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Filing State Tax

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Filing State Tax

Filing state tax Publication 971 - Main Content Table of Contents How To Request ReliefException for agreements relating to TEFRA partnership proceedings. Filing state tax The IRS Must Contact Your Spouse or Former Spouse Tax Court Review of Request Community Property LawsRelief for Married Persons Who Did Not File Joint Returns Innocent Spouse ReliefUnderstated Tax Erroneous Items Actual Knowledge or Reason To Know Indications of Unfairness for Innocent Spouse Relief Separation of Liability ReliefLimitations on Relief Equitable ReliefConditions for Getting Equitable Relief Factors for Determining Whether To Grant Equitable Relief RefundsProof Required Refunds Under Equitable Relief Limit on Amount of Refund Filled-in Form 8857 Flowcharts How To Request Relief File Form 8857 to ask the IRS for the types of relief discussed in this publication. Filing state tax If you are requesting relief for more than three tax years, you must file an additional Form 8857. Filing state tax The IRS will review your Form 8857 and let you know if you qualify. Filing state tax A completed Form 8857 is shown later. Filing state tax When to file Form 8857. Filing state tax   You should file Form 8857 as soon as you become aware of a tax liability for which you believe only your spouse or former spouse should be held responsible. Filing state tax The following are some of the ways you may become aware of such a liability. Filing state tax The IRS is examining your tax return and proposing to increase your tax liability. Filing state tax The IRS sends you a notice. Filing state tax   You must file Form 8857 no later than two years after the date on which the IRS first attempted to collect the tax from you that occurs after July 22, 1998. Filing state tax (But see the exceptions below for different filing deadlines that apply. Filing state tax ) For this reason, do not delay filing because you do not have all the documentation. Filing state tax   Collection activities that may start the 2-year period are: The IRS offset your income tax refund against an amount you owed on a joint return for another year and the IRS informed you about your right to file Form 8857. Filing state tax The filing of a claim by the IRS in a court proceeding in which you were a party or the filing of a claim in a proceeding that involves your property. Filing state tax This includes the filing of a proof of claim in a bankruptcy proceeding. Filing state tax The filing of a suit by the United States against you to collect the joint liability. Filing state tax The issuance of a section 6330 notice, which notifies you of the IRS' intent to levy and your right to a collection due process (CDP) hearing. Filing state tax The collection-related notices include, but are not limited to, Letter 11 and Letter 1058. Filing state tax Exception for equitable relief. Filing state tax   On July 25, 2011, the IRS issued Notice 2011-70 (available at www. Filing state tax irs. Filing state tax gov/irb/2011-32_IRB/ar11. Filing state tax html) expanding the amount of time to request equitable relief. Filing state tax The amount of time to request equitable relief depends on whether you are seeking relief from a balance due, seeking a credit or refund, or both: Balance Due – Generally, you must file your request within the time period the IRS has to collect the tax. Filing state tax Generally, the IRS has 10 years from the date the tax liability was assessed to collect the tax. Filing state tax In certain cases, the 10-year period is suspended. Filing state tax The amount of time the suspension is in effect will extend the time the IRS has to collect the tax. Filing state tax See Pub. Filing state tax 594, The IRS Collection Process, for details. Filing state tax Credit or Refund – Generally, you must file your request within 3 years after the date the original return was filed or within 2 years after the date the tax was paid, whichever is later. Filing state tax But you may have more time to file if you live in a federally declared disaster area or you are physically or mentally unable to manage your financial affairs. Filing state tax See Pub. Filing state tax 556, Examination of Returns, Appeal Rights, and Claims for Refund, for details. Filing state tax Both a Balance Due and a Credit or Refund – If you are seeking a refund of amounts you paid and relief from a balance due over and above what you have paid, the time period for credit or refund will apply to any payments you have made, and the time period for collection of a balance due amount will apply to any unpaid liability. Filing state tax Exception for relief based on community property laws. Filing state tax   If you are requesting relief based on community property laws, a different filing deadline applies. Filing state tax See Relief from liability arising from community property law discussed later under Community Property Laws . Filing state tax Form 8857 filed by or on behalf of a decedent. Filing state tax   An executor (including any other duly appointed representative) may pursue a Form 8857 filed during the decedent's lifetime. Filing state tax An executor (including any other duly appointed representative) may also file Form 8857 as long as the decedent satisfied the eligibility requirements while alive. Filing state tax For purposes of separation of liability relief (discussed later), the decedent's marital status is determined on the earlier of the date relief was requested or the date of death. Filing state tax Situations in which you are not entitled to relief. Filing state tax   You are not entitled to innocent spouse relief for any tax year to which the following situations apply. Filing state tax In a final decision dated after July 22, 1998, a court considered whether to grant you relief from joint liability and decided not to do so. Filing state tax In a final decision dated after July 22, 1998, a court did not consider whether to grant you relief from joint liability, but you meaningfully participated in the proceeding and could have asked for relief. Filing state tax You entered into an offer in compromise with the IRS. Filing state tax You entered into a closing agreement with the IRS that disposed of the same liability for which you want to seek relief. Filing state tax Exception for agreements relating to TEFRA partnership proceedings. Filing state tax   You may be entitled to relief, discussed in (4) earlier, if you entered into a closing agreement for both partnership items and nonpartnership items, while you were a party to a pending TEFRA partnership proceeding. Filing state tax (TEFRA is an acronym that refers to the “Tax Equity and Fiscal Responsibility Act of 1982” that prescribed the tax treatment of partnership items. Filing state tax ) You are not entitled to relief for the nonpartnership items, but you will be entitled to relief for the partnership items (if you otherwise qualify). Filing state tax Transferee liability not affected by innocent spouse relief provisions. Filing state tax   The innocent spouse relief provisions do not affect tax liabilities that arise under federal or state transferee liability or property laws. Filing state tax Therefore, even if you are relieved of the tax liability under the innocent spouse relief provisions, you may remain liable for the unpaid tax, interest, and penalties to the extent provided by these laws. Filing state tax Example. Filing state tax Herb and Wanda timely filed their 2008 joint income tax return on April 15, 2009. Filing state tax Herb died in March 2010, and the executor of Herb's will transferred all of the estate's assets to Wanda. Filing state tax In August 2010, the IRS assessed a deficiency for the 2008 return. Filing state tax The items causing the deficiency belong to Herb. Filing state tax Wanda is relieved of the deficiency under the innocent spouse relief provisions, and Herb's estate remains solely liable for it. Filing state tax However, the IRS may collect the deficiency from Wanda to the extent permitted under federal or state transferee liability or property laws. Filing state tax The IRS Must Contact Your Spouse or Former Spouse By law, the IRS must contact your spouse or former spouse. Filing state tax There are no exceptions, even for victims of spousal abuse or domestic violence. Filing state tax We will inform your spouse or former spouse that you filed Form 8857 and will allow him or her to participate in the process. Filing state tax If you are requesting relief from joint and several liability on a joint return, the IRS must also inform him or her of its preliminary and final determinations regarding your request for relief. Filing state tax However, to protect your privacy, the IRS will not disclose your personal information (for example, your current name, address, phone number(s), information about your employer, your income or assets) or any other information that does not relate to making a determination about your request for relief from liability. Filing state tax If you petition the Tax Court (explained below), your spouse or former spouse may see your personal information. Filing state tax Tax Court Review of Request After you file Form 8857, you may be able to petition (ask) the United States Tax Court to review your request for relief in the following two situations. Filing state tax The IRS sends you a final determination letter regarding your request for relief. Filing state tax You do not receive a final determination letter from the IRS within six months from the date you filed Form 8857. Filing state tax If you seek equitable relief for an underpaid tax, you will be able to get a Tax Court review of your request only if the tax arose or remained unpaid on or after December 20, 2006. Filing state tax The United States Tax Court is an independent judicial body and is not part of the IRS. Filing state tax You must file a petition with the United States Tax Court in order for it to review your request for relief. Filing state tax You must file the petition no later than the 90th day after the date the IRS mails its final determination notice to you. Filing state tax If you do not file a petition, or you file it late, the Tax Court cannot review your request for relief. Filing state tax You can get a copy of the rules for filing a petition by writing to the Tax Court at the following address:    United States Tax Court 400 Second Street, NW Washington, DC 20217 Or you can visit the Tax Court's website at www. Filing state tax ustaxcourt. Filing state tax gov Community Property Laws You must generally follow community property laws when filing a tax return if you are married and live in a community property state. Filing state tax Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Filing state tax Generally, community property laws require you to allocate community income and expenses equally between both spouses. Filing state tax However, community property laws are not taken into account in determining whether an item belongs to you or to your spouse (or former spouse) for purposes of requesting any relief from liability. Filing state tax Relief for Married Persons Who Did Not File Joint Returns Married persons who live in community property states, but who did not file joint returns, have two ways to get relief. Filing state tax Relief From Liability Arising From Community Property Law You are not responsible for the tax relating to an item of community income if all the following conditions exist. Filing state tax You did not file a joint return for the tax