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Irs com Publication 519 - Introductory Material Table of Contents Future Developments IntroductionOrdering forms and publications. Irs com Tax questions. Irs com What's New Reminders Future Developments For the latest information about developments related to Publication 519, such as legislation enacted after it was published, go to www. Irs com irs. Irs com gov/pub519. Irs com Introduction For tax purposes, an alien is an individual who is not a U. Irs com S. Irs com citizen. Irs com Aliens are classified as nonresident aliens and resident aliens. Irs com This publication will help you determine your status and give you information you will need to file your U. Irs com S. Irs com tax return. Irs com Resident aliens generally are taxed on their worldwide income, the same as U. Irs com S. Irs com citizens. Irs com Nonresident aliens are taxed only on their income from sources within the United States and on certain income connected with the conduct of a trade or business in the United States. Irs com The information in this publication is not as comprehensive for resident aliens as it is for nonresident aliens. Irs com Resident aliens are generally treated the same as U. Irs com S. Irs com citizens and can find more information in other IRS publications. Irs com Table A, Where To Find What You Need To Know About U. Irs com S. Irs com Taxes, provides a list of questions and the chapter or chapters in this publication where you will find the related discussion. Irs com Answers to frequently asked questions are presented in the back of the publication. Irs com Table A. Irs com Where To Find What You Need To Know About U. Irs com S. Irs com Taxes Commonly Asked Questions Where To Find The Answer Am I a nonresident alien or resident alien? See chapter 1. Irs com Can I be a nonresident alien and a resident alien in the same year? See Dual-Status Aliens in chapter 1. Irs com See chapter 6. Irs com I am a resident alien and my spouse is a nonresident alien. Irs com Are there special rules for us? See Nonresident Spouse Treated as a Resident  in chapter 1. Irs com See Community Income in chapter 2. Irs com Is all my income subject to U. Irs com S. Irs com tax? See chapter 2. Irs com See chapter 3. Irs com Is my scholarship subject to U. Irs com S. Irs com tax? See Scholarship Grants, Prizes, and Awards in chapter 2. Irs com See Scholarship and Fellowship Grants in chapter 3. Irs com See chapter 9. Irs com What is the tax rate on my income subject to U. Irs com S. Irs com tax? See chapter 4. Irs com I moved to the United States this year. Irs com Can I deduct my moving expenses on my U. Irs com S. Irs com return? See Deductions in chapter 5. Irs com Can I claim exemptions for my spouse and children? See Exemptions in chapter 5. Irs com I pay income taxes to my home country. Irs com Can I get credit for these taxes on my U. Irs com S. Irs com tax return? See Tax Credits and Payments in chapter 5. Irs com What forms must I file and when and where do I file them? See chapter 7. Irs com How should I pay my U. Irs com S. Irs com income taxes? See chapter 8. Irs com Am I eligible for any benefits under a tax treaty? See Income Entitled to Tax Treaty Benefits in chapter 8. Irs com See chapter 9. Irs com Are employees of foreign governments and international organizations exempt from U. Irs com S. Irs com tax? See chapter 10. Irs com Is there anything special I have to do before leaving the United States? See chapter 11. Irs com See Expatriation Tax in chapter 4. Irs com Comments and suggestions. Irs com   We welcome your comments about this publication and your suggestions for future editions. Irs com   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. Irs com NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Irs com Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Irs com   You can send us comments from www. Irs com irs. Irs com gov/formspubs/. Irs com Click on “More Information” and then on “Comment on Tax Forms and Publications. Irs com ”   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. Irs com Ordering forms and publications. Irs com   Visit www. Irs com irs. Irs com gov/formspubs/ to download forms and publications, call 1-800-829-3676, or write to the address below and receive a response within 10 days after your request is received. Irs com Internal Revenue Service 1201 N. Irs com Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. Irs com   If you have a tax question, check the information available on IRS. Irs com gov or call 1-800-829-1040. Irs com We cannot answer tax questions sent to either of the above addresses. Irs com What's New Personal exemption increased. Irs com  For tax years beginning in 2013, the personal exemption amount is increased to $3,900. Irs com U. Irs com S. Irs com real property interest. Irs com  Generally, the treatment of a regulated investment company (RIC) as a qualified investment entity (QIE) was scheduled to expire at the end of 2011. Irs com The provision has been extended through 2013. Irs com The special rules that apply to distributions from a QIE attributable to the gain from the sale or exchange of a U. Irs com S. Irs com real property interest will continue to apply to any distribution from a RIC in 2013. Irs com Beginning in 2014 (unless extended by legislation), a RIC will only be treated as a QIE for certain distributions from the RIC that are directly or indirectly attributable to distributions received by the RIC from a REIT. Irs com See Qualified investment entities under U. Irs com S. Irs com Real Property Interest. Irs com Interest-related dividends and short-term capital gain dividends received from mutual funds. Irs com  The exemption of tax on certain interest-related dividends and short-term capital gain dividends paid by a mutual fund or other regulated investment company was scheduled to expire at the end of 2011. Irs com These provisions have been extended through 2013. Irs com The exemption expires for amounts paid in tax years beginning after December 31, 2013 (unless extended by legislation). Irs com Multi-level marketing. Irs com  Clarification regarding the characterization and source of income received from multi-level marketing companies by distributors (upper-tier distributors) that are based on the sales or purchases of persons whom they have recruited and sponsored (lower-tier distributors) is provided. Irs com See Multi-level marketing under Personal Services in chapter 2. Irs com Additional Medicare Tax. Irs com  For 2013, you may be required to pay Additional Medicare Tax. Irs com Also, you may need to report Additional Medicare Tax withheld by your employer. Irs com For more information, see Additional Medicare Tax under Social Security and Medicare Taxes and Self-Employment Tax in chapter 8. Irs com For more information on Additional Medicare Tax, go to IRS. Irs com gov and enter “Additional Medicare Tax” in the search box. Irs com Reminders Refunds of certain withholding tax delayed. Irs com  Refund requests for tax withheld and reported on Form 1042-S, Form 8288-A, or Form 8805 may require additional time for processing. Irs com Allow up to 6 months for these refunds to be issued. Irs com Third party designee. Irs com  You can check the “Yes” box in the “Third Party Designee” area of your return to authorize the IRS to discuss your return with a friend, family member, or any other person you choose. Irs com This allows the IRS to call the person you identified as your designee to answer any questions that may arise during the processing of your return. Irs com It also allows your designee to perform certain actions such as asking the IRS for copies of notices or transcripts related to your return. Irs com Also, the authorization can be revoked. Irs com See your income tax return instructions for details. Irs com Change of address. Irs com . Irs com  If you change your mailing address, be sure to notify the Internal Revenue Service using Form 8822, Change of Address. Irs com Photographs of missing children. Irs com  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Irs com Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Irs com 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. Irs com Prev  Up  Next   Home   More Online Publications
