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H&r free federal 1. H&r free federal   Rental Income and Expenses (If No Personal Use of Dwelling) Table of Contents Rental IncomeWhen To Report Types of Income Rental ExpensesWhen To Deduct Types of Expenses This chapter discusses the various types of rental income and expenses for a residential rental activity with no personal use of the dwelling. H&r free federal Generally, each year you will report all income and deduct all out-of-pocket expenses in full. H&r free federal The deduction to recover the cost of your rental property—depreciation—is taken over a prescribed number of years, and is discussed in chapter 2, Depreciation of Rental Property. H&r free federal If your rental income is from property you also use personally or rent to someone at less than a fair rental price, first read the information in chapter 5 , Personal Use of Dwelling Unit (Including Vacation Home). H&r free federal Rental Income In most cases, you must include in your gross income all amounts you receive as rent. H&r free federal Rental income is any payment you receive for the use or occupation of property. H&r free federal In addition to amounts you receive as normal rental payments, there are other amounts that may be rental income. H&r free federal When To Report When you report rental income on your tax return generally depends on whether you are a cash basis taxpayer or use an accrual method. H&r free federal Most individual taxpayers use the cash method. H&r free federal Cash method. H&r free federal   You are a cash basis taxpayer if you report income on your return in the year you actually or constructively receive it, regardless of when it was earned. H&r free federal You constructively receive income when it is made available to you, for example, by being credited to your bank account. H&r free federal Accrual method. H&r free federal    If you are an accrual basis taxpayer, you generally report income when you earn it, rather than when you receive it. H&r free federal You generally deduct your expenses when you incur them, rather than when you pay them. H&r free federal More information. H&r free federal   See Publication 538, Accounting Periods and Methods, for more information about when you constructively receive income and accrual methods of accounting. H&r free federal Types of Income The following are common types of rental income. H&r free federal Advance rent. H&r free federal   Advance rent is any amount you receive before the period that it covers. H&r free federal Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use. H&r free federal Example. H&r free federal On March 18, 2013, you signed a 10-year lease to rent your property. H&r free federal During 2013, you received $9,600 for the first year's rent and $9,600 as rent for the last year of the lease. H&r free federal You must include $19,200 in your rental income in the first year. H&r free federal Canceling a lease. H&r free federal   If your tenant pays you to cancel a lease, the amount you receive is rent. H&r free federal Include the payment in your income in the year you receive it regardless of your method of accounting. H&r free federal Expenses paid by tenant. H&r free federal   If your tenant pays any of your expenses, those payments are rental income. H&r free federal Because you must include this amount in income, you can also deduct the expenses if they are deductible rental expenses. H&r free federal For more information, see Rental Expenses , later. H&r free federal Example 1. H&r free federal Your tenant pays the water and sewage bill for your rental property and deducts the amount from the normal rent payment. H&r free federal Under the terms of the lease, your tenant does not have to pay this bill. H&r free federal Include the utility bill paid by the tenant and any amount received as a rent payment in your rental income. H&r free federal You can deduct the utility payment made by your tenant as a rental expense. H&r free federal Example 2. H&r free federal While you are out of town, the furnace in your rental property stops working. H&r free federal Your tenant pays for the necessary repairs and deducts the repair bill from the rent payment. H&r free federal Include the repair bill paid by the tenant and any amount received as a rent payment in your rental income. H&r free federal You can deduct the repair payment made by your tenant as a rental expense. H&r free federal Property or services. H&r free federal   If you receive property or services as rent, instead of money, include the fair market value of the property or services in your rental income. H&r free federal   If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary. H&r free federal Example. H&r free federal Your tenant is a house painter. H&r free federal He offers to paint your rental property instead of paying 2 months