year. Filing state tax You did not include the item of community income in gross income. Filing state tax The item of community income you did not include is one of the following: Wages, salaries, and other compensation your spouse (or former spouse) received for services he or she performed as an employee. Filing state tax Income your spouse (or former spouse) derived from a trade or business he or she operated as a sole proprietor. Filing state tax Your spouse's (or former spouse's) distributive share of partnership income. Filing state tax Income from your spouse's (or former spouse's) separate property (other than income described in (a), (b), or (c)). Filing state tax Use the appropriate community property law to determine what is separate property. Filing state tax Any other income that belongs to your spouse (or former spouse) under community property law. Filing state tax You establish that you did not know of, and had no reason to know of, that community income. Filing state tax See  Actual Knowledge or Reason To Know , below. Filing state tax Under all facts and circumstances, it would not be fair to include the item of community income in your gross income. Filing state tax See Indications of unfairness for liability arising from community property law, later. Filing state tax Actual knowledge or reason to know. Filing state tax   You knew or had reason to know of an item of community income if: You actually knew of the item of community income, or A reasonable person in similar circumstances would have known of the item of community income. Filing state tax Amount of community income unknown. Filing state tax   If you are aware of the source of the item of community income or the income-producing activity, but are unaware of the specific amount, you are considered to know or have reason to know of the item of community income. Filing state tax Not knowing the specific amount is not a basis for relief. Filing state tax Reason to know. Filing state tax   The IRS will consider all facts and circumstances in determining whether you had reason to know of an item of community income. Filing state tax The facts and circumstances include: The nature of the item of community income and the amount of the item relative to other income items. Filing state tax The financial situation of you and your spouse (or former spouse). Filing state tax Your educational background and business experience. Filing state tax Whether the item of community income represented a departure from a recurring pattern reflected in prior years' returns (for example, omitted income from an investment regularly reported on prior years' returns). Filing state tax Indications of unfairness for liability arising from community property law. Filing state tax   The IRS will consider all of the facts and circumstances of the case in order to determine whether it is unfair to hold you responsible for the understated tax due to the item of community income. Filing state tax   The following are examples of factors the IRS will consider. Filing state tax Whether you received a benefit, either directly or indirectly, from the omitted item of community income (defined below). Filing state tax Whether your spouse (or former spouse) deserted you. Filing state tax Whether you and your spouse have been divorced or separated. Filing state tax  For other factors see Factors for Determining Whether To Grant Equitable Relief later. Filing state tax Benefit from omitted item of community income. Filing state tax   A benefit includes normal support, but does not include de minimis (small) amounts. Filing state tax Evidence of a direct or indirect benefit may consist of transfers of property or rights to property, including transfers received several years after the filing of the return. Filing state tax   For example, if you receive property, including life insurance proceeds, from your spouse (or former spouse) and the property is traceable to omitted items of community income attributable to your spouse (or former spouse), you are considered to have benefitted from those omitted items of community income. Filing state tax Equitable Relief If you do not qualify for the relief described above and are now liable for an underpaid or understated tax you believe should be paid only by your spouse (or former spouse), you may request equitable relief (discussed later). Filing state tax How and When To Request Relief You request relief by filing Form 8857, as discussed earlier. Filing state tax Fill in Form 8857 according to the instructions. Filing state tax For relief from liability arising from community property law, you must file Form 8857 no later than 6 months before the expiration of the period of limitations on assessment (including extensions) against your spouse for the tax year for which you are requesting relief. Filing state tax However, if the IRS begins an examination of your return during that 6-month period, the latest time for requesting relief is 30 days after the date the IRS' initial contact letter to you. Filing state tax The period of limitation on assessment is the amount of time, generally three years, that the IRS has from the date you filed the return to assess taxes that you owe. Filing state tax Innocent Spouse Relief By requesting innocent spouse relief, you can be relieved of responsibility for paying tax, interest, and penalties if your spouse (or former spouse) improperly reported items or omitted items on your tax return. Filing state tax Generally, the tax, interest, and penalties that qualify for relief can only be collected from your spouse (or former spouse). Filing state tax However, you are jointly and individually responsible for any tax, interest, and penalties that do not qualify for relief. Filing state tax The IRS can collect these amounts from either you or your spouse (or former spouse). Filing state tax You must meet all of the following conditions to qualify for innocent spouse relief. Filing state tax You filed a joint return. Filing state tax There is an understated tax on the return that is due to erroneous items (defined later) of your spouse (or former spouse). Filing state tax You can show that when you signed the joint return you did not know, and had no reason to know, that the understated tax existed (or the extent to which the understated tax existed). Filing state tax See Actual Knowledge or Reason To Know, later. Filing state tax Taking into account all the facts and circumstances, it would be unfair to hold you liable for the understated tax. Filing state tax See Indications of Unfairness for Innocent Spouse Relief , later. Filing state tax Innocent spouse relief will not be granted if the IRS proves that you and your spouse (or former spouse) transferred property to one another as part of a fraudulent scheme. Filing state tax A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, former spouse, or business partner. Filing state tax Understated Tax You have an understated tax if the IRS determined that your total tax should be more than the amount that was actually shown on your return. Filing state tax Erroneous Items Erroneous items are either of the following. Filing state tax Unreported income. Filing state tax This is any gross income item received by your spouse (or former spouse) that is not reported. Filing state tax Incorrect deduction, credit, or basis. Filing state tax This is any improper deduction, credit, or property basis claimed by your spouse (or former spouse). Filing state tax The following are examples of erroneous items. Filing state tax The expense for which the deduction is taken was never paid or incurred. Filing state tax For example, your spouse, a cash-basis taxpayer, deducted $10,000 of advertising expenses on Schedule C of your joint Form 1040, but never paid for any advertising. Filing state tax The expense does not qualify as a deductible expense. Filing state tax For example, your spouse claimed a business fee deduction of $10,000 that was for the payment of state fines. Filing state tax Fines are not deductible. Filing state tax No factual argument can be made to support the deductibility of the expense. Filing state tax For example, your spouse claimed $4,000 for security costs related to a home office, which were actually veterinary and food costs for your family's two dogs. Filing state tax Actual Knowledge or Reason To Know You knew or had reason to know of an understated tax if: You actually knew of the understated tax, or A reasonable person in similar circumstances would have known of the understated tax. Filing state tax Actual knowledge. Filing state tax   If you actually knew about an erroneous item that belongs to your spouse (or former spouse), the relief discussed here does not apply to any part of the understated tax due to that item. Filing state tax You and your spouse (or former spouse) remain jointly liable for that part of the understated tax. Filing state tax For information about the criteria for determining whether you actually knew about an erroneous item, see Actual Knowledge later under Separation of Liability Relief. Filing state tax Reason to know. Filing state tax   If you had reason to know about an erroneous item that belongs to your spouse (or former spouse), the relief discussed here does not apply to any part of the understated tax due to that item. Filing state tax You and your spouse (or former spouse) remain jointly liable for that part of the understated tax. Filing state tax   The IRS will consider all facts and circumstances in determining whether you had reason to know of an understated tax due to an erroneous item. Filing state tax The facts and circumstances include: The nature of the erroneous item and the amount of the erroneous item relative to other items. Filing state tax The financial situation of you and your spouse (or former spouse). Filing state tax Your educational background and business experience. Filing state tax The extent of your participation in the activity that resulted in the erroneous item. Filing state tax Whether you failed to ask, at or before the time the return was signed, about items on the return or omitted from the return that a reasonable person would question. Filing state tax Whether the erroneous item represented a departure from a recurring pattern reflected in prior years' returns (for example, omitted income from an investment regularly reported on prior years' returns). Filing state tax Partial relief when a portion of erroneous item is unknown. Filing state tax   You may qualify for partial relief if, at the time you filed your return, you had no knowledge or reason to know of only a portion of an erroneous item. Filing state tax You will be relieved of the understated tax due to that portion of the item if all other requirements are met for that portion. Filing state tax Example. Filing state tax At the time you signed your joint return, you knew that your spouse did not report $5,000 of gambling winnings. Filing state tax The IRS examined your tax return several months after you filed it and determined that your spouse's unreported gambling winnings were actually $25,000. Filing state tax You established that you did not know about, and had no reason to know about, the additional $20,000 because of the way your spouse handled gambling winnings. Filing state tax The understated tax due to the $20,000 will qualify for innocent spouse relief if you meet the other requirements. Filing state tax The understated tax due to the $5,000 of gambling winnings you knew about will not qualify for relief. Filing state tax Indications of Unfairness for Innocent Spouse Relief The IRS will consider all of the facts and