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My free tax Publication 530 - Main Content Table of Contents What You Can and Cannot DeductHardest Hit Fund and Emergency Homeowners' Loan Programs Real Estate Taxes Sales Taxes Home Mortgage Interest Mortgage Insurance Premiums Mortgage Interest CreditFiguring the Credit BasisFiguring Your Basis Adjusted Basis Keeping Records How To Get Tax HelpLow Income Taxpayer Clinics What You Can and Cannot Deduct To deduct expenses of owning a home, you must file Form 1040, U. My free tax S. My free tax Individual Income Tax Return, and itemize your deductions on Schedule A (Form 1040). My free tax If you itemize, you cannot take the standard deduction. My free tax This section explains what expenses you can deduct as a homeowner. My free tax It also points out expenses that you cannot deduct. My free tax There are four primary discussions: real estate taxes, sales taxes, home mortgage interest, and mortgage insurance premiums. My free tax Generally, your real estate taxes, home mortgage interest, and mortgage insurance premiums are included in your house payment. My free tax Your house payment. My free tax   If you took out a mortgage (loan) to finance the purchase of your home, you probably have to make monthly house payments. My free tax Your house payment may include several costs of owning a home. My free tax The only costs you can deduct are real estate taxes actually paid to the taxing authority, interest that qualifies as home mortgage interest, and mortgage insurance premiums. My free tax These are discussed in more detail later. My free tax   Some nondeductible expenses that may be included in your house payment include: Fire or homeowner's insurance premiums, and The amount applied to reduce the principal of the mortgage. My free tax Minister's or military housing allowance. My free tax   If you are a minister or a member of the uniformed services and receive a housing allowance that is not taxable, you still can deduct your real estate taxes and your home mortgage interest. My free tax You do not have to reduce your deductions by your nontaxable allowance. My free tax For more information see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers, and Publication 3, Armed Forces' Tax Guide. My free tax Nondeductible payments. My free tax   You cannot deduct any of the following items. My free tax Insurance (other than mortgage insurance premiums), including fire and comprehensive coverage, and title insurance. My free tax Wages you pay for domestic help. My free tax Depreciation. My free tax The cost of utilities, such as gas, electricity, or water. My free tax Most settlement costs. My free tax See Settlement or closing costs under Cost as Basis, later, for more information. My free tax Forfeited deposits, down payments, or earnest money. My free tax Hardest Hit Fund and Emergency Homeowners' Loan Programs 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. My free tax 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. My free tax 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. My free tax 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), box 4 (mortgage insurance premiums) and box 5 (real property taxes). My free tax 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. My free tax Real Estate Taxes Most state and local governments charge an annual tax on the value of real property. My free tax This is called a real estate tax. My free tax You can deduct the tax if it is assessed uniformly at a like rate on all real property throughout the community. My free tax The proceeds must be for general community or governmental purposes and not be a payment for a special privilege granted or service rendered to you. My free tax Deductible Real Estate Taxes You can deduct real estate taxes imposed on you. My free tax You must have paid them either at settlement or closing, or to a taxing authority (either directly or through an escrow account) during the year. My free tax If you own a cooperative apartment, see Special Rules for Cooperatives , later. My free tax Where to deduct real estate taxes. My free tax   Enter the amount of your deductible real estate taxes on Schedule A (Form 1040), line 6. My free tax Real estate taxes paid at settlement or closing. My free tax   Real estate taxes are generally divided so that you and the seller each pay taxes for the part of the property tax year you owned the home. My free tax Your share of these taxes is fully deductible if you itemize your deductions. My free tax Division of real estate taxes. My free tax   For federal income tax purposes, the seller is treated as paying the property taxes up to, but not including, the date of sale. My free tax You (the buyer) are treated as paying the taxes beginning with the date of sale. My free tax This applies regardless of the lien dates under local law. My free tax Generally, this information is included on the settlement statement you get at closing. My free tax   You and the seller each are considered to have paid your own share of the taxes, even if one or the other paid the entire amount. My free tax You each can deduct your own share, if you itemize deductions, for the year the property is sold. My free tax Example. My free tax You bought your home on September 1. My free tax The property tax year (the period to which the tax relates) in your area is the calendar year. My free tax The tax for the year was $730 and was due and paid by the seller on August 15. My free tax You owned your new home during the property tax year for 122 days (September 1 to December 31, including your date of purchase). My free tax You figure your deduction for real estate taxes on your home as follows. My free tax 1. My free tax Enter the total real estate taxes for the real property tax year $730 2. My free tax Enter the number of days in the property tax year that you owned the property 122 3. My free tax Divide line 2 by 365 . My free tax 3342 4. My free tax Multiply line 1 by line 3. My free tax This is your deduction. My free tax Enter it on Schedule A (Form 1040), line 6 $244   You can deduct $244 on your return for the year if you itemize your deductions. My free tax You are considered to have paid this amount and can deduct it on your return even if, under the contract, you did not have to reimburse the seller. My free tax Delinquent taxes. My free tax   Delinquent taxes are unpaid taxes that were imposed on the seller for an earlier tax year. My free tax If you agree to pay delinquent taxes when you buy your home, you cannot deduct them. My free tax You treat them as part of the cost of your home. My free tax See Real estate taxes , later, under Basis. My free tax Escrow accounts. My free tax   Many monthly house payments include an amount placed in escrow (put in the care of a third party) for real estate taxes. My free tax You may not be able to deduct the total you pay into the escrow account. My free tax You can deduct only the real estate taxes that the lender actually paid from escrow to the taxing authority. My free tax Your real estate tax bill will show this amount. My free tax Refund or rebate of real estate taxes. My free tax   If you receive a refund or rebate of real estate taxes this year for amounts you paid this year, you must reduce your real estate tax deduction by the amount refunded to you. My free tax If the refund or rebate was for real estate taxes paid for a prior year, you may have to include some or all of the refund in your income. My free tax For more information, see Recoveries in Publication 525, Taxable and Nontaxable Income. My free tax Items You Cannot Deduct as Real Estate Taxes The following items are not deductible as real estate taxes. My free tax Charges for services. My free tax   An itemized charge for services to specific property or people is not a tax, even if the charge is paid to the taxing authority. My free tax You cannot deduct the charge as a real estate tax if it is: A unit fee for the delivery of a service (such as a $5 fee charged for every 1,000 gallons of water you use), A periodic charge for a residential service (such as a $20 per month or $240 annual fee charged for trash collection), or A flat fee charged for a single service provided by your local government (such as a $30 charge for mowing your lawn because it had grown higher than permitted under a local ordinance). My free tax    You must look at your real estate tax bill to decide if any nondeductible itemized charges, such as those listed above, are included in the bill. My free tax If your taxing authority (or lender) does not furnish you a copy of your real estate tax bill, ask for it. My free tax Contact the taxing authority if you need additional information about a specific charge on your real estate tax bill. My free tax Assessments for local benefits. My free tax   You cannot deduct amounts you pay for local benefits that tend to increase the value of your property. My free tax Local benefits include the construction of streets, sidewalks, or water and sewer systems. My free tax You must add these amounts to the basis of your property. My free tax   You can, however, deduct assessments (or taxes) for local benefits if they are for maintenance, repair, or interest charges related to those benefits. My free tax An example is a charge to repair an existing sidewalk and any interest included in that charge. My free tax   If only a part of the assessment is for maintenance, repair, or interest charges, you must be able to show the amount of that part to claim the deduction. My free tax If you cannot show what part of the assessment is for maintenance, repair, or interest charges, you cannot deduct any of it. My free tax   An assessment for a local benefit may be listed as an item in your real estate tax bill. My free tax If so, use the rules in this section to find how much of it, if any, you can deduct. My free tax Transfer taxes (or stamp taxes). My free tax   You cannot deduct transfer taxes and similar taxes and charges on the sale of a personal home. My free tax If you are the buyer and you pay them, include them in the cost basis of the property. My free tax If you are the seller and you pay them, they are expenses of the sale and reduce the amount realized on the sale. My free tax Homeowners association assessments. My free tax   You cannot deduct these assessments because the homeowners association, rather than a state or local government, imposes them. My free tax Special Rules for Cooperatives If you own a cooperative apartment, some special rules apply to you, though you generally receive the same tax treatment as other homeowners. My free tax As an owner of a cooperative apartment, you own shares of stock in a corporation that owns or leases housing facilities. My free tax You can deduct your share of the corporation's deductible real estate taxes if the cooperative housing corporation meets the following conditions: The corporation has only one class of stock outstanding, Each stockholder, solely because of ownership of the stock, can live in a house, apartment, or house trailer owned or leased by the corporation, No stockholder can receive any distribution out of capital, except on a partial or complete liquidation of the corporation, and At least one of the following: At least 80% of the corporation's gross income for the tax year was paid by the tenant-stockholders. My free tax For this purpose, gross income means all income received during the entire tax year, including any received before the corporation changed to cooperative ownership. My free tax At least 80% of the total square footage of the corporation's property must be available for use by the tenant-stockholders during the entire tax year. My free tax At least 90% of the expenditures paid or incurred by the corporation were used for the acquisition, construction, management, maintenance, or care of the property for the benefit of the tenant-shareholders during the entire tax year. My free tax Tenant-stockholders. My free tax   A tenant-stockholder can be any entity (such as a corporation, trust, estate, partnership, or association) as well as an individual. My free tax The tenant-stockholder does not have to live in any of the cooperative's dwelling units. My free tax The units that the tenant-stockholder has the right to occupy can be rented to others. My free tax Deductible taxes. My free tax   You figure your share of real estate taxes in the following way. My free tax Divide the number of your shares of stock by the total number of shares outstanding, including any shares held by the corporation. My free tax Multiply the corporation's deductible real estate taxes by the number you figured in (1). My free tax This is your share of the real estate taxes. My free tax   Generally, the corporation will tell you your share of its real estate tax. My free tax This is the amount you can deduct if it reasonably reflects the cost of real estate taxes for your dwelling unit. My free tax Refund of real estate taxes. My free tax   If the corporation receives a refund of real estate taxes it paid in an earlier year, it must reduce the amount of real estate taxes paid this year when it allocates the tax expense to you. My free tax Your deduction for real estate taxes the corporation paid this year is reduced by your share of the refund the corporation received. My free tax Sales Taxes Generally, you can elect to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction on Schedule A (Form 1040). My free tax Deductible sales taxes may include sales taxes paid on your home (including mobile and prefabricated), or home building materials if the tax rate was the same as the general sales tax rate. My free tax For information on figuring your deduction, see the Instructions for Schedule A (Form 1040). My free tax If you elect to deduct the sales taxes paid on your home, or home building materials, you cannot include them as part of your cost basis in the home. My free tax Home Mortgage Interest This section of the publication gives you basic information about home mortgage interest, including information on interest paid at settlement, points, and Form 1098, Mortgage Interest Statement. My free tax Most home buyers take out a mortgage (loan) to buy their home. My free tax They then make monthly payments to either the mortgage holder or someone collecting the payments for the mortgage holder. My free tax Usually, you can deduct the entire part of your payment that is for mortgage interest, if you itemize your deductions on Schedule A (Form 1040). My free tax However, your deduction may be limited if: Your total mortgage balance is more than $1 million ($500,000 if married filing separately), or You took out a mortgage for reasons other than to buy, build, or improve your home. My free tax If either of these situations applies to you, see Publication 936 for more information. My free tax Also see Publication 936 if you later refinance your mortgage or buy a second home. My free tax Refund of home mortgage interest. My free tax   If you receive a refund of home mortgage interest that you