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Free ez file 6. Free ez file   Tax Treaty Benefits Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Purpose of Tax Treaties Common Benefits Competent Authority AssistanceAdditional filing. Free ez file Obtaining Copies of Tax Treaties Topics - This chapter discusses: Some common tax treaty benefits, How to get help in certain situations, and How to get copies of tax treaties. Free ez file Useful Items - You may want to see: Publication 597 Information on the United States—Canada Income Tax Treaty 901 U. Free ez file S. Free ez file Tax Treaties See chapter 7 for information about getting these publications. Free ez file Purpose of Tax Treaties The United States has tax treaties or conventions with many countries. Free ez file See Table 6-1 at the end of this chapter for a list of these countries. Free ez file Under these treaties and conventions, citizens and residents of the United States who are subject to taxes imposed by the foreign countries are entitled to certain credits, deductions, exemptions, and reductions in the rate of taxes of those foreign countries. Free ez file If a foreign country with which the United States has a treaty imposes a tax on you, you may be entitled to benefits under the treaty. Free ez file Treaty benefits generally are available to residents of the United States. Free ez file They generally are not available to U. Free ez file S. Free ez file citizens who do not reside in the United States. Free ez file However, certain treaty benefits and safeguards, such as the nondiscrimination provisions, are available to U. Free ez file S. Free ez file citizens residing in the treaty countries. Free ez file U. Free ez file S. Free ez file citizens residing in a foreign country also may be entitled to benefits under that country's tax treaties with third countries. Free ez file Certification of U. Free ez file S. Free ez file residency. Free ez file   Use Form 8802, Application for United States Residency Certification, to request certification of U. Free ez file S. Free ez file residency for purposes of claiming benefits under a tax treaty. Free ez file Certification can be requested for the current and any prior calendar years. Free ez file You should examine the specific treaty articles to find if you are entitled to a tax credit, tax exemption, reduced rate of tax, or other treaty benefit or safeguard. Free ez file Common Benefits Some common tax treaty benefits are explained below. Free ez file The credits, deductions, exemptions, reductions in rate, and other benefits provided by tax treaties are subject to conditions and various restrictions. Free ez file Benefits provided by certain treaties are not provided by others. Free ez file Personal service income. Free ez file If you are a U. Free ez file S. Free ez file resident who is in a treaty country for a limited number of days in the tax year and you meet certain other requirements, the payment you receive for personal services performed in that country may be exempt from that country's income tax. Free ez file Professors and teachers. Free ez file If you are a U. Free ez file S. Free ez file resident, the payment you receive for the first 2 or 3 years that you are teaching or doing research in a treaty country may be exempt from that country's income tax. Free ez file Students, trainees, and apprentices. Free ez file If you are a U. Free ez file S. Free ez file resident, amounts you receive from the United States for study, research, or business, professional and technical training may be exempt from a treaty country's income tax. Free ez file Some treaties exempt grants, allowances, and awards received from governmental and certain nonprofit organizations. Free ez file Also, under certain circumstances, a limited amount of pay received by students, trainees, and apprentices may be exempt from the income tax of many treaty countries. Free ez file Pensions and annuities. Free ez file If you are a U. Free ez file S. Free ez file resident, nongovernment pensions and annuities you receive may be exempt from the income tax of treaty countries. Free ez file Most treaties contain separate provisions for exempting government pensions and annuities from treaty country income tax, and some treaties provide exemption from the treaty country's income tax for social security payments. Free ez file Investment income. Free ez file If you are a U. Free ez file S. Free ez file resident, investment income, such as interest and dividends, that you receive from sources in a treaty country may be exempt from that country's income tax or taxed at a reduced rate. Free ez file Several treaties provide exemption for capital gains (other than from sales of real property in most cases) if specified requirements are met. Free ez file Tax credit provisions. Free ez file If you are a U. Free ez file S. Free ez file resident who receives income from or owns capital in a foreign country, you may be taxed on that income or capital by both the United States and the treaty country. Free ez file Most treaties allow you to take a credit against or deduction from the treaty country's taxes based on the U. Free ez file S. Free ez file tax on the income. Free ez file Nondiscrimination