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Income taxes free Publication 505 - Introductory Material Table of Contents IntroductionNonresident aliens. Income taxes free Ordering forms and publications. Income taxes free Tax questions. Income taxes free What's New for 2014 Reminders Introduction The federal income tax is a pay-as-you-go tax. Income taxes free You must pay the tax as you earn or receive income during the year. Income taxes free There are two ways to pay as you go. Income taxes free Withholding. Income taxes free If you are an employee, your employer probably withholds income tax from your pay. Income taxes free In addition, tax may be withheld from certain other income, such as pensions, bonuses, commissions, and gambling winnings. Income taxes free The amount withheld is paid to the Internal Revenue Service (IRS) in your name. Income taxes free Estimated tax. Income taxes free If you do not pay your tax through withholding, or do not pay enough tax that way, you might have to pay estimated tax. Income taxes free People who are in business for themselves generally will have to pay their tax this way. Income taxes free You may have to pay estimated tax if you receive income such as dividends, interest, capital gains, rents, and royalties. Income taxes free Estimated tax is used to pay not only income tax, but other taxes such as self-employment tax and alternative minimum tax. Income taxes free This publication explains both of these methods. Income taxes free It also explains how to take credit on your return for the tax that was withheld and for your estimated tax payments. Income taxes free If you did not pay enough tax during the year, either through withholding or by making estimated tax payments, you may have to pay a penalty. Income taxes free Generally, the IRS can figure this penalty for you. Income taxes free This underpayment penalty, and the exceptions to it, are discussed in chapter 4. Income taxes free Nonresident aliens. Income taxes free    Before completing Form W-4, nonresident alien employees should see the Instructions for Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual. Income taxes free Also see chapter 8 of Publication 519, U. Income taxes free S. Income taxes free Tax Guide for Aliens, for important information on withholding. Income taxes free What's new for 2013 and 2014. Income taxes free   See What's New for 2014 in this Introduction, and What's New for 2013 in chapter 4. Income taxes free Comments and suggestions. Income taxes free   We welcome your comments about this publication and your suggestions for future editions. Income taxes free   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. Income taxes free NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Income taxes free Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Income taxes free   You can send your comments from www. Income taxes free irs. Income taxes free gov/formspubs/. Income taxes free Click on “More Information” and then on Give us feedback on forms and publications. Income taxes free   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Income taxes free Ordering forms and publications. Income taxes free   Visit www. Income taxes free irs. Income taxes free gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 business days after your request is received. Income taxes free Internal Revenue Service 1201 N. Income taxes free Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. Income taxes free   If you have a tax question, check the information available on IRS. Income taxes free gov or call 1-800-829-1040. Income taxes free We cannot answer tax questions sent to either of the above addresses. Income taxes free What's New for 2014 Use your 2013 tax return as a guide in figuring your 2014 estimated tax, but be sure to consider the following. Income taxes free Standard mileage rates. Income taxes free  The 2014 rate for business use of your vehicle is 56 cents per mile. Income taxes free The rate for use of your vehicle to get medical care or move is 23½ cents per mile. Income taxes free The rate of 14 cents per mile for charitable use is unchanged. Income taxes free Personal exemption increased for certain taxpayers. Income taxes free  For 2014, the personal exemption amount is increased to $3,950 for taxpayers with adjusted gross income at or below $305,050 if married filing jointly or qualifying widow(er), $279,650 if head of household, $254,200 if single, or $152,525 if married filing separately. Income taxes free The personal exemption amount for taxpayers with adjusted gross income above these thresholds may be reduced. Income taxes free Limitation on itemized deductions. Income taxes free  For 2014, itemized deductions for taxpayers with adjusted gross income above $305,050 if married filing jointly or qualifying widow(er), $279,650 if head of household, $254,200 if single, and $152,525 if married filing separately may be reduced. Income taxes free Health care coverage. Income taxes free  When you file your 2014 tax return in 2015, you will need to either (1) indicate on your return that you and your family had health care coverage throughout 2014, (2) claim an exemption from the health care coverage requirement for some or all of 2014, or (3) make a payment if you do not have coverage or an exemption(s) for all 12 months of 2014. Income taxes free For examples on how this payment works, go to www. Income taxes free IRS. Income taxes free gov/aca and click under the “Individuals & Families” section. Income taxes free You may want to consider this when figuring your “Other taxes” on Line 12 of the 2014 Estimated Tax Worksheet (Worksheet 2-1). Income taxes free For general information on these requirements, go to www. Income taxes free IRS. Income taxes free gov/aca. Income taxes free Advance payments of the Premium Tax Credit. Income taxes free  If you buy health care insurance through the Health Insurance Marketplace, you may be eligible for advance payments of the Premium Tax Credit to help pay for your insurance coverage. Income taxes free Receiving too little or too much in advance will affect your refund or balance due. Income taxes free Promptly report changes in your income or family size