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H&r Block Tax Software 2011

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H&r Block Tax Software 2011

H&r block tax software 2011 Publication 936 - Main Content Table of Contents Part I. H&r block tax software 2011 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. H&r block tax software 2011 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. H&r block tax software 2011 Home Mortgage Interest This part explains what you can deduct as home mortgage interest. H&r block tax software 2011 It includes discussions on points, mortgage insurance premiums, and how to report deductible interest on your tax return. H&r block tax software 2011 Generally, home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). H&r block tax software 2011 The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan. H&r block tax software 2011 You can deduct home mortgage interest if all the following conditions are met. H&r block tax software 2011 You file Form 1040 and itemize deductions on Schedule A (Form 1040). H&r block tax software 2011 The mortgage is a secured debt on a qualified home in which you have an ownership interest. H&r block tax software 2011 Secured Debt and Qualified Home are explained later. H&r block tax software 2011  Both you and the lender must intend that the loan be repaid. H&r block tax software 2011 Fully deductible interest. H&r block tax software 2011   In most cases, you can deduct all of your home mortgage interest. H&r block tax software 2011 How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds. H&r block tax software 2011   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. H&r block tax software 2011 (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. H&r block tax software 2011 ) 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. H&r block tax software 2011   The three categories are as follows. H&r block tax software 2011 Mortgages you took out on or before October 13, 1987 (called grandfathered debt). H&r block tax software 2011 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). H&r block tax software 2011 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). H&r block tax software 2011 The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home. H&r block tax software 2011   See Part II for more detailed definitions of grandfathered, home acquisition, and home equity debt. H&r block tax software 2011    You can use Figure A to check whether your home mortgage interest is fully deductible. H&r block tax software 2011 This image is too large to be displayed in the current screen. H&r block tax software 2011 Please click the link to view the image. H&r block tax software 2011 Figure A. H&r block tax software 2011 Is My Home Mortgage Interest Fully Deductible? Secured Debt You can deduct your home mortgage interest only if your mortgage is a secured debt. H&r block tax software 2011 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. H&r block tax software 2011 In other words, your mortgage is a secured debt if you put your home up as collateral to protect the interests of the lender. H&r block tax software 2011 If you cannot pay the debt, your home can then serve as payment to the lender to satisfy (pay) the debt. H&r block tax software 2011 In this publication, mortgage will refer to secured debt. H&r block tax software 2011 Debt not secured by home. H&r block tax software 2011   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). H&r block tax software 2011   A debt is not secured by your home if it once was, but is no longer secured by your home. H&r block tax software 2011 Wraparound mortgage. H&r block tax software 2011   This is not a secured debt unless it is recorded or otherwise perfected under state law. H&r block tax software 2011 Example. H&r block tax software 2011 Beth owns a home subject to a mortgage of $40,000. H&r block tax software 2011 She sells the home for $100,000 to John, who takes it subject to the $40,000 mortgage. H&r block tax software 2011 Beth continues to make the payments on the $40,000 note. H&r block tax software 2011 John pays $10,000 down and gives Beth a $90,000 note secured by a wraparound mortgage on the home. H&r block tax software 2011 Beth does not record or otherwise perfect the $90,000 mortgage under the state law that applies. H&r block tax software 2011 Therefore, the mortgage is not a secured debt and John cannot deduct any of the interest he pays on it as home mortgage interest. H&r block tax software 2011 Choice to treat the debt as not secured by your home. H&r block tax software 2011   You can choose to treat any debt secured by your qualified home as not secured by the home. H&r block tax software 2011 This treatment begins with the tax year for which you make the choice and continues for all later tax years. H&r block tax software 2011 You can revoke your choice only with the consent of the Internal Revenue Service (IRS). H&r block tax software 2011   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. H&r block tax software 2011 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. H&r block tax software 2011 Cooperative apartment owner. H&r block tax software 2011   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. H&r block tax software 2011 Qualified Home For you to take a home mortgage interest deduction, your debt must be secured by a qualified home. H&r block tax software 2011 This means your main home or your second home. H&r block tax software 2011 A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities. H&r block tax software 2011 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. H&r block tax software 2011 Otherwise, it is considered personal interest and is not deductible. H&r block tax software 2011 Main home. H&r block tax software 2011   You can have only one main home at any one time. H&r block tax software 2011 This is the home where you ordinarily live most of the time. H&r block tax software 2011 Second home. H&r block tax software 2011   A second home is a home that you choose to treat as your second home. H&r block tax software 2011 Second home not rented out. H&r block tax software 2011   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. H&r block tax software 2011 You do not have to use the home during the year. H&r block tax software 2011 Second home rented out. H&r block tax software 2011   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. H&r block tax software 2011 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. H&r block tax software 2011 If you do not use the home long enough, it is considered rental property and not a second home. H&r block tax software 2011 For information on residential rental property, see Publication 527. H&r block tax software 2011 More than one second home. H&r block tax software 2011   If you have more than one second home, you can treat only one as the qualified second home during any year. H&r block tax software 2011 However, you can change the home you treat as a second home during the year in the following situations. H&r block tax software 2011 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. H&r block tax software 2011 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. H&r block tax software 2011 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. H&r block tax software 2011 Divided use of your home. H&r block tax software 2011   The only part of your home that is considered a qualified home is the part you use for residential living. H&r block tax software 2011 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. H&r block tax software 2011 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. H&r block tax software 2011 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. H&r block tax software 2011 (See Home Acquisition Debt in Part II. H&r block tax software 2011 ) Dividing the fair market value may affect your home equity debt limit, also explained in Part II . H&r block tax software 2011 Renting out part of home. H&r block tax software 2011   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. H&r block tax software 2011 The rented part of your home is used by the tenant primarily for residential living. H&r block tax software 2011 The rented part of your home is not a self-contained residential unit having separate sleeping, cooking, and toilet facilities. H&r block tax software 2011 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. H&r block tax software 2011 If two persons (and dependents of either) share the same sleeping quarters, they are treated as one tenant. H&r block tax software 2011 Office in home. H&r block tax software 2011   If you have an office in your home that you use in your business, see Publication 587, Business Use of Your Home. H&r block tax software 2011 It explains how to figure your deduction for the business use of your home, which includes the business part of your home mortgage