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1040ez Tax Form Instructions

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1040ez Tax Form Instructions

1040ez tax form instructions 3. 1040ez tax form instructions   SIMPLE Plans Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: SIMPLE IRA PlanWho Can Set Up a SIMPLE IRA Plan? Who Can Participate in a SIMPLE IRA Plan? How To Set Up a SIMPLE IRA Plan Notification Requirement Contribution Limits When To Deduct Contributions Where To Deduct Contributions Tax Treatment of Contributions Distributions (Withdrawals) More Information on SIMPLE IRA Plans SIMPLE 401(k) Plan Topics - This chapter discusses: SIMPLE IRA plan SIMPLE 401(k) plan Useful Items - You may want to see: Publications 590 Individual Retirement Arrangements (IRAs) 3998 Choosing A Retirement Solution for Your Small Business 4284 SIMPLE IRA Plan Checklist 4334 SIMPLE IRA Plans for Small Businesses Forms (and Instructions) W-2 Wage and Tax Statement 5304-SIMPLE Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)–Not for Use With a Designated Financial Institution 5305-SIMPLE Savings Incentive Match Plan for Employees of Small Employers (SIMPLE)–for Use With a Designated Financial Institution 8880 Credit for Qualified Retirement Savings Contributions 8881 Credit for Small Employer Pension Plan Startup Costs A savings incentive match plan for employees (SIMPLE plan) is a written arrangement that provides you and your employees with a simplified way to make contributions to provide retirement income. 1040ez tax form instructions Under a SIMPLE plan, employees can choose to make salary reduction contributions to the plan rather than receiving these amounts as part of their regular pay. 1040ez tax form instructions In addition, you will contribute matching or nonelective contributions. 1040ez tax form instructions SIMPLE plans can only be maintained on a calendar-year basis. 1040ez tax form instructions A SIMPLE plan can be set up in either of the following ways. 1040ez tax form instructions Using SIMPLE IRAs (SIMPLE IRA plan). 1040ez tax form instructions As part of a 401(k) plan (SIMPLE 401(k) plan). 1040ez tax form instructions Many financial institutions will help you set up a SIMPLE plan. 1040ez tax form instructions SIMPLE IRA Plan A SIMPLE IRA plan is a retirement plan that uses SIMPLE IRAs for each eligible employee. 1040ez tax form instructions Under a SIMPLE IRA plan, a SIMPLE IRA must be set up for each eligible employee. 1040ez tax form instructions For the definition of an eligible employee, see Who Can Participate in a SIMPLE IRA Plan , later. 1040ez tax form instructions Who Can Set Up a SIMPLE IRA Plan? You can set up a SIMPLE IRA plan if you meet both the following requirements. 1040ez tax form instructions You meet the employee limit. 1040ez tax form instructions You do not maintain another qualified plan unless the other plan is for collective bargaining employees. 1040ez tax form instructions Employee limit. 1040ez tax form instructions   You can set up a SIMPLE IRA plan only if you had 100 or fewer employees who received $5,000 or more in compensation from you for the preceding year. 1040ez tax form instructions Under this rule, you must take into account all employees employed at any time during the calendar year regardless of whether they are eligible to participate. 1040ez tax form instructions Employees include self-employed individuals who received earned income and leased employees (defined in chapter 1). 1040ez tax form instructions   Once you set up a SIMPLE IRA plan, you must continue to meet the 100-employee limit each year you maintain the plan. 1040ez tax form instructions Grace period for employers who cease to meet the 100-employee limit. 1040ez tax form instructions   If you maintain the SIMPLE IRA plan for at least 1 year and you cease to meet the 100-employee limit in a later year, you will be treated as meeting it for the 2 calendar years immediately following the calendar year for which you last met it. 1040ez tax form instructions   A different rule applies if you do not meet the 100-employee limit because of an acquisition, disposition, or similar transaction. 1040ez tax form instructions Under this rule, the SIMPLE IRA plan will be treated as meeting the 100-employee limit for the year of the transaction and the 2 following years if both the following conditions are satisfied. 1040ez tax form instructions Coverage under the plan has not significantly changed during the grace period. 1040ez tax form instructions The SIMPLE IRA plan would have continued to qualify after the transaction if you had remained a separate employer. 1040ez tax form instructions    The grace period for acquisitions, dispositions, and similar transactions also applies if, because of these types of transactions, you do not meet the rules explained under Other qualified plan or Who Can Participate in a SIMPLE IRA Plan, below. 1040ez tax form instructions Other qualified plan. 1040ez tax form instructions   The SIMPLE IRA plan generally must be the only retirement plan to which you make contributions, or to which benefits accrue, for service in any year beginning with the year the SIMPLE IRA plan becomes effective. 1040ez tax form instructions Exception. 1040ez tax form instructions   If you maintain a qualified plan for collective bargaining employees, you are permitted to maintain a SIMPLE IRA plan for other employees. 1040ez tax form instructions Who Can Participate in a SIMPLE IRA Plan? Eligible employee. 1040ez tax form instructions   Any employee who received at least $5,000 in compensation during any 2 years preceding the current calendar year and is reasonably expected to receive at least $5,000 during the current calendar year is eligible to participate. 1040ez tax form instructions The term “employee” includes a self-employed individual who received earned income. 1040ez tax form instructions   You can use less restrictive eligibility requirements (but not more restrictive ones) by eliminating or reducing the prior year compensation requirements, the current year compensation requirements, or both. 1040ez tax form instructions For example, you can allow participation for employees who received at least $3,000 in compensation during any preceding calendar year. 1040ez tax form instructions However, you cannot impose any other conditions for participating in a SIMPLE IRA plan. 1040ez tax form instructions Excludable employees. 1040ez tax form instructions   The following employees do not need to be covered under a SIMPLE IRA plan. 1040ez tax form instructions Employees who are covered by a union agreement and whose retirement benefits were bargained for in good faith by the employees' union and you. 1040ez tax form instructions Nonresident alien employees who have received no U. 1040ez tax form instructions S. 1040ez tax form instructions source wages, salaries, or other personal services compensation from you. 1040ez tax form instructions Compensation. 1040ez tax form instructions   Compensation for employees is the total wages, tips, and other compensation from the employer subject to federal income tax withholding and the amounts paid for domestic service in a private home, local college club, or local chapter of a college fraternity or sorority. 1040ez tax form instructions Compensation also includes the employee's salary reduction contributions made under this plan and, if applicable, elective deferrals under a section 401(k) plan, a SARSEP, or a section 403(b) annuity contract and compensation deferred under a section 457 plan required to be reported by the employer on Form W-2. 1040ez tax form instructions If you are self-employed, compensation is your net earnings from self-employment (line 4 of Short Schedule SE or line 6 of Long Schedule SE (Form 1040)) before subtracting any contributions made to the SIMPLE IRA plan for yourself. 1040ez tax form instructions How To Set Up a SIMPLE IRA Plan You can use Form 5304-SIMPLE or Form 5305-SIMPLE to set up a SIMPLE IRA plan. 1040ez tax form instructions Each form is a model savings incentive match plan for employees (SIMPLE) plan document. 1040ez tax form instructions Which form you use depends on whether you select a financial institution or your employees select the institution that will receive the contributions. 1040ez tax form instructions Use Form 5304-SIMPLE if you allow each plan participant to select the financial institution for receiving his or her SIMPLE IRA plan contributions. 1040ez tax form instructions Use Form 5305-SIMPLE if you require that all contributions under the SIMPLE IRA plan be deposited initially at a designated financial institution. 1040ez tax form instructions The SIMPLE IRA plan is adopted when you have completed all appropriate boxes and blanks on the form and you (and the designated financial institution, if any) have signed it. 1040ez tax form instructions Keep the original form. 1040ez tax form instructions Do not file it with the IRS. 1040ez tax form instructions Other uses of the forms. 1040ez tax form instructions   If you set up a SIMPLE IRA plan using Form 5304-SIMPLE or Form 5305-SIMPLE, you can use the form to satisfy other requirements, including the following. 1040ez tax form instructions Meeting employer notification requirements for the SIMPLE IRA plan. 1040ez tax form instructions Form 5304-SIMPLE and Form 5305-SIMPLE contain a Model Notification to Eligible Employees that provides the necessary information to the employee. 1040ez tax form instructions Maintaining the SIMPLE IRA plan records and proving you set up a SIMPLE IRA plan for employees. 1040ez tax form instructions Deadline for setting up a SIMPLE IRA plan. 1040ez tax form instructions   You can set up a SIMPLE IRA plan effective on any date from January 1 through October 1 of a year, provided you did not previously maintain a SIMPLE IRA plan. 1040ez tax form instructions This requirement does not apply if you are a new employer that comes into existence after October 1 of the year the SIMPLE IRA plan is set up and you set up a SIMPLE IRA plan as soon as administratively feasible after your business comes into existence. 1040ez tax form instructions If you previously maintained a SIMPLE IRA plan, you can set up a SIMPLE IRA plan effective only on January 1 of a year. 1040ez tax form instructions A SIMPLE IRA plan cannot have an effective date that is before the date you actually adopt the plan. 1040ez tax form instructions Setting up a SIMPLE IRA. 1040ez tax form instructions   SIMPLE IRAs are the individual retirement accounts or annuities into which the contributions are deposited. 1040ez tax form instructions A SIMPLE IRA must be set up for each eligible employee. 1040ez tax form instructions Forms 5305-S, SIMPLE Individual Retirement Trust Account, and 5305-SA, SIMPLE Individual Retirement Custodial Account, are model trust and custodial account documents the participant and the trustee (or custodian) can use for this purpose. 1040ez tax form instructions   A SIMPLE IRA cannot be a Roth IRA. 1040ez tax form instructions Contributions to a SIMPLE IRA will not affect the amount an individual can contribute to a Roth or traditional IRA. 1040ez tax form instructions Deadline for setting up a SIMPLE IRA. 1040ez tax form instructions   A SIMPLE IRA must be set up for an employee before the first date by which a contribution is required to be deposited into the employee's IRA. 1040ez tax form instructions See Time limits for contributing funds , later, under Contribution Limits. 1040ez tax form instructions Credit for startup costs. 1040ez tax form instructions   You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SIMPLE IRA plan that first became effective in 2013. 1040ez tax form instructions For more information, see Credit for startup costs under Reminders, earlier. 1040ez tax form instructions Notification Requirement If you adopt a SIMPLE IRA plan, you must notify each employee of the following information before the beginning of the election period. 1040ez tax form instructions The employee's opportunity to make or change a salary reduction choice under a SIMPLE IRA plan. 1040ez tax form instructions Your decision to make either matching contributions or nonelective contributions (discussed later). 1040ez tax form instructions A summary description provided by the financial institution. 1040ez tax form instructions Written notice that his or her balance can be transferred without cost or penalty if they use a designated financial institution. 1040ez tax form instructions Election period. 1040ez tax form instructions   The election period is generally the 60-day period immediately preceding January 1 of a calendar year (November 2 to December 31 of the preceding calendar year). 1040ez tax form instructions However, the dates of this period are modified if you set up a SIMPLE IRA plan in mid-year (for example, on July 1) or if the 60-day period falls before the first day an employee becomes eligible to participate in the SIMPLE IRA plan. 1040ez tax form instructions   A SIMPLE IRA plan can provide longer periods for permitting employees to enter into salary reduction agreements or to modify prior agreements. 1040ez tax form instructions For example, a SIMPLE IRA plan can provide a 90-day election period instead of the 60-day period. 1040ez tax form instructions Similarly, in addition to the 60-day period, a SIMPLE IRA plan can provide quarterly election periods during the 30 days before each calendar quarter, other than the first quarter of each year. 1040ez tax form instructions Contribution Limits Contributions are made up of salary reduction contributions and employer contributions. 1040ez tax form instructions You, as the employer, must make either matching contributions or nonelective contributions, defined later. 1040ez tax form instructions No other contributions can be made to the SIMPLE IRA plan. 1040ez tax form instructions These contributions, which you can deduct, must be made timely. 