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Irs com 3. Irs com   Investment Expenses Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Limits on DeductionsPassive activity. Irs com Other income (nonpassive income). Irs com Expenses. Irs com Additional information. Irs com Interest ExpensesInvestment Interest Limit on Deduction Bond Premium AmortizationSpecial rules to determine amounts payable on a bond. Irs com Basis. Irs com How To Figure Amortization Choosing To Amortize How To Report Amortization Expenses of Producing IncomeFees to buy or sell. Irs com Including mutual fund or REMIC expenses in income. Irs com Nondeductible ExpensesUsed as collateral. Irs com Short-sale expenses. Irs com Expenses for both tax-exempt and taxable income. Irs com State income taxes. Irs com Nondeductible amount. Irs com Basis adjustment. Irs com How To Report Investment Expenses When To Report Investment Expenses Topics - This chapter discusses: Limits on Deductions , Interest Expenses , Bond Premium Amortization , Expenses of Producing Income , Nondeductible Expenses , How To Report Investment Expenses , and When To Report Investment Expenses . Irs com Useful Items - You may want to see: Publication 535 Business Expenses 925 Passive Activity and At-Risk Rules 929 Tax Rules for Children and Dependents Form (and Instructions) Schedule A (Form 1040) Itemized Deductions 4952 Investment Interest Expense Deduction See chapter 5, How To Get Tax Help , for information about getting these publications and forms. Irs com Limits on Deductions Your deductions for investment expenses may be limited by: The at-risk rules, The passive activity loss limits, The limit on investment interest, or The 2% limit on certain miscellaneous itemized deductions. Irs com The at-risk rules and passive activity rules are explained briefly in this section. Irs com The limit on investment interest is explained later in this chapter under Interest Expenses . Irs com The 2% limit is explained later in this chapter under Expenses of Producing Income . Irs com At-risk rules. Irs com   Special at-risk rules apply to most income-producing activities. Irs com These rules limit the amount of loss you can deduct to the amount you risk losing in the activity. Irs com Generally, this is the cash and the adjusted basis of property you contribute to the activity. Irs com It also includes money you borrow for use in the activity if you are personally liable for repayment or if you use property not used in the activity as security for the loan. Irs com For more information, see Publication 925. Irs com Passive activity losses and credits. Irs com   The amount of losses and tax credits you can claim from passive activities is limited. Irs com Generally, you are allowed to deduct passive activity losses only up to the amount of your passive activity income. Irs com Also, you can use credits from passive activities only against tax on the income from passive activities. Irs com There are exceptions for certain activities, such as rental real estate activities. Irs com Passive activity. Irs com   A passive activity generally is any activity involving the conduct of any trade or business in which you do not materially participate and any rental activity. Irs com However, if you are involved in renting real estate, the activity is not a passive activity if both of the following are true. Irs com More than one-half of the personal services you perform during the year in all trades or businesses are performed in real property trades or businesses in which you materially participate. Irs com You perform more than 750 hours of services during the year in real property trades or businesses in which you materially participate. Irs com  The term “trade or business” generally means any activity that involves the conduct of a trade or business, is conducted in anticipation of starting a trade or business, or involves certain research or experimental expenditures. Irs com However, it does not include rental activities or certain activities treated as incidental to holding property for investment. Irs com   You are considered to materially participate in an activity if you are involved on a regular, continuous, and substantial basis in the operations of the activity. Irs com Other income (nonpassive income). Irs com    Generally, you can use losses from passive activities only to offset income from passive activities. Irs com You cannot use passive activity losses to offset your other income, such as your wages or your portfolio income. Irs com Portfolio income includes gross income from interest, dividends, annuities, or royalties that is not derived in the ordinary course of a trade or business. Irs com It also includes gains or losses (not derived in the ordinary course of a trade or business) from the sale or trade of property (other than an interest in a passive activity) producing portfolio income or held for investment. Irs com This includes capital gain distributions from mutual funds (and other regulated investment companies) and real estate investment trusts. Irs com   You cannot use passive activity losses to offset Alaska Permanent Fund dividends. Irs com Expenses. Irs com   Do not include in the computation of your passive activity income or loss: Expenses (other than interest) that are clearly and directly allocable to your portfolio income, or Interest expense properly allocable to portfolio income. Irs com However, this interest and other expenses may be subject to other limits. Irs com These limits are explained in the rest of this chapter. Irs com Additional information. Irs com   For more information about determining and reporting income and losses from passive activities, see Publication 925. Irs com Interest Expenses This section discusses interest expenses you may be able to deduct as an investor. Irs com For information on business interest, see chapter 4 of Publication 535. Irs com You cannot deduct personal interest expenses other than qualified home mortgage interest, as explained in Publication 936, Home Mortgage Interest Deduction, and interest on certain student loans, as explained in Publication 970. Irs com Investment Interest If you borrow money to buy property you hold for investment, the interest you pay is investment interest. Irs com You can deduct investment interest subject to the limit discussed later. Irs com However, you cannot deduct interest you