interest. H&r block tax software 2011 Home under construction. H&r block tax software 2011   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. H&r block tax software 2011   The 24-month period can start any time on or after the day construction begins. H&r block tax software 2011 Home destroyed. H&r block tax software 2011   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. H&r block tax software 2011 This means you can continue to deduct the interest you pay on your home mortgage, subject to the limits described in this publication. H&r block tax software 2011   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. H&r block tax software 2011   This rule applies to your main home and to a second home that you treat as a qualified home. H&r block tax software 2011 Time-sharing arrangements. H&r block tax software 2011   You can treat a home you own under a time-sharing plan as a qualified home if it meets all the requirements. H&r block tax software 2011 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. H&r block tax software 2011 Rental of time-share. H&r block tax software 2011   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. H&r block tax software 2011 See Second home rented out , earlier, for the use requirement. H&r block tax software 2011 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. H&r block tax software 2011 Married taxpayers. H&r block tax software 2011   If you are married and file a joint return, your qualified home(s) can be owned either jointly or by only one spouse. H&r block tax software 2011 Separate returns. H&r block tax software 2011   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. H&r block tax software 2011 However, if you both consent in writing, then one spouse can take both the main home and a second home into account. H&r block tax software 2011 Special Situations This section describes certain items that can be included as home mortgage interest and others that cannot. H&r block tax software 2011 It also describes certain special situations that may affect your deduction. H&r block tax software 2011 Late payment charge on mortgage payment. H&r block tax software 2011   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. H&r block tax software 2011 Mortgage prepayment penalty. H&r block tax software 2011   If you pay off your home mortgage early, you may have to pay a penalty. H&r block tax software 2011 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. H&r block tax software 2011 Sale of home. H&r block tax software 2011   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. H&r block tax software 2011 Example. H&r block tax software 2011 John and Peggy Harris sold their home on May 7. H&r block tax software 2011 Through April 30, they made home mortgage interest payments of $1,220. H&r block tax software 2011 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. H&r block tax software 2011 Their mortgage interest deduction is $1,270 ($1,220 + $50). H&r block tax software 2011 Prepaid interest. H&r block tax software 2011   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. H&r block tax software 2011 You can deduct in each year only the interest that qualifies as home mortgage interest for that year. H&r block tax software 2011 However, there is an exception that applies to points, discussed later. H&r block tax software 2011 Mortgage interest credit. H&r block tax software 2011    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. H&r block tax software 2011 Figure the credit on Form 8396, Mortgage Interest Credit. H&r block tax software 2011 If you take this credit, you must reduce your mortgage interest deduction by the amount of the credit. H&r block tax software 2011   See Form 8396 and Publication 530 for more information on the mortgage interest credit. H&r block tax software 2011 Ministers' and military housing allowance. H&r block tax software 2011   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. H&r block tax software 2011 Hardest Hit Fund and Emergency Homeowners' Loan Programs. H&r block tax software 2011   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. H&r block tax software 2011 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. H&r block tax software 2011 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. H&r block tax software 2011 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). H&r block tax software 2011 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. H&r block tax software 2011 Mortgage assistance payments under section 235 of the National Housing Act. H&r block tax software 2011   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. H&r block tax software 2011 You cannot deduct the interest that is paid for you. H&r block tax software 2011 No other effect on taxes. H&r block tax software 2011   Do not include these mortgage assistance payments in your income. H&r block tax software 2011 Also, do not use these payments to reduce other deductions, such as real estate taxes. H&r block tax software 2011 Divorced or separated individuals. H&r block tax software 2011   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. H&r block tax software 2011 See the discussion of Payments for jointly-owned home under Alimony in Publication 504, Divorced or Separated Individuals. H&r block tax software 2011 Redeemable ground rents. H&r block tax software 2011   In some states (such as Maryland), you can buy your home subject to a ground rent. H&r block tax software 2011 A ground rent is an obligation you assume to pay a fixed amount per year on the property. H&r block tax software 2011 Under this arrangement, you are leasing (rather than buying) the land on which your home is located. H&r block tax software 2011   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct them as mortgage interest. H&r block tax software 2011   A ground rent is a redeemable ground rent if all of the following are true. H&r block tax software 2011 Your lease, including renewal periods, is for more than 15 years. H&r block tax software 2011 You can freely assign the lease. H&r block tax software 2011 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. H&r block tax software 2011 The lessor's interest in the land is primarily a security interest to protect the rental payments to which he or she is entitled. H&r block tax software 2011   Payments made to end the lease and to buy the lessor's entire interest in the land are not deductible as mortgage interest. H&r block tax software 2011 Nonredeemable ground rents. H&r block tax software 2011   Payments on a nonredeemable ground rent are not mortgage interest. H&r block tax software 2011 You can deduct them as rent if they are a business expense or if they are for rental property. H&r block tax software 2011 Reverse mortgages. H&r block tax software 2011   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. H&r block tax software 2011 With a reverse mortgage, you retain title to your home. H&r block tax software 2011 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. H&r block tax software 2011 Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable. H&r block tax software 2011 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. H&r block tax software 2011 Your deduction may be limited because a reverse mortgage loan generally is subject to the limit on Home Equity Debt discussed in Part II. H&r block tax software 2011 Rental payments. H&r block tax software 2011   If you live in a house before final settlement on the purchase, any payments you make for that period are rent and not interest. H&r block tax software 2011 This is true even if the settlement papers call them interest. H&r block tax software 2011 You cannot deduct these payments as home mortgage interest. H&r block tax software 2011 Mortgage proceeds invested in tax-exempt securities. H&r block tax software 2011   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. H&r block tax software 2011 “Grandfathered debt” and “home equity debt” are defined in Part II of this publication. H&r block tax software 2011 Refunds of interest. H&r block tax software 2011   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. H&r block tax software 2011 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. H&r block tax software 2011 However, you need to include it only up to the amount of the deduction that reduced your tax in the earlier year. H&r block tax software 2011 This is true whether the interest overcharge was refunded to you or was used to reduce the outstanding principal on your mortgage. H&r block tax software 2011 If you need to include the refund in income, report it on Form 1040, line 21. H&r block tax software 2011   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. H&r block tax software 2011 For information about Form 1098, see Form 1098, Mortgage Interest Statement , later. H&r block tax software 2011   For more information on how to treat refunds of interest