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Compare tax software 17. Compare tax software   Individual Retirement Arrangements (IRAs) Table of Contents What's New Reminders Introduction Useful Items - You may want to see: Traditional IRAsWho Can Open a Traditional IRA? When and How Can a Traditional IRA Be Opened? How Much Can Be Contributed? When Can Contributions Be Made? How Much Can You Deduct? Nondeductible Contributions Inherited IRAs Can You Move Retirement Plan Assets? When Can You Withdraw or Use IRA Assets? When Must You Withdraw IRA Assets? (Required Minimum Distributions) Are Distributions Taxable? What Acts Result in Penalties or Additional Taxes? Roth IRAsWhat Is a Roth IRA? When Can a Roth IRA Be Opened? Can You Contribute to a Roth IRA? Can You Move Amounts Into a Roth IRA? Are Distributions Taxable? What's New Traditional IRA contribution and deduction limit. Compare tax software  The contribution limit to your traditional IRA for 2013 will be increased to the smaller of the following amounts: $5,500, or Your taxable compensation for the year. Compare tax software If you were age 50 or older before 2014, the most that can be contributed to your traditional IRA for 2013 will be the smaller of the following amounts: $6,500, or Your taxable compensation for the year. Compare tax software For more information, see How Much Can Be Contributed? later. Compare tax software Roth IRA contribution limit. Compare tax software  If contributions on your behalf are made only to Roth IRAs, your contribution limit for 2013 will generally be the lesser of: $5,500, or Your taxable compensation for the year. Compare tax software If you were age 50 or older before 2014 and contributions on your behalf were made only to Roth IRAs, your contribution limit for 2013 will generally be the lesser of: $6,500, or Your taxable compensation for the year. Compare tax software However, if your modified adjusted gross income (AGI) is above a certain amount, your contribution limit may be reduced. Compare tax software For more information, see How Much Can Be Contributed? under Can You Contribute to a Roth IRA? later. Compare tax software Modified AGI limit for traditional IRA contributions increased. Compare tax software  For 2013, if you were covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified AGI is: More than $95,000 but less than $115,000 for a married couple filing a joint return or a qualifying widow(er), More than $59,000 but less than $69,000 for a single individual or head of household, or Less than $10,000 for a married individual filing a separate return. Compare tax software If you either lived with your spouse or file a joint return, and your spouse was covered by a retirement plan at work, but you were not, your deduction is phased out if your modified AGI is more than $178,000 but less than $188,000. Compare tax software If your modified AGI is $188,000 or more, you cannot take a deduction for contributions to a traditional IRA. Compare tax software See How Much Can You Deduct , later. Compare tax software Modified AGI limit for Roth IRA contributions increased. Compare tax software  For 2013, your Roth IRA contribution limit is reduced (phased out) in the following situations. Compare tax software Your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $178,000. Compare tax software You cannot make a Roth IRA contribution if your modified AGI is $188,000 or more. Compare tax software Your filing status is single, head of household, or married filing separately and you did not live with your spouse at any time in 2013 and your modified AGI is at least $112,000. Compare tax software You cannot make a Roth IRA contribution if your modified AGI is $127,000 or more. Compare tax software Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than -0-. Compare tax software You cannot make a Roth IRA contribution if your modified AGI is $10,000 or more. Compare tax software See Can You Contribute to a Roth IRA , later. Compare tax software Net Investment Income Tax. Compare tax software   For purposes of the Net Investment Income Tax (NIIT), net investment income does not include distributions from a qualified retirement plan including IRAs (for example; 401(a), 403(a), 403(b), 408, 408A, or 457(b) plans). Compare tax software However, these distributions are taken into account when determining the modified adjusted gross income threshold. Compare tax software Distributions from a nonqualified retirement plan are included in net investment income. Compare tax software See Form 8960, Net Investment Income Tax - Individuals, Estates, and Trusts, and its instructions for more information. Compare tax software Name change. Compare tax software  All spousal IRAs have been renamed Kay Bailey Hutchison Spousal IRAs. Compare tax software There are no changes to the rules regarding these IRAs. Compare tax software See Kay Bailey Hutchison Spousal IRA Limit , later, for more information. Compare tax software Reminders 2014 limits. Compare tax software   You can find information about the 2014 contribution and AGI limits in Publication 590. Compare tax software Contributions to both traditional and Roth IRAs. Compare tax software   For information on your combined contribution limit if you contribute to both traditional and Roth IRAs, see Roth IRAs and traditional IRAs under How Much Can Be Contributed? in Roth IRAs, later. Compare tax software Statement of required minimum distribution. Compare tax software  If a minimum distribution from your IRA is required, the trustee, custodian, or issuer that held the IRA at the end of the preceding year must either report the amount of the required minimum distribution to you, or offer to calculate it for you. Compare tax software The report or offer must include the date by which the amount must be distributed. Compare tax software The report is due January 31 of the year in which the minimum distribution is required. Compare tax software It can be provided with the year-end fair market value statement that you normally get each year. Compare tax software No report is required for IRAs of owners who have died. Compare tax software IRA interest. Compare tax software  Although interest earned from your IRA is generally not taxed in the year earned, it is not tax-exempt interest. Compare tax software Tax on your traditional IRA is generally deferred until you take a distribution. Compare tax software Do not report this interest on your tax return as tax-exempt interest. Compare tax software Form 8606. Compare tax software   To designate contributions as nondeductible, you must file Form 8606, Nondeductible IRAs. Compare tax software The term “50 or older” is used several times in this chapter. Compare tax software It refers to an IRA owner who is age 50 or older by the end of the tax year. Compare tax software Introduction An individual retirement arrangement (IRA) is a personal savings plan that gives you tax advantages for setting aside money for your retirement. Compare tax software This chapter discusses the following topics. Compare tax software The rules for a traditional IRA (any IRA that is not a Roth or SIMPLE IRA). Compare tax software The Roth IRA, which features nondeductible contributions and tax-free distributions. Compare tax software Simplified Employee Pensions (SEPs) and Savings Incentive Match Plans for Employees (SIMPLEs) are not discussed in this chapter. Compare tax software For more information on these plans and employees' SEP IRAs and SIMPLE IRAs that are part of these plans, see Publications 560 and 590. Compare tax software For information about contributions, deductions, withdrawals, transfers, rollovers, and other transactions, see Publication 590. Compare tax software Useful Items - You may want to see: Publication 560 Retirement Plans for Small Business 590 Individual Retirement Arrangements (IRAs) Form (and Instructions) 5329 Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts 8606 Nondeductible IRAs Traditional IRAs In this chapter, the original IRA (sometimes called an ordinary or regular IRA) is referred to as a “traditional IRA. Compare tax software ” A traditional IRA is any IRA that is not a Roth IRA or a SIMPLE IRA. Compare tax software Two advantages of a traditional IRA are: You may be able to deduct some or all of your contributions to it, depending on your circumstances, and Generally, amounts in your IRA, including earnings and gains, are not taxed until they are distributed. Compare tax software Who Can Open a Traditional IRA? You can open and make contributions to a traditional IRA if: You (or, if you file a joint return, your spouse) received taxable compensation during the year, and You were not age 70½ by the end of the year. Compare tax software What is compensation?   Generally, compensation is what you earn from working. Compare tax software Compensation includes wages, salaries, tips, professional fees, bonuses, and other amounts you receive for providing personal services. Compare tax software The IRS treats as compensation any amount properly shown in box 1 (Wages, tips, other compensation) of Form W-2, Wage and Tax Statement, provided that amount is reduced by any amount properly shown in box 11 (Nonqualified plans). Compare tax software   Scholarship and fellowship payments are compensation for this purpose only if shown in box 1 of Form W-2. Compare tax software   Compensation also includes commissions and taxable alimony and separate maintenance payments. Compare tax software Self-employment income. Compare tax software   If you are self-employed (a sole proprietor or a partner), compensation is the net earnings from your trade or business (provided your personal services are a material income-producing factor) reduced by the total of: The deduction for contributions made on your behalf to retirement plans, and The deductible part of your self-employment tax. Compare tax software   Compensation includes earnings from self-employment even if they are not subject to self-employment tax because of your religious beliefs. Compare tax software Nontaxable combat pay. Compare tax software   For IRA purposes, if you were a member of the U. Compare tax software S. Compare tax software Armed Forces, your compensation includes any nontaxable combat pay you receive. Compare tax software What is not compensation?   Compensation does not include any of the following items. Compare tax software Earnings and profits from property, such as rental income, interest income, and dividend income. Compare tax software Pension or annuity income. Compare tax software Deferred compensation received (compensation payments postponed from a past year). Compare tax software Income from a partnership for which you do not provide services that are a material income-producing factor. Compare tax software Conservation Reserve Program (CRP) payments reported on Schedule SE (Form 1040), line 1b. Compare tax software Any amounts (other than combat pay) you exclude from income, such as foreign earned income and housing costs. Compare tax software When and How Can a Traditional IRA Be Opened? You can open a traditional IRA at any time. Compare tax software However, the time for making contributions for any year is limited. Compare tax software See When Can Contributions Be Made , later. Compare tax software You can open different kinds of IRAs with a variety of organizations. Compare tax software You can open an IRA at a bank or other financial institution or with a mutual fund or life insurance company. Compare tax software You can also open an IRA through your stockbroker. Compare tax software Any IRA must meet Internal Revenue Code requirements. Compare tax software Kinds of traditional IRAs. Compare tax software   Your traditional IRA can be an individual retirement account or annuity. Compare tax software It can be part of either a simplified employee pension (SEP) or an employer or employee association trust account. Compare tax software How Much Can Be Contributed? There are limits and other rules that affect the amount that can be contributed to a traditional IRA. Compare tax software These limits and other rules are explained below. Compare tax software Community property laws. Compare tax software   Except as discussed later under Kay Bailey Hutchison Spousal IRA limit , each spouse figures his or her limit separately, using his or her own compensation. Compare tax software This is the rule even in states with community property laws. Compare tax software Brokers' commissions. Compare tax software   Brokers' commissions paid in connection with your traditional IRA are subject to the contribution limit. Compare tax software Trustees' fees. Compare tax software   Trustees' administrative fees are not subject to the contribution limit. Compare tax software Qualified reservist repayments. Compare tax software   If you are (or were) a member of a reserve component and you were ordered or called to active duty after September 11, 2001, you may be able to contribute (repay) to an IRA amounts equal to any qualified reservist distributions you received. Compare tax software You can make these repayment contributions even if they would cause your total contributions to the IRA to be more than the general limit on contributions. Compare tax software To be eligible to make these repayment contributions, you must have received a qualified reservist distribution from an IRA or from a section 401(k) or 403(b) plan or similar arrangement. Compare tax software   For more information, see Qualified reservist repayments under How Much Can Be Contributed? in chapter 1 of Publication 590. Compare tax software Contributions on your behalf to a traditional IRA reduce your limit for contributions to a Roth IRA. Compare tax software (See Roth IRAs, later. Compare tax software ) General limit. Compare tax software   For 2013, the most that can be contributed to your traditional IRA generally is the smaller of the following amounts. Compare tax software $5,500 ($6,500 if you are 50 or older). Compare tax software Your taxable compensation (defined earlier) for the year. Compare tax software This is the most that can be contributed regardless of whether the contributions are to one or more traditional IRAs or whether all or part of the contributions are nondeductible. Compare tax software (See Nondeductible Contributions , later. Compare tax software ) Qualified reservist repayments do not affect this limit. Compare tax software Example 1. Compare tax software Betty, who is 34 years old and single, earned $24,000 in 2013. Compare tax software Her IRA contributions for 2013 are limited to $5,500. Compare tax software Example 2. Compare tax software John, an unmarried college student working part time, earned $3,500 in 2013. Compare tax software His IRA contributions for 2013 are limited to $3,500, the amount of his compensation. Compare tax software Kay Bailey Hutchison Spousal IRA limit. Compare tax software   For 2013, if you file a joint return and your taxable compensation is less than that of your spouse, the most that can be contributed for the year to your IRA is the smaller of the following amounts. Compare tax software $5,500 ($6,500 if you are 50 or older). Compare tax software The total compensation includible in the gross income of both you and your spouse for the year, reduced by the following two amounts. Compare tax software Your spouse's IRA contribution for the year to a traditional IRA. Compare tax software Any contribution for the year to a Roth IRA on behalf of your spouse. Compare tax software This means that the total combined contributions that can be made for the year to your IRA and your spouse's IRA can be as much as $11,000 ($12,000 if only one of you is 50 or older, or $13,000 if both of you are 50 or older). Compare tax software When Can Contributions Be Made? As soon as you open your traditional IRA, contributions can be made to it through your chosen sponsor (trustee or other administrator). Compare tax software Contributions must be in the form of money (cash, check, or money order). Compare tax software Property cannot be contributed. Compare tax software Contributions must be made by due date. Compare tax software   Contributions can be made to your traditional IRA for a year at any time during the year or by the due date for filing your return for that year, not including extensions. Compare tax software Age 70½ rule. Compare tax software   Contributions cannot be made to your traditional IRA for the year in which you reach age 70½ or for any later year. Compare tax software   You attain age 70½ on the date that is 6 calendar months after the 70th anniversary of your birth. Compare tax software If you were born on or before June 30, 1943, you cannot contribute for 2013 or any later year. Compare tax software Designating year for which contribution is made. Compare tax software   If an amount is contributed to your