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E File State Tax Return

E file state tax return Publication 17(SP) - Introductory Material Table of Contents Qué Hay de Nuevo Recordatorios IntroductionIconos. E file state tax return Para pedir formularios y publicaciones. E file state tax return Preguntas sobre los impuestos. E file state tax return Todo material en esta publicación puede ser reimpreso gratuitamente. E file state tax return Una referencia a El Impuesto Federal sobre los Ingresos (2013) sería apropiada. E file state tax return Las explicaciones y ejemplos en esta publicación representan la interpretación del Servicio de Impuestos Internos (IRS, por sus siglas en inglés) con respecto a: Leyes tributarias promulgadas por el Congreso de los Estados Unidos, Reglamentos del Departamento del Tesoro de los Estados Unidos y Decisiones de los tribunales. E file state tax return Sin embargo, la información provista no abarca cada situación y no se presenta con la intención de reemplazar la ley o cambiar su significado. E file state tax return Esta publicación abarca ciertos temas sobre los cuales un tribunal puede haber dictado un fallo más favorable para los contribuyentes que la interpretación hecha por el IRS. E file state tax return Hasta que estas interpretaciones divergentes sean resueltas por fallos o decretos de un tribunal superior o de alguna otra manera, esta publicación continuará presentando las interpretaciones hechas por el IRS. E file state tax return Todos los contribuyentes tienen derechos importantes cuando tratan con el IRS. E file state tax return Estos derechos están descritos en la sección titulada Derechos del Contribuyente , al final de esta publicación. E file state tax return Qué Hay de Nuevo Esta sección resume ciertos cambios tributarios importantes que entraron en vigor en el año 2013. E file state tax return La mayor parte de estos cambios se abordan en más detalle en esta publicación. E file state tax return Acontecimientos futuros. E file state tax return  Si desea obtener la información más reciente sobre temas de ley tributaria que se explican en esta publicación, incluyendo toda información sobre legislación tributaria, acceda a www. E file state tax return irs. E file state tax return gov/pub17sp. E file state tax return Impuesto Adicional del Medicare. E file state tax return  Comenzando en el año 2013, le corresponderá un Impuesto Adicional del Medicare de 0. E file state tax return 9% sobre los salarios, la compensación por jubilación ferroviaria (RRTA, por sus siglas en inglés) y el ingreso sobre el trabajo por cuenta propia que están sujetos al impuesto al Medicare. E file state tax return El impuesto corresponde si estos ingresos son mayores que: $125,000, si es casado que presenta una declaración por separado, $250,000, si es casado que presenta una declaración conjunta o $200,000, si presenta la declaración utilizando cualquier otro estado civil para efectos de la declaración. E file state tax return Si desea más información, vea el Formulario 8959 y sus Instrucciones, disponibles en inglés. E file state tax return Impuesto sobre los ingresos netos de inversión. E file state tax return  Comenzando en el año 2013, usted podría estar sujeto al impuesto sobre los ingresos netos de inversión (NIIT, por sus siglas en inglés). E file state tax return Este impuesto es el 3. E file state tax return 8% de la cantidad menor entre (a) su ingreso neto de inversión o (b) la cantidad en exceso de su ingreso bruto ajustado modificado sobre: $125,000, si es casado que presenta una declaración por separado, $250,000, si es casado que presenta una declaración conjunta o si es viudo calificado o $200,000, si presenta la declaración utilizando cualquier otro estado civil para efectos de la declaración. E file state tax return Si desea más información, vea el Formulario 8960 y sus Instrucciones, disponibles en inglés. E file state tax return Cambio en las tasas tributarias. E file state tax return  La tasa tributaria mayor es de 39. E file state tax return 6%. E file state tax return Si desea más información, vea la Hoja de Trabajo para el Cálculo del Impuesto del Año 2013 o las Tasas Impositivas de 2013 , las cuales se encuentran al final de esta publicación. E file state tax return Tasa tributaria sobre las ganancias netas de capital y dividendos calificados. E file state tax return  La tasa tributaria máxima de 15% sobre las ganancias netas de capital y los dividendos calificados ha aumentado a 20% para algunos contribuyentes. E file state tax return Vea el capítulo 16 . E file state tax return Gastos médicos y dentales. E file state tax return  Usted puede deducir solamente la parte de sus gastos médicos y dentales que sea mayor que el 10% de su ingreso bruto ajustado (7. E file state tax return 5% si usted o su cónyuge tiene 65 años de edad o más). E file state tax return Vea el capítulo 21 . E file state tax return Aumento de la cantidad de la exención personal para determinados contribuyentes. E file state tax return  La exención personal que le corresponde a usted ha aumentado a $3,900. E file state tax return Pero, esta cantidad se reduce si su ingreso bruto ajustado es mayor que: $150,000, si es casado que presenta una declaración por separado, $250,000, si es soltero, $275,000, si es cabeza de familia o $300,000, si presenta la declaración utilizando cualquier otro estado civil para efectos de la declaración. E file state tax return Vea el capítulo 3 . E file state tax return Límite sobre las deducciones detalladas. E file state tax return  Usted puede que no tenga derecho de deducir todas sus deducciones detalladas si su ingreso bruto ajustado es mayor que: $150,000, si es casado que presenta una declaración por separado, $250,000, si es soltero, $275,000, si es cabeza de familia o $300,000, si presenta la declaración utilizando cualquier otro estado civil para efectos de la declaración. E file state tax return Vea el capítulo 29 . E file state tax return Matrimonio entre el mismo sexo. E file state tax return  Si tiene un cónyuge de su mismo sexo con quien usted se casó en un estado (o jurisdicción o país extranjero) que reconoce el matrimonio entre personas del mismo sexo, usted y su cónyuge tienen que utilizar el estado civil para efectos de la declaración de casados que presentan una declaración conjunta o casado que presenta la declaración por separado en su declaración del año 2013. E file state tax return Utilice uno de estos estados civiles para efectos de la declaración aunque usted y su cónyuge en la actualidad vivan en un estado (o jurisdicción o país extranjero) en donde no se reconozca el matrimonio entre personas del mismo sexo. E file state tax return Vea el capítulo 2 . E file state tax return Si reúne ciertos requisitos, quizás podría presentar declaraciones enmendadas para cambiar su estado civil para efectos de la declaración para algunos años anteriores. E file state tax return Si desea saber más detalles sobre declaraciones enmendadas, vea el capítulo 1 . E file state tax return Cuenta flexible de ahorros para gastos médicos (FSA, por sus siglas en inglés). E file state tax return  Comenzando con los años del plan después de 2012, usted no puede hacer aportaciones mediante la reducción de salarios mayores de $2,500 a cuentas flexibles de ahorros para gastos médicos (FSA, por sus siglas en inglés). E file state tax return Vea el capítulo 5 . E file state tax return Créditos tributarios que vencen. E file state tax return  El crédito por vehículo eléctrico enchufable y la parte reembolsable del crédito del impuesto mínimo de años anteriores ha vencido. E file state tax return Usted no puede reclamar ninguno de éstos en su declaración del año 2013. E file state tax return Vea el capítulo 37 . E file state tax return Esquemas de inversión de tipo Ponzi. E file state tax return  Hay nuevas reglas sobre cómo reclamar una deducción en el Formulario 4684, en inglés, debido a una pérdida por robo por un esquema de inversión de tipo Ponzi. E file state tax return Vea el capítulo 25 . E file state tax return Método simplificado para la deducción por oficina en el hogar. E file state tax return  Si usted puede tomar una deducción por tener una oficina en su hogar, quizás pueda utilizar un método simplificado para calcular dicha deducción. E file state tax return Vea la Publicación 587, disponible en inglés. E file state tax return Tarifas estándar por milla. E file state tax return  Para 2013, la tarifa estándar por milla permitida por el costo de operar su automóvil para uso comercial ha aumentado a 56½ centavos por milla. E file state tax return Vea el capítulo 26 . E file state tax return Para 2013, la tarifa estándar por milla permitida por el costo de operar su automóvil por razones médicas ha aumentado a 24 centavos por milla. E file state