deducted in an earlier year and that reduced your tax, you generally must include the refund in income in the year you receive it. My free tax For more information, see Recoveries in Publication 525. My free tax The amount of the refund will usually be shown on the mortgage interest statement you receive from your mortgage lender. My free tax See Mortgage Interest Statement , later. My free tax Deductible Mortgage Interest To be deductible, the interest you pay must be on a loan secured by your main home or a second home. My free tax The loan can be a first or second mortgage, a home improvement loan, or a home equity loan. My free tax Prepaid interest. My free tax   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. My free tax Generally, you can deduct in each year only the interest that qualifies as home mortgage interest for that year. My free tax An exception (discussed later) applies to points. My free tax Late payment charge on mortgage payment. My free tax   You can deduct as home mortgage interest a late payment charge if it was not for a specific service in connection with your mortgage loan. My free tax Mortgage prepayment penalty. My free tax   If you pay off your home mortgage early, you may have to pay a penalty. My free tax 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. My free tax Ground rent. My free tax   In some states (such as Maryland), you may buy your home subject to a ground rent. My free tax A ground rent is an obligation you assume to pay a fixed amount per year on the property. My free tax Under this arrangement, you are leasing (rather than buying) the land on which your home is located. My free tax Redeemable ground rents. My free tax   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct the payments as mortgage interest. My free tax The ground rent is a redeemable ground rent only if all of the following are true. My free tax Your lease, including renewal periods, is for more than 15 years. My free tax You can freely assign the lease. My free tax You have a present or future right (under state or local law) to end the lease and buy the lessor's entire interest in the land by paying a specified amount. My free tax The lessor's interest in the land is primarily a security interest to protect the rental payments to which he or she is entitled. My free tax   Payments made to end the lease and buy the lessor's entire interest in the land are not redeemable ground rents. My free tax You cannot deduct them. My free tax Nonredeemable ground rents. My free tax   Payments on a nonredeemable ground rent are not mortgage interest. My free tax You can deduct them as rent only if they are a business expense or if they are for rental property. My free tax Cooperative apartment. My free tax   You can usually treat the interest on a loan you took out to buy stock in a cooperative housing corporation as home mortgage interest if you own a cooperative apartment, and the cooperative housing corporation meets the conditions described earlier under Special Rules for Cooperatives . My free tax In addition, you can treat as home mortgage interest your share of the corporation's deductible mortgage interest. My free tax Figure your share of mortgage interest the same way that is shown for figuring your share of real estate taxes in the Example under Division of real estate taxes, earlier. My free tax For more information on cooperatives, see Special Rule for Tenant-Stockholders in Cooperative Housing Corporations in Publication 936. My free tax Refund of cooperative's mortgage interest. My free tax   You must reduce your mortgage interest deduction by your share of any cash portion of a patronage dividend that the cooperative receives. My free tax The patronage dividend is a partial refund to the cooperative housing corporation of mortgage interest it paid in a prior year. My free tax   If you receive a Form 1098 from the cooperative housing corporation, the form should show only the amount you can deduct. My free tax Mortgage Interest Paid at Settlement One item that normally appears on a settlement or closing statement is home mortgage interest. My free tax You can deduct the interest that you pay at settlement if you itemize your deductions on Schedule A (Form 1040). My free tax This amount should be included in the mortgage interest statement provided by your lender. My free tax See the discussion under Mortgage Interest Statement , later. My free tax Also, if you pay interest in advance, see Prepaid interest , earlier, and Points , next. My free tax Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. My free tax Points also may be called loan origination fees, maximum loan charges, loan discount, or discount points. My free tax A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. My free tax See Points paid by the seller , later. My free tax General rule. My free tax   You cannot deduct the full amount of points in the year paid. My free tax They are prepaid interest, so you generally must deduct them over the life (term) of the mortgage. My free tax Exception. My free tax   You can deduct the full amount of points in the year paid if you meet all the following tests. My free tax Your loan is secured by your main home. My free tax (Generally, your main home is the one you live in most of the time. My free tax ) Paying points is an established business practice in the area where the loan was made. My free tax The points paid were not more than the points generally charged in that area. My free tax You use the cash method of accounting. My free tax This means you report income in the year you receive it and deduct expenses in the year you pay them. My free tax Most individuals use this method. My free tax 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. My free tax The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. My free tax The funds you provided are not required to have been applied to the points. My free tax They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. My free tax You cannot have borrowed these funds. My free tax You use your loan to buy or build your main home. My free tax The points were computed as a percentage of the principal amount of the mortgage. My free tax The amount is clearly shown on the settlement statement (such as the Uniform Settlement Statement, Form HUD-1) as points charged for the mortgage. My free tax The points may be shown as paid from either your funds or the seller's. My free tax Note. My free tax If you meet all of the tests listed above and you itemize your deductions in the year you get the loan, you can either deduct the full amount of points in the year paid or deduct them over the life of the loan, beginning in the year you get the loan. My free tax If you do not itemize your deductions in the year you get the loan, you can spread the points over the life of the loan and deduct the appropriate amount in each future year, if any, when you do itemize your deductions. My free tax Home improvement loan. My free tax   You can also fully deduct in the year paid points paid on a loan to improve your main home, if you meet the first six tests listed earlier. My free tax Refinanced loan. My free tax   If you use part of the refinanced mortgage proceeds to improve your main home and you meet the first six tests listed earlier, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. My free tax You can deduct the rest of the points over the life of the loan. My free tax Points not fully deductible in year paid. My free tax    If you do not qualify under the exception to deduct the full amount of points in the year paid (or choose not to do so), see Points in Publication 936 for the rules on when and how much you can deduct. My free tax Figure A. My free tax   You can use Figure A, next, as a quick guide to see whether your points are fully deductible in the year paid. My free tax    Please click here for the text description of the image. My free tax Figure A. My free tax Are my points fully deductible this year? Amounts charged for services. My free tax   Amounts charged by the lender for specific services connected to the loan are not interest. My free tax Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. My free tax You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. My free tax For information about the tax treatment of these amounts and other settlement fees and closing costs, see Basis , later. My free tax Points paid by the seller. My free tax   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. My free tax Treatment by seller. My free tax   The seller cannot deduct these fees as interest. My free tax However, they are a selling expense that reduces the seller's amount realized. My free tax See Publication 523 for more information. My free tax Treatment by buyer. My free tax   The buyer treats seller-paid points as if he or she had paid them. My free tax If all the tests listed earlier under Exception are met, the buyer can deduct the points in the year paid. My free tax If any of those tests are not met, the buyer must deduct the points over the life of the loan. My free tax   The buyer must also reduce the basis of the home by the amount of the seller-paid points. My free tax For more information about the basis of your home, see Basis , later. My free tax Funds provided are less than points. My free tax   If you meet all the tests listed earlier under Exception 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. My free tax In addition, you can deduct any points paid by the seller. My free tax Example 1. My free tax When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). My free tax You meet all the tests for deducting points in the year paid (see Exception , earlier), except the only funds you provided were a $750 down payment. My free tax Of the $1,000 you were charged for points, you can deduct $750 in the year paid. My free tax You spread the remaining $250 over the life of the mortgage. My free tax Example 2. My free tax 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. My free tax In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). My free tax You spread the remaining $250 over the life of the mortgage. My free tax You must reduce the basis of your home by the $1,000 paid by the seller. My free tax Excess points. My free tax   If you meet all the tests under Exception , earlier, except that the points paid were more than are generally charged in your area (test 3), you can deduct in the year paid only the points that are generally charged. My free tax You must spread any additional points over the life of the mortgage. My free tax Mortgage ending early. My free tax   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. My free tax A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. My free tax Example. My free tax Dan paid $3,000 in points in 2006 that he had to spread out over the 15-year life of the mortgage. My free tax He had deducted $1,400 of these points through 2012. My free tax Dan prepaid his mortgage in full in 2013. My free tax He can deduct the remaining $1,600 of points in 2013. My free tax Exception. My free tax   If you refinance the mortgage with the same lender, you cannot deduct any remaining points for the year. My free tax Instead, deduct them over the term of the new loan. My free tax Form 1098. My free tax   The mortgage interest statement you receive should show not only the total interest paid during the year, but also your deductible points paid during the year. My free tax See Mortgage Interest Statement , later. My free tax Where To Deduct Home Mortgage Interest Enter on Schedule A (Form 1040), line 10, the home mortgage interest and points reported to you on Form 1098 (discussed next). My free tax If you did not receive a Form 1098, enter your deductible interest on line 11, and any deductible points on line 12. My free tax See Table 1 below for a summary of where to deduct home mortgage interest and real estate taxes. My free tax If you paid home mortgage interest to the person from whom you bought your home, show that person's name, address, and social security number (SSN) or employer identification number (EIN) on the dotted lines next to line 11. My free tax The seller must give you this number and you must give the seller your SSN. My free tax Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. My free tax Failure to meet either of these requirements may result in a $50 penalty for each failure. My free tax Table 1. My free tax Where To Deduct Interest and Taxes Paid on Your Home See the text for information on what expenses are eligible. My free tax IF you are eligible to deduct . My free tax . My free tax . My free tax THEN report the amount  on Schedule A (Form 1040) . My free tax . My free tax . My free tax real estate taxes line 6. My free tax home mortgage interest and points reported on Form 1098 line 10. My free tax home mortgage interest not reported on  Form 1098 line 11. My free tax points not reported on Form 1098 line 12. My free tax qualified mortgage insurance premiums line 13. My free tax 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 to a mortgage holder in the course of that holder's trade or business, you should receive a Form 1098 or similar statement from the mortgage holder. My free tax The statement will show the total interest paid on your mortgage during the year. My free tax If you bought a main home during the year, it also will show the deductible points you paid and any points you can deduct that were paid by the person who sold you your home. My free tax See Points , earlier. My free tax The interest you paid at settlement should be included on the statement. My free tax If it is not, add the interest from the settlement sheet that qualifies as home mortgage interest to the total shown on Form 1098 or similar statement. My free tax Put the total on Schedule A (Form 1040), line 10, and attach a statement to your return explaining the difference. My free tax Write “See attached” to the right of line 10. My free tax A mortgage holder can be a financial institution, a governmental unit, or a cooperative housing corporation. My free tax If a statement comes from a cooperative housing corporation, it generally will show your share of interest. My free tax Your mortgage interest statement for 2013 should be provided or sent to you by January 31, 2014. My free tax If it is mailed, you should allow adequate time to receive it before contacting the mortgage holder. My free tax A copy of this form will be sent to the IRS also. My free tax Example. My free tax You bought a new home on May 3. My free tax You paid no points on the purchase. My free tax During the year, you made mortgage payments which included $4,480 deductible interest on your new home. My free tax The settlement sheet for the purchase of the home included interest of $620 for 29 days in May. My free tax The mortgage statement you receive from the lender includes total interest of $5,100 ($4,480 + $620). My free tax You can deduct the $5,100 if you itemize your deductions. My free tax Refund of overpaid interest. My free tax   If you receive a refund of