rent. H&r free federal You accept his offer. H&r free federal Include in your rental income the amount the tenant would have paid for 2 months rent. H&r free federal You can deduct that same amount as a rental expense for painting your property. H&r free federal Security deposits. H&r free federal   Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. H&r free federal But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year. H&r free federal    If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. H&r free federal Include it in your income when you receive it. H&r free federal Other Sources of Rental Income Lease with option to buy. H&r free federal   If the rental agreement gives your tenant the right to buy your rental property, the payments you receive under the agreement are generally rental income. H&r free federal If your tenant exercises the right to buy the property, the payments you receive for the period after the date of sale are considered part of the selling price. H&r free federal Part interest. H&r free federal   If you own a part interest in rental property, you must report your part of the rental income from the property. H&r free federal Rental of property also used as your home. H&r free federal   If you rent property that you also use as your home and you rent it less than 15 days during the tax year, do not include the rent you receive in your income and do not deduct rental expenses. H&r free federal However, you can deduct on Schedule A (Form 1040), Itemized Deductions, the interest, taxes, and casualty and theft losses that are allowed for nonrental property. H&r free federal See chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). H&r free federal Rental Expenses In most cases, the expenses of renting your property, such as maintenance, insurance, taxes, and interest, can be deducted from your rental income. H&r free federal Personal use of rental property. H&r free federal   If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and personal use. H&r free federal Also, your rental expense deductions may be limited. H&r free federal See chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). H&r free federal Part interest. H&r free federal   If you own a part interest in rental property, you can deduct expenses you paid according to your percentage of ownership. H&r free federal Example. H&r free federal Roger owns a one-half undivided interest in a rental house. H&r free federal Last year he paid $968 for necessary repairs on the property. H&r free federal Roger can deduct $484 (50% × $968) as a rental expense. H&r free federal He is entitled to reimbursement for the remaining half from the co-owner. H&r free federal When To Deduct You generally deduct your rental expenses in the year you pay them. H&r free federal If you use the accrual method, see Publication 538 for more information. H&r free federal Types of Expenses Listed below are the most common rental expenses. H&r free federal Advertising. H&r free federal Auto and travel expenses. H&r free federal Cleaning and maintenance. H&r free federal Commissions. H&r free federal Depreciation. H&r free federal Insurance. H&r free federal Interest (other). H&r free federal Legal and other professional fees. H&r free federal Local transportation expenses. H&r free federal Management fees. H&r free federal Mortgage interest paid to banks, etc. H&r free federal Points. H&r free federal Rental payments. H&r free federal Repairs. H&r free federal Taxes. H&r free federal Utilities. H&r free federal Some of these expenses, as well as other less common ones, are discussed below. H&r free federal Depreciation. H&r free federal   Depreciation is a capital expense. H&r free federal It is the mechanism for recovering your cost in an income producing property and must be taken over the expected life of the property. H&r free federal   You can begin to depreciate rental property when it is ready and available for rent. H&r free federal See Placed in Service under When Does Depreciation Begin and End in chapter 2. H&r free federal Insurance premiums paid in advance. H&r free federal   If you pay an insurance premium for more than one year in advance, for each year of coverage you can deduct the part of the premium payment that will apply to that year. H&r free federal You cannot deduct the total premium in the year you pay it. H&r free federal See chapter 6 of Publication 535 for information on deductible premiums. H&r free federal Interest expense. H&r free federal   You can deduct mortgage interest you pay on your rental property. H&r free federal When you refinance a rental property for more than the previous outstanding balance, the portion of the interest allocable to loan proceeds not related to rental use generally cannot be deducted as a rental expense. H&r free federal Chapter 4 of Publication 535 explains mortgage interest