tax return Vea el capítulo 21 . E file state tax return Para 2013, la tarifa estándar por milla permitida por el costo de operar su automóvil para determinar los gastos de mudanza ha aumentado a 24 centavos por milla. E file state tax return Vea la Publicación 521, Moving Expenses (Gastos de mudanza), en inglés. E file state tax return Recordatorios A continuación aparecen recordatorios importantes y otros asuntos que le podrían ayudar a presentar su declaración de impuestos del año 2013. E file state tax return Muchos de estos asuntos se explican más adelante en esta publicación. E file state tax return Anote su número de Seguro Social (SSN, por sus siglas en inglés) en la declaración. E file state tax return  Anote su número de Seguro Social (SSN, por sus siglas en inglés) en el espacio correspondiente de la declaración de impuestos. E file state tax return Si presentó una declaración conjunta de impuestos en el año 2012 y presenta una declaración conjunta en el año 2013 con el mismo cónyuge, escriba los nombres y números de Seguro Social en el mismo orden en que lo hizo en el año 2012. E file state tax return Vea el capítulo 1 . E file state tax return Proteja su documentación tributaria contra el robo de identidad. E file state tax return  El robo de identidad ocurre cuando otra persona usa la información personal de usted sin su autorización para cometer fraude u otros delitos. E file state tax return Dicha información personal podría ser su nombre, número de Seguro Social (SSN, por sus siglas en inglés) u otra información de identificación. E file state tax return Un ladrón de identidad puede usar su SSN para obtener un empleo o puede presentar una declaración de impuestos usando su SSN robado para recibir un reembolso. E file state tax return Si desea más información sobre el robo de identidad e información sobre cómo reducir su riesgo al robo de identidad, vea el capítulo 1 . E file state tax return Números de identificación del contribuyente. E file state tax return  Tiene que proveer el número de identificación del contribuyente de cada persona por la cual reclama ciertos beneficios tributarios. E file state tax return Este requisito se aplica aun en el caso en que la persona haya nacido en el año 2013. E file state tax return Por lo general, este número es el número de Seguro Social de la persona. E file state tax return Vea el capítulo 1 . E file state tax return Ingreso de fuentes en el extranjero. E file state tax return  Si es ciudadano de los Estados Unidos con ingresos provenientes de fuentes en el extranjero (ingresos del extranjero), tiene que declarar todos estos ingresos en su declaración de impuestos, a menos que estén exentos conforme a las leyes estadounidenses. E file state tax return Esto es cierto tanto si vive dentro como fuera de los Estados Unidos e independientemente de si recibe o no un Formulario W-2 ó 1099 del pagador extranjero. E file state tax return Esto corresponde al ingreso del trabajo (como salarios y propinas) y también al ingreso no derivado del trabajo (como intereses, dividendos, ganancias de capital, pensiones, alquileres y regalías). E file state tax return Si reside fuera de los Estados Unidos, es posible que pueda excluir la totalidad o parte de su ingreso del trabajo procedente de fuentes en el extranjero. E file state tax return Para más detalles, vea la Publicación 54, Tax Guide for U. E file state tax return S. E file state tax return Citizens and Resident Aliens Abroad (Guía tributaria para ciudadanos y residentes estadounidenses en el extranjero), en inglés. E file state tax return Activos financieros extranjeros. E file state tax return  Si tuvo activos financieros extranjeros en el 2013, es posible que tenga que presentar el nuevo Formulario 8938 con su declaración. E file state tax return Vea www. E file state tax return IRS. E file state tax return gov/form8938, en inglés, para más detalles. E file state tax return Prórroga automática de 6 meses para presentar la declaración de impuestos. E file state tax return  Puede usar el Formulario 4868(SP), Solicitud de Prórroga Automática para Presentar la Declaración del Impuesto sobre el Ingreso Personal de los Estados Unidos (o el Formulario 4868, en inglés), para obtener una prórroga automática de 6 meses para presentar su declaración de impuestos. E file state tax return Vea el capítulo 1 . E file state tax return Incluya su número de teléfono en la declaración. E file state tax return  Para resolver rápidamente cualquier pregunta que necesitemos hacerle para tramitar su declaración, nos gustaría poder llamarlo. E file state tax return Anote el número de teléfono donde podamos llamarlo durante el día, al lado del espacio donde firma la declaración de impuestos y donde aparece su ocupación. E file state tax return Si usted presenta una declaración conjunta, puede anotar el número de teléfono suyo o el de su cónyuge. E file state tax return Pago de los impuestos. E file state tax return   Puede pagar sus impuestos a través de la Internet, a través del teléfono o por medio de cheque o giro. E file state tax return Puede efectuar una transferencia directa de su cuenta bancaria o utilizar una tarjeta de crédito o débito. E file state tax return Si presenta su declaración electrónicamente (por medio de e-file), puede programar un pago electrónico. E file state tax return Vea el capítulo 1 . E file state tax return Maneras más rápidas de presentar su declaración. E file state tax return  El IRS ofrece maneras rápidas y fiables de presentar la información tributaria sin tener que presentar una declaración en papel. E file state tax return Puede usar el sistema electrónico e-file del IRS para presentar su declaración de impuestos. E file state tax return Vea el capítulo 1 . E file state tax return Presentación electrónica gratuita de la declaración. E file state tax return  Usted quizás pueda presentar su declaración de impuestos del año 2013 por Internet sin pagar cargo alguno. E file state tax return Vea el capítulo 1 . E file state tax return Cambio de dirección. E file state tax return  Si cambia de dirección, debe notificarle al IRS. E file state tax return Vea el tema titulado Cambio de Dirección , en el capítulo 1. E file state tax return Reembolsos de una declaración presentada fuera de plazo. E file state tax return  Si a usted se le debe un reembolso pero no presentó una declaración, por lo general tendrá que presentar su declaración dentro de 3 años a partir de la fecha en que la declaración venció (incluidas prórrogas) para obtener ese reembolso. E file state tax return Vea el capítulo 1 . E file state tax return Declaraciones de impuestos frívolas. E file state tax return  El IRS ha publicado una lista de posturas identificadas como frívolas. E file state tax return La multa por presentar una declaración de impuestos frívola es de $5,000. E file state tax return Vea el capítulo 1 . E file state tax return Reclamación errónea de reembolso o crédito. E file state tax return  Quizás tenga que pagar una multa si reclama erróneamente un reembolso o crédito. E file state tax return Vea el capítulo 1 . E file state tax return Información sobre la Ley de Confidencialidad de Información y la Ley de Reducción de Trámites. E file state tax return   La IRS Restructuring and Reform Act of 1998 (Ley de Reestructuración y Reforma del Servicio de Impuestos Internos de 1998), la Privacy Act of 1974 (Ley de Confidencialidad de Información de 1974) y la Paperwork Reduction Act of 1980 (Ley de Reducción de Trámites de 1980) requieren que, cuando le solicitemos información, le informemos primero sobre cuál es nuestro derecho legal para solicitar esa información, por qué la estamos solicitando, cómo se usará la información, qué podría suceder si no la recibimos y si su respuesta es voluntaria, necesaria para obtener un beneficio u obligatoria conforme a la ley. E file state tax return Una explicación completa sobre este tema puede encontrarse en las instrucciones de los formularios. E file state tax return Servicio a los contribuyentes. E file state tax return  Puede hacer una cita para recibir ayuda en persona en el Centro de Ayuda al Contribuyente más conveniente en el día laborable que más le convenga. E file state tax return Vea el tema titulado Cómo Obtener Ayuda con los Impuestos , al final de esta publicación. E file state tax return Mandato para preparadores de impuestos sobre el sistema e-file. E file state tax return  La mayoría de los preparadores de impuestos remunerados que preparan y presentan declaraciones tienen que presentar electrónicamente por medio del sistema e-file. E file state tax return Puede ser que su preparador le comunique sobre este requisito y las opciones que están a disposición suya. E file state tax return Inspector General del Tesoro para la Administración Tributaria. E file