provisions. Free ez file Most U. Free ez file S. Free ez file tax treaties provide that the treaty country cannot discriminate by imposing more burdensome taxes on U. Free ez file S. Free ez file citizens who are residents of the treaty country than it imposes on its own citizens in the same circumstances. Free ez file Saving clauses. Free ez file U. Free ez file S. Free ez file treaties contain saving clauses that provide that the treaties do not affect the U. Free ez file S. Free ez file taxation of its own citizens and residents. Free ez file As a result, U. Free ez file S. Free ez file citizens and residents generally cannot use the treaty to reduce their U. Free ez file S. Free ez file tax liability. Free ez file However, most treaties provide exceptions to saving clauses that allow certain provisions of the treaty to be claimed by U. Free ez file S. Free ez file citizens or residents. Free ez file It is important that you examine the applicable saving clause to determine if an exception applies. Free ez file More information on treaties. Free ez file   Publication 901 contains an explanation of treaty provisions that apply to amounts received by teachers, students, workers, and government employees and pensioners who are alien nonresidents or residents of the United States. Free ez file Since treaty provisions generally are reciprocal, you usually can substitute “United States” for the name of the treaty country whenever it appears, and vice versa when “U. Free ez file S. Free ez file ” appears in the treaty exemption discussions in Publication 901. Free ez file   Publication 597 contains an explanation of a number of frequently-used provisions of the United States–Canada income tax treaty. Free ez file Competent Authority Assistance If you are a U. Free ez file S. Free ez file citizen or resident alien, you can request assistance from the U. Free ez file S. Free ez file competent authority if you think that the actions of the United States, a treaty country, or both, cause or will cause a tax situation not intended by the treaty between the two countries. Free ez file You should read any treaty articles, including the mutual agreement procedure article, that apply in your situation. Free ez file The U. Free ez file S. Free ez file competent authority cannot consider requests involving countries with which the United States does not have a tax treaty. Free ez file Effect of request for assistance. Free ez file   If your request provides a basis for competent authority assistance, the U. Free ez file S. Free ez file competent authority generally will consult with the treaty country competent authority on how to resolve the situation. Free ez file How to make your request. Free ez file   It is important that you make your request for competent authority consideration as soon as either of the following occurs. Free ez file You are denied treaty benefits. Free ez file Actions taken by both the United States and the foreign country result in double taxation or will result in taxation not intended by the treaty. Free ez file   In addition to making a request for assistance, you should take steps so that any agreement reached by the competent authorities is not barred by administrative, legal, or procedural barriers. Free ez file Some of the steps you should consider taking include the following. Free ez file Filing a protective claim for credit or refund of U. Free ez file S. Free ez file taxes. Free ez file Delaying the expiration of any period of limitations on the making of a refund or other tax adjustment. Free ez file Avoiding the lapse or termination of your right to appeal any tax determination. Free ez file Complying with all applicable procedures for invoking competent authority consideration. Free ez file Contesting an adjustment or seeking an appropriate correlative adjustment with respect to the U. Free ez file S. Free ez file or treaty country tax. Free ez file Taxpayers can consult with the U. Free ez file S. Free ez file competent authority to determine whether they need to take protective steps and when any required steps need to be taken. Free ez file   The request should contain all essential items of information, including the following items. Free ez file A reference to the treaty and the treaty provisions on which the request is based. Free ez file The years and amounts involved in both U. Free ez file S. Free ez file dollars and foreign currency. Free ez file A brief description of the issues for which competent authority assistance is requested. Free ez file   A complete listing of the information that must be included with the request can be found in Revenue Procedure 2006-54, or its successor. Free ez file Revenue Procedure 2006-54 is available at www. Free ez file irs. Free ez file gov/irb/2006-49_IRB/ar13. Free ez file html. Free ez file   Also, see Notice 2013-78, which provides proposed updates to the procedures for requesting U. Free ez file S. Free ez file competent authority assistance under tax treaties. Free ez file As noted, Revenue Procedure 2006-54 will be superseded by a revenue procedure to be published in the future. Free ez file    Your request for competent authority consideration should be addressed to:   Deputy Commissioner (International) Large