for the 3-month period. Free tax filing for low income families Your total interest expense for 3 months on this debt is investment interest. Free tax filing for low income families 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. Free tax filing for low income families Amounts paid within 30 days. Free tax filing for low income families   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. Free tax filing for low income families This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. Free tax filing for low income families   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. Free tax filing for low income families Payments on debt may require new allocation. Free tax filing for low income families   As you repay a debt used for more than one purpose, you must reallocate the balance. Free tax filing for low income families You must first reduce the amount allocated to personal purposes by the repayment. Free tax filing for low income families You then reallocate the rest of the debt to find what part is for investment purposes. Free tax filing for low income families Example 3. Free tax filing for low income families If, in Example 2 , you repay $500 on November 1, the entire repayment is applied against the amount allocated to personal purposes. Free tax filing for low income families The debt balance is now allocated as $8,000 for investment purposes and $1,500 for personal purposes. Free tax filing for low income families Until the next reallocation is necessary, 84% ($8,000 ÷ $9,500) of the debt and the interest expense is allocated to investment. Free tax filing for low income families Pass-through entities. Free tax filing for low income families   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. Free tax filing for low income families If you contribute to the capital of the entity, you can make the allocation using any reasonable method. Free tax filing for low income families Additional allocation rules. Free tax filing for low income families   For more information about allocating interest expense, see chapter 4 of Publication 535. Free tax filing for low income families When To Deduct Investment Interest If you use the cash method of accounting, you must pay the interest before you can deduct it. Free tax filing for low income families If you use an accrual method of accounting, you can deduct interest over the period it accrues, regardless of when you pay it. Free tax filing for low income families For an exception, see Unpaid expenses owed to related party under When To Report Investment Expenses, later in this chapter. Free tax filing for low income families Example. Free tax filing for low income families You borrowed $1,000 on August 26, 2013, payable in 90 days at 12% interest. Free tax filing for low income families On November 26, 2013, you paid this with a new note for $1,030, due on February 26, 2014. Free tax filing for low income families 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. Free tax filing for low income families 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. Free tax filing for low income families Interest paid in advance. Free tax filing for low income families   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. Free tax filing for low income families You can deduct in each year only the interest for that year. Free tax filing for low income families Interest on margin accounts. Free tax filing for low income families   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. Free tax filing for low income families 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. Free tax filing for low income families 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. Free tax filing for low income families   You cannot deduct any interest on money borrowed for personal reasons. Free tax filing for low income families Limit on interest deduction for market discount bonds. Free tax filing for low income families   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. Free tax filing for low income families This limit does not apply if you accrue the market discount and include it in your income currently. Free tax filing for low income families   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. Free tax filing for low income families Figure the amount in (2) above using the rules for figuring accrued market discount in chapter 1 under Market Discount Bonds . Free tax filing for low income families Interest not deducted due to limit. Free tax filing for low income families   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. Free tax filing for low income families Choosing to deduct disallowed interest expense before the year of disposition. Free tax filing for low income families   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. Free tax filing for low income families The rest of the disallowed interest expense remains deductible in the year you dispose of the bond. Free tax filing for low income families Net interest income. Free tax filing for low income families   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. Free tax filing for low income families Limit on interest deduction for short-term obligations. Free tax filing for low income families   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. Free tax filing for low income families   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). Free tax filing for low income families The method of determining acquisition discount and OID for short-term obligations is discussed in chapter 1 under Discount on Short-Term Obligations . Free tax filing for low income families Interest not deducted due to limit. Free tax filing for low income families   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. Free tax filing for low income families Follow the same rules provided in the earlier discussion under Limit on interest deduction for market discount bonds , earlier. Free tax filing for low income families Limit on Deduction Generally, your deduction for investment interest expense is limited to your net investment income. Free tax filing for low income families You can carry over the amount of investment interest you could not deduct because of this limit to the next tax year. Free tax filing for low income families The interest carried over is treated as investment interest paid or accrued in that next year. Free tax filing for low income families 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. Free tax filing for low income families Net Investment Income Determine the amount of your net investment income by subtracting your investment expenses (other than interest expense) from your investment income. Free tax filing for low income families Investment income. Free tax filing for low income families   This generally includes your gross income from property held for investment (such as interest, dividends, annuities, and royalties). Free tax filing for low income families Investment income does not include Alaska Permanent Fund dividends. Free tax filing for low income families It also does not include qualified dividends or net capital gain unless you choose to include them. Free tax filing for low income families Choosing to include qualified dividends. Free tax filing for low income families   Investment income generally does not include qualified dividends, discussed in chapter 1. Free tax filing for low income families However, you can choose to include all or part of your qualified dividends in investment income. Free tax filing for low income families   You make this choice by completing Form 4952, line 4g, according to its instructions. Free tax filing for low income families   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. Free tax filing for low income families Choosing to include net capital gain. Free tax filing for low income families    Investment income generally does not include net capital gain from disposing of investment property (including capital gain distributions from mutual funds). Free tax filing for low income families However, you can choose to include all or part of your net capital gain in investment income. Free tax filing for low income families   You make this choice by completing Form 4952, line 4g, according to its instructions. Free tax filing for low income families   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. Free tax filing for low income families   For more information about the capital gains rates, see Capital Gain Tax Rates in chapter 4. Free tax filing for low income families    Before making either choice, consider the overall effect on your tax liability. Free tax filing for low income families Compare your tax if you make one or both of these choices with your tax if you do not. Free tax filing for low income families Investment income of child reported on parent's return. Free tax filing for low income families   Investment income includes the part of your child's interest and dividend income you choose to report on your return. Free tax filing for low income families 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. Free tax filing for low income families Include it on line 4a of Form 4952. Free tax filing for low income families Example. Free tax filing for low income families Your 8-year-old son has interest income of $2,200, which you choose to report on your own return. Free tax filing for low income families You enter $2,200 on Form 8814, lines 1a and 4, and $200 on lines 6 and 12 and complete Part II. Free tax filing for low income families Also enter $200 on Form 1040, line 21. Free tax filing for low income families Your investment income includes this $200. Free tax filing for low income families Child's qualified dividends. Free tax filing for low income families   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. Free tax filing for low income families However, you can choose to include all or part of it in investment income, as explained under Choosing to include qualified dividends , earlier. Free tax filing for low income families   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). Free tax filing for low income families Child's Alaska Permanent Fund dividends. Free tax filing for low income families   If part of the amount you report is your child's Alaska Permanent Fund dividends, that part does not count as investment income. Free tax filing for low income families 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. Free tax filing for low income families 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. Free tax filing for low income families Subtract the result from the amount on Form 8814, line 12. Free tax filing for low income families Example. Free tax filing for low income families Your 10-year-old child has taxable interest income of $4,000 and Alaska Permanent Fund dividends of $2,000. Free tax filing for low income families You choose to report this on your return. Free tax filing for low income families You enter $4,000 on Form 8814, line 1a, $2,000 on line 2a, and $6,000 on line 4. Free tax filing for low income families You then enter $4,000 on Form 8814, lines 6 and 12, and Form 1040, line 21. Free tax filing for low income families 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. Free tax filing for low income families Child's capital gain distributions. Free tax filing for low income families   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. Free tax filing for low income families However, you can choose to include all or part of it in investment income, as explained in Choosing to include net capital gain , earlier. Free tax filing for low income families   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). Free tax filing for low income families Investment expenses. Free tax filing for low income families   Investment expenses are your allowed deductions (other than interest expense) directly connected with the production of investment income. Free tax filing for low income families 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. Free tax filing for low income families 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. Free tax filing for low income families See Expenses of Producing Income , later, for a discussion of the 2% limit. Free tax filing for low income families Losses from passive activities. Free tax filing for low income families   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). Free tax filing for low income families See Publication 925 for information about passive activities. Free tax filing for low income families Example. Free tax filing for low income families Ted is a partner in a partnership that operates a business. Free tax filing for low income families However, he does not materially participate in the partnership's business. Free tax filing for low income families Ted's interest in the partnership is considered a passive activity. Free tax filing for low income families Ted's investment income from interest and dividends (other than qualified dividends) is $10,000. Free tax filing for low income families His investment expenses (other than interest) are $3,200 after taking into account the 2% limit on miscellaneous itemized deductions. Free tax filing for low income families His investment interest expense is $8,000. Free tax filing for low income families Ted also has income from the partnership of $2,000. Free tax filing for low income families 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. Free tax filing for low income families His investment interest deduction for the year is limited to $6,800, the amount of his net investment income. Free tax filing for low income families Form 4952 Use Form 4952 to figure your deduction for investment interest. Free tax filing for low income families See Form 4952 for more information. Free tax filing for low income families Exception to use of Form 4952. Free tax filing for low income families   You do not have to complete Form 4952 or attach it to your return if you meet all of the following tests. Free tax filing for low income families Your investment interest expense is not more than your investment income from interest and ordinary dividends minus any qualified dividends. Free tax filing for low income families You do not have any other deductible investment expenses. Free tax filing for low income families You have no carryover of investment interest expense from 2012. Free tax filing for low income families   If you meet all of these tests, you can deduct all of your investment interest. Free tax filing for low income families    Bond Premium Amortization If you pay a premium to buy a bond, the premium is part of your basis in the bond. Free tax filing for low income families If the bond yields taxable interest, you can choose to amortize the premium. Free tax filing for low income families 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. Free tax filing for low income families If you make this choice, you must reduce your basis in the bond by the amortization for the year. Free tax filing for low income families If the bond yields tax-exempt interest, you must amortize the premium. Free tax filing for low income families This amortized amount is not deductible in determining taxable income. Free tax filing for low income families 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. Free tax filing for low income families Bond premium. Free tax filing for low income families   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). Free tax filing for low income families For example, a bond with a maturity value of $1,000 generally would have a $50 premium if you buy it for $1,050. Free tax filing for low income families Special rules to determine amounts payable on a bond. Free tax filing for low income families   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. Free tax filing for low income families 171-3. Free tax filing for low income families Basis. Free tax filing for low income families   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. Free tax filing for low income families 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. Free tax filing