state tax return   Si desea denunciar confidencialmente la mala conducta, ineficacia, el fraude o abuso cometido por un empleado del IRS, puede llamar al 1-800-366-4484 (1-800-877-8339 para personas sordas, con limitación auditiva o que tienen impedimentos del habla, y que usen equipo TTY/TDD). E file state tax return Puede mantenerse anónimo. E file state tax return Fotografías de niños desaparecidos. E file state tax return  El IRS se enorgullece en colaborar con el National Center for Missing and Exploited Children (Centro Nacional de Búsqueda de Niños Desaparecidos y Explotados). E file state tax return Las fotografías de niños desaparecidos que han sido seleccionadas por el Centro pueden aparacer en esta publicación en páginas que de otra manera estarían en blanco. E file state tax return Usted puede ayudar a que estos niños regresen a sus hogares mirando sus fotografías y llamando al número gratuito 1-800-THE-LOST (1-800-843-5678) si reconoce a un niño. E file state tax return Introduction Esta publicación abarca las reglas generales para la presentación de una declaración federal de impuestos sobre el ingreso. E file state tax return La publicación complementa la información contenida en las instrucciones para el formulario de impuestos. E file state tax return Igualmente explica las leyes tributarias para asegurar que usted pague sólo los impuestos que adeuda y nada más. E file state tax return Cómo está organizada esta publicación. E file state tax return   Esta publicación sigue de cerca el Formulario 1040, U. E file state tax return S. E file state tax return Individual Income Tax Return (Declaración de impuestos de los Estados Unidos sobre los ingresos personales), disponible en inglés. E file state tax return Está dividida en seis partes que abarcan distintas secciones del Formulario 1040. E file state tax return Cada parte está subdividida en capítulos que normalmente explican una línea del formulario. E file state tax return No se preocupe si presenta el Formulario 1040A o el Formulario 1040EZ. E file state tax return Todo lo que está incluido en una línea de cualquiera de ambos formularios se incluye también en el Formulario 1040. E file state tax return   La tabla de contenido que aparece al comienzo de esta publicación y el índice que aparece al final le servirán de utilidad para encontrar la información que necesite. E file state tax return Qué se incluye en esta publicación. E file state tax return   Esta publicación comienza con las reglas para la presentación de una declaración de impuestos. E file state tax return La publicación explica: Quién tiene que presentar una declaración, Qué formulario se debe utilizar para declarar los impuestos, Cuándo es la fecha de vencimiento de la declaración, Cómo presentar su declaración usando el sistema electrónico e-file y Otra información general. E file state tax return Esta publicación le ayudará a identificar el estado civil para propósitos de la declaración al cual tiene derecho. E file state tax return Del mismo modo, le ayudará a determinar si puede reclamar algún dependiente y si los ingresos que recibe están sujetos a impuestos. E file state tax return La publicación también explica la deducción estándar, las clases de gastos que quizás pueda deducir y varios créditos que quizás pueda tomar para reducir sus impuestos. E file state tax return   A lo largo de la publicación, hay ejemplos que muestran cómo se aplican las leyes tributarias en situaciones típicas. E file state tax return También hay organigramas y tablas en la publicación que presentan información tributaria en una manera fácil de entender. E file state tax return   Muchos de los temas que se tratan en esta publicación son explicados en mayor detalle en otras publicaciones del IRS. E file state tax return Se hace referencia a dichas publicaciones y se indica si están disponibles en español o en inglés. E file state tax return Iconos. E file state tax return   En la publicación se utilizan pequeños símbolos gráficos, o sea iconos, para llamar su atención a información especial. E file state tax return Vea la Tabla 1 , más adelante, para una explicación de cada icono usado en esta publicación. E file state tax return Qué no se incluye en esta publicación. E file state tax return   Algunos materiales que le podrían ser útiles no se incluyen en esta publicación pero pueden encontrarse en el folleto de instrucciones del formulario de impuestos. E file state tax return Esto incluye listas que identifican lo siguiente: Dónde declarar ciertas partidas que aparecen en documentos informativos y Temas tributarios grabados (temas TeleTax). E file state tax return   Si opera su propio negocio o si tiene otros ingresos del trabajo por cuenta propia, tales como del cuidado de niños o la venta de artesanía, vea las siguientes publicaciones para más información: Publicación 334, Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ) (Guía tributaria para pequeños negocios (para personas que usen el Anexo C o C-EZ)), en inglés. E file state tax return Publicación 535, Business Expenses (Gastos de negocios), en inglés. E file state tax return Publicación 587, Business Use of Your Home (Including Use by Daycare Providers) (Uso comercial de su vivienda (incluyendo el uso por proveedores del cuidado de niños)), en inglés. E file state tax return Ayuda del IRS. E file state tax return   Existen muchas maneras en que puede obtener ayuda del IRS. E file state tax return Éstas se explican bajo el tema titulado Cómo Obtener Ayuda con los Impuestos , al final de esta publicación. E file state tax return Comentarios y sugerencias. E file state tax return   Agradeceremos sus comentarios acerca de esta publicación, así como sus sugerencias para ediciones futuras. E file state tax return   Puede enviar sus comentarios a la dirección siguiente:  Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. E file state tax return NW, IR-6526 Washington, DC 20224   Contestamos muchas cartas por teléfono. E file state tax return Por lo tanto, sería útil que incluyera en la correspondencia su número de teléfono, con el código de área, en donde nos podamos comunicar con usted durante el día. E file state tax return   Usted nos puede enviar comentarios desde la página web www. E file state tax return irs. E file state tax return gov/formspubs, en inglés, seleccionando Comment on Tax Forms and Publications (Enviar comentarios sobre los formularios y publicaciones de impuestos), bajo la sección More Information (Información adicional). E file state tax return   Aunque no le podemos contestar individualmente, agradecemos sus comentarios y sugerencias y los tendremos en cuenta para ediciones futuras de nuestros productos tributarios. E file state tax return Para pedir formularios y publicaciones. E file state tax return   Visite www. E file state tax return irs. E file state tax return gov/formspubs para descargar formularios y publicaciones, llame al 1-800-829-3676 para pedir formularios y publicaciones o escriba a la dirección indicada a continuación y recibirá una respuesta dentro de 10 días después de que nosotros recibamos su solicitud. E file state tax return  Internal Revenue Service 1201 N. E file state tax return Mitsubishi Motorway Bloomington, IL 61705-6613 Preguntas sobre los impuestos. E file state tax return   Si tiene una pregunta sobre los impuestos, verifique la información disponible en IRS. E file state tax return gov/espanol o llame al 1-800-829-1040. E file state tax return No podemos contestar preguntas sobre impuestos enviadas a ninguna de las dos direcciones indicadas anteriormente. E file state tax return Misión del IRS. E file state tax return   Proveerles a los contribuyentes de los Estados Unidos de América un servicio de la más alta calidad al ayudarles a entender y cumplir con sus responsabilidades tributarias y, a la vez, hacer cumplir las leyes tributarias de manera íntegra y justa para todos. E file state tax return Tabla 1. E file state tax return Leyenda de los Iconos Icono Explicación Partidas que podrían causarle problemas en particular o una alerta sobre legislaciones pendientes que podrían entrar en vigor después de que se imprima esta publicación. E file state tax return Un sitio en Internet o una dirección de correo electrónico. E file state tax return Una dirección que podría necesitar. E file state tax return Documentos que debería mantener en su documentación personal. E file state tax return Cálculos que necesite realizar o una hoja de trabajo que pueda tener que completar y conservar para sus archivos. E file state tax return Un número de teléfono importante. E file state tax return Información que podría necesitar. E file state tax return Prev  Up  Next   Home   More Online Publications
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Understanding Your CP19 Notice