1040ez tax form instructions See Time limits for contributing funds , later. 1040ez tax form instructions Salary reduction contributions. 1040ez tax form instructions   The amount the employee chooses to have you contribute to a SIMPLE IRA on his or her behalf cannot be more than $12,000 for 2013 and 2014. 1040ez tax form instructions These contributions must be expressed as a percentage of the employee's compensation unless you permit the employee to express them as a specific dollar amount. 1040ez tax form instructions You cannot place restrictions on the contribution amount (such as limiting the contribution percentage), except to comply with the $12,000 limit. 1040ez tax form instructions   If you or an employee participates in any other qualified plan during the year and you or your employee have salary reduction contributions (elective deferrals) under those plans, the salary reduction contributions under a SIMPLE IRA plan also count toward the overall annual limit ($17,500 for 2013 and 2014) on exclusion of salary reduction contributions and other elective deferrals. 1040ez tax form instructions Catch-up contributions. 1040ez tax form instructions   A SIMPLE IRA plan can permit participants who are age 50 or over at the end of the calendar year to also make catch-up contributions. 1040ez tax form instructions The catch-up contribution limit for 2013 and 2014 for SIMPLE IRA plans is $2,500. 1040ez tax form instructions Salary reduction contributions are not treated as catch-up contributions for 2013 or 2014 until they exceed $12,000. 1040ez tax form instructions However, the catch-up contribution a participant can make for a year cannot exceed the lesser of the following amounts. 1040ez tax form instructions The catch-up contribution limit. 1040ez tax form instructions The excess of the participant's compensation over the salary reduction contributions that are not catch-up contributions. 1040ez tax form instructions Employer matching contributions. 1040ez tax form instructions   You are generally required to match each employee's salary reduction contributions on a dollar-for-dollar basis up to 3% of the employee's compensation. 1040ez tax form instructions This requirement does not apply if you make nonelective contributions as discussed later. 1040ez tax form instructions Example. 1040ez tax form instructions In 2013, your employee, John Rose, earned $25,000 and chose to defer 5% of his salary. 1040ez tax form instructions Your net earnings from self-employment are $40,000, and you choose to contribute 10% of your earnings to your SIMPLE IRA. 1040ez tax form instructions You make 3% matching contributions. 1040ez tax form instructions The total contribution you make for John is $2,000, figured as follows. 1040ez tax form instructions Salary reduction contributions ($25,000 × . 1040ez tax form instructions 05) $1,250 Employer matching contribution ($25,000 × . 1040ez tax form instructions 03) 750 Total contributions $2,000     The total contribution you make for yourself is $5,200, figured as follows. 1040ez tax form instructions Salary reduction contributions ($40,000 × . 1040ez tax form instructions 10) $4,000 Employer matching contribution ($40,000 × . 1040ez tax form instructions 03) 1,200 Total contributions $5,200 Lower percentage. 1040ez tax form instructions   If you choose a matching contribution less than 3%, the percentage must be at least 1%. 1040ez tax form instructions You must notify the employees of the lower match within a reasonable period of time before the 60-day election period (discussed earlier) for the calendar year. 1040ez tax form instructions You cannot choose a percentage less than 3% for more than 2 years during the 5-year period that ends with (and includes) the year for which the choice is effective. 1040ez tax form instructions Nonelective contributions. 1040ez tax form instructions   Instead of matching contributions, you can choose to make nonelective contributions of 2% of compensation on behalf of each eligible employee who has at least $5,000 (or some lower amount you select) of compensation from you for the year. 1040ez tax form instructions If you make this choice, you must make nonelective contributions whether or not the employee chooses to make salary reduction contributions. 1040ez tax form instructions Only $255,000 of the employee's compensation can be taken into account to figure the contribution limit in 2013 ($260,000 in 2014). 1040ez tax form instructions   If you choose this 2% contribution formula, you must notify the employees within a reasonable period of time before the 60-day election period (discussed earlier) for the calendar year. 1040ez tax form instructions Example 1. 1040ez tax form instructions In 2013, your employee, Jane Wood, earned $36,000 and chose to have you contribute 10% of her salary. 1040ez tax form instructions Your net earnings from self-employment are $50,000, and you choose to contribute 10% of your earnings to your SIMPLE IRA. 1040ez tax form instructions You make a 2% nonelective contribution. 1040ez tax form instructions Both of you are under age 50. 1040ez tax form instructions The total contribution you make for Jane is $4,320, figured as follows. 1040ez tax form instructions Salary reduction contributions ($36,000 × . 1040ez tax form instructions 10) $3,600 2% nonelective contributions ($36,000 × . 1040ez tax form instructions 02) 720 Total contributions $4,320     The total contribution you make for yourself is $6,000, figured as follows. 1040ez tax form instructions Salary reduction contributions ($50,000 × . 1040ez tax form instructions 10) $5,000 2% nonelective contributions ($50,000 × . 1040ez tax form instructions 02) 1,000 Total contributions $6,000 Example 2. 1040ez tax form instructions Using the same facts as in Example 1, above, the maximum contribution you make for Jane or for yourself if you each earned $75,000 is $13,500, figured as follows. 1040ez tax form instructions Salary reduction contributions (maximum amount allowed) $12,000 2% nonelective contributions ($75,000 × . 1040ez tax form instructions 02) 1,500 Total contributions $13,500 Time limits for contributing funds. 1040ez tax form instructions   You must make the salary reduction contributions to the SIMPLE IRA within 30 days after the end of the month in which the amounts would otherwise have been payable to the employee in cash. 1040ez tax form instructions You must make matching contributions or nonelective contributions by the due date (including extensions) for filing your federal income tax return for the year. 1040ez tax form instructions Certain plans subject to Department of Labor rules may have an earlier due date for salary reduction contributions. 1040ez tax form instructions When To Deduct Contributions You can deduct SIMPLE IRA contributions in the tax year within which the calendar year for which contributions were made ends. 1040ez tax form instructions You can deduct contributions for a particular tax year if they are made for that tax year and are made by the due date (including extensions) of your federal income tax return for that year. 1040ez tax form instructions Example 1. 1040ez tax form instructions Your tax year is the fiscal year ending June 30. 1040ez tax form instructions Contributions under a SIMPLE IRA plan for the calendar year 2013 (including contributions made in 2013 before July 1, 2013) are deductible in the tax year ending June 30, 2014. 1040ez tax form instructions Example 2. 1040ez tax form instructions You are a sole proprietor whose tax year is the calendar year. 1040ez tax form instructions Contributions under a SIMPLE IRA plan for the calendar year 2013 (including contributions made in 2014 by April 15, 2014) are deductible in the 2013 tax year. 1040ez tax form instructions Where To Deduct Contributions Deduct the contributions you make for your common-law employees on your tax return. 1040ez tax form instructions For example, sole proprietors deduct them on Schedule C (Form 1040) or Schedule F (Form 1040); partnerships deduct them on Form 1065; and corporations deduct them on Form 1120 or Form 1120S. 1040ez tax form instructions Sole proprietors and partners deduct contributions for themselves on line 28 of Form 1040. 1040ez tax form instructions (If you are a partner, contributions for yourself are shown on the Schedule K-1 (Form 1065) you receive from the partnership. 1040ez tax form instructions ) Tax Treatment of Contributions You can deduct your contributions and your employees can exclude these contributions from their gross income. 1040ez tax form instructions SIMPLE IRA plan contributions are not subject to federal income tax withholding. 1040ez tax form instructions However, salary reduction contributions are subject to social security, Medicare, and federal unemployment (FUTA) taxes. 1040ez tax form instructions Matching and nonelective contributions are not subject to these taxes. 1040ez tax form instructions Reporting on Form W-2. 1040ez tax form instructions   Do not include SIMPLE IRA plan contributions in the “Wages, tips, other compensation” box of Form W-2. 1040ez tax form instructions You must, however, include them in the “Social security wages” and “Medicare wages and tips” boxes. 1040ez tax form instructions You must also include them in box 12. 1040ez tax form instructions Mark the “Retirement plan” checkbox in box 13. 1040ez tax form instructions For more information, see the Form W-2 instructions. 1040ez tax form instructions Distributions (Withdrawals) Distributions from a SIMPLE IRA are subject to IRA rules and generally are includible in income for the year received. 1040ez tax form instructions Tax-free rollovers can be made from one SIMPLE IRA into another SIMPLE IRA. 1040ez tax form instructions However, a rollover from a SIMPLE IRA to a non-SIMPLE IRA can be made tax free only after a 2-year participation in the SIMPLE IRA plan. 1040ez tax form instructions Generally, you or your employee must begin to receive distributions from a SIMPLE IRA by April 1 of the first year after the calendar year in which you or your employee reaches age 70½. 1040ez tax form instructions Early withdrawals generally are subject to a 10% additional tax. 1040ez tax form instructions However, the additional tax is increased to 25% if funds are withdrawn within 2 years of beginning participation. 1040ez tax form instructions More information. 1040ez tax form instructions   See Publication 590 for information about IRA rules, including those on the tax treatment of distributions, rollovers, required distributions, and income tax withholding. 1040ez tax form instructions More Information on SIMPLE IRA Plans If you need help to set up or maintain a SIMPLE IRA plan, go to the IRS website and search SIMPLE IRA Plan. 1040ez tax form instructions SIMPLE 401(k) Plan You can adopt a SIMPLE plan as part of a 401(k) plan if you meet the 100-employee limit as discussed earlier under SIMPLE IRA Plan. 1040ez tax form instructions A SIMPLE 401(k) plan is a qualified retirement plan and generally must satisfy the rules discussed under Qualification Rules in chapter 4, including the required distribution rules. 1040ez tax form instructions However, a SIMPLE 401(k) plan is not subject to the nondiscrimination and top-heavy rules discussed in chapter 4 if the plan meets the conditions listed below. 1040ez tax form instructions Under the plan, an employee can choose to have you make salary reduction contributions for the year to a trust in an amount expressed as a percentage of the employee's compensation, but not more than $12,000 for 2013 and 2014. 1040ez tax form instructions If permitted under the plan, an employee who is age 50 or over can also make a catch-up contribution of up to $2,500 for 2013 and 2014. 1040ez tax form instructions See Catch-up contributions , earlier under Contribution Limits. 1040ez tax form instructions You must make either: Matching contributions up to 3% of compensation for the year, or Nonelective contributions of 2% of compensation on behalf of each eligible employee who has at least $5,000 of compensation from you for the year. 1040ez tax form instructions No other contributions can be made to the trust. 1040ez tax form instructions No contributions are made, and no benefits accrue, for services during the year under any other qualified retirement plan sponsored by you on behalf of any employee eligible to participate in the SIMPLE 401(k) plan. 1040ez tax form instructions The employee's rights to any contributions are nonforfeitable. 1040ez tax form instructions No more than $255,000 of the employee's compensation can be taken into account in figuring matching contributions and nonelective contributions in 2013 ($260,000 in 2014). 1040ez tax form instructions Compensation is defined earlier in this chapter. 1040ez tax form instructions Employee notification. 1040ez tax form instructions   The notification requirement that applies to SIMPLE IRA plans also applies to SIMPLE 401(k) plans. 1040ez tax form instructions See Notification Requirement in this chapter. 1040ez tax form instructions Credit for startup costs. 1040ez tax form instructions   You may be able to claim a tax credit for part of the ordinary and necessary costs of starting a SIMPLE 401(k) plan that first became effective in 2013. 1040ez tax form instructions For more information, see Credit for startup costs under Reminders, earlier. 1040ez tax form instructions Note on Forms. 1040ez tax form instructions   Please note that Forms 5304-SIMPLE and 5305-SIMPLE can not be used to establish a SIMPLE 401(k) plan. 1040ez tax form instructions To set up a SIMPLE 401(k) plan, see Adopting a Written Plan in chapter 4. 1040ez tax form instructions Prev  Up  Next   Home   More Online Publications
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Understanding Your CP515 Business Notice