deducted in earlier years, see Recoveries in Publication 525, Taxable and Nontaxable Income. H&r block tax software 2011 Cooperative apartment owner. H&r block tax software 2011   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. H&r block tax software 2011 The patronage dividend is a partial refund to the cooperative housing corporation of mortgage interest it paid in a prior year. H&r block tax software 2011   If you receive a Form 1098 from the cooperative housing corporation, the form should show only the amount you can deduct. H&r block tax software 2011 Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. H&r block tax software 2011 Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. H&r block tax software 2011 This image is too large to be displayed in the current screen. H&r block tax software 2011 Please click the link to view the image. H&r block tax software 2011 Figure B. H&r block tax software 2011 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. H&r block tax software 2011 See Points paid by the seller , later. H&r block tax software 2011 General Rule You generally cannot deduct the full amount of points in the year paid. H&r block tax software 2011 Because they are prepaid interest, you generally deduct them ratably over the life (term) of the mortgage. H&r block tax software 2011 See Deduction Allowed Ratably , next. H&r block tax software 2011 For exceptions to the general rule, see Deduction Allowed in Year Paid , later. H&r block tax software 2011 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. H&r block tax software 2011 You use the cash method of accounting. H&r block tax software 2011 This means you report income in the year you receive it and deduct expenses in the year you pay them. H&r block tax software 2011 Most individuals use this method. H&r block tax software 2011 Your loan is secured by a home. H&r block tax software 2011 (The home does not need to be your main home. H&r block tax software 2011 ) Your loan period is not more than 30 years. H&r block tax software 2011 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. H&r block tax software 2011 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. H&r block tax software 2011 Example. H&r block tax software 2011 You use the cash method of accounting. H&r block tax software 2011 In 2013, you took out a $100,000 loan payable over 20 years. H&r block tax software 2011 The terms of the loan are the same as for other 20-year loans offered in your area. H&r block tax software 2011 You paid $4,800 in points. H&r block tax software 2011 You made 3 monthly payments on the loan in 2013. H&r block tax software 2011 You can deduct $60 [($4,800 ÷ 240 months) x 3 payments] in 2013. H&r block tax software 2011 In 2014, if you make all twelve payments, you will be able to deduct $240 ($20 x 12). H&r block tax software 2011 Deduction Allowed in Year Paid You can fully deduct points in the year paid if you meet all the following tests. H&r block tax software 2011 (You can use Figure B as a quick guide to see whether your points are fully deductible in the year paid. H&r block tax software 2011 ) Your loan is secured by your main home. H&r block tax software 2011 (Your main home is the one you ordinarily live in most of the time. H&r block tax software 2011 ) Paying points is an established business practice in the area where the loan was made. H&r block tax software 2011 The points paid were not more than the points generally charged in that area. H&r block tax software 2011 You use the cash method of accounting. H&r block tax software 2011 This means you report income in the year you receive it and deduct expenses in the year you pay them. H&r block tax software 2011 Most individuals use this method. H&r block tax software 2011 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. H&r block tax software 2011 The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. H&r block tax software 2011 The funds you provided are not required to have been applied to the points. H&r block tax software 2011 They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. H&r block tax software 2011 You cannot have borrowed these funds from your lender or mortgage broker. H&r block tax software 2011 You use your loan to buy or build your main home. H&r block tax software 2011 The points were computed as a percentage of the principal amount of the mortgage. H&r block tax software 2011 The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. H&r block tax software 2011 The points may be shown as paid from either your funds or the seller's. H&r block tax software 2011 Note. H&r block tax software 2011 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. H&r block tax software 2011 Home improvement loan. H&r block tax software 2011   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. H&r block tax software 2011 Second home. H&r block tax software 2011 You cannot fully deduct in the year paid points you pay on loans secured by your second home. H&r block tax software 2011 You can deduct these points only over the life of the loan. H&r block tax software 2011 Refinancing. H&r block tax software 2011   Generally, points you pay to refinance a mortgage are not deductible in full in the year you pay them. H&r block tax software 2011 This is true even if the new mortgage is secured by your main home. H&r block tax software 2011   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. H&r block tax software 2011 You can deduct the rest of the points over the life of the loan. H&r block tax software 2011 Example 1. H&r block tax software 2011 In 1998, Bill Fields got a mortgage to buy a home. H&r block tax software 2011 In 2013, Bill refinanced that mortgage with a 15-year $100,000 mortgage loan. H&r block tax software 2011 The mortgage is secured by his home. H&r block tax software 2011 To get the new loan, he had to pay three points ($3,000). H&r block tax software 2011 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. H&r block tax software 2011 Bill paid the points out of his private funds, rather than out of the proceeds of the new loan. H&r block tax software 2011 The payment of points is an established practice in the area, and the points charged are not more than the amount generally charged there. H&r block tax software 2011 Bill's first payment on the new loan was due July 1. H&r block tax software 2011 He made six payments on the loan in 2013 and is a cash basis taxpayer. H&r block tax software 2011 Bill used the funds from the new mortgage to repay his existing mortgage. H&r block tax software 2011 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. H&r block tax software 2011 He cannot deduct all of the points in 2013. H&r block tax software 2011 He can deduct two points ($2,000) ratably over the life of the loan. H&r block tax software 2011 He deducts $67 [($2,000 ÷ 180 months) × 6 payments] of the points in 2013. H&r block tax software 2011 The other point ($1,000) was a fee for services and is not deductible. H&r block tax software 2011 Example 2. H&r block tax software 2011 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. H&r block tax software 2011 Bill deducts 25% ($25,000 ÷ $100,000) of the points ($2,000) in 2013. H&r block tax software 2011 His deduction is $500 ($2,000 × 25%). H&r block tax software 2011 Bill also deducts the ratable part of the remaining $1,500 ($2,000 − $500) that must be spread over the life of the loan. H&r block tax software 2011 This is $50 [($1,500 ÷ 180 months) × 6 payments] in 2013. H&r block tax software 2011 The total amount Bill deducts in 2013 is $550 ($500 + $50). H&r block tax software 2011 Special Situations This section describes certain special situations that may affect your deduction of points. H&r block tax software 2011 Original issue discount. H&r block tax software 2011   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. H&r block tax software 2011 This reduction results in original issue discount, which is discussed in chapter 4 of Publication 535. H&r block tax software 2011 Amounts charged for services. H&r block tax software 2011    Amounts charged by the lender for specific services connected to the loan are not interest. H&r block tax software 2011 Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. H&r block tax software 2011  You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. H&r block tax software 2011 Points paid by the seller. H&r block tax software 2011   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. H&r block tax software 2011 Treatment by seller. H&r block tax software 2011   The seller cannot deduct these fees as interest. H&r block tax software 2011 But they are a selling expense that reduces the amount realized by the seller. H&r block tax software 2011 See Publication 523 for information on selling your home. H&r block tax software 2011 Treatment by buyer. H&r block tax software 2011   