for low income families See Regulations section 1. Free tax filing for low income families 171-1(e). Free tax filing for low income families Dealers. Free tax filing for low income families   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. Free tax filing for low income families   See section 75 of the Internal Revenue Code for the treatment of bond premium by a dealer in tax-exempt bonds. Free tax filing for low income families 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. Free tax filing for low income families Constant yield method. Free tax filing for low income families   Figure the bond premium amortization for each accrual period as follows. Free tax filing for low income families Step 1: Determine your yield. Free tax filing for low income families   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. Free tax filing for low income families Figure the yield as of the date you got the bond. Free tax filing for low income families 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. Free tax filing for low income families   If you do not know the yield, consult your broker or tax advisor. Free tax filing for low income families Databases available to them are likely to show the yield at the date of purchase. Free tax filing for low income families Step 2: Determine the accrual periods. Free tax filing for low income families   You can choose the accrual periods to use. Free tax filing for low income families 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. Free tax filing for low income families The computation is simplest if accrual periods are the same as the intervals between interest payment dates. Free tax filing for low income families Step 3: Determine the bond premium for the accrual period. Free tax filing for low income families   To do this, multiply your adjusted acquisition price at the beginning of the accrual period by your yield. Free tax filing for low income families Then subtract the result from the qualified stated interest for the period. Free tax filing for low income families   Your adjusted acquisition price at the beginning of the first accrual period is the same as your basis. Free tax filing for low income families 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. Free tax filing for low income families Example. Free tax filing for low income families On February 1, 2012, you bought a taxable bond for $110,000. Free tax filing for low income families 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). Free tax filing for low income families The bond pays qualified stated interest of $10,000 on February 1 of each year. Free tax filing for low income families Your yield is 8. Free tax filing for low income families 07439% compounded annually. Free tax filing for low income families You choose to use annual accrual periods ending on February 1 of each year. Free tax filing for low income families 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. Free tax filing for low income families When you subtract the result ($8,881. Free tax filing for low income families 83) from the qualified stated interest for the period ($10,000), you find that your bond premium amortization for the period is $1,118. Free tax filing for low income families 17. Free tax filing for low income families Special rules to figure amortization. Free tax filing for low income families   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. Free tax filing for low income families 171-3. Free tax filing for low income families Bonds Issued Before September 28, 1985 For these bonds, you can amortize bond premium using any reasonable method. Free tax filing for low income families Reasonable methods include: The straight-line method, and The Revenue Ruling 82-10 method. Free tax filing for low income families Straight-line method. Free tax filing for low income families   Under this method, the amount of your bond premium amortization is the same each month. Free tax filing for low income families 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. Free tax filing for low income families Then multiply the result by the bond premium (reduced by any bond premium amortization claimed in earlier years). Free tax filing for low income families This gives you your bond premium amortization for the year. Free tax filing for low income families Revenue Ruling 82-10 method. Free tax filing for low income families   Under this method, the amount of your bond premium amortization increases each month over the life of the bond. Free tax filing for low income families This method is explained in Revenue Ruling 82-10, 1982-1 C. Free tax filing for low income families B. Free tax filing for low income families 46. Free tax filing for low income families 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. Free tax filing for low income families You should attach a statement to your return that you are making this choice under section 171. Free tax filing for low income families See How To Report Amortization, next. Free tax filing for low income families This choice is binding for the year you make it and for later tax years. Free tax filing for low income families It applies to all taxable bonds you own in the year you make the choice and also to those you acquire in later years. Free tax filing for low income families You can change your decision to amortize bond premium only with the written approval of the IRS. Free tax filing for low income families To request approval, use Form 3115. Free tax filing for low income families For more information on requesting approval, see section 5 of the Appendix to Revenue Procedure 2011-14 in Internal Revenue Bulletin 2011-4. Free tax filing for low income families You can find Revenue Procedure 2011-14 at www. Free tax filing for low income families irs. Free tax filing for low income families gov/irb/2011-04_IRB/ar08. Free tax filing for low income families html. Free tax filing for low income families How To Report Amortization Subtract the bond premium amortization from your interest income from these bonds. Free tax filing for low income families Report the bond's interest on Schedule B (Form 1040A or 1040), line 1. Free tax filing for low income families Under your last entry on line 1, put a subtotal of all interest listed on line 1. Free tax filing for low income families Below this subtotal, print “ABP Adjustment,” and the total interest you received. Free tax filing for low income families Subtract this amount from the subtotal, and enter the result on line 2. Free tax filing for low income families Bond premium amortization more than interest. Free tax filing for low income families   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. Free tax filing for low income families    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. Free tax filing for low income families Any amount you cannot deduct because of this limit can be carried forward to the next accrual period. Free tax filing for low income families Pre-1998 election to amortize bond premium. Free tax filing for low income families   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. Free tax filing for low income families Bonds acquired before October 23, 1986. Free tax filing for low income families   The amortization of the premium on these bonds is a miscellaneous itemized deduction not subject to the 2%-of-adjusted-gross-income limit. Free tax filing for low income families Bonds acquired after October 22, 1986, but before 1988. Free tax filing for low income families    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. Free tax filing for low income families Expenses of Producing Income You deduct investment expenses (other than interest expenses) as miscellaneous itemized deductions on Schedule A (Form 1040). Free tax filing for low income families 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. Free tax filing for low income families The expenses must be directly related to the income or income-producing property, and the income must be taxable to you. Free tax filing for low income families The deduction for most income-producing expenses is subject to a 2% limit that also applies to certain other miscellaneous itemized deductions. Free tax filing for low income families The amount deductible is limited to the total of these miscellaneous deductions that is more than 2% of your adjusted gross income. Free tax filing for low income families For information on how to report expenses of producing income, see How To Report Investment Expenses , later. Free tax filing for low income families Attorney or accounting fees. Free tax filing for low income families   You can deduct attorney or accounting fees that are necessary to produce or collect taxable income. Free tax filing for low income families However, in some cases, attorney or accounting fees are part of the basis of property. Free tax filing for low income families See Basis of Investment Property in chapter 4. Free tax filing for low income families Automatic investment service and dividend reinvestment plans. Free tax filing for low income families   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. Free tax filing for low income families Or a bank that is a dividend disbursing agent for a number of publicly-owned corporations may set up an automatic dividend reinvestment service. Free tax filing for low income families Through that service, cash dividends are reinvested in more shares of stock after the bank deducts a service charge. Free tax filing for low income families   A corporation in which you own stock also may have a dividend reinvestment plan. Free tax filing for low income families 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. Free tax filing for low income families   You can deduct the monthly service charge you pay to a bank to participate in an automatic investment service. Free tax filing for low income families 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. Free tax filing for low income families Deduct the charges in the year you pay them. Free tax filing for low income families Clerical help and office rent. Free tax filing for low income families   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. Free tax filing for low income families Cost of replacing missing securities. Free tax filing for low income families   To replace your taxable securities that are mislaid, lost, stolen, or destroyed, you may have to post an indemnity bond. Free tax filing for low income families You can deduct the premium you pay to buy the indemnity bond and the related incidental expenses. Free tax filing for low income families   You may, however, get a refund of part of the bond premium if the missing securities are recovered within a specified time. Free tax filing for low income families Under certain types of insurance policies, you can recover some of the expenses. Free tax filing for low income families   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. Free tax filing for low income families 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. Free tax filing for low income families Fees to collect income. Free tax filing for low income families   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. Free tax filing for low income families Fees to buy or sell. Free tax filing for low income families   You cannot deduct a fee you pay to a broker to acquire investment property, such as stocks or bonds. Free tax filing for low income families You must add the fee to the cost of the property. Free tax filing for low income families See Basis of Investment Property in chapter 4. Free tax filing for low income families    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. Free tax filing for low income families They can be used only to figure gain or loss from the sale. Free tax filing for low income families See Reporting Capital Gains and Losses , in chapter 4, for more information about the treatment of these sale expenses. Free tax filing for low income families Investment counsel and advice. Free tax filing for low income families   You can deduct fees you pay for counsel and advice about investments that produce taxable income. Free tax filing for low income families This includes amounts you pay for investment advisory services. Free tax filing for low income families Safe deposit box rent. Free tax filing for low income families   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. Free tax filing for low income families If you also use the box to store tax-exempt securities or personal items, you can deduct only part of the rent. Free tax filing for low income families See Tax-exempt income under Nondeductible Expenses, later, to figure what part you can deduct. Free tax filing for low income families State and local transfer taxes. Free tax filing for low income families   You cannot deduct the state and local transfer taxes you pay when you buy or sell securities. Free tax filing for low income families If you pay these transfer taxes when you buy securities, you must treat them as part of the cost of the property. Free tax filing for low income families If you pay these transfer taxes when you sell securities, you must treat them as a reduction in the amount realized. Free tax filing for low income families Trustee's commissions for revocable trust. Free tax filing for low income families   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. Free tax filing for low income families 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. Free tax filing for low income families   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. Free tax filing for low income families You cannot deduct the entire amount in the year you pay it. Free tax filing for low income families Investment expenses from pass-through entities. Free tax filing for low income families   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. Free tax filing for low income families 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). Free tax filing for low income families A nonpublicly offered mutual fund will indicate your share of these expenses in box 5 of Form 1099-DIV (or substitute statement). Free tax filing for low income families Publicly-offered mutual funds are discussed later. Free tax filing for low income families   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. Free tax filing for low income families 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). Free tax filing for low income families   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. Free tax filing for low income families Including mutual fund or REMIC expenses in income. Free tax filing for low income families   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. Free tax filing for low income families 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. Free tax filing for low income families 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). Free tax filing for low income families 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. Free tax filing for low income families If you are a REMIC regular interest holder, you must include the amount of any expense allocation you received on Form 1040, line 8a. Free tax filing for low income families Publicly-offered mutual funds. Free tax filing for low income families   Most mutual funds are publicly offered. Free tax filing for low income families These mutual funds, generally, are traded on an established securities exchange. Free tax filing for low income families These funds do not pass investment expenses through to you. Free tax filing for low income families 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. Free tax filing for low income families As a result, you cannot deduct the expenses on your return. Free tax filing for low income families   Include the amount from box 1a of Form 1099-DIV (or substitute statement) in your income. Free tax filing for low income families    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. Free tax filing for low income families Contact your mutual fund if you are not sure whether it is publicly offered. Free tax filing