Business and International Division Internal Revenue Service 1111 Constitution Avenue, NW Routing M4-365 Washington, DC 20224 Attn: TAIT Additional filing. Free ez file   In the case of U. Free ez file S. Free ez file - initiated adjustments, you also must file a copy of the request with the IRS office where your case is pending. Free ez file If the request is filed after the matter has been designated for litigation or while a suit contesting your relevant tax liability is pending in a United States court, a copy of the request, with a separate statement attached identifying the court where the suit is pending and the docket number of the action, also must be filed with the: Office of Associate Chief Counsel (International) Internal Revenue Service 1111 Constitution Avenue, NW Washington, DC 20224 Additional details on the procedures for requesting competent authority assistance are included in Revenue Procedure 2006-54, or its successor. Free ez file Obtaining Copies of Tax Treaties Table 6-1 lists those countries with which the United States has income tax treaties. Free ez file This table is updated through October 31, 2013. Free ez file You can get complete information about treaty provisions from the taxing authority in the country from which you receive income or from the treaty itself. Free ez file You can obtain the text of most U. Free ez file S. Free ez file treaties at IRS. Free ez file gov. Free ez file You also can request the text of treaties from the Department of Treasury at the following address. Free ez file Department of Treasury Office of Business and Public Liaison Rm. Free ez file 3411 1500 Pennsylvania Avenue, NW  Washington, DC 20220 If you have questions about a treaty and you are in the United States, Puerto Rico, or the U. Free ez file S. Free ez file Virgin Islands, you can call the IRS at 1-800-829-1040. Free ez file Table 6–1. Free ez file List of Tax Treaties (Updated through October 31, 2013) Country Official Text  Symbol1 General  Effective Date Citation Applicable Treasury Explanations  or Treasury Decision (T. Free ez file D. Free ez file ) Australia TIAS 10773 Dec. Free ez file 1, 1983 1986-2 C. Free ez file B. Free ez file 220 1986-2 C. Free ez file B. Free ez file 246 Protocol TIAS Jan. Free ez file 1, 2004     Austria TIAS Jan. Free ez file 1, 1999     Bangladesh TIAS Jan. Free ez file 1, 2007     Barbados TIAS 11090 Jan. Free ez file 1, 1984 1991-2 C. Free ez file B. Free ez file 436 1991-2 C. Free ez file B. Free ez file 466 Protocol TIAS Jan. Free ez file 1, 2005     Belgium TIAS Jan. Free ez file 1, 2008     Bulgaria TIAS Jan. Free ez file 1, 2009     Canada2 TIAS 11087 Jan. Free ez file 1, 1985 1986-2 C. Free ez file B. Free ez file 258 1987-2 C. Free ez file B. Free ez file 298 Protocol TIAS Jan. Free ez file 1, 2009     China, People's Republic of TIAS 12065 Jan. Free ez file 1, 1987 1988-1 C. Free ez file B. Free ez file 414 1988-1 C. Free ez file B. Free ez file 447 Commonwealth of Independent States3 TIAS 8225 Jan. Free ez file 1, 1976 1976-2 C. Free ez file B. Free ez file 463 1976-2 C. Free ez file B. Free ez file 475 Cyprus TIAS 10965 Jan. Free ez file 1, 1986 1989-2 C. Free ez file B. Free ez file 280 1989-2 C. Free ez file B. Free ez file 314 Czech Republic TIAS Jan. Free ez file 1, 1993     Denmark TIAS Jan. Free ez file 1, 2001     Protocol TIAS Jan. Free ez file 1, 2008     Egypt TIAS 10149 Jan. Free ez file 1, 1982 1982-1 C. Free ez file B. Free ez file 219 1982-1 C. Free ez file B. Free ez file 243 Estonia TIAS Jan. Free ez file 1, 2000     Finland TIAS 12101 Jan. Free ez file 1, 1991     Protocol TIAS Jan. Free ez file 1, 2008     France TIAS Jan. Free ez file 1, 1996     Protocol TIAS Jan. Free ez file 1, 2009     Germany TIAS Jan. Free ez file 1, 1990     Protocol TIAS Jan. Free ez file 1, 2008     Greece TIAS 2902 Jan. Free ez file 1, 1953 1958-2 C. Free ez file B. Free ez file 1054 T. Free ez file D. Free ez file 6109, 1954-2 C. Free ez file B. Free ez file 638 Hungary TIAS 9560 Jan. Free ez file 1, 1980 1980-1 C. Free ez file B. Free ez file 333 1980-1 C. Free ez file B. Free ez file 354 Iceland TIAS 8151 Jan. Free ez file 1, 2009     India TIAS Jan. Free ez file 1, 1991     Indonesia TIAS 11593 Jan. Free ez file 1, 1990     Ireland TIAS Jan. Free ez file 1, 1998     Israel TIAS Jan. Free ez file 1, 1995     Italy TIAS Jan. Free ez file 1, 2010     Jamaica TIAS 10207 Jan. Free ez file 1, 1982 1982-1 C. Free ez file B. Free ez file 257 1982-1 C. Free ez file B. Free ez file 291 Japan TIAS Jan. Free ez file 1, 2005     Kazakhstan TIAS Jan. Free ez file 1, 1996     Korea, South TIAS 9506 Jan. Free ez file 1, 1980 1979-2 C. Free ez file B. Free ez file 435 1979-2 C. Free ez file B. Free ez file 458 Latvia TIAS Jan. Free ez file 1, 2000     Lithuania TIAS Jan. Free ez file 1, 2000     Luxembourg TIAS Jan. Free ez file 1, 2001     Malta TIAS Jan. Free ez file 1, 2011     Mexico TIAS Jan. Free ez file 1,1994     Protocol TIAS Jan. Free ez file 1, 2004               Table 6–1 (continued). Free ez file Country Official Text  Symbol1 General  Effective Date Citation Applicable Treasury Explanations  or Treasury Decision (T. Free ez file D. Free ez file ) Morocco TIAS 10195 Jan. Free ez file 1, 1981 1982-2 C. Free ez file B. Free ez