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. H&r block tax software 2011 If all the tests under Deduction Allowed in Year Paid , earlier, are met, the buyer can deduct the points in the year paid. H&r block tax software 2011 If any of those tests are not met, the buyer deducts the points over the life of the loan. H&r block tax software 2011   If you need information about the basis of your home, see Publication 523 or Publication 530. H&r block tax software 2011 Funds provided are less than points. H&r block tax software 2011   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. H&r block tax software 2011 In addition, you can deduct any points paid by the seller. H&r block tax software 2011 Example 1. H&r block tax software 2011 When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). H&r block tax software 2011 You meet all the tests for deducting points in the year paid, except the only funds you provided were a $750 down payment. H&r block tax software 2011 Of the $1,000 charged for points, you can deduct $750 in the year paid. H&r block tax software 2011 You spread the remaining $250 over the life of the mortgage. H&r block tax software 2011 Example 2. H&r block tax software 2011 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. H&r block tax software 2011 In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). H&r block tax software 2011 You spread the remaining $250 over the life of the mortgage. H&r block tax software 2011 You must reduce the basis of your home by the $1,000 paid by the seller. H&r block tax software 2011 Excess points. H&r block tax software 2011   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. H&r block tax software 2011 You must spread any additional points over the life of the mortgage. H&r block tax software 2011 Mortgage ending early. H&r block tax software 2011   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. H&r block tax software 2011 However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. H&r block tax software 2011 Instead, deduct the remaining balance over the term of the new loan. H&r block tax software 2011   A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. H&r block tax software 2011 Example. H&r block tax software 2011 Dan paid $3,000 in points in 2002 that he had to spread out over the 15-year life of the mortgage. H&r block tax software 2011 He deducts $200 points per year. H&r block tax software 2011 Through 2012, Dan has deducted $2,200 of the points. H&r block tax software 2011 Dan prepaid his mortgage in full in 2013. H&r block tax software 2011 He can deduct the remaining $800 of points in 2013. H&r block tax software 2011 Limits on deduction. H&r block tax software 2011   You cannot fully deduct points paid on a mortgage that exceeds the limits discussed in Part II . H&r block tax software 2011 See the Table 1 Instructions for line 10. H&r block tax software 2011 Form 1098. H&r block tax software 2011    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. H&r block tax software 2011 See Form 1098, Mortgage Interest Statement , later. H&r block tax software 2011 Mortgage Insurance Premiums You can treat amounts you paid during 2013 for qualified mortgage insurance as home mortgage interest. H&r block tax software 2011 The insurance must be in connection with home acquisition debt, and the insurance contract must have been issued after 2006. H&r block tax software 2011 Qualified mortgage insurance. H&r block tax software 2011   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). H&r block tax software 2011   Mortgage insurance provided by the Department of Veterans Affairs is commonly known as a funding fee. H&r block tax software 2011 If provided by the Rural Housing Service, it is commonly known as a guarantee fee. H&r block tax software 2011 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. H&r block tax software 2011 These fees can be deducted fully in 2013 if the mortgage insurance contract was issued in 2013. H&r block tax software 2011 Contact the mortgage insurance issuer to determine the deductible amount if it is not reported in box 4 of Form 1098. H&r block tax software 2011 Special rules for prepaid mortgage insurance. H&r block tax software 2011   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. H&r block tax software 2011 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. H&r block tax software 2011 No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term. H&r block tax software 2011 This paragraph does not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service. H&r block tax software 2011 Example. H&r block tax software 2011 Ryan purchased a home in May of 2012 and financed the home with a 15-year mortgage. H&r block tax software 2011 Ryan also prepaid all of the $9,240 in private mortgage insurance required at the time of closing in May. H&r block tax software 2011 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. H&r block tax software 2011 Ryan's adjusted gross income (AGI) for 2012 is $76,000. H&r block tax software 2011 Ryan can deduct $880 ($9,240 ÷ 84 x 8 months) for qualified mortgage insurance premiums in 2012. H&r block tax software 2011 For 2013, Ryan can deduct $1,320 ($9,240 ÷ 84 x 12 months) if his AGI is $100,000 or less. H&r block tax software 2011 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). H&r block tax software 2011 Limit on deduction. H&r block tax software 2011   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. H&r block tax software 2011 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. H&r block tax software 2011 If your adjusted gross income is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. H&r block tax software 2011 Form 1098. H&r block tax software 2011   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. H&r block tax software 2011 See Form 1098, Mortgage Interest Statement, next. H&r block tax software 2011 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. H&r block tax software 2011 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. H&r block tax software 2011 A governmental unit is a person for purposes of furnishing the statement. H&r block tax software 2011 The statement for each year should be sent to you by January 31 of the following year. H&r block tax software 2011 A copy of this form will also be sent to the IRS. H&r block tax software 2011 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. H&r block tax software 2011 However, it should not show any interest that was paid for you by a government agency. H&r block tax software 2011 As a general rule, Form 1098 will include only points that you can fully deduct in the year paid. H&r block tax software 2011 However, certain points not included on Form 1098 also may be deductible, either in the year paid or over the life of the loan. H&r block tax software 2011 See the earlier discussion of Points to determine whether you can deduct points not shown on Form 1098. H&r block tax software 2011 Prepaid interest on Form 1098. H&r block tax software 2011   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. H&r block tax software 2011 However, you cannot deduct the prepaid amount for January 2014 in 2013. H&r block tax software 2011 (See Prepaid interest , earlier. H&r block tax software 2011 ) You will have to figure the interest that accrued for 2014 and subtract it from the amount in box 1. H&r block tax software 2011 You will include the interest for January 2014 with other interest you pay for 2014. H&r block tax software 2011 Refunded interest. H&r block tax software 2011   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. H&r block tax software 2011 See Refunds of interest , earlier. H&r block tax software 2011 Mortgage insurance premiums. H&r block tax software 2011   The amount of mortgage insurance premiums you paid during 2013 may be shown in Box 4 of Form 1098. H&r block tax software 2011 See Mortgage Insurance Premiums , earlier. H&r block tax software 2011 How To Report Deduct the home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 10. H&r block tax software 2011 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. H&r block tax software 2011 Attach a statement explaining the difference and print “See attached” next to line 10. H&r block tax software 2011 Deduct home mortgage interest that was not reported to you on Form 1098 on Schedule A (Form 1040), line 11. H&r block tax software 2011 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. H&r block tax software 2011 The seller must give you this number and you must give the seller your TIN. H&r block tax software 2011 A Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. H&r block tax software 2011 Failure to meet any of these requirements may result in a $50 penalty for each failure. H&r block tax software 2011 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. H&r block tax software 2011 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. H&r block tax software 