traditional IRA between January 1 and April 15, you should tell the sponsor which year (the current year or the previous year) the contribution is for. Compare tax software If you do not tell the sponsor which year it is for, the sponsor can assume, and report to the IRS, that the contribution is for the current year (the year the sponsor received it). Compare tax software Filing before a contribution is made. Compare tax software   You can file your return claiming a traditional IRA contribution before the contribution is actually made. Compare tax software Generally, the contribution must be made by the due date of your return, not including extensions. Compare tax software Contributions not required. Compare tax software   You do not have to contribute to your traditional IRA for every tax year, even if you can. Compare tax software How Much Can You Deduct? Generally, you can deduct the lesser of: The contributions to your traditional IRA for the year, or The general limit (or the Kay Bailey Hutchison Spousal IRA limit, if it applies). Compare tax software However, if you or your spouse was covered by an employer retirement plan, you may not be able to deduct this amount. Compare tax software See Limit If Covered by Employer Plan , later. Compare tax software You may be able to claim a credit for contributions to your traditional IRA. Compare tax software For more information, see chapter 37. Compare tax software Trustees' fees. Compare tax software   Trustees' administrative fees that are billed separately and paid in connection with your traditional IRA are not deductible as IRA contributions. Compare tax software However, they may be deductible as a miscellaneous itemized deduction on Schedule A (Form 1040). Compare tax software See chapter 28. Compare tax software Brokers' commissions. Compare tax software   Brokers' commissions are part of your IRA contribution and, as such, are deductible subject to the limits. Compare tax software Full deduction. Compare tax software   If neither you nor your spouse was covered for any part of the year by an employer retirement plan, you can take a deduction for total contributions to one or more traditional IRAs of up to the lesser of: $5,500 ($6,500 if you are age 50 or older in 2013). Compare tax software 100% of your compensation. Compare tax software This limit is reduced by any contributions made to a 501(c)(18) plan on your behalf. Compare tax software Kay Bailey Hutchison Spousal IRA. Compare tax software   In the case of a married couple with unequal compensation who file a joint return, the deduction for contributions to the traditional IRA of the spouse with less compensation is limited to the lesser of the following amounts. Compare tax software $5,500 ($6,500 if the spouse with the lower compensation is age 50 or older in 2013). Compare tax software The total compensation includible in the gross income of both spouses for the year reduced by the following three amounts. Compare tax software The IRA deduction for the year of the spouse with the greater compensation. Compare tax software Any designated nondeductible contribution for the year made on behalf of the spouse with the greater compensation. Compare tax software Any contributions for the year to a Roth IRA on behalf of the spouse with the greater compensation. Compare tax software This limit is reduced by any contributions to a 501(c)(18) plan on behalf of the spouse with the lesser compensation. Compare tax software Note. Compare tax software If you were divorced or legally separated (and did not remarry) before the end of the year, you cannot deduct any contributions to your spouse's IRA. Compare tax software After a divorce or legal separation, you can deduct only contributions to your own IRA. Compare tax software Your deductions are subject to the rules for single individuals. Compare tax software Covered by an employer retirement plan. Compare tax software   If you or your spouse was covered by an employer retirement plan at any time during the year for which contributions were made, your deduction may be further limited. Compare tax software This is discussed later under Limit If Covered by Employer Plan . Compare tax software Limits on the amount you can deduct do not affect the amount that can be contributed. Compare tax software See Nondeductible Contributions , later. Compare tax software Are You Covered by an Employer Plan? The Form W-2 you receive from your employer has a box used to indicate whether you were covered for the year. Compare tax software The “Retirement plan” box should be checked if you were covered. Compare tax software Reservists and volunteer firefighters should also see Situations in Which You Are Not Covered by an Employer Plan , later. Compare tax software If you are not certain whether you were covered by your employer's retirement plan, you should ask your employer. Compare tax software Federal judges. Compare tax software   For purposes of the IRA deduction, federal judges are covered by an employer retirement plan. Compare tax software For Which Year(s) Are You Covered by an Employer Plan? Special rules apply to determine the tax years for which you are covered by an employer plan. Compare tax software These rules differ depending on whether the plan is a defined contribution plan or a defined benefit plan. Compare tax software Tax year. Compare tax software   Your tax year is the annual accounting period you use to keep records and report income and expenses on your income tax return. Compare tax software For almost all people, the tax year is the calendar year. Compare tax software Defined contribution plan. Compare tax software   Generally, you are covered by a defined contribution plan for a tax year if amounts are contributed or allocated to your account for the plan year that ends with or within that tax year. Compare tax software   A defined contribution plan is a plan that provides for a separate account for each person covered by the plan. Compare tax software Types of defined contribution plans include profit-sharing plans, stock bonus plans, and money purchase pension plans. Compare tax software Defined benefit plan. Compare tax software   If you are eligible to participate in your employer's defined benefit plan for the plan year that ends within your tax year, you are covered by the plan. Compare tax software This rule applies even if you: Declined to participate in the plan, Did not make a required contribution, or Did not perform the minimum service required to accrue a benefit for the year. Compare tax software   A defined benefit plan is any plan that is not a defined contribution plan. Compare tax software Defined benefit plans include pension plans and annuity plans. Compare tax software No vested interest. Compare tax software   If you accrue a benefit for a plan year, you are covered by that plan even if you have no vested interest in (legal right to) the accrual. Compare tax software Situations in Which You Are Not Covered by an Employer Plan Unless you are covered under another employer plan, you are not covered by an employer plan if you are in one of the situations described below. Compare tax software Social security or railroad retirement. Compare tax software   Coverage under social security or railroad retirement is not coverage under an employer retirement plan. Compare tax software Benefits from a previous employer's plan. Compare tax software   If you receive retirement benefits from a previous employer's plan, you are not covered by that plan. Compare tax software Reservists. Compare tax software   If the only reason you participate in a plan is because you are a member of a reserve unit of the armed forces, you may not be covered by the plan. Compare tax software You are not covered by the plan if both of the following conditions are met. Compare tax software The plan you participate in is established for its employees by: The United States, A state or political subdivision of a state, or An instrumentality of either (a) or (b) above. Compare tax software You did not serve more than 90 days on active duty during the year (not counting duty for training). Compare tax software Volunteer firefighters. Compare tax software   If the only reason you participate in a plan is because you are a volunteer firefighter, you may not be covered by the plan. Compare tax software You are not covered by the plan if both of the following conditions are met. Compare tax software The plan you participate in is established for its employees by: The United States, A state or political subdivision of a state, or An instrumentality of either (a) or (b) above. Compare tax software Your accrued retirement benefits at the beginning of the year will not provide more than $1,800 per year at retirement. Compare tax software Limit If Covered by Employer Plan If either you or your spouse was covered by an employer retirement plan, you may be entitled to only a partial (reduced) deduction or no deduction at all, depending on your income and your filing status. Compare tax software Your deduction begins to decrease (phase out) when your income rises above a certain amount and is eliminated altogether when it reaches a higher amount. Compare tax software These amounts vary depending on your filing status. Compare tax software To determine if your deduction is subject to phaseout, you must determine your modified adjusted gross income (AGI) and your filing status. Compare tax software See Filing status and Modified adjusted gross income (AGI) , later. Compare tax software Then use Table 17-1 or 17-2 to determine if the phaseout applies. Compare tax software Social security recipients. Compare tax software   Instead of using Table 17-1 or Table 17-2, use the worksheets in Appendix B of Publication 590 if, for the year, all of the following apply. Compare tax software You received social security benefits. Compare tax software You received taxable compensation. Compare tax software Contributions were made to your traditional IRA. Compare tax software You or your spouse was covered by an employer retirement plan. Compare tax software Use those worksheets to figure your IRA deduction, your nondeductible contribution, and the taxable portion, if any, of your social security benefits. Compare tax software Deduction phaseout. Compare tax software   If you were covered by an employer retirement plan and you did not receive any social security retirement benefits, your IRA deduction may be reduced or eliminated depending on your filing status and modified AGI as shown in Table 17-1. Compare tax software Table 17-1. Compare tax software Effect of Modified AGI1 on Deduction if You Are Covered by Retirement Plan at Work If you are covered by a retirement plan at work, use this table to determine if your modified AGI affects the amount of your deduction. Compare tax software IF your filing status is. Compare tax software . Compare tax software . Compare tax software   AND your modified AGI is. Compare tax software . Compare tax software . Compare tax software   THEN you can take. Compare tax software . Compare tax software . Compare tax software single   or  head of household   $59,000 or less   a full deduction. Compare tax software   more than $59,000 but less than $69,000   a partial deduction. Compare tax software   $69,000 or more   no deduction. Compare tax software married filing jointly   or  qualifying widow(er)   $95,000 or less   a full deduction. Compare tax software   more than $95,000 but less than $115,000   a partial deduction. Compare tax software   $115,000 or more   no deduction. Compare tax software married filing separately2   less than $10,000   a partial deduction. Compare tax software   $10,000 or more   no deduction. Compare tax software 1Modified AGI (adjusted gross income). Compare tax software See Modified adjusted gross income (AGI) . Compare tax software 2If you did not live with your spouse at any time during the year, your filing status is considered Single for this purpose (therefore, your IRA deduction is determined under the “Single” column). Compare tax software If your spouse is covered. Compare tax software   If you are not covered by an employer retirement plan, but your spouse is, and you did not receive any social security benefits, your IRA deduction may be reduced or eliminated entirely depending on your filing status and modified AGI as shown in Table 17-2. Compare tax software Filing status. Compare tax software   Your filing status depends primarily on your marital status. Compare tax software For this purpose, you need to know if your filing status is single or head of household, married filing jointly or qualifying widow(er), or married filing separately. Compare tax software If you need more information on filing status, see chapter 2. Compare tax software Lived apart from spouse. Compare tax software   If you did not live with your spouse at any time during the year and you file a separate return, your filing status, for this purpose, is single. Compare tax software Table 17-2. Compare tax software Effect of Modified AGI1 on Deduction if You Are NOT Covered by Retirement Plan at Work If you are not covered by a retirement plan at work, use this table to determine if your modified AGI affects the amount of your deduction. Compare tax software IF your filing status is. Compare tax software . Compare tax software . Compare tax software   AND your modified AGI is. Compare tax software . Compare tax software . Compare tax software   THEN you can take. Compare tax software . Compare tax software . Compare tax software single, head of household, or qualifying widow(er)   any amount   a full deduction. Compare tax software married filing jointly or separately with a spouse who is not covered by a plan at work   any amount   a full deduction. Compare tax software married filing jointly with a spouse who is covered by a plan at work   $178,000 or less   a full deduction. Compare tax software   more than $178,000 but less than $188,000   a partial deduction. Compare tax software   $188,000 or more   no deduction. Compare tax software married filing separately with a spouse who is covered by a plan at work2   less than $10,000   a partial deduction. Compare tax software   $10,000 or more   no deduction. Compare tax software 1Modified AGI (adjusted gross income). Compare tax software See Modified adjusted gross income (AGI) . Compare tax software 2You are entitled to the full deduction if you did not live with your spouse at any time during the year. Compare tax software Modified adjusted gross income (AGI). Compare tax software   How you figure your modified AGI depends on whether you are filing Form 1040 or Form 1040A. Compare tax software If you made contributions to your IRA for 2013 and received a distribution from your IRA in 2013, see Publication 590. Compare tax software You may be able to use Worksheet 17-1 to figure your modified AGI. Compare tax software    Do not assume that your modified AGI is the same as your compensation. Compare tax software Your modified AGI may include income in addition to your compensation (discussed earlier), such as interest, dividends, and income from IRA distributions. Compare tax software Form 1040. Compare tax software   If you file Form 1040, refigure the amount on the page 1 “adjusted gross income” line without taking into account any of the following eight amounts. Compare tax software IRA deduction. Compare tax software Student loan interest deduction. Compare tax software Tuition and fees deduction. Compare tax software Domestic production activities deduction. Compare tax software Foreign earned income exclusion. Compare tax software Foreign housing exclusion or deduction. Compare tax software Exclusion of qualified savings bond interest shown on Form 8815, Exclusion of Interest From Series EE and I U. Compare tax software S. Compare tax software Savings Bonds Issued After 1989. Compare tax software Exclusion of employer-provided adoption benefits shown on Form 8839, Qualified Adoption Expenses. Compare tax software This is your modified AGI. Compare tax software Form 1040A. Compare tax software   If you file Form 1040A, refigure the amount on the page 1 “adjusted gross income” line without taking into account any of the following amounts. Compare tax software IRA deduction. Compare tax software Student loan interest deduction. Compare tax software Tuition and fees deduction. Compare tax software Exclusion of qualified savings bond interest shown on Form 8815. Compare tax software This is your modified AGI. Compare tax software Both contributions for 2013 and distributions in 2013. Compare tax software   If all three of the following apply, any IRA distributions you received in 2013 may be partly tax free and partly taxable. Compare tax software You received distributions in 2013 from one or more traditional IRAs. Compare tax software You made contributions to a traditional