file 405 1982-2 C. Free ez file B. Free ez file 427 Netherlands TIAS Jan. Free ez file 1, 1994     Protocol TIAS Jan. Free ez file 1, 2005     New Zealand TIAS 10772 Nov. Free ez file 2, 1983 1990-2 C. Free ez file B. Free ez file 274 1990-2 C. Free ez file B. Free ez file 303 Protocol TIAS Jan. Free ez file 1, 2011     Norway TIAS 7474 Jan. Free ez file 1, 1971 1973-1 C. Free ez file B. Free ez file 669 1973-1 C. Free ez file B. Free ez file 693 Protocol TIAS 10205 Jan. Free ez file 1, 1982 1982-2 C. Free ez file B. Free ez file 440 1982-2 C. Free ez file B. Free ez file 454 Pakistan TIAS 4232 Jan. Free ez file 1, 1959 1960-2 C. Free ez file B. Free ez file 646 T. Free ez file D. Free ez file 6431, 1960-1 C. Free ez file B. Free ez file 755 Philippines TIAS 10417 Jan. Free ez file 1, 1983 1984-2 C. Free ez file B. Free ez file 384 1984-2 C. Free ez file B. Free ez file 412 Poland TIAS 8486 Jan. Free ez file 1, 1974 1977-1 C. Free ez file B. Free ez file 416 1977-1 C. Free ez file B. Free ez file 427 Portugal TIAS Jan. Free ez file 1, 1996     Romania TIAS 8228 Jan. Free ez file 1, 1974 1976-2 C. Free ez file B. Free ez file 492 1976-2 C. Free ez file B. Free ez file 504 Russia TIAS Jan. Free ez file 1, 1994     Slovak Republic TIAS Jan. Free ez file 1, 1993     Slovenia TIAS Jan. Free ez file 1, 2002     South Africa TIAS Jan. Free ez file 1, 1998     Spain TIAS Jan. Free ez file 1, 1991     Sri Lanka TIAS Jan. Free ez file 1, 2004     Sweden TIAS Jan. Free ez file 1, 1996     Protocol TIAS Jan. Free ez file 1, 2007     Switzerland TIAS Jan. Free ez file 1, 1998     Thailand TIAS Jan. Free ez file 1, 1998     Trinidad and Tobago TIAS 7047 Jan. Free ez file 1, 1970 1971-2 C. Free ez file B. Free ez file 479   Tunisia TIAS Jan. Free ez file 1, 1990     Turkey TIAS Jan. Free ez file 1, 1998     Ukraine TIAS Jan. Free ez file 1, 2001     United Kingdom TIAS Jan. Free ez file 1, 2004     Venezuela TIAS Jan. Free ez file 1, 2000      1(TIAS) — Treaties and Other International Act Series. Free ez file  2Information on the treaty can be found in Publication 597, Information on the United States—Canada Income Tax Treaty. Free ez file 3The U. Free ez file S. Free ez file -U. Free ez file S. Free ez file S. Free ez file R. Free ez file income tax treaty applies to the countries of Armenia, Azerbaijan, Belarus, Georgia, Kyrgyzstan, Moldova, Tajikistan, Turkmenistan, and Uzbekistan. Free ez file Prev  Up  Next   Home   More Online Publications
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The Free Ez File

Free ez file 3. Free ez file   Investment Expenses Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Limits on DeductionsPassive activity. Free ez file Other income (nonpassive income). Free ez file Expenses. Free ez file Additional information. Free ez file Interest ExpensesInvestment Interest Limit on Deduction Bond Premium AmortizationSpecial rules to determine amounts payable on a bond. Free ez file Basis. Free ez file How To Figure Amortization Choosing To Amortize How To Report Amortization Expenses of Producing IncomeFees to buy or sell. Free ez file Including mutual fund or REMIC expenses in income. Free ez file Nondeductible ExpensesUsed as collateral. Free ez file Short-sale expenses. Free ez file Expenses for both tax-exempt and taxable income. Free ez file State income taxes. Free ez file Nondeductible amount. Free ez file Basis adjustment. Free ez file How To Report Investment Expenses When To Report Investment Expenses Topics - This chapter discusses: Limits on Deductions , Interest Expenses , Bond Premium Amortization , Expenses of Producing Income , Nondeductible Expenses , How To Report Investment Expenses , and When To Report Investment Expenses . Free ez file Useful Items - You may want to see: Publication 535 Business Expenses 925 Passive Activity and At-Risk Rules 929 Tax Rules for Children and Dependents Form (and Instructions) Schedule A (Form 1040) Itemized Deductions 4952 Investment Interest Expense Deduction See chapter 5, How To Get Tax Help , for information about getting these publications and forms. Free ez file Limits on Deductions Your deductions for investment expenses may be limited by: The at-risk rules, The passive activity loss limits, The limit on investment interest, or The 2% limit on certain miscellaneous itemized deductions. Free ez file The at-risk rules and passive activity rules are explained briefly in this section. Free ez file The limit on investment interest is explained later in this chapter under Interest Expenses . Free ez file The 2% limit is explained later in this chapter under Expenses of Producing Income . Free ez file At-risk rules. Free ez file   Special at-risk rules apply to most income-producing activities. Free ez file These rules limit the amount of loss you can deduct to the amount you risk losing in the activity. Free ez file Generally, this is the cash and the adjusted basis of property you contribute to the activity. Free ez file It also includes money you borrow for use in the activity if you are personally liable for repayment or if you use property not used in the activity as security for the loan. Free ez file For more information, see Publication 925. Free ez file Passive activity losses and credits. Free ez file   