to your Marketplace. Income taxes free You may want to consider this when figuring your estimated taxes for 2014. Income taxes free For more information, go to www. Income taxes free IRS. Income taxes free gov/aca and see Publication 5120 and Publication 5121. Income taxes free http://www. Income taxes free IRS. Income taxes free gov/pub5120 Alternative minimum tax (AMT) exemption amount increased. Income taxes free  The AMT exemption amount is increased to $52,800 ($82,100 if married filing jointly or qualifying widow(er); $41,050 if married filing separately). Income taxes free Lifetime learning credit income limits. Income taxes free  In order to claim a lifetime learning credit, your MAGI must be less than $54,000 ($108,000 if married filing jointly). Income taxes free Retirement savings contribution credit income limits increased. Income taxes free  In order to claim this credit for 2014, your MAGI must be less than $30,000 ($60,000 if married filing jointly; $45,000 if head of household). Income taxes free Adoption credit or exclusion. Income taxes free  The maximum adoption credit or exclusion for employer-provided adoption benefits has increased to $13,190. Income taxes free In order to claim either the credit or exclusion, your MAGI must be less than $237,880. Income taxes free Earned income credit (EIC). Income taxes free  You may be able to take the EIC in 2014 if: Three or more children lived with you and you earned less than $46,997 ($52,427 if married filing jointly), Two children lived with you and you earned less than $43,756 ($49,186 if married filing jointly), One child lived with you and you earned less than $38,511 ($43,941 if married filing jointly), or A child did not live with you and you earned less than $14,590 ($20,020 if married filing jointly). Income taxes free Also, the maximum MAGI you can have and still get the credit has increased. Income taxes free You may be able to take the credit if your MAGI is less than the amount in the above list that applies to you. Income taxes free The maximum investment income you can have and get the credit has increased to $3,350. Income taxes free Reminders Future developments. Income taxes free  The IRS has created a page on IRS. Income taxes free gov for information about Publication 505 at www. Income taxes free irs. Income taxes free gov/pub505. Income taxes free Information about any future developments affecting Publication 505 (such as legislation enacted after we release it) will be posted on that page. Income taxes free Social security tax. Income taxes free   Generally, each employer for whom you work during the tax year must withhold social security tax up to the annual limit. Income taxes free The annual limit is $117,000 in 2014. Income taxes free Photographs of missing children. Income taxes free  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Income taxes free Photographs of missing children selected by the Center may appear in this publication on pages that otherwise would be blank. Income taxes free You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Income taxes free Additional Medicare Tax. Income taxes free  Beginning in 2013, a 0. Income taxes free 9% Additional Medicare Tax applies to Medicare wages, Railroad Retirement Tax Act compensation, and self-employment income over a threshold amount based on your filing status. Income taxes free You may need to include this amount when figuring your estimated tax. Income taxes free See the instructions for line 12 of the 2014 Estimated Tax Worksheet. Income taxes free You may also request that your employer deduct and withhold an additional amount of income tax withholding from your wages on Form W-4, Employee's Withholding Allowance Certificate. Income taxes free For more information on Additional Medicare Tax, go to IRS. Income taxes free gov and enter “Additional Medicare Tax” in the search box. Income taxes free Net Investment Income Tax. Income taxes free  Beginning in 2013, you may be subject to Net Investment Income Tax (NIIT). Income taxes free NIIT is a 3. Income taxes free 8% tax on the lesser of net investment income or the excess of your modified adjusted gross income (MAGI) over the threshold amount. Income taxes free NIIT may need to be included when figuring estimated tax. Income taxes free See the instructions for line 12 of the 2014 Estimated Tax Worksheet. Income taxes free You may also request that your employer deduct and withhold an additional amount of income tax withholding from your wages on Form W-4. Income taxes free For more information on NIIT, go to IRS. Income taxes free gov and enter “Net Investment Income Tax” in the search box. Income taxes free Prev  Up  Next   Home   More Online Publications
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Income taxes free 23. Income taxes free   Interest Expense Table of Contents Introduction Useful Items - You may want to see: Home Mortgage InterestAmount Deductible Points Mortgage Insurance Premiums Form 1098, Mortgage Interest Statement Investment InterestInvestment Property Allocation of Interest Expense Limit on Deduction Items You Cannot DeductPersonal Interest Allocation of Interest How To ReportMore than one borrower. Income taxes free Mortgage proceeds used for business or investment. Income taxes free Introduction This chapter discusses what interest expenses you can deduct. Income taxes free Interest is the amount you pay for the use of borrowed money. Income taxes free The following are types of interest you can deduct as itemized deductions on Schedule A (Form 1040). Income taxes free Home mortgage interest, including certain points and mortgage insurance premiums. Income taxes free Investment interest. Income taxes free This chapter explains these deductions. Income taxes free It also explains where to deduct other types of interest and lists some types of interest you cannot deduct. Income taxes free Use Table 23-1 to find out where to get more information on various types of interest, including investment interest. Income taxes free Useful Items - You may want to see: Publication 936 Home Mortgage Interest Deduction 550 Investment Income and Expenses Home Mortgage Interest Generally, home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). Income