circumstances of the case in order to determine whether it is unfair to hold you responsible for the understated tax. Filing state tax The following are examples of factors the IRS will consider. Filing state tax Whether you received a significant benefit (defined below), either directly or indirectly, from the understated tax. Filing state tax Whether your spouse (or former spouse) deserted you. Filing state tax Whether you and your spouse have been divorced or separated. Filing state tax Whether you received a benefit on the return from the understated tax. Filing state tax For other factors, see Factors for Determining Whether To Grant Equitable Relief later under Equitable Relief. Filing state tax Significant benefit. Filing state tax   A significant benefit is any benefit in excess of normal support. Filing state tax Normal support depends on your particular circumstances. Filing state tax Evidence of a direct or indirect benefit may consist of transfers of property or rights to property, including transfers that may be received several years after the year of the understated tax. Filing state tax Example. Filing state tax You receive money from your spouse that is beyond normal support. Filing state tax The money can be traced to your spouse's lottery winnings that were not reported on your joint return. Filing state tax You will be considered to have received a significant benefit from that income. Filing state tax This is true even if your spouse gives you the money several years after he or she received it. Filing state tax Separation of Liability Relief Under this type of relief, the understated tax (plus interest and penalties) on your joint return is allocated between you and your spouse (or former spouse). Filing state tax The understated tax allocated to you is generally the amount you are responsible for. Filing state tax This type of relief is available only for unpaid liabilities resulting from the understated tax. Filing state tax Refunds are not allowed. Filing state tax To request separation of liability relief, you must have filed a joint return and meet either of the following requirements at the time you file Form 8857. Filing state tax You are no longer married to, or are legally separated from, the spouse with whom you filed the joint return for which you are requesting relief. Filing state tax (Under this rule, you are no longer married if you are widowed. Filing state tax ) You were not a member of the same household (explained below) as the spouse with whom you filed the joint return at any time during the 12-month per- iod ending on the date you file Form 8857. Filing state tax Members of the same household. Filing state tax   You and your spouse are not members of the same household if you are living apart and are estranged. Filing state tax However, you and your spouse are considered members of the same household if any of the following conditions are met. Filing state tax You and your spouse reside in the same dwelling. Filing state tax You and your spouse reside in separate dwellings but are not estranged, and one of you is temporarily absent from the other's household as explained in (3) below. Filing state tax Either spouse is temporarily absent from the household and it is reasonable to assume that the absent spouse will return to the household, and the household or a substantially equivalent household is maintained in anticipation of the absent spouse's return. Filing state tax Examples of temporary absences include absence due to imprisonment, illness, business, vacation, military service, or education. Filing state tax Burden of proof. Filing state tax   You must be able to prove that you meet all of the requirements for separation of liability relief (except actual knowledge) and that you did not transfer property to avoid tax (discussed later). Filing state tax You must also establish the basis for allocating the erroneous items. Filing state tax Limitations on Relief Even if you meet the requirements discussed previously, separation of liability relief will not be granted in the following situations. Filing state tax The IRS proves that you and your spouse (or former spouse) transferred assets to one another as part of a fraudulent scheme. Filing state tax A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, former spouse, or business partner. Filing state tax The IRS proves that at the time you signed your joint return, you had actual knowledge (explained below) of any erroneous items giving rise to the deficiency that were allocable to your spouse (or former spouse). Filing state tax For the definition of erroneous items, see Erroneous Items earlier under Innocent Spouse Relief. Filing state tax Your spouse (or former spouse) transferred property to you to avoid tax or the payment of tax. Filing state tax See Transfers of Property To Avoid Tax , later. Filing state tax Actual Knowledge The relief discussed here does not apply to any part of the understated tax due to your spouse's (or former spouse's) erroneous items of which you had actual knowledge. Filing state tax You and your spouse (or former spouse) remain jointly and severally liable for this part of the understated tax. Filing state tax If you had actual knowledge of only a portion of an erroneous item, the IRS will not grant relief for that portion of the item. Filing state tax You had actual knowledge of an erroneous item if: You knew that an item of unreported income was received. Filing state tax (This rule applies whether or not there was a receipt of cash. Filing state tax ) You knew of the facts that made an incorrect deduction or credit unallowable. Filing state tax For a false or inflated deduction, you knew that the expense was not incurred, or not incurred to the extent shown on the tax return. Filing state tax Knowledge of the source of an erroneous item is not sufficient to establish actual knowledge. Filing state tax Also, your actual knowledge may not be inferred when you merely had a reason to know of the erroneous item. Filing state tax Similarly, the IRS does not have to establish that you knew of the source of an erroneous item in order to establish that you had actual knowledge of the item itself. Filing state tax Your actual knowledge of the proper tax treatment of an erroneous item is not relevant for purposes of demonstrating that you had actual knowledge of that item. Filing state tax Neither is your actual knowledge of how the erroneous item was treated on the tax return. Filing state tax For example, if you knew that your spouse received dividend income, relief is not available for that income even if you did not know it was taxable. Filing state tax Example. Filing state tax Bill and Karen Green filed a joint return showing Karen's wages of $50,000 and Bill's self-employment income of $10,000. Filing state tax The IRS audited their return and found that Bill did not report $20,000 of self-employment income. Filing state tax The additional income resulted in a $6,000 understated tax, plus interest and penalties. Filing state tax After obtaining a legal separation from Bill, Karen filed Form 8857 to request separation of liability relief. Filing state tax The IRS proved that Karen actually knew about the $20,000 of additional income at the time she signed the joint return. Filing state tax Bill is liable for all of the understated tax, interest, and penalties because all of it was due to his unreported income. Filing state tax Karen is also liable for the understated tax, interest, and penalties due to the $20,000 of unreported income because she actually knew of the item. Filing state tax The IRS can collect the entire $6,000 plus interest and penalties from either Karen or Bill because they are jointly and individually liable for it. Filing state tax Factors supporting actual knowledge. Filing state tax   The IRS may rely on all facts and circumstances in determining whether you actually knew of an erroneous item at the time you signed the return. Filing state tax The following are examples of factors the IRS may use. Filing state tax Whether you made a deliberate effort to avoid learning about the item in order to be shielded from liability. Filing state tax Whether you and your spouse (or former spouse) jointly owned the property that resulted in the erroneous item. Filing state tax Exception for spousal abuse or domestic violence. Filing state tax   Even if you had actual knowledge, you may still qualify for relief if you establish that: You were the victim of spousal abuse or domestic violence before signing the return, and Because of that abuse, you did not challenge the treatment of any items on the return because you were afraid your spouse (or former spouse) would retaliate against you. Filing state tax   If you establish that you signed your joint return under duress (threat of harm or other form of coercion), then it is not a joint return, and you are not liable for any tax shown on that return or any tax deficiency for that return. Filing state tax However, you may be required to file a separate return for that tax year. Filing state tax For more information about duress, see the instructions for Form 8857. Filing state tax Transfers of Property To Avoid Tax If your spouse (or former spouse) transfers property (or the right to property) to you for the main purpose of avoiding tax or payment of tax, the tax liability allocated to you will be increased by the fair market value of the property on the date of the transfer. Filing state tax The increase may not be more than the entire amount of the liability. Filing state tax A transfer will be presumed to have as its main purpose the avoidance of tax or payment of tax if the transfer is made after the date that is 1 year before the date on which the IRS sent its first letter of proposed deficiency. Filing state tax This presumption will not apply if: The transfer was made under a divorce decree, separate maintenance agreement, or a written instrument incident to such an agreement, or You establish that the transfer did not have as its main purpose the avoidance of tax or payment of tax. Filing state tax If the presumption does not apply, but the IRS can establish that the purpose of the transfer was the avoidance of tax or payment of tax, the tax liability allocated to you will be increased as explained above. Filing state tax Equitable Relief If you do not qualify for innocent spouse relief, separation of liability relief, or relief from liability arising from community property law, you may still be relieved of responsibility for tax, interest, and penalties through equitable relief. Filing state tax Unlike innocent spouse relief or separation of liability relief, you can get equitable relief from an understated tax (defined earlier under Innocent Spouse Relief ) or an underpaid tax. Filing state tax An underpaid tax is an amount of tax you properly reported on your return but you have not paid. Filing state tax For example, your joint 2009 return shows that you and your spouse owed $5,000. Filing state tax You paid $2,000 with the return. Filing state tax You have an underpaid tax of $3,000. Filing state tax Conditions for Getting Equitable Relief You may qualify for equitable relief if you meet all of the following conditions. Filing state tax You are not eligible for innocent spouse relief, separation of liability relief, or relief from liability arising from community property law. Filing state tax You have an understated tax or an underpaid tax. Filing state tax You did not pay the tax. Filing state tax However, see Refunds , later, for situations in which you are entitled to a refund of payments you made. Filing state tax