We have increased the amount of tax you owe because we believe you incorrectly claimed one or more deductions or credits.


What you need to do

  • Review your notice and compare our changes to your tax return.
  • Complete and return the Response form.

You may want to...

  • Review this notice with your tax preparer.
  • Read about the deduction or credit in Publication 17.
  • Call us for clarification at the number listed on your notice.

Answers to Common Questions

What is the notice telling me?
Based on the information shown on your tax return, it appears you have not met the requirements for claiming one or more deductions or credits. As a result, your total tax is more than you expected.

What do I have to do?
Review the requirements for the deduction or credit we adjusted. Return the Response form indicating thereon your agreement or disagreement with the changes we made.

If you feel your tax return was correct as filed, send us the documentation listed on page 2 of the notice to verify you qualify for the exemption or credit.

If you agree with the changes we made, pay the amount due by the date requested on the notice.


Tips for next year

Consider filing your taxes electronically. Filing online can help you avoid mistakes and find credits and deductions that you may qualify for. In many cases you can file for free. Learn more about e-file.

Page Last Reviewed or Updated: 20-Feb-2014

Printable samples of this notice (PDF)


 

 

 

How to get help

  • Call the 1-800 number listed on the top right corner of your notice.
  • Authorize someone (e.g., accountant) to contact the IRS on your behalf using Form 2848.
  • See if you qualify for help from a Low Income Taxpayer Clinic.
     