mortgage interest you overpaid in a prior year, you generally will receive a Form 1098 showing the refund in box 3. My free tax Generally, you must include the refund in income in the year you receive it. My free tax See Refund of home mortgage interest , earlier, under Home Mortgage Interest. My free tax More than one borrower. My free tax   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. My free tax Show how much of the interest each of you paid, and give the name and address of the person who received the form. My free tax Deduct your share of the interest on Schedule A (Form 1040), line 11, and write “See attached” to the right of that line. My free tax Mortgage Insurance Premiums You may be able to take an itemized deduction on Schedule A (Form 1040), line 13, for premiums you pay or accrue during 2013 for qualified mortgage insurance in connection with home acquisition debt on your qualified home. My free tax Mortgage insurance premiums you paid or accrued on any mortgage insurance contract issued before January 1, 2007, are not deductible as an itemized deduction. My free tax Qualified Mortgage Insurance Qualified mortgage insurance is mortgage insurance provided by the Veterans Administration, the Federal Housing Administration, or the Rural Housing Administration, and private mortgage insurance (as defined in section 2 of the Homeowners Protection Act of 1998 as in effect on December 20, 2006). My free tax Prepaid mortgage insurance premiums. My free tax   If you paid premiums that are allocable to periods after 2013, you must allocate them over the shorter of: The stated term of the mortgage, or 84 months, beginning with the month the insurance was obtained. My free tax The premiums are treated as paid in the year to which they were allocated. My free tax If the mortgage is satisfied before its term, no deduction is allowed for the unamortized balance. My free tax See Publication 936 for details. My free tax Exception for certain mortgage insurance. My free tax   The allocation rules, explained above, do not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or Rural Housing Service. My free tax Home Acquisition Debt Home acquisition debt is a mortgage you took out after October 13, 1987, to buy, build, or substantially improve a qualified home. My free tax It also must be secured by that home. My free tax If the amount of your mortgage is more than the cost of the home plus the cost of any substantial improvements, only the debt that is not more than the cost of the home plus improvements qualifies as home acquisition debt. My free tax Home acquisition debt limit. My free tax   The total amount you can treat as home acquisition debt at any time on your home cannot be more than $1 million ($500,000 if married filing separately). My free tax Discharges of qualified principal residence indebtedness. My free tax   You can exclude from gross income any discharges of qualified principal residence indebtedness made after 2006 and before 2014. My free tax You must reduce the basis of your principal residence (but not below zero) by the amount you exclude. My free tax Principal residence. My free tax   Your principal residence is the home where you ordinarily live most of the time. My free tax You can have only one principal residence at any one time. My free tax Qualified principal residence indebtedness. My free tax   This is a mortgage that you took out to buy, build, or substantially improve your principal residence and that is secured by that residence. My free tax If the amount of your original mortgage is more than the cost of your principal residence plus the cost of substantial improvements, qualified principal residence indebtedness cannot be more than the cost of your principal residence plus improvements. My free tax   Any debt secured by your principal residence that you use to refinance qualified principal residence indebtedness is qualified principal residence indebtedness up to the amount of your old mortgage principal just before the refinancing. My free tax Additional debt incurred to substantially improve your principal residence is also qualified principal residence indebtedness. My free tax Amount you can exclude. My free tax   You can only exclude debt discharged after 2006 and before 2014. My free tax The most you can exclude is $2 million ($1 million if married filing separately). My free tax You cannot exclude any amount that was discharged because of services performed for the lender or on account of any other factor not directly related either to a decline in the value of your residence or to your financial condition. My free tax Ordering rule. My free tax   If only a part of a loan is qualified principal residence indebtedness, you can exclude only the amount of the discharge that is more than the amount of the loan (immediately before the discharge) that is not qualified principal residence indebtedness. My free tax Qualified Home This means your main home or your second home. My free tax A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities. My free tax Main home. My free tax   You can have only one main home at any one time. My free tax This is the home where you ordinarily live most of the time. My free tax Second home and other special situations. My free tax   If you have a second home, use part of your home for other than residential living (such as a home office), rent out part of your home, or are having your home constructed, see Qualified Home in Publication 936. My free tax Limit on Deduction If your adjusted gross income (AGI) 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 deductible is reduced and may be eliminated. My free tax 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. My free tax If your AGI is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. My free tax Form 1098. My free tax   The amount of mortgage insurance premiums you paid during 2013 should be reported in box 4. My free tax See Form 1098, Mortgage Interest Statement in Publication 936. My free tax Mortgage Interest Credit The mortgage interest credit is intended to help lower-income individuals afford home ownership. My free tax If you qualify, you can claim the credit on Form 8396 each year for part of the home mortgage interest you pay. My free tax Who qualifies. My free tax   You may be eligible for the credit if you were issued a qualified Mortgage Credit Certificate (MCC) from your state or local government. My free tax Generally, an MCC is issued only in connection with a new mortgage for the purchase of your main home. My free tax The MCC will show the certificate credit rate you will use to figure your credit. My free tax It also will show the certified indebtedness amount. My free tax Only the interest on that amount qualifies for the credit. My free tax See Figuring the Credit , later. My free tax You must contact the appropriate government agency about getting an MCC before you get a mortgage and buy your home. My free tax Contact your state or local housing finance agency for information about the availability of MCCs in your area. My free tax How to claim the credit. My free tax   To claim the credit, complete Form 8396 and attach it to your Form 1040 or Form 1040NR, U. My free tax S. My free tax Nonresident Alien Income Tax Return. My free tax Include the credit in your total for Form 1040, line 53, or Form 1040NR, line 50; be sure to check box c and write “Form 8396” on that line. My free tax Reducing your home mortgage interest deduction. My free tax   If you itemize your deductions on Schedule A (Form 1040), you must reduce your home mortgage interest deduction by the amount of the mortgage interest credit shown on Form 8396, line 3. My free tax You must do this even if part of that amount is to be carried forward to 2014. My free tax Selling your home. My free tax   If you purchase a home after 1990 using an MCC, and you sell that home within 9 years, you may have to recapture (repay) all or part of the benefit you received from the MCC program. My free tax For additional information, see Recapturing (Paying Back) a Federal Mortgage Subsidy, in Publication 523. My free tax Figuring the Credit Figure your credit on Form 8396. My free tax Mortgage not more than certified indebtedness. My free tax   If your mortgage loan amount is equal to (or smaller than) the certified indebtedness amount shown on your MCC, enter on Form 8396, line 1, all the interest you paid on your mortgage during the year. My free tax Mortgage more than certified indebtedness. My free tax   If your mortgage loan amount is larger than the certified indebtedness amount shown on your MCC, you can figure the credit on only part of the interest you paid. My free tax To find the amount to enter on line 1, multiply the total interest you paid during the year on your mortgage by the following fraction. My free tax Certified indebtedness amount on your MCC Original amount of your mortgage   The fraction will not change as long as you are entitled to take the mortgage interest credit. My free tax Example. My free tax Emily bought a home this year. My free tax Her mortgage loan is $125,000. My free tax The certified indebtedness amount on her MCC is $100,000. My free tax She paid $7,500 interest this year. My free tax Emily figures the interest to enter on Form 8396, line 1, as follows:   $100,000 = 80% (. My free tax 80)       $125,000       $7,500 x . My free tax 80 = $6,000   Emily enters $6,000 on Form 8396, line 1. My free tax In each later year, she will figure her credit using only 80% of the interest she pays for that year. My free tax Limits Two limits may apply to your credit. My free tax A limit based on the credit rate, and A limit based on your tax. My free tax Limit based on credit rate. My free tax   If the certificate credit rate is higher than 20%, the credit you are allowed cannot be more than $2,000. My free tax Limit based on tax. My free tax   After applying the limit based on the credit rate, your credit generally cannot be more than your tax liability. My free tax See the Credit Limit Worksheet in the Form 8396 instructions to calculate the limit based on tax. My free tax Dividing the Credit If two or more persons (other than a married couple filing a joint return) hold an interest in the home to which the MCC relates, the credit must be divided based on the interest held by each person. My free tax Example. My free tax John and his brother, George, were issued an MCC. My free tax They used it to get a mortgage on their main home. My free tax John has a 60% ownership interest in the home, and George has a 40% ownership interest in the home. My free tax John paid $5,400 mortgage interest this year and George paid $3,600. My free tax The MCC shows a credit rate of 25% and a certified indebtedness amount of $130,000. My free tax The loan amount (mortgage) on their home is $120,000. My free tax The credit is limited to $2,000 because the credit rate is more than 20%. My free tax John figures the credit by multiplying the mortgage interest he paid this year ($5,400) by the certificate credit rate (25%) for a total of $1,350. My free tax His credit is limited to $1,200 ($2,000 × 60%). My free tax George figures the credit by multiplying the mortgage interest he paid this year ($3,600) by the certificate credit rate (25%) for a total of $900. My free tax His credit is limited to $800 ($2,000 × 40%). My free tax Carryforward If your allowable credit is reduced because of the limit based on your tax, you can carry forward the unused portion of the credit to the next 3 years or until used, whichever comes first. My free tax Example. My free tax You receive a mortgage credit certificate from State X. My free tax This year, your regular tax liability is $1,100, you owe no alternative minimum tax, and your mortgage interest credit is $1,700. My free tax You claim no other credits. My free tax Your unused mortgage interest credit for this year is $600 ($1,700 − $1,100). My free tax You can carry forward this amount to the next 3 years or until used, whichever comes first. My free tax Credit rate more than 20%. My free tax   If you are subject to the $2,000 limit because your certificate credit rate is more than 20%, you cannot carry forward any amount more than $2,000 (or your share of the $2,000 if you must divide the credit). My free tax Example. My free tax In the earlier example under Dividing the Credit , John and George used the entire $2,000 credit. My free tax The excess   John $1,350 − $1,200 = $150     George $900 − $800 = $100   $150 for John ($1,350 − $1,200) and $100 for George ($900 − $800) cannot be carried forward to future years, despite the respective tax liabilities for John and George. My free tax Refinancing If you refinance your original mortgage loan on which you had been given an MCC, you must get a new MCC to be able to claim the credit on the new loan. My free tax The amount of credit you can claim on the new loan may change. My free tax Table 2 below summarizes how to figure your credit if you refinance your original mortgage loan. My free tax Table 2. My free tax Effect of Refinancing on Your Credit IF you get a new (reissued) MCC and the amount of your new mortgage is . My free tax . My free tax . My free tax THEN the interest you claim on Form 8396, line 1, is* . My free tax . My free tax . My free tax smaller than or equal to the certified indebtedness amount on the new MCC all the interest paid during the year on your new mortgage. My free tax larger than the certified indebtedness amount on the new MCC interest paid during the year on your new mortgage multiplied by the following fraction. My free tax         certified indebtedness  amount on your new MCC       original amount of your  mortgage   *The credit using the new MCC cannot be more than the credit using the old MCC. My free tax  See New MCC cannot increase your credit above. My free tax An issuer may reissue an MCC after you refinance your mortgage. My free tax If you did not get a new MCC, you may want to contact the state or local housing finance agency that issued your original MCC for information about whether you can get a reissued MCC. My free tax Year of refinancing. My free tax   In the year of refinancing, add the applicable amount of interest paid on the old mortgage and the applicable amount of interest paid on the new mortgage, and enter the total on Form 8396, line 1. My free tax   If your new MCC has a credit rate different from the rate on the old MCC, you must attach a statement to Form 8396. My free tax The statement must show the calculation for lines 1, 2, and 3 for the part of the year when the old MCC was in effect. My free tax It must show a separate calculation for the part of the year when the new MCC was in effect. My free tax Combine the amounts from both calculations for line 3, enter the total on line 3 of the form, and write “See attached” on the dotted line next to line 2. My free tax New MCC cannot increase your credit. My free tax   The credit that you claim with your new MCC cannot be more than the credit that you could have claimed with your old MCC. My free