taxes free The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan. Income taxes free You can deduct home mortgage interest if all the following conditions are met. Income taxes free You file Form 1040 and itemize deductions on Schedule A (Form 1040). Income taxes free The mortgage is a secured debt on a qualified home in which you have an ownership interest. Income taxes free (Generally, your mortgage is a secured debt if you put your home up as collateral to protect the interest of the lender. Income taxes free The term “qualified home” means your main home or second home. Income taxes free For details, see Publication 936. Income taxes free )  Both you and the lender must intend that the loan be repaid. Income taxes free Amount Deductible In most cases, you can deduct all of your home mortgage interest. Income taxes free How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds. Income taxes free Fully deductible interest. Income taxes free   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. Income taxes free (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. Income taxes free )   The three categories are as follows: Mortgages you took out on or before October 13, 1987 (called grandfathered debt). Income taxes free 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). Income taxes free 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). Income taxes free The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home. Income taxes free   See Part II of Publication 936 for more detailed definitions of grandfathered, home acquisition, and home equity debt. Income taxes free    You can use Figure 23-A to check whether your home mortgage interest is fully deductible. Income taxes free Figure 23-A. Income taxes free Is My Home Mortgage Interest Fully Deductible? Please click here for the text description of the image. Income taxes free Figure 23-A. Income taxes free Is My Interest Fully Deductible? Limits on deduction. Income taxes free   You cannot fully deduct interest on a mortgage that does not fit into any of the three categories listed earlier. Income taxes free If this applies to you, see Part II of Publication 936 to figure the amount of interest you can deduct. Income taxes free Special Situations This section describes certain items that can be included as home mortgage interest and others that cannot. Income taxes free It also describes certain special situations that may affect your deduction. Income taxes free Late payment charge on mortgage payment. Income taxes free   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. Income taxes free Mortgage prepayment penalty. Income taxes free   If you pay off your home mortgage early, you may have to pay a penalty. Income taxes free 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. Income taxes free Sale of home. Income taxes free   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 sale. Income taxes free Example. Income taxes free John and Peggy Harris sold their home on May 7. Income taxes free Through April 30, they made home mortgage interest payments of $1,220. Income taxes free 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. Income taxes free Their mortgage interest deduction is $1,270 ($1,220 + $50). Income taxes free Prepaid interest. Income taxes free   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. Income taxes free You can deduct in each year only the interest that qualifies as home mortgage interest for that year. Income taxes free However, there is an exception that applies to points, discussed later. Income taxes free Mortgage interest credit. Income taxes free   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. Income taxes free Figure the credit on Form 8396, Mortgage Interest Credit. Income taxes free If you take this credit, you must reduce your mortgage interest deduction by the amount of the credit. Income taxes free   For more information on the credit, see chapter 37. Income taxes free Ministers' and military housing allowance. Income taxes free   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. Income taxes free Hardest Hit Fund and Emergency Homeowners' Loan Programs. Income taxes free   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. Income taxes free 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. Income taxes free 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. Income taxes free 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 (real property taxes). Income taxes free 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. Income taxes free Mortgage assistance payments under section 235 of the National Housing Act. Income taxes free   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. Income taxes free You cannot deduct the interest that is paid for you. Income taxes free No other effect on taxes. Income taxes free   Do not include these mortgage assistance payments in your income. Income taxes free Also, do not use these payments to reduce other deductions, such as real estate taxes. Income taxes free Divorced or separated individuals. Income taxes free   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. Income taxes free See the discussion of Payments for jointly-owned home in chapter 18. Income taxes free Redeemable ground rents. Income taxes free   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct them as mortgage interest. Income taxes free   Payments made to end the lease and to buy the lessor's entire interest in the land are not deductible as mortgage interest. Income taxes free For more information, see Publication 936. Income taxes free Nonredeemable ground rents. Income taxes free   Payments on a nonredeemable ground rent are not mortgage interest. Income taxes free You can deduct them as rent if they are a business expense or if they are for rental property. Income taxes free Reverse mortgages. Income taxes free   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. Income taxes free With a reverse mortgage, you retain title to your home. Income taxes free 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. Income taxes free Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable. Income taxes free Any interest (including