You received this reminder notice because our records indicate you didn't file a business tax return.


What you need to do

  • File your required business return immediately.
  • If eligible, file your return electronically with all required schedules, using your e-file provider, or
  • File a paper return with all required schedules
  • Complete the Response form enclosed with your notice and mail it to us, using the enclosed envelope:
    • To explain why you are filing late.
    • To explain why you don’t think you need to file.
    • If you already filed and it's been more than four weeks, or if you used a different name or employer ID number (EIN) than shown on the notice when filing.
  • If you filed within the last four weeks using the same name and EIN shown on the notice, you may disregard this notice.

You may want to...

  • Review Tax Information for Businesses which provides information regarding various business filing issues.
  • Review your records and ensure all returns are filed timely.

Answers to Common Questions

Why did I receive multiple CP 515 notices?
If your business hasn't filed tax returns, a notice will be generated and mailed for each tax form and tax period the IRS shows as delinquent.

I have never had employees and or filed this return previously so why did I receive a notice requesting me to file?
When you apply for an employer identification number, filing requirements are established requiring specific types of returns to be filed (e.g. Form 940, Employer's Annual Federal Unemployment Tax Return; Form 941, Employer's Quarterly Federal Tax Return; Form 1120, U.S. Corporation Income Tax Return, etc.). When the return isn't filed, the IRS considers it to be delinquent and generates a notice requesting the return be filed.

Do I still need to file a tax return even if I had no employees or business activity during the tax period(s) in question?
If you had no employees or business activity during a tax period, you aren't required to file a return for that tax period. You still need to respond to this notice. 

If you made Federal Tax Deposits or other payments or credits for the tax period, you must file a signed return showing the payments to get a refund.


Tips for next year

File all required returns by the appropriate due date.


  • Understanding your notice

    Your notice may look different from the sample because the information contained in your notice is tailored to your situation.

    Notice CP515B, Page 1

    Notice CP515B, Page 2

    Notice CP515B, Page 3

    Notice CP515B, Page 4

    Notice CP515B, Page 5

Page Last Reviewed or Updated: 10-Jan-2014

Printable samples of this notice (PDF)

 

 

How to get help

  • Call the 1-800 number listed on the top right corner of your notice.
  • Authorize someone (e.g., accountant) to contact the IRS on your behalf using Form 2848.
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The 1040ez Tax Form Instructions

