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Taxact returning user 10. Taxact returning user   Retirement Savings Contributions Credit (Saver's Credit) Table of Contents Full-time student. Taxact returning user Adjusted gross income. Taxact returning user Distributions received by spouse. Taxact returning user Testing period. Taxact returning user If you or your employer make eligible contributions (defined later) to a retirement plan, you may be able to take a credit of up to $1,000 (up to $2,000 if filing jointly). Taxact returning user This credit could reduce the federal income tax you pay dollar for dollar. Taxact returning user Can you claim the credit?   If you or your employer make eligible contributions to a retirement plan, you can claim the credit if all of the following apply. Taxact returning user You are not under age 18. Taxact returning user You are not a full-time student (explained next). Taxact returning user No one else, such as your parent(s), claims an exemption for you on their tax return. Taxact returning user Your adjusted gross income (defined later) is not more than: $59,000 for 2013 ($60,000 for 2014) if your filing status is married filing jointly, $44,250 for 2013 ($45,000 for 2014) if your filing status is head of household (with qualifying person), or $29,500 for 2013 ($30,000 for 2014) if your filing status is single, married filing separately, or qualifying widow(er) with dependent child. Taxact returning user Full-time student. Taxact returning user   You are a full-time student if, during some part of each of 5 calendar months (not necessarily consecutive) during the calendar year, you are either: A full-time student at a school that has a regular teaching staff, course of study, and regularly enrolled body of students in attendance, or A student taking a full-time, on-farm training course given by either a school that has a regular teaching staff, course of study, and regularly enrolled body of students in attendance, or a state, county, or local government. Taxact returning user You are a full-time student if you are enrolled for the number of hours or courses the school considers to be full-time. Taxact returning user Adjusted gross income. Taxact returning user   This is generally the amount on line 38 of your 2013 Form 1040 or line 22 of your 2013 Form 1040A. Taxact returning user However, you must add to that amount any exclusion or deduction claimed for the year for: Foreign earned income, Foreign housing costs, Income for bona fide residents of American Samoa, and Income from Puerto Rico. Taxact returning user Eligible contributions. Taxact returning user   These include: Contributions to a traditional or Roth IRA, Elective deferrals, including amounts designated as after-tax Roth contributions, to: A 401(k) plan (including a SIMPLE 401(k)), A section 403(b) annuity, An eligible deferred compensation plan of a state or local government (a governmental 457 plan), A SIMPLE IRA plan, or A salary reduction SEP, and Contributions to a section 501(c)(18) plan. Taxact returning user They also include voluntary after-tax employee contributions to a tax-qualified retirement plan or a section 403(b) annuity. Taxact returning user For purposes of the credit, an employee contribution will be voluntary as long as it is not required as a condition of employment. Taxact returning user Reducing eligible contributions. Taxact returning user   Reduce your eligible contributions (but not below zero) by the total distributions you received during the testing period (defined later) from any IRA, plan, or annuity included earlier under Eligible contributions. Taxact returning user Also reduce your eligible contributions by any distribution from a Roth IRA that is not rolled over, even if the distribution is not taxable. Taxact returning user      Do not reduce your eligible contributions by any of the following: The portion of any distribution which is not includible in income because it is a trustee-to-trustee transfer or a rollover distribution. Taxact returning user Any distribution that is a return of a contribution to an IRA (including a Roth IRA) made during the year for which you claim the credit if: The distribution is made before the due date (including extensions) of your tax return for that year, You do not take a deduction for the contribution, and The distribution includes any income attributable to the contribution. Taxact returning user Loans from a qualified employer plan treated as a distribution. Taxact returning user Distributions of excess contributions or deferrals (and income attributable to excess contributions and deferrals). Taxact returning user Distributions of dividends paid on stock held by an employee stock ownership plan under section 404(k). Taxact returning user Distributions from an eligible retirement plan that are converted or rolled over to a Roth IRA. Taxact returning user Distributions from a military retirement plan. Taxact returning user Distributions received by spouse. Taxact returning user   Any distributions your spouse receives are treated as received by you if you file a joint return with your spouse both for the year of the distribution and for the year for which you claim the credit. Taxact returning user Testing period. Taxact returning user   The testing period consists of: The year in which you claim the credit, The 2 years before the year in which you claim the credit, and The period after the end of the year in which you claim the credit and before the due date of the return (including extensions) for filing your return for the year in which you claimed the credit. Taxact returning user Example. Taxact returning user You and your spouse filed joint returns in 2011 and 2012, and plan to do so in 2013 and 2014. Taxact returning user You received a taxable distribution from a qualified plan in 2011 and a taxable distribution from an eligible section 457(b) deferred compensation plan in 2012. Taxact returning user Your spouse received taxable distributions from a Roth IRA in 2013 and tax-free distributions from a Roth IRA in 2014 before April 15. Taxact returning user You made eligible contributions to an IRA in 2013 and you otherwise qualify for this credit. Taxact returning user You must reduce the amount of your qualifying contributions in 2013 by the total of the distributions you and your spouse received in 2011, 2012, 2013, and 2014. Taxact returning user Maximum eligible contributions. Taxact returning user   After your contributions are reduced, the maximum annual contribution on which you can base the credit is $2,000 per person. Taxact returning user Effect on other credits. Taxact returning user   The amount of this credit will not change the amount of your refundable tax credits. Taxact returning user A refundable tax credit, such as the earned income credit or the additional child