The E File State Tax Return

E file state tax return 4. E file state tax return   Interest Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Allocation of InterestOrder of funds spent. E file state tax return Payments from checking accounts. E file state tax return Amounts paid within 30 days. E file state tax return Optional method for determining date of reallocation. E file state tax return Interest on a segregated account. E file state tax return How to report. E file state tax return Interest You Can DeductStatement. E file state tax return Expenses paid to obtain a mortgage. E file state tax return Prepayment penalty. E file state tax return De minimis OID. E file state tax return Constant-yield method. E file state tax return Loan or mortgage ends. E file state tax return Interest You Cannot DeductPenalties. E file state tax return Who is a key person? Exceptions for pre-June 1997 contracts. E file state tax return Interest allocated to unborrowed policy cash value. E file state tax return Capitalization of Interest When To Deduct InterestPrepaid interest. E file state tax return Discounted loan. E file state tax return Refunds of interest. E file state tax return Prepaid interest. E file state tax return Discounted loan. E file state tax return Tax deficiency. E file state tax return Related person. E file state tax return Below-Market LoansLimit on forgone interest for gift loans of $100,000 or less. E file state tax return Introduction This chapter discusses the tax treatment of business interest expense. E file state tax return Business interest expense is an amount charged for the use of money you borrowed for business activities. E file state tax return Topics - This chapter discusses: Allocation of interest Interest you can deduct Interest you cannot deduct Capitalization of interest When to deduct interest Below-market loans Useful Items - You may want to see: Publication 537 Installment Sales 550 Investment Income and Expenses 936 Home Mortgage Interest Deduction Form (and Instructions) Sch A (Form 1040) Itemized Deductions Sch E (Form 1040) Supplemental Income and Loss Sch K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc. E file state tax return Sch K-1 (Form 1120S) Shareholder's Share of Income, Deductions, Credits, etc. E file state tax return 1098 Mortgage Interest Statement 3115 Application for Change in Accounting Method 4952 Investment Interest Expense Deduction 8582 Passive Activity Loss Limitations See chapter 12 for information about getting publications and forms. E file state tax return Allocation of Interest The rules for deducting interest vary, depending on whether the loan proceeds are used for business, personal, or investment activities. E file state tax return If you use the proceeds of a loan for more than one type of expense, you must allocate the interest based on the use of the loan's proceeds. E file state tax return Allocate your interest expense to the following categories. E file state tax return Nonpassive trade or business activity interest Passive trade or business activity interest Investment interest Portfolio interest Personal interest In general, you allocate interest on a loan the same way you allocate the loan proceeds. E file state tax return You allocate loan proceeds by tracing disbursements to specific uses. E file state tax return The easiest way to trace disbursements to specific uses is to keep the proceeds of a particular loan separate from any other funds. E file state tax return Secured loan. E file state tax return   The allocation of loan proceeds and the related interest is not generally affected by the use of property that secures the loan. E file state tax return Example. E file state tax return You secure a loan with property used in your business. E file state tax return You use the loan proceeds to buy an automobile for personal use. E file state tax return You must allocate interest expense on the loan to personal use (purchase of the automobile) even though the loan is secured by business property. E file state tax return    If the property that secures the loan is your home, you generally do not allocate the loan proceeds or the related interest. E file state tax return The interest is usually deductible as qualified home mortgage interest, regardless of how the loan proceeds are used. E file state tax return For more information, see Publication 936. E file state tax return Allocation period. E file state tax return   The period for which a loan is allocated to a particular use begins on the date the proceeds are used and ends on the earlier of the following dates. E file state tax return The date the loan is repaid. E file state tax return The date the loan is reallocated to another use. E file state tax return Proceeds not disbursed to borrower. E file state tax return   Even if the lender disburses the loan proceeds to a third party, the allocation of the loan is still based on your use of the funds. E file state tax return This applies whether you pay for property, services, or anything else by incurring a loan, or you take property subject to a debt. E file state tax return Proceeds deposited in borrower's account. E file state tax return   Treat loan proceeds deposited in an account as property held for investment. E file state tax return It does not matter whether the account pays interest. E file state tax return Any interest you pay on the loan is investment interest expense. E file state tax return If you withdraw the proceeds of the loan, you must reallocate the loan based on the use of the funds. E file state tax return Example. E file state tax return Celina, a calendar-year taxpayer, borrows $100,000 on January 4 and immediately uses the proceeds to open a checking account. E file state tax return No other amounts are deposited in the account during the year and no part of the loan principal is repaid during the year. E file state tax return On April 2, Celina uses $20,000 from the checking account for a passive activity expenditure. E file state tax return On September 4, Celina uses an additional $40,000 from the account for personal purposes. E file state tax return Under the interest allocation rules, the entire $100,000 loan is treated as property held for investment for the period from January 4 through April 1. E file state tax return From April 2 through September 3, Celina must treat $20,000 of the loan as used in the passive activity and $80,000 of the loan as property held for investment. E file state tax return From September 4 through December 31, she must treat $40,000 of the loan as used for personal purposes, $20,000 as used in the passive activity, and $40,000 as property held for investment. E file state tax return Order of funds spent. E file state tax return   Generally, you treat loan proceeds deposited in an account as used (spent) before either of the following amounts. E file state tax return Any unborrowed amounts held in the same account. E file state tax return Any amounts deposited after these loan proceeds. E file state tax return Example. E file state tax return On January 9, Olena opened a checking account, depositing $500 of the proceeds of Loan A and $1,000 of unborrowed funds. E file state tax return The following table shows the transactions in her account during the tax year. E file state tax return Date Transaction January 9 $500 proceeds of Loan A and $1,000 unborrowed funds deposited January 14 $500 proceeds of Loan B  deposited February 19 $800 used for personal purposes February 27 $700 used for passive activity June 19 $1,000 proceeds of Loan C  deposited November 20 $800 used for an investment December 18 $600 used for personal purposes Olena treats the $800 used for personal purposes as made from the $500 proceeds of Loan A and $300 of the proceeds of Loan B. E file state tax return She treats the $700 used for a passive activity as made from the remaining $200 proceeds of Loan B and $500 of unborrowed funds. E file state tax return She treats the $800 used for an investment as made entirely from the proceeds of Loan C. E file state tax return She treats the $600 used for personal purposes as made from the remaining $200 proceeds of Loan C and $400 of unborrowed funds. E file state tax return For the periods during which loan proceeds are held in the account, Olena treats them as property held for investment. E file state tax return Payments from checking accounts. E file state tax return   Generally, you treat a payment from a checking or similar account as made at the time the check is written if you mail or deliver it to the payee within a reasonable period after you write it. E file state tax return You can treat checks written on the same day as written in any order. E file state tax return Amounts paid within 30 days. E file state tax return   If you receive loan proceeds in cash or if the loan proceeds are deposited in an account, you can treat any payment (up to the amount of the proceeds) made from any account you own, or from cash, as made from those proceeds. E file state tax return This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. E file state tax return   If the loan proceeds are deposited in an account, you can apply this rule even if the rules stated earlier under Order of funds spent would otherwise require you to treat the proceeds as used for other purposes. E file state tax return If you apply this rule to any payments, disregard those payments (and the proceeds from which they are made) when applying the rules stated under Order of funds spent. E file state tax return   If you received the loan proceeds in cash, you can treat the payment as made on the date you received the cash instead of the date you actually made the payment. E file state tax return Example. E file state tax return Giovanni gets a loan of $1,000 on August 4 and receives the proceeds in cash. E file state tax return Giovanni deposits $1,500 in an account on August 18 and on August 28 writes a check on the account for a passive activity expense. E file state tax return Also, Giovanni deposits his paycheck, deposits other loan proceeds, and pays his bills during the same period. E file state tax return Regardless of these other transactions, Giovanni can treat $1,000 of the deposit he made on August 18 as being paid on August 4 from the loan proceeds. E file state tax return In addition, Giovanni can treat the passive activity expense he paid on August 28 as made from the $1,000 loan proceeds treated as deposited in the account. E file state tax return Optional method for determining date of reallocation. E file state tax return   You can use the following method to determine the date loan proceeds are reallocated to another use. E file state tax return You can treat all payments from loan proceeds in the account during any month as taking place on the later of the following dates. E file state tax return The first day of that month. E file state tax return The date the loan proceeds are deposited in the account. E file state tax return However, you can use this optional method only if you treat all payments from the account during the same calendar month in the same way. E file state tax return Interest on a segregated account. E file state tax return   If you have an account that contains only loan proceeds and interest earned on the account, you can treat any payment from that account as being made first from the interest. E file state tax return When the interest earned is used up, any remaining payments are from loan proceeds. E file state tax return Example. E file state tax return You borrowed $20,000 and used the proceeds of this loan to open a new savings account. E file state tax return When the account had earned interest of $867, you withdrew $20,000 for personal purposes. E file state tax return You can treat