incurred to produce tax-exempt income. Irs com See Tax-exempt income under Nondeductible Expenses, later. Irs com You also cannot deduct interest expenses on straddles discussed under Interest expense and carrying charges on straddles , later. Irs com 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. Irs com Investment property. Irs com   Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. Irs com 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). Irs com Investment property also includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity). Irs com Partners, shareholders, and beneficiaries. Irs com   To determine your investment interest, combine your share of investment interest from a partnership, S corporation, estate, or trust with your other investment interest. Irs com 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. Irs com Only the interest expense on the part of the debt used for investment purposes is treated as investment interest. Irs com The allocation is not affected by the use of property that secures the debt. Irs com Example 1. Irs com You borrow $10,000 and use $8,000 to buy stock. Irs com You use the other $2,000 to buy items for your home. Irs com Since 80% of the debt is used for, and allocated to, investment purposes, 80% of the interest on that debt is investment interest. Irs com The other 20% is nondeductible personal interest. Irs com Debt proceeds received in cash. Irs com   If you receive debt proceeds in cash, the proceeds are generally not treated as investment property. Irs com Debt proceeds deposited in account. Irs com   If you deposit debt proceeds in an account, that deposit is treated as investment property, regardless of whether the account bears interest. Irs com But, if you withdraw the funds and use them for another purpose, you must reallocate the debt to determine the amount considered to be for investment purposes. Irs com Example 2. Irs com Assume in Example 1 that you borrowed the money on March 1 and immediately bought the stock for $8,000. Irs com You did not buy the household items until June 1. Irs com You had deposited the $2,000 in the bank. Irs com You had no other transactions on the bank account until June. Irs com You did not sell the stock, and you made no principal payments on the debt. Irs com You paid interest from another account. Irs com The $8,000 is treated as being used for an investment purpose. Irs com The $2,000 is treated as being used for an investment purpose for the 3-month period. Irs com Your total interest expense for 3 months on this debt is investment interest. Irs com In June, when you spend the $2,000 for household items, you must begin to allocate 80% of the debt and the interest expense to investment purposes and 20% to personal purposes. Irs com Amounts paid within 30 days. Irs com   If you receive loan proceeds in cash or if the loan proceeds are deposited in an account, you can treat any payment (up to the amount of the proceeds) made from any account you own, or from cash, as made from those proceeds. Irs com This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. Irs com   If you received the loan proceeds in cash, you can treat the payment as made on the date you received the cash instead of the date you actually made the payment. Irs com Payments on debt may require new allocation. Irs com   As you repay a debt used for more than one purpose, you must reallocate the balance. Irs com You must first reduce the amount allocated to personal purposes by the repayment. Irs com You then reallocate the rest of the debt to find what part is for investment purposes. Irs com Example 3. Irs com If, in Example 2 , you repay $500 on November 1, the entire repayment is applied against the amount allocated to personal purposes. Irs com The debt balance is now allocated as $8,000 for investment purposes and $1,500 for personal purposes. Irs com Until the next reallocation is necessary, 84% ($8,000 ÷ $9,500) of the debt and the interest expense is allocated to investment. Irs com Pass-through entities. Irs com   If you use borrowed funds to buy an interest in a partnership or S corporation, then the interest on those funds must be allocated based on the assets of the entity. Irs com If you contribute to the capital of the entity, you can make the allocation using any reasonable method. Irs com Additional allocation rules. Irs com   For more information about allocating interest expense, see chapter 4 of Publication 535. Irs com When To Deduct Investment Interest If you use the cash method of accounting, you must pay the interest before you can deduct it. Irs com If you use an accrual method of accounting, you can deduct interest over the period it accrues, regardless of when you pay it. Irs com For an exception, see Unpaid expenses owed to related party under When To Report Investment Expenses, later in this chapter. Irs com Example. Irs com You borrowed $1,000 on August 26, 2013, payable in 90 days at 12% interest. Irs com On November 26, 2013, you paid this with a new note for $1,030, due on February 26, 2014. Irs com If you use the cash method of accounting, you cannot deduct any part of the $30 interest on your return for 2013 because you did not actually pay it. Irs com If you use an accrual method, you may be able to deduct a portion of the interest on the loans through December 31, 2013, on your return for 2013. Irs com Interest paid in advance. Irs com   Generally, if you pay interest in advance for a period that goes beyond the end of the tax year, you must spread the interest over the tax years to which it belongs under the OID rules discussed in chapter 1. Irs com You can deduct in each year only the interest for that year. Irs com Interest on margin accounts. Irs com   If you are a cash method taxpayer, you can deduct interest on margin accounts to buy taxable securities as investment interest in the year you paid it. Irs com You are considered to have paid interest on these accounts only when you actually pay the broker or when payment becomes available to the broker through your account. Irs com Payment may become available to the broker through your account when the broker collects dividends or interest for your account, or sells securities held for you or received from you. Irs com   You cannot deduct any interest on money borrowed for personal reasons. Irs com Limit on interest deduction for market discount bonds. Irs com   The amount you can deduct for interest expense you paid or accrued during the year to buy or carry a market discount bond may be limited. Irs com This limit does not apply if you accrue the market discount and include it in your income currently. Irs com   Under this limit, the interest is deductible only to the extent it is more than: The total interest and OID includible in gross income for the bond for the year, plus The market discount for the number of days you held the bond during the year. Irs com Figure the amount in (2) above using the rules for figuring accrued market discount in chapter 1 under Market Discount Bonds . Irs com Interest not deducted due to limit. Irs com   In the year you dispose of the bond, you can deduct any interest expense you were not allowed to deduct in earlier years because of the limit. Irs com Choosing to deduct disallowed interest expense before the year of disposition. Irs com   You