tax credit, is an amount that you would receive as a refund even if you did not otherwise owe any taxes. Taxact returning user Maximum credit. Taxact returning user   This is a nonrefundable credit. Taxact returning user The amount of the credit in any year cannot be more than the amount of tax that you would otherwise pay (not counting any refundable credits or the adoption credit) in any year. Taxact returning user If your tax liability is reduced to zero because of other nonrefundable credits, such as the education credits, then you will not be entitled to this credit. Taxact returning user How to figure and report the credit. Taxact returning user   The amount of the credit you can get is based on the contributions you make and your credit rate. Taxact returning user The credit rate can be as low as 10% or as high as 50%. Taxact returning user Your credit rate depends on your income and your filing status. Taxact returning user See Form 8880, Credit for Qualified Retirement Savings Contributions, to determine your credit rate. Taxact returning user   The maximum contribution taken into account is $2,000 per person. Taxact returning user On a joint return, up to $2,000 is taken into account for each spouse. Taxact returning user   Figure the credit on Form 8880. Taxact returning user Report the credit on line 50 of your Form 1040 or line 32 of your Form 1040A, and attach Form 8880 to your return. Taxact returning user Prev  Up  Next   Home   More Online Publications
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Taxact returning user 23. Taxact returning user   Interest Expense Table of Contents Introduction Useful Items - You may want to see: Home Mortgage InterestAmount Deductible Points Mortgage Insurance Premiums Form 1098, Mortgage Interest Statement Investment InterestInvestment Property Allocation of Interest Expense Limit on Deduction Items You Cannot DeductPersonal Interest Allocation of Interest How To ReportMore than one borrower. Taxact returning user Mortgage proceeds used for business or investment. Taxact returning user Introduction This chapter discusses what interest expenses you can deduct. Taxact returning user Interest is the amount you pay for the use of borrowed money. Taxact returning user The following are types of interest you can deduct as itemized deductions on Schedule A (Form 1040). Taxact returning user Home mortgage interest, including certain points and mortgage insurance premiums. Taxact returning user Investment interest. Taxact returning user This chapter explains these deductions. Taxact returning user It also explains where to deduct other types of interest and lists some types of interest you cannot deduct. Taxact returning user Use Table 23-1 to find out where to get more information on various types of interest, including investment interest. Taxact returning user Useful Items - You may want to see: Publication 936 Home Mortgage Interest Deduction 550 Investment Income and Expenses Home Mortgage Interest Generally, home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). Taxact returning user The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan. Taxact returning user You can deduct home mortgage interest if all the following conditions are met. Taxact returning user You file Form 1040 and itemize deductions on Schedule A (Form 1040). Taxact returning user The mortgage is a secured debt on a qualified home in which you have an ownership interest. Taxact returning user (Generally, your mortgage is a secured debt if you put your home up as collateral to protect the interest of the lender. Taxact returning user The term “qualified home” means your main home or second home. Taxact returning user For details, see Publication 936. Taxact returning user )  Both you and the lender must intend that the loan be repaid. Taxact returning user Amount Deductible In most cases, you can deduct all of your home mortgage interest. Taxact returning user How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds. Taxact returning user Fully deductible interest. Taxact returning user   If all of your mortgages fit into one or more of the following three categories at all times during the year, you can deduct all of the interest on those mortgages. Taxact returning user (If any one mortgage fits into more than one category, add the debt that fits in each category to your other debt in the same category. Taxact returning user )   The three categories are as follows: Mortgages you took out on or before October 13, 1987 (called grandfathered debt). Taxact returning user Mortgages you took out after October 13, 1987, to buy, build, or improve your home (called home acquisition debt), but only if throughout 2013 these mortgages plus any grandfathered debt totaled $1 million or less ($500,000 or less if married filing separately). Taxact returning user Mortgages you took out after October 13, 1987, other than to buy, build, or improve your home (called home equity debt), but only if throughout 2013 these mortgages totaled $100,000 or less ($50,000 or less if married filing separately) and totaled no more than the fair market value of your home reduced by (1) and (2). Taxact returning user The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home. Taxact returning user   See Part II of Publication 936 for more detailed definitions of grandfathered, home acquisition, and home equity debt. Taxact returning user    You can use Figure 23-A to check whether your home mortgage interest is fully deductible. Taxact returning user Figure 23-A. Taxact returning user Is My Home Mortgage Interest Fully Deductible? Please click here for the text description of the image. Taxact returning user Figure 23-A. Taxact returning user Is My Interest Fully Deductible? Limits on deduction. Taxact returning user   You cannot fully deduct interest on a mortgage that does not fit into any of the three categories listed earlier. Taxact returning user If this applies to you, see Part II of Publication 936 to figure the amount of interest you can deduct. Taxact returning user Special Situations This section describes certain items that can be included as home mortgage interest and others that cannot. Taxact returning user It also describes certain special situations that may affect your deduction. Taxact returning user Late payment charge on mortgage payment. Taxact returning user   You can deduct as home mortgage interest a late payment charge if it was not for a specific service performed in connection with your mortgage loan. Taxact returning user Mortgage prepayment penalty. Taxact returning user   If you pay off your home mortgage early, you may have to pay a penalty. Taxact returning user 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. Taxact returning user Sale of home. Taxact returning user   If you sell your home, you can deduct your home mortgage interest (subject to any limits that apply) paid up to, but not including, the date of sale. Taxact returning user Example. Taxact returning user John and Peggy Harris sold their home on May 7. Taxact returning user Through April 30, they made home mortgage interest payments of $1,220. Taxact returning user The settlement sheet for the sale of the home showed $50 interest for the 6-day period in May up to, but not including, the date of sale. Taxact returning user Their mortgage interest deduction is $1,270 ($1,220 + $50). Taxact returning user Prepaid interest. Taxact returning user   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. Taxact returning user You can deduct in each year only the interest that qualifies as home mortgage interest for that year. Taxact returning user However, there is an exception that applies to points, discussed later. Taxact returning user Mortgage interest credit. Taxact returning user   You may be able to claim a mortgage interest credit if you were issued a mortgage credit certificate (MCC) by a state or local government. Taxact returning user Figure the credit on Form 8396, Mortgage Interest Credit. Taxact returning user If you take this credit, you must reduce your mortgage interest deduction by the amount of the credit. Taxact returning user   For more information on the credit, see chapter 37. Taxact returning user Ministers' and military housing allowance. Taxact returning user   If you are a minister or a member of the uniformed services and receive a housing allowance that is not taxable, you can still deduct your home mortgage interest. Taxact returning user Hardest Hit Fund and Emergency Homeowners' Loan Programs. Taxact returning user   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. Taxact returning user 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. Taxact returning user 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. Taxact returning user If you meet these tests, then you can deduct all of the payments you actually made during the year to your mortgage servicer, the State HFA, or HUD on the home mortgage (including the amount shown on box 3 of Form 1098-MA, Mortgage Assistance Payments), but not more than the sum of the amounts shown on Form 1098, Mortgage Interest Statement, in box 1 (mortgage interest received from payer(s) / borrower(s)), box 4 (mortgage insurance premiums) and box 5 (real property taxes). Taxact returning user 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. Taxact returning user Mortgage assistance payments under section 235 of the National Housing Act. Taxact returning user   If you qualify for mortgage assistance payments for lower-income families under section 235 of the National Housing Act, part or all of the interest on your mortgage may be paid for you. Taxact returning user You cannot deduct the interest that is paid for you. Taxact returning user No other effect on taxes. Taxact returning user   Do not include these mortgage assistance payments in your income. Taxact returning user Also, do not use these payments to reduce other deductions, such as real estate taxes. Taxact returning user Divorced or separated individuals. Taxact returning user   If a divorce or separation agreement requires you or your spouse or former spouse to pay home mortgage interest on a home owned by both of you, the payment of interest may be alimony. Taxact returning user See the discussion of Payments for jointly-owned home in chapter 18. Taxact returning user Redeemable ground rents. Taxact returning user   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct them as mortgage interest. Taxact returning user   Payments made to end the lease and to buy the lessor's entire interest in the land are not deductible as mortgage interest. Taxact returning user For more information, see Publication 936. Taxact returning user Nonredeemable ground rents. Taxact returning user   Payments on a nonredeemable ground rent are not mortgage interest. Taxact returning user You can deduct them as rent if they are a business expense or if they are for rental property. Taxact returning user Reverse mortgages. Taxact returning user   A reverse mortgage is a loan where the lender pays you (in a lump sum, a monthly advance, a line of credit, or a combination of all three) while you continue to live in your home. Taxact returning user With a reverse mortgage, you retain title to your home. Taxact returning user Depending on the plan, your reverse mortgage becomes due with interest when you move, sell your home, reach the end of a pre-selected loan period, or die. Taxact returning user Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable. Taxact returning user Any interest (including original issue discount) accrued on a reverse mortgage is not deductible until the loan is paid in full. Taxact returning user Your deduction may be limited because a reverse mortgage loan generally is subject to the limit on Home Equity Debt discussed in Publication 936. Taxact returning user Rental payments. Taxact returning user   If you live in a house before final settlement on the purchase, any payments you make for that period are rent and not interest. Taxact returning user This is true even if the settlement papers call them interest. Taxact returning user You cannot deduct these payments as home mortgage interest. Taxact returning user Mortgage proceeds invested in tax-exempt securities. Taxact returning user   You cannot deduct the home mortgage interest on grandfathered debt or home equity debt if you used the proceeds of the mortgage to buy securities or certificates that produce tax-free income. Taxact returning user “Grandfathered debt” and “home equity debt” are defined earlier under Amount Deductible. Taxact returning user Refunds of interest. Taxact returning user   If you receive a refund of interest in the same tax year you paid it, you must reduce your interest expense by the amount refunded to you. Taxact returning user If you receive a refund of interest you deducted in an earlier year, you generally must include the refund in income in the year you receive it. Taxact returning user However, you need to include it only up to the amount of the deduction that reduced your tax in the earlier year. Taxact returning user This is true whether the interest overcharge was refunded to you or was used to reduce the outstanding principal on your mortgage. Taxact returning user    If you received a refund of interest you overpaid in an earlier year, you generally will receive a Form 1098, Mortgage Interest Statement, showing the refund in box 3. Taxact returning user For information about Form 1098, see Form 1098, Mortgage Interest Statement , later. Taxact returning user   For more information on how to treat refunds of interest deducted in earlier years, see Recoveries in chapter 12. Taxact returning user Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Taxact returning user Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. Taxact returning user A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. Taxact returning user See Points paid by the seller , later. Taxact returning user General Rule You generally cannot deduct the full amount of points in the year paid. Taxact returning user Because they are prepaid interest, you generally deduct them ratably over the life (term) of the mortgage. Taxact returning user See Deduction Allowed Ratably , next. Taxact returning user For exceptions to the general rule, see Deduction Allowed in Year Paid , later. Taxact returning user Deduction Allowed Ratably If you do not meet the tests listed under Deduction Allowed in Year Paid , later, the loan is not a home improvement loan, or you choose not to deduct your points in full in the year paid, you can deduct the points ratably (equally) over the life of the loan if you meet all the following tests. Taxact returning user You use the cash method of accounting. Taxact returning user This means you report income in the year you receive it and deduct expenses in the year you pay them. Taxact returning user Most individuals use this method. Taxact returning user Your loan is secured by a home. Taxact returning user (The home does not need to be your main home. Taxact returning user ) Your loan period is not more than 30 years. Taxact returning user If your loan period is more than 10 years, the terms of your loan are the same as other loans offered in your area for the same or longer period. Taxact returning user Either your loan amount is $250,000 or less, or the number of points is not more than: 4, if your loan period is 15 years or less, or 6, if your loan period is more than 15 years. Taxact returning user Deduction Allowed in Year Paid You can fully deduct points in the year paid if you meet all the following tests. Taxact returning user (You can use Figure 23-B as a quick guide to see whether your points are fully deductible in the year paid. Taxact returning user ) Your loan is secured by your main home. Taxact returning user (Your main home is the one you ordinarily live in most of the time. Taxact returning user ) Paying points is an established business practice in the area where the loan was made. Taxact returning user The points paid were not more than the points generally charged in that area. Taxact returning user You use the cash method of accounting. Taxact returning user This means you report income in the year you receive it and deduct expenses in the year you pay them. Taxact returning user (If you want more information about this method, see Accounting Methods in chapter 1. Taxact returning user ) 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. Taxact returning user The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. Taxact returning user The funds you provided are not required to have been applied to the points. Taxact returning user They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. Taxact returning user You cannot have borrowed these funds from your lender or mortgage broker. Taxact returning user You use your loan to buy or build your main home. Taxact returning user The points were computed as a percentage of the principal amount of the mortgage. Taxact returning user The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. Taxact returning user The points may be shown as paid from either your funds or the seller's. Taxact returning user Figure 23-B. Taxact returning user Are My Points Fully Deductible This Year? Please click here for the text description of the image. Taxact returning user Figure 23-B. Taxact returning user Are My Points Fully Deductible This Year? Note. Taxact returning user If you meet all of these tests, you can choose to either fully deduct the points in the year paid, or deduct them over the life of the loan. Taxact returning user Home improvement loan. Taxact returning user   You can also fully deduct in the year paid points paid on a loan to improve your main home, if tests (1) through (6) are met. Taxact returning user Second home. Taxact returning user You cannot fully deduct in the year paid points you pay on loans secured by your second home. Taxact returning user You can deduct these points only over the life of the loan. Taxact returning user Refinancing. Taxact returning user   Generally, points you pay to refinance a mortgage are not deductible in full in the year you pay them. Taxact returning user This is true even if the new mortgage is secured by your main home. Taxact returning user   However, if you use part of the refinanced mortgage proceeds to improve your main home and you meet the first 6 tests listed under Deduction Allowed in Year Paid , earlier, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. Taxact returning user You can deduct the rest of the points over the life of the loan. Taxact returning user Example 1. Taxact returning user In 1998, Bill Fields got a mortgage to buy a home. Taxact returning user In 2013, Bill refinanced that mortgage with a 15-year $100,000 mortgage loan. Taxact returning user The mortgage is secured by his home. Taxact returning user To get the new loan, he had to pay three points ($3,000). Taxact returning user Two points ($2,000) were for prepaid interest, and one point ($1,000) was charged for services, in place of amounts that ordinarily are stated separately on the settlement statement. Taxact returning user Bill paid the points out of his private funds, rather than out of the proceeds of the new loan. Taxact returning user The payment of points is an established practice in the area, and the points charged are not more than the amount generally charged there. Taxact returning user Bill's first payment on the new loan was due July 1. Taxact returning user He made six payments on the loan in 2013 and is a cash basis taxpayer. Taxact returning user Bill used the funds from the new mortgage to repay his existing mortgage. Taxact returning user Although the new mortgage loan was for Bill's continued ownership of his main home, it was not for the purchase or improvement of that home. Taxact returning user He cannot deduct all of the points in 2013. Taxact returning user He can deduct two points ($2,000) ratably over the life of the loan. Taxact returning user He deducts $67 [($2,000 ÷ 180 months) × 6 payments] of the points in 2013. Taxact returning user The other point ($1,000) was a fee for services and is not deductible. Taxact returning user Example 2. Taxact returning user The facts are the same as in Example 1, except that Bill used $25,000 of the loan proceeds to improve his home and $75,000 to repay his existing mortgage. Taxact returning user Bill deducts 25% ($25,000 ÷ $100,000) of the points ($2,000) in 2013. Taxact returning user His deduction is $500 ($2,000 × 25%). Taxact returning user Bill also deducts the ratable part of the remaining $1,500 ($2,000 − $500) that must be spread over the life of the loan. Taxact returning user This is $50 [($1,500 ÷ 180 months) × 6 payments] in 2013. Taxact returning user The total amount Bill deducts in 2013 is $550 ($500 + $50). Taxact returning user Special Situations This section describes certain special situations that may affect your deduction of points. Taxact returning user Original issue discount. Taxact returning user   If you do not qualify to either deduct the points in the year paid or deduct them ratably over the life of the loan, or if you choose not to use either of these methods, the points reduce the issue price of the loan. Taxact returning user This reduction results in original issue discount, which is discussed in chapter 4 of Publication 535. Taxact returning user Amounts charged for services. Taxact returning user   Amounts charged by the lender for specific services connected to the loan are not interest. Taxact returning user Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. Taxact returning user You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. Taxact returning user Points paid by the seller. Taxact returning user   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. Taxact returning user Treatment by seller. Taxact returning user   The seller cannot deduct these fees as interest. Taxact returning user But they are a selling expense that reduces the amount realized by the seller. Taxact returning user See chapter 15 for information on selling your home. Taxact returning user Treatment by buyer. Taxact returning user    The buyer reduces the basis of the home by the amount of the seller-paid points and treats the points as if he or she had paid them. Taxact returning user If all the tests under Deduction Allowed in Year Paid , earlier, are met, the buyer can deduct the points in the year paid. Taxact returning user If any of those tests are not met, the buyer deducts the points over the life of the loan. Taxact returning user   For information about basis, see chapter 13. Taxact returning user Funds provided are less than points. Taxact returning user   If you meet all the tests in Deduction Allowed in Year Paid , earlier, except that the funds you provided were less than the points charged to you (test (6)), you can deduct the points in the year paid, up to the amount of funds you provided. Taxact returning user In addition, you can deduct any points paid by the seller. Taxact returning user Example 1. Taxact returning user When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). Taxact returning user You meet all the tests for deducting points in the year paid, except the only funds you provided were a $750 down payment. Taxact returning user Of the $1,000 charged for points, you can deduct $750 in the year paid. Taxact returning user You spread the remaining $250 over the life of the mortgage. Taxact returning user Example 2. Taxact returning user 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. Taxact returning user In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). Taxact returning user You spread the remaining $250 over the life of the mortgage. Taxact returning user You must reduce the basis of your home by the $1,000 paid by the seller. Taxact returning user Excess points. Taxact returning user   If you meet all the tests in Deduction Allowed in Year Paid , earlier, except that the points paid were more than generally paid in your area (test (3)), you deduct in the year paid only the points that are generally charged. Taxact returning user You must spread any additional points over the life of the mortgage. Taxact returning user Mortgage ending early. Taxact returning user   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. Taxact returning user However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. Taxact returning user Instead, deduct the remaining balance over the term of the new loan. Taxact returning user    A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. Taxact returning user Example. Taxact returning user Dan paid $3,000 in points in 2002 that he had to spread out over the 15-year life of the mortgage. Taxact returning user He deducts $200 points per year. Taxact returning user Through 2012, Dan has deducted $2,200 of the points. Taxact returning user Dan prepaid his mortgage in full in 2013. Taxact returning user He can deduct the remaining $800 of points in 2013. Taxact returning user Limits on deduction. Taxact returning user   You cannot fully deduct points paid on a mortgage unless the mortgage fits into one of the categories listed earlier under Fully deductible interest . Taxact returning user See Publication 936 for details. Taxact returning user Mortgage Insurance Premiums You can treat amounts you paid during 2013 for qualified mortgage insurance as home mortgage interest. Taxact returning user The insurance must be in connection with home acquisition debt and the insurance contract must have been issued after 2006. Taxact returning user Qualified mortgage insurance. Taxact returning user   Qualified mortgage insurance is mortgage insurance provided by the Department of Veterans Affairs, the Federal Housing Administration, or the Rural Housing Service, and private mortgage insurance (as defined in section 2 of the Homeowners Protection Act of 1998 as in effect on December 20, 2006). Taxact returning user   Mortgage insurance provided by the Department of Veterans Affairs is commonly known as a funding fee. Taxact returning user If provided by the Rural Housing Service, it is commonly known as a guarantee fee. Taxact returning user These fees can be deducted fully in 2013 if the mortgage insurance contract was issued in 2013. Taxact returning user Contact the mortgage insurance issuer to determine the deductible amount if it is not reported in box 4 of Form 1098. Taxact returning user Special rules for prepaid mortgage insurance. Taxact returning user   Generally, if you paid premiums for qualified mortgage insurance that are allocable to periods after the close of the tax year, such premiums are treated as paid in the period to which they are allocated. Taxact returning user You must allocate the premiums over the shorter of the stated term of the mortgage or 84 months, beginning with the month the insurance was obtained. Taxact returning user No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term. Taxact returning user This paragraph does not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service. Taxact returning user See the Example below. Taxact returning user Example. Taxact returning user Ryan purchased a home in May of 2012 and financed the home with a 15-year mortgage. Taxact returning user Ryan also prepaid all of the $9,240 in private mortgage insurance required at the