the withdrawal as coming first from the interest earned on the account, $867, and then from the loan proceeds, $19,133 ($20,000 − $867). E file state tax return All the interest charged on the loan from the time it was deposited in the account until the time of the withdrawal is investment interest expense. E file state tax return The interest charged on the part of the proceeds used for personal purposes ($19,133) from the time you withdrew it until you either repay it or reallocate it to another use is personal interest expense. E file state tax return The interest charged on the loan proceeds you left in the account ($867) continues to be investment interest expense until you either repay it or reallocate it to another use. E file state tax return Loan repayment. E file state tax return   When you repay any part of a loan allocated to more than one use, treat it as being repaid in the following order. E file state tax return Personal use. E file state tax return Investments and passive activities (other than those included in (3)). E file state tax return Passive activities in connection with a rental real estate activity in which you actively participate. E file state tax return Former passive activities. E file state tax return Trade or business use and expenses for certain low-income housing projects. E file state tax return Line of credit (continuous borrowings). E file state tax return   The following rules apply if you have a line of credit or similar arrangement. E file state tax return Treat all borrowed funds on which interest accrues at the same fixed or variable rate as a single loan. E file state tax return Treat borrowed funds or parts of borrowed funds on which interest accrues at different fixed or variable rates as different loans. E file state tax return Treat these loans as repaid in the order shown on the loan agreement. E file state tax return Loan refinancing. E file state tax return   Allocate the replacement loan to the same uses to which the repaid loan was allocated. E file state tax return Make the allocation only to the extent you use the proceeds of the new loan to repay any part of the original loan. E file state tax return Debt-financed distribution. E file state tax return   A debt-financed distribution occurs when a partnership or S corporation borrows funds and allocates those funds to distributions made to partners or shareholders. E file state tax return The manner in which you report the interest expense associated with the distributed debt proceeds depends on your use of those proceeds. E file state tax return How to report. E file state tax return   If the proceeds were used in a nonpassive trade or business activity, report the interest on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership or S corporation in column (a) and the amount in column (h). E file state tax return If the proceeds were used in a passive activity, follow the Instructions for Form 8582, Passive Activity Loss Limitations, to determine the amount of interest expense that can be reported on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership in column (a) and the amount in column (f). E file state tax return If the proceeds were used in an investment activity, enter the interest on Form 4952. E file state tax return If the proceeds are used for personal purposes, the interest is generally not deductible. E file state tax return Interest You Can Deduct You can generally deduct as a business expense all interest you pay or accrue during the tax year on debts related to your trade or business. E file state tax return Interest relates to your trade or business if you use the proceeds of the loan for a trade or business expense. E file state tax return It does not matter what type of property secures the loan. E file state tax return You can deduct interest on a debt only if you meet all the following requirements. E file state tax return You are legally liable for that debt. E file state tax return Both you and the lender intend that the debt be repaid. E file state tax return You and the lender have a true debtor-creditor relationship. E file state tax return Partial liability. E file state tax return   If you are liable for part of a business debt, you can deduct only your share of the total interest paid or accrued. E file state tax return Example. E file state tax return You and your brother borrow money. E file state tax return You are liable for 50% of the note. E file state tax return You use your half of the loan in your business, and you make one-half of the loan payments. E file state tax return You can deduct your half of the total interest payments as a business deduction. E file state tax return Mortgage. E file state tax return   Generally, mortgage interest paid or accrued on real estate you own legally or equitably is deductible. E file state tax return However, rather than deducting the interest currently, you may have to add it to the cost basis of the property as explained later under Capitalization of Interest. E file state tax return Statement. E file state tax return   If you paid $600 or more of mortgage interest (including certain points) during the year on any one mortgage, you generally will receive a Form 1098 or a similar statement. E file state tax return You will receive the statement if you pay interest to a person (including a financial institution or a cooperative housing corporation) in the course of that person's trade or business. E file state tax return A governmental unit is a person for purposes of furnishing the statement. E file state tax return   If you receive a refund of interest you overpaid in an earlier year, this amount will be reported in box 3 of Form 1098. E file state tax return You cannot deduct this amount. E file state tax return For information on how to report this refund, see Refunds of interest, later in this chapter. E file state tax return Expenses paid to obtain a mortgage. E file state tax return   Certain expenses you pay to obtain a mortgage cannot be deducted as interest. E file state tax return These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses. E file state tax return If the property mortgaged is business or income-producing property, you can amortize the costs over the life of the mortgage. E file state tax return Prepayment penalty. E file state tax return   If you pay off your mortgage early and pay the lender a penalty for doing this, you can deduct the penalty as interest. E file state tax return Interest on employment tax deficiency. E file state tax return   Interest charged on employment taxes assessed on your business is deductible. E file state tax return Original issue discount (OID). E file state tax return   OID is a form of interest. E file state tax return A loan (mortgage or other debt) generally has OID when its proceeds are less than its principal amount. E file state tax return The OID is the difference between the stated redemption price at maturity and the issue price of the loan. E file state tax return   A loan's stated redemption price at maturity is the sum of all amounts (principal and interest) payable on it other than qualified stated interest. E file state tax return Qualified stated interest is stated interest that is unconditionally payable in cash or property (other than another loan of the issuer) at least annually over the term of the loan at a single fixed rate. E file state tax return You generally deduct OID over the term of the loan. E file state tax return Figure the amount to deduct each year using the constant-yield method, unless the OID on the loan is de minimis. E file state tax return De minimis OID. E file state tax return   The OID is de minimis if it is less than one-fourth of 1% (. E file state tax return 0025) of the stated redemption price of the loan at maturity multiplied by the number of full years from the date of original issue to maturity (the term of the loan). E file state tax return   If the OID is de minimis, you can choose one of the following ways to figure the amount you can deduct each year. E file state tax return On a constant-yield basis over the term of the loan. E file state tax return On a straight-line basis over the term of the loan. E file state tax return In proportion to stated interest payments. E file state tax return In its entirety at maturity of the loan. E file state tax return You make this choice by deducting the OID in a manner consistent with the method chosen on your timely filed tax return for the tax year in which the loan is issued. E file state tax return Example. E file state tax return On January 1, 2013, you took out a $100,000 discounted loan and received $98,500 in proceeds. E file state tax return The loan will mature on January 1, 2023 (a 10-year term), and the $100,000 principal is payable on that date. E file state tax return Interest of $10,000 is payable on January 1 of each year, beginning January 1, 2014. E file state tax return The $1,500 OID on the loan is de minimis because it is less than $2,500 ($100,000 × . E file state tax return 0025 × 10). E file state tax return You choose to deduct the OID on a straight-line basis over the term of the loan. E file state tax return Beginning in 2013, you can deduct $150 each year for 10 years. E file state tax return Constant-yield method. E file state tax return   If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year. E file state tax return You figure your deduction for the first year using the following steps. E file state tax return Determine the issue price of the loan. E file state tax return Generally, this equals the proceeds of the loan. E file state tax return If you paid points on the loan (as discussed later), the issue price generally is the difference between the proceeds and the points. E file state tax return Multiply the result in (1) by the yield to maturity. E file state tax return Subtract any qualified stated interest payments from the result in (2). E file state tax return This is the OID you can deduct in the first year. E file state tax return   To figure your deduction in any subsequent year, follow the above steps, except determine the adjusted issue price in step (1). E file state tax return To get the adjusted issue price, add to the issue price any OID previously deducted. E file state tax return Then follow steps (2) and (3) above. E file state tax return   The yield to maturity is generally shown in the literature you receive from your lender. E file state tax return If you do not have this information, consult your lender or tax advisor. E file state tax return In general, the yield to maturity is the discount rate that, when used in computing the present value of all principal and interest payments, produces an amount equal to the principal amount of the loan. E file state tax return Example. E file state tax return The facts are the same as in the previous example, except that you deduct the OID on a constant yield basis over the term of the loan. E file state tax return The yield to maturity on your loan is 10. E file state tax return 2467%, compounded annually. E file state tax return For 2013, you can deduct $93 [($98,500 × . E file state tax return 102467) − $10,000]. E file state tax return For 2014, you can deduct $103 [($98,593 × . E file state tax return 102467) − $10,000]. E file state tax return Loan or mortgage ends. E file state tax return   If your loan or mortgage ends, you may be able to deduct any remaining OID in the tax year in which the loan or mortgage ends. E file state tax return A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. E file state tax return If you refinance with the original lender, you generally cannot deduct the remaining OID in the year in which the refinancing occurs, but you may be able to deduct it over the term of the new mortgage