You establish that, taking into account all the facts and circumstances, it would be unfair to hold you liable for the understated or underpaid tax. Filing state tax See Factors for Determining Whether To Grant Equitable Relief, later. Filing state tax You and your spouse (or former spouse) did not transfer assets to one another as a part of a fraudulent scheme. Filing state tax A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, former spouse, or business partner. Filing state tax Your spouse (or former spouse) did not transfer property to you for the main purpose of avoiding tax or the payment of tax. Filing state tax See Transfers of Property To Avoid Tax, earlier, under Separation of Liability Relief. Filing state tax You did not file or fail to file your return with the intent to commit fraud. Filing state tax The income tax liability from which you seek relief must be attributable to an item of the spouse (or former spouse) with whom you filed the joint return, unless one of the following exceptions applies: The item is attributable or partially attributable to you solely due to the operation of community property law. Filing state tax If you meet this exception, that item will be considered attributable to your spouse (or former spouse) for purposes of equitable relief. Filing state tax If the item is titled in your name, the item is presumed to be attributable to you. Filing state tax However, you can rebut this presumption based on the facts and circumstances. Filing state tax You did not know, and had no reason to know, that funds intended for the payment of tax were misappropriated by your spouse (or former spouse) for his or her benefit. Filing state tax If you meet this exception, the IRS will consider granting equitable relief although the underpaid tax may be attributable in part or in full to your item, and only to the extent the funds intended for payment were taken by your spouse (or former spouse). Filing state tax You establish that you were the victim of spousal abuse or domestic violence before signing the return, and that, as a result of the prior abuse, you did not challenge the treatment of any items on the return for fear of your spouse's (or former spouse's) retaliation. Filing state tax If you meet this exception, relief will be considered although the understated tax or underpaid tax may be attributable in part or in full to your item. Filing state tax Factors for Determining Whether To Grant Equitable Relief The IRS will consider all of the facts and circumstances in order to determine whether it is unfair to hold you responsible for the understated or underpaid tax. Filing state tax The following are examples of factors that the IRS will consider to determine whether to grant equitable relief. Filing state tax The IRS will consider all factors and weigh them appropriately. Filing state tax Relevant Factors The following are examples of factors that may be relevant to whether the IRS will grant equitable relief. Filing state tax Whether you are separated (whether legally or not) or divorced from your spouse. Filing state tax A temporary absence, such as an absence due to imprisonment, illness, business, vacation, military service, or education, is not considered separation for this purpose. Filing state tax A temporary absence is one where it is reasonable to assume that the absent spouse will return to the household, and the household or a substantially equivalent household is maintained in anticipation of the absent spouse's return. Filing state tax Whether you would suffer a significant economic hardship if relief is not granted. Filing state tax (In other words, you would not be able to pay your reasonable basic living expenses. Filing state tax ) Whether you have a legal obligation under a divorce decree or agreement to pay the tax. Filing state tax This factor will not weigh in favor of relief if you knew or had reason to know, when entering into the divorce decree or agreement, that your former spouse would not pay the income tax liability. Filing state tax Whether you received a significant benefit (beyond normal support) from the underpaid tax or item causing the understated tax. Filing state tax (For a definition of significant benefit, see Indications of Unfairness for Innocent Spouse Relief earlier. Filing state tax ) Whether you have made a good faith effort to comply with federal income tax laws for the tax year for which you are requesting relief or the following years. Filing state tax Whether you knew or had reason to know about the items causing the understated tax or that the tax would not be paid, as explained next. Filing state tax Knowledge or reason to know. Filing state tax   In the case of an underpaid tax, the IRS will consider whether you did not know and had no reason to know that your spouse (or former spouse) would not pay the income tax liability. Filing state tax   In the case of an income tax liability that arose from an understated tax, the IRS will consider whether you did not know and had no reason to know of the item causing the understated tax. Filing state tax Reason to know of the item giving rise to the understated tax will not be weighed more heavily than other factors. Filing state tax Actual knowledge of the item giving rise to the understated tax, however, is a strong factor weighing against relief. Filing state tax This strong factor may be overcome if the factors in favor of equitable relief are particularly compelling. Filing state tax Reason to know. Filing state tax   In determining whether you had reason to know, the IRS will consider your level of education, any deceit or evasiveness of your spouse (or former spouse), your degree of involvement in the activity generating the income tax liability, your involvement in business and household financial matters, your business or financial expertise, and any lavish or unusual expenditures compared with past spending levels. Filing state tax Example. Filing state tax You and your spouse filed a joint 2009 return. Filing state tax That return showed you owed $10,000. Filing state tax You had $5,000 of your own money and you took out a loan to pay the other $5,000. Filing state tax You gave 2 checks for $5,000 each to your spouse to pay the $10,000 liability. Filing state tax Without telling you, your spouse took the $5,000 loan and spent it on himself. Filing state tax You and your spouse were divorced in 2010. Filing state tax In addition, you had no knowledge or reason to know at the time you signed the return that the tax would not be paid. Filing state tax These facts indicate to the IRS that it may be unfair to hold you liable for the $5,000 underpaid tax. Filing state tax The IRS will consider these facts, together with all of the other facts and circumstances, to determine whether to grant you equitable relief from the $5,000 underpaid tax. Filing state tax Factors Weighing in Favor of Equitable Relief The following are examples of factors that will weigh in favor of equitable relief, but will not weigh against equitable relief. Filing state tax Whether your spouse (or former spouse) abused you. Filing state tax Whether you were in poor mental or physical health on the date you signed the return or at the time you requested relief. Filing state tax Refunds If you are granted relief, refunds are: Permitted under innocent spouse relief as explained later under Limit on Amount of Refund . Filing state tax Not permitted under separation of liability relief. Filing state tax Permitted in limited circumstances under equitable relief, as explained under Refunds Under Equitable Relief. Filing state tax Proof Required The IRS will only refund payments you made with your own money. Filing state tax However, you must provide proof that you made the payments with your own money. Filing state tax Examples of proof are a copy of your bank statement or a canceled check. Filing state tax No proof is required if your individual refund was used by the IRS to pay a tax you owed on a joint tax return for another year. Filing state tax Refunds Under Equitable Relief In the following situations, you are eligible to receive a refund of certain payments you made. Filing state tax Underpaid tax. Filing state tax   If you are granted relief for an underpaid tax, you are eligible for a refund of separate payments that you made after July 22, 1998. Filing state tax However, you are not eligible for refunds of payments made with the joint return, joint payments, or payments that your spouse (or former spouse) made. Filing state tax For example, withholding tax and estimated tax payments cannot be refunded because they are considered made with the joint return. Filing state tax   The amount of the refund is subject to the limit discussed later under Limit on Amount of Refund. Filing state tax Understated tax. Filing state tax   If you are granted relief for an understated tax, you are eligible for a refund of certain payments made under an installment agreement that you entered into with the IRS, if you have not defaulted on the installment agreement. Filing state tax You are not in default if the IRS did not issue you a notice of default or take any action to end the installment agreement. Filing state tax Only installment payments made after the date you filed Form 8857 are eligible for a refund. Filing state tax   The amount of the refund is subject to the limit discussed next. Filing state tax Limit on Amount of Refund The amount of your refund is limited. Filing state tax Read the following chart to find out the limit. Filing state tax IF you file Form 8857. Filing state tax . Filing state tax . Filing state tax THEN the refund cannot be more than. Filing state tax . Filing state tax . Filing state tax Within 3 years after filing your return The part of the tax paid within 3 years (plus any extension of time for filing your return) before you filed Form 8857. Filing state tax After the 3-year period, but within 2 years from the time you paid the tax The tax you paid within 2 years immediately before you filed Form 8857. Filing state tax Filled-in Form 8857 This part explains how Janie Boulder fills out Form 8857 to request innocent spouse relief. Filing state tax Janie and Joe Boulder filed a joint tax return for 2007. Filing state tax They claimed one dependency exemption for their son Michael. Filing state tax Their return was adjusted by the IRS because Joe did not report a $5,000 award he won that year. Filing state tax Janie did not know about the award when the return was filed. Filing state tax They agreed to the adjustment but could not pay the additional amount due of $815 ($650 tax + $165 penalty and interest). Filing state tax Janie and Joe were divorced on May 13, 2009. Filing state tax In February 2010, Janie filed her 2009 federal income tax return as head of household. Filing state tax She expected a refund of $1,203. Filing state tax In May 2010, she received a notice informing her that the IRS had offset her refund against the $815 owed on her joint 2007 income tax return and that she had a right to file Form 8857. Filing state tax Janie applies the conditions listed earlier under Innocent Spouse Relief to see if she qualifies for relief. Filing state tax Janie meets the first and second conditions because the joint tax return they filed has an understated tax due to Joe's erroneous item. Filing state tax Janie believes she meets the third condition. Filing state tax She did not know about the award and had no reason to know about it because of the secretive way Joe conducted his financial affairs. Filing state tax Janie believes she meets the fourth condition. Filing state tax She believes