tax   In most cases, the agency that issues your new MCC will make sure that it does not increase your credit. My free tax However, if either your old loan or your new loan has a variable (adjustable) interest rate, you will need to check this yourself. My free tax In that case, you will need to know the amount of the credit you could have claimed using the old MCC. My free tax   There are two methods for figuring the credit you could have claimed. My free tax Under one method, you figure the actual credit that would have been allowed. My free tax This means you use the credit rate on the old MCC and the interest you would have paid on the old loan. My free tax   If your old loan was a variable rate mortgage, you can use another method to determine the credit that you could have claimed. My free tax Under this method, you figure the credit using a payment schedule of a hypothetical self-amortizing mortgage with level payments projected to the final maturity date of the old mortgage. My free tax The interest rate of the hypothetical mortgage is the annual percentage rate (APR) of the new mortgage for purposes of the Federal Truth in Lending Act. My free tax The principal of the hypothetical mortgage is the remaining outstanding balance of the certified mortgage indebtedness shown on the old MCC. My free tax    You must choose one method and use it consistently beginning with the first tax year for which you claim the credit based on the new MCC. My free tax    As part of your tax records, you should keep your old MCC and the schedule of payments for your old mortgage. My free tax Basis Basis is your starting point for figuring a gain or loss if you later sell your home, or for figuring depreciation if you later use part of your home for business purposes or for rent. My free tax While you own your home, you may add certain items to your basis. My free tax You may subtract certain other items from your basis. My free tax These items are called adjustments to basis and are explained later under Adjusted Basis . My free tax It is important that you understand these terms when you first acquire your home because you must keep track of your basis and adjusted basis during the period you own your home. My free tax You also must keep records of the events that affect basis or adjusted basis. My free tax See Keeping Records , below. My free tax Figuring Your Basis How you figure your basis depends on how you acquire your home. My free tax If you buy or build your home, your cost is your basis. My free tax If you receive your home as a gift, your basis is usually the same as the adjusted basis of the person who gave you the property. My free tax If you inherit your home from a decedent, different rules apply depending on the date of the decedent's death. My free tax Each of these topics is discussed later. My free tax Property transferred from a spouse. My free tax   If your home is transferred to you from your spouse, or from your former spouse as a result of a divorce, your basis is the same as your spouse's (or former spouse's) adjusted basis just before the transfer. My free tax Publication 504, Divorced or Separated Individuals, fully discusses transfers between spouses. My free tax Cost as Basis The cost of your home, whether you purchased it or constructed it, is the amount you paid for it, including any debt you assumed. My free tax The cost of your home includes most settlement or closing costs you paid when you bought the home. My free tax If you built your home, your cost includes most closing costs paid when you bought the land or settled on your mortgage. My free tax See Settlement or closing costs , later. My free tax If you elect to deduct the sales taxes on the purchase or construction of your home as an itemized deduction on Schedule A (Form 1040), you cannot include the sales taxes as part of your cost basis in the home. My free tax Purchase. My free tax   The basis of a home you bought is the amount you paid for it. My free tax This usually includes your down payment and any debt you assumed. My free tax The basis of a cooperative apartment is the amount you paid for your shares in the corporation that owns or controls the property. My free tax This amount includes any purchase commissions or other costs of acquiring the shares. My free tax Construction. My free tax   If you contracted to have your home built on land that you own, your basis in the home is your basis in the land plus the amount you paid to have the home built. My free tax This includes the cost of labor and materials, the amount you paid the contractor, any architect's fees, building permit charges, utility meter and connection charges, and legal fees that are directly connected with building your home. My free tax If you built all or part of your home yourself, your basis is the total amount it cost you to build it. My free tax You cannot include in basis the value of your own labor or any other labor for which you did not pay. My free tax Real estate taxes. My free tax   Real estate taxes are usually divided so that you and the seller each pay taxes for the part of the property tax year that each owned the home. My free tax See the earlier discussion of Real estate taxes paid at settlement or closing , under Real Estate Taxes, earlier, to figure the real estate taxes you paid or are considered to have paid. My free tax   If you pay any part of the seller's share of the real estate taxes (the taxes up to the date of sale), and the seller did not reimburse you, add those taxes to your basis in the home. My free tax You cannot deduct them as taxes paid. My free tax   If the seller paid any of your share of the real estate taxes (the taxes beginning with the date of sale), you can still deduct those taxes. My free tax Do not include those taxes in your basis. My free tax If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. My free tax Example 1. My free tax You bought your home on September 1. My free tax The property tax year in your area is the calendar year, and the tax is due on August 15. My free tax The real estate taxes on the home you bought were $1,275 for the year and had been paid by the seller on August 15. My free tax You did not reimburse the seller for your share of the real estate taxes from September 1 through December 31. My free tax You must reduce the basis of your home by the $426 [(122 ÷ 365) × $1,275] the seller paid for you. My free tax You can deduct your $426 share of real estate taxes on your return for the year you purchased your home. My free tax Example 2. My free tax You bought your home on May 3, 2013. My free tax The property tax year in your area is the calendar year. My free tax The taxes for the previous year are assessed on January 2 and are due on May 31 and November 30. My free tax Under state law, the taxes become a lien on May 31. My free tax You agreed to pay all taxes due after the date of sale. My free tax The taxes due in 2013 for 2012 were $1,375. My free tax The taxes due in 2014 for 2013 will be $1,425. My free tax You cannot deduct any of the taxes paid in 2013 because they relate to the 2012 property tax year and you did not own the home until 2013. My free tax Instead, you add the $1,375 to the cost (basis) of your home. My free tax You owned the home in 2013 for 243 days (May 3 to December 31), so you can take a tax deduction on your 2014 return of $949 [(243 ÷ 365) × $1,425] paid in 2014 for 2013. My free tax You add the remaining $476 ($1,425 − $949) of taxes paid in 2014 to the cost (basis) of your home. My free tax Settlement or closing costs. My free tax   If you bought your home, you probably paid settlement or closing costs in addition to the contract price. My free tax These costs are divided between you and the seller according to the sales contract, local custom, or understanding of the parties. My free tax If you built your home, you probably paid these costs when you bought the land or settled on your mortgage. My free tax   The only settlement or closing costs you can deduct are home mortgage interest and certain real estate taxes. My free tax You deduct them in the year you buy your home if you itemize your deductions. My free tax You can add certain other settlement or closing costs to the basis of your home. My free tax Items added to basis. My free tax   You can include in your basis the settlement fees and closing costs you paid for buying your home. My free tax A fee is for buying the home if you would have had to pay it even if you paid cash for the home. My free tax   The following are some of the settlement fees and closing costs that you can include in the original basis of your home. My free tax Abstract fees (abstract of title fees). My free tax Charges for installing utility services. My free tax Legal fees (including fees for the title search and preparation of the sales contract and deed). My free tax Recording fees. My free tax Surveys. My free tax Transfer or stamp taxes. My free tax Owner's title insurance. My free tax Any amount the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, cost for improvements or repairs, and sales commissions. My free tax   If the seller actually paid for any item for which you are liable and for which you can take a deduction (such as your share of the real estate taxes for the year of sale), you must reduce your basis by that amount unless you are charged for it in the settlement. My free tax Items not added to basis and not deductible. My free tax   Here are some settlement and closing costs that you cannot deduct or add to your basis. My free tax Fire insurance premiums. My free tax Charges for using utilities or other services related to occupancy of the home before closing. My free tax Rent for occupying the home before closing. My free tax Charges connected with getting or refinancing a mortgage loan, such as: Loan assumption fees, Cost of a credit report, and Fee for an appraisal required by a lender. My free tax Points paid by seller. My free tax   If you bought your home after April 3, 1994, you must reduce your basis by any points paid for your mortgage by the person who sold you your home. My free tax   If you bought your home after 1990 but before April 4, 1994, you must reduce your basis by seller-paid points only if you deducted them. My free tax See Points , earlier, for the rules on deducting points. My free tax Gift To figure the basis of property you receive as a gift, you must know its adjusted basis (defined later) to the donor just before it was given to you, its fair market value (FMV) at the time it was given to you, and any gift tax paid on it. My free tax Fair market value. My free tax   Fair market value (FMV) is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and who both have a reasonable knowledge of all the necessary facts. My free tax Donor's adjusted basis is more than FMV. My free tax   If someone gave you your home and the donor's adjusted basis, when it was given to you, was more than the FMV, your basis at the time of receipt is the same as the donor's adjusted basis. My free tax Disposition basis. My free tax   If the donor's adjusted basis at the time of the gift is more than the FMV, your basis (plus or minus any required adjustments, see Adjusted Basis , later) when you dispose of the property will depend on whether you have a gain or a loss. My free tax Your basis for figuring a gain is the same as the donor's adjusted basis. My free tax Your basis for figuring a loss is the FMV when you received the gift. My free tax If you use the donor's adjusted basis to figure a gain and it results in a loss, then you must use the FMV (at the time of the gift) to refigure the loss. My free tax However, if using the FMV results in a gain, then you neither have a gain nor a loss. My free tax Example 1. My free tax Andrew received a house as a gift from Ishmael (the donor). My free tax At the time of the gift, the home had an FMV of $80,000. My free tax Ishmael's adjusted basis was $100,000. My free tax After he received the house, no events occurred to increase or decrease the basis. My free tax If Andrew sells the house for $120,000, he will have a $20,000 gain because he must use the donor's adjusted basis ($100,000) at the time of the gift as his basis to figure the gain. My free tax Example 2. My free tax Same facts as Example 1 , except this time Andrew sells the house for $70,000. My free tax He will have a loss of $10,000 because he must use the FMV ($80,000) at the time of the gift as his basis to figure the loss. My free tax Example 3. My free tax Same facts as Example 1 , except this time Andrew sells the house for $90,000. My free tax Initially, he figures the gain using Ishmael's adjusted basis ($100,000), which results in a loss of $10,000. My free tax Since it is a loss, Andrew must now recalculate the loss using the FMV ($80,000), which results in a gain of $10,000. My free tax So in this situation, Andrew will neither have a gain nor a loss. My free tax Donor's adjusted basis equal to or less than the FMV. My free tax   If someone gave you your home after 1976 and the donor's adjusted basis, when it was given to you, was equal to or less than the FMV, your basis at the time of receipt is the same as the donor's adjusted basis, plus the part of any federal gift tax paid that is due to the net increase in value of the home. My free tax Part of federal gift tax due to net increase in value. My free tax   Figure the part of the federal gift tax paid that is due to the net increase in value of the home by multiplying the total federal gift tax paid by a fraction. My free tax The numerator (top part) of the fraction is the net increase in the value of the home, and the denominator (bottom part) is the value of the home for gift tax purposes after reduction for any annual exclusion and marital or charitable deduction that applies to the gift. My free tax The net increase in the value of the home is its FMV minus the adjusted basis of the donor. My free tax Publication 551 gives more information, including examples, on figuring your basis when you receive property as a gift. My free tax Inheritance Your basis in a home you inherited is generally the fair market value of the home on the date of the decedent's death or on the alternative valuation date if the personal representative for the estate chooses to use alternative valuation. My free tax If an estate tax return was filed, your basis is generally the value of the home listed on the estate tax return. My free tax If an estate tax return was not filed, your basis is the appraised value of the home at the decedent's date of death for state inheritance or transmission taxes. My free tax Publication 551 and Publication 559, Survivors, Executors, and Administrators, have more information on the basis of inherited property. My free tax If you inherited your home from someone who died in 2010, and the executor of the decedent's estate made the election to file Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent, refer to the information provided by the executor or see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010. My