can choose to deduct disallowed interest expense in any year before the year you dispose of the bond, up to your net interest income from the bond during the year. Irs com The rest of the disallowed interest expense remains deductible in the year you dispose of the bond. Irs com Net interest income. Irs com   This is the interest income (including OID) from the bond that you include in income for the year, minus the interest expense paid or accrued during the year to purchase or carry the bond. Irs com Limit on interest deduction for short-term obligations. Irs com   If the current income inclusion rules discussed in chapter 1 under Discount on Short-Term Obligations do not apply to you, the amount you can deduct for interest expense you paid or accrued during the year to buy or carry a short-term obligation is limited. Irs com   The interest is deductible only to the extent it is more than: The amount of acquisition discount or OID on the obligation for the tax year, plus The amount of any interest payable on the obligation for the year that is not included in income because of your accounting method (other than interest taken into account in determining the amount of acquisition discount or OID). Irs com The method of determining acquisition discount and OID for short-term obligations is discussed in chapter 1 under Discount on Short-Term Obligations . Irs com Interest not deducted due to limit. Irs com   In the year you dispose of the obligation, or, if you choose, in another year in which you have net interest income from the obligation, you can deduct any interest expense you were not allowed to deduct for an earlier year because of the limit. Irs com Follow the same rules provided in the earlier discussion under Limit on interest deduction for market discount bonds , earlier. Irs com Limit on Deduction Generally, your deduction for investment interest expense is limited to your net investment income. Irs com You can carry over the amount of investment interest you could not deduct because of this limit to the next tax year. Irs com The interest carried over is treated as investment interest paid or accrued in that next year. Irs com 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. Irs com Net Investment Income Determine the amount of your net investment income by subtracting your investment expenses (other than interest expense) from your investment income. Irs com Investment income. Irs com   This generally includes your gross income from property held for investment (such as interest, dividends, annuities, and royalties). Irs com Investment income does not include Alaska Permanent Fund dividends. Irs com It also does not include qualified dividends or net capital gain unless you choose to include them. Irs com Choosing to include qualified dividends. Irs com   Investment income generally does not include qualified dividends, discussed in chapter 1. Irs com However, you can choose to include all or part of your qualified dividends in investment income. Irs com   You make this choice by completing Form 4952, line 4g, according to its instructions. Irs com   If you choose to include any of your qualified dividends in investment income, you must reduce your qualified dividends that are eligible for the lower capital gains tax rates by the same amount. Irs com Choosing to include net capital gain. Irs com    Investment income generally does not include net capital gain from disposing of investment property (including capital gain distributions from mutual funds). Irs com However, you can choose to include all or part of your net capital gain in investment income. Irs com   You make this choice by completing Form 4952, line 4g, according to its instructions. Irs com   If you choose to include any of your net capital gain in investment income, you must reduce your net capital gain that is eligible for the lower capital gains tax rates by the same amount. Irs com   For more information about the capital gains rates, see Capital Gain Tax Rates in chapter 4. Irs com    Before making either choice, consider the overall effect on your tax liability. Irs com Compare your tax if you make one or both of these choices with your tax if you do not. Irs com Investment income of child reported on parent's return. Irs com   Investment income includes the part of your child's interest and dividend income you choose to report on your return. Irs com 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. Irs com Include it on line 4a of Form 4952. Irs com Example. Irs com Your 8-year-old son has interest income of $2,200, which you choose to report on your own return. Irs com You enter $2,200 on Form 8814, lines 1a and 4, and $200 on lines 6 and 12 and complete Part II. Irs com Also enter $200 on Form 1040, line 21. Irs com Your investment income includes this $200. Irs com Child's qualified dividends. Irs com   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. Irs com However, you can choose to include all or part of it in investment income, as explained under Choosing to include qualified dividends , earlier. Irs com   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). Irs com Child's Alaska Permanent Fund dividends. Irs com   If part of the amount you report is your child's Alaska Permanent Fund dividends, that part does not count as investment income. Irs com 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. Irs com 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. Irs com Subtract the result from the amount on Form 8814, line 12. Irs com Example. Irs com Your 10-year-old child has taxable interest income of $4,000 and Alaska Permanent Fund dividends of $2,000. Irs com You choose to report this on your return. Irs com You enter $4,000 on Form 8814, line 1a, $2,000 on line 2a, and $6,000 on line 4. Irs com You then enter $4,000 on Form 8814, lines 6 and 12, and Form 1040, line 21. Irs com You figure the amount of your child's income that you can consider your investment income as follows: $4,000 − ($4,000 × ($2,000 ÷ $6,000)) = $2,667 You include the result, $2,667, on Form 4952, line 4a. Irs com Child's capital gain distributions. Irs com   If part of the amount you report is your child's capital gain distributions, that part (which is reported on Schedule D (Form 1040), line 13, or Form 1040, line 13) generally does not count as investment income. Irs com However, you can choose to include all or part of it in investment income, as explained in Choosing to include net capital gain , earlier. Irs com   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). Irs com Investment expenses. Irs com   Investment expenses are your allowed deductions (other than interest expense) directly connected with the production of investment income. Irs com 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. Irs com Use the smaller of: The investment expenses included on Schedule A (Form 1040), line 23, or The amount on Schedule A (Form 1040), line 27. Irs com See Expenses of Producing Income , later, for a discussion of the 2% limit. Irs com Losses from passive activities. Irs com   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). Irs com See Publication 925 for information about passive activities. Irs com Example. Irs com Ted is a partner in a partnership that operates a business. Irs com However, he does not materially participate in the