1040ez tax form instructions Publication 936 - Main Content Table of Contents Part I. 1040ez tax form instructions Home Mortgage InterestSecured Debt Qualified Home Special Situations Points Mortgage Insurance Premiums Form 1098, Mortgage Interest Statement How To Report Special Rule for Tenant-Stockholders in Cooperative Housing Corporations Part II. 1040ez tax form instructions Limits on Home Mortgage Interest DeductionHome Acquisition Debt Home Equity Debt Grandfathered Debt Table 1 Instructions How To Get Tax HelpLow Income Taxpayer Clinics Part I. 1040ez tax form instructions Home Mortgage Interest This part explains what you can deduct as home mortgage interest. 1040ez tax form instructions It includes discussions on points, mortgage insurance premiums, and how to report deductible interest on your tax return. 1040ez tax form instructions Generally, home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). 1040ez tax form instructions The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan. 1040ez tax form instructions You can deduct home mortgage interest if all the following conditions are met. 1040ez tax form instructions You file Form 1040 and itemize deductions on Schedule A (Form 1040). 1040ez tax form instructions The mortgage is a secured debt on a qualified home in which you have an ownership interest. 1040ez tax form instructions Secured Debt and Qualified Home are explained later. 1040ez tax form instructions  Both you and the lender must intend that the loan be repaid. 1040ez tax form instructions Fully deductible interest. 1040ez tax form instructions   In most cases, you can deduct all of your home mortgage interest. 1040ez tax form instructions How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds. 1040ez tax form instructions   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. 1040ez tax form instructions (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. 1040ez tax form instructions ) If one or more of your mortgages does not fit into any of these categories, use Part II of this publication to figure the amount of interest you can deduct. 1040ez tax form instructions   The three categories are as follows. 1040ez tax form instructions Mortgages you took out on or before October 13, 1987 (called grandfathered debt). 1040ez tax form instructions 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). 1040ez tax form instructions 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). 1040ez tax form instructions The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home. 1040ez tax form instructions   See Part II for more detailed definitions of grandfathered, home acquisition, and home equity debt. 1040ez tax form instructions    You can use Figure A to check whether your home mortgage interest is fully deductible. 1040ez tax form instructions This image is too large to be displayed in the current screen. 1040ez tax form instructions Please click the link to view the image. 1040ez tax form instructions Figure A. 1040ez tax form instructions Is My Home Mortgage Interest Fully Deductible? Secured Debt You can deduct your home mortgage interest only if your mortgage is a secured debt. 1040ez tax form instructions A secured debt is one in which you sign an instrument (such as a mortgage, deed of trust, or land contract) that: Makes your ownership in a qualified home security for payment of the debt, Provides, in case of default, that your home could satisfy the debt, and Is recorded or is otherwise perfected under any state or local law that applies. 1040ez tax form instructions In other words, your mortgage is a secured debt if you put your home up as collateral to protect the interests of the lender. 1040ez tax form instructions If you cannot pay the debt, your home can then serve as payment to the lender to satisfy (pay) the debt. 1040ez tax form instructions In this publication, mortgage will refer to secured debt. 1040ez tax form instructions Debt not secured by home. 1040ez tax form instructions   A debt is not secured by your home if it is secured solely because of a lien on your general assets or if it is a security interest that attaches to the property without your consent (such as a mechanic's lien or judgment lien). 1040ez tax form instructions   A debt is not secured by your home if it once was, but is no longer secured by your home. 1040ez tax form instructions Wraparound mortgage. 1040ez tax form instructions   This is not a secured debt unless it is recorded or otherwise perfected under state law. 1040ez tax form instructions Example. 1040ez tax form instructions Beth owns a home subject to a mortgage of $40,000. 1040ez tax form instructions She sells the home for $100,000 to John, who takes it subject to the $40,000 mortgage. 1040ez tax form instructions Beth continues to make the payments on the $40,000 note. 1040ez tax form instructions John pays $10,000 down and gives Beth a $90,000 note secured by a wraparound mortgage on the home. 1040ez tax form instructions Beth does not record or otherwise perfect the $90,000 mortgage under the state law that applies. 1040ez tax form instructions Therefore, the mortgage is not a secured debt and John cannot deduct any of the interest he pays on it as home mortgage interest. 1040ez tax form instructions Choice to treat the debt as not secured by your home. 1040ez tax form instructions   You can choose to treat any debt secured by your qualified home as not secured by the home. 1040ez tax form instructions This treatment begins with the tax year for which you make the choice and continues for all later tax years. 1040ez tax form instructions You can revoke your choice only with the consent of the Internal Revenue Service (IRS). 1040ez tax form instructions   You may want to treat a debt as not secured by your home if the interest on that debt is fully deductible (for example, as a business expense) whether or not it qualifies as home mortgage interest. 1040ez tax form instructions This may allow you, if the limits in Part II apply, more of a deduction for interest on other debts that are deductible only as home mortgage interest. 1040ez tax form instructions Cooperative apartment owner. 1040ez tax form instructions   If you own stock in a cooperative housing corporation, see the Special Rule for Tenant-Stockholders in Cooperative Housing Corporations , near the end of this Part I. 1040ez tax form instructions Qualified Home For you to take a home mortgage interest deduction, your debt must be secured by a qualified home. 1040ez tax form instructions This means your main home or your second home. 1040ez tax form instructions A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities. 1040ez tax form instructions The interest you pay on a mortgage on a home other than your main or second home may be deductible if the proceeds of the loan were used for business, investment, or other deductible purposes. 1040ez tax form instructions Otherwise, it is considered personal interest and is not deductible. 1040ez tax form instructions Main home. 1040ez tax form instructions   You can have only one main home at any one time. 1040ez tax form instructions This is the home where you ordinarily live most of the time. 1040ez tax form instructions Second home. 1040ez tax form instructions   A second home is a home that you choose to treat as your second home. 1040ez tax form instructions Second home not rented out. 1040ez tax form instructions   If you have a second home that you do not hold out for rent or resale to others at any time during the year, you can treat it as a qualified home. 1040ez tax form instructions You do not have to use the home during the year. 1040ez tax form instructions Second home rented out. 1040ez tax form instructions   If you have a second home and rent it out part of the year, you also must use it as a home during the year for it to be a qualified home. 1040ez tax form instructions You must use this home more than 14 days or more than 10% of the number of days during the year that the home is rented at a fair rental, whichever is longer. 1040ez tax form instructions If you do not use the home long enough, it is considered rental property and not a second home. 1040ez tax form instructions For information on residential rental property, see Publication 527. 1040ez tax form instructions More than one second home. 1040ez tax form instructions   If you have more than one second home, you can treat only one as the qualified second home during any year. 1040ez tax form instructions However, you can change the home you treat as a second home during the year in the following situations. 1040ez tax form instructions If you get a new home during the year, you can choose to treat the new home as your second home as of the day you buy it. 1040ez tax form instructions If your main home no longer qualifies as your main home, you can choose to treat it as your second home as of the day you stop using it as your main home. 1040ez tax form instructions If your second home is sold during the year or becomes your main home, you can choose a new second home as of the day you sell the old one or begin using it as your main home. 1040ez tax form instructions Divided use of your home. 1040ez tax form instructions   The only part of your home that is considered a qualified home is the part you use for residential living. 1040ez tax form instructions If you use part of your home for other than residential living, such as a home office, you must allocate the use of your home. 1040ez tax form instructions You must then divide both the cost and fair market value of your home between the part that is a qualified home and the part that is not. 1040ez tax form instructions Dividing the cost may affect the amount of your home acquisition debt, which is limited to the cost of your home plus the cost of any improvements. 1040ez tax form instructions (See Home Acquisition Debt in Part II. 1040ez tax form instructions ) Dividing the fair market value may affect your home equity debt limit, also explained in Part II . 1040ez tax form instructions Renting out part of home. 1040ez tax form instructions   If you rent out part of a qualified home to another person (tenant), you can treat the rented part as being used by you for residential living only if all of the following conditions apply. 1040ez tax form instructions The rented part of your home is used by the tenant primarily for residential living. 1040ez tax form instructions The rented part of your home is not a self-contained residential unit having separate sleeping, cooking, and toilet facilities. 1040ez tax form instructions You do not rent (directly or by sublease) the same or different parts of your home to more than two tenants at any time during the tax year. 1040ez tax form instructions If two persons (and dependents of either) share the same sleeping quarters, they are treated as one tenant. 1040ez tax form instructions Office in home. 1040ez tax form instructions   If you have an office in your home that you use in your business, see Publication 587, Business Use of Your Home. 1040ez tax form instructions It explains how to figure your deduction for the business use of your home, which includes the business part of your home mortgage interest. 1040ez tax form instructions Home under construction. 1040ez tax form instructions   You can treat a home under construction as a qualified home for a period of up to 24 months, but only if it becomes your qualified home at the time it is ready for occupancy. 1040ez tax form instructions   The 24-month period can start any time on or after the day construction begins. 1040ez tax form instructions Home destroyed. 1040ez tax form instructions   You may be able to continue treating your home as a qualified home even after it is destroyed in a fire, storm, tornado, earthquake, or other casualty. 1040ez tax form instructions This means you can continue to deduct the interest you pay on your home mortgage, subject to the limits described in this publication. 1040ez tax form instructions   You can continue treating a destroyed home as a qualified home if, within a reasonable period of time after the home is destroyed, you: Rebuild the destroyed home and move into it, or Sell the land on which the home was located. 1040ez tax form instructions   This rule applies to your main home and to a second home that you treat as a qualified home. 1040ez tax form instructions Time-sharing arrangements. 1040ez tax form instructions   You can treat a home you own under a time-sharing plan as a qualified home if it meets all the requirements. 1040ez tax form instructions A time-sharing plan is an arrangement between two or more people that limits each person's interest in the home or right to use it to a certain part of the year. 1040ez tax form instructions Rental of time-share. 1040ez tax form instructions   If you rent out your time-share, it qualifies as a second home only if you also use it as a home during the year. 1040ez tax form instructions See Second home rented out , earlier, for the use requirement. 1040ez tax form instructions To know whether you meet that requirement, count your days of use and rental of the home only during the time you have a right to use it or to receive any benefits from the rental of it. 1040ez tax form instructions Married taxpayers. 1040ez tax form instructions   If you are married and file a joint return, your qualified home(s) can be owned either jointly or by only one spouse. 1040ez tax form instructions Separate returns. 1040ez tax form instructions   If you are married filing separately and you and your spouse own more than one home, you can each take into account only one home as a qualified home. 1040ez tax form instructions However, if you both consent in writing, then one spouse can take both the main home and a second home into account. 1040ez tax form instructions Special Situations This section describes certain items that can be included as home mortgage interest and others that cannot. 1040ez tax form instructions It also describes certain special situations that may affect your deduction. 1040ez tax form instructions Late payment charge on mortgage payment. 1040ez tax form instructions   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. 1040ez tax form instructions Mortgage prepayment penalty. 1040ez tax form instructions   If you pay off your home mortgage early, you may have to pay a penalty. 1040ez tax form instructions 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. 1040ez tax form instructions Sale of home. 1040ez tax form instructions   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 the sale. 1040ez tax form instructions Example. 1040ez tax form instructions John and Peggy Harris sold their home on May 7. 1040ez tax form instructions Through April 30, they made home mortgage interest payments of $1,220. 1040ez tax form instructions 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. 1040ez tax form instructions Their mortgage interest deduction is $1,270 ($1,220 + $50). 