IRA for 2013. Compare tax software Some of those contributions may be nondeductible contributions. Compare tax software If this is your situation, you must figure the taxable part of the traditional IRA distribution before you can figure your modified AGI. Compare tax software To do this, you can use Worksheet 1-5, Figuring the Taxable Part of Your IRA Distribution, in Publication 590. Compare tax software   If at least one of the above does not apply, figure your modified AGI using Worksheet 17-1, later. Compare tax software    How to figure your reduced IRA deduction. Compare tax software   You can figure your reduced IRA deduction for either Form 1040 or Form 1040A by using the worksheets in chapter 1 of Publication 590. Compare tax software Also, the instructions for Form 1040 and Form 1040A include similar worksheets that you may be able to use instead. Compare tax software Worksheet 17-1. Compare tax software Figuring Your Modified AGI Use this worksheet to figure your modified adjusted gross income for traditional IRA purposes. Compare tax software 1. Compare tax software Enter your adjusted gross income (AGI) from Form 1040, line 38, or Form 1040A, line 22, figured without taking into account the amount from Form 1040, line 32, or Form 1040A, line 17 1. Compare tax software   2. Compare tax software Enter any student loan interest deduction from Form 1040, line 33, or Form 1040A, line 18 2. Compare tax software   3. Compare tax software Enter any tuition and fees deduction from Form 1040, line 34, or Form 1040A, line 19 3. Compare tax software   4. Compare tax software Enter any domestic production activities deduction from Form 1040, line 35 4. Compare tax software   5. Compare tax software Enter any foreign earned income and/or housing exclusion from Form 2555, line 45, or Form 2555-EZ, line 18 5. Compare tax software   6. Compare tax software Enter any foreign housing deduction from Form 2555, line 50 6. Compare tax software   7. Compare tax software Enter any excludable savings bond interest from Form 8815, line 14 7. Compare tax software   8. Compare tax software Enter any excluded employer-provided adoption benefits from Form 8839, line 28 8. Compare tax software   9. Compare tax software Add lines 1 through 8. Compare tax software This is your Modified AGI for traditional IRA purposes 9. Compare tax software   Reporting Deductible Contributions If you file Form 1040, enter your IRA deduction on line 32 of that form. Compare tax software If you file Form 1040A, enter your IRA deduction on line 17. Compare tax software You cannot deduct IRA contributions on Form 1040EZ. Compare tax software Nondeductible Contributions Although your deduction for IRA contributions may be reduced or eliminated, contributions can be made to your IRA up to the general limit or, if it applies, the Kay Bailey Hutchison Spousal IRA limit. Compare tax software The difference between your total permitted contributions and your IRA deduction, if any, is your nondeductible contribution. Compare tax software Example. Compare tax software Mike is 28 years old and single. Compare tax software In 2013, he was covered by a retirement plan at work. Compare tax software His salary was $57,312. Compare tax software His modified AGI was $70,000. Compare tax software Mike made a $5,500 IRA contribution for 2013. Compare tax software Because he was covered by a retirement plan and his modified AGI was over $69,000, he cannot deduct his $5,500 IRA contribution. Compare tax software He must designate this contribution as a nondeductible contribution by reporting it on Form 8606, as explained next. Compare tax software Form 8606. Compare tax software   To designate contributions as nondeductible, you must file Form 8606. Compare tax software   You do not have to designate a contribution as nondeductible until you file your tax return. Compare tax software When you file, you can even designate otherwise deductible contributions as nondeductible. Compare tax software   You must file Form 8606 to report nondeductible contributions even if you do not have to file a tax return for the year. Compare tax software A Form 8606 is not used for the year that you make a rollover from a qualified retirement plan to a traditional IRA and the rollover includes nontaxable amounts. Compare tax software In those situations, a Form 8606 is completed for the year you take a distribution from that IRA. Compare tax software See Form 8606 under Distributions Fully or Partly Taxable, later. Compare tax software Failure to report nondeductible contributions. Compare tax software   If you do not report nondeductible contributions, all of the contributions to your traditional IRA will be treated as deductible contributions when withdrawn. Compare tax software All distributions from your IRA will be taxed unless you can show, with satisfactory evidence, that nondeductible contributions were made. Compare tax software Penalty for overstatement. Compare tax software   If you overstate the amount of nondeductible contributions on your Form 8606 for any tax year, you must pay a penalty of $100 for each overstatement, unless it was due to reasonable cause. Compare tax software Penalty for failure to file Form 8606. Compare tax software   You will have to pay a $50 penalty if you do not file a required Form 8606, unless you can prove that the failure was due to reasonable cause. Compare tax software    Tax on earnings on nondeductible contributions. Compare tax software   As long as contributions are within the contribution limits, none of the earnings or gains on contributions (deductible or nondeductible) will be taxed until they are distributed. Compare tax software See When Can You Withdraw or Use IRA Assets , later. Compare tax software Cost basis. Compare tax software   You will have a cost basis in your traditional IRA if you made any nondeductible contributions. Compare tax software Your cost basis is the sum of the nondeductible contributions to your IRA minus any withdrawals or distributions of nondeductible contributions. Compare tax software Inherited IRAs If you inherit a traditional IRA, you are called a beneficiary. Compare tax software A beneficiary can be any person or entity the owner chooses to receive the benefits of the IRA after he or she dies. Compare tax software Beneficiaries of a traditional IRA must include in their gross income any taxable distributions they receive. Compare tax software Inherited from spouse. Compare tax software   If you inherit a traditional IRA from your spouse, you generally have the following three choices. Compare tax software You can: Treat it as your own IRA by designating yourself as the account owner. Compare tax software Treat it as your own by rolling it over into your IRA, or to the extent it is taxable, into a: Qualified employer plan, Qualified employee annuity plan (section 403(a) plan), Tax-sheltered annuity plan (section 403(b) plan), or Deferred compensation plan of a state or local government (section 457 plan). Compare tax software Treat yourself as the beneficiary rather than treating the IRA as your own. Compare tax software Treating it as your own. Compare tax software   You will be considered to have chosen to treat the IRA as your own if: Contributions (including rollover contributions) are made to the inherited IRA, or You do not take the required minimum distribution for a year as a beneficiary of the IRA. Compare tax software You will only be considered to have chosen to treat the IRA as your own if: You are the sole beneficiary of the IRA, and You have an unlimited right to withdraw amounts from it. Compare tax software   However, if you receive a distribution from your deceased spouse's IRA, you can roll that distribution over into your own IRA within the 60-day time limit, as long as the distribution is not a required distribution, even if you are not the sole beneficiary of your deceased spouse's IRA. Compare tax software Inherited from someone other than spouse. Compare tax software   If you inherit a traditional IRA from anyone other than your deceased spouse, you cannot treat the inherited IRA as your own. Compare tax software This means that you cannot make any contributions to the IRA. Compare tax software It also means you cannot roll over any amounts into or out of the inherited IRA. Compare tax software However, you can make a trustee-to-trustee transfer as long as the IRA into which amounts are being moved is set up and maintained in the name of the deceased IRA owner for the benefit of you as beneficiary. Compare tax software For more information, see the discussion of inherited IRAs under Rollover From One IRA Into Another, later. Compare tax software Can You Move Retirement Plan Assets? You can transfer, tax free, assets (money or property) from other retirement plans (including traditional IRAs) to a traditional IRA. Compare tax software You can make the following kinds of transfers. Compare tax software Transfers from one trustee to another. Compare tax software Rollovers. Compare tax software Transfers incident to a divorce. Compare tax software Transfers to Roth IRAs. Compare tax software   Under certain conditions, you can move assets from a traditional IRA or from a designated Roth account to a Roth IRA. Compare tax software You can also move assets from a qualified retirement plan to a Roth IRA. Compare tax software See Can You Move Amounts Into a Roth IRA? under Roth IRAs, later. Compare tax software Trustee-to-Trustee Transfer A transfer of funds in your traditional IRA from one trustee directly to another, either at your request or at the trustee's request, is not a rollover. Compare tax software Because there is no distribution to you, the transfer is tax free. Compare tax software Because it is not a rollover, it is not affected by the 1-year waiting period required between rollovers, discussed later under Rollover From One IRA Into Another . Compare tax software For information about direct transfers to IRAs from retirement plans other than IRAs, see Can You Move Retirement Plan Assets? in chapter 1 and Can You Move Amounts Into a Roth IRA? in chapter 2 of Publication 590. Compare tax software Rollovers Generally, a rollover is a tax-free distribution to you of cash or other assets from one retirement plan that you contribute (roll over) to another retirement plan. Compare tax software The contribution to the second retirement plan is called a “rollover contribution. Compare tax software ” Note. Compare tax software An amount rolled over tax free from one retirement plan to another is generally includible in income when it is distributed from the second plan. Compare tax software Kinds of rollovers to a traditional IRA. Compare tax software   You can roll over amounts from the following plans into a traditional IRA: A traditional IRA, An employer's qualified retirement plan for its employees, A deferred compensation plan of a state or local government (section 457 plan), or A tax-sheltered annuity plan (section 403(b) plan). Compare tax software Treatment of rollovers. Compare tax software   You cannot deduct a rollover contribution, but you must report the rollover distribution on your tax return as discussed later under Reporting rollovers from IRAs and under Reporting rollovers from employer plans . Compare tax software Kinds of rollovers from a traditional IRA. Compare tax software   You may be able to roll over, tax free, a distribution from your traditional IRA into a qualified plan. Compare tax software These plans include the federal Thrift Savings Fund (for federal employees), deferred compensation plans of state or local governments (section 457 plans), and tax-sheltered annuity plans (section 403(b) plans). Compare tax software The part of the distribution that you can roll over is the part that would otherwise be taxable (includible in your income). Compare tax software Qualified plans may, but are not required to, accept such rollovers. Compare tax software Time limit for making a rollover contribution. Compare tax software   You generally must make the rollover contribution by the 60th day after the day you receive the distribution from your traditional IRA or your employer's plan. Compare tax software The IRS may waive the 60-day requirement where the failure to do so would be against equity or good conscience, such as in the event of a casualty, disaster, or other event beyond your reasonable control. Compare tax software For more information, see Can You Move Retirement Plan Assets? in chapter 1 of Publication 590. Compare tax software Extension of rollover period. Compare tax software   If an amount distributed to you from a traditional IRA or a qualified employer retirement plan is a frozen deposit at any time during the 60-day period allowed for a rollover, special rules extend the rollover period. Compare tax software For more information, see Can You Move Retirement Plan Assets? in chapter 1 of Publication 590. Compare tax software More information. Compare tax software   For more information on rollovers, see Can You Move Retirement Plan Assets? in chapter 1 of Publication 590. Compare tax software Rollover From One IRA Into Another You can withdraw, tax free, all or part of the assets from one traditional IRA if you reinvest them within 60 days in the same or another traditional IRA. Compare tax software Because this is a rollover, you cannot deduct the amount that you reinvest in an IRA. Compare tax software Waiting period between rollovers. Compare tax software   Generally, if you make a tax-free rollover of any part of a distribution from a traditional IRA, you cannot, within a 1-year period, make a tax-free rollover of any later distribution from that same IRA. Compare tax software You also cannot make a tax-free rollover of any amount distributed, within the same 1-year period, from the IRA into which you made the tax-free rollover. Compare tax software   The 1-year period begins on the date you receive the IRA distribution, not on the date you roll it over into an IRA. Compare tax software Example. Compare tax software You have two traditional IRAs, IRA-1 and IRA-2. Compare tax software You make a tax-free rollover of a distribution from IRA-1 into a new traditional IRA (IRA-3). Compare tax software You cannot, within 1 year of the distribution from IRA-1, make a tax-free rollover of any distribution from either IRA-1 or IRA-3 into another traditional IRA. Compare tax software However, the rollover from IRA-1 into IRA-3 does not prevent you from making a tax-free rollover from IRA-2 into any other traditional IRA. Compare tax software This is because you have not, within the last year, rolled over, tax free, any distribution from IRA-2 or made a tax-free rollover into IRA-2. Compare tax software Exception. Compare tax software   For an exception for distributions from failed financial institutions, see Rollover From One IRA Into Another under Can You Move Retirement Plan Assets? in chapter 1 of Publication 590. Compare tax software Partial rollovers. Compare tax software   If you withdraw assets from a traditional IRA, you can roll over part of the withdrawal tax free and keep the rest of it. Compare tax software The amount you keep will generally be taxable (except for the part that is a return of nondeductible contributions). Compare tax software The amount you keep may be subject to the 10% additional tax on early distributions, discussed later under What Acts Result in Penalties or Additional Taxes? . Compare tax software Required distributions. Compare tax software   Amounts that must be distributed during a particular year under the required distribution rules (discussed later) are not eligible for rollover treatment. Compare tax software Inherited IRAs. Compare tax software   If you inherit a traditional IRA from your spouse, you generally can roll it over, or you can choose to make the inherited IRA your own. Compare tax software See Treating it as your own , earlier. Compare tax software Not inherited from spouse. Compare tax software   If you inherit a traditional IRA from someone other than your spouse, you cannot roll it over or allow it to receive a rollover contribution. Compare tax software You must withdraw the IRA assets within a certain period. Compare tax software For more information, see When Must You Withdraw Assets? in chapter 1 of Publication 590. Compare tax software Reporting rollovers from IRAs. Compare tax software   Report any rollover from one traditional IRA to the same or another traditional IRA on lines 15a and 15b, Form 1040, or lines 11a and 11b, Form 1040A, as follows. Compare tax software   Enter the total amount of the distribution on Form 1040, line 15a, or Form 1040A, line 11a. Compare tax software If the total amount on Form 1040, line 15a, or Form 1040A, line 11a, was rolled over, enter zero on Form 1040, line 15b, or Form 1040A, line 11b. Compare tax software If the total