free tax Adjusted Basis While you own your home, various events may take place that can change the original basis of your home. My free tax These events can increase or decrease your original basis. My free tax The result is called adjusted basis. My free tax See Table 3, on this page, for a list of some of the items that can adjust your basis. My free tax Table 3. My free tax Adjusted Basis This table lists examples of some items that generally will increase or decrease your basis in your home. My free tax It is not intended to be all-inclusive. My free tax Increases to Basis Decreases to Basis Improvements: Putting an addition on your home Replacing an entire roof Paving your driveway Installing central air conditioning Rewiring your home Assessments for local improvements (see Assessments for local benefits , under What You Can and Cannot Deduct, earlier) Amounts spent to restore damaged property Insurance or other reimbursement for casualty losses Deductible casualty loss not covered by insurance Payments received for easement or right-of-way granted Depreciation allowed or allowable if home is used for business or rental purposes Value of subsidy for energy conservation measure excluded from income Improvements. My free tax   An improvement materially adds to the value of your home, considerably prolongs its useful life, or adapts it to new uses. My free tax You must add the cost of any improvements to the basis of your home. My free tax You cannot deduct these costs. My free tax   Improvements include putting a recreation room in your unfinished basement, adding another bathroom or bedroom, putting up a fence, putting in new plumbing or wiring, installing a new roof, and paving your driveway. My free tax Amount added to basis. My free tax   The amount you add to your basis for improvements is your actual cost. My free tax This includes all costs for material and labor, except your own labor, and all expenses related to the improvement. My free tax For example, if you had your lot surveyed to put up a fence, the cost of the survey is a part of the cost of the fence. My free tax   You also must add to your basis state and local assessments for improvements such as streets and sidewalks if they increase the value of the property. My free tax These assessments are discussed earlier under Real Estate Taxes . My free tax Improvements no longer part of home. My free tax    Your home's adjusted basis does not include the cost of any improvements that are replaced and are no longer part of the home. My free tax Example. My free tax You put wall-to-wall carpeting in your home 15 years ago. My free tax Later, you replaced that carpeting with new wall-to-wall carpeting. My free tax The cost of the old carpeting you replaced is no longer part of your home's adjusted basis. My free tax Repairs versus improvements. My free tax   A repair keeps your home in an ordinary, efficient operating condition. My free tax It does not add to the value of your home or prolong its life. My free tax Repairs include repainting your home inside or outside, fixing your gutters or floors, fixing leaks or plastering, and replacing broken window panes. My free tax You cannot deduct repair costs and generally cannot add them to the basis of your home. My free tax   However, repairs that are done as part of an extensive remodeling or restoration of your home are considered improvements. My free tax You add them to the basis of your home. My free tax Records to keep. My free tax   You can use Table 4 (at the end of the publication) as a guide to help you keep track of improvements to your home. My free tax Also see Keeping Records , below. My free tax Energy conservation subsidy. My free tax   If a public utility gives you (directly or indirectly) a subsidy for the purchase or installation of an energy conservation measure for your home, do not include the value of that subsidy in your income. My free tax You must reduce the basis of your home by that value. My free tax   An energy conservation measure is an installation or modification primarily designed to reduce consumption of electricity or natural gas or to improve the management of energy demand. My free tax Keeping Records Keeping full and accurate records is vital to properly report your income and expenses, to support your deductions and credits, and to know the basis or adjusted basis of your home. My free tax These records include your purchase contract and settlement papers if you bought the property, or other objective evidence if you acquired it by gift, inheritance, or similar means. My free tax You should keep any receipts, canceled checks, and similar evidence for improvements or other additions to the basis. My free tax In addition, you should keep track of any decreases to the basis such as those listed in Table 3, earlier. My free tax How to keep records. My free tax   How you keep records is up to you, but they must be clear and accurate and must be available to the IRS. My free tax How long to keep records. My free tax   You must keep your records for as long as they are important for meeting any provision of the federal tax law. My free tax   Keep records that support an item of income, a deduction, or a credit appearing on a return until the period of limitations for the return runs out. My free tax (A period of limitations is the period of time after which no legal action can be brought. My free tax ) For assessment of tax you owe, this is generally 3 years from the date you filed the return. My free tax For filing a claim for credit or refund, this is generally 3 years from the date you filed the original return, or 2 years from the date you paid the tax, whichever is later. My free tax Returns filed before the due date are treated as filed on the due date. My free tax   You may need to keep records relating to the basis of property (discussed earlier) for longer than the period of limitations. My free tax Keep those records as long as they are important in figuring the basis of the original or replacement property. My free tax Generally, this means for as long as you own the property and, after you dispose of it, for the period of limitations that applies to you. My free tax Table 4. My free tax Record of Home Improvements Keep this for your records. My free tax Also, keep receipts or other proof of improvements. My free tax Remove from this record any improvements that are no longer part of your main home. My free tax For example, if you put wall-to-wall carpeting in your home and later replace it with new wall-to-wall carpeting, remove the cost of the first carpeting. My free tax (a) Type of Improvement (b) Date (c) Amount   (a) Type of Improvement (b) Date (c) Amount Additions:       Heating & Air  Conditioning:     Bedroom       Heating system     Bathroom       Central air conditioning     Deck       Furnace     Garage       Duct work     Porch       Central humidifier     Patio       Filtration system     Storage shed       Other     Fireplace       Electrical:     Other           Lawn & Grounds:       Lighting fixtures           Wiring upgrades     Landscaping       Other     Driveway       Plumbing:     Walkway           Fences       Water heater     Retaining wall       Soft water system     Sprinkler system       Filtration system     Swimming pool       Other     Exterior lighting       Insulation:     Other           Communications:       Attic           Walls     Satellite dish       Floors     Intercom       Pipes and duct work     Security system       Other     Other             Miscellaneous:       Interior  Improvements:     Storm windows and doors       Built-in appliances     Roof       Kitchen modernization     Central vacuum       Bathroom modernization     Other       Flooring             Wall-to-wall carpeting             Other     How To
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My free tax 11. My free tax   Other Expenses Table of Contents What's New Introduction Topics - This chapter discusses: Useful Items - You may want to see: Reimbursement of Travel, Meals, and EntertainmentReimbursements Miscellaneous ExpensesMeaning of generally enforced. My free tax Kickbacks. My free tax Form 1099-MISC. My free tax Exception. My free tax Tax preparation fees. My free tax Covered executive branch official. My free tax Exceptions to denial of deduction. My free tax Indirect political contributions. My free tax Type of deduction. My free tax Repayment—$3,000 or less. My free tax Repayment—over $3,000. My free tax Method 1. My free tax Method 2. My free tax Repayment does not apply. My free tax Year of deduction (or credit). My free tax Telephone. My free tax What's New Standard mileage rate. My free tax  Beginning in 2013, the standard mileage rate for the cost of operating your car, van, pickup, or panel truck for business use is 56. My free tax 5 cents per mile. My free tax For more information, see Car and truck expenses under Miscellaneous Expenses. My free tax Introduction This chapter covers business expenses that may not have been explained to you, as a business owner, in previous chapters of this publication. My free tax Topics - This chapter discusses: Travel, meals, and entertainment Bribes and kickbacks Charitable contributions Education expenses Lobbying expenses Penalties and fines Repayments (claim of right) Other miscellaneous expenses Useful Items - You may want to see: Publication 15-B Employer's Tax Guide to Fringe Benefits 463 Travel, Entertainment, Gift, and Car Expenses 526 Charitable Contributions 529 Miscellaneous Deductions 544 Sales and Other Dispositions of Assets 970 Tax Benefits for Education 1542 Per Diem Rates See chapter 12 for information about getting publications and forms. My free tax Reimbursement of Travel, Meals, and Entertainment The following discussion explains how to handle any reimbursements or allowances you may provide to your employees under a reimbursement or allowance arrangement for travel, meals, and entertainment expenses. My free tax If you are self-employed and report your income and expenses on Schedule C or C-EZ (Form 1040), see Publication 463. My free tax To be deductible for tax purposes, expenses incurred for travel, meals, and entertainment must be ordinary and necessary expenses incurred while carrying on your trade or business. My free tax Generally, you also must show that entertainment expenses (including meals) are directly related to, or associated with, the conduct of your trade or business. My free tax For more information on travel, meals, and entertainment, including deductibility, see Publication 463. My free tax Reimbursements A “reimbursement or allowance arrangement” provides for payment of advances, reimbursements, and allowances for travel, meals, and entertainment expenses incurred by your employees during the ordinary course of business. My free tax If the expenses are substantiated, you can deduct the allowable amount on your tax return. My free tax Because of differences between accounting methods and tax law, the amount you can deduct for tax purposes may not be the same as the amount you deduct on your business books and records. My free tax For example, you can deduct 100% of the cost of meals on your business books and records. My free tax However, only 50% of these costs are allowed by law as a tax deduction. My free tax How you deduct a business expense under a reimbursement or allowance arrangement depends on whether you have: An accountable plan, or A nonaccountable plan. My free tax If you reimburse these expenses under an accountable plan, deduct them as travel, meals, or entertainment expenses. My free tax If you reimburse these expenses under a nonaccountable plan, report the reimbursements as wages on Form W-2, Wage and Tax Statement, and deduct them as wages on the appropriate line of your tax return. My free tax If you make a single payment to your employees and it includes both wages and an expense reimbursement, you must specify the amount of the reimbursement and report it accordingly. My free tax See Table 11-1 , Reporting Reimbursements. My free tax Accountable Plans An accountable plan requires your employees to meet all of the following requirements. My free tax Each employee must: Have paid or incurred deductible expenses while performing services as your employee, Adequately account to you for these expenses within a reasonable period of time, and Return any excess reimbursement or allowance within a reasonable period of time. My free tax An arrangement under which you advance money to employees is treated as meeting (3) above only if the following requirements are also met. My free tax The advance is reasonably calculated not to exceed the amount of anticipated expenses. My free tax You make the advance within a reasonable period of time of your employee paying or incurring the expense. My free tax If any expenses reimbursed under this arrangement are not substantiated, or an excess reimbursement is not returned within a reasonable period of time by an employee, you cannot treat these expenses as reimbursed under an accountable plan. My free tax Instead, treat the reimbursed expenses as paid under a nonaccountable plan, discussed later. My free tax Adequate accounting. My free tax   Your employees must adequately account to you for their travel, meals, and entertainment expenses. My free tax They must give you documentary evidence of their travel, mileage, and other employee business expenses. My free tax This evidence should include items such as receipts, along with either a statement of expenses, an account book, a day-planner, or similar record in which the employee entered each expense at or near the time the expense was incurred. My free tax Excess reimbursement or allowance. My free tax   An excess reimbursement or allowance is any amount you pay to an employee that is more than the business-related expenses for which the employee adequately accounted. My free tax The employee must return any excess reimbursement or other expense allowance to you within a reasonable period of time. My free tax Reasonable period of time. My free tax   A reasonable period of time depends on the facts and circumstances. My free tax Generally, actions that take place within the times specified in the following list will be treated as taking place within a reasonable period of time. My free tax You give an advance within 30 days of the time the employee pays or incurs the expense. My free tax Your employees adequately account for their expenses within 60 days after the expenses were paid or incurred. My free tax Your employees return any excess reimbursement within 120 days after the expenses were paid or incurred. My free tax You give a periodic statement (at least quarterly) to your employees that asks them to either return or adequately account for outstanding advances and they comply within 120 days of the date of the statement. My free tax How to deduct. My free tax   You can claim a deduction for travel, meals, and entertainment expenses if you reimburse your employees for these expenses under an accountable plan. My free tax Generally, the