1040ez tax form instructions Prepaid interest. 1040ez tax form instructions   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. 1040ez tax form instructions You can deduct in each year only the interest that qualifies as home mortgage interest for that year. 1040ez tax form instructions However, there is an exception that applies to points, discussed later. 1040ez tax form instructions Mortgage interest credit. 1040ez tax form instructions    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. 1040ez tax form instructions Figure the credit on Form 8396, Mortgage Interest Credit. 1040ez tax form instructions If you take this credit, you must reduce your mortgage interest deduction by the amount of the credit. 1040ez tax form instructions   See Form 8396 and Publication 530 for more information on the mortgage interest credit. 1040ez tax form instructions Ministers' and military housing allowance. 1040ez tax form instructions   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. 1040ez tax form instructions Hardest Hit Fund and Emergency Homeowners' Loan Programs. 1040ez tax form instructions   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. 1040ez tax form instructions 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. 1040ez tax form instructions 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. 1040ez tax form instructions 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 (other information including real property taxes paid). 1040ez tax form instructions 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. 1040ez tax form instructions Mortgage assistance payments under section 235 of the National Housing Act. 1040ez tax form instructions   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. 1040ez tax form instructions You cannot deduct the interest that is paid for you. 1040ez tax form instructions No other effect on taxes. 1040ez tax form instructions   Do not include these mortgage assistance payments in your income. 1040ez tax form instructions Also, do not use these payments to reduce other deductions, such as real estate taxes. 1040ez tax form instructions Divorced or separated individuals. 1040ez tax form instructions   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. 1040ez tax form instructions See the discussion of Payments for jointly-owned home under Alimony in Publication 504, Divorced or Separated Individuals. 1040ez tax form instructions Redeemable ground rents. 1040ez tax form instructions   In some states (such as Maryland), you can buy your home subject to a ground rent. 1040ez tax form instructions A ground rent is an obligation you assume to pay a fixed amount per year on the property. 1040ez tax form instructions Under this arrangement, you are leasing (rather than buying) the land on which your home is located. 1040ez tax form instructions   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct them as mortgage interest. 1040ez tax form instructions   A ground rent is a redeemable ground rent if all of the following are true. 1040ez tax form instructions Your lease, including renewal periods, is for more than 15 years. 1040ez tax form instructions You can freely assign the lease. 1040ez tax form instructions 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 specific amount. 1040ez tax form instructions The lessor's interest in the land is primarily a security interest to protect the rental payments to which he or she is entitled. 1040ez tax form instructions   Payments made to end the lease and to buy the lessor's entire interest in the land are not deductible as mortgage interest. 1040ez tax form instructions Nonredeemable ground rents. 1040ez tax form instructions   Payments on a nonredeemable ground rent are not mortgage interest. 1040ez tax form instructions You can deduct them as rent if they are a business expense or if they are for rental property. 1040ez tax form instructions Reverse mortgages. 1040ez tax form instructions   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. 1040ez tax form instructions With a reverse mortgage, you retain title to your home. 1040ez tax form instructions 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. 1040ez tax form instructions Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable. 1040ez tax form instructions Any interest (including original issue discount) accrued on a reverse mortgage is not deductible until you actually pay it, which is usually when you pay off the loan in full. 1040ez tax form instructions Your deduction may be limited because a reverse mortgage loan generally is subject to the limit on Home Equity Debt discussed in Part II. 1040ez tax form instructions Rental payments. 1040ez tax form instructions   If you live in a house before final settlement on the purchase, any payments you make for that period are rent and not interest. 1040ez tax form instructions This is true even if the settlement papers call them interest. 1040ez tax form instructions You cannot deduct these payments as home mortgage interest. 1040ez tax form instructions Mortgage proceeds invested in tax-exempt securities. 1040ez tax form instructions   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. 1040ez tax form instructions “Grandfathered debt” and “home equity debt” are defined in Part II of this publication. 1040ez tax form instructions Refunds of interest. 1040ez tax form instructions   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. 1040ez tax form instructions 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. 1040ez tax form instructions However, you need to include it only up to the amount of the deduction that reduced your tax in the earlier year. 1040ez tax form instructions This is true whether the interest overcharge was refunded to you or was used to reduce the outstanding principal on your mortgage. 1040ez tax form instructions If you need to include the refund in income, report it on Form 1040, line 21. 1040ez tax form instructions   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. 1040ez tax form instructions For information about Form 1098, see Form 1098, Mortgage Interest Statement , later. 1040ez tax form instructions   For more information on how to treat refunds of interest deducted in earlier years, see Recoveries in Publication 525, Taxable and Nontaxable Income. 1040ez tax form instructions Cooperative apartment owner. 1040ez tax form instructions   If you own a cooperative apartment, you must reduce your home mortgage interest deduction by your share of any cash portion of a patronage dividend that the cooperative receives. 1040ez tax form instructions The patronage dividend is a partial refund to the cooperative housing corporation of mortgage interest it paid in a prior year. 1040ez tax form instructions   If you receive a Form 1098 from the cooperative housing corporation, the form should show only the amount you can deduct. 1040ez tax form instructions Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. 1040ez tax form instructions Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. 1040ez tax form instructions This image is too large to be displayed in the current screen. 1040ez tax form instructions Please click the link to view the image. 1040ez tax form instructions Figure B. 1040ez tax form instructions Are My Points Fully Deductible This Year? A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. 1040ez tax form instructions See Points paid by the seller , later. 1040ez tax form instructions General Rule You generally cannot deduct the full amount of points in the year paid. 1040ez tax form instructions Because they are prepaid interest, you generally deduct them ratably over the life (term) of the mortgage. 1040ez tax form instructions See Deduction Allowed Ratably , next. 1040ez tax form instructions For exceptions to the general rule, see Deduction Allowed in Year Paid , later. 1040ez tax form instructions 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. 1040ez tax form instructions You use the cash method of accounting. 1040ez tax form instructions This means you report income in the year you receive it and deduct expenses in the year you pay them. 1040ez tax form instructions Most individuals use this method. 1040ez tax form instructions Your loan is secured by a home. 1040ez tax form instructions (The home does not need to be your main home. 1040ez tax form instructions ) Your loan period is not more than 30 years. 1040ez tax form instructions 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. 1040ez tax form instructions 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. 1040ez tax form instructions Example. 1040ez tax form instructions You use the cash method of accounting. 1040ez tax form instructions In 2013, you took out a $100,000 loan payable over 20 years. 1040ez tax form instructions The terms of the loan are the same as for other 20-year loans offered in your area. 1040ez tax form instructions You paid $4,800 in points. 1040ez tax form instructions You made 3 monthly payments on the loan in 2013. 1040ez tax form instructions You can deduct $60 [($4,800 ÷ 240 months) x 3 payments] in 2013. 1040ez tax form instructions In 2014, if you make all twelve payments, you will be able to deduct $240 ($20 x 12). 1040ez tax form instructions Deduction Allowed in Year Paid You can fully deduct points in the year paid if you meet all the following tests. 1040ez tax form instructions (You can use Figure B as a quick guide to see whether your points are fully deductible in the year paid. 1040ez tax form instructions ) Your loan is secured by your main home. 1040ez tax form instructions (Your main home is the one you ordinarily live in most of the time. 1040ez tax form instructions ) Paying points is an established business practice in the area where the loan was made. 1040ez tax form instructions The points paid were not more than the points generally charged in that area. 1040ez tax form instructions You use the cash method of accounting. 1040ez tax form instructions This means you report income in the year you receive it and deduct expenses in the year you pay them. 1040ez tax form instructions Most individuals use this method. 1040ez tax form instructions 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. 1040ez tax form instructions The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. 1040ez tax form instructions The funds you provided are not required to have been applied to the points. 1040ez tax form instructions They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. 1040ez tax form instructions You cannot have borrowed these funds from your lender or mortgage broker. 1040ez tax form instructions You use your loan to buy or build your main home. 1040ez tax form instructions The points were computed as a percentage of the principal amount of the mortgage. 1040ez tax form instructions The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. 1040ez tax form instructions The points may be shown as paid from either your funds or the seller's. 1040ez tax form instructions Note. 1040ez tax form instructions 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. 1040ez tax form instructions Home improvement loan. 1040ez tax form instructions   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. 1040ez tax form instructions Second home. 1040ez tax form instructions You cannot fully deduct in the year paid points you pay on loans secured by your second home. 1040ez tax form instructions You can deduct these points only over the life of the loan. 1040ez tax form instructions Refinancing. 1040ez tax form instructions   Generally, points you pay to refinance a mortgage are not deductible in full in the year you pay them. 1040ez tax form instructions This is true even if the new mortgage is secured by your main home. 1040ez tax form instructions   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 , you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. 1040ez tax form instructions You can deduct the rest of the points over the life of the loan. 1040ez tax form instructions Example 1. 1040ez tax form instructions In 1998, Bill Fields got a mortgage to buy a home. 1040ez tax form instructions In 2013, Bill refinanced that mortgage with a 15-year $100,000 mortgage loan. 1040ez tax form instructions The mortgage is secured by his home. 1040ez tax form instructions To get the new loan, he had to pay three points ($3,000). 1040ez tax form instructions 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. 1040ez tax form instructions Bill paid the points out of his private funds, rather than out of the proceeds of the new loan. 1040ez tax form instructions The payment of points is an established practice in the area, and the points charged are not more than the amount generally charged there. 1040ez tax form instructions Bill's first payment on the new loan was due July 1. 1040ez tax form instructions He made six payments on the loan in 2013 and is a cash basis taxpayer. 1040ez tax form instructions Bill used the funds from the new mortgage to repay his existing mortgage. 1040ez tax form instructions 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. 1040ez tax form instructions He cannot deduct all of the points in 2013. 1040ez tax form instructions He can deduct two points ($2,000) ratably over the life of the loan. 1040ez tax form instructions He deducts $67 [($2,000 ÷ 180 months) × 6 payments] of the points in 2013. 1040ez tax form instructions The other point ($1,000) was a fee for services and is not deductible. 1040ez tax form instructions Example 2. 1040ez tax form instructions 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. 1040ez tax form instructions Bill deducts 25% ($25,000 ÷ $100,000) of the points ($2,000) in 2013. 1040ez tax form instructions His deduction is $500 ($2,000 × 25%). 1040ez tax form instructions Bill also deducts the ratable part of the remaining $1,500 ($2,000 − $500) that must be spread over the life of the loan. 1040ez tax form instructions This is $50 [($1,500 ÷ 180 months) × 6 payments] in 2013. 1040ez tax form instructions The total amount Bill deducts in 2013 is $550 ($500 + $50). 1040ez tax form instructions Special Situations This section describes certain special situations that may affect your deduction of points. 1040ez tax form instructions Original issue discount. 1040ez tax form instructions   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. 1040ez tax form instructions This reduction results in original issue discount, which is discussed in chapter 4 of Publication 535. 1040ez tax form instructions Amounts charged for services. 1040ez tax form instructions    Amounts charged by the lender for specific services connected to the loan are not interest. 1040ez tax form instructions Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. 1040ez tax form instructions  You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. 1040ez tax form instructions Points paid by the seller. 