distribution was not rolled over, enter the taxable portion of the part that was not rolled over on Form 1040, line 15b, or Form 1040A, line 11b. Compare tax software Put “Rollover” next to Form 1040, line 15b, or Form 1040A, line 11b. Compare tax software See your tax return instructions. Compare tax software   If you rolled over the distribution into a qualified plan (other than an IRA) or you make the rollover in 2014, attach a statement explaining what you did. Compare tax software Rollover From Employer's Plan Into an IRA You can roll over into a traditional IRA all or part of an eligible rollover distribution you receive from your (or your deceased spouse's): Employer's qualified pension, profit-sharing, or stock bonus plan; Annuity plan; Tax-sheltered annuity plan (section 403(b) plan); or Governmental deferred compensation plan (section 457 plan). Compare tax software A qualified plan is one that meets the requirements of the Internal Revenue Code. Compare tax software Eligible rollover distribution. Compare tax software   Generally, an eligible rollover distribution is any distribution of all or part of the balance to your credit in a qualified retirement plan except the following. Compare tax software A required minimum distribution (explained later under When Must You Withdraw IRA Assets? (Required Minimum Distributions) ). Compare tax software A hardship distribution. Compare tax software Any of a series of substantially equal periodic distributions paid at least once a year over: Your lifetime or life expectancy, The lifetimes or life expectancies of you and your beneficiary, or A period of 10 years or more. Compare tax software Corrective distributions of excess contributions or excess deferrals, and any income allocable to the excess, or of excess annual additions and any allocable gains. Compare tax software A loan treated as a distribution because it does not satisfy certain requirements either when made or later (such as upon default), unless the participant's accrued benefits are reduced (offset) to repay the loan. Compare tax software Dividends on employer securities. Compare tax software The cost of life insurance coverage. Compare tax software Any nontaxable amounts that you roll over into your traditional IRA become part of your basis (cost) in your IRAs. Compare tax software To recover your basis when you take distributions from your IRA, you must complete Form 8606 for the year of the distribution. Compare tax software See Form 8606 under Distributions Fully or Partly Taxable, later. Compare tax software Rollover by nonspouse beneficiary. Compare tax software   A direct transfer from a deceased employee's qualified pension, profit-sharing, or stock bonus plan; annuity plan; tax-sheltered annuity (section 403(b)) plan; or governmental deferred compensation (section 457) plan to an IRA set up to receive the distribution on your behalf can be treated as an eligible rollover distribution if you are the designated beneficiary of the plan and not the employee's spouse. Compare tax software The IRA is treated as an inherited IRA. Compare tax software For more information about inherited IRAs, see Inherited IRAs , earlier. Compare tax software Reporting rollovers from employer plans. Compare tax software    Enter the total distribution (before income tax or other deductions were withheld) on Form 1040, line 16a, or Form 1040A, line 12a. Compare tax software This amount should be shown in box 1 of Form 1099-R. Compare tax software From this amount, subtract any contributions (usually shown in box 5 of Form 1099-R) that were taxable to you when made. Compare tax software From that result, subtract the amount that was rolled over either directly or within 60 days of receiving the distribution. Compare tax software Enter the remaining amount, even if zero, on Form 1040, line 16b, or Form 1040A, line 12b. Compare tax software Also, enter "Rollover" next to Form 1040, line 16b, or Form 1040A, line 12b. Compare tax software Transfers Incident to Divorce If an interest in a traditional IRA is transferred from your spouse or former spouse to you by a divorce or separate maintenance decree or a written document related to such a decree, the interest in the IRA, starting from the date of the transfer, is treated as your IRA. Compare tax software The transfer is tax free. Compare tax software For detailed information, see Can You Move Retirement Plan Assets? in chapter 1 of Publication 590. Compare tax software Converting From Any Traditional IRA to a Roth IRA Allowable conversions. Compare tax software   You can withdraw all or part of the assets from a traditional IRA and reinvest them (within 60 days) in a Roth IRA. Compare tax software The amount that you withdraw and timely contribute (convert) to the Roth IRA is called a conversion contribution. Compare tax software If properly (and timely) rolled over, the 10% additional tax on early distributions will not apply. Compare tax software However, a part or all of the conversion contribution from your traditional IRA is included in your gross income. Compare tax software Required distributions. Compare tax software   You cannot convert amounts that must be distributed from your traditional IRA for a particular year (including the calendar year in which you reach age 70½) under the required distribution rules (discussed later). Compare tax software Income. Compare tax software   You must include in your gross income distributions from a traditional IRA that you would have had to include in income if you had not converted them into a Roth IRA. Compare tax software These amounts are normally included in income on your return for the year that you converted them from a traditional IRA to a Roth IRA. Compare tax software   You do not include in gross income any part of a distribution from a traditional IRA that is a return of your basis, as discussed later. Compare tax software   You must file Form 8606 to report 2013 conversions from traditional, SEP, or SIMPLE IRAs to a Roth IRA in 2013 (unless you recharacterized the entire amount) and to figure the amount to include in income. Compare tax software   If you must include any amount in your gross income, you may have to increase your withholding or make estimated tax payments. Compare tax software See chapter 4. Compare tax software Recharacterizations You may be able to treat a contribution made to one type of IRA as having been made to a different type of IRA. Compare tax software This is called recharacterizing the contribution. Compare tax software See Can You Move Retirement Plan Assets? in chapter 1 of Publication 590 for more detailed information. Compare tax software How to recharacterize a contribution. Compare tax software   To recharacterize a contribution, you generally must have the contribution transferred from the first IRA (the one to which it was made) to the second IRA in a trustee-to-trustee transfer. Compare tax software If the transfer is made by the due date (including extensions) for your tax return for the year during which the contribution was made, you can elect to treat the contribution as having been originally made to the second IRA instead of to the first IRA. Compare tax software If you recharacterize your contribution, you must do all three of the following. Compare tax software Include in the transfer any net income allocable to the contribution. Compare tax software If there was a loss, the net income you must transfer may be a negative amount. Compare tax software Report the recharacterization on your tax return for the year during which the contribution was made. Compare tax software Treat the contribution as having been made to the second IRA on the date that it was actually made to the first IRA. Compare tax software No deduction allowed. Compare tax software   You cannot deduct the contribution to the first IRA. Compare tax software Any net income you transfer with the recharacterized contribution is treated as earned in the second IRA. Compare tax software Required notifications. Compare tax software   To recharacterize a contribution, you must notify both the trustee of the first IRA (the one to which the contribution was actually made) and the trustee of the second IRA (the one to which the contribution is being moved) that you have elected to treat the contribution as having been made to the second IRA rather than the first. Compare tax software You must make the notifications by the date of the transfer. Compare tax software Only one notification is required if both IRAs are maintained by the same trustee. Compare tax software The notification(s) must include all of the following information. Compare tax software The type and amount of the contribution to the first IRA that is to be recharacterized. Compare tax software The date on which the contribution was made to the first IRA and the year for which it was made. Compare tax software A direction to the trustee of the first IRA to transfer in a trustee-to-trustee transfer the amount of the contribution and any net income (or loss) allocable to the contribution to the trustee of the second IRA. Compare tax software The name of the trustee of the first IRA and the name of the trustee of the second IRA. Compare tax software Any additional information needed to make the transfer. Compare tax software Reporting a recharacterization. Compare tax software   If you elect to recharacterize a contribution to one IRA as a contribution to another IRA, you must report the recharacterization on your tax return as directed by Form 8606 and its instructions. Compare tax software You must treat the contribution as having been made to the second IRA. Compare tax software When Can You Withdraw or Use IRA Assets? There are rules limiting use of your IRA assets and distributions from it. Compare tax software Violation of the rules generally results in additional taxes in the year of violation. Compare tax software See What Acts Result in Penalties or Additional Taxes , later. Compare tax software Contributions returned before the due date of return. Compare tax software   If you made IRA contributions in 2013, you can withdraw them tax free by the due date of your return. Compare tax software If you have an extension of time to file your return, you can withdraw them tax free by the extended due date. Compare tax software You can do this if, for each contribution you withdraw, both of the following conditions apply. Compare tax software You did not take a deduction for the contribution. Compare tax software You withdraw any interest or other income earned on the contribution. Compare tax software You can take into account any loss on the contribution while it was in the IRA when calculating the amount that must be withdrawn. Compare tax software If there was a loss, the net income earned on the contribution may be a negative amount. Compare tax software Note. Compare tax software To calculate the amount you must withdraw, see Worksheet 1-4 under When Can You Withdraw or Use Assets? in chapter 1 of Publication 590. Compare tax software Earnings includible in income. Compare tax software   You must include in income any earnings on the contributions you withdraw. Compare tax software Include the earnings in income for the year in which you made the contributions, not in the year in which you withdraw them. Compare tax software Generally, except for any part of a withdrawal that is a return of nondeductible contributions (basis), any withdrawal of your contributions after the due date (or extended due date) of your return will be treated as a taxable distribution. Compare tax software Excess contributions can also be recovered tax free as discussed under What Acts Result in Penalties or Additional Taxes?, later. Compare tax software    Early distributions tax. Compare tax software   The 10% additional tax on distributions made before you reach age 59½ does not apply to these tax-free withdrawals of your contributions. Compare tax software However, the distribution of interest or other income must be reported on Form 5329 and, unless the distribution qualifies as an exception to the age 59½ rule, it will be subject to this tax. Compare tax software When Must You Withdraw IRA Assets? (Required Minimum Distributions) You cannot keep funds in a traditional IRA indefinitely. Compare tax software Eventually they must be distributed. Compare tax software If there are no distributions, or if the distributions are not large enough, you may have to pay a 50% excise tax on the amount not distributed as required. Compare tax software See Excess Accumulations (Insufficient Distributions) , later. Compare tax software The requirements for distributing IRA funds differ depending on whether you are the IRA owner or the beneficiary of a decedent's IRA. Compare tax software Required minimum distribution. Compare tax software   The amount that must be distributed each year is referred to as the required minimum distribution. Compare tax software Required distributions not eligible for rollover. Compare tax software   Amounts that must be distributed (required minimum distributions) during a particular year are not eligible for rollover treatment. Compare tax software IRA owners. Compare tax software   If you are the owner of a traditional IRA, you must generally start receiving distributions from your IRA by April 1 of the year following the year in which you reach age 70½. Compare tax software April 1 of the year following the year in which you reach age 70½ is referred to as the required beginning date. Compare tax software Distributions by the required beginning date. Compare tax software   You must receive at least a minimum amount for each year starting with the year you reach age 70½ (your 70½ year). Compare tax software If you do not (or did not) receive that minimum amount in your 70½ year, then you must receive distributions for your 70½ year by April 1 of the next year. Compare tax software   If an IRA owner dies after reaching age 70½, but before April 1 of the next year, no minimum distribution is required because death occurred before the required beginning date. Compare tax software Even if you begin receiving distributions before you attain age 70½, you must begin calculating and receiving required minimum distributions by your required beginning date. Compare tax software Distributions after the required beginning date. Compare tax software   The required minimum distribution for any year after the year you turn 70½ must be made by December 31 of that later year. Compare tax software    Beneficiaries. Compare tax software   If you are the beneficiary of a decedent's traditional IRA, the requirements for distributions from that IRA generally depend on whether the IRA owner died before or after the required beginning date for distributions. Compare tax software More information. Compare tax software   For more information, including how to figure your minimum required distribution each year and how to figure your required distribution if you are a beneficiary of a decedent's IRA, see When Must You Withdraw Assets? in chapter 1 of Publication 590. Compare tax software Are Distributions Taxable? In general, distributions from a traditional IRA are taxable in the year you receive them. Compare tax software Exceptions. Compare tax software   Exceptions to distributions from traditional IRAs being taxable in the year you receive them are: Rollovers, Qualified charitable distributions (QCD), discussed later, Tax-free withdrawals of contributions, discussed earlier, and The return of nondeductible contributions, discussed later under Distributions Fully or Partly Taxable . Compare tax software    Although a conversion of a traditional IRA is considered a rollover for Roth IRA purposes, it is not an exception to the rule that distributions from a traditional IRA are taxable in the year you receive them. Compare tax software Conversion distributions are includible in your gross income subject to this rule and the special rules for conversions explained in Converting From Any Traditional IRA Into a Roth IRA under Can You Move Retirement Plan Assets? in chapter 1 of Publication 590. Compare tax software Qualified charitable distributions (QCD). Compare tax software   A QCD is generally a nontaxable distribution made directly by the trustee of your IRA to an organization eligible to receive tax-deductible contributions. Compare tax software Special rules apply if you made a qualified charitable distribution in January 2013 that you elected to treat as made in 2012. Compare tax software See Qualified Charitable Distributions in Publication 590 for more information. Compare tax software Ordinary income. Compare tax software   Distributions from traditional IRAs that you include in income are taxed as ordinary income. Compare tax software No special treatment. Compare tax software   In figuring your tax, you cannot use the 10-year tax option