amount you can deduct for meals and entertainment is subject to a 50% limit, discussed later. My free tax If you are a sole proprietor, or are filing as a single member limited liability company, deduct the travel reimbursement on line 24a and the deductible part of the meals and entertainment reimbursement on line 24b, Schedule C (Form 1040) or line 2, Schedule C-EZ (Form 1040). My free tax   If you are filing an income tax return for a corporation, include the reimbursement on the Other deductions line of Form 1120, U. My free tax S. My free tax Corporation Income Tax Return. My free tax If you are filing any other business income tax return, such as a partnership or S corporation return, deduct the reimbursement on the appropriate line of the return as provided in the instructions for that return. My free tax Table 11-1. My free tax Reporting Reimbursements IF the type of reimbursement (or other expense allowance) arrangement is under THEN the employer reports on Form W-2 An accountable plan with: Actual expense reimbursement:  Adequate accounting made and excess returned No amount. My free tax Actual expense reimbursement:  Adequate accounting and return of excess both required but excess not returned The excess amount as wages in box 1. My free tax Per diem or mileage allowance up to the federal rate:  Adequate accounting made and excess returned No amount. My free tax Per diem or mileage allowance up to the federal rate:  Adequate accounting and return of excess both required but excess not returned The excess amount as wages in box 1. My free tax The amount up to the federal rate is reported only in box 12—it is not reported in box 1. My free tax Per diem or mileage allowance exceeds the federal rate:  Adequate accounting made up to the federal rate only and excess not returned The excess amount as wages in box 1. My free tax The amount up to the federal rate is reported only in box 12—it is not reported in box 1. My free tax A nonaccountable plan with: Either adequate accounting or return of excess, or both, not required by plan The entire amount as wages in box 1. My free tax No reimbursement plan The entire amount as wages in box 1. My free tax Per Diem and Car Allowances You can reimburse your employees under an accountable plan based on travel days, miles, or some other fixed allowance. My free tax In these cases, your employee is considered to have accounted to you for the amount of the expense that does not exceed the rates established by the federal government. My free tax Your employee must actually substantiate to you the other elements of the expense, such as time, place, and business purpose. My free tax Federal rate. My free tax   The federal rate can be figured using any one of the following methods. My free tax For car expenses: The standard mileage rate. My free tax A fixed and variable rate (FAVR). My free tax For per diem amounts: The regular federal per diem rate. My free tax The standard meal allowance. My free tax The high-low rate. My free tax Car allowance. My free tax   Your employee is considered to have accounted to you for car expenses that do not exceed the standard mileage rate. My free tax Beginning in 2013, the standard business mileage rate is 56. My free tax 5 cents per mile. My free tax   You can choose to reimburse your employees using a fixed and variable rate (FAVR) allowance. My free tax This is an allowance that includes a combination of payments covering fixed and variable costs, such as a cents-per-mile rate to cover your employees' variable operating costs (such as gas, oil, etc. My free tax ) plus a flat amount to cover your employees' fixed costs (such as depreciation, insurance, etc. My free tax ). My free tax For information on using a FAVR allowance, see Revenue Procedure 2010-51, available at www. My free tax irs. My free tax gov/irb/2010-51_IRB/ar14. My free tax html and Notice 2012-72, available at www. My free tax irs. My free tax gov/irb/2012-50_IRB/ar10. My free tax html. My free tax Per diem allowance. My free tax   If your employee actually substantiates to you the other elements (discussed earlier) of the expenses reimbursed using the per diem allowance, how you report and deduct the allowance depends on whether the allowance is for lodging and meal expenses or for meal expenses only and whether the allowance is more than the federal rate. My free tax Regular federal per diem rate. My free tax   The regular federal per diem rate is the highest amount the federal government will pay to its employees while away from home on travel. My free tax It has two components: Lodging expense, and Meal and incidental expense (M&IE). My free tax The rates are different for different locations. My free tax Publication 1542 lists the rates in the continental United States. My free tax Standard meal allowance. My free tax   The federal rate for meal and incidental expenses (M&IE) is the standard meal allowance. My free tax You can pay only an M&IE allowance to employees who travel away from home if: You pay the employee for actual expenses for lodging based on receipts submitted to you, You provide for the lodging, You pay for the actual expense of the lodging directly to the provider, You do not have a reasonable belief that lodging expenses were incurred by the employee, or The allowance is computed on a basis similar to that used in computing the employee's wages (that is, number of hours worked or miles traveled). My free tax Internet access. My free tax    Per diem rates are available on the Internet. My free tax You can access per diem rates at www. My free tax gsa. My free tax gov/perdiemrates. My free tax High-low method. My free tax   This is a simplified method of computing the federal per diem rate for travel within the continental United States. My free tax It eliminates the need to keep a current list of the per diem rate for each city. My free tax   Under the high-low method, the per diem amount for travel during January through September of 2013 is $242 ($65 for M&IE) for certain high-cost locations. My free tax All other areas have a per diem amount of $163 ($52 for M&IE). My free tax The high-cost locations eligible for the higher per diem amount under the high-low method are listed in Publication 1542. My free tax   Effective October 1, 2013, the per diem rate for high-cost locations increased to $251 ($65 for M&IE). My free tax The rate for all other locations increased to $170 ($52 for M&IE). My free tax For October, November, and December 2013, you can either continue to use the rates described in the preceding paragraph or change to the new rates. My free tax However, you must use the same rate for all employees reimbursed under the high-low method. My free tax   For more information about the high-low method, see Notice 2013-65, available at www. My free tax irs. My free tax gov/irb/2013-44_IRB/ar13. My free tax html. My free tax See Publication 1542 (available on the Internet at IRS. My free tax gov) for the current per diem rates for all locations. My free tax Reporting per diem and car allowances. My free tax   The following discussion explains how to report per diem and car allowances. My free tax The manner in which you report them depends on how the allowance compares to the federal rate. My free tax See Table 11-1. My free tax Allowance less than or equal to the federal rate. My free tax   If your allowance for the employee is less than or equal to the appropriate federal rate, that allowance is not included as part of the employee's pay in box 1 of the employee's Form W-2. My free tax Deduct the allowance as travel expenses (including meals that may be subject to the 50% limit, discussed later). My free tax See How to deduct under Accountable Plans, earlier. My free tax Allowance more than the federal rate. My free tax   If your employee's allowance is more than the appropriate federal rate, you must report the allowance as two separate items. My free tax   Include the allowance amount up to the federal rate in box 12 (code L) of the employee's Form W-2. My free tax Deduct it as travel expenses (as explained above). My free tax This part of the allowance is treated as reimbursed under an accountable plan. My free tax   Include the amount that is more than the federal rate in box 1 (and in boxes 3 and 5 if they apply) of the employee's Form W-2. My free tax Deduct it as wages subject to income tax withholding, social security, Medicare, and federal unemployment taxes. My free tax This part of the allowance is treated as reimbursed under a nonaccountable plan as explained later under Nonaccountable Plans. My free tax Meals and Entertainment Under an accountable plan, you can generally deduct only 50% of any otherwise deductible business-related meal and entertainment expenses you reimburse your employees. My free tax The deduction limit applies even if you reimburse them for 100% of the expenses. My free tax Application of the 50% limit. My free tax   The 50% deduction limit applies to reimbursements you make to your employees for expenses they incur for meals while traveling away from home on business and for entertaining business customers at your place of business, a restaurant, or another location. My free tax It applies to expenses incurred at a business convention or reception, business meeting, or business luncheon at a club. My free tax The deduction limit may also apply to meals you furnish on your premises to your employees. My free tax Related expenses. My free tax   Taxes and tips relating to a meal or entertainment activity you reimburse to your employee under an accountable plan are included in the amount subject to the 50% limit. My free tax Reimbursements you make for expenses, such as cover charges for admission to a nightclub, rent paid for a room to hold a dinner or cocktail party, or the amount you pay for parking at a sports arena, are all subject to the 50% limit. My free tax However, the cost of transportation to and from an otherwise allowable business meal or a business-related entertainment activity is not subject to the 50% limit. My free tax Amount subject to 50% limit. My free tax   If you provide your employees with a per diem allowance only for meal and incidental expenses, the amount treated as an expense for food and beverages is the lesser of the following. My free tax The per diem allowance. My free tax The federal rate for M&IE. My free tax   If you provide your employees with a per diem allowance that covers lodging, meals, and incidental expenses, you must treat an amount equal to the federal M&IE rate for the area of travel as an expense for food and beverages. My free tax If the per diem allowance you provide is less than the federal per diem rate for the area of travel, you can treat 40% of the per diem allowance as the amount for food and beverages. My free tax Meal expenses when subject to “hours of service” limits. My free tax   You can deduct 80% of the cost of reimbursed meals your employees consume while away from their tax home on business during, or incident to, any period subject to the Department of Transportation's “hours of service” limits. My free tax   See Publication 463 for a detailed discussion of individuals subject to the Department of Transportation's “hours of service” limits. My free tax De minimis (minimal) fringe benefit. My free tax   The 50% limit does not apply to an expense for food or beverage that is excluded from the gross income of an employee because it is a de minimis fringe benefit. My free tax See Publication 15-B for additional information on de minimis fringe benefits. My free tax Company cafeteria or executive dining room. My free tax   The cost of food and beverages you provide primarily to your employees on your business premises is deductible. My free tax This includes the cost of maintaining the facilities for providing the food and beverages. My free tax These expenses are subject to the 50% limit unless they qualify as a de minimis fringe benefit, as just discussed, or unless they are compensation to your employees (explained later). My free tax Employee activities. My free tax   The expense of providing recreational, social, or similar activities (including the use of a facility) for your employees is deductible and is not subject to the 50% limit. My free tax The benefit must be primarily for your employees who are not highly compensated. My free tax   For this purpose, a highly compensated employee is an employee who meets either of the following requirements. My free tax Owned a 10% or more interest in the business during the year or the preceding year. My free tax An employee is treated as owning any interest owned by his or her brother, sister, spouse, ancestors, and lineal descendants. My free tax Received more than $115,000 in pay for the preceding year. My free tax You can choose to include only employees who were also in the top 20% of employees when ranked by pay for the preceding year. My free tax   For example, the expenses for food, beverages, and entertainment for a company-wide picnic are not subject to the 50% limit. My free tax Meals or entertainment treated as compensation. My free tax   The 50% limit does not apply to either of the following. My free tax Expenses for meals or entertainment that you treat as: Compensation to an employee who was the recipient of the meals or entertainment, and Wages subject to withholding of federal income tax. My free tax Expenses for meals or entertainment if: A recipient of the meals or entertainment who is not your employee has to include the expenses in gross income as compensation for services or as a prize or award, and You include that amount on a Form 1099 issued to the recipient, if a Form 1099 is required. My free tax Sales of meals or entertainment. My free tax   You can deduct the cost of meals or entertainment (including the use of facilities) you sell to the public. My free tax For example, if you run a nightclub, your expense for the entertainment you furnish to your customers, such as a floor show, is a business expense that is fully deductible. My free tax The 50% limit does not apply to this expense. My free tax Providing meals or entertainment to general public to promote goodwill. My free tax   You can deduct the cost of providing meals, entertainment, or recreational facilities to the general public as a means of advertising or promoting goodwill in the community. My free tax The 50% limit does not apply to this expense. My free tax Director, stockholder, or employee meetings. My free tax   You can deduct entertainment expenses directly related to business meetings of your employees, partners, stockholders, agents, or directors. My free tax You can provide some minor social activities, but the main purpose of the meeting must be your company's business. My free tax These expenses are subject to the 50% limit. My free tax Trade association meetings. My free tax   You can deduct expenses directly related to and necessary for attending business meetings or conventions of certain tax-exempt organizations. My free tax These organizations include business leagues, chambers of