it would be unfair to be held liable for the tax because she did not benefit from the award. Filing state tax Joe spent it on personal items for his use only. Filing state tax Because Janie believes she qualifies for innocent spouse relief, she first completes Part I of Form 8857 to determine if she should file the form. Filing state tax In Part I, she makes all entries under the Tax Year 1 column because she is requesting relief for only one year. Filing state tax Part I Line 1. Filing state tax   She enters “2007” on line 1 because this is the tax year for which she is requesting relief. Filing state tax Line 2. Filing state tax   She checks the box because she wants a refund. Filing state tax Note. Filing state tax Because the IRS used her individual refund to pay the tax owed on the joint tax return, she does not need to provide proof of payment. Filing state tax Line 3. Filing state tax   She checks the “No” box because the IRS did not use her share of a joint refund to pay Joe's past-due debts. Filing state tax Line 4. Filing state tax   She checks the “Yes” box because she filed a joint tax return for tax year 2007. Filing state tax Line 5. Filing state tax   She skips this line because she checked the “Yes” box on line 4. Filing state tax Part II Line 6. Filing state tax   She enters her name, address, social security number, county, and best daytime phone number. Filing state tax Part III Line 7. Filing state tax   She enters Joe's name, address, social security number, and best daytime phone number. Filing state tax Line 8. Filing state tax   She checks the “divorced since” box and enters the date she was divorced as “05/13/2009. Filing state tax ” She attaches a copy of her entire divorce decree (not Illustrated) to the form. Filing state tax Line 9. Filing state tax   She checks the box for “High school diploma, equivalent, or less,” because she had completed high school when her 2007 joint tax return was filed. Filing state tax Line 10. Filing state tax   She checks the “No” box because she was not a victim of spousal abuse or domestic violence. Filing state tax Line 11. Filing state tax   She checks the “No” box because neither she nor Joe incurred any large expenses during the year for which she wants relief. Filing state tax Line 12. Filing state tax   She checks the “Yes” box because she signed the 2007 joint tax return. Filing state tax Line 13. Filing state tax   She checks the “No” box because she did not have a mental or physical condition when the return was filed and does not have one now. Filing state tax Part IV Line 14. Filing state tax   Because she was not involved in preparing the return, she checks the box, “You were not involved in preparing the returns. Filing state tax ” Line 15. Filing state tax   She checks the box, “You did not know anything was incorrect or missing” because she did not know that Joe had received a $5,000 award. Filing state tax She explains this in the space provided. Filing state tax Line 16. Filing state tax   She checks the box, “You knew that person had income” because she knew Joe had income from wages. Filing state tax She also lists Joe's income. Filing state tax Under “Type of Income” she enters “wages. Filing state tax ” Under “Who paid it to that person,” she enters the name of Joe's employer, “Allied. Filing state tax ” Under “Tax Year 1” she enters the amount of Joe's wages, “$40,000. Filing state tax ” Because she is only requesting relief for one tax year, she leaves the entry spaces for “Tax Year 2” and “Tax Year 3” blank. Filing state tax Line 17. Filing state tax   She checks the “No” box because she did not know any amount was owed to the IRS when the 2007 return was signed. Filing state tax Line 18. Filing state tax   She checks the “No” box because, when the return was signed, she was not having financial problems. Filing state tax Line 19. Filing state tax   She checks the box, “You were not involved in handling money for the household” because Joe handled all the money for the household. Filing state tax She provides additional information in the space provided. Filing state tax Line 20. Filing state tax   She checks the “No” box because Joe has never transferred money or property to her. Filing state tax Part V Line 21. Filing state tax   She enters the number “1” on both the line for “Adults” and the line for “Children” because her current household consists of herself and her son. Filing state tax Line 22. Filing state tax   She enters her average monthly income for her entire household. Filing state tax Line 23. Filing state tax   She lists her assets, which are $500 for the fair market value of a car, $450 in her checking account, and $100 in her savings account. Filing state tax Signing and mailing Form 8857. Filing state tax    Janie signs and dates the form. Filing state tax She attaches the copy of her divorce decree (not illustrated) required by line 8. Filing state tax Finally, she sends the form to the IRS address or fax number shown in the instructions for Form 8857. Filing state tax This image is too large to be displayed in the current screen. Filing state tax Please click the link to view the image. Filing state tax Boulder's filled-in Form 8857 page 1 This image is too large to be displayed in the current screen. Filing state tax Please click the link to view the image. Filing state tax Boulder's filled-in Form 8857 page 2 This image is too large to be displayed in the current screen. Filing state tax Please click the link to view the image. Filing state tax Boulder's filled-in Form 8857 page 3 This image is too large to be displayed in the current screen. Filing state tax Please click the link to view the image. Filing state tax Boulder's filled-in Form 8857 page 4 Flowcharts The following flowcharts provide a quick way for determining whether you may qualify for relief. Filing state tax But do not rely on these flowcharts alone. Filing state tax Also read the earlier discussions. Filing state tax Figure A. Filing state tax Do You Qualify for Innocent Spouse Relief? Please click here for the text description of the image. Filing state tax "Do You Qualify for Innocent Spouse Relief?" Figure B. Filing state tax Do You Qualify for Separation of Liability Relief? Please click here for the text description of the image. Filing state tax "Do You Qualify for Separation of Liability Relief?" Figure C. Filing state tax Do You Qualify for Equitable Relief? This image is too large to be displayed in the current screen. Filing state tax Please click the link to view the image. Filing state tax "Do You Qualify for Equitable Relief?" Prev  Up  Next   Home   More Online Publications
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The Filing State Tax

Filing state tax 23. Filing state tax   Interest Expense Table of Contents Introduction Useful Items - You may want to see: Home Mortgage InterestAmount Deductible Points Mortgage Insurance Premiums Form 1098, Mortgage Interest Statement Investment InterestInvestment Property Allocation of Interest Expense Limit on Deduction Items You Cannot DeductPersonal Interest Allocation of Interest How To ReportMore than one borrower. Filing state tax Mortgage proceeds used for business or investment. Filing state tax Introduction This chapter discusses what interest expenses you can deduct. Filing state tax Interest is the amount you pay for the use of borrowed money. Filing state tax The following are types of interest you can deduct as itemized deductions on Schedule A (Form 1040). Filing state tax Home mortgage interest, including certain points and mortgage insurance premiums. Filing state tax Investment interest. Filing state tax This chapter explains these deductions. Filing state tax It also explains where to deduct other types of interest and lists some types of interest you cannot deduct. Filing state tax Use Table 23-1 to find out where to get more information on various types of interest, including investment interest. Filing state tax Useful Items - You may want to see: Publication 936 Home Mortgage Interest Deduction 550 Investment Income and Expenses Home Mortgage Interest Generally, home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). Filing state tax The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan. Filing state tax You can deduct home mortgage interest if all the following conditions are met. Filing state tax You file Form 1040 and itemize deductions on Schedule A (Form 1040). Filing state tax The mortgage is a secured debt on a qualified home in which you have an ownership interest. Filing state tax (Generally, your mortgage is a secured debt if you put your home up as collateral to protect the interest of the lender. Filing state tax The term “qualified home” means your main home or second home. Filing state tax For details, see Publication 936. Filing state tax )  Both you and the lender must intend that the loan be repaid. Filing state tax Amount Deductible In most cases, you can deduct all of your home mortgage interest. Filing state tax How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds. Filing state tax Fully deductible interest. Filing state tax   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. Filing state tax (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. Filing state tax )   The three categories are as follows: Mortgages you took out on or before October 13, 1987 (called grandfathered debt). Filing state tax 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). Filing state tax 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). Filing state tax The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home. Filing state tax   See Part II of Publication 936 for more detailed definitions of grandfathered, home acquisition, and home equity debt. Filing state tax    You can use Figure 23-A to check whether your home mortgage interest is fully deductible. Filing state tax Figure 23-A. Filing state tax Is My Home Mortgage Interest Fully Deductible? Please click here for the text description of the image. Filing state tax Figure 23-A. Filing state tax Is My Interest Fully Deductible? Limits on deduction. Filing state tax   You cannot fully deduct interest on a mortgage that does not fit into any of the three categories listed earlier. Filing state tax If this applies to you, see Part II of Publication 936 to figure the amount of interest you can deduct. Filing state tax Special Situations This section describes certain items that can be included as home mortgage interest and others that cannot. Filing state tax It also describes certain special situations that may affect your deduction. Filing state tax Late payment charge on mortgage payment. Filing state tax   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. Filing state tax Mortgage prepayment penalty. Filing state tax   If you pay off your home mortgage early, you may have to pay a penalty. Filing state tax You can deduct that penalty as home mortgage interest provided the penalty is not for a specific service performed or cost incurred in connection with your mortgage loan. Filing state tax Sale of home. Filing state tax   If you sell your home, you can deduct your home mortgage interest (subject to any limits that apply) paid up to, but not including, the date of sale. Filing state tax Example. Filing state tax John and Peggy Harris sold their home on May 7. Filing state tax Through April 30, they made home mortgage interest payments of $1,220. Filing state tax 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. Filing state tax Their mortgage interest deduction is $1,270 ($1,220 + $50). Filing state tax Prepaid interest. Filing state tax   If you pay interest in advance