original issue discount) accrued on a reverse mortgage is not deductible until the loan is paid in full. Income taxes free Your deduction may be limited because a reverse mortgage loan generally is subject to the limit on Home Equity Debt discussed in Publication 936. Income taxes free Rental payments. Income taxes free   If you live in a house before final settlement on the purchase, any payments you make for that period are rent and not interest. Income taxes free This is true even if the settlement papers call them interest. Income taxes free You cannot deduct these payments as home mortgage interest. Income taxes free Mortgage proceeds invested in tax-exempt securities. Income taxes free   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. Income taxes free “Grandfathered debt” and “home equity debt” are defined earlier under Amount Deductible. Income taxes free Refunds of interest. Income taxes free   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. Income taxes free 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. Income taxes free However, you need to include it only up to the amount of the deduction that reduced your tax in the earlier year. Income taxes free This is true whether the interest overcharge was refunded to you or was used to reduce the outstanding principal on your mortgage. Income taxes free    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. Income taxes free For information about Form 1098, see Form 1098, Mortgage Interest Statement , later. Income taxes free   For more information on how to treat refunds of interest deducted in earlier years, see Recoveries in chapter 12. Income taxes free Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Income taxes free Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. Income taxes free A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. Income taxes free See Points paid by the seller , later. Income taxes free General Rule You generally cannot deduct the full amount of points in the year paid. Income taxes free Because they are prepaid interest, you generally deduct them ratably over the life (term) of the mortgage. Income taxes free See Deduction Allowed Ratably , next. Income taxes free For exceptions to the general rule, see Deduction Allowed in Year Paid , later. Income taxes free 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. Income taxes free You use the cash method of accounting. Income taxes free This means you report income in the year you receive it and deduct expenses in the year you pay them. Income taxes free Most individuals use this method. Income taxes free Your loan is secured by a home. Income taxes free (The home does not need to be your main home. Income taxes free ) Your loan period is not more than 30 years. Income taxes free 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. Income taxes free 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. Income taxes free Deduction Allowed in Year Paid You can fully deduct points in the year paid if you meet all the following tests. Income taxes free (You can use Figure 23-B as a quick guide to see whether your points are fully deductible in the year paid. Income taxes free ) Your loan is secured by your main home. Income taxes free (Your main home is the one you ordinarily live in most of the time. Income taxes free ) Paying points is an established business practice in the area where the loan was made. Income taxes free The points paid were not more than the points generally charged in that area. Income taxes free You use the cash method of accounting. Income taxes free This means you report income in the year you receive it and deduct expenses in the year you pay them. Income taxes free (If you want more information about this method, see Accounting Methods in chapter 1. Income taxes free ) 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. Income taxes free The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. Income taxes free The funds you provided are not required to have been applied to the points. Income taxes free They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. Income taxes free You cannot have borrowed these funds from your lender or mortgage broker. Income taxes free You use your loan to buy or build your main home. Income taxes free The points were computed as a percentage of the principal amount of the mortgage. Income taxes free The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. Income taxes free The points may be shown as paid from either your funds or the seller's. Income taxes free Figure 23-B. Income taxes free Are My Points Fully Deductible This Year? Please click here for the text description of the image. Income taxes free Figure 23-B. Income taxes free Are My Points Fully Deductible This Year? Note. Income taxes free 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. Income taxes free Home improvement loan. Income taxes free   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. Income taxes free Second home. Income taxes free You cannot fully deduct in the year paid points you pay on loans secured by your second home. Income taxes free You can deduct these points only over the life of the loan. Income taxes free Refinancing. Income taxes free   Generally, points you pay to refinance a mortgage are not deductible in full in the year you pay them. Income taxes free This is true even if the new mortgage is secured by your main home. Income taxes free   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 , earlier, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. Income taxes free You can deduct the rest of the points over the life of the loan. Income taxes free Example 1. Income taxes free In 1998, Bill Fields got a mortgage to buy a home. Income taxes free In 2013, Bill refinanced that mortgage with a 15-year $100,000 mortgage loan. Income taxes free The mortgage is secured by his home. Income taxes free To get the new loan, he had to pay three points ($3,000). Income taxes free 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. Income taxes free Bill paid the points out of his private funds, rather than out of the proceeds of the new loan. Income taxes free The payment of points is an established practice in