The amount of losses and tax credits you can claim from passive activities is limited. Free ez file Generally, you are allowed to deduct passive activity losses only up to the amount of your passive activity income. Free ez file Also, you can use credits from passive activities only against tax on the income from passive activities. Free ez file There are exceptions for certain activities, such as rental real estate activities. Free ez file Passive activity. Free ez file   A passive activity generally is any activity involving the conduct of any trade or business in which you do not materially participate and any rental activity. Free ez file However, if you are involved in renting real estate, the activity is not a passive activity if both of the following are true. Free ez file More than one-half of the personal services you perform during the year in all trades or businesses are performed in real property trades or businesses in which you materially participate. Free ez file You perform more than 750 hours of services during the year in real property trades or businesses in which you materially participate. Free ez file  The term “trade or business” generally means any activity that involves the conduct of a trade or business, is conducted in anticipation of starting a trade or business, or involves certain research or experimental expenditures. Free ez file However, it does not include rental activities or certain activities treated as incidental to holding property for investment. Free ez file   You are considered to materially participate in an activity if you are involved on a regular, continuous, and substantial basis in the operations of the activity. Free ez file Other income (nonpassive income). Free ez file    Generally, you can use losses from passive activities only to offset income from passive activities. Free ez file You cannot use passive activity losses to offset your other income, such as your wages or your portfolio income. Free ez file Portfolio income includes gross income from interest, dividends, annuities, or royalties that is not derived in the ordinary course of a trade or business. Free ez file It also includes gains or losses (not derived in the ordinary course of a trade or business) from the sale or trade of property (other than an interest in a passive activity) producing portfolio income or held for investment. Free ez file This includes capital gain distributions from mutual funds (and other regulated investment companies) and real estate investment trusts. Free ez file   You cannot use passive activity losses to offset Alaska Permanent Fund dividends. Free ez file Expenses. Free ez file   Do not include in the computation of your passive activity income or loss: Expenses (other than interest) that are clearly and directly allocable to your portfolio income, or Interest expense properly allocable to portfolio income. Free ez file However, this interest and other expenses may be subject to other limits. Free ez file These limits are explained in the rest of this chapter. Free ez file Additional information. Free ez file   For more information about determining and reporting income and losses from passive activities, see Publication 925. Free ez file Interest Expenses This section discusses interest expenses you may be able to deduct as an investor. Free ez file For information on business interest, see chapter 4 of Publication 535. Free ez file You cannot deduct personal interest expenses other than qualified home mortgage interest, as explained in Publication 936, Home Mortgage Interest Deduction, and interest on certain student loans, as explained in Publication 970. Free ez file Investment Interest If you borrow money to buy property you hold for investment, the interest you pay is investment interest. Free ez file You can deduct investment interest subject to the limit discussed later. Free ez file However, you cannot deduct interest you incurred to produce tax-exempt income. Free ez file See Tax-exempt income under Nondeductible Expenses, later. Free ez file You also cannot deduct interest expenses on straddles discussed under Interest expense and carrying charges on straddles , later. Free ez file 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. Free ez file Investment property. Free ez file   Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. Free ez file 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). Free ez file Investment property also includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity). Free ez file Partners, shareholders, and beneficiaries. Free ez file   To determine your investment interest, combine your share of investment interest from a partnership, S corporation, estate, or trust with your other investment interest. Free ez file 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. Free ez file Only the interest expense on the part of the debt used for investment purposes is treated as investment interest. Free ez file The allocation is not affected by the use of property that secures the debt. Free ez file Example 1. Free ez file You borrow $10,000 and use $8,000 to buy stock. Free ez file You use the other $2,000 to buy items for your home. Free ez file Since 80% of the debt is used for, and allocated