or loan. E file state tax return See Interest paid with funds borrowed from original lender under Interest You Cannot Deduct, later. E file state tax return Points. E file state tax return   The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a loan or a mortgage. E file state tax return These charges are also called loan origination fees, maximum loan charges, discount points, or premium charges. E file state tax return If any of these charges (points) are solely for the use of money, they are interest. E file state tax return   Because points are prepaid interest, you generally cannot deduct the full amount in the year paid. E file state tax return However, you can choose to fully deduct points in the year paid if you meet certain tests. E file state tax return For exceptions to the general rule, see Publication 936. E file state tax return The points reduce the issue price of the loan and result in original issue discount (OID), deductible as explained in the preceding discussion. E file state tax return Partial payments on a nontax debt. E file state tax return   If you make partial payments on a debt (other than a debt owed the IRS), the payments are applied, in general, first to interest and any remainder to principal. E file state tax return You can deduct only the interest. E file state tax return This rule does not apply when it can be inferred that the borrower and lender understood that a different allocation of the payments would be made. E file state tax return Installment purchase. E file state tax return   If you make an installment purchase of business property, the contract between you and the seller generally provides for the payment of interest. E file state tax return If no interest or a low rate of interest is charged under the contract, a portion of the stated principal amount payable under the contract may be recharacterized as interest (unstated interest). E file state tax return The amount recharacterized as interest reduces your basis in the property and increases your interest expense. E file state tax return For more information on installment sales and unstated interest, see Publication 537. E file state tax return Interest You Cannot Deduct Certain interest payments cannot be deducted. E file state tax return In addition, certain other expenses that may seem to be interest but are not, cannot be deducted as interest. E file state tax return You cannot currently deduct interest that must be capitalized, and you generally cannot deduct personal interest. E file state tax return Interest paid with funds borrowed from original lender. E file state tax return   If you use the cash method of accounting, you cannot deduct interest you pay with funds borrowed from the original lender through a second loan, an advance, or any other arrangement similar to a loan. E file state tax return You can deduct the interest expense once you start making payments on the new loan. E file state tax return   When you make a payment on the new loan, you first apply the payment to interest and then to the principal. E file state tax return All amounts you apply to the interest on the first loan are deductible, along with any interest you pay on the second loan, subject to any limits that apply. E file state tax return Capitalized interest. E file state tax return   You cannot currently deduct interest you are required to capitalize under the uniform capitalization rules. E file state tax return See Capitalization of Interest, later. E file state tax return In addition, if you buy property and pay interest owed by the seller (for example, by assuming the debt and any interest accrued on the property), you cannot deduct the interest. E file state tax return Add this interest to the basis of the property. E file state tax return Commitment fees or standby charges. E file state tax return   Fees you incur to have business funds available on a standby basis, but not for the actual use of the funds, are not deductible as interest payments. E file state tax return You may be able to deduct them as business expenses. E file state tax return   If the funds are for inventory or certain property used in your business, the fees are indirect costs and you generally must capitalize them under the uniform capitalization rules. E file state tax return See Capitalization of Interest, later. E file state tax return Interest on income tax. E file state tax return   Interest charged on income tax assessed on your individual income tax return is not a business deduction even though the tax due is related to income from your trade or business. E file state tax return Treat this interest as a business deduction only in figuring a net operating loss deduction. E file state tax return Penalties. E file state tax return   Penalties on underpaid deficiencies and underpaid estimated tax are not interest. E file state tax return You cannot deduct them. E file state tax return Generally, you cannot deduct any fines or penalties. E file state tax return Interest on loans with respect to life insurance policies. E file state tax return   You generally cannot deduct interest on a debt incurred with respect to any life insurance, annuity, or endowment contract that covers any individual unless that individual is a key person. E file state tax return   If the policy or contract covers a key person, you can deduct the interest on up to $50,000 of debt for that person. E file state tax return However, the deduction for any month cannot be more than the interest figured using Moody's Composite Yield on Seasoned Corporate Bonds (formerly known as Moody's Corporate Bond Yield Average-Monthly Average Corporates) (Moody's rate) for that month. E file state tax return Who is a key person?   A key person is an officer or 20% owner. E file state tax return However, the number of individuals you can treat as key persons is limited to the greater of the following. E file state tax return Five individuals. E file state tax return The lesser of 5% of the total officers and employees of the company or 20 individuals. E file state tax return Exceptions for pre-June 1997 contracts. E file state tax return   You can generally deduct the interest if the contract was issued before June 9, 1997, and the covered individual is someone other than an employee, officer, or someone financially interested in your business. E file state tax return If the contract was purchased before June 21, 1986, you can generally deduct the interest no matter who is covered by the contract. E file state tax return Interest allocated to unborrowed policy cash value. E file state tax return   Corporations and partnerships generally cannot deduct any interest expense allocable to unborrowed cash values of life insurance, annuity, or endowment contracts. E file state tax return This rule applies to contracts issued after June 8, 1997, that cover someone other than an officer, director, employee, or 20% owner. E file state tax return For more information, see section 264(f) of the Internal Revenue Code. E file state tax return Capitalization of Interest Under the uniform capitalization rules, you generally must capitalize interest on debt equal to your expenditures to produce real property or certain tangible personal property. E file state tax return The property must be produced by you for use in your trade or business or for sale to customers. E file state tax return You cannot capitalize interest related to property that you acquire in any other manner. E file state tax return Interest you paid or incurred during the production period must be capitalized if the property produced is designated property. E file state tax return Designated property is any of the following. E file state tax return Real property. E file state tax return Tangible personal property with a class life of 20 years or more. E file state tax return Tangible personal property with an estimated production period of more than 2 years. E file state tax return Tangible personal property with an estimated production period of more than 1 year if the estimated cost of production is more than $1 million. E file state tax return Property you produce. E file state tax return   You produce property if you construct, build, install, manufacture, develop, improve, create, raise, or grow it. E file state tax return Treat property produced for you under a contract as produced by you up to the amount you pay or incur for the property. E file state tax return Carrying charges. E file state tax return   Carrying charges include taxes you pay to carry or develop real estate or to carry, transport, or install personal property. E file state tax return You can choose to capitalize carrying charges not subject to the uniform capitalization rules if they are otherwise deductible. E file state tax return For more information, see chapter 7. E file state tax return Capitalized interest. E file state tax return   Treat capitalized interest as a cost of the property produced. E file state tax return You recover your interest when you sell or use the property. E file state tax return If the property is inventory, recover capitalized interest through cost of goods sold. E file state tax return If the property is used in your trade or business, recover capitalized interest through an adjustment to basis, depreciation, amortization, or other method. E file state tax return Partnerships and S corporations. E file state tax return   The interest capitalization rules are applied first at the partnership or S corporation level. E file state tax return The rules are then applied at the partners' or shareholders' level to the extent the partnership or S corporation has insufficient debt to support the production or construction costs. E file state tax return   If you are a partner or a shareholder, you may have to capitalize interest you incur during the tax year for the production costs of the partnership or S corporation. E file state tax return You may also have to capitalize interest incurred by the partnership or S corporation for your own production costs. E file state tax return To properly capitalize interest under these rules, you must be given the required information in an attachment to the Schedule K-1 you receive from the partnership or S corporation. E file state tax return Additional information. E file state tax return   The procedures for applying the uniform capitalization rules are beyond the scope of this publication. E file state tax return For more information, see sections 1. E file state tax return 263A-8 through 1. E file state tax return 263A-15 of the regulations and Notice 88-99. E file state tax return Notice 88-99 is in Cumulative Bulletin 1988-2. E file state tax return When To Deduct Interest If the uniform capitalization rules, discussed under Capitalization of Interest, earlier, do not apply to you, deduct interest as follows. E file state tax return Cash method. E file state tax return   Under the cash method, you can generally deduct only the interest you actually paid during the tax year. E file state tax return You cannot deduct a promissory note you gave as payment because it is a promise to pay and not an actual payment. E file state tax return Prepaid interest. E file state tax return   You generally cannot deduct any interest paid before the year it is due. E file state tax return Interest paid in advance can be deducted only in the tax year in which it is due. E file state tax return Discounted loan. E file state tax return   If interest or a discount is subtracted from your loan proceeds, it is not a payment of interest and you cannot deduct it when you get the loan. E file state tax return For more information, see Original issue discount (OID) under Interest You Can Deduct, earlier. E file state tax return Refunds of interest. E file state tax