for low income families Nondeductible Expenses Some expenses that you incur as an investor are not deductible. Free tax filing for low income families Stockholders' meetings. Free tax filing for low income families   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. Free tax filing for low income families This is true even if your purpose in attending is to get information that would be useful in making further investments. Free tax filing for low income families Investment-related seminar. Free tax filing for low income families   You cannot deduct expenses for attending a convention, seminar, or similar meeting for investment purposes. Free tax filing for low income families Single-premium life insurance, endowment, and annuity contracts. Free tax filing for low income families   You cannot deduct interest on money you borrow to buy or carry a single-premium life insurance, endowment, or annuity contract. Free tax filing for low income families Used as collateral. Free tax filing for low income families   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. Free tax filing for low income families 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. Free tax filing for low income families Borrowing on insurance. Free tax filing for low income families   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. Free tax filing for low income families 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. Free tax filing for low income families Tax-exempt income. Free tax filing for low income families   You cannot deduct expenses you incur to produce tax-exempt income. Free tax filing for low income families 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. Free tax filing for low income families Short-sale expenses. Free tax filing for low income families   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. Free tax filing for low income families 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. Free tax filing for low income families Short sales are discussed in Short Sales in chapter 4. Free tax filing for low income families Expenses for both tax-exempt and taxable income. Free tax filing for low income families   You may have expenses that are for both tax-exempt and taxable income. Free tax filing for low income families 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. Free tax filing for low income families 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. Free tax filing for low income families   One accepted method for dividing expenses is to do it in the same proportion that each type of income is to the total income. Free tax filing for low income families If the expenses relate in part to capital gains and losses, include the gains, but not the losses, in figuring this proportion. Free tax filing for low income families 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. Free tax filing for low income families Example. Free tax filing for low income families You received $6,000 interest; $4,800 was tax-exempt and $1,200 was taxable. Free tax filing for low income families In earning this income, you had $500 of expenses. Free tax filing for low income families You cannot specifically identify the amount of each expense item that is for each income item, so you must divide your expenses. Free tax filing for low income families 80% ($4,800 tax-exempt interest divided by $6,000 total interest) of your expenses is for the tax-exempt income. Free tax filing for low income families You cannot deduct $400 (80% of $500) of the expenses. Free tax filing for low income families You can deduct $100 (the rest of the expenses) because they are for the taxable interest. Free tax filing for low income families State income taxes. Free tax filing for low income families   If you itemize your deductions, you can deduct, as taxes, state income taxes on interest income that is exempt from federal income tax. Free tax filing for low income families But you cannot deduct, as either taxes or investment expenses, state income taxes on other exempt income. Free tax filing for low income families Interest expense and carrying charges on straddles. Free tax filing for low income families   You cannot deduct interest and carrying charges allocable to personal property that is part of a straddle. Free tax filing for low income families The nondeductible interest and carrying charges are added to the basis of the straddle property. Free tax filing for low income families 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. Free tax filing for low income families  For information about straddles, including definitions of the terms used in this discussion, see Straddles in chapter 4. Free tax filing for low income families   Interest includes any amount you pay or incur in connection with personal property used in a short sale. Free tax filing for low income families However, you must first apply the rules discussed in Payments in lieu of dividends under Short Sales in chapter 4. Free tax filing for low income families   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). Free tax filing for low income families Nondeductible amount. Free tax filing for low income families   Figure the nondeductible interest and carrying charges on straddle property as follows. Free tax filing for low income families 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. Free tax filing for low income families 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. Free tax filing for low income families Basis adjustment. Free tax filing for low income families   Add the nondeductible amount to the basis of your straddle property. Free tax filing for low income families How To Report Investment Expenses To deduct your investment expenses, you must itemize deductions on Schedule A (Form 1040). Free tax filing for low income families Enter your deductible investment interest expense on Schedule A (Form1040), line 14. Free tax filing for low income families Include any deductible short sale expenses. Free tax filing for low income families (See Short Sales in chapter 4 for information on these expenses. Free tax filing for low income families ) Also attach a completed Form 4952 if you used that form to figure your investment interest expense. Free tax filing for low income families Enter the total amount of your other investment expenses (other than interest expenses) on Schedule A (Form 1040), line 23. Free tax filing for low income families List the type and amount of each expense on the dotted lines next to line 23. Free tax filing for low income families (If necessary, you can show the required information on an attached statement. Free tax filing for low income families ) For information on how to report amortizable bond premium, see Bond Premium Amortization , earlier in this chapter. Free tax filing for low income families 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. Free tax filing for low income families If you use an accrual method, you generally deduct your expenses when you incur a liability for them, rather than when you pay them. Free tax filing for low income families Also see When To Deduct Investment Interest , earlier in this chapter. Free tax filing for low income families Unpaid expenses owed to related party. Free tax filing for low income families   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. Free tax filing for low income families 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. Free tax filing for low income families 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. Free tax filing for low income families   This rule generally applies to those relationships listed in chapter 4 under Related Party Transactions . Free tax filing for low income families It also applies to accruals by partnerships to partners, partners to partnerships, shareholders to S corporations, and S corporations to shareholders. Free tax filing for low income families   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. Free tax filing for low income families 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. Free tax filing for low income families Prev  Up  Next   Home   More Online Publications
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The Free Tax Filing For Low Income Families

Free tax filing for low income families Publication 936 - Main Content Table of Contents Part I. Free tax filing for low income families Home Mortgage InterestSecured Debt Qualified Home Special Situations Points Mortgage Insurance Premiums Form 1098, Mortgage Interest Statement How To Report Special Rule for Tenant-Stockholders in Cooperative Housing Corporations Part II. Free tax filing for low income families Limits on Home Mortgage Interest DeductionHome Acquisition Debt Home Equity Debt Grandfathered Debt Table 1 Instructions How To Get Tax HelpLow Income Taxpayer Clinics Part I. Free tax filing for low income families Home Mortgage Interest This part explains what you can deduct as home mortgage interest. Free tax filing for low income families It includes discussions on points, mortgage insurance premiums, and how to report deductible interest on your tax return. Free tax filing for low income families Generally, home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). Free tax filing for low income families The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan. Free tax filing for low income families You can deduct home mortgage interest if all the following conditions are met. Free tax filing for low income families You file Form 1040 and itemize deductions on Schedule A (Form 1040). Free tax filing for low income families The mortgage is a secured debt on a qualified home in which you have an ownership interest. Free tax filing for low income families Secured Debt and Qualified Home are explained later. Free tax filing for low income families  Both you and the lender must intend that the loan be repaid. Free tax filing for low income families Fully deductible interest. Free tax filing for low income families   In most cases, you can deduct all of your home mortgage interest. Free tax filing for low income families How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds. Free tax filing for low income families   If all of your mortgages fit into one or more of the following three categories at all times during the year, you can deduct all of the interest on those mortgages. Free tax filing for low income families (If any one mortgage fits into more than one category, add the debt that fits in each category to your other debt in the same category. Free tax filing for low income families ) If one or more of your mortgages does not fit into any of these categories, use Part II of this publication to figure the amount of interest you can deduct. Free tax filing for low income families   The three categories are as follows. Free tax filing for low income families Mortgages you took out on or before October 13, 1987 (called grandfathered debt). Free tax filing for low income families Mortgages you took out after October 13, 1987, to buy, build, or improve your home (called home acquisition debt), but only if throughout 2013 these mortgages plus any grandfathered debt totaled $1 million or less ($500,000 or less if married filing separately). Free tax filing for low income families Mortgages you took out after October 13, 1987, other than to buy, build, or improve your home (called home equity debt), but only if throughout 2013 these mortgages totaled $100,000 or less ($50,000 or less if married filing separately) and totaled no more than the fair market value of your home reduced by (1) and (2). Free tax filing for low income families The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home. Free tax filing for low income families   See Part II for more detailed definitions of grandfathered, home acquisition, and home equity debt. Free tax filing for low income families    You can use Figure A to check whether your home mortgage interest is fully deductible. Free tax filing for low income families This image is too large to be displayed in the current screen. Free tax filing for low income families Please click the link to view the image. Free tax filing for low income families Figure A. Free tax filing for low income families Is My Home Mortgage Interest Fully Deductible? Secured Debt You can deduct your home mortgage interest only if your mortgage is a secured debt. Free tax filing for low income families A secured debt is one in which you sign an instrument (such as a mortgage, deed of trust, or land contract) that: Makes your ownership in a qualified home security for payment of the debt, Provides, in case of default, that your home could satisfy the debt, and Is recorded or is otherwise perfected under any state or local law that applies. Free tax filing for low income families In other words, your mortgage is a secured debt if you put your home up as collateral to protect the interests of the lender. Free tax filing for low income families If you cannot pay the debt, your home can then serve as payment to the lender to satisfy (pay) the debt. Free tax filing for low income families In this publication, mortgage will refer to secured debt. Free tax filing for low income families Debt not secured by home. Free tax filing for low income families   A debt is not secured by your home if it is secured solely because of a lien on your general assets or if it is a security interest that attaches to the property without your consent (such as a mechanic's lien or judgment lien). Free tax filing for low income families   A debt is not secured by your home if it once was, but is no longer secured by your home. Free tax filing for low income families Wraparound mortgage. Free tax filing for low income families   This is not a secured debt unless it is recorded or otherwise perfected under state law. Free tax filing for low income families Example. Free tax filing for low income families Beth owns a home subject to a mortgage of $40,000. Free tax filing for low income families She sells the home for $100,000 to John, who takes it subject to the $40,000 mortgage. Free tax filing for low income families Beth continues to make the payments on the $40,000 note. Free tax filing for low income families John pays $10,000 down and gives Beth a $90,000 note secured by a wraparound mortgage on the home. Free tax filing for low income families Beth does not record or otherwise perfect the $90,000 mortgage under the state law that applies. Free tax filing for low income families Therefore, the mortgage is not a secured debt and John cannot deduct any of the interest he pays on it as home mortgage interest. Free tax filing for low income families Choice to treat the debt as not secured by your home. Free tax filing for low income families   You can choose to treat any debt secured by your qualified home as not secured by the home. Free tax filing for low income families This treatment begins with the tax year for which you make the choice and continues for all later tax years. Free tax filing for low income families You can revoke your choice only with the consent of the Internal Revenue Service (IRS). Free tax filing for low income families   You may want to treat a debt as not secured by your home if the interest on that debt is fully deductible (for example, as a business expense) whether or not it qualifies as home mortgage interest. Free tax filing for low income families This may allow you, if the limits in Part II apply, more of a deduction for interest on other debts that are deductible only as home mortgage interest. Free tax filing for low income families Cooperative apartment owner. Free tax filing for low income families   If you own stock in a cooperative housing corporation, see the Special Rule for Tenant-Stockholders in Cooperative Housing Corporations , near the end of this Part I. Free tax filing for low income families Qualified Home For you to take a home mortgage interest deduction, your debt must be secured by a qualified home. Free tax filing for low income families This means your main home or your second home. Free tax filing