or capital gain treatment that applies to lump-sum distributions from qualified retirement plans. Compare tax software Distributions Fully or Partly Taxable Distributions from your traditional IRA may be fully or partly taxable, depending on whether your IRA includes any nondeductible contributions. Compare tax software Fully taxable. Compare tax software   If only deductible contributions were made to your traditional IRA (or IRAs, if you have more than one), you have no basis in your IRA. Compare tax software Because you have no basis in your IRA, any distributions are fully taxable when received. Compare tax software See Reporting taxable distributions on your return , later. Compare tax software Partly taxable. Compare tax software    If you made nondeductible contributions or rolled over any after-tax amounts to any of your traditional IRAs, you have a cost basis (investment in the contract) equal to the amount of those contributions. Compare tax software These nondeductible contributions are not taxed when they are distributed to you. Compare tax software They are a return of your investment in your IRA. Compare tax software   Only the part of the distribution that represents nondeductible contributions and rolled over after-tax amounts (your cost basis) is tax free. Compare tax software If nondeductible contributions have been made or after-tax amounts have been rolled over to your IRA, distributions consist partly of nondeductible contributions (basis) and partly of deductible contributions, earnings, and gains (if there are any). Compare tax software Until all of your basis has been distributed, each distribution is partly nontaxable and partly taxable. Compare tax software Form 8606. Compare tax software   You must complete Form 8606 and attach it to your return if you receive a distribution from a traditional IRA and have ever made nondeductible contributions or rolled over after-tax amounts to any of your traditional IRAs. Compare tax software Using the form, you will figure the nontaxable distributions for 2013 and your total IRA basis for 2013 and earlier years. Compare tax software Note. Compare tax software If you are required to file Form 8606, but you are not required to file an income tax return, you still must file Form 8606. Compare tax software Send it to the IRS at the time and place you would otherwise file an income tax return. Compare tax software Distributions reported on Form 1099-R. Compare tax software   If you receive a distribution from your traditional IRA, you will receive Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Compare tax software , or a similar statement. Compare tax software IRA distributions are shown in boxes 1 and 2a of Form 1099-R. Compare tax software A number or letter code in box 7 tells you what type of distribution you received from your IRA. Compare tax software Withholding. Compare tax software   Federal income tax is withheld from distributions from traditional IRAs unless you choose not to have tax withheld. Compare tax software See chapter 4. Compare tax software IRA distributions delivered outside the United States. Compare tax software   In general, if you are a U. Compare tax software S. Compare tax software citizen or resident alien and your home address is outside the United States or its possessions, you cannot choose exemption from withholding on distributions from your traditional IRA. Compare tax software Reporting taxable distributions on your return. Compare tax software    Report fully taxable distributions, including early distributions on Form 1040, line 15b, or Form 1040A, line 11b (no entry is required on Form 1040, line 15a, or Form 1040A, line 11a). Compare tax software If only part of the distribution is taxable, enter the total amount on Form 1040, line 15a, or Form 1040A, line 11a, and the taxable part on Form 1040, line 15b, or Form 1040A, line 11b. Compare tax software You cannot report distributions on Form 1040EZ. Compare tax software What Acts Result in Penalties or Additional Taxes? The tax advantages of using traditional IRAs for retirement savings can be offset by additional taxes and penalties if you do not follow the rules. Compare tax software There are additions to the regular tax for using your IRA funds in prohibited transactions. Compare tax software There are also additional taxes for the following activities. Compare tax software Investing in collectibles. Compare tax software Making excess contributions. Compare tax software Taking early distributions. Compare tax software Allowing excess amounts to accumulate (failing to take required distributions). Compare tax software There are penalties for overstating the amount of nondeductible contributions and for failure to file a Form 8606, if required. Compare tax software Prohibited Transactions Generally, a prohibited transaction is any improper use of your traditional IRA by you, your beneficiary, or any disqualified person. Compare tax software Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendent, and any spouse of a lineal descendent). Compare tax software The following are examples of prohibited transactions with a traditional IRA. Compare tax software Borrowing money from it. Compare tax software Selling property to it. Compare tax software Receiving unreasonable compensation for managing it. Compare tax software Using it as security for a loan. Compare tax software Buying property for personal use (present or future) with IRA funds. Compare tax software Effect on an IRA account. Compare tax software   Generally, if you or your beneficiary engages in a prohibited transaction in connection with your traditional IRA account at any time during the year, the account stops being an IRA as of the first day of that year. Compare tax software Effect on you or your beneficiary. Compare tax software   If your account stops being an IRA because you or your beneficiary engaged in a prohibited transaction, the account is treated as distributing all its assets to you at their fair market values on the first day of the year. Compare tax software If the total of those values is more than your basis in the IRA, you will have a taxable gain that is includible in your income. Compare tax software For information on figuring your gain and reporting it in income, see Are Distributions Taxable , earlier. Compare tax software The distribution may be subject to additional taxes or penalties. Compare tax software Taxes on prohibited transactions. Compare tax software   If someone other than the owner or beneficiary of a traditional IRA engages in a prohibited transaction, that person may be liable for certain taxes. Compare tax software In general, there is a 15% tax on the amount of the prohibited transaction and a 100% additional tax if the transaction is not corrected. Compare tax software More information. Compare tax software   For more information on prohibited transactions, see What Acts Result in Penalties or Additional Taxes? in chapter 1 of Publication 590. Compare tax software Investment in Collectibles If your traditional IRA invests in collectibles, the amount invested is considered distributed to you in the year invested. Compare tax software You may have to pay the 10% additional tax on early distributions, discussed later. Compare tax software Collectibles. Compare tax software   These include: Artworks, Rugs, Antiques, Metals, Gems, Stamps, Coins, Alcoholic beverages, and Certain other tangible personal property. Compare tax software Exception. Compare tax software    Your IRA can invest in one, one-half, one-quarter, or one-tenth ounce U. Compare tax software S. Compare tax software gold coins, or one-ounce silver coins minted by the Treasury Department. Compare tax software It can also invest in certain platinum coins and certain gold, silver, palladium, and platinum bullion. Compare tax software Excess Contributions Generally, an excess contribution is the amount contributed to your traditional IRA(s) for the year that is more than the smaller of: The maximum deductible amount for the year. Compare tax software For 2013, this is $5,500 ($6,500 if you are 50 or older), or Your taxable compensation for the year. Compare tax software Tax on excess contributions. Compare tax software   In general, if the excess contributions for a year are not withdrawn by the date your return for the year is due (including extensions), you are subject to a 6% tax. Compare tax software You must pay the 6% tax each year on excess amounts that remain in your traditional IRA at the end of your tax year. Compare tax software The tax cannot be more than 6% of the combined value of all your IRAs as of the end of your tax year. Compare tax software Excess contributions withdrawn by due date of return. Compare tax software   You will not have to pay the 6% tax if you withdraw an excess contribution made during a tax year and you also withdraw interest or other income earned on the excess contribution. Compare tax software You must complete your withdrawal by the date your tax return for that year is due, including extensions. Compare tax software How to treat withdrawn contributions. Compare tax software   Do not include in your gross income an excess contribution that you withdraw from your traditional IRA before your tax return is due if both the following conditions are met. Compare tax software No deduction was allowed for the excess contribution. Compare tax software You withdraw the interest or other income earned on the excess contribution. Compare tax software You can take into account any loss on the contribution while it was in the IRA when calculating the amount that must be withdrawn. Compare tax software If there was a loss, the net income you must withdraw may be a negative amount. Compare tax software How to treat withdrawn interest or other income. Compare tax software   You must include in your gross income the interest or other income that was earned on the excess contribution. Compare tax software Report it on your return for the year in which the excess contribution was made. Compare tax software Your withdrawal of interest or other income may be subject to an additional 10% tax on early distributions, discus
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Compare tax software Publication 936 - Main Content Table of Contents Part I. Compare tax software 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. Compare tax software 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. Compare tax software Home Mortgage Interest This part explains what you can deduct as home mortgage interest. Compare tax software It includes discussions on points, mortgage insurance premiums, and how to report deductible interest on your tax return. Compare tax software Generally, home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). Compare tax software The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan. Compare tax software You can deduct home mortgage interest if all the following conditions are met. Compare tax software You file Form 1040 and itemize deductions on Schedule A (Form 1040). Compare tax software The mortgage is a secured debt on a qualified home in which you have an ownership interest. Compare tax software Secured Debt and Qualified Home are explained later. Compare tax software  Both you and the lender must intend that the loan be repaid. Compare tax software Fully deductible interest. Compare tax software   In most cases, you can deduct all of your home mortgage interest. Compare tax software How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds. Compare tax software   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. Compare tax software (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. Compare tax software ) 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. Compare tax software   The three categories are as follows. Compare tax software Mortgages you took out on or before October 13, 1987 (called grandfathered debt). Compare tax software 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). Compare tax software 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). Compare tax software The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home. Compare tax software   See Part II for more detailed definitions of grandfathered, home acquisition, and home equity debt. Compare tax software    You can use Figure A to check whether your home mortgage interest is fully deductible. Compare tax software This image is too large to be displayed in the current screen. Compare tax software Please click the link to view the image. Compare tax software Figure A. Compare tax software Is My Home Mortgage Interest Fully Deductible? Secured Debt You can deduct your home mortgage interest only if your mortgage is a secured debt. Compare tax software 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. Compare tax software In other words, your mortgage is a secured debt if you put your home up as collateral to protect the interests of the lender. Compare tax software If you cannot pay the debt, your home can then serve as payment to the lender to satisfy (pay) the debt. Compare tax software In this publication, mortgage will refer to secured debt. Compare tax software Debt not secured by home. Compare tax software   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). Compare tax software   A debt is not secured by your home if it once was, but is no longer secured by your home. Compare tax software Wraparound mortgage. Compare tax software   This is not a secured debt unless it is recorded or otherwise perfected under state law. Compare tax software Example. Compare tax software Beth owns a home subject to a mortgage of $40,000. Compare tax software She sells the home for $100,000 to John, who takes it subject to the $40,000 mortgage. Compare tax software Beth continues to make the payments on the $40,000 note. Compare tax software John pays $10,000 down and gives Beth a $90,000 note secured by a wraparound mortgage on the home. Compare tax software Beth does not record or otherwise perfect the $90,000 mortgage under the state law that applies. Compare tax software Therefore, the mortgage is not a secured debt and John cannot deduct any of the interest he pays on it as home mortgage interest. Compare tax software Choice to treat the debt as not secured by your home. Compare tax software   You can choose to treat any debt secured by your qualified home as not secured by the home. Compare tax software This treatment begins with the tax year for which you make the choice and continues for all later tax years. Compare tax software You can revoke your choice only with the consent of the Internal Revenue Service (IRS). Compare tax software   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. Compare tax software 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. Compare tax software Cooperative apartment owner. Compare tax software   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. Compare tax software Qualified Home For you to take a home mortgage interest deduction, your debt must be secured by a qualified home. Compare tax software This means your main home or your second home. Compare tax software A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities. Compare tax software 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. Compare tax software Otherwise, it is considered personal interest and is not deductible. Compare tax software Main home. Compare tax software   You can have only one main home at any one time. Compare tax software This is the home where you ordinarily live most of the time. Compare tax software Second home. Compare tax software   A second home is a home that you choose to treat as your second home. Compare tax software Second home not rented out. Compare tax software   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. Compare tax software You do not have to use the home during the year. Compare tax software Second home rented out. Compare tax software   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. Compare tax software 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. Compare tax software If you do not use the home long enough, it is considered rental property and not a second home. Compare tax software For information on residential rental property, see Publication 527. Compare tax software More than one second home. Compare tax software   If you have more than one second home, you can treat only one as the qualified second home during any year. Compare tax software However, you can change the home you treat as a second home during the year in the following situations. Compare tax software 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. Compare tax software 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. Compare tax software 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. Compare tax software Divided use of your home. Compare tax software   