in detail. H&r free federal Expenses paid to obtain a mortgage. H&r free federal   Certain expenses you pay to obtain a mortgage on your rental property cannot be deducted as interest. H&r free federal These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses that are part of your basis in the property. H&r free federal Form 1098, Mortgage Interest Statement. H&r free federal   If you paid $600 or more of mortgage interest on your rental property to any one person, you should receive a Form 1098 or similar statement showing the interest you paid for the year. H&r free federal 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, the mortgage, and the other person received the Form 1098, report your share of the interest on Schedule E (Form 1040), line 13. H&r free federal Attach a statement to your return showing the name and address of the other person. H&r free federal On the dotted line next to line 13, enter “See attached. H&r free federal ” Legal and other professional fees. H&r free federal   You can deduct, as a rental expense, legal and other professional expenses such as tax return preparation fees you paid to prepare Schedule E, Part I. H&r free federal For example, on your 2013 Schedule E you can deduct fees paid in 2013 to prepare Part I of your 2012 Schedule E. H&r free federal You can also deduct, as a rental expense, any expense (other than federal taxes and penalties) you paid to resolve a tax underpayment related to your rental activities. H&r free federal Local benefit taxes. H&r free federal   In most cases, you cannot deduct charges for local benefits that increase the value of your property, such as charges for putting in streets, sidewalks, or water and sewer systems. H&r free federal These charges are nondepreciable capital expenditures and must be added to the basis of your property. H&r free federal However, you can deduct local benefit taxes that are for maintaining, repairing, or paying interest charges for the benefits. H&r free federal Local transportation expenses. H&r free federal   You may be able to deduct your ordinary and necessary local transportation expenses if you incur them to collect rental income or to manage, conserve, or maintain your rental property. H&r free federal However, transportation expenses incurred to travel between your home and a rental property generally constitute nondeductible commuting costs unless you use your home as your principal place of business. H&r free federal See Publication 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business. H&r free federal   Generally, if you use your personal car, pickup truck, or light van for rental activities, you can deduct the expenses using one of two methods: actual expenses or the standard mileage rate. H&r free federal For 2013, the standard mileage rate for business use is 56. H&r free federal 5 cents per mile. H&r free federal For more information, see chapter 4 of Publication 463. H&r free federal    To deduct car expenses under either method, you must keep records that follow the rules in chapter 5 of Publication 463. H&r free federal In addition, you must complete Form 4562, Part V, and attach it to your tax return. H&r free federal Pre-rental expenses. H&r free federal   You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent. H&r free federal Rental of equipment. H&r free federal   You can deduct the rent you pay for equipment that you use for rental purposes. H&r free federal However, in some cases, lease contracts are actually purchase contracts. H&r free federal If so, you cannot deduct these payments. H&r free federal You can recover the cost of purchased equipment through depreciation. H&r free federal Rental of property. H&r free federal   You can deduct the rent you pay for property that you use for rental purposes. H&r free federal If you buy a leasehold for rental purposes, you can deduct an equal part of the cost each year over the term of the lease. H&r free federal Travel expenses. H&r free federal   You can deduct the ordinary and necessary expenses of traveling away from home if the primary purpose of the trip is to collect rental income or to manage, conserve, or maintain your rental property. H&r free federal You must properly allocate your expenses between rental and nonrental activities. H&r free federal You cannot deduct the cost of traveling away from home if the primary purpose of the trip is to improve the property. H&r free federal The cost of improvements is recovered by taking depreciation. H&r free federal For information on travel expenses, see chapter 1 of Publication 463. H&r free federal    To deduct travel expenses, you must keep records that follow the rules in chapter 5 of Publication 463. H&r free federal Uncollected rent. H&r free federal   If you are a cash basis taxpayer, do not deduct uncollected rent. H&r free federal Because you have not