for low income families A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities. Free tax filing for low income families The interest you pay on a mortgage on a home other than your main or second home may be deductible if the proceeds of the loan were used for business, investment, or other deductible purposes. Free tax filing for low income families Otherwise, it is considered personal interest and is not deductible. Free tax filing for low income families Main home. Free tax filing for low income families   You can have only one main home at any one time. Free tax filing for low income families This is the home where you ordinarily live most of the time. Free tax filing for low income families Second home. Free tax filing for low income families   A second home is a home that you choose to treat as your second home. Free tax filing for low income families Second home not rented out. Free tax filing for low income families   If you have a second home that you do not hold out for rent or resale to others at any time during the year, you can treat it as a qualified home. Free tax filing for low income families You do not have to use the home during the year. Free tax filing for low income families Second home rented out. Free tax filing for low income families   If you have a second home and rent it out part of the year, you also must use it as a home during the year for it to be a qualified home. Free tax filing for low income families You must use this home more than 14 days or more than 10% of the number of days during the year that the home is rented at a fair rental, whichever is longer. Free tax filing for low income families If you do not use the home long enough, it is considered rental property and not a second home. Free tax filing for low income families For information on residential rental property, see Publication 527. Free tax filing for low income families More than one second home. Free tax filing for low income families   If you have more than one second home, you can treat only one as the qualified second home during any year. Free tax filing for low income families However, you can change the home you treat as a second home during the year in the following situations. Free tax filing for low income families If you get a new home during the year, you can choose to treat the new home as your second home as of the day you buy it. Free tax filing for low income families If your main home no longer qualifies as your main home, you can choose to treat it as your second home as of the day you stop using it as your main home. Free tax filing for low income families If your second home is sold during the year or becomes your main home, you can choose a new second home as of the day you sell the old one or begin using it as your main home. Free tax filing for low income families Divided use of your home. Free tax filing for low income families   The only part of your home that is considered a qualified home is the part you use for residential living. Free tax filing for low income families If you use part of your home for other than residential living, such as a home office, you must allocate the use of your home. Free tax filing for low income families You must then divide both the cost and fair market value of your home between the part that is a qualified home and the part that is not. Free tax filing for low income families Dividing the cost may affect the amount of your home acquisition debt, which is limited to the cost of your home plus the cost of any improvements. Free tax filing for low income families (See Home Acquisition Debt in Part II. Free tax filing for low income families ) Dividing the fair market value may affect your home equity debt limit, also explained in Part II . Free tax filing for low income families Renting out part of home. Free tax filing for low income families   If you rent out part of a qualified home to another person (tenant), you can treat the rented part as being used by you for residential living only if all of the following conditions apply. Free tax filing for low income families The rented part of your home is used by the tenant primarily for residential living. Free tax filing for low income families The rented part of your home is not a self-contained residential unit having separate sleeping, cooking, and toilet facilities. Free tax filing for low income families You do not rent (directly or by sublease) the same or different parts of your home to more than two tenants at any time during the tax year. Free tax filing for low income families If two persons (and dependents of either) share the same sleeping quarters, they are treated as one tenant. Free tax filing for low income families Office in home. Free tax filing for low income families   If you have an office in your home that you use in your business, see Publication 587, Business Use of Your Home. Free tax filing for low income families It explains how to figure your deduction for the business use of your home, which includes the business part of your home mortgage interest. Free tax filing for low income families Home under construction. Free tax filing for low income families   You can treat a home under construction as a qualified home for a period of up to 24 months, but only if it becomes your qualified home at the time it is ready for occupancy. Free tax filing for low income families   The 24-month period can start any time on or after the day construction begins. Free tax filing for low income families Home destroyed. Free tax filing for low income families   You may be able to continue treating your home as a qualified home even after it is destroyed in a fire, storm, tornado, earthquake, or other casualty. Free tax filing for low income families This means you can continue to deduct the interest you pay on your home mortgage, subject to the limits described in this publication. Free tax filing for low income families   You can continue treating a destroyed home as a qualified home if, within a reasonable period of time after the home is destroyed, you: Rebuild the destroyed home and move into it, or Sell the land on which the home was located. Free tax filing for low income families   This rule applies to your main home and to a second home that you treat as a qualified home. Free tax filing for low income families Time-sharing arrangements. Free tax filing for low income families   You can treat a home you own under a time-sharing plan as a qualified home if it meets all the requirements. Free tax filing for low income families A time-sharing plan is an arrangement between two or more people that limits each person's interest in the home or right to use it to a certain part of the year. Free tax filing for low income families Rental of time-share. Free tax filing for low income families   If you rent out your time-share, it qualifies as a second home only if you also use it as a home during the year. Free tax filing for low income families See Second home rented out , earlier, for the use requirement. Free tax filing for low income families To know whether you meet that requirement, count your days of use and rental of the home only during the time you have a right to use it or to receive any benefits from the rental of it. Free tax filing for low income families Married taxpayers. Free tax filing for low income families   If you are married and file a joint return, your qualified home(s) can be owned either jointly or by only one spouse. Free tax filing for low income families Separate returns. Free tax filing for low income families   If you are married filing separately and you and your spouse own more than one home, you can each take into account only one home as a qualified home. Free tax filing for low income families However, if you both consent in writing, then one spouse can take both the main home and a second home into account. Free tax filing for low income families Special Situations This section describes certain items that can be included as home mortgage interest and others that cannot. Free tax filing for low income families It also describes certain special situations that may affect your deduction. Free tax filing for low income families Late payment charge on mortgage payment. Free tax filing for low income families   You can deduct as home mortgage interest a late payment charge if it was not for a specific service performed in connection with your mortgage loan. Free tax filing for low income families Mortgage prepayment penalty. Free tax filing for low income families   If you pay off your home mortgage early, you may have to pay a penalty. Free tax filing for low income families 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 tax filing for low income families Sale of home. Free tax filing for low income families   If you sell your home, you can deduct your home mortgage interest (subject to any limits that apply) paid up to, but not including, the date of the sale. Free tax filing for low income families Example. Free tax filing for low income families John and Peggy Harris sold their home on May 7. Free tax filing for low income families Through April 30, they made home mortgage interest payments of $1,220. Free tax filing for low income families The settlement sheet for the sale of the home showed $50 interest for the 6-day period in May up to, but not including, the date of sale. Free tax filing for low income families Their mortgage interest deduction is $1,270 ($1,220 + $50). Free tax filing for low income families Prepaid interest. Free tax filing for low income families   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 tax filing for low income families You can deduct in each year only the interest that qualifies as home mortgage interest for that year. Free tax filing for low income families However, there is an exception that applies to points, discussed later. Free tax filing for low income families Mortgage interest credit. Free tax filing for low income families    You may be able to claim a mortgage interest credit if you were issued a mortgage credit certificate (MCC) by a state or local government. Free tax filing for low income families Figure the credit on Form 8396, Mortgage Interest Credit. Free tax filing for low income families If you take this credit, you must reduce your mortgage interest deduction by the amount of the credit. Free tax filing for low income families   See Form 8396 and Publication 530 for more information on the mortgage interest credit. Free tax filing for low income families Ministers' and military housing allowance. Free tax filing for low income families   If you are a minister or a member of the uniformed services and receive a housing allowance that is not taxable, you can still deduct your home mortgage interest. Free tax filing for low income families Hardest Hit Fund and Emergency Homeowners' Loan Programs. Free tax filing for low income families   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 tax filing for low income families 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 tax filing for low income families 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 tax filing for low income families If you meet these tests, then you can deduct all of the payments you actually made during the year to your mortgage servicer, the State HFA, or HUD on the home mortgage (including the amount shown on box 3 of Form 1098–MA, Mortgage Assistance Payments), but not more than the sum of the amounts shown on Form 1098, Mortgage Interest Statement, in box 1 (mortgage interest received from payer(s) / borrower(s)), box 4 (mortgage insurance premiums), and box 5 (other information including real property taxes paid). Free tax filing for low income families 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 tax filing for low income families Mortgage assistance payments under section 235 of the National Housing Act. Free tax filing for low income families   If you qualify for mortgage assistance payments for lower-income families under section 235 of the National Housing Act, part or all of the interest on your mortgage may be paid for you. Free tax filing for low income families You cannot deduct the interest that is paid for you. Free tax filing for low income families No other effect on taxes. Free tax filing for low income families   Do not include these mortgage assistance payments in your income. Free tax filing for low income families Also, do not use these payments to reduce other deductions, such as real estate taxes. Free tax filing for low income families Divorced or separated individuals. Free tax filing for low income families   If a divorce or separation agreement requires you or your spouse or former spouse to pay home mortgage interest on a home owned by both of you, the payment of interest may be alimony. Free tax filing for low income families See the discussion of Payments for jointly-owned home under Alimony in Publication 504, Divorced or Separated Individuals. Free tax filing for low income families Redeemable ground rents. Free tax filing for low income families   In some states (such as Maryland), you can buy your home subject to a ground rent. Free tax filing for low income families A ground rent is an obligation you assume to pay a fixed amount per year on the property. Free tax filing for low income families Under this arrangement, you are leasing (rather than buying) the land on which your home is located. Free tax filing for low income families   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct them as mortgage interest. Free tax filing for low income families   A ground rent is a redeemable ground rent if all of the following are true. Free tax filing for low income families Your lease, including renewal periods, is for more than 15 years. Free tax filing for low income families You can freely assign the lease. Free tax filing for low income families 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 specific amount. Free tax filing for low income families 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 tax filing for low income families   Payments made to end the lease and to buy the lessor's entire interest in the land are not deductible as mortgage interest. Free tax filing for low income families Nonredeemable ground rents. Free tax filing for low income families   Payments on a nonredeemable ground rent are not mortgage interest. Free tax filing for low income families You can deduct them as rent if they are a business expense or if they are for rental property. Free tax filing for low income families Reverse mortgages. Free tax filing for low income families   A reverse mortgage is a loan where the lender pays you (in a lump sum, a monthly advance, a line of credit, or a combination of all three) while you continue to live in your home. Free tax filing for low income families With a reverse mortgage, you retain title to your home. Free tax filing for low income families Depending on the plan, your reverse mortgage becomes due with interest when you move, sell your home, reach the end of a pre-selected loan period, or die. Free tax filing for low income families Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable. Free tax filing for low income families Any interest (including original issue discount) accrued on a reverse mortgage is not deductible until you actually pay it, which is usually when you pay off the loan in full. Free tax filing for low income families Your deduction may be limited because a reverse mortgage loan generally is subject to the limit on Home Equity Debt discussed in Part II. Free tax filing for low income families Rental payments. Free tax filing for low income families   If you live in a house before final settlement on the purchase, any payments you make for that period are rent and not interest. Free tax filing for low income families This is true even if the settlement papers call them interest. Free tax filing for low income families You cannot deduct these payments as home mortgage interest. Free tax filing for low income families Mortgage proceeds invested in tax-exempt