return   If you pay interest and then receive a refund in the same tax year of any part of the interest, reduce your interest deduction by the refund. E file state tax return If you receive the refund in a later tax year, include the refund in your income to the extent the deduction for the interest reduced your tax. E file state tax return Accrual method. E file state tax return   Under an accrual method, you can deduct only interest that has accrued during the tax year. E file state tax return Prepaid interest. E file state tax return   See Prepaid interest, earlier. E file state tax return Discounted loan. E file state tax return   See Discounted loan, earlier. E file state tax return Tax deficiency. E file state tax return   If you contest a federal income tax deficiency, interest does not accrue until the tax year the final determination of liability is made. E file state tax return If you do not contest the deficiency, then the interest accrues in the year the tax was asserted and agreed to by you. E file state tax return   However, if you contest but pay the proposed tax deficiency and interest, and you do not designate the payment as a cash bond, then the interest is deductible in the year paid. E file state tax return Related person. E file state tax return   If you use an accrual method, you cannot deduct interest owed to a related person who uses the cash method until payment is made and the interest is includible in the gross income of that person. E file state tax return The relationship is determined as of the end of the tax year for which the interest would otherwise be deductible. E file state tax return See section 267 of the Internal Revenue Code for more information. E file state tax return Below-Market Loans If you receive a below-market gift or demand loan and use the proceeds in your trade or business, you may be able to deduct the forgone interest. E file state tax return See Treatment of gift and demand loans, later, in this discussion. E file state tax return A below-market loan is a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. E file state tax return A gift or demand loan that is a below-market loan generally is considered an arm's-length transaction in which you, the borrower, are considered as having received both the following. E file state tax return A loan in exchange for a note that requires the payment of interest at the applicable federal rate. E file state tax return An additional payment in an amount equal to the forgone interest. E file state tax return The additional payment is treated as a gift, dividend, contribution to capital, payment of compensation, or other payment, depending on the substance of the transaction. E file state tax return Forgone interest. E file state tax return   For any period, forgone interest is The interest that would be payable for that period if interest accrued on the loan at the applicable federal rate and was payable annually on December 31, minus Any interest actually payable on the loan for the period. E file state tax return Applicable federal rates are published by the IRS each month in the Internal Revenue Bulletin. E file state tax return Internal Revenue Bulletins are available on the IRS web site at www. E file state tax return irs. E file state tax return gov/irb. E file state tax return You can also contact an IRS office to get these rates. E file state tax return Loans subject to the rules. E file state tax return   The rules for below-market loans apply to the following. E file state tax return Gift loans (below-market loans where the forgone interest is in the nature of a gift). E file state tax return Compensation-related loans (below-market loans between an employer and an employee or between an independent contractor and a person for whom the contractor provides services). E file state tax return Corporation-shareholder loans. E file state tax return Tax avoidance loans (below-market loans where the avoidance of federal tax is one of the main purposes of the interest arrangement). E file state tax return Loans to qualified continuing care facilities under a continuing care contract (made after October 11, 1985). E file state tax return   Except as noted in (5) above, these rules apply to demand loans (loans payable in full at any time upon the lender's demand) outstanding after June 6, 1984, and to term loans (loans that are not demand loans) made after that date. E file state tax return Treatment of gift and demand loans. E file state tax return   If you receive a below-market gift loan or demand loan, you are treated as receiving an additional payment (as a gift, dividend, etc. E file state tax return ) equal to the forgone interest on the loan. E file state tax return You are then treated as transferring this amount back to the lender as interest. E file state tax return These transfers are considered to occur annually, generally on December 31. E file state tax return If you use the loan proceeds in your trade or business, you can deduct the forgone interest each year as a business interest expense. E file state tax return The lender must report it as interest income. E file state tax return Limit on forgone interest for gift loans of $100,000 or less. E file state tax return   For gift loans between individuals, forgone interest treated as transferred back to the lender is limited to the borrower's net investment income for the year. E file state tax return This limit applies if the outstanding loans between the lender and borrower total $100,000 or less. E file state tax return If the borrower's net investment income is $1,000 or less, it is treated as zero. E file state tax return This limit does not apply to a loan if the avoidance of any federal tax is one of the main purposes of the interest arrangement. E file state tax return Treatment of term loans. E file state tax return   If you receive a below-market term loan other than a gift or demand loan, you are treated as receiving an additional cash payment (as a dividend, etc. E file state tax return ) on the date the loan is made. E file state tax return This payment is equal to the loan amount minus the present value, at the applicable federal rate, of all payments due under the loan. E file state tax return The same amount is treated as original issue discount on the loan. E file state tax return See Original issue discount (OID) under Interest You Can Deduct, earlier. E file state tax return Exceptions for loans of $10,000 or less. E file state tax return   The rules for below-market loans do not apply to any day on which the total outstanding loans between the borrower and lender is $10,000 or less. E file state tax return This exception applies only to the following. E file state tax return Gift loans between individuals if the loan is not directly used to buy or carry income-producing assets. E file state tax return Compensation-related loans or corporation-shareholder loans if the avoidance of any federal tax is not a principal purpose of the interest arrangement. E file state tax return This exception does not apply to a term loan described in (2) above that was previously subject to the below-market loan rules. E file state tax return Those rules will continue to apply even if the outstanding balance is reduced to $10,000 or less. E file state tax return Exceptions for loans without significant tax effect. E file state tax return   The following loans are specifically exempted from the rules for below-market loans because their interest arrangements do not have a significant effect on the federal tax liability of the borrower or the lender. E file state tax return Loans made available by lenders to the general public on the same terms and conditions that are consistent with the lender's customary business practices. E file state tax return Loans subsidized by a federal, state, or municipal government that are made available under a program of general application to the public. E file state tax return Certain employee-relocation loans. E file state tax return Certain loans to or from a foreign person, unless the interest income would be effectively connected with the conduct of a U. E file state tax return S. E file state tax return trade or business and not exempt from U. E file state tax return S. E file state tax return tax under an income tax treaty. E file state tax return Any other loan if the taxpayer can show that the interest arrangement has no significant effect on the federal tax liability of the lender or the borrower. E file state tax return Whether an interest arrangement has a significant effect on the federal tax liability of the lender or the borrower will be determined by all the facts and circumstances. E file state tax return Consider all the following factors. E file state tax return Whether items of income and deduction generated by the loan offset each other. E file state tax return The amount of the items. E file state tax return The cost of complying with the below-market loan provisions if they were to apply. E file state tax return Any reasons, other than taxes, for structuring the transaction as a below-market loan. E file state tax return Exception for loans to qualified continuing care facilities. E file state tax return   The below-market interest rules do not apply to a loan owed by a qualified continuing care facility under a continuing care contract if the lender or lender's spouse is age 62 or older by the end of the calendar year. E file state tax return A qualified continuing care facility is one or more facilities (excluding nursing homes) meeting the requirements listed below. E file state tax return Designed to provide services under continuing care contracts (defined below). E file state tax return Includes an independent living unit, and either an assisted living or nursing facility, or both. E file state tax return Substantially all of the independent living unit residents are covered by continuing care contracts. E file state tax return A continuing care contract is a written contract between an individual and a qualified continuing care facility that includes all of the following conditions. E file state tax return The individual or individual's spouse must be entitled to use the facility for the rest of their life or lives. E file state tax return The individual or individual's spouse will be provided with housing, as appropriate for the health of the individual or individual's spouse in an: independent living unit (which has additional available facilities outside the unit for the provision of meals and other personal care), and assisted living or nursing facility available in the continuing care facility. E file state tax return The individual or individual's spouse will be provided with assisted living or nursing care available in the continuing care facility, as required for the health of the individual or the individual's spouse. E file state tax return For more information, see section 7872(h) of the Internal Revenue Code. E file state tax return Sale or exchange of property. E file state tax return   Different rules generally apply to a loan connected with the sale or exchange of property. E file state tax return If the loan does not provide adequate stated interest, part of the principal payment may be considered interest. E file state tax return However, there are exceptions that may require you to apply the below-market interest rate rules to these loans. E file state tax return See Unstated Interest and Original Issue Discount (OID) in Publication 537. E file state tax return More information. E file state tax return   For more information on below-market loans, see section 7872 of the Internal Revenue Code and section 1. E file state tax return 7872-5 of the regulations. E file state tax return Prev  Up  Next   Home   More Online Publications