included it in your income, it is not deductible. H&r free federal   If you use an accrual method, report income when you earn it. H&r free federal If you are unable to collect the rent, you may be able to deduct it as a business bad debt. H&r free federal See chapter 10 of Publication 535 for more information about business bad debts. H&r free federal Vacant rental property. H&r free federal   If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. H&r free federal However, you cannot deduct any loss of rental income for the period the property is vacant. H&r free federal Vacant while listed for sale. H&r free federal   If you sell property you held for rental purposes, you can deduct the ordinary and necessary expenses for managing, conserving, or maintaining the property until it is sold. H&r free federal If the property is not held out and available for rent while listed for sale, the expenses are not deductible rental expenses. H&r free federal Points The term “points” is often used to describe some of the charges paid, or treated as paid, by a borrower to take out a loan or a mortgage. H&r free federal These charges are also called loan origination fees, maximum loan charges, or premium charges. H&r free federal Any of these charges (points) that are solely for the use of money are interest. H&r free federal Because points are prepaid interest, you generally cannot deduct the full amount in the year paid, but must deduct the interest over the term of the loan. H&r free federal The method used to figure the amount of points you can deduct each year follows the original issue discount (OID) rules. H&r free federal In this case, points are equivalent to OID, which is the difference between: The amount borrowed (redemption price at maturity, or principal) and The proceeds (issue price). H&r free federal The first step is to determine whether your total OID (which you may have on bonds or other investments in addition to the mortgage loan), including the OID resulting from the points, is insignificant or de minimis. H&r free federal If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct. H&r free federal De minimis OID. H&r free federal   The OID is de minimis if it is less than one-fourth of 1% (. H&r free federal 0025) of the stated redemption price at maturity (principal amount of the loan) multiplied by the number of full years from the date of original issue to maturity (term of the loan). H&r free federal   If the OID is de minimis, you can choose one of the following ways to figure the amount of points you can deduct each year. H&r free federal On a constant-yield basis over the term of the loan. H&r free federal On a straight line basis over the term of the loan. H&r free federal In proportion to stated interest payments. H&r free federal In its entirety at maturity of the loan. H&r free federal You make this choice by deducting the OID (points) in a manner consistent with the method chosen on your timely filed tax return for the tax year in which the loan is issued. H&r free federal Example. H&r free federal Carol Madison took out a $100,000 mortgage loan on January 1, 2013, to buy a house she will use as a rental during 2013. H&r free federal The loan is to be repaid over 30 years. H&r free federal During 2013, Carol paid $10,000 of mortgage interest (stated interest) to the lender. H&r free federal When the loan was made, she paid $1,500 in points to the lender. H&r free federal The points reduced the principal amount of the loan from $100,000 to $98,500, resulting in $1,500 of OID. H&r free federal Carol determines that the points (OID) she paid are de minimis based on the following computation. H&r free federal Redemption price at maturity (principal amount of the loan) $100,000 Multiplied by: The term of the  loan in complete years ×30 Multiplied by ×. H&r free federal 0025 De minimis amount $7,500 The points (OID) she paid ($1,500) are less than the de minimis amount ($7,500). H&r free federal Therefore, Carol has de minimis OID and she can choose one of the four ways discussed earlier to figure the amount she can deduct each year. H&r free federal Under the straight line method, she can deduct $50 each year for 30 years. H&r free federal Constant-yield method. H&r free federal   If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year. H&r free federal   You figure your deduction for the first year in the following manner. H&r free federal Determine the issue price of the loan. H&r free federal If you paid points on the loan, the issue price generally is the difference between the principal and the points. H&r free federal Multiply the result in (1) by the yield to maturity (defined later). H&r free federal Subtract any qualified stated interest payments (defined later) from the result in (2). H&r free federal This is the OID you can deduct in the first year. H&r free federal Yield to maturity (YTM). H&r free federal   This rate is generally shown in the literature you receive from your lender. H&r free federal If you do not have this information, consult your lender or tax advisor. H&r free federal In general, the YTM is the discount rate that, when used in computing the present value of all principal and interest payments, produces an amount equal to the principal amount of the loan. H&r free federal Qualified stated interest (QSI). H&r free federal   In general, this is the stated interest that is unconditionally payable in cash or property (other than another loan of the issuer) at least annually over the term of the loan at a fixed rate. H&r free federal Example—Year 1. H&r free federal The facts are the same as in the previous example. H&r free federal The yield to maturity on Carol's loan is 10. H&r free federal 2467%, compounded annually. H&r free federal She figured the amount of points (OID) she could deduct in 2013 as follows. H&r free federal Principal amount of the loan $100,000 Minus: Points (OID) –1,500 Issue price of the loan $98,500 Multiplied by: YTM × . H&r free federal 102467 Total 10,093 Minus: QSI –10,000 Points (OID) deductible in 2013 $93 To figure your deduction in any subsequent year, you start with the adjusted issue price. H&r free federal To get the adjusted issue price, add to the issue price figured in Year 1 any OID previously deducted. H&r free federal Then follow steps (2) and (3), earlier. H&r free federal Example—Year 2. H&r free federal Carol figured the deduction for 2014 as follows. H&r free federal Issue price $98,500 Plus: Points (OID) deducted  in 2013 +93 Adjusted issue price $98,593 Multiplied by: YTM × . H&r free federal 102467 Total 10,103 Minus: QSI –10,000 Points (OID) deductible in 2014 $103 Loan or mortgage ends. H&r free federal    If your loan or mortgage ends, you may be able to deduct any remaining points (OID) in the tax year in which the loan or mortgage ends. H&r free federal A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. H&r free federal However, if the refinancing is with the same lender, the remaining points (OID) generally are not deductible in the year in which the refinancing occurs, but may be deductible over the term of the new mortgage or loan. H&r free federal Points when loan refinance is more than the previous outstanding balance. H&r free federal   When you refinance a rental property for more than the previous outstanding balance, the portion of the points allocable to loan proceeds not related to rental use generally cannot be deducted as a rental expense. H&r free federal For example, if an individual refinanced a loan with a balance of $100,000, the amount of the new loan was $120,000, and the taxpayer used $20,000 to purchase a car, points allocable to the $20,000 would be treated as nondeductible personal interest. H&r free federal Repairs and Improvements Generally, an expense for repairing or maintaining your rental property may be deducted if you are not required to capitalize the expense. H&r free federal Improvements. H&r free federal   You must capitalize any expense you pay to improve your rental property. H&r free federal An expense is for an improvement if it results in a betterment to your property, restores your property, or adapts your property to a new or different use. H&r free federal Betterments. H&r free federal   Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property. H&r free federal Restoration. H&r free federal   Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition. H&r free federal Adaptation. H&r free federal   Expenses that may be for adaptation include expenses for altering your property to a use that is not consistent with the intended ordinary use of your property when you began renting the property. H&r free federal Separate the costs of repairs and improvements, and keep accurate records. H&r free federal You will need to know the cost of improvements when you sell or depreciate your property. H&r free federal The expenses you capitalize for improving your property can generally be depreciated as if the improvement were separate property. H&r free federal Table 1-1. H&r free federal Examples of Improvements Additions Bedroom Bathroom Deck Garage Porch Patio  Lawn & Grounds Landscaping Driveway Walkway Fence Retaining wall Sprinkler system Swimming pool Miscellaneous Storm windows, doors New roof Central vacuum Wiring upgrades Satellite dish Security system   Heating & Air Conditioning Heating system Central air conditioning Furnace Duct work Central humidifier Filtration system Plumbing Septic system Water heater Soft water system Filtration system  Interior Improvements Built-in appliances Kitchen modernization Flooring Wall-to-wall carpeting  Insulation Attic Walls, floor Pipes, duct work Prev  Up  Next   Home   More Online Publications