the area, and the points charged are not more than the amount generally charged there. Income taxes free Bill's first payment on the new loan was due July 1. Income taxes free He made six payments on the loan in 2013 and is a cash basis taxpayer. Income taxes free Bill used the funds from the new mortgage to repay his existing mortgage. Income taxes free 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. Income taxes free He cannot deduct all of the points in 2013. Income taxes free He can deduct two points ($2,000) ratably over the life of the loan. Income taxes free He deducts $67 [($2,000 ÷ 180 months) × 6 payments] of the points in 2013. Income taxes free The other point ($1,000) was a fee for services and is not deductible. Income taxes free Example 2. Income taxes free 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. Income taxes free Bill deducts 25% ($25,000 ÷ $100,000) of the points ($2,000) in 2013. Income taxes free His deduction is $500 ($2,000 × 25%). Income taxes free Bill also deducts the ratable part of the remaining $1,500 ($2,000 − $500) that must be spread over the life of the loan. Income taxes free This is $50 [($1,500 ÷ 180 months) × 6 payments] in 2013. Income taxes free The total amount Bill deducts in 2013 is $550 ($500 + $50). Income taxes free Special Situations This section describes certain special situations that may affect your deduction of points. Income taxes free Original issue discount. Income taxes free   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. Income taxes free This reduction results in original issue discount, which is discussed in chapter 4 of Publication 535. Income taxes free Amounts charged for services. Income taxes free   Amounts charged by the lender for specific services connected to the loan are not interest. Income taxes free Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. Income taxes free You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. Income taxes free Points paid by the seller. Income taxes free   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. Income taxes free Treatment by seller. Income taxes free   The seller cannot deduct these fees as interest. Income taxes free But they are a selling expense that reduces the amount realized by the seller. Income taxes free See chapter 15 for information on selling your home. Income taxes free Treatment by buyer. Income taxes free    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. Income taxes free If all the tests under Deduction Allowed in Year Paid , earlier, are met, the buyer can deduct the points in the year paid. Income taxes free If any of those tests are not met, the buyer deducts the points over the life of the loan. Income taxes free   For information about basis, see chapter 13. Income taxes free Funds provided are less than points. Income taxes free   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. Income taxes free In addition, you can deduct any points paid by the seller. Income taxes free Example 1. Income taxes free When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). Income taxes free You meet all the tests for deducting points in the year paid, except the only funds you provided were a $750 down payment. Income taxes free Of the $1,000 charged for points, you can deduct $750 in the year paid. Income taxes free You spread the remaining $250 over the life of the mortgage. Income taxes free Example 2. Income taxes free 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. Income taxes free In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). Income taxes free You spread the remaining $250 over the life of the mortgage. Income taxes free You must reduce the basis of your home by the $1,000 paid by the seller. Income taxes free Excess points. Income taxes free   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. Income taxes free You must spread any additional points over the life of the mortgage. Income taxes free Mortgage ending early. Income taxes free   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. Income taxes free However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. Income taxes free Instead, deduct the remaining balance over the term of the new loan. Income taxes free    A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. Income taxes free Example. Income taxes free Dan paid $3,000 in points in 2002 that he had to spread out over the 15-year life of the mortgage. Income taxes free He deducts $200 points per year. Income taxes free Through 2012, Dan has deducted $2,200 of the points. Income taxes free Dan prepaid his mortgage in full in 2013. Income taxes free He can deduct the remaining $800 of points in 2013. Income taxes free Limits on deduction. Income taxes free   You cannot fully deduct points paid on a mortgage unless the mortgage fits into one of the categories listed earlier under Fully deductible interest . Income taxes free See Publication 936 for details. Income taxes free Mortgage Insurance Premiums You can treat amounts you paid during 2013 for qualified mortgage insurance as home mortgage interest. Income taxes free The insurance must be in connection with home acquisition debt and the insurance contract must have been issued after 2006. Income taxes free Qualified mortgage insurance. Income taxes free   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). Income taxes free   Mortgage insurance provided by the Department of Veterans Affairs is commonly known as a funding fee. Income taxes free If provided by the Rural Housing Service, it is commonly known as a guarantee fee. Income taxes free These fees can be deducted fully in 2013 if the mortgage insurance contract was issued in 2013. Income taxes free Contact the mortgage insurance issuer to determine the deductible amount if it is not reported in box 4 of Form 1098. Income taxes free Special rules for prepaid mortgage insurance. Income taxes free   Generally, if you paid premiums for qualified mortgage insurance that are allocable to periods after the close of the tax year, such premiums are treated as paid in the period to which they are allocated. Income taxes free 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. Income taxes free