for a period that goes beyond the end of the tax year, you must spread this interest over the tax years to which it applies. Filing state tax You can deduct in each year only the interest that qualifies as home mortgage interest for that year. Filing state tax However, there is an exception that applies to points, discussed later. Filing state tax Mortgage interest credit. Filing state tax   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. Filing state tax Figure the credit on Form 8396, Mortgage Interest Credit. Filing state tax If you take this credit, you must reduce your mortgage interest deduction by the amount of the credit. Filing state tax   For more information on the credit, see chapter 37. Filing state tax Ministers' and military housing allowance. Filing state tax   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. Filing state tax Hardest Hit Fund and Emergency Homeowners' Loan Programs. Filing state tax   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. Filing state tax You received assistance under: A State Housing Finance Agency (State HFA) Hardest Hit Fund program in which program payments could be used to pay mortgage interest, or An Emergency Homeowners' Loan Program administered by the Department of Housing and Urban Development (HUD) or a state. Filing state tax You meet the rules to deduct all of the mortgage interest on your loan and all of the real estate taxes on your main home. Filing state tax If you meet these tests, then you can deduct all of the payments you actually made during the year to your mortgage servicer, the State HFA, or HUD on the home mortgage (including the amount shown on box 3 of Form 1098-MA, Mortgage Assistance Payments), but not more than the sum of the amounts shown on Form 1098, Mortgage Interest Statement, in box 1 (mortgage interest received from payer(s) / borrower(s)), box 4 (mortgage insurance premiums) and box 5 (real property taxes). Filing state tax However, you are not required to use this special method to compute your deduction for mortgage interest and real estate taxes on your main home. Filing state tax Mortgage assistance payments under section 235 of the National Housing Act. Filing state tax   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. Filing state tax You cannot deduct the interest that is paid for you. Filing state tax No other effect on taxes. Filing state tax   Do not include these mortgage assistance payments in your income. Filing state tax Also, do not use these payments to reduce other deductions, such as real estate taxes. Filing state tax Divorced or separated individuals. Filing state tax   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. Filing state tax See the discussion of Payments for jointly-owned home in chapter 18. Filing state tax Redeemable ground rents. Filing state tax   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct them as mortgage interest. Filing state tax   Payments made to end the lease and to buy the lessor's entire interest in the land are not deductible as mortgage interest. Filing state tax For more information, see Publication 936. Filing state tax Nonredeemable ground rents. Filing state tax   Payments on a nonredeemable ground rent are not mortgage interest. Filing state tax You can deduct them as rent if they are a business expense or if they are for rental property. Filing state tax Reverse mortgages. Filing state tax   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. Filing state tax With a reverse mortgage, you retain title to your home. Filing state tax 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. Filing state tax Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable. Filing state tax Any interest (including original issue discount) accrued on a reverse mortgage is not deductible until the loan is paid in full. Filing state tax Your deduction may be limited because a reverse mortgage loan generally is subject to the limit on Home Equity Debt discussed in Publication 936. Filing state tax Rental payments. Filing state tax   If you live in a house before final settlement on the purchase, any payments you make for that period are rent and not interest. Filing state tax This is true even if the settlement papers call them interest. Filing state tax You cannot deduct these payments as home mortgage interest. Filing state tax Mortgage proceeds invested in tax-exempt securities. Filing state tax   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. Filing state tax “Grandfathered debt” and “home equity debt” are defined earlier under Amount Deductible. Filing state tax Refunds of interest. Filing state tax   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. Filing state tax 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. Filing state tax However, you need to include it only up to the amount of the deduction that reduced your tax in the earlier year. Filing state tax This is true whether the interest overcharge was refunded to you or was used to reduce the outstanding principal on your mortgage. Filing state tax    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. Filing state tax For information about Form 1098, see Form 1098, Mortgage Interest Statement , later. Filing state tax   For more information on how to treat refunds of interest deducted in earlier years, see Recoveries in chapter 12. Filing state tax Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Filing state tax Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. Filing state tax A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. Filing state tax See Points paid by the seller , later. Filing state tax General Rule You generally cannot deduct the full amount of points in the year paid. Filing state tax Because they are prepaid interest, you generally deduct them ratably over the life (term) of the mortgage. Filing state tax See Deduction Allowed Ratably , next. Filing state tax For exceptions to the general rule, see Deduction Allowed in Year Paid , later. Filing state tax 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. Filing state tax You use the cash method of accounting. Filing state tax This means you report income in the year you receive it and deduct expenses in the year you pay them. Filing state tax Most individuals use this method. Filing state tax Your loan is secured by a home. Filing state tax (The home does not need to be your main home. Filing state tax ) Your loan period is not more than 30 years. Filing state tax 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. Filing state tax 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. Filing state tax Deduction Allowed in Year Paid You can fully deduct points in the year paid if you meet all the following tests. Filing state tax (You can use Figure 23-B as a quick guide to see whether your points are fully deductible in the year paid. Filing state tax ) Your loan is secured by your main home. Filing state tax (Your main home is the one you ordinarily live in most of the time. Filing state tax ) Paying points is an established business practice in the area where the loan was made. Filing state tax The points paid were not more than the points generally charged in that area. Filing state tax You use the cash method of accounting. Filing state tax This means you report income in the year you receive it and deduct expenses in the year you pay them. Filing state tax (If you want more information about this method, see Accounting Methods in chapter 1. Filing state tax ) The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes. Filing state tax The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. Filing state tax The funds you provided are not required to have been applied to the points. Filing state tax They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. Filing state tax You cannot have borrowed these funds from your lender or mortgage broker. Filing state tax You use your loan to buy or build your main home. Filing state tax The points were computed as a percentage of the principal amount of the mortgage. Filing state tax The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. Filing state tax The points may be shown as paid from either your funds or the seller's. Filing state tax Figure 23-B. Filing state tax Are My Points Fully Deductible This Year? Please click here for the text description of the image. Filing state tax Figure 23-B. Filing state tax Are My Points Fully Deductible This Year? Note. Filing state tax 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. Filing state tax Home improvement loan. Filing state tax   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. Filing state tax Second home. Filing state tax You cannot fully deduct in the year paid points you pay on loans secured by your second home. Filing state tax You can deduct these points only over the life of the loan. Filing state tax Refinancing. Filing state tax   Generally, points you pay to refinance a mortgage are not deductible in full in the year you pay them. Filing state tax This is true even if the new mortgage is secured by your main home. Filing state tax   However, if you use part of the refinanced mortgage proceeds to improve your main home and you meet the first 6 tests listed under Deduction Allowed in Year Paid , earlier, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. Filing state tax You can deduct the rest of the points over the life of the loan. Filing state tax Example 1. Filing state tax In 1998, Bill Fields got a mortgage to buy a home. Filing state tax In 2013, Bill refinanced that mortgage with a 15-year $100,000 mortgage loan. Filing state tax The mortgage is secured by his home. Filing state tax To get the new loan, he had to pay three points ($3,000). Filing state tax 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. Filing state tax Bill paid the points out of his private funds, rather than out of the proceeds of the new loan. Filing state tax The payment of points is an established practice in the area, and the points charged are not more than the amount generally charged there. Filing state tax Bill's first payment on the new loan was due July 1. Filing state tax He made six payments on the loan in 2013 and is a cash basis taxpayer. Filing state tax Bill used the funds from the new mortgage to repay his existing mortgage. Filing state tax 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. Filing state tax He cannot deduct all of the points in 2013. Filing state tax He can deduct two points ($2,000) ratably over the life of the loan. Filing state tax He deducts $67 [($2,000 ÷ 180 months) × 6 payments] of the points in 2013. Filing state tax The other point ($1,000) was a fee for services and is not deductible. Filing state tax Example 2. Filing state tax 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. Filing state tax Bill deducts 25% ($25,000 ÷ $100,000) of the points ($2,000) in 2013. Filing state tax His deduction is $500 ($2,000 × 25%). Filing state tax Bill also deducts the ratable part of the remaining $1,500 ($2,000 − $500) that must be spread over the life of the loan. Filing state tax This is $50 [($1,500 ÷ 180 months) × 6 payments] in 2013. Filing state tax The total amount Bill deducts in 2013 is $550 ($500 + $50). Filing state tax Special Situations This section describes certain special situations that may affect your deduction of points. Filing state tax Original issue discount. Filing state tax   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. Filing state tax This reduction results in original issue discount, which is discussed in chapter 4 of Publication 535. Filing state tax Amounts charged for services. Filing state tax   