1040ez tax form instructions   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. 1040ez tax form instructions Treatment by seller. 1040ez tax form instructions   The seller cannot deduct these fees as interest. 1040ez tax form instructions But they are a selling expense that reduces the amount realized by the seller. 1040ez tax form instructions See Publication 523 for information on selling your home. 1040ez tax form instructions Treatment by buyer. 1040ez tax form instructions   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. 1040ez tax form instructions If all the tests under Deduction Allowed in Year Paid , earlier, are met, the buyer can deduct the points in the year paid. 1040ez tax form instructions If any of those tests are not met, the buyer deducts the points over the life of the loan. 1040ez tax form instructions   If you need information about the basis of your home, see Publication 523 or Publication 530. 1040ez tax form instructions Funds provided are less than points. 1040ez tax form instructions   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. 1040ez tax form instructions In addition, you can deduct any points paid by the seller. 1040ez tax form instructions Example 1. 1040ez tax form instructions When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). 1040ez tax form instructions You meet all the tests for deducting points in the year paid, except the only funds you provided were a $750 down payment. 1040ez tax form instructions Of the $1,000 charged for points, you can deduct $750 in the year paid. 1040ez tax form instructions You spread the remaining $250 over the life of the mortgage. 1040ez tax form instructions Example 2. 1040ez tax form instructions 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. 1040ez tax form instructions In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). 1040ez tax form instructions You spread the remaining $250 over the life of the mortgage. 1040ez tax form instructions You must reduce the basis of your home by the $1,000 paid by the seller. 1040ez tax form instructions Excess points. 1040ez tax form instructions   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. 1040ez tax form instructions You must spread any additional points over the life of the mortgage. 1040ez tax form instructions Mortgage ending early. 1040ez tax form instructions   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. 1040ez tax form instructions However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. 1040ez tax form instructions Instead, deduct the remaining balance over the term of the new loan. 1040ez tax form instructions   A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. 1040ez tax form instructions Example. 1040ez tax form instructions Dan paid $3,000 in points in 2002 that he had to spread out over the 15-year life of the mortgage. 1040ez tax form instructions He deducts $200 points per year. 1040ez tax form instructions Through 2012, Dan has deducted $2,200 of the points. 1040ez tax form instructions Dan prepaid his mortgage in full in 2013. 1040ez tax form instructions He can deduct the remaining $800 of points in 2013. 1040ez tax form instructions Limits on deduction. 1040ez tax form instructions   You cannot fully deduct points paid on a mortgage that exceeds the limits discussed in Part II . 1040ez tax form instructions See the Table 1 Instructions for line 10. 1040ez tax form instructions Form 1098. 1040ez tax form instructions    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. 1040ez tax form instructions See Form 1098, Mortgage Interest Statement , later. 1040ez tax form instructions Mortgage Insurance Premiums You can treat amounts you paid during 2013 for qualified mortgage insurance as home mortgage interest. 1040ez tax form instructions The insurance must be in connection with home acquisition debt, and the insurance contract must have been issued after 2006. 1040ez tax form instructions Qualified mortgage insurance. 1040ez tax form instructions   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). 1040ez tax form instructions   Mortgage insurance provided by the Department of Veterans Affairs is commonly known as a funding fee. 1040ez tax form instructions If provided by the Rural Housing Service, it is commonly known as a guarantee fee. 1040ez tax form instructions The funding fee and guarantee fee can either be included in the amount of the loan or paid in full at the time of closing. 1040ez tax form instructions These fees can be deducted fully in 2013 if the mortgage insurance contract was issued in 2013. 1040ez tax form instructions Contact the mortgage insurance issuer to determine the deductible amount if it is not reported in box 4 of Form 1098. 1040ez tax form instructions Special rules for prepaid mortgage insurance. 1040ez tax form instructions   Generally, if you paid premiums for qualified mortgage insurance that are properly allocable to periods after the close of the tax year, such premiums are treated as paid in the period to which they are allocated. 1040ez tax form instructions 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. 1040ez tax form instructions No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term. 1040ez tax form instructions This paragraph does not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service. 1040ez tax form instructions Example. 1040ez tax form instructions Ryan purchased a home in May of 2012 and financed the home with a 15-year mortgage. 1040ez tax form instructions Ryan also prepaid all of the $9,240 in private mortgage insurance required at the time of closing in May. 1040ez tax form instructions 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. 1040ez tax form instructions Ryan's adjusted gross income (AGI) for 2012 is $76,000. 1040ez tax form instructions Ryan can deduct $880 ($9,240 ÷ 84 x 8 months) for qualified mortgage insurance premiums in 2012. 1040ez tax form instructions For 2013, Ryan can deduct $1,320 ($9,240 ÷ 84 x 12 months) if his AGI is $100,000 or less. 1040ez tax form instructions 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). 1040ez tax form instructions Limit on deduction. 1040ez tax form instructions   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. 1040ez tax form instructions 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. 1040ez tax form instructions If your adjusted gross income is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. 1040ez tax form instructions Form 1098. 1040ez tax form instructions   The mortgage interest statement you receive should show not only the total interest paid during the year, but also your mortgage insurance premiums paid during the year, which may qualify to be treated as deductible mortgage interest. 1040ez tax form instructions See Form 1098, Mortgage Interest Statement, next. 1040ez tax form instructions 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. 1040ez tax form instructions You will receive the statement if you pay interest to a person (including a financial institution or cooperative housing corporation) in the course of that person's trade or business. 1040ez tax form instructions A governmental unit is a person for purposes of furnishing the statement. 1040ez tax form instructions The statement for each year should be sent to you by January 31 of the following year. 1040ez tax form instructions A copy of this form will also be sent to the IRS. 1040ez tax form instructions 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. 1040ez tax form instructions However, it should not show any interest that was paid for you by a government agency. 1040ez tax form instructions As a general rule, Form 1098 will include only points that you can fully deduct in the year paid. 1040ez tax form instructions However, certain points not included on Form 1098 also may be deductible, either in the year paid or over the life of the loan. 1040ez tax form instructions See the earlier discussion of Points to determine whether you can deduct points not shown on Form 1098. 1040ez tax form instructions Prepaid interest on Form 1098. 1040ez tax form instructions   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. 1040ez tax form instructions However, you cannot deduct the prepaid amount for January 2014 in 2013. 1040ez tax form instructions (See Prepaid interest , earlier. 1040ez tax form instructions ) You will have to figure the interest that accrued for 2014 and subtract it from the amount in box 1. 1040ez tax form instructions You will include the interest for January 2014 with other interest you pay for 2014. 1040ez tax form instructions Refunded interest. 1040ez tax form instructions   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. 1040ez tax form instructions See Refunds of interest , earlier. 1040ez tax form instructions Mortgage insurance premiums. 1040ez tax form instructions   The amount of mortgage insurance premiums you paid during 2013 may be shown in Box 4 of Form 1098. 1040ez tax form instructions See Mortgage Insurance Premiums , earlier. 1040ez tax form instructions How To Report Deduct the home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 10. 1040ez tax form instructions 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. 1040ez tax form instructions Attach a statement explaining the difference and print “See attached” next to line 10. 1040ez tax form instructions Deduct home mortgage interest that was not reported to you on Form 1098 on Schedule A (Form 1040), line 11. 1040ez tax form instructions 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. 1040ez tax form instructions The seller must give you this number and you must give the seller your TIN. 1040ez tax form instructions A Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. 1040ez tax form instructions Failure to meet any of these requirements may result in a $50 penalty for each failure. 1040ez tax form instructions 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. 1040ez tax form instructions 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. 1040ez tax form instructions Deduct mortgage insurance premiums on Schedule A (Form 1040), line 13. 1040ez tax form instructions More than one borrower. 1040ez tax form instructions   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. 1040ez tax form instructions Show how much of the interest each of you paid, and give the name and address of the person who received the form. 1040ez tax form instructions Deduct your share of the interest on Schedule A (Form 1040), line 11, and print “See attached” next to the line. 1040ez tax form instructions Also, deduct your share of any qualified mortgage insurance premiums on Schedule A (Form 1040), line 13. 1040ez tax form instructions   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. 1040ez tax form instructions Let each of the other borrowers know what his or her share is. 1040ez tax form instructions Mortgage proceeds used for business or investment. 1040ez tax form instructions   If your home mortgage interest deduction is limited under the rules explained in Part II , but all or part of the mortgage proceeds were used for business, investment, or other deductible activities, see Table 2 near the end of this publication. 1040ez tax form instructions It shows where to deduct the part of your excess interest that is for those activities. 1040ez tax form instructions The Table 1 Instructions for line 13 in Part II explain how to divide the excess interest among the activities for which the mortgage proceeds were used. 1040ez tax form instructions Special Rule for Tenant-Stockholders in Cooperative Housing Corporations A qualified home includes stock in a cooperative housing corporation owned by a tenant-stockholder. 1040ez tax form instructions This applies only if the tenant-stockholder is entitled to live in the house or apartment because of owning stock in the cooperative. 1040ez tax form instructions Cooperative housing corporation. 1040ez tax form instructions   This is a corporation that meets all of the following conditions. 1040ez tax form instructions Has only one class of stock outstanding, Has no stockholders other than those who own the stock that can live in a house, apartment, or house trailer owned or leased by the corporation, Has no stockholders who can receive any distribution out of capital other than on a liquidation of the corporation, and Meets at least one of the following requirements. 1040ez tax form instructions Receives at least 80% of its gross income for the year in which the mortgage interest is paid or incurred from tenant-stockholders. 1040ez tax form instructions For this purpose, gross income is all income received during the entire year, including amounts received before the corporation changed to cooperative ownership. 1040ez tax form instructions At all times during the year, at least 80% of the total square footage of the corporation's property is used or available for use by the tenant-stockholders for residential or residential-related use. 1040ez tax form instructions At least 90% of the corporation's expenditures paid or incurred during the year are for the acquisition, construction, management, maintenance, or care of corporate property for the benefit of the tenant-stockholders. 1040ez tax form instructions Stock used to secure debt. 1040ez tax form instructions   In some cases, you cannot use your cooperative housing stock to secure a debt because of either: Restrictions under local or state law, or Restrictions in the cooperative agreement (other than restrictions in which the main purpose is to permit the tenant- stockholder to treat unsecured debt as secured debt). 1040ez tax form instructions However, you can treat a debt as secured by the stock to the extent that the proceeds are used to buy the stock under the allocation of interest rules. 1040ez tax form instructions See chapter 4 of Publication 535 for details on these rules. 1040ez tax form instructions Figuring deductible home mortgage interest. 1040ez tax form instructions   Generally, if you are a tenant-stockholder, you can deduct payments you make for your share of the interest paid or incurred by the cooperative. 1040ez tax form instructions The interest must be on a debt to buy, build, change, improve, or maintain the cooperative's housing, or on a debt to buy the land. 1040ez tax form instructions   Figure your share of this interest by multiplying the total by the following fraction. 1040ez tax form instructions      Your shares of stock in the cooperative   The total shares of stock in the cooperative Limits on deduction. 1040ez tax form instructions   To figure how the limits discussed in Part II apply to you, treat your share of the cooperative's debt as debt incurred by you. 1040ez tax form instructions The cooperative should determine your share of its grandfathered debt, its home acquisition debt, and its home equity debt. 1040ez tax form instructions (Your share of each of these types of debt is equal to the average balance of each debt multiplied by the fraction just given. 