commerce, real estate boards, and trade and professional associations. My free tax Nonaccountable Plans A nonaccountable plan is an arrangement that does not meet the requirements for an accountable plan. My free tax All amounts paid, or treated as paid, under a nonaccountable plan are reported as wages on Form W-2. My free tax The payments are subject to income tax withholding, social security, Medicare, and federal unemployment taxes. My free tax You can deduct the reimbursement as compensation or wages only to the extent it meets the deductibility tests for employees' pay in chapter 2. My free tax Deduct the allowable amount as compensation or wages on the appropriate line of your income tax return, as provided in its instructions. My free tax Miscellaneous Expenses In addition to travel, meal, and entertainment expenses, there are other expenses you can deduct. My free tax Advertising expenses. My free tax   You generally can deduct reasonable advertising expenses that are directly related to your business activities. My free tax Generally, you cannot deduct amounts paid to influence legislation (i. My free tax e. My free tax , lobbying). My free tax See Lobbying expenses , later. My free tax   You can usually deduct as a business expense the cost of institutional or goodwill advertising to keep your name before the public if it relates to business you reasonably expect to gain in the future. My free tax For example, the cost of advertising that encourages people to contribute to the Red Cross, to buy U. My free tax S. My free tax Savings Bonds, or to participate in similar causes is usually deductible. My free tax Anticipated liabilities. My free tax   Anticipated liabilities or reserves for anticipated liabilities are not deductible. My free tax For example, assume you sold 1-year TV service contracts this year totaling $50,000. My free tax From experience, you know you will have expenses of about $15,000 in the coming year for these contracts. My free tax You cannot deduct any of the $15,000 this year by charging expenses to a reserve or liability account. My free tax You can deduct your expenses only when you actually pay or accrue them, depending on your accounting method. My free tax Bribes and kickbacks. My free tax   Engaging in the payment of bribes or kickbacks is a serious criminal matter. My free tax Such activity could result in criminal prosecution. My free tax Any payments that appear to have been made, either directly or indirectly, to an official or employee of any government or an agency or instrumentality of any government are not deductible for tax purposes and are in violation of the law. My free tax   Payments paid directly or indirectly to a person in violation of any federal or state law (but only if that state law is generally enforced, defined below) that provides for a criminal penalty or for the loss of a license or privilege to engage in a trade or business are also not allowed as a deduction for tax purposes. My free tax Meaning of “generally enforced. My free tax ”   A state law is considered generally enforced unless it is never enforced or enforced only for infamous persons or persons whose violations are extraordinarily flagrant. My free tax For example, a state law is generally enforced unless proper reporting of a violation of the law results in enforcement only under unusual circumstances. My free tax Kickbacks. My free tax   A kickback is a payment for referring a client, patient, or customer. My free tax The common kickback situation occurs when money or property is given to someone as payment for influencing a third party to purchase from, use the services of, or otherwise deal with the person who pays the kickback. My free tax In many cases, the person whose business is being sought or enjoyed by the person who pays the kickback is not aware of the payment. My free tax   For example, the Yard Corporation is in the business of repairing ships. My free tax It returns 10% of the repair bills as kickbacks to the captains and chief officers of the vessels it repairs. My free tax Although this practice is considered an ordinary and necessary expense of getting business, it is clearly a violation of a state law that is generally enforced. My free tax These expenditures are not deductible for tax purposes, whether or not the owners of the shipyard are subsequently prosecuted. My free tax Form 1099-MISC. My free tax   It does not matter whether any kickbacks paid during the tax year are deductible on your income tax return in regards to information reporting. My free tax See Form 1099-MISC for more information. My free tax Car and truck expenses. My free tax   The costs of operating a car, truck, or other vehicle in your business are deductible. My free tax For more information on how to figure your deduction, see Publication 463. My free tax Charitable contributions. My free tax   Cash payments to an organization, charitable or otherwise, may be deductible as business expenses if the payments are not charitable contributions or gifts and are directly related to your business. My free tax If the payments are charitable contributions or gifts, you cannot deduct them as business expenses. My free tax However, corporations (other than S corporations) can deduct charitable contributions on their income tax returns, subject to limitations. My free tax See the Instructions for Form 1120 for more information. My free tax Sole proprietors, partners in a partnership, or shareholders in an S corporation may be able to deduct charitable contributions made by their business on Schedule A (Form 1040). My free tax Example. My free tax You paid $15 to a local church for a half-page ad in a program for a concert it is sponsoring. My free tax The purpose of the ad was to encourage readers to buy your products. My free tax Your payment is not a charitable contribution. My free tax You can deduct it as an advertising expense. My free tax Example. My free tax You made a $100,000 donation to a committee organized by the local Chamber of Commerce to bring a convention to your city, intended to increase business activity, including yours. My free tax Your payment is not a charitable contribution. My free tax You can deduct it as a business expense. My free tax See Publication 526 for a discussion of donated inventory, including capital gain property. My free tax Club dues and membership fees. My free tax   Generally, you cannot deduct amounts paid or incurred for membership in any club organized for business, pleasure, recreation, or any other social purpose. My free tax This includes country clubs, golf and athletic clubs, hotel clubs, sporting clubs, airline clubs, and clubs operated to provide meals under circumstances generally considered to be conducive to business discussions. My free tax Exception. My free tax   The following organizations are not treated as clubs organized for business, pleasure, recreation, or other social purpose unless one of the main purposes is to conduct entertainment activities for members or their guests or to provide members or their guests with access to entertainment facilities. My free tax Boards of trade. My free tax Business leagues. My free tax Chambers of commerce. My free tax Civic or public service organizations. My free tax Professional organizations such as bar associations and medical associations. My free tax Real estate boards. My free tax Trade associations. My free tax Credit card convenience fees. My free tax   Credit card companies charge a fee to businesses who accept their cards. My free tax This fee when paid or incurred by the business can be deducted as a business expense. My free tax Damages recovered. My free tax   Special rules apply to compensation you receive for damages sustained as a result of patent infringement, breach of contract or fiduciary duty, or antitrust violations. My free tax You must include this compensation in your income. My free tax However, you may be able to take a special deduction. My free tax The deduction applies only to amounts recovered for actual economic injury, not any additional amount. My free tax The deduction is the smaller of the following. My free tax The amount you received or accrued for damages in the tax year reduced by the amount you paid or incurred in the year to recover that amount. My free tax Your losses from the injury you have not deducted. My free tax Demolition expenses or losses. My free tax   Amounts paid or incurred to demolish a structure are not deductible. My free tax These amounts are added to the basis of the land where the demolished structure was located. My free tax Any loss for the remaining undepreciated basis of a demolished structure would not be recognized until the property is disposed of. My free tax Education expenses. My free tax   Ordinary and necessary expenses paid for the cost of the education and training of your employees are deductible. My free tax See Education Expenses in chapter 2. My free tax   You can also deduct the cost of your own education (including certain related travel) related to your trade or business. My free tax You must be able to show the education maintains or improves skills required in your trade or business, or that it is required by law or regulations, for keeping your license to practice, status, or job. My free tax For example, an attorney can deduct the cost of attending Continuing Legal Education (CLE) classes that are required by the state bar association to maintain his or her license to practice law. My free tax   Education expenses you incur to meet the minimum requirements of your present trade or business, or those that qualify you for a new trade or business, are not deductible. My free tax This is true even if the education maintains or improves skills presently required in your business. My free tax For more information on education expenses, see Publication 970. My free tax Franchise, trademark, trade name. My free tax   If you buy a franchise, trademark, or trade name, you can deduct the amount you pay or incur as a business expense only if your payments are part of a series of payments that are: Contingent on productivity, use, or disposition of the item, Payable at least annually for the entire term of the transfer agreement, and Substantially equal in amount (or payable under a fixed formula). My free tax   When determining the term of the transfer agreement, include all renewal options and any other period for which you and the transferrer reasonably expect the agreement to be renewed. My free tax   A franchise includes an agreement that gives one of the parties to the agreement the right to distribute, sell, or provide goods, services, or facilities within a specified area. My free tax Impairment-related expenses. My free tax   If you are disabled, you can deduct expenses necessary for you to be able to work (impairment-related expenses) as a business expense, rather than as a medical expense. My free tax   You are disabled if you have either of the following. My free tax A physical or mental disability (for example, blindness or deafness) that functionally limits your being employed. My free tax A physical or mental impairment that substantially limits one or more of your major life activities. My free tax   The expense qualifies as a business expense if all the following apply. My free tax Your work clearly requires the expense for you to satisfactorily perform that work. My free tax The goods or services purchased are clearly not needed or used, other than incidentally, in your personal activities. My free tax Their treatment is not specifically provided for under other tax law provisions. My free tax Example. My free tax You are blind. My free tax You must use a reader to do your work, both at and away from your place of work. My free tax The reader's services are only for your work. My free tax You can deduct your expenses for the reader as a business expense. My free tax Internet-related expenses. My free tax   Generally, you can deduct internet-related expenses including domain registrations fees and webmaster consulting costs. My free tax If you are starting a business you may have to amortize these expenses as start-up costs. My free tax For more information about amortizing start-up and organizational costs, see chapter 8. My free tax Interview expense allowances. My free tax   Reimbursements you make to job candidates for transportation or other expenses related to interviews for possible employment are not wages. My free tax You can deduct the reimbursements as a business expense. My free tax However, expenses for food, beverages, and entertainment are subject to the 50% limit discussed earlier under Meals and Entertainment. My free tax Legal and professional fees. My free tax   Fees charged by accountants and attorneys that are ordinary and necessary expenses directly related to operating your business are deductible as business expenses. My free tax However, usually legal fees you pay to acquire business assets are not deductible. My free tax These costs are added to the basis of the property. My free tax   Fees that include payments for work of a personal nature (such as drafting a will, or damages arising from a personal injury) are not allowed as a business deduction on Schedule C or C-EZ. My free tax If the invoice includes both business and personal charges, compute the business portion as follows: multiply the total amount of the bill by a fraction, the numerator of which is the amount attributable to business matters, the denominator of which is the total amount paid. My free tax The result is the portion of the invoice attributable to business expenses. My free tax The portion attributable to personal matters is the difference between the total amount and the business portion (computed above). My free tax   Legal fees relating to personal tax advice may be deductible on Schedule A (Form 1040), if you itemize deductions. My free tax However, the deduction is subject to the 2% limitation on miscellaneous itemized deductions. My free tax See Publication 529, Miscellaneous Deductions. My free tax Tax preparation fees. My free tax   The cost of hiring a tax professional, such as a C. My free tax P. My free tax A. My free tax , to prepare that part of your tax return relating to your business as a sole proprietor is deductible on Schedule C or Schedule C-EZ. My free tax Any remaining cost may be deductible on Schedule A (Form 1040) if you itemize deductions. My free tax   You can also claim a business deduction for amounts paid or incurred in resolving asserted tax deficiencies for your business operated as a sole proprietor. My free tax Licenses and regulatory fees. My free tax   Licenses and regulatory fees for your trade or business paid annually to state or local governments generally are deductible. My free tax Some licenses and fees may have to be amortized. My free tax See chapter 8 for more information. My free tax Lobbying expenses. My free tax   Generally, lobbying expenses are not deductible. My free tax Lobbying expenses include amounts paid or incurred for any of the following activities. My