No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term. Income taxes free This paragraph does not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service. Income taxes free See the Example below. Income taxes free Example. Income taxes free Ryan purchased a home in May of 2012 and financed the home with a 15-year mortgage. Income taxes free Ryan also prepaid all of the $9,240 in private mortgage insurance required at the time of closing in May. Income taxes free 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. Income taxes free Ryan's adjusted gross income (AGI) for 2012 is $76,000. Income taxes free Ryan can deduct $880 ($9,240 ÷ 84 × 8 months) for qualified mortgage insurance premiums in 2012. Income taxes free For 2013, Ryan can deduct $1,320 ($9,240 ÷ 84 × 12 months) if his AGI is $100,000 or less. Income taxes free 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). Income taxes free Limit on deduction. Income taxes free   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. Income taxes free 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. Income taxes free If your adjusted gross income is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. Income taxes free 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. Income taxes free You will receive the statement if you pay interest to a person (including a financial institution or a cooperative housing corporation) in the course of that person's trade or business. Income taxes free A governmental unit is a person for purposes of furnishing the statement. Income taxes free The statement for each year should be sent to you by January 31 of the following year. Income taxes free A copy of this form will also be sent to the IRS. Income taxes free 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. Income taxes free However, it should not show any interest that was paid for you by a government agency. Income taxes free As a general rule, Form 1098 will include only points that you can fully deduct in the year paid. Income taxes free However, certain points not included on Form 1098 also may be deductible, either in the year paid or over the life of the loan. Income taxes free See Points , earlier, to determine whether you can deduct points not shown on Form 1098. Income taxes free Prepaid interest on Form 1098. Income taxes free   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. Income taxes free However, you cannot deduct the prepaid amount for January 2014 in 2013. Income taxes free (See Prepaid interest , earlier. Income taxes free ) You will have to figure the interest that accrued for 2014 and subtract it from the amount in box 1. Income taxes free You will include the interest for January 2014 with the other interest you pay for 2014. Income taxes free See How To Report , later. Income taxes free Refunded interest. Income taxes free   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. Income taxes free See Refunds of interest , earlier. Income taxes free Mortgage insurance premiums. Income taxes free   The amount of mortgage insurance premiums you paid during 2013 may be shown in box 4 of Form 1098. Income taxes free See Mortgage Insurance Premiums, earlier. Income taxes free Investment Interest This section discusses interest expenses you may be able to deduct as an investor. Income taxes free If you borrow money to buy property you hold for investment, the interest you pay is investment interest. Income taxes free You can deduct investment interest subject to the limit discussed later. Income taxes free However, you cannot deduct interest you incurred to produce tax-exempt income. Income taxes free Nor can you deduct interest expenses on straddles. Income taxes free Investment interest does not include any qualified home mortgage interest or any interest taken into account in computing income or loss from a passive activity. Income taxes free Investment Property Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. Income taxes free It also includes property that produces gain or loss (not derived in the ordinary course of a trade or business) from the sale or trade of property producing these types of income or held for investment (other than an interest in a passive activity). Income taxes free Investment property also includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity). Income taxes free Partners, shareholders, and beneficiaries. Income taxes free   To determine your investment interest, combine your share of investment interest from a partnership, S corporation, estate, or trust with your other investment interest. Income taxes free Allocation of Interest Expense If you borrow money for business or personal purposes as well as for investment, you must allocate the debt among those purposes. Income taxes free Only the interest expense on the part of the debt used for investment purposes is treated as investment interest. Income taxes free The allocation is not affected by the use of property that secures the debt. Income taxes free Limit on Deduction Generally, your deduction for investment interest expense is limited to the amount of your net investment income. Income taxes free You can carry over the amount of investment interest that you could not deduct because of this limit to the next tax year. Income taxes free The interest carried over is treated as investment interest paid or accrued in that next year. Income taxes free You can carry over disallowed investment interest to the next tax year even if it is more than your taxable income in the year the interest was paid or accrued. Income taxes free Net Investment Income Determine the amount of your net investment income by subtracting your investment expenses (other than interest expense) from your investment income. Income taxes free Investment income. Income taxes free    This generally includes your gross income from property held for investment (such as interest, dividends, annuities, and royalties). Income taxes free Investment income does not include Alaska Permanent Fund dividends. Income taxes free It also does not include qualified dividends or net capital gain unless you choose to include them. Income taxes free Choosing to include qualified dividends. Income taxes free   Investment income