time of closing in May. Taxact returning user Since the $9,240 in private mortgage insurance is allocable to periods after 2012, Ryan must allocate the $9,240 over the shorter of the life of the mortgage or 84 months. Taxact returning user Ryan's adjusted gross income (AGI) for 2012 is $76,000. Taxact returning user Ryan can deduct $880 ($9,240 ÷ 84 × 8 months) for qualified mortgage insurance premiums in 2012. Taxact returning user For 2013, Ryan can deduct $1,320 ($9,240 ÷ 84 × 12 months) if his AGI is $100,000 or less. Taxact returning user In this example, the mortgage insurance premiums are allocated over 84 months, which is shorter than the life of the mortgage of 15 years (180 months). Taxact returning user Limit on deduction. Taxact returning user   If your adjusted gross income on Form 1040, line 38, is more than $100,000 ($50,000 if your filing status is married filing separately), the amount of your mortgage insurance premiums that are otherwise deductible is reduced and may be eliminated. Taxact returning user 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. Taxact returning user If your adjusted gross income is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. Taxact returning user Form 1098, Mortgage Interest Statement If you paid $600 or more of mortgage interest (including certain points and mortgage insurance premiums) during the year on any one mortgage, you generally will receive a Form 1098 or a similar statement from the mortgage holder. Taxact returning user You will receive the statement if you pay interest to a person (including a financial institution or a cooperative housing corporation) in the course of that person's trade or business. Taxact returning user A governmental unit is a person for purposes of furnishing the statement. Taxact returning user The statement for each year should be sent to you by January 31 of the following year. Taxact returning user A copy of this form will also be sent to the IRS. Taxact returning user The statement will show the total interest you paid during the year, any mortgage insurance premiums you paid, and if you purchased a main home during the year, it also will show the deductible points paid during the year, including seller-paid points. Taxact returning user However, it should not show any interest that was paid for you by a government agency. Taxact returning user As a general rule, Form 1098 will include only points that you can fully deduct in the year paid. Taxact returning user However, certain points not included on Form 1098 also may be deductible, either in the year paid or over the life of the loan. Taxact returning user See Points , earlier, to determine whether you can deduct points not shown on Form 1098. Taxact returning user Prepaid interest on Form 1098. Taxact returning user   If you prepaid interest in 2013 that accrued in full by January 15, 2014, this prepaid interest may be included in box 1 of Form 1098. Taxact returning user However, you cannot deduct the prepaid amount for January 2014 in 2013. Taxact returning user (See Prepaid interest , earlier. Taxact returning user ) You will have to figure the interest that accrued for 2014 and subtract it from the amount in box 1. Taxact returning user You will include the interest for January 2014 with the other interest you pay for 2014. Taxact returning user See How To Report , later. Taxact returning user Refunded interest. Taxact returning user   If you received a refund of mortgage interest you overpaid in an earlier year, you generally will receive a Form 1098 showing the refund in box 3. Taxact returning user See Refunds of interest , earlier. Taxact returning user Mortgage insurance premiums. Taxact returning user   The amount of mortgage insurance premiums you paid during 2013 may be shown in box 4 of Form 1098. Taxact returning user See Mortgage Insurance Premiums, earlier. Taxact returning user Investment Interest This section discusses interest expenses you may be able to deduct as an investor. Taxact returning user If you borrow money to buy property you hold for investment, the interest you pay is investment interest. Taxact returning user You can deduct investment interest subject to the limit discussed later. Taxact returning user However, you cannot deduct interest you incurred to produce tax-exempt income. Taxact returning user Nor can you deduct interest expenses on straddles. Taxact returning user Investment interest does not include any qualified home mortgage interest or any interest taken into account in computing income or loss from a passive activity. Taxact returning user Investment Property Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. Taxact returning user It also includes property that produces gain or loss (not derived in the ordinary course of a trade or business) from the sale or trade of property producing these types of income or held for investment (other than an interest in a passive activity). Taxact returning user Investment property also includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity). Taxact returning user Partners, shareholders, and beneficiaries. Taxact returning user   To determine your investment interest, combine your share of investment interest from a partnership, S corporation, estate, or trust with your other investment interest. Taxact returning user Allocation of Interest Expense If you borrow money for business or personal purposes as well as for investment, you must allocate the debt among those purposes. Taxact returning user Only the interest expense on the part of the debt used for investment purposes is treated as investment interest. Taxact returning user The allocation is not affected by the use of property that secures the debt. Taxact returning user Limit on Deduction Generally, your deduction for investment interest expense is limited to the amount of your net investment income. Taxact returning user You can carry over the amount of investment interest that you could not deduct because of this limit to the next tax year. Taxact returning user The interest carried over is treated as investment interest paid or accrued in that next year. Taxact returning user You can carry over disallowed investment interest to the next tax year even if it is more than your taxable income in the year the interest was paid or accrued. Taxact returning user Net Investment Income Determine the amount of your net investment income by subtracting your investment expenses (other than interest expense) from your investment income. Taxact returning user Investment income. Taxact returning user    This generally includes your gross income from property held for investment (such as interest, dividends, annuities, and royalties). Taxact returning user Investment income does not include Alaska Permanent Fund dividends. Taxact returning user It also does not include qualified