partnership's business. Irs com Ted's interest in the partnership is considered a passive activity. Irs com Ted's investment income from interest and dividends (other than qualified dividends) is $10,000. Irs com His investment expenses (other than interest) are $3,200 after taking into account the 2% limit on miscellaneous itemized deductions. Irs com His investment interest expense is $8,000. Irs com Ted also has income from the partnership of $2,000. Irs com Ted figures his net investment income and the limit on his investment interest expense deduction in the following way: Total investment income $10,000 Minus: Investment expenses (other than interest) 3,200 Net investment income $6,800 Deductible investment interest expense for the year $6,800 The $2,000 of income from the passive activity is not used in determining Ted's net investment income. Irs com His investment interest deduction for the year is limited to $6,800, the amount of his net investment income. Irs com Form 4952 Use Form 4952 to figure your deduction for investment interest. Irs com See Form 4952 for more information. Irs com Exception to use of Form 4952. Irs com   You do not have to complete Form 4952 or attach it to your return if you meet all of the following tests. Irs com Your investment interest expense is not more than your investment income from interest and ordinary dividends minus any qualified dividends. Irs com You do not have any other deductible investment expenses. Irs com You have no carryover of investment interest expense from 2012. Irs com   If you meet all of these tests, you can deduct all of your investment interest. Irs com    Bond Premium Amortization If you pay a premium to buy a bond, the premium is part of your basis in the bond. Irs com If the bond yields taxable interest, you can choose to amortize the premium. Irs com This generally means that each year, over the life of the bond, you use a part of the premium to reduce the amount of interest includible in your income. Irs com If you make this choice, you must reduce your basis in the bond by the amortization for the year. Irs com If the bond yields tax-exempt interest, you must amortize the premium. Irs com This amortized amount is not deductible in determining taxable income. Irs com However, each year you must reduce your basis in the bond (and tax-exempt interest otherwise reportable on Form 1040, line 8b) by the amortization for the year. Irs com Bond premium. Irs com   Bond premium is the amount by which your basis in the bond right after you get it is more than the total of all amounts payable on the bond after you get it (other than payments of qualified stated interest). Irs com For example, a bond with a maturity value of $1,000 generally would have a $50 premium if you buy it for $1,050. Irs com Special rules to determine amounts payable on a bond. Irs com   For special rules that apply to determine the amounts payable on a variable rate bond, an inflation-indexed debt instrument, a bond that provides for certain alternative payment schedules (for example, a bond callable prior to the stated maturity date of the bond), or a bond that provides for remote or incidental contingencies, see Regulations section 1. Irs com 171-3. Irs com Basis. Irs com   In general, your basis for figuring bond premium amortization is the same as your basis for figuring any loss on the sale of the bond. Irs com However, you may need to use a different basis for: Convertible bonds, Bonds you got in a trade, and Bonds whose basis has to be determined using the basis of the person who transferred the bond to you. Irs com See Regulations section 1. Irs com 171-1(e). Irs com Dealers. Irs com   A dealer in taxable bonds (or anyone who holds them mainly for sale to customers in the ordinary course of a trade or business or who would properly include bonds in inventory at the close of the tax year) cannot claim a deduction for amortizable bond premium. Irs com   See section 75 of the Internal Revenue Code for the treatment of bond premium by a dealer in tax-exempt bonds. Irs com How To Figure Amortization For bonds issued after September 27, 1985, you must amortize bond premium using a constant yield method on the basis of the bond's yield to maturity, determined by using the bond's basis and compounding at the close of each accrual period. Irs com Constant yield method. Irs com   Figure the bond premium amortization for each accrual period as follows. Irs com Step 1: Determine your yield. Irs com   Your yield is the discount rate that, when used in figuring the present value of all remaining payments to be made on the bond (including payments of qualified stated interest), produces an amount equal to your basis in the bond. Irs com Figure the yield as of the date you got the bond. Irs com It must be constant over the term of the bond and must be figured to at least two decimal places when expressed as a percentage. Irs com   If you do not know the yield, consult your broker or tax advisor. Irs com Databases available to them are likely to show the yield at the date of purchase. Irs com Step 2: Determine the accrual periods. Irs com   You can choose the accrual periods to use. Irs com They may be of any length and may vary in length over the term of the bond, but each accrual period can be no longer than 1 year and each scheduled payment of principal or interest must occur either on the first or the final day of an accrual period. Irs com The computation is simplest if accrual periods are the same as the intervals between interest payment dates. Irs com Step 3: Determine the bond premium for the accrual period. Irs com   To do this, multiply your adjusted acquisition price at the beginning of the accrual period by your yield. Irs com Then subtract the result from the qualified stated interest for the period. Irs com   Your adjusted acquisition price at the beginning of the first accrual period is the same as your basis. Irs com After that, it is your basis decreased by the amount of bond premium amortized for earlier periods and the amount of any payment previously made on the bond other than a payment of qualified stated interest. Irs com Example. Irs com On February 1, 2012, you bought a taxable bond for $110,000. Irs com The bond has a stated principal amount of $100,000, payable at maturity on February 1, 2019, making your premium $10,000 ($110,000 − $100,000). Irs com The bond pays qualified stated interest of $10,000 on February 1 of each year. Irs com Your yield is 8. Irs com 07439% compounded annually. Irs com You choose to use annual accrual periods ending on February 1 of each year. Irs com To find your bond premium amortization for the accrual period ending on February 1, 2013, you multiply the adjusted acquisition price at the beginning of the period ($110,000) by your yield. Irs com When you subtract the result ($8,881. Irs com 83) from the qualified stated interest for the period ($10,000), you find that your bond premium amortization for the period is $1,118. Irs com 17. Irs com Special rules to figure amortization. Irs com   For special rules to figure the bond premium amortization on a variable rate bond, an inflation-indexed debt instrument, a bond that provides for certain alternative payment schedules (for example, a bond callable prior to the stated maturity date of the bond), or a bond that provides