2011 Deduct mortgage insurance premiums on Schedule A (Form 1040), line 13. H&r block tax software 2011 More than one borrower. H&r block tax software 2011   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. H&r block tax software 2011 Show how much of the interest each of you paid, and give the name and address of the person who received the form. H&r block tax software 2011 Deduct your share of the interest on Schedule A (Form 1040), line 11, and print “See attached” next to the line. H&r block tax software 2011 Also, deduct your share of any qualified mortgage insurance premiums on Schedule A (Form 1040), line 13. H&r block tax software 2011   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. H&r block tax software 2011 Let each of the other borrowers know what his or her share is. H&r block tax software 2011 Mortgage proceeds used for business or investment. H&r block tax software 2011   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. H&r block tax software 2011 It shows where to deduct the part of your excess interest that is for those activities. H&r block tax software 2011 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. H&r block tax software 2011 Special Rule for Tenant-Stockholders in Cooperative Housing Corporations A qualified home includes stock in a cooperative housing corporation owned by a tenant-stockholder. H&r block tax software 2011 This applies only if the tenant-stockholder is entitled to live in the house or apartment because of owning stock in the cooperative. H&r block tax software 2011 Cooperative housing corporation. H&r block tax software 2011   This is a corporation that meets all of the following conditions. H&r block tax software 2011 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. H&r block tax software 2011 Receives at least 80% of its gross income for the year in which the mortgage interest is paid or incurred from tenant-stockholders. H&r block tax software 2011 For this purpose, gross income is all income received during the entire year, including amounts received before the corporation changed to cooperative ownership. H&r block tax software 2011 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. H&r block tax software 2011 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. H&r block tax software 2011 Stock used to secure debt. H&r block tax software 2011   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). H&r block tax software 2011 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. H&r block tax software 2011 See chapter 4 of Publication 535 for details on these rules. H&r block tax software 2011 Figuring deductible home mortgage interest. H&r block tax software 2011   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. H&r block tax software 2011 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. H&r block tax software 2011   Figure your share of this interest by multiplying the total by the following fraction. H&r block tax software 2011      Your shares of stock in the cooperative   The total shares of stock in the cooperative Limits on deduction. H&r block tax software 2011   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. H&r block tax software 2011 The cooperative should determine your share of its grandfathered debt, its home acquisition debt, and its home equity debt. H&r block tax software 2011 (Your share of each of these types of debt is equal to the average balance of each debt multiplied by the fraction just given. H&r block tax software 2011 ) 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. H&r block tax software 2011 Form 1098. H&r block tax software 2011    The cooperative should give you a Form 1098 showing your share of the interest. H&r block tax software 2011 Use the rules in this publication to determine your deductible mortgage interest. H&r block tax software 2011 Part II. H&r block tax software 2011 Limits on Home Mortgage Interest Deduction This part of the publication discusses the limits on deductible home mortgage interest. H&r block tax software 2011 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 . H&r block tax software 2011 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. H&r block tax software 2011 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. H&r block tax software 2011 Table 1 can help you figure your qualified loan limit and your deductible home mortgage interest. H&r block tax software 2011 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). H&r block tax software 2011 It also must be secured by that home. H&r block tax software 2011 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. H&r block tax software 2011 The additional debt may qualify as home equity debt (discussed later). H&r block tax software 2011 Home acquisition debt limit. H&r block tax software 2011   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). H&r block tax software 2011 This limit is reduced (but not below zero) by the amount of your grandfathered debt (discussed later). H&r block tax software 2011 Debt over this limit may qualify as home equity debt (also discussed later). H&r block tax software 2011 Refinanced home acquisition debt. H&r block tax software 2011   Any secured debt you use to refinance home acquisition debt is treated as home acquisition debt. H&r block tax software 2011 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. H&r block tax software 2011 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). H&r block tax software 2011 Mortgage that qualifies later. H&r block tax software 2011   A mortgage that does not qualify as home acquisition debt because it does not meet all the requirements may qualify at a later time. H&r block tax software 2011 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. H&r block tax software 2011 However, if the debt is later secured by the home, it may qualify as home acquisition debt after that time. H&r block tax software 2011 Similarly, a debt that you use to buy property may not qualify because the property is not a qualified home. H&r block tax software 2011 However, if the property later becomes a qualified home, the debt may qualify after that time. H&r block tax software 2011 Mortgage treated as used to buy, build, or improve home. H&r block tax software 2011   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. H&r block tax software 2011 This applies in the following situations. H&r block tax software 2011 You buy your home within 90 days before or after the date you take out the mortgage. H&r block tax software 2011 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). H&r block tax software 2011 (See Example 1 later. H&r block tax software 2011 ) You build or improve your home and take out the mortgage before the work is completed. H&r block tax software 2011 The home acquisition debt is limited to the amount of the expenses incurred within 24 months before the date of the mortgage. H&r block tax software 2011 You build or improve your home and take out the mortgage within 90 days after the work is completed. H&r block tax software 2011 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. H&r block tax software 2011 (See Example 2 later. H&r block tax software 2011 ) Example 1. H&r block tax software 2011 You bought your main home on June 3 for $175,000. H&r block tax software 2011 You paid for the home with cash you got from the sale of your old home. H&r block tax software 2011 On July 15, you took out a mortgage of $150,000 secured by your main home. H&r block tax software 2011 You used the $150,000 to invest in stocks. H&r block tax software 2011 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. H&r block tax software 2011 The entire mortgage qualifies as home acquisition debt because it was not more than the home's cost. H&r block tax software 2011 Example 2. H&r block tax software 2011 On January 31, John began building a home on the lot that he owned. H&r block tax software 2011 He used $45,000 of his personal funds to build the home. H&r block tax software 2011 The home was completed on October 31. H&r block tax software 2011 On November 21, John took out a $36,000 mortgage that was secured by the home. H&r block tax software 2011 The mortgage can be treated as used to build the home because it was taken out within 90 days after the home was completed. H&r block tax software 2011 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. H&r block tax software 2011 This is illustrated by Figure C. H&r block tax software 2011   Please click here for the text description of the image. H&r block tax software 2011 Figure C. H&r block tax software 2011 John's example Date of the mortgage. H&r block tax software 2011   The date you take out your mortgage is the day the loan proceeds are disbursed. H&r block tax software 2011 This is generally the closing date. H&r block tax software 2011 You can treat the day you apply in writing for your mortgage as the date you take it