dividends or net capital gain unless you choose to include them. Taxact returning user Choosing to include qualified dividends. Taxact returning user   Investment income generally does not include qualified dividends, discussed in chapter 8. Taxact returning user However, you can choose to include all or part of your qualified dividends in investment income. Taxact returning user   You make this choice by completing Form 4952, line 4g, according to its instructions. Taxact returning user   If you choose to include any amount of your qualified dividends in investment income, you must reduce your qualified dividends that are eligible for the lower capital gains tax rates by the same amount. Taxact returning user Choosing to include net capital gain. Taxact returning user   Investment income generally does not include net capital gain from disposing of investment property (including capital gain distributions from mutual funds). Taxact returning user However, you can choose to include all or part of your net capital gain in investment income. Taxact returning user    You make this choice by completing Form 4952, line 4g, according to its instructions. Taxact returning user   If you choose to include any amount of your net capital gain in investment income, you must reduce your net capital gain that is eligible for the lower capital gains tax rates by the same amount. Taxact returning user    Before making either choice, consider the overall effect on your tax liability. Taxact returning user Compare your tax if you make one or both of these choices with your tax if you do not. Taxact returning user Investment income of child reported on parent's return. Taxact returning user    Investment income includes the part of your child's interest and dividend income that you choose to report on your return. Taxact returning user If the child does not have qualified dividends, Alaska Permanent Fund dividends, or capital gain distributions, this is the amount on line 6 of Form 8814, Parents' Election To Report Child's Interest and Dividends. Taxact returning user Child's qualified dividends. Taxact returning user   If part of the amount you report is your child's qualified dividends, that part (which is reported on Form 1040, line 9b) generally does not count as investment income. Taxact returning user However, you can choose to include all or part of it in investment income, as explained under Choosing to include qualified dividends , earlier. Taxact returning user   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured next under Child's Alaska Permanent Fund dividends). Taxact returning user Child's Alaska Permanent Fund dividends. Taxact returning user   If part of the amount you report is your child's Alaska Permanent Fund dividends, that part does not count as investment income. Taxact returning user To figure the amount of your child's income that you can consider your investment income, start with the amount on Form 8814, line 6. Taxact returning user Multiply that amount by a percentage that is equal to the Alaska Permanent Fund dividends divided by the total amount on Form 8814, line 4. Taxact returning user Subtract the result from the amount on Form 8814, line 12. Taxact returning user Child's capital gain distributions. Taxact returning user    If part of the amount you report is your child's capital gain distributions, that part (which is reported on Schedule D, line 13, or Form 1040, line 13) generally does not count as investment income. Taxact returning user However, you can choose to include all or part of it in investment income, as explained in Choosing to include net capital gain , earlier. Taxact returning user   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured under Child's Alaska Permanent Fund dividends , earlier). Taxact returning user Investment expenses. Taxact returning user   Investment expenses are your allowed deductions (other than interest expense) directly connected with the production of investment income. Taxact returning user Investment expenses that are included as a miscellaneous itemized deduction on Schedule A (Form 1040) are allowable deductions after applying the 2% limit that applies to miscellaneous itemized deductions. Taxact returning user Use the smaller of: The investment expenses included on Schedule A (Form 1040), line 23, or The amount on Schedule A, line 27. Taxact returning user Losses from passive activities. Taxact returning user   Income or expenses that you used in computing income or loss from a passive activity are not included in determining your investment income or investment expenses (including investment interest expense). Taxact returning user See Publication 925, Passive Activity and At-Risk Rules, for information about passive activities. Taxact returning user Form 4952 Use Form 4952, Investment Interest Expense Deduction, to figure your deduction for investment interest. Taxact returning user Exception to use of Form 4952. Taxact returning user   You do not have to complete Form 4952 or attach it to your return if you meet all of the following tests. Taxact returning user Your investment interest expense is not more than your investment income from interest and ordinary dividends minus any qualified dividends. Taxact returning user You do not have any other deductible investment expenses. Taxact returning user You have no carryover of investment interest expense from 2012. Taxact returning user If you meet all of these tests, you can deduct all of your investment interest. Taxact returning user More Information For more information on investment interest, see Interest Expenses in chapter 3 of Publication 550. Taxact returning user Items You Cannot Deduct Some interest payments are not deductible. Taxact returning user Certain expenses similar to interest also are not deductible. Taxact returning user Nondeductible expenses include the following items. Taxact returning user Personal interest (discussed later). Taxact returning user Service charges (however, see Other Expenses (Line 23) in chapter 28). Taxact returning user Annual fees for credit cards. Taxact returning user Loan fees. Taxact returning user Credit investigation fees. Taxact returning user Interest to purchase or carry tax-exempt securities. Taxact returning user Penalties. Taxact returning user   You cannot deduct fines and penalties paid to a government for violations of law, regardless of their nature. Taxact returning user Personal Interest Personal interest is not deductible. Taxact returning user Personal interest is any interest that is not home mortgage interest, investment interest, business interest, or other deductible interest. Taxact returning user It includes the following items. Taxact returning user Interest on car loans (unless you use the car for business). Taxact returning user Interest on federal, state, or local income