to, investment purposes, 80% of the interest on that debt is investment interest. Free ez file The other 20% is nondeductible personal interest. Free ez file Debt proceeds received in cash. Free ez file   If you receive debt proceeds in cash, the proceeds are generally not treated as investment property. Free ez file Debt proceeds deposited in account. Free ez file   If you deposit debt proceeds in an account, that deposit is treated as investment property, regardless of whether the account bears interest. Free ez file But, if you withdraw the funds and use them for another purpose, you must reallocate the debt to determine the amount considered to be for investment purposes. Free ez file Example 2. Free ez file Assume in Example 1 that you borrowed the money on March 1 and immediately bought the stock for $8,000. Free ez file You did not buy the household items until June 1. Free ez file You had deposited the $2,000 in the bank. Free ez file You had no other transactions on the bank account until June. Free ez file You did not sell the stock, and you made no principal payments on the debt. Free ez file You paid interest from another account. Free ez file The $8,000 is treated as being used for an investment purpose. Free ez file The $2,000 is treated as being used for an investment purpose for the 3-month period. Free ez file Your total interest expense for 3 months on this debt is investment interest. Free ez file In June, when you spend the $2,000 for household items, you must begin to allocate 80% of the debt and the interest expense to investment purposes and 20% to personal purposes. Free ez file Amounts paid within 30 days. Free ez file   If you receive loan proceeds in cash or if the loan proceeds are deposited in an account, you can treat any payment (up to the amount of the proceeds) made from any account you own, or from cash, as made from those proceeds. Free ez file This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. Free ez file   If you received the loan proceeds in cash, you can treat the payment as made on the date you received the cash instead of the date you actually made the payment. Free ez file Payments on debt may require new allocation. Free ez file   As you repay a debt used for more than one purpose, you must reallocate the balance. Free ez file You must first reduce the amount allocated to personal purposes by the repayment. Free ez file You then reallocate the rest of the debt to find what part is for investment purposes. Free ez file Example 3. Free ez file If, in Example 2 , you repay $500 on November 1, the entire repayment is applied against the amount allocated to personal purposes. Free ez file The debt balance is now allocated as $8,000 for investment purposes and $1,500 for personal purposes. Free ez file Until the next reallocation is necessary, 84% ($8,000 ÷ $9,500) of the debt and the interest expense is allocated to investment. Free ez file Pass-through entities. Free ez file   If you use borrowed funds to buy an interest in a partnership or S corporation, then the interest on those funds must be allocated based on the assets of the entity. Free ez file If you contribute to the capital of the entity, you can make the allocation using any reasonable method. Free ez file Additional allocation rules. Free ez file   For more information about allocating interest expense, see chapter 4 of Publication 535. Free ez file When To Deduct Investment Interest If you use the cash method of accounting, you must pay the interest before you can deduct it. Free ez file If you use an accrual method of accounting, you can deduct interest over the period it accrues, regardless of when you pay it. Free ez file For an exception, see Unpaid expenses owed to related party under When To Report Investment Expenses, later in this chapter. Free ez file Example. Free ez file You borrowed $1,000 on August 26, 2013, payable in 90 days at 12% interest. Free ez file On November 26, 2013, you paid this with a new note for $1,030, due on February 26, 2014. Free ez file If you use the cash method of accounting, you cannot deduct any part of the $30 interest on your return for 2013 because you did not actually pay it. Free ez file If you use an accrual method, you may be able to deduct a portion of the interest on the loans through December 31, 2013, on your return for 2013. Free ez file Interest paid in advance. Free ez file   Generally, if you pay interest in advance for a period that goes beyond the end of the tax year, you must spread the interest over the tax years to which it belongs under the OID rules discussed in chapter 1. Free ez file You can deduct in each year only the interest for that year. Free ez file Interest on margin accounts. Free ez file   If you are a cash method taxpayer, you can deduct interest on margin accounts to buy taxable securities as investment interest in the year you paid it. Free ez file You are considered to have paid interest on these accounts only when you actually pay the broker or when payment becomes available to the broker through your account. Free ez file Payment may become available to the broker through your account when the broker collects dividends or interest for your account, or sells securities held for you or received from