1040ez tax form instructions ) After your share of the average balance of each type of debt is determined, you include it with the average balance of that type of debt secured by your stock. 1040ez tax form instructions Form 1098. 1040ez tax form instructions    The cooperative should give you a Form 1098 showing your share of the interest. 1040ez tax form instructions Use the rules in this publication to determine your deductible mortgage interest. 1040ez tax form instructions Part II. 1040ez tax form instructions Limits on Home Mortgage Interest Deduction This part of the publication discusses the limits on deductible home mortgage interest. 1040ez tax form instructions These limits apply to your home mortgage interest expense if you have a home mortgage that does not fit into any of the three categories listed at the beginning of Part I under Fully deductible interest . 1040ez tax form instructions Your home mortgage interest deduction is limited to the interest on the part of your home mortgage debt that is not more than your qualified loan limit. 1040ez tax form instructions This is the part of your home mortgage debt that is grandfathered debt or that is not more than the limits for home acquisition debt and home equity debt. 1040ez tax form instructions Table 1 can help you figure your qualified loan limit and your deductible home mortgage interest. 1040ez tax form instructions 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 (your main or second home). 1040ez tax form instructions It also must be secured by that home. 1040ez tax form instructions 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. 1040ez tax form instructions The additional debt may qualify as home equity debt (discussed later). 1040ez tax form instructions Home acquisition debt limit. 1040ez tax form instructions   The total amount you can treat as home acquisition debt at any time on your main home and second home cannot be more than $1 million ($500,000 if married filing separately). 1040ez tax form instructions This limit is reduced (but not below zero) by the amount of your grandfathered debt (discussed later). 1040ez tax form instructions Debt over this limit may qualify as home equity debt (also discussed later). 1040ez tax form instructions Refinanced home acquisition debt. 1040ez tax form instructions   Any secured debt you use to refinance home acquisition debt is treated as home acquisition debt. 1040ez tax form instructions However, the new debt will qualify as home acquisition debt only up to the amount of the balance of the old mortgage principal just before the refinancing. 1040ez tax form instructions Any additional debt not used to buy, build, or substantially improve a qualified home is not home acquisition debt, but may qualify as home equity debt (discussed later). 1040ez tax form instructions Mortgage that qualifies later. 1040ez tax form instructions   A mortgage that does not qualify as home acquisition debt because it does not meet all the requirements may qualify at a later time. 1040ez tax form instructions For example, a debt that you use to buy your home may not qualify as home acquisition debt because it is not secured by the home. 1040ez tax form instructions However, if the debt is later secured by the home, it may qualify as home acquisition debt after that time. 1040ez tax form instructions Similarly, a debt that you use to buy property may not qualify because the property is not a qualified home. 1040ez tax form instructions However, if the property later becomes a qualified home, the debt may qualify after that time. 1040ez tax form instructions Mortgage treated as used to buy, build, or improve home. 1040ez tax form instructions   A mortgage secured by a qualified home may be treated as home acquisition debt, even if you do not actually use the proceeds to buy, build, or substantially improve the home. 1040ez tax form instructions This applies in the following situations. 1040ez tax form instructions You buy your home within 90 days before or after the date you take out the mortgage. 1040ez tax form instructions The home acquisition debt is limited to the home's cost, plus the cost of any substantial improvements within the limit described below in (2) or (3). 1040ez tax form instructions (See Example 1 later. 1040ez tax form instructions ) You build or improve your home and take out the mortgage before the work is completed. 1040ez tax form instructions The home acquisition debt is limited to the amount of the expenses incurred within 24 months before the date of the mortgage. 1040ez tax form instructions You build or improve your home and take out the mortgage within 90 days after the work is completed. 1040ez tax form instructions The home acquisition debt is limited to the amount of the expenses incurred within the period beginning 24 months before the work is completed and ending on the date of the mortgage. 1040ez tax form instructions (See Example 2 later. 1040ez tax form instructions ) Example 1. 1040ez tax form instructions You bought your main home on June 3 for $175,000. 1040ez tax form instructions You paid for the home with cash you got from the sale of your old home. 1040ez tax form instructions On July 15, you took out a mortgage of $150,000 secured by your main home. 1040ez tax form instructions You used the $150,000 to invest in stocks. 1040ez tax form instructions You can treat the mortgage as taken out to buy your home because you bought the home within 90 days before you took out the mortgage. 1040ez tax form instructions The entire mortgage qualifies as home acquisition debt because it was not more than the home's cost. 1040ez tax form instructions Example 2. 1040ez tax form instructions On January 31, John began building a home on the lot that he owned. 1040ez tax form instructions He used $45,000 of his personal funds to build the home. 1040ez tax form instructions The home was completed on October 31. 1040ez tax form instructions On November 21, John took out a $36,000 mortgage that was secured by the home. 1040ez tax form instructions The mortgage can be treated as used to build the home because it was taken out within 90 days after the home was completed. 1040ez tax form instructions The entire mortgage qualifies as home acquisition debt because it was not more than the expenses incurred within the period beginning 24 months before the home was completed. 1040ez tax form instructions This is illustrated by Figure C. 1040ez tax form instructions   Please click here for the text description of the image. 1040ez tax form instructions Figure C. 1040ez tax form instructions John's example Date of the mortgage. 1040ez tax form instructions   The date you take out your mortgage is the day the loan proceeds are disbursed. 1040ez tax form instructions This is generally the closing date. 1040ez tax form instructions You can treat the day you apply in writing for your mortgage as the date you take it out. 1040ez tax form instructions However, this applies only if you receive the loan proceeds within a reasonable time (such as within 30 days) after your application is approved. 1040ez tax form instructions If a timely application you make is rejected, a reasonable additional time will be allowed to make a new application. 1040ez tax form instructions Cost of home or improvements. 1040ez tax form instructions   To determine your cost, include amounts paid to acquire any interest in a qualified home or to substantially improve the home. 1040ez tax form instructions   The cost of building or substantially improving a qualified home includes the costs to acquire real property and building materials, fees for architects and design plans, and required building permits. 1040ez tax form instructions Substantial improvement. 1040ez tax form instructions   An improvement is substantial if it: Adds to the value of your home, Prolongs your home's useful life, or Adapts your home to new uses. 1040ez tax form instructions    Repairs that maintain your home in good condition, such as repainting your home, are not substantial improvements. 1040ez tax form instructions However, if you paint your home as part of a renovation that substantially improves your qualified home, you can include the painting costs in the cost of the improvements. 1040ez tax form instructions Acquiring an interest in a home because of a divorce. 1040ez tax form instructions   If you incur debt to acquire the interest of a spouse or former spouse in a home, because of a divorce or legal separation, you can treat that debt as home acquisition debt. 1040ez tax form instructions Part of home not a qualified home. 1040ez tax form instructions    To figure your home acquisition debt, you must divide the cost of your home and improvements between the part of your home that is a qualified home and any part that is not a qualified home. 1040ez tax form instructions See Divided use of your home under Qualified Home in Part I. 1040ez tax form instructions Home Equity Debt If you took out a loan for reasons other than to buy, build, or substantially improve your home, it may qualify as home equity debt. 1040ez tax form instructions In addition, debt you incurred to buy, build, or substantially improve your home, to the extent it is more than the home acquisition debt limit (discussed earlier), may qualify as home equity debt. 1040ez tax form instructions Home equity debt is a mortgage you took out after October 13, 1987, that: Does not qualify as home acquisition debt or as grandfathered debt, and Is secured by your qualified home. 1040ez tax form instructions Example. 1040ez tax form instructions You bought your home for cash 10 years ago. 1040ez tax form instructions You did not have a mortgage on your home until last year, when you took out a $50,000 loan, secured by your home, to pay for your daughter's college tuition and your father's medical bills. 1040ez tax form instructions This loan is home equity debt. 1040ez tax form instructions Home equity debt limit. 1040ez tax form instructions   There is a limit on the amount of debt that can be treated as home equity debt. 1040ez tax form instructions The total home equity debt on your main home and second home is limited to the smaller of: $100,000 ($50,000 if married filing separately), or The total of each home's fair market value (FMV) reduced (but not below zero) by the amount of its home acquisition debt and grandfathered debt. 1040ez tax form instructions Determine the FMV and the outstanding home acquisition and grandfathered debt for each home on the date that the last debt was secured by the home. 1040ez tax form instructions Example. 1040ez tax form instructions You own one home that you bought in 2000. 1040ez tax form instructions Its FMV now is $110,000, and the current balance on your original mortgage (home acquisition debt) is $95,000. 1040ez tax form instructions Bank M offers you a home mortgage loan of 125% of the FMV of the home less any outstanding mortgages or other liens. 1040ez tax form instructions To consolidate some of your other debts, you take out a $42,500 home mortgage loan [(125% × $110,000) − $95,000] with Bank M. 1040ez tax form instructions Your home equity debt is limited to $15,000. 1040ez tax form instructions This is the smaller of: $100,000, the maximum limit, or $15,000, the amount that the FMV of $110,000 exceeds the amount of home acquisition debt of $95,000. 1040ez tax form instructions Debt higher than limit. 1040ez tax form instructions   Interest on amounts over the home equity debt limit (such as the interest on $27,500 [$42,500 − $15,000] in the preceding example) generally is treated as personal interest and is not deductible. 1040ez tax form instructions But if the proceeds of the loan were used for investment, business, or other deductible purposes, the interest may be deductible. 1040ez tax form instructions If it is, see the Table 1 Instructions for line 13 for an explanation of how to allocate the excess interest. 1040ez tax form instructions Part of home not a qualified home. 1040ez tax form instructions   To figure the limit on your home equity debt, you must divide the FMV of your home between the part that is a qualified home and any part that is not a qualified home. 1040ez tax form instructions See Divided use of your home under Qualified Home in Part I. 1040ez tax form instructions Fair market value (FMV). 1040ez tax form instructions    This is the price at which the home would change hands between you and a buyer, neither having to sell or buy, and both having reasonable knowledge of all relevant facts. 1040ez tax form instructions Sales of similar homes in your area, on about the same date your last debt was secured by the home, may be helpful in figuring the FMV. 1040ez tax form instructions Grandfathered Debt If you took out a mortgage on your home before October 14, 1987, or you refinanced such a mortgage, it may qualify as grandfathered debt. 1040ez tax form instructions To qualify, it must have been secured by your qualified home on October 13, 1987, and at all times after that date. 1040ez tax form instructions How you used the proceeds does not matter. 1040ez tax form instructions Grandfathered debt is not limited. 1040ez tax form instructions All of the interest you paid on grandfathered debt is fully deductible home mortgage interest. 1040ez tax form instructions However, the amount of your grandfathered debt reduces the $1 million limit for home acquisition debt and the limit based on your home's fair market value for home equity debt. 1040ez tax form instructions Refinanced grandfathered debt. 1040ez tax form instructions   If you refinanced grandfathered debt after October 13, 1987, for an amount that was not more than the mortgage principal left on the debt, then you still treat it as grandfathered debt. 1040ez tax form instructions To the extent the new debt is more than that mortgage principal, it is treated as home acquisition or home equity debt, and the mortgage is a mixed-use mortgage (discussed later under Average Mortgage Balance in the Table 1 instructions). 1040ez tax form instructions The debt must be secured by the qualified home. 1040ez tax form instructions   You treat grandfathered debt that was refinanced after October 13, 1987, as grandfathered debt only for the term left on the debt that was refinanced. 1040ez tax form instructions After that, you treat it as home acquisition debt or home equity debt, depending on how you used the proceeds. 1040ez tax form instructions Exception. 1040ez tax form instructions   If the debt before refinancing was like a balloon note (the principal on the debt was not amortized over the term of the debt), then you treat the refinanced debt as grandfathered debt for the term of the first refinancing. 1040ez tax form instructions This term cannot be more than 30 years. 1040ez tax form instructions Example. 1040ez tax form instructions Chester took out a $200,000 first mortgage on his home in 1986. 