generally does not include qualified dividends, discussed in chapter 8. Income taxes free However, you can choose to include all or part of your qualified dividends in investment income. Income taxes free   You make this choice by completing Form 4952, line 4g, according to its instructions. Income taxes free   If you choose to include any amount of your qualified dividends in investment income, you must reduce your qualified dividends that are eligible for the lower capital gains tax rates by the same amount. Income taxes free Choosing to include net capital gain. Income taxes free   Investment income generally does not include net capital gain from disposing of investment property (including capital gain distributions from mutual funds). Income taxes free However, you can choose to include all or part of your net capital gain in investment income. Income taxes free    You make this choice by completing Form 4952, line 4g, according to its instructions. Income taxes free   If you choose to include any amount of your net capital gain in investment income, you must reduce your net capital gain that is eligible for the lower capital gains tax rates by the same amount. Income taxes free    Before making either choice, consider the overall effect on your tax liability. Income taxes free Compare your tax if you make one or both of these choices with your tax if you do not. Income taxes free Investment income of child reported on parent's return. Income taxes free    Investment income includes the part of your child's interest and dividend income that you choose to report on your return. Income taxes free If the child does not have qualified dividends, Alaska Permanent Fund dividends, or capital gain distributions, this is the amount on line 6 of Form 8814, Parents' Election To Report Child's Interest and Dividends. Income taxes free Child's qualified dividends. Income taxes free   If part of the amount you report is your child's qualified dividends, that part (which is reported on Form 1040, line 9b) generally does not count as investment income. Income taxes free However, you can choose to include all or part of it in investment income, as explained under Choosing to include qualified dividends , earlier. Income taxes free   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured next under Child's Alaska Permanent Fund dividends). Income taxes free Child's Alaska Permanent Fund dividends. Income taxes free   If part of the amount you report is your child's Alaska Permanent Fund dividends, that part does not count as investment income. Income taxes free To figure the amount of your child's income that you can consider your investment income, start with the amount on Form 8814, line 6. Income taxes free Multiply that amount by a percentage that is equal to the Alaska Permanent Fund dividends divided by the total amount on Form 8814, line 4. Income taxes free Subtract the result from the amount on Form 8814, line 12. Income taxes free Child's capital gain distributions. Income taxes free    If part of the amount you report is your child's capital gain distributions, that part (which is reported on Schedule D, line 13, or Form 1040, line 13) generally does not count as investment income. Income taxes free However, you can choose to include all or part of it in investment income, as explained in Choosing to include net capital gain , earlier. Income taxes free   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured under Child's Alaska Permanent Fund dividends , earlier). Income taxes free Investment expenses. Income taxes free   Investment expenses are your allowed deductions (other than interest expense) directly connected with the production of investment income. Income taxes free Investment expenses that are included as a miscellaneous itemized deduction on Schedule A (Form 1040) are allowable deductions after applying the 2% limit that applies to miscellaneous itemized deductions. Income taxes free Use the smaller of: The investment expenses included on Schedule A (Form 1040), line 23, or The amount on Schedule A, line 27. Income taxes free Losses from passive activities. Income taxes free   Income or expenses that you used in computing income or loss from a passive activity are not included in determining your investment income or investment expenses (including investment interest expense). Income taxes free See Publication 925, Passive Activity and At-Risk Rules, for information about passive activities. Income taxes free Form 4952 Use Form 4952, Investment Interest Expense Deduction, to figure your deduction for investment interest. Income taxes free Exception to use of Form 4952. Income taxes free   You do not have to complete Form 4952 or attach it to your return if you meet all of the following tests. Income taxes free Your investment interest expense is not more than your investment income from interest and ordinary dividends minus any qualified dividends. Income taxes free You do not have any other deductible investment expenses. Income taxes free You have no carryover of investment interest expense from 2012. Income taxes free If you meet all of these tests, you can deduct all of your investment interest. Income taxes free More Information For more information on investment interest, see Interest Expenses in chapter 3 of Publication 550. Income taxes free Items You Cannot Deduct Some interest payments are not deductible. Income taxes free Certain expenses similar to interest also are not deductible. Income taxes free Nondeductible expenses include the following items. Income taxes free Personal interest (discussed later). Income taxes free Service charges (however, see Other Expenses (Line 23) in chapter 28). Income taxes free Annual fees for credit cards. Income taxes free Loan fees. Income taxes free Credit investigation fees. Income taxes free Interest to purchase or carry tax-exempt securities. Income taxes free Penalties. Income taxes free   You cannot deduct fines and penalties paid to a government for violations of law, regardless of their nature. Income taxes free Personal Interest Personal interest is not deductible. Income taxes free Personal interest is any interest that is not home mortgage interest, investment