you. Free ez file   You cannot deduct any interest on money borrowed for personal reasons. Free ez file Limit on interest deduction for market discount bonds. Free ez file   The amount you can deduct for interest expense you paid or accrued during the year to buy or carry a market discount bond may be limited. Free ez file This limit does not apply if you accrue the market discount and include it in your income currently. Free ez file   Under this limit, the interest is deductible only to the extent it is more than: The total interest and OID includible in gross income for the bond for the year, plus The market discount for the number of days you held the bond during the year. Free ez file Figure the amount in (2) above using the rules for figuring accrued market discount in chapter 1 under Market Discount Bonds . Free ez file Interest not deducted due to limit. Free ez file   In the year you dispose of the bond, you can deduct any interest expense you were not allowed to deduct in earlier years because of the limit. Free ez file Choosing to deduct disallowed interest expense before the year of disposition. Free ez file   You can choose to deduct disallowed interest expense in any year before the year you dispose of the bond, up to your net interest income from the bond during the year. Free ez file The rest of the disallowed interest expense remains deductible in the year you dispose of the bond. Free ez file Net interest income. Free ez file   This is the interest income (including OID) from the bond that you include in income for the year, minus the interest expense paid or accrued during the year to purchase or carry the bond. Free ez file Limit on interest deduction for short-term obligations. Free ez file   If the current income inclusion rules discussed in chapter 1 under Discount on Short-Term Obligations do not apply to you, the amount you can deduct for interest expense you paid or accrued during the year to buy or carry a short-term obligation is limited. Free ez file   The interest is deductible only to the extent it is more than: The amount of acquisition discount or OID on the obligation for the tax year, plus The amount of any interest payable on the obligation for the year that is not included in income because of your accounting method (other than interest taken into account in determining the amount of acquisition discount or OID). Free ez file The method of determining acquisition discount and OID for short-term obligations is discussed in chapter 1 under Discount on Short-Term Obligations . Free ez file Interest not deducted due to limit. Free ez file   In the year you dispose of the obligation, or, if you choose, in another year in which you have net interest income from the obligation, you can deduct any interest expense you were not allowed to deduct for an earlier year because of the limit. Free ez file Follow the same rules provided in the earlier discussion under Limit on interest deduction for market discount bonds , earlier. Free ez file Limit on Deduction Generally, your deduction for investment interest expense is limited to your net investment income. Free ez file You can carry over the amount of investment interest you could not deduct because of this limit to the next tax year. Free ez file The interest carried over is treated as investment interest paid or accrued in that next year. Free ez file 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. Free ez file Net Investment Income Determine the amount of your net investment income by subtracting your investment expenses (other than interest expense) from your investment income. Free ez file Investment income. Free ez file   This generally includes your gross income from property held for investment (such as interest, dividends, annuities, and royalties). Free ez file Investment income does not include Alaska Permanent Fund dividends. Free ez file It also does not include qualified dividends or net capital gain unless you choose to include them. Free ez file Choosing to include qualified dividends. Free ez file   Investment income generally does not include qualified dividends, discussed in chapter 1. Free ez file However, you can choose to include all or part of your qualified dividends in investment income. Free ez file   You make this choice by completing Form 4952, line 4g, according to its instructions. Free ez file   If you choose to include any 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. Free ez file Choosing to include net capital gain. Free ez file    Investment income generally does not include net capital gain from disposing of investment property (including capital gain distributions from mutual funds). Free ez file However, you can choose to include all or part of your net capital gain in investment income. Free ez file   You make this choice by completing Form 4952, line 4g, according to its instructions. Free ez file   If you choose to include any 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. Free ez file   For more information about the capital gains rates, see Capital Gain Tax Rates in chapter 4. Free ez file    Before making either choice, consider the overall effect on your tax liability. Free ez file Compare your tax if you make one or both of these choices