The only part of your home that is considered a qualified home is the part you use for residential living. Compare tax software 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. Compare tax software 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. Compare tax software 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. Compare tax software (See Home Acquisition Debt in Part II. Compare tax software ) Dividing the fair market value may affect your home equity debt limit, also explained in Part II . Compare tax software Renting out part of home. Compare tax software   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. Compare tax software The rented part of your home is used by the tenant primarily for residential living. Compare tax software The rented part of your home is not a self-contained residential unit having separate sleeping, cooking, and toilet facilities. Compare tax software 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. Compare tax software If two persons (and dependents of either) share the same sleeping quarters, they are treated as one tenant. Compare tax software Office in home. Compare tax software   If you have an office in your home that you use in your business, see Publication 587, Business Use of Your Home. Compare tax software It explains how to figure your deduction for the business use of your home, which includes the business part of your home mortgage interest. Compare tax software Home under construction. Compare tax software   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. Compare tax software   The 24-month period can start any time on or after the day construction begins. Compare tax software Home destroyed. Compare tax software   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. Compare tax software This means you can continue to deduct the interest you pay on your home mortgage, subject to the limits described in this publication. Compare tax software   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. Compare tax software   This rule applies to your main home and to a second home that you treat as a qualified home. Compare tax software Time-sharing arrangements. Compare tax software   You can treat a home you own under a time-sharing plan as a qualified home if it meets all the requirements. Compare tax software 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. Compare tax software Rental of time-share. Compare tax software   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. Compare tax software See Second home rented out , earlier, for the use requirement. Compare tax software 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. Compare tax software Married taxpayers. Compare tax software   If you are married and file a joint return, your qualified home(s) can be owned either jointly or by only one spouse. Compare tax software Separate returns. Compare tax software   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. Compare tax software However, if you both consent in writing, then one spouse can take both the main home and a second home into account. Compare tax software Special Situations This section describes certain items that can be included as home mortgage interest and others that cannot. Compare tax software It also describes certain special situations that may affect your deduction. Compare tax software Late payment charge on mortgage payment. Compare tax software   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. Compare tax software Mortgage prepayment penalty. Compare tax software   If you pay off your home mortgage early, you may have to pay a penalty. Compare tax software 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. Compare tax software Sale of home. Compare tax software   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. Compare tax software Example. Compare tax software John and Peggy Harris sold their home on May 7. Compare tax software Through April 30, they made home mortgage interest payments of $1,220. Compare tax software 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. Compare tax software Their mortgage interest deduction is $1,270 ($1,220 + $50). Compare tax software Prepaid interest. Compare tax software   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. Compare tax software You can deduct in each year only the interest that qualifies as home mortgage interest for that year. Compare tax software However, there is an exception that applies to points, discussed later. Compare tax software Mortgage interest credit. Compare tax software    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. Compare tax software Figure the credit on Form 8396, Mortgage Interest Credit. Compare tax software If you take this credit, you must reduce your mortgage interest deduction by the amount of the credit. Compare tax software   See Form 8396 and Publication 530 for more information on the mortgage interest credit. Compare tax software Ministers' and military housing allowance. Compare tax software   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. Compare tax software Hardest Hit Fund and Emergency Homeowners' Loan Programs. Compare tax software   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. Compare tax software 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. Compare tax software 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. Compare tax software 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). Compare tax software 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. Compare tax software Mortgage assistance payments under section 235 of the National Housing Act. Compare tax software   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. Compare tax software You cannot deduct the interest that is paid for you. Compare tax software No other effect on taxes. Compare tax software   Do not include these mortgage assistance payments in your income. Compare tax software Also, do not use these payments to reduce other deductions, such as real estate taxes. Compare tax software Divorced or separated individuals. Compare tax software   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. Compare tax software See the discussion of Payments for jointly-owned home under Alimony in Publication 504, Divorced or Separated Individuals. Compare tax software Redeemable ground rents. Compare tax software   In some states (such as Maryland), you can buy your home subject to a ground rent. Compare tax software A ground rent is an obligation you assume to pay a fixed amount per year on the property. Compare tax software Under this arrangement, you are leasing (rather than buying) the land on which your home is located. Compare tax software   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct them as mortgage interest. Compare tax software   A ground rent is a redeemable ground rent if all of the following are true. Compare tax software Your lease, including renewal periods, is for more than 15 years. Compare tax software You can freely assign the lease. Compare tax software 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. Compare tax software The lessor's interest in the land is primarily a security interest to protect the rental payments to which he or she is entitled. Compare tax software   Payments made to end the lease and to buy the lessor's entire interest in the land are not deductible as mortgage interest. Compare tax software Nonredeemable ground rents. Compare tax software   Payments on a nonredeemable ground rent are not mortgage interest. Compare tax software You can deduct them as rent if they are a business expense or if they are for rental property. Compare tax software Reverse mortgages. Compare tax software   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. Compare tax software With a reverse mortgage, you retain title to your home. Compare tax software 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. Compare tax software Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable. Compare tax software 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. Compare tax software Your deduction may be limited because a reverse mortgage loan generally is subject to the limit on Home Equity Debt discussed in Part II. Compare tax software Rental payments. Compare tax software   If you live in a house before final settlement on the purchase, any payments you make for that period are rent and not interest. Compare tax software This is true even if the settlement papers call them interest. Compare tax software You cannot deduct these payments as home mortgage interest. Compare tax software Mortgage proceeds invested in tax-exempt securities. Compare tax software   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. Compare tax software “Grandfathered debt” and “home equity debt” are defined in Part II of this publication. Compare tax software Refunds of interest. Compare tax software   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. Compare tax software 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. Compare tax software However, you need to include it only up to the amount of the deduction that reduced your tax in the earlier year. Compare tax software This is true whether the interest overcharge was refunded to you or was used to reduce the outstanding principal on your mortgage. Compare tax software If you need to include the refund in income, report it on Form 1040, line 21. Compare tax software   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. Compare tax software For information about Form 1098, see Form 1098, Mortgage Interest Statement , later. Compare tax software   For more information on how to treat refunds of interest deducted in earlier years, see Recoveries in Publication 525, Taxable and Nontaxable Income. Compare tax software Cooperative apartment owner. Compare tax software   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. Compare tax software The patronage dividend is a partial refund to the cooperative housing corporation of mortgage interest it paid in a prior year. Compare tax software   If you receive a Form 1098 from the cooperative housing corporation, the form should show only the amount you can deduct. Compare tax software Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Compare tax software Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. Compare tax software This image is too large to be displayed in the current screen. Compare tax software Please click the link to view the image. Compare tax software Figure B. Compare tax software 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. Compare tax software See Points paid by the seller , later. Compare tax software General Rule You generally cannot deduct the full amount of points in the year paid. Compare tax software Because they are prepaid interest, you generally deduct them ratably over the life (term) of the mortgage. Compare tax software See Deduction Allowed Ratably , next. Compare tax software For exceptions to the general rule, see Deduction Allowed in Year Paid , later. Compare tax software 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. Compare tax software You use the cash method of accounting. Compare tax software This means you report income in the year you receive it and deduct expenses in the year you pay them. Compare tax software Most individuals use this method. Compare tax software Your loan is secured by a home. Compare tax software (The home does not need to be your main home. Compare tax software ) Your loan period is not more than 30 years. Compare tax software 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. Compare tax software 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. Compare tax software Example. Compare tax software You use the cash method of accounting. Compare tax software In 2013, you took out a $100,000 loan payable over 20 years. Compare tax software The terms of the loan are the same as for other 20-year loans offered in your area. Compare tax software You paid $4,800 in points. Compare tax software You made 3 monthly payments on the loan in 2013. Compare tax software You can deduct $60 [($4,800 ÷ 240 months) x 3 payments] in 2013. Compare tax software In 2014, if you make all twelve payments, you will be able to deduct $240 ($20 x 12). Compare tax software Deduction Allowed in Year Paid You can fully deduct points in the year paid if you meet all the following tests. Compare tax software (You can use Figure B as a quick guide to see whether your points are fully deductible in the year paid. Compare tax software ) Your loan is secured by your main home. Compare tax software (Your main home is the one you ordinarily live in most of the time. Compare tax software ) Paying points is an established business practice in the area where the loan was made. Compare tax software The points paid were not more than the points generally charged in that area. Compare tax software You use the cash method of accounting. Compare tax software This means you report income in the year you receive it and deduct expenses in the year you pay them. Compare tax software Most individuals use this method. Compare tax software 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. Compare tax software The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. Compare tax software The funds you provided are not required to have been applied to the points. Compare tax software They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. Compare tax software You cannot have borrowed these funds from your lender or mortgage broker. Compare tax software You use your loan to buy or build your main home. Compare tax software The points were computed as a percentage of the principal amount of the mortgage. Compare tax software The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. Compare tax software The points may be shown as paid from either your funds or the seller's. Compare tax software Note. Compare tax software 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. Compare tax software Home improvement loan. Compare tax software   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. Compare tax software Second home. Compare tax software You cannot fully deduct in the year paid points you pay on loans secured by your second home. Compare tax software You can deduct these points only over the life of the loan. Compare tax software Refinancing. Compare tax software   Generally, points you pay to refinance a mortgage are not deductible in full in the year you pay them. Compare tax software This is true even if the new mortgage is secured by your main home. Compare tax software   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. Compare tax software You can deduct the rest of the points over the life of the loan. Compare tax software Example 1. Compare tax software In 1998, Bill Fields got a mortgage to buy a home. Compare tax software In 2013, Bill refinanced that mortgage with a 15-year $100,000 mortgage loan. Compare tax software The mortgage is secured by his home. Compare tax software To get the new loan, he had to pay three points ($3,000). Compare tax software 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. Compare tax software Bill paid the points out of his private funds, rather than out of the proceeds of the new loan. Compare tax software The payment of points is an established practice in the area, and the points charged are not more than the amount generally charged there. Compare tax software Bill's first payment on the new loan was due July 1. Compare tax software He made six payments on the loan in 2013 and is a cash basis taxpayer. Compare tax software Bill used the funds from the new mortgage to repay his existing mortgage. Compare tax software 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. Compare tax software He cannot deduct all of the points in 2013. Compare tax software He can deduct two points ($2,000) ratably over the life of the loan. Compare tax software He deducts $67 [($2,000 ÷ 180 months) × 6 payments] of the points in 2013. Compare tax software The other point ($1,000) was a fee for services and is not deductible. Compare tax software Example 2. Compare tax software 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. Compare tax software Bill deducts 25% ($25,000 ÷ $100,000) of the points ($2,000) in 2013. Compare tax software His deduction is $500 ($2,000 × 25%). Compare tax software Bill also deducts the ratable part of the remaining $1,500 ($2,000 − $500) that must be spread over the life of the loan. Compare tax software This is $50 [($1,500 ÷ 180 months) × 6 payments] in 2013. Compare tax software The total amount Bill deducts in 2013 is $550 ($500 + $50). Compare tax software Special Situations This section describes certain special situations that may affect your deduction of points. Compare tax software Original issue discount. Compare tax software   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. Compare