securities. Free tax filing for low income families   You cannot deduct the home mortgage interest on grandfathered debt or home equity debt if you used the proceeds of the mortgage to buy securities or certificates that produce tax-free income. Free tax filing for low income families “Grandfathered debt” and “home equity debt” are defined in Part II of this publication. Free tax filing for low income families Refunds of interest. Free tax filing for low income families   If you receive a refund of interest in the same tax year you paid it, you must reduce your interest expense by the amount refunded to you. Free tax filing for low income families If you receive a refund of interest you deducted in an earlier year, you generally must include the refund in income in the year you receive it. Free tax filing for low income families However, you need to include it only up to the amount of the deduction that reduced your tax in the earlier year. Free tax filing for low income families This is true whether the interest overcharge was refunded to you or was used to reduce the outstanding principal on your mortgage. Free tax filing for low income families If you need to include the refund in income, report it on Form 1040, line 21. Free tax filing for low income families   If you received a refund of interest you overpaid in an earlier year, you generally will receive a Form 1098, Mortgage Interest Statement, showing the refund in box 3. Free tax filing for low income families For information about Form 1098, see Form 1098, Mortgage Interest Statement , later. Free tax filing for low income families   For more information on how to treat refunds of interest deducted in earlier years, see Recoveries in Publication 525, Taxable and Nontaxable Income. Free tax filing for low income families Cooperative apartment owner. Free tax filing for low income families   If you own a cooperative apartment, you must reduce your home mortgage interest deduction by your share of any cash portion of a patronage dividend that the cooperative receives. Free tax filing for low income families The patronage dividend is a partial refund to the cooperative housing corporation of mortgage interest it paid in a prior year. Free tax filing for low income families   If you receive a Form 1098 from the cooperative housing corporation, the form should show only the amount you can deduct. Free tax filing for low income families Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Free tax filing for low income families Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. Free tax filing for low income families This image is too large to be displayed in the current screen. Free tax filing for low income families Please click the link to view the image. Free tax filing for low income families Figure B. Free tax filing for low income families Are My Points Fully Deductible This Year? A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. Free tax filing for low income families See Points paid by the seller , later. Free tax filing for low income families General Rule You generally cannot deduct the full amount of points in the year paid. Free tax filing for low income families Because they are prepaid interest, you generally deduct them ratably over the life (term) of the mortgage. Free tax filing for low income families See Deduction Allowed Ratably , next. Free tax filing for low income families For exceptions to the general rule, see Deduction Allowed in Year Paid , later. Free tax filing for low income families Deduction Allowed Ratably If you do not meet the tests listed under Deduction Allowed in Year Paid , later, the loan is not a home improvement loan, or you choose not to deduct your points in full in the year paid, you can deduct the points ratably (equally) over the life of the loan if you meet all the following tests. Free tax filing for low income families You use the cash method of accounting. Free tax filing for low income families This means you report income in the year you receive it and deduct expenses in the year you pay them. Free tax filing for low income families Most individuals use this method. Free tax filing for low income families Your loan is secured by a home. Free tax filing for low income families (The home does not need to be your main home. Free tax filing for low income families ) Your loan period is not more than 30 years. Free tax filing for low income families If your loan period is more than 10 years, the terms of your loan are the same as other loans offered in your area for the same or longer period. Free tax filing for low income families Either your loan amount is $250,000 or less, or the number of points is not more than: 4, if your loan period is 15 years or less, or 6, if your loan period is more than 15 years. Free tax filing for low income families Example. Free tax filing for low income families You use the cash method of accounting. Free tax filing for low income families In 2013, you took out a $100,000 loan payable over 20 years. Free tax filing for low income families The terms of the loan are the same as for other 20-year loans offered in your area. Free tax filing for low income families You paid $4,800 in points. Free tax filing for low income families You made 3 monthly payments on the loan in 2013. Free tax filing for low income families You can deduct $60 [($4,800 ÷ 240 months) x 3 payments] in 2013. Free tax filing for low income families In 2014, if you make all twelve payments, you will be able to deduct $240 ($20 x 12). Free tax filing for low income families Deduction Allowed in Year Paid You can fully deduct points in the year paid if you meet all the following tests. Free tax filing for low income families (You can use Figure B as a quick guide to see whether your points are fully deductible in the year paid. Free tax filing for low income families ) Your loan is secured by your main home. Free tax filing for low income families (Your main home is the one you ordinarily live in most of the time. Free tax filing for low income families ) Paying points is an established business practice in the area where the loan was made. Free tax filing for low income families The points paid were not more than the points generally charged in that area. Free tax filing for low income families You use the cash method of accounting. Free tax filing for low income families This means you report income in the year you receive it and deduct expenses in the year you pay them. Free tax filing for low income families Most individuals use this method. Free tax filing for low income families 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 tax filing for low income families The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. Free tax filing for low income families The funds you provided are not required to have been applied to the points. Free tax filing for low income families They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. Free tax filing for low income families You cannot have borrowed these funds from your lender or mortgage broker. Free tax filing for low income families You use your loan to buy or build your main home. Free tax filing for low income families The points were computed as a percentage of the principal amount of the mortgage. Free tax filing for low income families The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. Free tax filing for low income families The points may be shown as paid from either your funds or the seller's. Free tax filing for low income families Note. Free tax filing for low income families If you meet all of these tests, you can choose to either fully deduct the points in the year paid, or deduct them over the life of the loan. Free tax filing for low income families Home improvement loan. Free tax filing for low income families   You can also fully deduct in the year paid points paid on a loan to improve your main home, if tests (1) through (6) are met. Free tax filing for low income families Second home. Free tax filing for low income families You cannot fully deduct in the year paid points you pay on loans secured by your second home. Free tax filing for low income families You can deduct these points only over the life of the loan. Free tax filing for low income families Refinancing. Free tax filing for low income families   Generally, points you pay to refinance a mortgage are not deductible in full in the year you pay them. Free tax filing for low income families This is true even if the new mortgage is secured by your main home. Free tax filing for low income families   However, if you use part of the refinanced mortgage proceeds to improve your main home and you meet the first 6 tests listed under Deduction Allowed in Year Paid , you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. Free tax filing for low income families You can deduct the rest of the points over the life of the loan. Free tax filing for low income families Example 1. Free tax filing for low income families In 1998, Bill Fields got a mortgage to buy a home. Free tax filing for low income families In 2013, Bill refinanced that mortgage with a 15-year $100,000 mortgage loan. Free tax filing for low income families The mortgage is secured by his home. Free tax filing for low income families To get the new loan, he had to pay three points ($3,000). Free tax filing for low income families Two points ($2,000) were for prepaid interest, and one point ($1,000) was charged for services, in place of amounts that ordinarily are stated separately on the settlement statement. Free tax filing for low income families Bill paid the points out of his private funds, rather than out of the proceeds of the new loan. Free tax filing for low income families The payment of points is an established practice in the area, and the points charged are not more than the amount generally charged there. Free tax filing for low income families Bill's first payment on the new loan was due July 1. Free tax filing for low income families He made six payments on the loan in 2013 and is a cash basis taxpayer. Free tax filing for low income families Bill used the funds from the new mortgage to repay his existing mortgage. Free tax filing for low income families Although the new mortgage loan was for Bill's continued ownership of his main home, it was not for the purchase or improvement of that home. Free tax filing for low income families He cannot deduct all of the points in 2013. Free tax filing for low income families He can deduct two points ($2,000) ratably over the life of the loan. Free tax filing for low income families He deducts $67 [($2,000 ÷ 180 months) × 6 payments] of the points in 2013. Free tax filing for low income families The other point ($1,000) was a fee for services and is not deductible. Free tax filing for low income families Example 2. Free tax filing for low income families The facts are the same as in Example 1, except that Bill used $25,000 of the loan proceeds to improve his home and $75,000 to repay his existing mortgage. Free tax filing for low income families Bill deducts 25% ($25,000 ÷ $100,000) of the points ($2,000) in 2013. Free tax filing for low income families His deduction is $500 ($2,000 × 25%). Free tax filing for low income families Bill also deducts the ratable part of the remaining $1,500 ($2,000 − $500) that must be spread over the life of the loan. Free tax filing for low income families This is $50 [($1,500 ÷ 180 months) × 6 payments] in 2013. Free tax filing for low income families The total amount Bill deducts in 2013 is $550 ($500 + $50). Free tax filing for low income families Special Situations This section describes certain special situations that may affect your deduction of points. Free tax filing for low income families Original issue discount. Free tax filing for low income families   If you do not qualify to either deduct the points in the year paid or deduct them ratably over the life of the loan, or if you choose not to use either of these methods, the points reduce the issue price of the loan. Free tax filing for low income families This reduction results in original issue discount, which is discussed in chapter 4 of Publication 535. Free tax filing for low income families Amounts charged for services. Free tax filing for low income families    Amounts charged by the lender for specific services connected to the loan are not interest. Free tax filing for low income families Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. Free tax filing for low income families  You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. Free tax filing for low income families Points paid by the seller. Free tax filing for low income families   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. Free tax filing for low income families Treatment by seller. Free tax filing for low income families   The seller cannot deduct these fees as interest. Free tax filing for low income families But they are a selling expense that reduces the amount realized by the seller. Free tax filing for low income families See Publication 523 for information on selling your home. Free tax filing for low income families Treatment by buyer. Free tax filing for low income families   The buyer reduces the basis of the home by the amount of the seller-paid points and treats the points as if he or she had paid them. Free tax filing for low income families If all the tests under Deduction Allowed in Year Paid , earlier, are met, the buyer can deduct the points in the year paid. Free tax filing for low income families If any of those tests are not met, the buyer deducts the points over the life of the loan. Free tax filing for low income families   If you need information about the basis of your home, see Publication 523 or Publication 530. Free tax filing for low income families Funds provided are less than points. Free tax filing for low income families   If you meet all the tests in Deduction Allowed in Year Paid , earlier, except that the funds you provided were less than the points charged to you (test (6)), you can deduct the points in the year paid, up to the amount of funds you provided. Free tax filing for low income families In addition, you can deduct any points paid by the seller. Free tax filing for low income families Example 1. Free tax filing for low income families When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). Free tax filing for low income families You meet all the tests for deducting points in the year paid, except the only funds you provided were a $750 down payment. Free tax filing for low income families Of the $1,000 charged for points, you can deduct $750 in the year paid. Free tax filing for low income families You spread the remaining $250 over the life of the mortgage. Free tax filing for low income families Example 2. Free tax filing for low income families 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 tax filing for low income families 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 tax filing for low income families You spread the remaining $250 over the life of the mortgage. Free tax filing for low income families You must reduce the basis of your home by the $1,000 paid by the seller. Free tax filing for low income families Excess points. Free tax filing for low income families   If you meet all the tests in Deduction Allowed in Year Paid , earlier, except that the points paid were more than generally paid in your area (test (3)), you deduct in the year paid only the points that are generally charged. Free tax filing for low income families You must spread any additional points over the life of the mortgage. Free tax filing for low income families Mortgage ending early. Free tax filing for low income families   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 tax filing for low income families However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. Free tax filing for low income families Instead, deduct the remaining balance over the term of the new loan. Free tax filing for low income families   A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. Free tax filing for low