free tax Influencing legislation. My free tax Participating in or intervening in any political campaign for, or against, any candidate for public office. My free tax Attempting to influence the general public, or segments of the public, about elections, legislative matters, or referendums. My free tax Communicating directly with covered executive branch officials (defined later) in any attempt to influence the official actions or positions of those officials. My free tax Researching, preparing, planning, or coordinating any of the preceding activities. My free tax   Your expenses for influencing legislation and communicating directly with a covered executive branch official include a portion of your labor costs and general and administrative costs of your business. My free tax For information on making this allocation, see section 1. My free tax 162-28 of the regulations. My free tax   You cannot claim a charitable or business expense deduction for amounts paid to an organization if both of the following apply. My free tax The organization conducts lobbying activities on matters of direct financial interest to your business. My free tax A principal purpose of your contribution is to avoid the rules discussed earlier that prohibit a business deduction for lobbying expenses. My free tax   If a tax-exempt organization, other than a section 501(c)(3) organization, provides you with a notice on the part of dues that is allocable to nondeductible lobbying and political expenses, you cannot deduct that part of the dues. My free tax Covered executive branch official. My free tax   For purposes of this discussion, a covered executive branch official is any of the following. My free tax The President. My free tax The Vice President. My free tax Any officer or employee of the White House Office of the Executive Office of the President and the two most senior level officers of each of the other agencies in the Executive Office. My free tax Any individual who: Is serving in a position in Level I of the Executive Schedule under section 5312 of title 5, United States Code, Has been designated by the President as having Cabinet-level status, or Is an immediate deputy of an individual listed in item (a) or (b). My free tax Exceptions to denial of deduction. My free tax   The general denial of the deduction does not apply to the following. My free tax Expenses of appearing before, or communicating with, any committee or member of any local council or similar governing body concerning its legislation (local legislation) if the legislation is of direct interest to you or to you and an organization of which you are a member. My free tax An Indian tribal government is treated as a local council or similar governing body. My free tax Any in-house expenses for influencing legislation and communicating directly with a covered executive branch official if those expenses for the tax year do not exceed $2,000 (excluding overhead expenses). My free tax Expenses incurred by taxpayers engaged in the trade or business of lobbying (professional lobbyists) on behalf of another person (but does apply to payments by the other person to the lobbyist for lobbying activities). My free tax Moving machinery. My free tax   Generally, the cost of moving machinery from one city to another is a deductible expense. My free tax So is the cost of moving machinery from one plant to another, or from one part of your plant to another. My free tax You can deduct the cost of installing the machinery in the new location. My free tax However, you must capitalize the costs of installing or moving newly purchased machinery. My free tax Outplacement services. My free tax   The costs of outplacement services you provide to your employees to help them find new employment, such as career counseling, résumé assistance, skills assessment, etc. My free tax are deductible. My free tax   The costs of outplacement services may cover more than one deduction category. My free tax For example, deduct as a utilities expense the cost of telephone calls made under this service and deduct as rental expense the cost of renting machinery and equipment for this service. My free tax   For information on whether the value of outplacement services is includable in your employees' income, see Publication 15-B. My free tax Penalties and fines. My free tax   Penalties paid for late performance or nonperformance of a contract are generally deductible. My free tax For instance, you own and operate a construction company. My free tax Under a contract, you are to finish construction of a building by a certain date. My free tax Due to construction delays, the building is not completed and ready for occupancy on the date stipulated in the contract. My free tax You are now required to pay an additional amount for each day that completion is delayed beyond the completion date stipulated in the contract. My free tax These additional costs are deductible business expenses. My free tax   On the other hand, penalties or fines paid to any government agency or instrumentality because of a violation of any law are not deductible. My free tax These fines or penalties include the following amounts. My free tax Paid because of a conviction for a crime or after a plea of guilty or no contest in a criminal proceeding. My free tax Paid as a penalty imposed by federal, state, or local law in a civil action, including certain additions to tax and additional amounts and assessable penalties imposed by the Internal Revenue Code. My free tax Paid in settlement of actual or possible liability for a fine or penalty, whether civil or criminal. My free tax Forfeited as collateral posted for a proceeding that could result in a fine or penalty. My free tax   Examples of nondeductible penalties and fines include the following. My free tax Fines for violating city housing codes. My free tax Fines paid by truckers for violating state maximum highway weight laws. My free tax Fines for violating air quality laws. My free tax Civil penalties for violating federal laws regarding mining safety standards and discharges into navigable waters. My free tax   A fine or penalty does not include any of the following. My free tax Legal fees and related expenses to defend yourself in a prosecution or civil action for a violation of the law imposing the fine or civil penalty. My free tax Court costs or stenographic and printing charges. My free tax Compensatory damages paid to a government. My free tax Political contributions. My free tax   Contributions or gifts paid to political parties or candidates are not deductible. My free tax In addition, expenses paid or incurred to take part in any political campaign of a candidate for public office are not deductible. My free tax Indirect political contributions. My free tax   You cannot deduct indirect political contributions and costs of taking part in political activities as business expenses. My free tax Examples of nondeductible expenses include the following. My free tax Advertising in a convention program of a political party, or in any other publication if any of the proceeds from the publication are for, or intended for, the use of a political party or candidate. My free tax Admission to a dinner or program (including, but not limited to, galas, dances, film presentations, parties, and sporting events) if any of the proceeds from the function are for, or intended for, the use of a political party or candidate. My free tax Admission to an inaugural ball, gala, parade, concert, or similar event if identified with a political party or candidate. My free tax Repairs. My free tax   The cost of repairing or improving property used in your trade or business is either a deductible or capital expense. My free tax Routine maintenance that keeps your property in a normal efficient operating condition, but that does not materially increase the value or substantially prolong the useful life of the property, is deductible in the year that it is incurred. My free tax Otherwise, the cost must be capitalized and depreciated. My free tax See Form 4562 and its instructions for how to compute and claim the depreciation deduction. My free tax   The cost of repairs includes the costs of labor, supplies, and certain other items. My free tax The value of your own labor is not deductible. My free tax Examples of repairs include: Reconditioning floors (but not replacement), Repainting the interior and exterior walls of a building, Cleaning and repairing roofs and gutters, and Fixing plumbing leaks (but not replacement of fixtures). My free tax Repayments. My free tax   If you had to repay an amount you included in your income in an earlier year, you may be able to deduct the amount repaid for the year in which you repaid it. My free tax Or, if the amount you repaid is more than $3,000, you may be able to take a credit against your tax for the year in which you repaid it. My free tax Type of deduction. My free tax   The type of deduction you are allowed in the year of repayment depends on the type of income you included in the earlier year. My free tax For instance, if you repay an amount you previously reported as a capital gain, deduct the repayment as a capital loss on Form 8949. My free tax If you reported it as self-employment income, deduct it as a business deduction on Schedule C or Schedule C-EZ (Form 1040) or Schedule F (Form 1040). My free tax   If you reported the amount as wages, unemployment compensation, or other nonbusiness ordinary income, enter it on Schedule A (Form 1040) as a miscellaneous itemized deduction that is subject to the 2% limitation. My free tax However, if the repayment is over $3,000 and Method 1 (discussed later) applies, deduct it on Schedule A (Form 1040) as a miscellaneous itemized deduction that is not subject to the 2% limitation. My free tax Repayment—$3,000 or less. My free tax   If the amount you repaid was $3,000 or less, deduct it from your income in the year you repaid it. My free tax Repayment—over $3,000. My free tax   If the amount you repaid was more than $3,000, you can deduct the repayment, as described earlier. My free tax However, you can instead choose to take a tax credit for the year of repayment if you included the income under a “claim of right. My free tax ” This means that at the time you included the income, it appeared that you had an unrestricted right to it. My free tax If you qualify for this choice, figure your tax under both methods and use the method that results in less tax. My free tax Method 1. My free tax   Figure your tax for 2013 claiming a deduction for the repaid amount. My free tax Method 2. My free tax   Figure your tax for 2013 claiming a credit for the repaid amount. My free tax Follow these steps. My free tax Figure your tax for 2013 without deducting the repaid amount. My free tax Refigure your tax from the earlier year without including in income the amount you repaid in 2013. My free tax Subtract the tax in (2) from the tax shown on your return for the earlier year. My free tax This is the amount of your credit. My free tax Subtract the answer in (3) from the tax for 2013 figured without the deduction (step 1). My free tax   If Method 1 results in less tax, deduct the amount repaid as discussed earlier under Type of deduction. My free tax   If Method 2 results in less tax, claim the credit on line 71 of Form 1040, and write “I. My free tax R. My free tax C. My free tax 1341” next to line 71. My free tax Example. My free tax For 2012, you filed a return and reported your income on the cash method. My free tax In 2013, you repaid $5,000 included in your 2012 gross income under a claim of right. My free tax Your filing status in 2013 and 2012 is single. My free tax Your income and tax for both years are as follows:   2012  With Income 2012  Without Income Taxable Income $15,000 $10,000 Tax $ 1,819 $ 1,069   2013  Without Deduction 2013  With Deduction Taxable Income $49,950 $44,950 Tax $8,423 $7,173 Your tax under Method 1 is $7,173. My free tax Your tax under Method 2 is $7,673, figured as follows: Tax previously determined for 2012 $ 1,819 Less: Tax as refigured − 1,069 Decrease in 2012 tax $ 750 Regular tax liability for 2013 $8,423 Less: Decrease in 2012 tax − 750 Refigured tax for 2013 $ 7,673 Because you pay less tax under Method 1, you should take a deduction for the repayment in 2013. My free tax Repayment does not apply. My free tax   This discussion does not apply to the following. My free tax Deductions for bad debts. My free tax Deductions from sales to customers, such as returns and allowances, and similar items. My free tax Deductions for legal and other expenses of contesting the repayment. My free tax Year of deduction (or credit). My free tax   If you use the cash method of accounting, you can take the deduction (or credit, if applicable) for the tax year in which you actually make the repayment. My free tax If you use any other accounting method, you can deduct the repayment or claim a credit for it only for the tax year in which it is a proper deduction under your accounting method. My free tax For example, if you use the accrual method, you are entitled to the deduction or credit in the tax year in which the obligation for the repayment accrues. My free tax Subscriptions. My free tax   Subscriptions to professional, technical, and trade journals that deal with your business field are deductible. My free tax Supplies and materials. My free tax   Unless you have deducted the cost in any earlier year, you generally can deduct the cost of materials and supplies actually consumed and used during the tax year. My free tax   If you keep incidental materials and supplies on hand, you can deduct the cost of the incidental materials and supplies you bought during the tax year if all the following requirements are met. My free tax You do not keep a record of when they are used. My free tax You do not take an inventory of the amount on hand at the beginning and end of the tax year. My free tax This method does not distort your income. My free tax   You can also deduct the cost of books, professional instruments, equipment, etc. My free tax , if you normally use them within a year. My free tax However, if the usefulness of these items extends substantially beyond the year they are placed in service, you generally must recover their costs through depreciation. My free tax For more information regarding depreciation see Publication 946, How To Depreciate Property. My free tax Utilities. My free tax   Business expenses for heat, lights, power, telephone service, and water and sewerage are deductible. My free tax However, any part due to personal use is not deductible. My free tax Telephone. My free tax   You cannot deduct the cost of basic local telephone service (including any taxes) for the first telephone line you have in your home, even if you have an office in your home. My free tax However, charges for business long-distance phone calls on that line, as well as the cost of a second line into your home used exclusively for business, are deductible business expenses. My free tax Prev  Up  Next   Home   More Online Publications