interest, business interest, or other deductible interest. Income taxes free It includes the following items. Income taxes free Interest on car loans (unless you use the car for business). Income taxes free Interest on federal, state, or local income tax. Income taxes free Finance charges on credit cards, retail installment contracts, and revolving charge accounts incurred for personal expenses. Income taxes free Late payment charges by a public utility. Income taxes free You may be able to deduct interest you pay on a qualified student loan. Income taxes free For details, see Publication 970, Tax Benefits for Education. Income taxes free Allocation of Interest If you use the proceeds of a loan for more than one purpose (for example, personal and business), you must allocate the interest on the loan to each use. Income taxes free However, you do not have to allocate home mortgage interest if it is fully deductible, regardless of how the funds are used. Income taxes free You allocate interest (other than fully deductible home mortgage interest) on a loan in the same way as the loan itself is allocated. Income taxes free You do this by tracing disbursements of the debt proceeds to specific uses. Income taxes free For details on how to do this, see chapter 4 of Publication 535. Income taxes free How To Report You must file Form 1040 to deduct any home mortgage interest expense on your tax return. Income taxes free Where you deduct your interest expense generally depends on how you use the loan proceeds. Income taxes free See Table 23-1 for a summary of where to deduct your interest expense. Income taxes free Home mortgage interest and points. Income taxes free   Deduct the home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 10. Income taxes free 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. Income taxes free Attach a statement explaining the difference and print “See attached” next to line 10. Income taxes free    Deduct home mortgage interest that was not reported to you on Form 1098 on Schedule A (Form 1040), line 11. Income taxes free 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. Income taxes free The seller must give you this number and you must give the seller your TIN. Income taxes free A Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. Income taxes free Failure to meet any of these requirements may result in a $50 penalty for each failure. Income taxes free 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. Income taxes free See Social Security Number (SSN) in chapter 1 for more information about TINs. Income taxes free    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. Income taxes free   Deduct mortgage insurance premiums on Schedule A (Form 1040), line 13. Income taxes free More than one borrower. Income taxes free   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. Income taxes free Show how much of the interest each of you paid, and give the name and address of the person who received the form. Income taxes free Deduct your share of the interest on Schedule A (Form 1040), line 11, and print “See attached” next to the line. Income taxes free Also, deduct your share of any qualified mortgage insurance premiums on Schedule A (Form 1040), line 13. Income taxes free   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. Income taxes free You should let each of the other borrowers know what his or her share is. Income taxes free Mortgage proceeds used for business or investment. Income taxes free    If your home mortgage interest deduction is limited, but all or part of the mortgage proceeds were used for business, investment, or other deductible activities, see Table 23-1. Income taxes free It shows where to deduct the part of your excess interest that is for those activities. Income taxes free Investment interest. Income taxes free    Deduct investment interest, subject to certain limits discussed in Publication 550, on Schedule A (Form 1040), line 14. Income taxes free Amortization of bond premium. Income taxes free   There are various ways to treat the premium you pay to buy taxable bonds. Income taxes free See Bond Premium Amortization in Publication 550. Income taxes free Income-producing rental or royalty interest. Income taxes free   Deduct interest on a loan for income-producing rental or royalty property that is not used in your business in Part I of Schedule E (Form 1040). Income taxes free Example. Income taxes free You rent out part of your home and borrow money to make repairs. Income taxes free You can deduct only the interest payment for the rented part in Part I of Schedule E (Form 1040). Income taxes free Deduct the rest of the interest payment on Schedule A (Form 1040) if it is deductible home mortgage interest. Income taxes free Table 23-1. Income taxes free Where To Deduct Your Interest Expense IF you have . Income taxes free . Income taxes free . Income taxes free THEN deduct it on . Income taxes free . Income taxes free . Income taxes free AND for more information go to . Income taxes free . Income taxes free . Income taxes free deductible student loan interest Form 1040, line 33, or Form 1040A, line 18 Publication 970. Income taxes free deductible home mortgage interest and points reported on Form 1098 Schedule A (Form 1040), line 10 Publication 936. Income taxes free deductible home mortgage interest not reported on Form 1098 Schedule A (Form 1040), line 11 Publication 936. Income taxes free deductible points not reported on Form 1098 Schedule A (Form 1040), line 12 Publication 936. Income taxes free deductible mortgage insurance premiums Schedule A (Form 1040), line 13 Publication 936. Income taxes free deductible investment interest (other than incurred to produce rents or royalties) Schedule A (Form 1040), line 14 Publication 550. Income taxes free deductible business interest (non-farm) Schedule C or C-EZ (Form 1040) Publication 535. Income taxes free deductible farm business interest Schedule F (Form 1040) Publications 225 and 535. Income taxes free deductible interest incurred to produce rents or royalties Schedule E (Form 1040) Publications 527 and 535. Income taxes free personal interest not deductible. Income taxes free Prev  Up  Next   Home   More Online Publications