income families Example. Free tax filing for low income families Dan paid $3,000 in points in 2002 that he had to spread out over the 15-year life of the mortgage. Free tax filing for low income families He deducts $200 points per year. Free tax filing for low income families Through 2012, Dan has deducted $2,200 of the points. Free tax filing for low income families Dan prepaid his mortgage in full in 2013. Free tax filing for low income families He can deduct the remaining $800 of points in 2013. Free tax filing for low income families Limits on deduction. Free tax filing for low income families   You cannot fully deduct points paid on a mortgage that exceeds the limits discussed in Part II . Free tax filing for low income families See the Table 1 Instructions for line 10. Free tax filing for low income families Form 1098. Free tax filing for low income families    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 tax filing for low income families See Form 1098, Mortgage Interest Statement , later. Free tax filing for low income families Mortgage Insurance Premiums You can treat amounts you paid during 2013 for qualified mortgage insurance as home mortgage interest. Free tax filing for low income families The insurance must be in connection with home acquisition debt, and the insurance contract must have been issued after 2006. Free tax filing for low income families Qualified mortgage insurance. Free tax filing for low income families   Qualified mortgage insurance is mortgage insurance provided by the Department of Veterans Affairs, the Federal Housing Administration, or the Rural Housing Service, and private mortgage insurance (as defined in section 2 of the Homeowners Protection Act of 1998 as in effect on December 20, 2006). Free tax filing for low income families   Mortgage insurance provided by the Department of Veterans Affairs is commonly known as a funding fee. Free tax filing for low income families If provided by the Rural Housing Service, it is commonly known as a guarantee fee. Free tax filing for low income families The funding fee and guarantee fee can either be included in the amount of the loan or paid in full at the time of closing. Free tax filing for low income families These fees can be deducted fully in 2013 if the mortgage insurance contract was issued in 2013. Free tax filing for low income families Contact the mortgage insurance issuer to determine the deductible amount if it is not reported in box 4 of Form 1098. Free tax filing for low income families Special rules for prepaid mortgage insurance. Free tax filing for low income families   Generally, if you paid premiums for qualified mortgage insurance that are properly allocable to periods after the close of the tax year, such premiums are treated as paid in the period to which they are allocated. Free tax filing for low income families You must allocate the premiums over the shorter of the stated term of the mortgage or 84 months, beginning with the month the insurance was obtained. Free tax filing for low income families No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term. Free tax filing for low income families This paragraph does not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service. Free tax filing for low income families Example. Free tax filing for low income families Ryan purchased a home in May of 2012 and financed the home with a 15-year mortgage. Free tax filing for low income families Ryan also prepaid all of the $9,240 in private mortgage insurance required at the time of closing in May. Free tax filing for low income families Since the $9,240 in private mortgage insurance is allocable to periods after 2012, Ryan must allocate the $9,240 over the shorter of the life of the mortgage or 84 months. Free tax filing for low income families Ryan's adjusted gross income (AGI) for 2012 is $76,000. Free tax filing for low income families Ryan can deduct $880 ($9,240 ÷ 84 x 8 months) for qualified mortgage insurance premiums in 2012. Free tax filing for low income families For 2013, Ryan can deduct $1,320 ($9,240 ÷ 84 x 12 months) if his AGI is $100,000 or less. Free tax filing for low income families In this example, the mortgage insurance premiums are allocated over 84 months, which is shorter than the life of the mortgage of 15 years (180 months). Free tax filing for low income families Limit on deduction. Free tax filing for low income families   If your adjusted gross income on Form 1040, line 38, is more than $100,000 ($50,000 if your filing status is married filing separately), the amount of your mortgage insurance premiums that are otherwise deductible is reduced and may be eliminated. Free tax filing for low income families 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 tax filing for low income families If your adjusted gross income is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. Free tax filing for low income families Form 1098. Free tax filing for low income families   The mortgage interest statement you receive should show not only the total interest paid during the year, but also your mortgage insurance premiums paid during the year, which may qualify to be treated as deductible mortgage interest. Free tax filing for low income families See Form 1098, Mortgage Interest Statement, next. Free tax filing for low income families Form 1098, Mortgage Interest Statement If you paid $600 or more of mortgage interest (including certain points and mortgage insurance premiums) during the year on any one mortgage, you generally will receive a Form 1098 or a similar statement from the mortgage holder. Free tax filing for low income families You will receive the statement if you pay interest to a person (including a financial institution or cooperative housing corporation) in the course of that person's trade or business. Free tax filing for low income families A governmental unit is a person for purposes of furnishing the statement. Free tax filing for low income families The statement for each year should be sent to you by January 31 of the following year. Free tax filing for low income families A copy of this form will also be sent to the IRS. Free tax filing for low income families The statement will show the total interest you paid during the year, any mortgage insurance premiums you paid, and if you purchased a main home during the year, it also will show the deductible points paid during the year, including seller-paid points. Free tax filing for low income families However, it should not show any interest that was paid for you by a government agency. Free tax filing for low income families As a general rule, Form 1098 will include only points that you can fully deduct in the year paid. Free tax filing for low income families However, certain points not included on Form 1098 also may be deductible, either in the year paid or over the life of the loan. Free tax filing for low income families See the earlier discussion of Points to determine whether you can deduct points not shown on Form 1098. Free tax filing for low income families Prepaid interest on Form 1098. Free tax filing for low income families   If you prepaid interest in 2013 that accrued in full by January 15, 2014, this prepaid interest may be included in box 1 of Form 1098. Free tax filing for low income families However, you cannot deduct the prepaid amount for January 2014 in 2013. Free tax filing for low income families (See Prepaid interest , earlier. Free tax filing for low income families ) You will have to figure the interest that accrued for 2014 and subtract it from the amount in box 1. Free tax filing for low income families You will include the interest for January 2014 with other interest you pay for 2014. Free tax filing for low income families Refunded interest. Free tax filing for low income families   If you received a refund of mortgage interest you overpaid in an earlier year, you generally will receive a Form 1098 showing the refund in box 3. Free tax filing for low income families See Refunds of interest , earlier. Free tax filing for low income families Mortgage insurance premiums. Free tax filing for low income families   The amount of mortgage insurance premiums you paid during 2013 may be shown in Box 4 of Form 1098. Free tax filing for low income families See Mortgage Insurance Premiums , earlier. Free tax filing for low income families How To Report Deduct the home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 10. Free tax filing for low income families If you paid more deductible interest to the financial institution than the amount shown on Form 1098, show the larger deductible amount on line 10. Free tax filing for low income families Attach a statement explaining the difference and print “See attached” next to line 10. Free tax filing for low income families Deduct home mortgage interest that was not reported to you on Form 1098 on Schedule A (Form 1040), line 11. Free tax filing for low income families If you paid home mortgage interest to the person from whom you bought your home, show that person's name, address, and taxpayer identification number (TIN) on the dotted lines next to line 11. Free tax filing for low income families The seller must give you this number and you must give the seller your TIN. Free tax filing for low income families A Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. Free tax filing for low income families Failure to meet any of these requirements may result in a $50 penalty for each failure. Free tax filing for low income families The TIN can be either a social security number, an individual taxpayer identification number (issued by the Internal Revenue Service), or an employer identification number. Free tax filing for low income families If you can take a deduction for points that were not reported to you on Form 1098, deduct those points on Schedule A (Form 1040), line 12. Free tax filing for low income families Deduct mortgage insurance premiums on Schedule A (Form 1040), line 13. Free tax filing for low income families More than one borrower. Free tax filing for low income families   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 tax filing for low income families Show how much of the interest each of you paid, and give the name and address of the person who received the form. Free tax filing for low income families Deduct your share of the interest on Schedule A (Form 1040), line 11, and print “See attached” next to the line. Free tax filing for low income families Also, deduct your share of any qualified mortgage insurance premiums on Schedule A (Form 1040), line 13. Free tax filing for low income families   Similarly, if you are the payer of record on a mortgage on which there are other borrowers entitled to a deduction for the interest shown on the Form 1098 you received, deduct only your share of the interest on Schedule A (Form 1040), line 10. Free tax filing for low income families Let each of the other borrowers know what his or her share is. Free tax filing for low income families Mortgage proceeds used for business or investment. Free tax filing for low income families   If your home mortgage interest deduction is limited under the rules explained in Part II , but all or part of the mortgage proceeds were used for business, investment, or other deductible activities, see Table 2 near the end of this publication. Free tax filing for low income families It shows where to deduct the part of your excess interest that is for those activities. Free tax filing for low income families The Table 1 Instructions for line 13 in Part II explain how to divide the excess interest among the activities for which the mortgage proceeds were used. Free tax filing for low income families Special Rule for Tenant-Stockholders in Cooperative Housing Corporations A qualified home includes stock in a cooperative housing corporation owned by a tenant-stockholder. Free tax filing for low income families This applies only if the tenant-stockholder is entitled to live in the house or apartment because of owning stock in the cooperative. Free tax filing for low income families Cooperative housing corporation. Free tax filing for low income families   This is a corporation that meets all of the following conditions. Free tax filing for low income families Has only one class of stock outstanding, Has no stockholders other than those who own the stock that can live in a house, apartment, or house trailer owned or leased by the corporation, Has no stockholders who can receive any distribution out of capital other than on a liquidation of the corporation, and Meets at least one of the following requirements. Free tax filing for low income families Receives at least 80% of its gross income for the year in which the mortgage interest is paid or incurred from tenant-stockholders. Free tax filing for low income families For this purpose, gross income is all income received during the entire year, including amounts received before the corporation changed to cooperative ownership. Free tax filing for low income families At all times during the year, at least 80% of the total square footage of the corporation's property is used or available for use by the tenant-stockholders for residential or residential-related use. Free tax filing for low income families At least 90% of the corporation's expenditures paid or incurred during the year are for the acquisition, construction, management, maintenance, or care of corporate property for the benefit of the tenant-stockholders. Free tax filing for low income families Stock used to secure debt. Free tax filing for low income families   In some cases, you cannot use your cooperative housing stock to secure a debt because of either: Restrictions under local or state law, or Restrictions in the cooperative agreement (other than restrictions in which the main purpose is to permit the tenant- stockholder to treat unsecured debt as secured debt). Free tax filing for low income families However, you can treat a debt as secured by the stock to the extent that the proceeds are used to buy the stock under the allocation of interest rules. Free tax filing for low income families See chapter 4 of Publication 535 for details on these rules. Free tax filing for low income families Figuring deductible home mortgage interest. Free tax filing for low income families   Generally, if you are a tenant-stockholder, you can deduct payments you make for your share of the interest paid or incurred by the cooperative. Free tax filing for low income families The interest must be on a debt to buy, build, change, improve, or maintain the cooperative's housing, or on a debt to buy the land. Free tax filing for low income families   Figure your share of this interest by multiplying the total by the following fraction. Free tax filing for low income families      Your shares of stock in the cooperative   The total shares of stock in the cooperative Limits on deduction. Free tax filing for low income families   To figure how the limits discussed in Part II apply to you, treat your share of the cooperative's debt as debt incurred by you. Free tax filing for low income families The cooperative should determine your share of its grandfathered debt, its home acquisition debt, and its home equity debt. Free tax filing for low income families (Your share of each of these types of debt is equal to the average balance of each debt multiplied by the fraction just given. Free tax filing for low income families ) After your share of the average balance of each type of debt is determined, you include it with the average balance of that type of debt secured by your stock. Free tax filing for low income families Form 1098. Free tax filing for low income families    The cooperative should give you a Form 1098 showing your share of the interest. Free tax filing for low income families Use the rules in this publication to determine your deductible mortgage interest. Free tax filing for low income families Part II. Free tax filing for low income families Limits on Home Mortgage Interest Deduction This part of the publication discusses the