for remote or incidental contingencies, see Regulations section 1. Irs com 171-3. Irs com Bonds Issued Before September 28, 1985 For these bonds, you can amortize bond premium using any reasonable method. Irs com Reasonable methods include: The straight-line method, and The Revenue Ruling 82-10 method. Irs com Straight-line method. Irs com   Under this method, the amount of your bond premium amortization is the same each month. Irs com Divide the number of months you held the bond during the year by the number of months from the beginning of the tax year (or, if later, the date of acquisition) to the date of maturity or earlier call date. Irs com Then multiply the result by the bond premium (reduced by any bond premium amortization claimed in earlier years). Irs com This gives you your bond premium amortization for the year. Irs com Revenue Ruling 82-10 method. Irs com   Under this method, the amount of your bond premium amortization increases each month over the life of the bond. Irs com This method is explained in Revenue Ruling 82-10, 1982-1 C. Irs com B. Irs com 46. Irs com Choosing To Amortize You choose to amortize the premium on taxable bonds by reporting the amortization for the year on your income tax return for the first tax year you want the choice to apply. Irs com You should attach a statement to your return that you are making this choice under section 171. Irs com See How To Report Amortization, next. Irs com This choice is binding for the year you make it and for later tax years. Irs com It applies to all taxable bonds you own in the year you make the choice and also to those you acquire in later years. Irs com You can change your decision to amortize bond premium only with the written approval of the IRS. Irs com To request approval, use Form 3115. Irs com For more information on requesting approval, see section 5 of the Appendix to Revenue Procedure 2011-14 in Internal Revenue Bulletin 2011-4. Irs com You can find Revenue Procedure 2011-14 at www. Irs com irs. Irs com gov/irb/2011-04_IRB/ar08. Irs com html. Irs com How To Report Amortization Subtract the bond premium amortization from your interest income from these bonds. Irs com Report the bond's interest on Schedule B (Form 1040A or 1040), line 1. Irs com Under your last entry on line 1, put a subtotal of all interest listed on line 1. Irs com Below this subtotal, print “ABP Adjustment,” and the total interest you received. Irs com Subtract this amount from the subtotal, and enter the result on line 2. Irs com Bond premium amortization more than interest. Irs com   If the amount of your bond premium amortization for an accrual period is more than the qualified stated interest for the period, you can deduct the difference as a miscellaneous itemized deduction on Schedule A (Form 1040), line 28. Irs com    But your deduction is limited to the amount by which your total interest inclusions on the bond in prior accrual periods is more than your total bond premium deductions on the bond in prior periods. Irs com Any amount you cannot deduct because of this limit can be carried forward to the next accrual period. Irs com Pre-1998 election to amortize bond premium. Irs com   Generally, if you first elected to amortize bond premium before 1998, the above treatment of the premium does not apply to bonds you acquired before 1988. Irs com Bonds acquired before October 23, 1986. Irs com   The amortization of the premium on these bonds is a miscellaneous itemized deduction not subject to the 2%-of-adjusted-gross-income limit. Irs com Bonds acquired after October 22, 1986, but before 1988. Irs com    The amortization of the premium on these bonds is investment interest expense subject to the investment interest limit, unless you choose to treat it as an offset to interest income on the bond. Irs com Expenses of Producing Income You deduct investment expenses (other than interest expenses) as miscellaneous itemized deductions on Schedule A (Form 1040). Irs com To be deductible, these expenses must be ordinary and necessary expenses paid or incurred: To produce or collect income, or To manage property held for producing income. Irs com The expenses must be directly related to the income or income-producing property, and the income must be taxable to you. Irs com The deduction for most income-producing expenses is subject to a 2% limit that also applies to certain other miscellaneous itemized deductions. Irs com The amount deductible is limited to the total of these miscellaneous deductions that is more than 2% of your adjusted gross income. Irs com For information on how to report expenses of producing income, see How To Report Investment Expenses , later. Irs com Attorney or accounting fees. Irs com   You can deduct attorney or accounting fees that are necessary to produce or collect taxable income. Irs com However, in some cases, attorney or accounting fees are part of the basis of property. Irs com See Basis of Investment Property in chapter 4. Irs com Automatic investment service and dividend reinvestment plans. Irs com   A bank may offer its checking account customers an automatic investment service so that, for a charge, each customer can choose to invest a part of the checking account each month in common stock. Irs com Or a bank that is a dividend disbursing agent for a number of publicly-owned corporations may set up an automatic dividend reinvestment service. Irs com Through that service, cash dividends are reinvested in more shares of stock after the bank deducts a service charge. Irs com   A corporation in which you own stock also may have a dividend reinvestment plan. Irs com This plan lets you choose to use your dividends to buy more shares of stock in the corporation instead of receiving the dividends in cash. Irs com   You can deduct the monthly service charge you pay to a bank to participate in an automatic investment service. Irs com If you participate in a dividend reinvestment plan, you can deduct any service charge subtracted from your cash dividends before the dividends are used to buy more shares of stock. Irs com Deduct the charges in the year you pay them. Irs com Clerical help and office rent. Irs com   You can deduct office expenses, such as rent and clerical help, you incurred in connection with your investments and collecting the taxable income on your investments. Irs com Cost of replacing missing securities. Irs com   To replace your taxable securities that are mislaid, lost, stolen, or destroyed, you may have to post an indemnity bond. Irs com You can deduct the premium you pay to buy the indemnity bond and the related incidental expenses. Irs com   You may, however, get a refund of part of the bond premium if the missing securities are recovered within a specified time. Irs com Under certain types of insurance policies, you can recover some of the expenses. Irs com   If you receive the refund in the tax year you pay the amounts, you can deduct only the difference between the expenses paid and the amount refunded. Irs com If the refund is made in a later tax year, you must include the refund in income in the year you received it, but only to the extent that the expenses decreased your tax in the year you deducted them. Irs com Fees to collect income. Irs com   You can deduct fees you pay to a broker, bank, trustee, or similar agent to collect investment income, such