Amounts charged by the lender for specific services connected to the loan are not interest. Filing state tax Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. Filing state tax You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. Filing state tax Points paid by the seller. Filing state tax   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. Filing state tax Treatment by seller. Filing state tax   The seller cannot deduct these fees as interest. Filing state tax But they are a selling expense that reduces the amount realized by the seller. Filing state tax See chapter 15 for information on selling your home. Filing state tax Treatment by buyer. Filing state tax    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. Filing state tax If all the tests under Deduction Allowed in Year Paid , earlier, are met, the buyer can deduct the points in the year paid. Filing state tax If any of those tests are not met, the buyer deducts the points over the life of the loan. Filing state tax   For information about basis, see chapter 13. Filing state tax Funds provided are less than points. Filing state tax   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. Filing state tax In addition, you can deduct any points paid by the seller. Filing state tax Example 1. Filing state tax When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). Filing state tax You meet all the tests for deducting points in the year paid, except the only funds you provided were a $750 down payment. Filing state tax Of the $1,000 charged for points, you can deduct $750 in the year paid. Filing state tax You spread the remaining $250 over the life of the mortgage. Filing state tax Example 2. Filing state tax The facts are the same as in Example 1, except that the person who sold you your home also paid one point ($1,000) to help you get your mortgage. Filing state tax In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). Filing state tax You spread the remaining $250 over the life of the mortgage. Filing state tax You must reduce the basis of your home by the $1,000 paid by the seller. Filing state tax Excess points. Filing state tax   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. Filing state tax You must spread any additional points over the life of the mortgage. Filing state tax Mortgage ending early. Filing state tax   If you spread your deduction for points over the life of the mortgage, you can deduct any remaining balance in the year the mortgage ends. Filing state tax However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. Filing state tax Instead, deduct the remaining balance over the term of the new loan. Filing state tax    A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. Filing state tax Example. Filing state tax Dan paid $3,000 in points in 2002 that he had to spread out over the 15-year life of the mortgage. Filing state tax He deducts $200 points per year. Filing state tax Through 2012, Dan has deducted $2,200 of the points. Filing state tax Dan prepaid his mortgage in full in 2013. Filing state tax He can deduct the remaining $800 of points in 2013. Filing state tax Limits on deduction. Filing state tax   You cannot fully deduct points paid on a mortgage unless the mortgage fits into one of the categories listed earlier under Fully deductible interest . Filing state tax See Publication 936 for details. Filing state tax Mortgage Insurance Premiums You can treat amounts you paid during 2013 for qualified mortgage insurance as home mortgage interest. Filing state tax The insurance must be in connection with home acquisition debt and the insurance contract must have been issued after 2006. Filing state tax Qualified mortgage insurance. Filing state tax   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). Filing state tax   Mortgage insurance provided by the Department of Veterans Affairs is commonly known as a funding fee. Filing state tax If provided by the Rural Housing Service, it is commonly known as a guarantee fee. Filing state tax These fees can be deducted fully in 2013 if the mortgage insurance contract was issued in 2013. Filing state tax Contact the mortgage insurance issuer to determine the deductible amount if it is not reported in box 4 of Form 1098. Filing state tax Special rules for prepaid mortgage insurance. Filing state tax   Generally, if you paid premiums for qualified mortgage insurance that are allocable to periods after the close of the tax year, such premiums are treated as paid in the period to which they are allocated. Filing state tax 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. Filing state tax No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term. Filing state tax This paragraph does not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service. Filing state tax See the Example below. Filing state tax Example. Filing state tax Ryan purchased a home in May of 2012 and financed the home with a 15-year mortgage. Filing state tax Ryan also prepaid all of the $9,240 in private mortgage insurance required at the time of closing in May. Filing state tax 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. Filing state tax Ryan's adjusted gross income (AGI) for 2012 is $76,000. Filing state tax Ryan can deduct $880 ($9,240 ÷ 84 × 8 months) for qualified mortgage insurance premiums in 2012. Filing state tax For 2013, Ryan can deduct $1,320 ($9,240 ÷ 84 × 12 months) if his AGI is $100,000 or less. Filing state tax 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). Filing state tax Limit on deduction. Filing state tax   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. Filing state tax See Line 13 in the instructions for Schedule A (Form 1040) and complete the Mortgage Insurance Premiums Deduction Worksheet to figure the amount you can deduct. Filing state tax If your adjusted gross income is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. Filing state tax 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. Filing state tax 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. Filing state tax A governmental unit is a person for purposes of furnishing the statement. Filing state tax The statement for each year should be sent to you by January 31 of the following year. Filing state tax A copy of this form will also be sent to the IRS. Filing state tax 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. Filing state tax However, it should not show any interest that was paid for you by a government agency. Filing state tax As a general rule, Form 1098 will include only points that you can fully deduct in the year paid. Filing state tax However, certain points not included on Form 1098 also may be deductible, either in the year paid or over the life of the loan. Filing state tax See Points , earlier, to determine whether you can deduct points not shown on Form 1098. Filing state tax Prepaid interest on Form 1098. Filing state tax   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. Filing state tax However, you cannot deduct the prepaid amount for January 2014 in 2013. Filing state tax (See Prepaid interest , earlier. Filing state tax ) You will have to figure the interest that accrued for 2014 and subtract it from the amount in box 1. Filing state tax You will include the interest for January 2014 with the other interest you pay for 2014. Filing state tax See How To Report , later. Filing state tax Refunded interest. Filing state tax   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. Filing state tax See Refunds of interest , earlier. Filing state tax Mortgage insurance premiums. Filing state tax   The amount of mortgage insurance premiums you paid during 2013 may be shown in box 4 of Form 1098. Filing state tax See Mortgage Insurance Premiums, earlier. Filing state tax Investment Interest This section discusses interest expenses you may be able to deduct as an investor. Filing state tax If you borrow money to buy property you hold for investment, the interest you pay is investment interest. Filing state tax You can deduct investment interest subject to the limit discussed later. Filing state tax However, you cannot deduct interest you incurred to produce tax-exempt income. Filing state tax Nor can you deduct interest expenses on straddles. Filing state tax Investment interest does not include any qualified home mortgage interest or any interest taken into account in computing income or loss from a passive activity. Filing state tax Investment Property Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. Filing state tax It also includes property that produces gain or loss (not derived in the ordinary course of a trade or business) from the sale or trade of property producing these types of income or held for investment (other than an interest in a passive activity). Filing state tax Investment property also includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity). Filing state tax Partners, shareholders, and beneficiaries. Filing state tax   To determine your investment interest, combine your share of investment interest from a partnership, S corporation, estate, or trust with your other investment interest. Filing state tax Allocation of Interest Expense If you borrow money for business or personal purposes as well as for investment, you must allocate the debt among those purposes. Filing state tax Only the interest expense on the part of the debt used for investment purposes is treated as investment interest. Filing state tax The allocation is not affected by the use of property that secures the debt. Filing state tax Limit on Deduction Generally, your deduction for investment interest expense is limited to the amount of your net investment income. Filing state tax You can carry over the amount of investment interest that you could not deduct because of this limit to the next tax year. Filing state tax The interest carried over is treated as investment interest paid or accrued in that next year. Filing state tax You can carry over disallowed investment interest to the next tax year even if it is more than your taxable income in the year the interest was paid or accrued. Filing state tax Net Investment Income Determine the amount of your net investment income by subtracting your investment expenses (other than interest expense) from your investment income. Filing state tax Investment income. Filing state tax    This generally includes your gross income from property held for investment (such as interest, dividends, annuities, and royalties). Filing state tax Investment income does not include Alaska Permanent Fund dividends. Filing state tax It also does not include qualified dividends or net capital gain unless you choose to include them. Filing state tax Choosing to include qualified dividends. Filing state tax   Investment income generally does not include qualified dividends, discussed in chapter 8. Filing state tax However, you can choose to include all or part of your qualified dividends in investment income. Filing state tax   You make this choice by completing Form 4952, line 4g, according to its instructions. Filing state tax   If you choose to include any amount of your qualified dividends in investment income, you must reduce your qualified dividends that are eligible for the lower capital gains tax rates by the same amount. Filing state tax Choosing to include net capital gain. Filing state tax   Investment income generally does not include net capital gain from disposing of investment property (including capital gain distributions from mutual funds). Filing state tax However, you can choose to include all or part of your net capital gain in investment income. Filing state tax    You make this choice by