limits on deductible home mortgage interest. Free tax filing for low income families These limits apply to your home mortgage interest expense if you have a home mortgage that does not fit into any of the three categories listed at the beginning of Part I under Fully deductible interest . Free tax filing for low income families Your home mortgage interest deduction is limited to the interest on the part of your home mortgage debt that is not more than your qualified loan limit. Free tax filing for low income families This is the part of your home mortgage debt that is grandfathered debt or that is not more than the limits for home acquisition debt and home equity debt. Free tax filing for low income families Table 1 can help you figure your qualified loan limit and your deductible home mortgage interest. Free tax filing for low income families 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 (your main or second home). Free tax filing for low income families It also must be secured by that home. Free tax filing for low income families 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 tax filing for low income families The additional debt may qualify as home equity debt (discussed later). Free tax filing for low income families Home acquisition debt limit. Free tax filing for low income families   The total amount you can treat as home acquisition debt at any time on your main home and second home cannot be more than $1 million ($500,000 if married filing separately). Free tax filing for low income families This limit is reduced (but not below zero) by the amount of your grandfathered debt (discussed later). Free tax filing for low income families Debt over this limit may qualify as home equity debt (also discussed later). Free tax filing for low income families Refinanced home acquisition debt. Free tax filing for low income families   Any secured debt you use to refinance home acquisition debt is treated as home acquisition debt. Free tax filing for low income families However, the new debt will qualify as home acquisition debt only up to the amount of the balance of the old mortgage principal just before the refinancing. Free tax filing for low income families Any additional debt not used to buy, build, or substantially improve a qualified home is not home acquisition debt, but may qualify as home equity debt (discussed later). Free tax filing for low income families Mortgage that qualifies later. Free tax filing for low income families   A mortgage that does not qualify as home acquisition debt because it does not meet all the requirements may qualify at a later time. Free tax filing for low income families For example, a debt that you use to buy your home may not qualify as home acquisition debt because it is not secured by the home. Free tax filing for low income families However, if the debt is later secured by the home, it may qualify as home acquisition debt after that time. Free tax filing for low income families Similarly, a debt that you use to buy property may not qualify because the property is not a qualified home. Free tax filing for low income families However, if the property later becomes a qualified home, the debt may qualify after that time. Free tax filing for low income families Mortgage treated as used to buy, build, or improve home. Free tax filing for low income families   A mortgage secured by a qualified home may be treated as home acquisition debt, even if you do not actually use the proceeds to buy, build, or substantially improve the home. Free tax filing for low income families This applies in the following situations. Free tax filing for low income families You buy your home within 90 days before or after the date you take out the mortgage. Free tax filing for low income families The home acquisition debt is limited to the home's cost, plus the cost of any substantial improvements within the limit described below in (2) or (3). Free tax filing for low income families (See Example 1 later. Free tax filing for low income families ) You build or improve your home and take out the mortgage before the work is completed. Free tax filing for low income families The home acquisition debt is limited to the amount of the expenses incurred within 24 months before the date of the mortgage. Free tax filing for low income families You build or improve your home and take out the mortgage within 90 days after the work is completed. Free tax filing for low income families The home acquisition debt is limited to the amount of the expenses incurred within the period beginning 24 months before the work is completed and ending on the date of the mortgage. Free tax filing for low income families (See Example 2 later. Free tax filing for low income families ) Example 1. Free tax filing for low income families You bought your main home on June 3 for $175,000. Free tax filing for low income families You paid for the home with cash you got from the sale of your old home. Free tax filing for low income families On July 15, you took out a mortgage of $150,000 secured by your main home. Free tax filing for low income families You used the $150,000 to invest in stocks. Free tax filing for low income families You can treat the mortgage as taken out to buy your home because you bought the home within 90 days before you took out the mortgage. Free tax filing for low income families The entire mortgage qualifies as home acquisition debt because it was not more than the home's cost. Free tax filing for low income families Example 2. Free tax filing for low income families On January 31, John began building a home on the lot that he owned. Free tax filing for low income families He used $45,000 of his personal funds to build the home. Free tax filing for low income families The home was completed on October 31. Free tax filing for low income families On November 21, John took out a $36,000 mortgage that was secured by the home. Free tax filing for low income families The mortgage can be treated as used to build the home because it was taken out within 90 days after the home was completed. Free tax filing for low income families The entire mortgage qualifies as home acquisition debt because it was not more than the expenses incurred within the period beginning 24 months before the home was completed. Free tax filing for low income families This is illustrated by Figure C. Free tax filing for low income families   Please click here for the text description of the image. Free tax filing for low income families Figure C. Free tax filing for low income families John's example Date of the mortgage. Free tax filing for low income families   The date you take out your mortgage is the day the loan proceeds are disbursed. Free tax filing for low income families This is generally the closing date. Free tax filing for low income families You can treat the day you apply in writing for your mortgage as the date you take it out. Free tax filing for low income families However, this applies only if you receive the loan proceeds within a reasonable time (such as within 30 days) after your application is approved. Free tax filing for low income families If a timely application you make is rejected, a reasonable additional time will be allowed to make a new application. Free tax filing for low income families Cost of home or improvements. Free tax filing for low income families   To determine your cost, include amounts paid to acquire any interest in a qualified home or to substantially improve the home. Free tax filing for low income families   The cost of building or substantially improving a qualified home includes the costs to acquire real property and building materials, fees for architects and design plans, and required building permits. Free tax filing for low income families Substantial improvement. Free tax filing for low income families   An improvement is substantial if it: Adds to the value of your home, Prolongs your home's useful life, or Adapts your home to new uses. Free tax filing for low income families    Repairs that maintain your home in good condition, such as repainting your home, are not substantial improvements. Free tax filing for low income families However, if you paint your home as part of a renovation that substantially improves your qualified home, you can include the painting costs in the cost of the improvements. Free tax filing for low income families Acquiring an interest in a home because of a divorce. Free tax filing for low income families   If you incur debt to acquire the interest of a spouse or former spouse in a home, because of a divorce or legal separation, you can treat that debt as home acquisition debt. Free tax filing for low income families Part of home not a qualified home. Free tax filing for low income families    To figure your home acquisition debt, you must divide the cost of your home and improvements between the part of your home that is a qualified home and any part that is not a qualified home. Free tax filing for low income families See Divided use of your home under Qualified Home in Part I. Free tax filing for low income families Home Equity Debt If you took out a loan for reasons other than to buy, build, or substantially improve your home, it may qualify as home equity debt. Free tax filing for low income families In addition, debt you incurred to buy, build, or substantially improve your home, to the extent it is more than the home acquisition debt limit (discussed earlier), may qualify as home equity debt. Free tax filing for low income families Home equity debt is a mortgage you took out after October 13, 1987, that: Does not qualify as home acquisition debt or as grandfathered debt, and Is secured by your qualified home. Free tax filing for low income families Example. Free tax filing for low income families You bought your home for cash 10 years ago. Free tax filing for low income families You did not have a mortgage on your home until last year, when you took out a $50,000 loan, secured by your home, to pay for your daughter's college tuition and your father's medical bills. Free tax filing for low income families This loan is home equity debt. Free tax filing for low income families Home equity debt limit. Free tax filing for low income families   There is a limit on the amount of debt that can be treated as home equity debt. Free tax filing for low income families The total home equity debt on your main home and second home is limited to the smaller of: $100,000 ($50,000 if married filing separately), or The total of each home's fair market value (FMV) reduced (but not below zero) by the amount of its home acquisition debt and grandfathered debt. Free tax filing for low income families Determine the FMV and the outstanding home acquisition and grandfathered debt for each home on the date that the last debt was secured by the home. Free tax filing for low income families Example. Free tax filing for low income families You own one home that you bought in 2000. Free tax filing for low income families Its FMV now is $110,000, and the current balance on your original mortgage (home acquisition debt) is $95,000. Free tax filing for low income families Bank M offers you a home mortgage loan of 125% of the FMV of the home less any outstanding mortgages or other liens. Free tax filing for low income families To consolidate some of your other debts, you take out a $42,500 home mortgage loan [(125% × $110,000) − $95,000] with Bank M. Free tax filing for low income families Your home equity debt is limited to $15,000. Free tax filing for low income families This is the smaller of: $100,000, the maximum limit, or $15,000, the amount that the FMV of $110,000 exceeds the amount of home acquisition debt of $95,000. Free tax filing for low income families Debt higher than limit. Free tax filing for low income families   Interest on amounts over the home equity debt limit (such as the interest on $27,500 [$42,500 − $15,000] in the preceding example) generally is treated as personal interest and is not deductible. Free tax filing for low income families But if the proceeds of the loan were used for investment, business, or other deductible purposes, the interest may be deductible. Free tax filing for low income families If it is, see the Table 1 Instructions for line 13 for an explanation of how to allocate the excess interest. Free tax filing for low income families Part of home not a qualified home. Free tax filing for low income families   To figure the limit on your home equity debt, you must divide the FMV of your home between the part that is a qualified home and any part that is not a qualified home. Free tax filing for low income families See Divided use of your home under Qualified Home in Part I. Free tax filing for low income families Fair market value (FMV). Free tax filing for low income families    This is the price at which the home would change hands between you and a buyer, neither having to sell or buy, and both having reasonable knowledge of all relevant facts. Free tax filing for low income families Sales of similar homes in your area, on about the same date your last debt was secured by the home, may be helpful in figuring the FMV. Free tax filing for low income families Grandfathered Debt If you took out a mortgage on your home before October 14, 1987, or you refinanced such a mortgage, it may qualify as grandfathered debt. Free tax filing for low income families To qualify, it must have been secured by your qualified home on October 13, 1987, and at all times after that date. Free tax filing for low income families How you used the proceeds does not matter. Free tax filing for low income families Grandfathered debt is not limited. Free tax filing for low income families All of the interest you paid on grandfathered debt is fully deductible home mortgage interest. Free tax filing for low income families However, the amount of your grandfathered debt reduces the $1 million limit for home acquisition debt and the limit based on your home's fair market value for home equity debt. Free tax filing for low income families Refinanced grandfathered debt. Free tax filing for low income families   If you refinanced grandfathered debt after October 13, 1987, for an amount that was not more than the mortgage principal left on the debt, then you still treat it as grandfathered debt. Free tax filing for low income families To the extent the new debt is more than that mortgage principal, it is treated as home acquisition or home equity debt, and the mortgage is a mixed-use mortgage (discussed later under Average Mortgage Balance in the Table 1 instructions). Free tax filing for low income families The debt must be secured by the qualified home. Free tax filing for low income families   You treat grandfathered debt that was refinanced after October 13, 1987, as grandfathered debt only for the term left on the debt that was refinanced. Free tax filing for low income families After that, you treat it as home acquisition debt or home equity debt, depending on how you used the proceeds. Free tax filing for low income families Exception. Free tax filing for low income families   If the debt before refinancing was like a balloon note (the principal on the debt was not amortized over the term of the debt), then you treat the refinanced debt as grandfathered debt for the term of the first refinancing. Free tax filing for low income families This term cannot be more than 30 years. Free tax filing for low income families Example. Free tax filing for low income families Chester took out a $200,000 first mortgage on his home in 1986. Free tax filing for low income families The mortgage was a five-year balloon note and the entire balance on the note was due in 1991. Free tax filing for low income families Chester refinanced the debt in 1991 with a new 20-year mortgage. Free tax filing for low income families The refinanced debt is treated as grandfathered debt for its entire term (20 years). Free tax filing for low income families Line-of-credit mortgage. Free tax filing for low income families    If you had a line-of-credit mortgage on