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