tax software This reduction results in original issue discount, which is discussed in chapter 4 of Publication 535. Compare tax software Amounts charged for services. Compare tax software    Amounts charged by the lender for specific services connected to the loan are not interest. Compare tax software Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. Compare tax software  You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. Compare tax software Points paid by the seller. Compare tax software   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. Compare tax software Treatment by seller. Compare tax software   The seller cannot deduct these fees as interest. Compare tax software But they are a selling expense that reduces the amount realized by the seller. Compare tax software See Publication 523 for information on selling your home. Compare tax software Treatment by buyer. Compare tax software   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. Compare tax software If all the tests under Deduction Allowed in Year Paid , earlier, are met, the buyer can deduct the points in the year paid. Compare tax software If any of those tests are not met, the buyer deducts the points over the life of the loan. Compare tax software   If you need information about the basis of your home, see Publication 523 or Publication 530. Compare tax software Funds provided are less than points. Compare tax software   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. Compare tax software In addition, you can deduct any points paid by the seller. Compare tax software Example 1. Compare tax software When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). Compare tax software You meet all the tests for deducting points in the year paid, except the only funds you provided were a $750 down payment. Compare tax software Of the $1,000 charged for points, you can deduct $750 in the year paid. Compare tax software You spread the remaining $250 over the life of the mortgage. Compare tax software Example 2. Compare tax software 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. Compare tax software In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). Compare tax software You spread the remaining $250 over the life of the mortgage. Compare tax software You must reduce the basis of your home by the $1,000 paid by the seller. Compare tax software Excess points. Compare tax software   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. Compare tax software You must spread any additional points over the life of the mortgage. Compare tax software Mortgage ending early. Compare tax software   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. Compare tax software However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. Compare tax software Instead, deduct the remaining balance over the term of the new loan. Compare tax software   A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. Compare tax software Example. Compare tax software Dan paid $3,000 in points in 2002 that he had to spread out over the 15-year life of the mortgage. Compare tax software He deducts $200 points per year. Compare tax software Through 2012, Dan has deducted $2,200 of the points. Compare tax software Dan prepaid his mortgage in full in 2013. Compare tax software He can deduct the remaining $800 of points in 2013. Compare tax software Limits on deduction. Compare tax software   You cannot fully deduct points paid on a mortgage that exceeds the limits discussed in Part II . Compare tax software See the Table 1 Instructions for line 10. Compare tax software Form 1098. Compare tax software    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. Compare tax software See Form 1098, Mortgage Interest Statement , later. Compare tax software Mortgage Insurance Premiums You can treat amounts you paid during 2013 for qualified mortgage insurance as home mortgage interest. Compare tax software The insurance must be in connection with home acquisition debt, and the insurance contract must have been issued after 2006. Compare tax software Qualified mortgage insurance. Compare tax software   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). Compare tax software   Mortgage insurance provided by the Department of Veterans Affairs is commonly known as a funding fee. Compare tax software If provided by the Rural Housing Service, it is commonly known as a guarantee fee. Compare tax software 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. Compare tax software These fees can be deducted fully in 2013 if the mortgage insurance contract was issued in 2013. Compare tax software Contact the mortgage insurance issuer to determine the deductible amount if it is not reported in box 4 of Form 1098. Compare tax software Special rules for prepaid mortgage insurance. Compare tax software   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. Compare tax software 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. Compare tax software No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term. Compare tax software This paragraph does not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service. Compare tax software Example. Compare tax software Ryan purchased a home in May of 2012 and financed the home with a 15-year mortgage. Compare tax software Ryan also prepaid all of the $9,240 in private mortgage insurance required at the time of closing in May. Compare tax software 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. Compare tax software Ryan's adjusted gross income (AGI) for 2012 is $76,000. Compare tax software Ryan can deduct $880 ($9,240 ÷ 84 x 8 months) for qualified mortgage insurance premiums in 2012. Compare tax software For 2013, Ryan can deduct $1,320 ($9,240 ÷ 84 x 12 months) if his AGI is $100,000 or less. Compare tax software 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). Compare tax software Limit on deduction. Compare tax software   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. Compare tax software 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. Compare tax software If your adjusted gross income is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. Compare tax software Form 1098. Compare tax software   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. Compare tax software See Form 1098, Mortgage Interest Statement, next. Compare tax software 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. Compare tax software 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. Compare tax software A governmental unit is a person for purposes of furnishing the statement. Compare tax software The statement for each year should be sent to you by January 31 of the following year. Compare tax software A copy of this form will also be sent to the IRS. Compare tax software 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. Compare tax software However, it should not show any interest that was paid for you by a government agency. Compare tax software As a general rule, Form 1098 will include only points that you can fully deduct in the year paid. Compare tax software However, certain points not included on Form 1098 also may be deductible, either in the year paid or over the life of the loan. Compare tax software See the earlier discussion of Points to determine whether you can deduct points not shown on Form 1098. Compare tax software Prepaid interest on Form 1098. Compare tax software   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. Compare tax software However, you cannot deduct the prepaid amount for January 2014 in 2013. Compare tax software (See Prepaid interest , earlier. Compare tax software ) You will have to figure the interest that accrued for 2014 and subtract it from the amount in box 1. Compare tax software You will include the interest for January 2014 with other interest you pay for 2014. Compare tax software Refunded interest. Compare tax software   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. Compare tax software See Refunds of interest , earlier. Compare tax software Mortgage insurance premiums. Compare tax software   The amount of mortgage insurance premiums you paid during 2013 may be shown in Box 4 of Form 1098. Compare tax software See Mortgage Insurance Premiums , earlier. Compare tax software How To Report Deduct the home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 10. Compare tax software 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. Compare tax software Attach a statement explaining the difference and print “See attached” next to line 10. Compare tax software Deduct home mortgage interest that was not reported to you on Form 1098 on Schedule A (Form 1040), line 11. Compare tax software 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. Compare tax software The seller must give you this number and you must give the seller your TIN. Compare tax software A Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. Compare tax software Failure to meet any of these requirements may result in a $50 penalty for each failure. Compare tax software 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. Compare tax software 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. Compare tax software Deduct mortgage insurance premiums on Schedule A (Form 1040), line 13. Compare tax software More than one borrower. Compare tax software   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. Compare tax software Show how much of the interest each of you paid, and give the name and address of the person who received the form. Compare tax software Deduct your share of the interest on Schedule A (Form 1040), line 11, and print “See attached” next to the line. Compare tax software Also, deduct your share of any qualified mortgage insurance premiums on Schedule A (Form 1040), line 13. Compare tax software   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. Compare tax software Let each of the other borrowers know what his or her share is. Compare tax software Mortgage proceeds used for business or investment. Compare tax software   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. Compare tax software It shows where to deduct the part of your excess interest that is for those activities. Compare tax software 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. Compare tax software Special Rule for Tenant-Stockholders in Cooperative Housing Corporations A qualified home includes stock in a cooperative housing corporation owned by a tenant-stockholder. Compare tax software This applies only if the tenant-stockholder is entitled to live in the house or apartment because of owning stock in the cooperative. Compare tax software Cooperative housing corporation. Compare tax software   This is a corporation that meets all of the following conditions. Compare tax software 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. Compare tax software Receives at least 80% of its gross income for the year in which the mortgage interest is paid or incurred from tenant-stockholders. Compare tax software For this purpose, gross income is all income received during the entire year, including amounts received before the corporation changed to cooperative ownership. Compare tax software 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. Compare tax software 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. Compare tax software Stock used to secure debt. Compare tax software   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). Compare tax software 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. Compare tax software See chapter 4 of Publication 535 for details on these rules. Compare tax software Figuring deductible home mortgage interest. Compare tax software   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. Compare tax software 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. Compare tax software   Figure your share of this interest by multiplying the total by the following fraction. Compare tax software      Your shares of stock in the cooperative   The total shares of stock in the cooperative Limits on deduction. Compare tax software   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. Compare tax software The cooperative should determine your share of its grandfathered debt, its home acquisition debt, and its home equity debt. Compare tax software (Your share of each of these types of debt is equal to the average balance of each debt multiplied by the fraction just given. Compare tax software ) 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. Compare tax software Form 1098. Compare tax software    The cooperative should give you a Form 1098 showing your share of the interest. Compare tax software Use the rules in this publication to determine your deductible mortgage interest. Compare tax software Part II. Compare tax software Limits on Home Mortgage Interest Deduction This part of the publication discusses the limits on deductible home mortgage interest. Compare tax software 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 . Compare tax software 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. Compare tax software 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. Compare tax software Table 1 can help you figure your qualified loan limit and your deductible home mortgage interest. Compare tax software 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). Compare tax software It also must be secured by that home. Compare tax software 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. Compare tax software The additional debt may qualify as home equity debt (discussed later). Compare tax software Home acquisition debt limit. Compare tax software   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). Compare tax software This limit is reduced (but not below zero) by the amount of your grandfathered debt (discussed later). Compare tax software Debt over this limit may qualify as home equity debt (also discussed later). Compare tax software Refinanced home acquisition debt. Compare tax software   Any secured debt you use to refinance home acquisition debt is treated as home acquisition debt. Compare tax software 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. Compare tax software 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). Compare tax software Mortgage that qualifies later. Compare tax software   A mortgage that does not qualify as home acquisition debt because it does not meet all the requirements may qualify at a later time. Compare tax software 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. Compare tax software However, if the debt is later secured by the home, it may qualify as home acquisition debt after that time. Compare tax software Similarly, a debt that you use to buy property may not qualify because the property is not a qualified home. Compare tax software However, if the property later becomes a qualified home, the debt may qualify after that time. Compare tax software Mortgage treated as used to buy, build, or improve home. Compare tax software   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. Compare tax software This applies in the following situations. Compare tax software You buy your home within 90 days before or after the date you take out the mortgage. Compare tax software 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). Compare tax software (See Example 1 later. Compare tax software ) You build or improve your home and take out the mortgage before the work is completed. Compare tax software The home acquisition debt is limited to the amount of the expenses incurred within 24 months before the date of the mortgage. Compare tax software You build or improve your home and take out the mortgage within 90 days after the work is completed. Compare tax software 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. Compare tax software (See Example 2 later. Compare tax software ) Example 1. Compare tax software You bought your main home on June 3 for $175,000. Compare tax software You paid for the home with cash you got from the sale of your old home. Compare tax software On July 15, you took out a mortgage of $150,000 secured by your main home. Compare tax software You used the $150,000 to invest in stocks. Compare tax software 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. Compare tax software The entire mortgage qualifies as home acquisition debt because it was not more than the home's cost. Compare tax software Example 2. Compare tax software On January 31, John began building a home on the lot that he owned. Compare tax software He used $45,000 of his personal funds to build the home. Compare tax software The home was completed on October 31. Compare tax software On November 21, John took out a $36,000 mortgage that was secured by the home. Compare tax software The mortgage can be treated as used to build the home because it was taken out within 90 days after the home was completed. Compare tax