October 13, 1987, and borrowed additional amounts against it after that date, then the additional amounts are either home acquisition debt or home equity debt depending on how you used the proceeds. Free tax filing for low income families The balance on the mortgage before you borrowed the additional amounts is grandfathered debt. Free tax filing for low income families The newly borrowed amounts are not grandfathered debt because the funds were borrowed after October 13, 1987. Free tax filing for low income families See Average Mortgage Balance in the Table 1 Instructions that follow. Free tax filing for low income families Table 1 Instructions Unless you are subject to the overall limit on itemized deductions, you can deduct all of the interest you paid during the year on mortgages secured by your main home or second home in either of the following two situations. Free tax filing for low income families All the mortgages are grandfathered debt. Free tax filing for low income families The total of the mortgage balances for the entire year is within the limits discussed earlier under Home Acquisition Debt and Home Equity Debt . Free tax filing for low income families In either of those cases, you do not need Table 1. Free tax filing for low income families Otherwise, you can use Table 1 to determine your qualified loan limit and deductible home mortgage interest. Free tax filing for low income families Fill out only one Table 1 for both your main and second home regardless of how many mortgages you have. Free tax filing for low income families Table 1. Free tax filing for low income families Worksheet To Figure Your Qualified Loan Limit and Deductible Home Mortgage Interest For the Current Year See the Table 1 Instructions. Free tax filing for low income families Part I Qualified Loan Limit 1. Free tax filing for low income families Enter the average balance of all your grandfathered debt. Free tax filing for low income families See line 1 instructions 1. Free tax filing for low income families   2. Free tax filing for low income families Enter the average balance of all your home acquisition debt. Free tax filing for low income families See line 2 instructions 2. Free tax filing for low income families   3. Free tax filing for low income families Enter $1,000,000 ($500,000 if married filing separately) 3. Free tax filing for low income families   4. Free tax filing for low income families Enter the larger of the amount on line 1 or the amount on line 3 4. Free tax filing for low income families   5. Free tax filing for low income families Add the amounts on lines 1 and 2. Free tax filing for low income families Enter the total here 5. Free tax filing for low income families   6. Free tax filing for low income families Enter the smaller of the amount on line 4 or the amount on line 5 6. Free tax filing for low income families   7. Free tax filing for low income families If you have home equity debt, enter the smaller of $100,000 ($50,000 if married filing separately) or your limited amount. Free tax filing for low income families See the line 7 instructions for the limit which may apply to you. Free tax filing for low income families 7. Free tax filing for low income families   8. Free tax filing for low income families Add the amounts on lines 6 and 7. Free tax filing for low income families Enter the total. Free tax filing for low income families This is your qualified loan limit. Free tax filing for low income families 8. Free tax filing for low income families   Part II Deductible Home Mortgage Interest 9. Free tax filing for low income families Enter the total of the average balances of all mortgages on all qualified homes. Free tax filing for low income families  See line 9 instructions 9. Free tax filing for low income families     If line 8 is less than line 9, go on to line 10. Free tax filing for low income families If line 8 is equal to or more than line 9, stop here. Free tax filing for low income families All of your interest on all the mortgages included on line 9 is deductible as home mortgage interest on Schedule A (Form 1040). Free tax filing for low income families     10. Free tax filing for low income families Enter the total amount of interest that you paid. Free tax filing for low income families See line 10 instructions 10. Free tax filing for low income families   11. Free tax filing for low income families Divide the amount on line 8 by the amount on line 9. Free tax filing for low income families Enter the result as a decimal amount (rounded to three places) 11. Free tax filing for low income families × . Free tax filing for low income families 12. Free tax filing for low income families Multiply the amount on line 10 by the decimal amount on line 11. Free tax filing for low income families Enter the result. Free tax filing for low income families This is your deductible home mortgage interest. Free tax filing for low income families Enter this amount on Schedule A (Form 1040) 12. Free tax filing for low income families   13. Free tax filing for low income families Subtract the amount on line 12 from the amount on line 10. Free tax filing for low income families Enter the result. Free tax filing for low income families This is not home mortgage interest. Free tax filing for low income families See line 13 instructions 13. Free tax filing for low income families   Home equity debt only. Free tax filing for low income families   If all of your mortgages are home equity debt, do not fill in lines 1 through 5. Free tax filing for low income families Enter zero on line 6 and complete the rest of Table 1. Free tax filing for low income families Average Mortgage Balance You have to figure the average balance of each mortgage to determine your qualified loan limit. Free tax filing for low income families You need these amounts to complete lines 1, 2, and 9 of Table 1. Free tax filing for low income families You can use the highest mortgage balances during the year, but you may benefit most by using the average balances. Free tax filing for low income families The following are methods you can use to figure your average mortgage balances. Free tax filing for low income families However, if a mortgage has more than one category of debt, see Mixed-use mortgages , later, in this section. Free tax filing for low income families Average of first and last balance method. Free tax filing for low income families   You can use this method if all the following apply. Free tax filing for low income families You did not borrow any new amounts on the mortgage during the year. Free tax filing for low income families (This does not include borrowing the original mortgage amount. Free tax filing for low income families ) You did not prepay more than one month's principal during the year. Free tax filing for low income families (This includes prepayment by refinancing your home or by applying proceeds from its sale. Free tax filing for low income families ) You had to make level payments at fixed equal intervals on at least a semi-annual basis. Free tax filing for low income families You treat your payments as level even if they were adjusted from time to time because of changes in the interest rate. Free tax filing for low income families    To figure your average balance, complete the following worksheet. Free tax filing for low income families    1. Free tax filing for low income families Enter the balance as of the first day of the year that the mortgage was secured by your qualified home during the year (generally January 1)   2. Free tax filing for low income families Enter the balance as of the last day of the year that the mortgage was secured by your qualified home during the year (generally December 31)   3. Free tax filing for low income families Add amounts on lines 1 and 2   4. Free tax filing for low income families Divide the amount on line 3 by 2. Free tax filing for low income families Enter the result   Interest paid divided by interest rate method. Free tax filing for low income families   You can use this method if at all times in 2013 the mortgage was secured by your qualified home and the interest was paid at least monthly. Free tax filing for low income families    Complete the following worksheet to figure your average balance. Free tax filing for low income families    1. Free tax filing for low income families Enter the interest paid in 2013. Free tax filing for low income families Do not include points, mortgage insurance premiums, or any interest paid in 2013 that is for a year after 2013. Free tax filing for low income families However, do include interest that is for 2013 but was paid in an earlier year   2. Free tax filing for low income families Enter the annual interest rate on the mortgage. Free tax filing for low income families If the interest rate varied in 2013, use the lowest rate for the year   3. Free tax filing for low income families Divide the amount on line 1 by the amount on line 2. Free tax filing for low income families Enter the result   Example. Free tax filing for low income families Mr. Free tax filing for low income families Blue had a line of credit secured by his main home all year. Free tax filing for low income families He paid interest of $2,500 on this loan. Free tax filing for low income families The interest rate on the loan was 9% (. Free tax filing for low income families 09) all year. Free tax filing for low income families His average balance using this method is $27,778, figured as follows. Free tax filing for low income families 1. Free tax filing for low income families Enter the interest paid in 2013. Free tax filing for low income families Do not include points, mortgage insurance premiums, or any interest paid in 2013 that is for a year after 2013. Free tax filing for low income families However, do include interest that is for 2013 but was paid in an earlier year $2,500 2. Free tax filing for low income families Enter the annual interest rate on the mortgage. Free tax filing for low income families If the interest rate varied in 2013, use the lowest rate for the year . Free tax filing for low income families 09 3. Free tax filing for low income families Divide the amount on line 1 by the amount on line 2. Free tax filing for low income families Enter the result $27,778 Statements provided by your lender. Free tax filing for low income families   If you receive monthly statements showing the closing balance or the average balance for the month, you can use either to figure your average balance for the year. Free tax filing for low income families You can treat the balance as zero for any month the mortgage was not secured by your qualified home. Free tax filing for low income families   For each mortgage, figure your average balance by adding your monthly closing or average balances and dividing that total by the number of months the home secured by that mortgage was a qualified home during the year. Free tax filing for low income families   If your lender can give you your average balance for the year, you can use that amount. Free tax filing for low income families Example. Free tax filing for low income families Ms. Free tax filing for low income families Brown had a home equity loan secured by her main home all year. Free tax filing for low income families She received monthly statements showing her average balance for each month. Free tax filing for low income families She can figure her average balance for the year by adding her monthly average balances and dividing the total by 12. Free tax filing for low income families Mixed-use mortgages. Free tax filing for low income families   A mixed-use mortgage is a loan that consists of more than one of the three categories of debt (grandfathered debt, home acquisition debt, and home equity debt). Free tax filing for low income families For example, a mortgage you took out during the year is a mixed-use mortgage if you used its proceeds partly to refinance a mortgage that you took out in an earlier year to buy your home (home acquisition debt) and partly to buy a car (home equity debt). Free tax filing for low income families   Complete lines 1 and 2 of Table 1 by including the separate average balances of any grandfathered debt and home acquisition debt in your mixed-use mortgage. Free tax filing for low income families Do not use the methods described earlier in this section to figure the average balance of either category. Free tax filing for low income families Instead, for each category, use the following method. Free tax filing for low income families Figure the balance of that category of debt for each month. Free tax filing for low income families This is the amount of the loan proceeds allocated to that category, reduced by your principal payments on the mortgage previously applied to that category. Free tax filing for low income families Principal payments on a mixed-use mortgage are applied in full to each category of debt, until its balance is zero, in the following order: First, any home equity debt, Next, any grandfathered debt, and Finally, any home acquisition debt. Free tax filing for low income families Add together the monthly balances figured in (1). Free tax filing for low income families Divide the result in (2) by 12. Free tax filing for low income families   Complete line 9 of Table 1 by including the average balance of the entire mixed-use mortgage, figured under one of the methods described earlier in this section. Free tax filing for low income families Example 1. Free tax filing for low income families In 1986, Sharon took out a $1,400,000 mortgage to buy her main home (grandfathered debt). Free tax filing for low income families On March 2, 2013, when the home had a fair market value of $1,700,000 and she owed $1,100,000 on the mortgage, Sharon took out a second mortgage for $200,000. Free tax filing for low income families She used $180,000 of the proceeds to make substantial improvements to her home (home acquisition debt) and the remaining $20,000 to buy a car (home equity debt). Free tax filing for low income families Under the loan agreement, Sharon must make principal payments of $1,000 at the end of each month. Free tax filing for low income families During 2013, her principal payments on the second mortgage totaled $10,000. Free tax filing for low income families To complete Table 1, line 2, Sharon must figure a separate average balance for the part of her second mortgage that is home acquisition debt. Free tax filing for low income families The January and February balances were zero. Free tax filing for low income families The March through December balances were all $180,000, because none of her principal payments are applied to the home acquisition debt. Free tax filing for low income families (They are all applied to the home equity debt, reducing it to $10,000 [$20,000 − $10,000]. Free tax filing for low income families ) The monthly balances of the home acquisition debt total $1,800,000 ($180,000 × 10). Free tax filing for low income families Therefore, the average balance of the home acquisition debt for 2013 was $150,000 ($1,800,000 ÷ 12). Free tax filing for low income families Example 2. Free tax filing for low income families The facts are the same as in Example 1. Free tax filing for low income families In 2014, Sharon's January through October principal payments on her second mortgage are applied to the home equity debt, reducing it to zero. Free tax filing for low income families The balance of the home acquisition debt remains $180,000 for each of those months. Free tax filing for low income families Because her November and December principal payments are applied to the home acquisition debt, the November balance is $179,000 ($180,000 − $1,000) and the December balance is $178,000 ($180,000 − $2,000). Free tax filing for low income families The monthly balances total $2,157,000 [($180,000 × 10) + $179,000 + $178,000]. Free tax filing for low income families Therefore, the average balance of the home acquisition debt for 2014 is $179,750 ($2,157,000 ÷ 12). Free tax filing for low income families L