1040ez tax form instructions The mortgage was a five-year balloon note and the entire balance on the note was due in 1991. 1040ez tax form instructions Chester refinanced the debt in 1991 with a new 20-year mortgage. 1040ez tax form instructions The refinanced debt is treated as grandfathered debt for its entire term (20 years). 1040ez tax form instructions Line-of-credit mortgage. 1040ez tax form instructions    If you had a line-of-credit mortgage on October 13, 1987, and borrowed additional amounts against it after that date, then the additional amounts are either home acquisition debt or home equity debt depending on how you used the proceeds. 1040ez tax form instructions The balance on the mortgage before you borrowed the additional amounts is grandfathered debt. 1040ez tax form instructions The newly borrowed amounts are not grandfathered debt because the funds were borrowed after October 13, 1987. 1040ez tax form instructions See Average Mortgage Balance in the Table 1 Instructions that follow. 1040ez tax form instructions Table 1 Instructions Unless you are subject to the overall limit on itemized deductions, you can deduct all of the interest you paid during the year on mortgages secured by your main home or second home in either of the following two situations. 1040ez tax form instructions All the mortgages are grandfathered debt. 1040ez tax form instructions The total of the mortgage balances for the entire year is within the limits discussed earlier under Home Acquisition Debt and Home Equity Debt . 1040ez tax form instructions In either of those cases, you do not need Table 1. 1040ez tax form instructions Otherwise, you can use Table 1 to determine your qualified loan limit and deductible home mortgage interest. 1040ez tax form instructions Fill out only one Table 1 for both your main and second home regardless of how many mortgages you have. 1040ez tax form instructions Table 1. 1040ez tax form instructions Worksheet To Figure Your Qualified Loan Limit and Deductible Home Mortgage Interest For the Current Year See the Table 1 Instructions. 1040ez tax form instructions Part I Qualified Loan Limit 1. 1040ez tax form instructions Enter the average balance of all your grandfathered debt. 1040ez tax form instructions See line 1 instructions 1. 1040ez tax form instructions   2. 1040ez tax form instructions Enter the average balance of all your home acquisition debt. 1040ez tax form instructions See line 2 instructions 2. 1040ez tax form instructions   3. 1040ez tax form instructions Enter $1,000,000 ($500,000 if married filing separately) 3. 1040ez tax form instructions   4. 1040ez tax form instructions Enter the larger of the amount on line 1 or the amount on line 3 4. 1040ez tax form instructions   5. 1040ez tax form instructions Add the amounts on lines 1 and 2. 1040ez tax form instructions Enter the total here 5. 1040ez tax form instructions   6. 1040ez tax form instructions Enter the smaller of the amount on line 4 or the amount on line 5 6. 1040ez tax form instructions   7. 1040ez tax form instructions If you have home equity debt, enter the smaller of $100,000 ($50,000 if married filing separately) or your limited amount. 1040ez tax form instructions See the line 7 instructions for the limit which may apply to you. 1040ez tax form instructions 7. 1040ez tax form instructions   8. 1040ez tax form instructions Add the amounts on lines 6 and 7. 1040ez tax form instructions Enter the total. 1040ez tax form instructions This is your qualified loan limit. 1040ez tax form instructions 8. 1040ez tax form instructions   Part II Deductible Home Mortgage Interest 9. 1040ez tax form instructions Enter the total of the average balances of all mortgages on all qualified homes. 1040ez tax form instructions  See line 9 instructions 9. 1040ez tax form instructions     If line 8 is less than line 9, go on to line 10. 1040ez tax form instructions If line 8 is equal to or more than line 9, stop here. 1040ez tax form instructions All of your interest on all the mortgages included on line 9 is deductible as home mortgage interest on Schedule A (Form 1040). 1040ez tax form instructions     10. 1040ez tax form instructions Enter the total amount of interest that you paid. 1040ez tax form instructions See line 10 instructions 10. 1040ez tax form instructions   11. 1040ez tax form instructions Divide the amount on line 8 by the amount on line 9. 1040ez tax form instructions Enter the result as a decimal amount (rounded to three places) 11. 1040ez tax form instructions × . 1040ez tax form instructions 12. 1040ez tax form instructions Multiply the amount on line 10 by the decimal amount on line 11. 1040ez tax form instructions Enter the result. 1040ez tax form instructions This is your deductible home mortgage interest. 1040ez tax form instructions Enter this amount on Schedule A (Form 1040) 12. 1040ez tax form instructions   13. 1040ez tax form instructions Subtract the amount on line 12 from the amount on line 10. 1040ez tax form instructions Enter the result. 1040ez tax form instructions This is not home mortgage interest. 1040ez tax form instructions See line 13 instructions 13. 1040ez tax form instructions   Home equity debt only. 1040ez tax form instructions   If all of your mortgages are home equity debt, do not fill in lines 1 through 5. 1040ez tax form instructions Enter zero on line 6 and complete the rest of Table 1. 1040ez tax form instructions Average Mortgage Balance You have to figure the average balance of each mortgage to determine your qualified loan limit. 1040ez tax form instructions You need these amounts to complete lines 1, 2, and 9 of Table 1. 1040ez tax form instructions You can use the highest mortgage balances during the year, but you may benefit most by using the average balances. 1040ez tax form instructions The following are methods you can use to figure your average mortgage balances. 1040ez tax form instructions However, if a mortgage has more than one category of debt, see Mixed-use mortgages , later, in this section. 1040ez tax form instructions Average of first and last balance method. 1040ez tax form instructions   You can use this method if all the following apply. 1040ez tax form instructions You did not borrow any new amounts on the mortgage during the year. 1040ez tax form instructions (This does not include borrowing the original mortgage amount. 1040ez tax form instructions ) You did not prepay more than one month's principal during the year. 1040ez tax form instructions (This includes prepayment by refinancing your home or by applying proceeds from its sale. 1040ez tax form instructions ) You had to make level payments at fixed equal intervals on at least a semi-annual basis. 1040ez tax form instructions You treat your payments as level even if they were adjusted from time to time because of changes in the interest rate. 1040ez tax form instructions    To figure your average balance, complete the following worksheet. 1040ez tax form instructions    1. 1040ez tax form instructions Enter the balance as of the first day of the year that the mortgage was secured by your qualified home during the year (generally January 1)   2. 1040ez tax form instructions Enter the balance as of the last day of the year that the mortgage was secured by your qualified home during the year (generally December 31)   3. 1040ez tax form instructions Add amounts on lines 1 and 2   4. 1040ez tax form instructions Divide the amount on line 3 by 2. 1040ez tax form instructions Enter the result   Interest paid divided by interest rate method. 1040ez tax form instructions   You can use this method if at all times in 2013 the mortgage was secured by your qualified home and the interest was paid at least monthly. 1040ez tax form instructions    Complete the following worksheet to figure your average balance. 1040ez tax form instructions    1. 1040ez tax form instructions Enter the interest paid in 2013. 1040ez tax form instructions Do not include points, mortgage insurance premiums, or any interest paid in 2013 that is for a year after 2013. 1040ez tax form instructions However, do include interest that is for 2013 but was paid in an earlier year   2. 1040ez tax form instructions Enter the annual interest rate on the mortgage. 1040ez tax form instructions If the interest rate varied in 2013, use the lowest rate for the year   3. 1040ez tax form instructions Divide the amount on line 1 by the amount on line 2. 1040ez tax form instructions Enter the result   Example. 1040ez tax form instructions Mr. 1040ez tax form instructions Blue had a line of credit secured by his main home all year. 1040ez tax form instructions He paid interest of $2,500 on this loan. 1040ez tax form instructions The interest rate on the loan was 9% (. 1040ez tax form instructions 09) all year. 1040ez tax form instructions His average balance using this method is $27,778, figured as follows. 1040ez tax form instructions 1. 1040ez tax form instructions Enter the interest paid in 2013. 1040ez tax form instructions Do not include points, mortgage insurance premiums, or any interest paid in 2013 that is for a year after 2013. 1040ez tax form instructions However, do include interest that is for 2013 but was paid in an earlier year $2,500 2. 1040ez tax form instructions Enter the annual interest rate on the mortgage. 1040ez tax form instructions If the interest rate varied in 2013, use the lowest rate for the year . 1040ez tax form instructions 09 3. 1040ez tax form instructions Divide the amount on line 1 by the amount on line 2. 1040ez tax form instructions Enter the result $27,778 Statements provided by your lender. 1040ez tax form instructions   If you receive monthly statements showing the closing balance or the average balance for the month, you can use either to figure your average balance for the year. 1040ez tax form instructions You can treat the balance as zero for any month the mortgage was not secured by your qualified home. 1040ez tax form instructions   For each mortgage, figure your average balance by adding your monthly closing or average balances and dividing that total by the number of months the home secured by that mortgage was a qualified home during the year. 1040ez tax form instructions   If your lender can give you your average balance for the year, you can use that amount. 1040ez tax form instructions Example. 1040ez tax form instructions Ms. 1040ez tax form instructions Brown had a home equity loan secured by her main home all year. 1040ez tax form instructions She received monthly statements showing her average balance for each month. 1040ez tax form instructions She can figure her average balance for the year by adding her monthly average balances and dividing the total by 12. 1040ez tax form instructions Mixed-use mortgages. 1040ez tax form instructions   A mixed-use mortgage is a loan that consists of more than one of the three categories of debt (grandfathered debt, home acquisition debt, and home equity debt). 1040ez tax form instructions For example, a mortgage you took out during the year is a mixed-use mortgage if you used its proceeds partly to refinance a mortgage that you took out in an earlier year to buy your home (home acquisition debt) and partly to buy a car (home equity debt). 1040ez tax form instructions   Complete lines 1 and 2 of Table 1 by including the separate average balances of any grandfathered debt and home acquisition debt in your mixed-use mortgage. 1040ez tax form instructions Do not use the methods described earlier in this section to figure the average balance of either category. 1040ez tax form instructions Instead, for each category, use the following method. 1040ez tax form instructions Figure the balance of that category of debt for each month. 1040ez tax form instructions This is the amount of the loan proceeds allocated to that category, reduced by your principal payments on the mortgage previously applied to that category. 1040ez tax form instructions Principal payments on a mixed-use mortgage are applied in full to each category of debt, until its balance is zero, in the following order: First, any home equity debt, Next, any grandfathered debt, and Finally, any home acquisition debt. 1040ez tax form instructions Add together the monthly balances figured in (1). 1040ez tax form instructions Divide the result in (2) by 12. 1040ez tax form instructions   Complete line 9 of Table 1 by including the average balance of the entire mixed-use mortgage, figured under one of the methods described earlier in this section. 1040ez tax form instructions Example 1. 1040ez tax form instructions In 1986, Sharon took out a $1,400,000 mortgage to buy her main home (grandfathered debt). 1040ez tax form instructions On March 2, 2013, when the home had a fair market value of $1,700,000 and she owed $1,100,000 on the mortgage, Sharon took out a second mortgage for $200,000. 1040ez tax form instructions She used $180,000 of the proceeds to make substantial improvements to her home (home acquisition debt) and the remaining $20,000 to buy a car (home equity debt). 1040ez tax form instructions Under the loan agreement, Sharon must make principal payments of $1,000 at the end of each month. 1040ez tax form instructions During 2013, her principal payments on the second mortgage totaled $10,000. 1040ez tax form instructions To complete Table 1, line 2, Sharon must figure a separate average balance for the part of her second mortgage that is home acquisition debt. 1040ez tax form instructions The January and February balances were zero. 1040ez tax form instructions The March through December balances were all $180,000, because none of her principal payments are applied to the home acquisition debt. 1040ez tax form instructions (They are all applied to the home equity debt, reducing it to $10,000 [$20,000 − $10,000]. 1040ez tax form instructions ) The monthly balances of the home acquisition debt total $1,800,000 ($180,000 × 10). 1040ez tax form instructions Therefore, the average balance of the home acquisition debt for 2013 was $150,000 ($1,800,000 ÷ 12). 1040ez tax form instructions Example 2. 1040ez tax form instructions The facts are the same as in Example 1. 1040ez tax form instructions In 2014, Sharon's January through October principal payments on her second mortgage are applied to the home equity debt, reducing it to zero. 1040ez tax form instructions The balance of the home acquisition debt remains $180,000 for each of those months. 1040ez tax form instructions Because her November and December principal payments are applied to the home acquisition debt, the November balance is $179,000 ($180,000 − $1,000) and the December balance is $178,000 ($180,000 − $2,000). 1040ez tax form instructions The monthly balances total $2,157,000 [($180,000 × 10) + $179,000 + $178,000]. 1040ez tax form instructions Therefore, the average balance of the home acquisition debt for 2014 is $179,750 ($2,157,000 ÷ 12). 1040ez tax form instructions L