tax. Taxact returning user Finance charges on credit cards, retail installment contracts, and revolving charge accounts incurred for personal expenses. Taxact returning user Late payment charges by a public utility. Taxact returning user You may be able to deduct interest you pay on a qualified student loan. Taxact returning user For details, see Publication 970, Tax Benefits for Education. Taxact returning user Allocation of Interest If you use the proceeds of a loan for more than one purpose (for example, personal and business), you must allocate the interest on the loan to each use. Taxact returning user However, you do not have to allocate home mortgage interest if it is fully deductible, regardless of how the funds are used. Taxact returning user You allocate interest (other than fully deductible home mortgage interest) on a loan in the same way as the loan itself is allocated. Taxact returning user You do this by tracing disbursements of the debt proceeds to specific uses. Taxact returning user For details on how to do this, see chapter 4 of Publication 535. Taxact returning user How To Report You must file Form 1040 to deduct any home mortgage interest expense on your tax return. Taxact returning user Where you deduct your interest expense generally depends on how you use the loan proceeds. Taxact returning user See Table 23-1 for a summary of where to deduct your interest expense. Taxact returning user Home mortgage interest and points. Taxact returning user   Deduct the home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 10. Taxact returning user If you paid more deductible interest to the financial institution than the amount shown on Form 1098, show the larger deductible amount on line 10. Taxact returning user Attach a statement explaining the difference and print “See attached” next to line 10. Taxact returning user    Deduct home mortgage interest that was not reported to you on Form 1098 on Schedule A (Form 1040), line 11. Taxact returning user If you paid home mortgage interest to the person from whom you bought your home, show that person's name, address, and taxpayer identification number (TIN) on the dotted lines next to line 11. Taxact returning user The seller must give you this number and you must give the seller your TIN. Taxact returning user A Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. Taxact returning user Failure to meet any of these requirements may result in a $50 penalty for each failure. Taxact returning user The TIN can be either a social security number, an individual taxpayer identification number (issued by the Internal Revenue Service), or an employer identification number. Taxact returning user See Social Security Number (SSN) in chapter 1 for more information about TINs. Taxact returning user    If you can take a deduction for points that were not reported to you on Form 1098, deduct those points on Schedule A (Form 1040), line 12. Taxact returning user   Deduct mortgage insurance premiums on Schedule A (Form 1040), line 13. Taxact returning user More than one borrower. Taxact returning user   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. Taxact returning user Show how much of the interest each of you paid, and give the name and address of the person who received the form. Taxact returning user Deduct your share of the interest on Schedule A (Form 1040), line 11, and print “See attached” next to the line. Taxact returning user Also, deduct your share of any qualified mortgage insurance premiums on Schedule A (Form 1040), line 13. Taxact returning user   Similarly, if you are the payer of record on a mortgage on which there are other borrowers entitled to a deduction for the interest shown on the Form 1098 you received, deduct only your share of the interest on Schedule A (Form 1040), line 10. Taxact returning user You should let each of the other borrowers know what his or her share is. Taxact returning user Mortgage proceeds used for business or investment. Taxact returning user    If your home mortgage interest deduction is limited, but all or part of the mortgage proceeds were used for business, investment, or other deductible activities, see Table 23-1. Taxact returning user It shows where to deduct the part of your excess interest that is for those activities. Taxact returning user Investment interest. Taxact returning user    Deduct investment interest, subject to certain limits discussed in Publication 550, on Schedule A (Form 1040), line 14. Taxact returning user Amortization of bond premium. Taxact returning user   There are various ways to treat the premium you pay to buy taxable bonds. Taxact returning user See Bond Premium Amortization in Publication 550. Taxact returning user Income-producing rental or royalty interest. Taxact returning user   Deduct interest on a loan for income-producing rental or royalty property that is not used in your business in Part I of Schedule E (Form 1040). Taxact returning user Example. Taxact returning user You rent out part of your home and borrow money to make repairs. Taxact returning user You can deduct only the interest payment for the rented part in Part I of Schedule E (Form 1040). Taxact returning user Deduct the rest of the interest payment on Schedule A (Form 1040) if it is deductible home mortgage interest. Taxact returning user Table 23-1. Taxact returning user Where To Deduct Your Interest Expense IF you have . Taxact returning user . Taxact returning user . Taxact returning user THEN deduct it on . Taxact returning user . Taxact returning user . Taxact returning user AND for more information go to . Taxact returning user . Taxact returning user . Taxact returning user deductible student loan interest Form 1040, line 33, or Form 1040A, line 18 Publication 970. Taxact returning user deductible home mortgage interest and points reported on Form 1098 Schedule A (Form 1040), line 10 Publication 936. Taxact returning user deductible home mortgage interest not reported on Form 1098 Schedule A (Form 1040), line 11 Publication 936. Taxact returning user deductible points not reported on Form 1098 Schedule A (Form 1040), line 12 Publication 936. Taxact returning user deductible mortgage insurance premiums Schedule A (Form 1040), line 13 Publication 936. Taxact returning user deductible investment interest (other than incurred to produce rents or royalties) Schedule A (Form 1040), line 14 Publication 550. Taxact returning user deductible business interest (non-farm) Schedule C or C-EZ (Form 1040) Publication 535. Taxact returning user deductible farm business interest Schedule F (Form 1040) Publications 225 and 535. Taxact returning user deductible interest incurred to produce rents or royalties Schedule E (Form 1040) Publications 527 and 535. Taxact returning user personal interest not deductible. Taxact returning user Prev  Up  Next   Home   More Online Publications