out. H&r block tax software 2011 However, this applies only if you receive the loan proceeds within a reasonable time (such as within 30 days) after your application is approved. H&r block tax software 2011 If a timely application you make is rejected, a reasonable additional time will be allowed to make a new application. H&r block tax software 2011 Cost of home or improvements. H&r block tax software 2011   To determine your cost, include amounts paid to acquire any interest in a qualified home or to substantially improve the home. H&r block tax software 2011   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. H&r block tax software 2011 Substantial improvement. H&r block tax software 2011   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. H&r block tax software 2011    Repairs that maintain your home in good condition, such as repainting your home, are not substantial improvements. H&r block tax software 2011 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. H&r block tax software 2011 Acquiring an interest in a home because of a divorce. H&r block tax software 2011   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. H&r block tax software 2011 Part of home not a qualified home. H&r block tax software 2011    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. H&r block tax software 2011 See Divided use of your home under Qualified Home in Part I. H&r block tax software 2011 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. H&r block tax software 2011 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. H&r block tax software 2011 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. H&r block tax software 2011 Example. H&r block tax software 2011 You bought your home for cash 10 years ago. H&r block tax software 2011 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. H&r block tax software 2011 This loan is home equity debt. H&r block tax software 2011 Home equity debt limit. H&r block tax software 2011   There is a limit on the amount of debt that can be treated as home equity debt. H&r block tax software 2011 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. H&r block tax software 2011 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. H&r block tax software 2011 Example. H&r block tax software 2011 You own one home that you bought in 2000. H&r block tax software 2011 Its FMV now is $110,000, and the current balance on your original mortgage (home acquisition debt) is $95,000. H&r block tax software 2011 Bank M offers you a home mortgage loan of 125% of the FMV of the home less any outstanding mortgages or other liens. H&r block tax software 2011 To consolidate some of your other debts, you take out a $42,500 home mortgage loan [(125% × $110,000) − $95,000] with Bank M. H&r block tax software 2011 Your home equity debt is limited to $15,000. H&r block tax software 2011 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. H&r block tax software 2011 Debt higher than limit. H&r block tax software 2011   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. H&r block tax software 2011 But if the proceeds of the loan were used for investment, business, or other deductible purposes, the interest may be deductible. H&r block tax software 2011 If it is, see the Table 1 Instructions for line 13 for an explanation of how to allocate the excess interest. H&r block tax software 2011 Part of home not a qualified home. H&r block tax software 2011   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. H&r block tax software 2011 See Divided use of your home under Qualified Home in Part I. H&r block tax software 2011 Fair market value (FMV). H&r block tax software 2011    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. H&r block tax software 2011 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. H&r block tax software 2011 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. H&r block tax software 2011 To qualify, it must have been secured by your qualified home on October 13, 1987, and at all times after that date. H&r block tax software 2011 How you used the proceeds does not matter. H&r block tax software 2011 Grandfathered debt is not limited. H&r block tax software 2011 All of the interest you paid on grandfathered debt is fully deductible home mortgage interest. H&r block tax software 2011 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. H&r block tax software 2011 Refinanced grandfathered debt. H&r block tax software 2011   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. H&r block tax software 2011 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). H&r block tax software 2011 The debt must be secured by the qualified home. H&r block tax software 2011   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. H&r block tax software 2011 After that, you treat it as home acquisition debt or home equity debt, depending on how you used the proceeds. H&r block tax software 2011 Exception. H&r block tax software 2011   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. H&r block tax software 2011 This term cannot be more than 30 years. H&r block tax software 2011 Example. H&r block tax software 2011 Chester took out a $200,000 first mortgage on his home in 1986. H&r block tax software 2011 The mortgage was a five-year balloon note and the entire balance on the note was due in 1991. H&r block tax software 2011 Chester refinanced the debt in 1991 with a new 20-year mortgage. H&r block tax software 2011 The refinanced debt is treated as grandfathered debt for its entire term (20 years). H&r block tax software 2011 Line-of-credit mortgage. H&r block tax software 2011    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. H&r block tax software 2011 The balance on the mortgage before you borrowed the additional amounts is grandfathered debt. H&r block tax software 2011 The newly borrowed amounts are not grandfathered debt because the funds were borrowed after October 13, 1987. H&r block tax software 2011 See Average Mortgage Balance in the Table 1 Instructions that follow. H&r block tax software 2011 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. H&r block tax software 2011 All the mortgages are grandfathered debt. H&r block tax software 2011 The total of the mortgage balances for the entire year is within the limits discussed earlier under Home Acquisition Debt and Home Equity Debt . H&r block tax software 2011 In either of those cases, you do not need Table 1. H&r block tax software 2011 Otherwise, you can use Table 1 to determine your qualified loan limit and deductible home mortgage interest. H&r block tax software 2011 Fill out only one Table 1 for both your main and second home regardless of how many mortgages you have. H&r block tax software 2011 Table 1. H&r block tax software 2011 Worksheet To Figure Your Qualified Loan Limit and Deductible Home Mortgage Interest For the Current Year See the Table 1 Instructions. H&r block tax software 2011 Part I Qualified Loan Limit 1. H&r block tax software 2011 Enter the average balance of all your grandfathered debt. H&r block tax software 2011 See line 1 instructions 1. H&r block tax software 2011   2. H&r block tax software 2011 Enter the average balance of all your home acquisition debt. H&r block tax software 2011 See line 2 instructions 2. H&r block tax software 2011   3. H&r block tax software 2011 Enter $1,000,000 ($500,000 if married filing separately) 3. H&r block tax software 2011   4. H&r block tax software 2011 Enter the larger of the amount on line 1 or the amount on line 3 4. H&r block tax software 2011   5. H&r block tax software 2011 Add the amounts on lines 1 and 2. H&r block tax software 2011 Enter the total here 5. H&r block tax software 2011   6. H&r block tax software 2011 Enter the smaller of the amount on line 4 or the amount on line 5 6. H&r block tax software 2011   7. H&r block tax software 2011 If you have home equity debt, enter the smaller of $100,000 ($50,000 if married filing separately) or your limited amount. H&r block tax software 2011 See the line 7 instructions for the limit which may apply to you. H&r block tax software 2011 7. H&r block tax software 2011   8. H&r block tax software 2011 Add the amounts on lines 6 and 7. H&r block tax software 2011 Enter the total. H&r block tax software 2011 This is your qualified loan limit. H&r block tax software 2011 8. H&r block tax software 2011   Part II Deductible Home Mortgage Interest 9. H&r block tax software 2011 Enter the total of the average balances of all mortgages on all qualified homes. H&r block tax software 2011  See line 9 instructions 9. H&r block tax software 2011     If line 8 is less than line 9, go on to line 10. H&r block tax software 2011 If line 8 is equal to or more than line 9, stop here. H&r block tax software 2011 All of your interest on all the mortgages included on line 9 is deductible as home mortgage interest on Schedule A (Form 1040). H&r block tax software 2011     