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H&r free federal 29. H&r free federal   Limit on Itemized Deductions Table of Contents Introduction Useful Items - You may want to see: Are You Subject to the Limit? Which Itemized Deductions Are Limited? Which Itemized Deductions Are Not Limited? How Do You Figure the Limit?Example. H&r free federal Introduction This chapter discusses the overall limit on itemized deductions on Schedule A (Form 1040). H&r free federal The following topics are included. H&r free federal Who is subject to the limit. H&r free federal Which itemized deductions are limited. H&r free federal How to figure the limit. H&r free federal Useful Items - You may want to see: Forms (and Instructions) Schedule A (Form 1040) Itemized Deductions Are You Subject to the Limit? You are subject to the limit on certain itemized deductions if your adjusted gross income (AGI) is more than $300,000 if married filing jointly or qualifying widow(er), $275,000 if head of household, $250,000 if single, or $150,000 if married filing separately. H&r free federal Your AGI is the amount on Form 1040, line 38. H&r free federal Which Itemized Deductions Are Limited? The following Schedule A (Form 1040) deductions are subject to the overall limit on itemized deductions. H&r free federal Taxes paid—line 9 Interest paid—lines 10, 11, 12, and 13 Gifts to charity—line 19 Job expenses and certain miscellaneous deductions—line 27 Other miscellaneous deductions—line 28, excluding gambling and casualty or theft losses. H&r free federal . H&r free federal Which Itemized Deductions Are Not Limited? The following Schedule A (Form 1040) deductions are not subject to the overall limit on itemized deductions. H&r free federal However, they are still subject to other applicable limits. H&r free federal Medical and dental expenses—line 4. H&r free federal Investment interest expense—line 14. H&r free federal Casualty and theft losses of personal use property—line 20. H&r free federal Casualty and theft losses of income-producing property—line 28. H&r free federal Gambling losses—line 28. H&r free federal How Do You Figure the Limit? If your itemized deductions are subject to the limit, the total of all your itemized deductions is reduced by the smaller of: 80% of your itemized deductions that are affected by the limit. H&r free federal See Which Itemized Deductions Are Limited , earlier, or 3% of the amount by which your AGI exceeds $300,000 if married filing jointly or qualifying widow(er), $275,000 if head of household, $250,000 if single, or $150,000 if married filing separately. H&r free federal Before you figure the overall limit on itemized deductions, you first must complete Schedule A (Form 1040), lines 1 through 28, including any related forms (such as Form 2106, Form 4684, etc. H&r free federal ). H&r free federal The overall limit on itemized deductions is figured after you have applied any other limit on the allowance of any itemized deduction. H&r free federal These other limits include charitable contribution limits (chapter 24), the limit on certain meal and entertainment expenses (chapter 26), and the 2%-of-adjusted-gross-income limit on certain miscellaneous deductions (chapter 28). H&r free federal Itemized Deductions Worksheet. H&r free federal   After you have completed Schedule A (Form 1040) through line 28, you can use the Itemized Deductions Worksheet in the Instructions for Schedule A (Form 1040) to figure your limit. H&r free federal Enter the result on Schedule A (Form 1040), line 29. H&r free federal Keep the worksheet for your records. H&r free federal    You should compare the amount of your standard deduction to the amount of your itemized deductions after applying the limit. H&r free federal Use the greater amount when completing Form 1040, line 40. H&r free federal See chapter 20 for information on how to figure your standard deduction. H&r free federal Example. H&r free federal For tax year 2013 Bill and Terry Willow are filing a joint return on Form 1040. H&r free federal Their adjusted gross income on line 38 is $325,500. H&r free federal Their Schedule A itemized deductions are as follows: Taxes paid—line 9 $17,900 Interest paid—lines 10, 11, 12, and 13 45,000 Investment interest expense—line 14 41,000 Gifts to charity—line 19 21,000 Job expenses—line 27 17,240 Total $142,140 The Willows’ investment interest expense deduction ($41,000 from Schedule A (Form 1040), line 14) is not subject to the overall limit on itemized deductions. H&r free federal The Willows use the Itemized Deductions Worksheet in the Schedule A (Form 1040) instructions to figure their overall limit. H&r free federal Of their $142,140 total itemized deductions, the Willows can deduct only $141,375 ($142,140 - $765). H&r free federal They enter $141,375 on Schedule A (Form 1040), line 29. H&r free federal Prev  Up  Next   Home   More Online Publications