completing Form 4952, line 4g, according to its instructions. Filing state tax   If you choose to include any amount of your net capital gain in investment income, you must reduce your net capital gain that is eligible for the lower capital gains tax rates by the same amount. Filing state tax    Before making either choice, consider the overall effect on your tax liability. Filing state tax Compare your tax if you make one or both of these choices with your tax if you do not. Filing state tax Investment income of child reported on parent's return. Filing state tax    Investment income includes the part of your child's interest and dividend income that you choose to report on your return. Filing state tax If the child does not have qualified dividends, Alaska Permanent Fund dividends, or capital gain distributions, this is the amount on line 6 of Form 8814, Parents' Election To Report Child's Interest and Dividends. Filing state tax Child's qualified dividends. Filing state tax   If part of the amount you report is your child's qualified dividends, that part (which is reported on Form 1040, line 9b) generally does not count as investment income. Filing state tax However, you can choose to include all or part of it in investment income, as explained under Choosing to include qualified dividends , earlier. Filing state tax   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured next under Child's Alaska Permanent Fund dividends). Filing state tax Child's Alaska Permanent Fund dividends. Filing state tax   If part of the amount you report is your child's Alaska Permanent Fund dividends, that part does not count as investment income. Filing state tax To figure the amount of your child's income that you can consider your investment income, start with the amount on Form 8814, line 6. Filing state tax Multiply that amount by a percentage that is equal to the Alaska Permanent Fund dividends divided by the total amount on Form 8814, line 4. Filing state tax Subtract the result from the amount on Form 8814, line 12. Filing state tax Child's capital gain distributions. Filing state tax    If part of the amount you report is your child's capital gain distributions, that part (which is reported on Schedule D, line 13, or Form 1040, line 13) generally does not count as investment income. Filing state tax However, you can choose to include all or part of it in investment income, as explained in Choosing to include net capital gain , earlier. Filing state tax   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured under Child's Alaska Permanent Fund dividends , earlier). Filing state tax Investment expenses. Filing state tax   Investment expenses are your allowed deductions (other than interest expense) directly connected with the production of investment income. Filing state tax Investment expenses that are included as a miscellaneous itemized deduction on Schedule A (Form 1040) are allowable deductions after applying the 2% limit that applies to miscellaneous itemized deductions. Filing state tax Use the smaller of: The investment expenses included on Schedule A (Form 1040), line 23, or The amount on Schedule A, line 27. Filing state tax Losses from passive activities. Filing state tax   Income or expenses that you used in computing income or loss from a passive activity are not included in determining your investment income or investment expenses (including investment interest expense). Filing state tax See Publication 925, Passive Activity and At-Risk Rules, for information about passive activities. Filing state tax Form 4952 Use Form 4952, Investment Interest Expense Deduction, to figure your deduction for investment interest. Filing state tax Exception to use of Form 4952. Filing state tax   You do not have to complete Form 4952 or attach it to your return if you meet all of the following tests. Filing state tax Your investment interest expense is not more than your investment income from interest and ordinary dividends minus any qualified dividends. Filing state tax You do not have any other deductible investment expenses. Filing state tax You have no carryover of investment interest expense from 2012. Filing state tax If you meet all of these tests, you can deduct all of your investment interest. Filing state tax More Information For more information on investment interest, see Interest Expenses in chapter 3 of Publication 550. Filing state tax Items You Cannot Deduct Some interest payments are not deductible. Filing state tax Certain expenses similar to interest also are not deductible. Filing state tax Nondeductible expenses include the following items. Filing state tax Personal interest (discussed later). Filing state tax Service charges (however, see Other Expenses (Line 23) in chapter 28). Filing state tax Annual fees for credit cards. Filing state tax Loan fees. Filing state tax Credit investigation fees. Filing state tax Interest to purchase or carry tax-exempt securities. Filing state tax Penalties. Filing state tax   You cannot deduct fines and penalties paid to a government for violations of law, regardless of their nature. Filing state tax Personal Interest Personal interest is not deductible. Filing state tax Personal interest is any interest that is not home mortgage interest, investment interest, business interest, or other deductible interest. Filing state tax It includes the following items. Filing state tax Interest on car loans (unless you use the car for business). Filing state tax Interest on federal, state, or local income tax. Filing state tax Finance charges on credit cards, retail installment contracts, and revolving charge accounts incurred for personal expenses. Filing state tax Late payment charges by a public utility. Filing state tax You may be able to deduct interest you pay on a qualified student loan. Filing state tax For details, see Publication 970, Tax Benefits for Education. Filing state tax Allocation of Interest If you use the proceeds of a loan for more than one purpose (for example, personal and business), you must allocate the interest on the loan to each use. Filing state tax However, you do not have to allocate home mortgage interest if it is fully deductible, regardless of how the funds are used. Filing state tax You allocate interest (other than fully deductible home mortgage interest) on a loan in the same way as the loan itself is allocated. Filing state tax You do this by tracing disbursements of the debt proceeds to specific uses. Filing state tax For details on how to do this, see chapter 4 of Publication 535. Filing state tax How To Report You must file Form 1040 to deduct any home mortgage interest expense on your tax return. Filing state tax Where you deduct your interest expense generally depends on how you use the loan proceeds. Filing state tax See Table 23-1 for a summary of where to deduct your interest expense. Filing state tax Home mortgage interest and points. Filing state tax   Deduct the home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 10. Filing state tax 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. Filing state tax Attach a statement explaining the difference and print “See attached” next to line 10. Filing state tax    Deduct home mortgage interest that was not reported to you on Form 1098 on Schedule A (Form 1040), line 11. Filing state tax 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. Filing state tax The seller must give you this number and you must give the seller your TIN. Filing state tax A Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. Filing state tax Failure to meet any of these requirements may result in a $50 penalty for each failure. Filing state tax 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. Filing state tax See Social Security Number (SSN) in chapter 1 for more information about TINs. Filing state tax    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. Filing state tax   Deduct mortgage insurance premiums on Schedule A (Form 1040), line 13. Filing state tax More than one borrower. Filing state tax   If you and at least one other person (other than your spouse if you file a joint return) were liable for and paid interest on a mortgage that was for your home, and the other person received a Form 1098 showing the interest that was paid during the year, attach a statement to your return explaining this. Filing state tax Show how much of the interest each of you paid, and give the name and address of the person who received the form. Filing state tax Deduct your share of the interest on Schedule A (Form 1040), line 11, and print “See attached” next to the line. Filing state tax Also, deduct your share of any qualified mortgage insurance premiums on Schedule A (Form 1040), line 13. Filing state tax   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. Filing state tax You should let each of the other borrowers know what his or her share is. Filing state tax Mortgage proceeds used for business or investment. Filing state tax    If your home mortgage interest deduction is limited, but all or part of the mortgage proceeds were used for business, investment, or other deductible activities, see Table 23-1. Filing state tax It shows where to deduct the part of your excess interest that is for those activities. Filing state tax Investment interest. Filing state tax    Deduct investment interest, subject to certain limits discussed in Publication 550, on Schedule A (Form 1040), line 14. Filing state tax Amortization of bond premium. Filing state tax   There are various ways to treat the premium you pay to buy taxable bonds. Filing state tax See Bond Premium Amortization in Publication 550. Filing state tax Income-producing rental or royalty interest. Filing state tax   Deduct interest on a loan for income-producing rental or royalty property that is not used in your business in Part I of Schedule E (Form 1040). Filing state tax Example. Filing state tax You rent out part of your home and borrow money to make repairs. Filing state tax You can deduct only the interest payment for the rented part in Part I of Schedule E (Form 1040). Filing state tax Deduct the rest of the interest payment on Schedule A (Form 1040) if it is deductible home mortgage interest. Filing state tax Table 23-1. Filing state tax Where To Deduct Your Interest Expense IF you have . Filing state tax . Filing state tax . Filing state tax THEN deduct it on . Filing state tax . Filing state tax . Filing state tax AND for more information go to . Filing state tax . Filing state tax . Filing state tax deductible student loan interest Form 1040, line 33, or Form 1040A, line 18 Publication 970. Filing state tax deductible home mortgage interest and points reported on Form 1098 Schedule A (Form 1040), line 10 Publication 936. Filing state tax deductible home mortgage interest not reported on Form 1098 Schedule A (Form 1040), line 11 Publication 936. Filing state tax deductible points not reported on Form 1098 Schedule A (Form 1040), line 12 Publication 936. Filing state tax deductible mortgage insurance premiums Schedule A (Form 1040), line 13 Publication 936. Filing state tax deductible investment interest (other than incurred to produce rents or royalties) Schedule A (Form 1040), line 14 Publication 550. Filing state tax deductible business interest (non-farm) Schedule C or C-EZ (Form 1040) Publication 535. Filing state tax deductible farm business interest Schedule F (Form 1040) Publications 225 and 535. Filing state tax deductible interest incurred to produce rents or royalties Schedule E (Form 1040) Publications 527 and 535. Filing state tax personal interest not deductible. Filing state tax Prev  Up  Next   Home   More Online Publications