10. H&r block tax software 2011 Enter the total amount of interest that you paid. H&r block tax software 2011 See line 10 instructions 10. H&r block tax software 2011   11. H&r block tax software 2011 Divide the amount on line 8 by the amount on line 9. H&r block tax software 2011 Enter the result as a decimal amount (rounded to three places) 11. H&r block tax software 2011 × . H&r block tax software 2011 12. H&r block tax software 2011 Multiply the amount on line 10 by the decimal amount on line 11. H&r block tax software 2011 Enter the result. H&r block tax software 2011 This is your deductible home mortgage interest. H&r block tax software 2011 Enter this amount on Schedule A (Form 1040) 12. H&r block tax software 2011   13. H&r block tax software 2011 Subtract the amount on line 12 from the amount on line 10. H&r block tax software 2011 Enter the result. H&r block tax software 2011 This is not home mortgage interest. H&r block tax software 2011 See line 13 instructions 13. H&r block tax software 2011   Home equity debt only. H&r block tax software 2011   If all of your mortgages are home equity debt, do not fill in lines 1 through 5. H&r block tax software 2011 Enter zero on line 6 and complete the rest of Table 1. H&r block tax software 2011 Average Mortgage Balance You have to figure the average balance of each mortgage to determine your qualified loan limit. H&r block tax software 2011 You need these amounts to complete lines 1, 2, and 9 of Table 1. H&r block tax software 2011 You can use the highest mortgage balances during the year, but you may benefit most by using the average balances. H&r block tax software 2011 The following are methods you can use to figure your average mortgage balances. H&r block tax software 2011 However, if a mortgage has more than one category of debt, see Mixed-use mortgages , later, in this section. H&r block tax software 2011 Average of first and last balance method. H&r block tax software 2011   You can use this method if all the following apply. H&r block tax software 2011 You did not borrow any new amounts on the mortgage during the year. H&r block tax software 2011 (This does not include borrowing the original mortgage amount. H&r block tax software 2011 ) You did not prepay more than one month's principal during the year. H&r block tax software 2011 (This includes prepayment by refinancing your home or by applying proceeds from its sale. H&r block tax software 2011 ) You had to make level payments at fixed equal intervals on at least a semi-annual basis. H&r block tax software 2011 You treat your payments as level even if they were adjusted from time to time because of changes in the interest rate. H&r block tax software 2011    To figure your average balance, complete the following worksheet. H&r block tax software 2011    1. H&r block tax software 2011 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. H&r block tax software 2011 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. H&r block tax software 2011 Add amounts on lines 1 and 2   4. H&r block tax software 2011 Divide the amount on line 3 by 2. H&r block tax software 2011 Enter the result   Interest paid divided by interest rate method. H&r block tax software 2011   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. H&r block tax software 2011    Complete the following worksheet to figure your average balance. H&r block tax software 2011    1. H&r block tax software 2011 Enter the interest paid in 2013. H&r block tax software 2011 Do not include points, mortgage insurance premiums, or any interest paid in 2013 that is for a year after 2013. H&r block tax software 2011 However, do include interest that is for 2013 but was paid in an earlier year   2. H&r block tax software 2011 Enter the annual interest rate on the mortgage. H&r block tax software 2011 If the interest rate varied in 2013, use the lowest rate for the year   3. H&r block tax software 2011 Divide the amount on line 1 by the amount on line 2. H&r block tax software 2011 Enter the result   Example. H&r block tax software 2011 Mr. H&r block tax software 2011 Blue had a line of credit secured by his main home all year. H&r block tax software 2011 He paid interest of $2,500 on this loan. H&r block tax software 2011 The interest rate on the loan was 9% (. H&r block tax software 2011 09) all year. H&r block tax software 2011 His average balance using this method is $27,778, figured as follows. H&r block tax software 2011 1. H&r block tax software 2011 Enter the interest paid in 2013. H&r block tax software 2011 Do not include points, mortgage insurance premiums, or any interest paid in 2013 that is for a year after 2013. H&r block tax software 2011 However, do include interest that is for 2013 but was paid in an earlier year $2,500 2. H&r block tax software 2011 Enter the annual interest rate on the mortgage. H&r block tax software 2011 If the interest rate varied in 2013, use the lowest rate for the year . H&r block tax software 2011 09 3. H&r block tax software 2011 Divide the amount on line 1 by the amount on line 2. H&r block tax software 2011 Enter the result $27,778 Statements provided by your lender. H&r block tax software 2011   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. H&r block tax software 2011 You can treat the balance as zero for any month the mortgage was not secured by your qualified home. H&r block tax software 2011   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. H&r block tax software 2011   If your lender can give you your average balance for the year, you can use that amount. H&r block tax software 2011 Example. H&r block tax software 2011 Ms. H&r block tax software 2011 Brown had a home equity loan secured by her main home all year. H&r block tax software 2011 She received monthly statements showing her average balance for each month. H&r block tax software 2011 She can figure her average balance for the year by adding her monthly average balances and dividing the total by 12. H&r block tax software 2011 Mixed-use mortgages. H&r block tax software 2011   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). H&r block tax software 2011 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). H&r block tax software 2011   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. H&r block tax software 2011 Do not use the methods described earlier in this section to figure the average balance of either category. H&r block tax software 2011 Instead, for each category, use the following method. H&r block tax software 2011 Figure the balance of that category of debt for each month. H&r block tax software 2011 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. H&r block tax software 2011 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. H&r block tax software 2011 Add together the monthly balances figured in (1). H&r block tax software 2011 Divide the result in (2) by 12. H&r block tax software 2011   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. H&r block tax software 2011 Example 1. H&r block tax software 2011 In 1986, Sharon took out a $1,400,000 mortgage to buy her main home (grandfathered debt). H&r block tax software 2011 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. H&r block tax software 2011 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). H&r block tax software 2011 Under the loan agreement, Sharon must make principal payments of $1,000 at the end of each month. H&r block tax software 2011 During 2013, her principal payments on the second mortgage totaled $10,000. H&r block tax software 2011 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. H&r block tax software 2011 The January and February balances were zero. H&r block tax software 2011 The March through December balances were all $180,000, because none of her principal payments are applied to the home acquisition debt. H&r block tax software 2011 (They are all applied to the home equity debt, reducing it to $10,000 [$20,000 − $10,000]. H&r block tax software 2011 ) The monthly balances of the home acquisition debt total $1,800,000 ($180,000 × 10). H&r block tax software 2011 Therefore, the average balance of the home acquisition debt for 2013 was $150,000 ($1,800,000 ÷ 12). H&r block tax software 2011 Example 2. H&r block tax software 2011 The facts are the same as in Example 1. H&r block tax software 2011 In 2014, Sharon's January through October principal payments on her second mortgage are applied to the home equity debt, reducing it to zero. H&r block tax software 2011 The balance of the home acquisition debt remains $180,000 for each of those months. H&r block tax software 2011 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). H&r block tax software 2011 The monthly balances total $2,157,000 [($180,000 × 10) + $179,000 + $178,000]. H&r block tax software 2011 Therefore, the average balance of the home acquisition debt for 2014 is $179,750 ($2,157,000 ÷ 12). H&r block tax software 2011 L