as your taxable bond or mortgage interest, or your dividends on shares of stock. Irs com Fees to buy or sell. Irs com   You cannot deduct a fee you pay to a broker to acquire investment property, such as stocks or bonds. Irs com You must add the fee to the cost of the property. Irs com See Basis of Investment Property in chapter 4. Irs com    You cannot deduct any broker's fees, commissions, or option premiums you pay (or that were netted out) in connection with the sale of investment property. Irs com They can be used only to figure gain or loss from the sale. Irs com See Reporting Capital Gains and Losses , in chapter 4, for more information about the treatment of these sale expenses. Irs com Investment counsel and advice. Irs com   You can deduct fees you pay for counsel and advice about investments that produce taxable income. Irs com This includes amounts you pay for investment advisory services. Irs com Safe deposit box rent. Irs com   You can deduct rent you pay for a safe deposit box if you use the box to store taxable income-producing stocks, bonds, or other investment-related papers and documents. Irs com If you also use the box to store tax-exempt securities or personal items, you can deduct only part of the rent. Irs com See Tax-exempt income under Nondeductible Expenses, later, to figure what part you can deduct. Irs com State and local transfer taxes. Irs com   You cannot deduct the state and local transfer taxes you pay when you buy or sell securities. Irs com If you pay these transfer taxes when you buy securities, you must treat them as part of the cost of the property. Irs com If you pay these transfer taxes when you sell securities, you must treat them as a reduction in the amount realized. Irs com Trustee's commissions for revocable trust. Irs com   If you set up a revocable trust and have its income distributed to you, you can deduct the commission you pay the trustee for managing the trust to the extent it is to produce or collect taxable income or to manage property. Irs com However, you cannot deduct any part of the commission used for producing or collecting tax-exempt income or for managing property that produces tax-exempt income. Irs com   If you are a cash-basis taxpayer and pay the commissions for several years in advance, you must deduct a part of the commission each year. Irs com You cannot deduct the entire amount in the year you pay it. Irs com Investment expenses from pass-through entities. Irs com   If you hold an interest in a partnership, S corporation, real estate mortgage investment conduit (REMIC), or a nonpublicly offered mutual fund, you can deduct your share of that entity's investment expenses. Irs com A partnership or S corporation will show your share of these expenses on your Schedule K-1 (Form 1065) or Schedule K-1 (Form 1120S). Irs com A nonpublicly offered mutual fund will indicate your share of these expenses in box 5 of Form 1099-DIV (or substitute statement). Irs com Publicly-offered mutual funds are discussed later. Irs com   If you hold an interest in a REMIC, any expenses relating to your residual interest investment will be shown on Schedule Q (Form 1066), line 3b. Irs com Any expenses relating to your regular interest investment will appear in box 5 of Form 1099-INT (or substitute statement) or box 9 of Form 1099-OID (or substitute statement). Irs com   Report your share of these investment expenses on Schedule A (Form 1040), subject to the 2% limit, in the same manner as your other investment expenses. Irs com Including mutual fund or REMIC expenses in income. Irs com   Your share of the investment expenses of a REMIC or a nonpublicly offered mutual fund, as described above, are considered to be indirect deductions through that pass-through entity. Irs com You must include in your gross income an amount equal to the expenses allocated to you, whether or not you are able to claim a deduction for those expenses. Irs com If you are a shareholder in a nonpublicly offered mutual fund, you must include on your return the full amount of ordinary dividends or other distributions of stock, as shown in box 1a of Form 1099-DIV (or substitute statement). Irs com If you are a residual interest holder in a REMIC, you must report as ordinary income on Schedule E (Form 1040) the total amounts shown on Schedule Q (Form 1066), lines 1b and 3b. Irs com If you are a REMIC regular interest holder, you must include the amount of any expense allocation you received on Form 1040, line 8a. Irs com Publicly-offered mutual funds. Irs com   Most mutual funds are publicly offered. Irs com These mutual funds, generally, are traded on an established securities exchange. Irs com These funds do not pass investment expenses through to you. Irs com Instead, the dividend income they report to you in box 1a of Form 1099-DIV (or substitute statement) is already reduced by your share of investment expenses. Irs com As a result, you cannot deduct the expenses on your return. Irs com   Include the amount from box 1a of Form 1099-DIV (or substitute statement) in your income. Irs com    A publicly offered mutual fund is one that: Is continuously offered pursuant to a public offering, Is regularly traded on an established securities market, and Is held by or for no fewer than 500 persons at any time during the year. Irs com Contact your mutual fund if you are not sure whether it is publicly offered. Irs com Nondeductible Expenses Some expenses that you incur as an investor are not deductible. Irs com Stockholders' meetings. Irs com   You cannot deduct transportation and other expenses you pay to attend stockholders' meetings of companies in which you have no interest other than owning stock. Irs com This is true even if your purpose in attending is to get information that would be useful in making further investments. Irs com Investment-related seminar. Irs com   You cannot deduct expenses for attending a convention, seminar, or similar meeting for investment purposes. Irs com Single-premium life insurance, endowment, and annuity contracts. Irs com   You cannot deduct interest on money you borrow to buy or carry a single-premium life insurance, endowment, or annuity contract. Irs com Used as collateral. Irs com   If you use a single premium annuity contract as collateral to obtain or continue a mortgage loan, you cannot deduct any interest on the loan that is collateralized by the annuity contract. Irs com Figure the amount of interest expense disallowed by multiplying the current interest rate on the mortgage loan by the lesser of the amount of the annuity contract used as collateral or the amount of the loan. Irs com Borrowing on insurance. Irs com   Generally, you cannot deduct interest on money you borrow to buy or carry a life insurance, endowment, or annuity contract if you plan to systematically borrow part or all of the increases in the cash value of the contract. Irs com This rule applies to the interest on the total amount borrowed to buy or carry the contract, not just the interest on the borrowed increases in the cash value. Irs com Tax-exempt income. Irs com   You cannot deduct expenses you incur to produce tax-exempt income. Irs com Nor can you deduct interest on money you borrow to buy tax-exempt securities or shares in a mutual fund or other regulated investment company that distributes only exempt-interest dividends. Irs