software 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. Compare tax software This is illustrated by Figure C. Compare tax software   Please click here for the text description of the image. Compare tax software Figure C. Compare tax software John's example Date of the mortgage. Compare tax software   The date you take out your mortgage is the day the loan proceeds are disbursed. Compare tax software This is generally the closing date. Compare tax software You can treat the day you apply in writing for your mortgage as the date you take it out. Compare tax software However, this applies only if you receive the loan proceeds within a reasonable time (such as within 30 days) after your application is approved. Compare tax software If a timely application you make is rejected, a reasonable additional time will be allowed to make a new application. Compare tax software Cost of home or improvements. Compare tax software   To determine your cost, include amounts paid to acquire any interest in a qualified home or to substantially improve the home. Compare tax software   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. Compare tax software Substantial improvement. Compare tax software   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. Compare tax software    Repairs that maintain your home in good condition, such as repainting your home, are not substantial improvements. Compare tax software 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. Compare tax software Acquiring an interest in a home because of a divorce. Compare tax software   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. Compare tax software Part of home not a qualified home. Compare tax software    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. Compare tax software See Divided use of your home under Qualified Home in Part I. Compare tax software 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. Compare tax software 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. Compare tax software 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. Compare tax software Example. Compare tax software You bought your home for cash 10 years ago. Compare tax software 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. Compare tax software This loan is home equity debt. Compare tax software Home equity debt limit. Compare tax software   There is a limit on the amount of debt that can be treated as home equity debt. Compare tax software 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. Compare tax software 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. Compare tax software Example. Compare tax software You own one home that you bought in 2000. Compare tax software Its FMV now is $110,000, and the current balance on your original mortgage (home acquisition debt) is $95,000. Compare tax software Bank M offers you a home mortgage loan of 125% of the FMV of the home less any outstanding mortgages or other liens. Compare tax software To consolidate some of your other debts, you take out a $42,500 home mortgage loan [(125% × $110,000) − $95,000] with Bank M. Compare tax software Your home equity debt is limited to $15,000. Compare tax software 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. Compare tax software Debt higher than limit. Compare tax software   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. Compare tax software But if the proceeds of the loan were used for investment, business, or other deductible purposes, the interest may be deductible. Compare tax software If it is, see the Table 1 Instructions for line 13 for an explanation of how to allocate the excess interest. Compare tax software Part of home not a qualified home. Compare tax software   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. Compare tax software See Divided use of your home under Qualified Home in Part I. Compare tax software Fair market value (FMV). Compare tax software    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. Compare tax software 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. Compare tax software 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. Compare tax software To qualify, it must have been secured by your qualified home on October 13, 1987, and at all times after that date. Compare tax software How you used the proceeds does not matter. Compare tax software Grandfathered debt is not limited. Compare tax software All of the interest you paid on grandfathered debt is fully deductible home mortgage interest. Compare tax software 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. Compare tax software Refinanced grandfathered debt. Compare tax software   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. Compare tax software 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). Compare tax software The debt must be secured by the qualified home. Compare tax software   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. Compare tax software After that, you treat it as home acquisition debt or home equity debt, depending on how you used the proceeds. Compare tax software Exception. Compare tax software   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. Compare tax software This term cannot be more than 30 years. Compare tax software Example. Compare tax software Chester took out a $200,000 first mortgage on his home in 1986. Compare tax software The mortgage was a five-year balloon note and the entire balance on the note was due in 1991. Compare tax software Chester refinanced the debt in 1991 with a new 20-year mortgage. Compare tax software The refinanced debt is treated as grandfathered debt for its entire term (20 years). Compare tax software Line-of-credit mortgage. Compare tax software    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. Compare tax software The balance on the mortgage before you borrowed the additional amounts is grandfathered debt. Compare tax software The newly borrowed amounts are not grandfathered debt because the funds were borrowed after October 13, 1987. Compare tax software See Average Mortgage Balance in the Table 1 Instructions that follow. Compare tax software 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. Compare tax software All the mortgages are grandfathered debt. Compare tax software The total of the mortgage balances for the entire year is within the limits discussed earlier under Home Acquisition Debt and Home Equity Debt . Compare tax software In either of those cases, you do not need Table 1. Compare tax software Otherwise, you can use Table 1 to determine your qualified loan limit and deductible home mortgage interest. Compare tax software Fill out only one Table 1 for both your main and second home regardless of how many mortgages you have. Compare tax software Table 1. Compare tax software Worksheet To Figure Your Qualified Loan Limit and Deductible Home Mortgage Interest For the Current Year See the Table 1 Instructions. Compare tax software Part I Qualified Loan Limit 1. Compare tax software Enter the average balance of all your grandfathered debt. Compare tax software See line 1 instructions 1. Compare tax software   2. Compare tax software Enter the average balance of all your home acquisition debt. Compare tax software See line 2 instructions 2. Compare tax software   3. Compare tax software Enter $1,000,000 ($500,000 if married filing separately) 3. Compare tax software   4. Compare tax software Enter the larger of the amount on line 1 or the amount on line 3 4. Compare tax software   5. Compare tax software Add the amounts on lines 1 and 2. Compare tax software Enter the total here 5. Compare tax software   6. Compare tax software Enter the smaller of the amount on line 4 or the amount on line 5 6. Compare tax software   7. Compare tax software If you have home equity debt, enter the smaller of $100,000 ($50,000 if married filing separately) or your limited amount. Compare tax software See the line 7 instructions for the limit which may apply to you. Compare tax software 7. Compare tax software   8. Compare tax software Add the amounts on lines 6 and 7. Compare tax software Enter the total. Compare tax software This is your qualified loan limit. Compare tax software 8. Compare tax software   Part II Deductible Home Mortgage Interest 9. Compare tax software Enter the total of the average balances of all mortgages on all qualified homes. Compare tax software  See line 9 instructions 9. Compare tax software     If line 8 is less than line 9, go on to line 10. Compare tax software If line 8 is equal to or more than line 9, stop here. Compare tax software All of your interest on all the mortgages included on line 9 is deductible as home mortgage interest on Schedule A (Form 1040). Compare tax software     10. Compare tax software Enter the total amount of interest that you paid. Compare tax software See line 10 instructions 10. Compare tax software   11. Compare tax software Divide the amount on line 8 by the amount on line 9. Compare tax software Enter the result as a decimal amount (rounded to three places) 11. Compare tax software × . Compare tax software 12. Compare tax software Multiply the amount on line 10 by the decimal amount on line 11. Compare tax software Enter the result. Compare tax software This is your deductible home mortgage interest. Compare tax software Enter this amount on Schedule A (Form 1040) 12. Compare tax software   13. Compare tax software Subtract the amount on line 12 from the amount on line 10. Compare tax software Enter the result. Compare tax software This is not home mortgage interest. Compare tax software See line 13 instructions 13. Compare tax software   Home equity debt only. Compare tax software   If all of your mortgages are home equity debt, do not fill in lines 1 through 5. Compare tax software Enter zero on line 6 and complete the rest of Table 1. Compare tax software Average Mortgage Balance You have to figure the average balance of each mortgage to determine your qualified loan limit. Compare tax software You need these amounts to complete lines 1, 2, and 9 of Table 1. Compare tax software You can use the highest mortgage balances during the year, but you may benefit most by using the average balances. Compare tax software The following are methods you can use to figure your average mortgage balances. Compare tax software However, if a mortgage has more than one category of debt, see Mixed-use mortgages , later, in this section. Compare tax software Average of first and last balance method. Compare tax software   You can use this method if all the following apply. Compare tax software You did not borrow any new amounts on the mortgage during the year. Compare tax software (This does not include borrowing the original mortgage amount. Compare tax software ) You did not prepay more than one month's principal during the year. Compare tax software (This includes prepayment by refinancing your home or by applying proceeds from its sale. Compare tax software ) You had to make level payments at fixed equal intervals on at least a semi-annual basis. Compare tax software You treat your payments as level even if they were adjusted from time to time because of changes in the interest rate. Compare tax software    To figure your average balance, complete the following worksheet. Compare tax software    1. Compare tax software 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. Compare tax software 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. Compare tax software Add amounts on lines 1 and 2   4. Compare tax software Divide the amount on line 3 by 2. Compare tax software Enter the result   Interest paid divided by interest rate method. Compare tax software   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. Compare tax software    Complete the following worksheet to figure your average balance. Compare tax software    1. Compare tax software Enter the interest paid in 2013. Compare tax software Do not include points, mortgage insurance premiums, or any interest paid in 2013 that is for a year after 2013. Compare tax software However, do include interest that is for 2013 but was paid in an earlier year   2. Compare tax software Enter the annual interest rate on the mortgage. Compare tax software If the interest rate varied in 2013, use the lowest rate for the year   3. Compare tax software Divide the amount on line 1 by the amount on line 2. Compare tax software Enter the result   Example. Compare tax software Mr. Compare tax software Blue had a line of credit secured by his main home all year. Compare tax software He paid interest of $2,500 on this loan. Compare tax software The interest rate on the loan was 9% (. Compare tax software 09) all year. Compare tax software His average balance using this method is $27,778, figured as follows. Compare tax software 1. Compare tax software Enter the interest paid in 2013. Compare tax software Do not include points, mortgage insurance premiums, or any interest paid in 2013 that is for a year after 2013. Compare tax software However, do include interest that is for 2013 but was paid in an earlier year $2,500 2. Compare tax software Enter the annual interest rate on the mortgage. Compare tax software If the interest rate varied in 2013, use the lowest rate for the year . Compare tax software 09 3. Compare tax software Divide the amount on line 1 by the amount on line 2. Compare tax software Enter the result $27,778 Statements provided by your lender. Compare tax software   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. Compare tax software You can treat the balance as zero for any month the mortgage was not secured by your qualified home. Compare tax software   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. Compare tax software   If your lender can give you your average balance for the year, you can use that amount. Compare tax software Example. Compare tax software Ms. Compare tax software Brown had a home equity loan secured by her main home all year. Compare tax software She received monthly statements showing her average balance for each month. Compare tax software She can figure her average balance for the year by adding her monthly average balances and dividing the total by 12. Compare tax software Mixed-use mortgages. Compare tax software   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). Compare tax software 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). Compare tax software   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. Compare tax software Do not use the methods described earlier in this section to figure the average balance of either category. Compare tax software Instead, for each category, use the following method. Compare tax software Figure the balance of that category of debt for each month. Compare tax software 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. Compare tax software 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. Compare tax software Add together the monthly balances figured in (1). Compare tax software Divide the result in (2) by 12. Compare tax software   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. Compare tax software Example 1. Compare tax software In 1986, Sharon took out a $1,400,000 mortgage to buy her main home (grandfathered debt). Compare tax software 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. Compare tax software 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). Compare tax software Under the loan agreement, Sharon must make principal payments of $1,000 at the end of each month. Compare tax software During 2013, her principal payments on the second mortgage totaled $10,000. Compare tax software 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. Compare tax software The January and February balances were zero. Compare tax software The March through December balances were all $180,000, because none of her principal payments are applied to the home acquisition debt. Compare tax software (They are all applied to the home equity debt, reducing it to $10,000 [$20,000 − $10,000]. Compare tax software ) The monthly balances of the home acquisition debt total $1,800,000 ($180,000 × 10). Compare tax software Therefore, the average balance of the home acquisition debt for 2013 was $150,000 ($1,800,000 ÷ 12). Compare tax software Example 2. Compare tax software The facts are the same as in Example 1. Compare tax software In 2014, Sharon's January through October principal payments on her second mortgage are applied to the home equity debt, reducing it to zero. Compare tax software The balance of the home acquisition debt remains $180,000 for each of those months. Compare tax software 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). Compare tax software The monthly balances total $2,157,000 [($180,000 × 10) + $179,000 + $178,000]. Compare tax software Therefore, the average balance of the home acquisition debt for 2014 is $179,750 ($2,157,000 ÷ 12). Compare tax software L