Topic 602 - Child and Dependent Care Credit

You may be able to claim the child and dependent care credit if you paid work-related expenses for the care of a qualifying individual. The credit is generally a percentage of the amount of work-related expenses you paid to a care provider for the care of a qualifying individual. The percentage depends on your adjusted gross income. Work-related expenses qualifying for the credit are those paid for the care of a qualifying individual to enable you to work or actively look for work.

Expenses are paid for the care of a qualifying individual if the primary function is to assure the individual's well-being and protection. In general, amounts paid for services outside your household qualify for the credit if the care is provided for (i) a qualifying individual who is your qualifying child under age 13 or (ii) a qualifying individual who regularly spends at least 8 hours each day in your household.

The total expenses that may be used to calculate the credit are capped at $3,000 (for one qualifying individual) or at $6,000 (for two or more qualifying individuals). The dollar limits may differ depending on the tax year in question. The expenses qualifying for the computation of the credit must be reduced by the amount of any dependent care benefits provided by your employer that you exclude from gross income. In general, you can exclude up to $5,000 for dependent care benefits received from your employer. Also, generally, the expenses claimed may not exceed the lesser of your earned income or your spouse’s earned income. A special rule applies if your spouse is a full-time student or incapable of self-care. For additional information, refer to Publication 503, Child and Dependent Care Expenses.

For purposes of the child and dependent care credit, a qualifying individual is:

  1. Your dependent qualifying child who is under age 13 when the care is provided,
  2. Your spouse who is physically or mentally incapable of self-care and who has the same principal place of abode as you for more than half of the year, or
  3. Your dependent who is physically or mentally incapable of self-care, and who has the same principal place of abode as you for more than half of the year. For this purpose, whether an individual is your dependent is determined without regard to the individual's gross income, whether the individual files a joint return, or whether you are a dependent of another taxpayer.

An individual is physically or mentally incapable of self-care if, as a result of a physical or mental defect, the individual is incapable of caring for his or her hygiene or nutritional needs, or requires the full-time attention of another person for the individual's own safety or the safety of others.

For more information on who is a dependent or a qualifying child, refer to Publication 501, Exemptions, Standard Deduction, and Filing Information.

A noncustodial parent may not treat a child as a qualifying individual for purposes of the credit, even if the noncustodial parent may claim an exemption for the child. For more information on divorced or separated parents or parents who live apart at all times during the last six months of the year, refer to the topic Child of Divorced or Separated Parents or Parents Living Apart in Publication 503, Child and Dependent Care Expenses.

If a person is a qualifying individual for only a part of the tax year, only those expenses paid during that part of the year are included in calculating the credit.

In addition to paying for the care of a qualifying individual, you must meet all of the following conditions to claim the credit:

  1. Your payment must be made to a care provider who is not your spouse, the parent of your child who is your qualifying individual, your child under age 19, or a dependent of you or your spouse.
  2. You must file a joint return if you are married.
  3. You must provide the taxpayer identification number (usually the social security number) of each qualifying individual on the return on which you claim the credit.
  4. You must report the name, address, and taxpayer identification number (either the social security number, or the employer identification number) of the care provider on your return. If the care provider is a tax-exempt organization, you need only report the name and address on your return. You can use Form W-10 (PDF), Dependent Care Provider's Identification and Certification, to request this information from the care provider. If you do not provide information regarding the care provider, you may still be eligible for the credit if you can show that you exercised due diligence in attempting to provide the required information.

If you qualify for the credit, complete Form 2441 (PDF) and Form 1040 (PDF) or Form 1040A (PDF). If you received dependent care benefits from your employer (this amount should be shown on your Form W-2 (PDF), you must complete Part III of Form 2441. You cannot claim the child and dependent care credit if you use Form 1040EZ (PDF).

If you pay a provider to care for your dependent or spouse in your home, you may be a household employer. If you are a household employer, you may have to withhold and pay social security and Medicare taxes and pay federal unemployment tax. For more information, refer to Publication 926, Household Employer's Tax Guide, or Topic 756.

Page Last Reviewed or Updated: December 12, 2013

The H&r Block Tax Software 2011

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