com Short-sale expenses. Irs com   The rule disallowing a deduction for interest expenses on tax-exempt securities applies to amounts you pay in connection with personal property used in a short sale or amounts paid by others for the use of any collateral in connection with the short sale. Irs com However, it does not apply to the expenses you incur if you deposit cash as collateral for the property used in the short sale and the cash does not earn a material return during the period of the sale. Irs com Short sales are discussed in Short Sales in chapter 4. Irs com Expenses for both tax-exempt and taxable income. Irs com   You may have expenses that are for both tax-exempt and taxable income. Irs com If you cannot specifically identify what part of the expenses is for each type of income, you can divide the expenses, using reasonable proportions based on facts and circumstances. Irs com You must attach a statement to your return showing how you divided the expenses and stating that each deduction claimed is not based on tax-exempt income. Irs com   One accepted method for dividing expenses is to do it in the same proportion that each type of income is to the total income. Irs com If the expenses relate in part to capital gains and losses, include the gains, but not the losses, in figuring this proportion. Irs com To find the part of the expenses that is for the tax-exempt income, divide your tax-exempt income by the total income and multiply your expenses by the result. Irs com Example. Irs com You received $6,000 interest; $4,800 was tax-exempt and $1,200 was taxable. Irs com In earning this income, you had $500 of expenses. Irs com You cannot specifically identify the amount of each expense item that is for each income item, so you must divide your expenses. Irs com 80% ($4,800 tax-exempt interest divided by $6,000 total interest) of your expenses is for the tax-exempt income. Irs com You cannot deduct $400 (80% of $500) of the expenses. Irs com You can deduct $100 (the rest of the expenses) because they are for the taxable interest. Irs com State income taxes. Irs com   If you itemize your deductions, you can deduct, as taxes, state income taxes on interest income that is exempt from federal income tax. Irs com But you cannot deduct, as either taxes or investment expenses, state income taxes on other exempt income. Irs com Interest expense and carrying charges on straddles. Irs com   You cannot deduct interest and carrying charges allocable to personal property that is part of a straddle. Irs com The nondeductible interest and carrying charges are added to the basis of the straddle property. Irs com However, this treatment does not apply if: All the offsetting positions making up the straddle either consist of one or more qualified covered call options and the optioned stock, or consist of section 1256 contracts (and the straddle is not part of a larger straddle); or The straddle is a hedging transaction. Irs com  For information about straddles, including definitions of the terms used in this discussion, see Straddles in chapter 4. Irs com   Interest includes any amount you pay or incur in connection with personal property used in a short sale. Irs com However, you must first apply the rules discussed in Payments in lieu of dividends under Short Sales in chapter 4. Irs com   To determine the interest on market discount bonds and short-term obligations that are part of a straddle, you must first apply the rules discussed under Limit on interest deduction for market discount bonds and Limit on interest deduction for short-term obligations (both under Interest Expenses, earlier). Irs com Nondeductible amount. Irs com   Figure the nondeductible interest and carrying charges on straddle property as follows. Irs com Add: Interest on indebtedness incurred or continued to buy or carry the personal property, and All other amounts (including charges to insure, store, or transport the personal property) paid or incurred to carry the personal property. Irs com Subtract from the amount in (1): Interest (including OID) includible in gross income for the year on the personal property, Any income from the personal property treated as ordinary income on the disposition of short-term government obligations or as ordinary income under the market discount and short-term bond provisions — see Discount on Debt Instruments in chapter 1, The dividends includible in gross income for the year from the personal property, and Any payment on a loan of the personal property for use in a short sale that is includible in gross income. Irs com Basis adjustment. Irs com   Add the nondeductible amount to the basis of your straddle property. Irs com How To Report Investment Expenses To deduct your investment expenses, you must itemize deductions on Schedule A (Form 1040). Irs com Enter your deductible investment interest expense on Schedule A (Form1040), line 14. Irs com Include any deductible short sale expenses. Irs com (See Short Sales in chapter 4 for information on these expenses. Irs com ) Also attach a completed Form 4952 if you used that form to figure your investment interest expense. Irs com Enter the total amount of your other investment expenses (other than interest expenses) on Schedule A (Form 1040), line 23. Irs com List the type and amount of each expense on the dotted lines next to line 23. Irs com (If necessary, you can show the required information on an attached statement. Irs com ) For information on how to report amortizable bond premium, see Bond Premium Amortization , earlier in this chapter. Irs com When To Report Investment Expenses If you use the cash method to report income and expenses, you generally deduct your expenses, except for certain prepaid interest, in the year you pay them. Irs com If you use an accrual method, you generally deduct your expenses when you incur a liability for them, rather than when you pay them. Irs com Also see When To Deduct Investment Interest , earlier in this chapter. Irs com Unpaid expenses owed to related party. Irs com   If you use an accrual method, you cannot deduct interest and other expenses owed to a related cash-basis person until payment is made and the amount is includible in the gross income of that person. Irs com The relationship, for purposes of this rule, is determined as of the end of the tax year for which the interest or expense would otherwise be deductible. Irs com If a deduction is denied under this rule, this rule will continue to apply even if your relationship with the person ceases to exist before the amount is includible in the gross income of that person. Irs com   This rule generally applies to those relationships listed in chapter 4 under Related Party Transactions . Irs com It also applies to accruals by partnerships to partners, partners to partnerships, shareholders to S corporations, and S corporations to shareholders. Irs com   The postponement of deductions for unpaid expenses and interest under the related party rule does not apply to OID, regardless of when payment is made. Irs com This rule also does not apply to loans with below-market interest rates or to certain payments for the use of property and services when the lender or recipient has to include payments periodically in income, even if a payment has not been made. Irs com Prev  Up  Next   Home   More Online Publications