with your tax if you do not. Free ez file Investment income of child reported on parent's return. Free ez file   Investment income includes the part of your child's interest and dividend income you choose to report on your return. Free ez file 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. Free ez file Include it on line 4a of Form 4952. Free ez file Example. Free ez file Your 8-year-old son has interest income of $2,200, which you choose to report on your own return. Free ez file You enter $2,200 on Form 8814, lines 1a and 4, and $200 on lines 6 and 12 and complete Part II. Free ez file Also enter $200 on Form 1040, line 21. Free ez file Your investment income includes this $200. Free ez file Child's qualified dividends. Free ez file   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. Free ez file However, you can choose to include all or part of it in investment income, as explained under Choosing to include qualified dividends , earlier. Free ez file   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). Free ez file Child's Alaska Permanent Fund dividends. Free ez file   If part of the amount you report is your child's Alaska Permanent Fund dividends, that part does not count as investment income. Free ez file 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. Free ez file 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. Free ez file Subtract the result from the amount on Form 8814, line 12. Free ez file Example. Free ez file Your 10-year-old child has taxable interest income of $4,000 and Alaska Permanent Fund dividends of $2,000. Free ez file You choose to report this on your return. Free ez file You enter $4,000 on Form 8814, line 1a, $2,000 on line 2a, and $6,000 on line 4. Free ez file You then enter $4,000 on Form 8814, lines 6 and 12, and Form 1040, line 21. Free ez file You figure the amount of your child's income that you can consider your investment income as follows: $4,000 − ($4,000 × ($2,000 ÷ $6,000)) = $2,667 You include the result, $2,667, on Form 4952, line 4a. Free ez file Child's capital gain distributions. Free ez file   If part of the amount you report is your child's capital gain distributions, that part (which is reported on Schedule D (Form 1040), line 13, or Form 1040, line 13) generally does not count as investment income. Free ez file However, you can choose to include all or part of it in investment income, as explained in Choosing to include net capital gain , earlier. Free ez file   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). Free ez file Investment expenses. Free ez file   Investment expenses are your allowed deductions (other than interest expense) directly connected with the production of investment income. Free ez file 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. Free ez file Use the smaller of: The investment expenses included on Schedule A (Form 1040), line 23, or The amount on Schedule A (Form 1040), line 27. Free ez file See Expenses of Producing Income , later, for a discussion of the 2% limit. Free ez file Losses from passive activities. Free ez file   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). Free ez file See Publication 925 for information about passive activities. Free ez file Example. Free ez file Ted is a partner in a partnership that operates a business. Free ez file However, he does not materially participate in the partnership's business. Free ez file Ted's interest in the partnership is considered a passive activity. Free ez file Ted's investment income from interest and dividends (other than qualified dividends) is $10,000. Free ez file His investment expenses (other than interest) are $3,200 after taking into account the 2% limit on miscellaneous itemized deductions. Free ez file His investment interest expense is $8,000. Free ez file Ted also has income from the partnership of $2,000. Free ez file Ted figures his net investment income and the limit on his investment interest expense deduction in the following way: Total investment income $10,000 Minus: Investment expenses (other than interest) 3,200 Net investment income $6,800 Deductible investment interest expense for the year $6,800 The $2,000 of income from the passive activity is not used in determining Ted's net investment income. Free ez file His investment interest deduction for the year is limited to $6,800, the amount of his net investment income. Free ez file Form 4952 Use Form 4952 to figure your deduction for investment interest. Free ez file See Form 4952 for more information. Free ez file Exception to use of Form 4952. Free ez file   You do not have to complete Form 4952 or attach it to your return if you meet all of the following tests. Free ez file Your investment interest expense is not more than your investment income from interest and ordinary dividends minus any qualified dividends. Free ez file You do not have any other deductible investment expenses. Free ez file You have no carryover of investment interest expense from 2012. Free ez file   If you meet all of these tests, you can deduct all of your investment interest. Free ez file    Bond Premium Amortization If you pay a premium to buy a bond, the premium is part of your basis in the bond. Free ez file If the bond yields taxable interest, you can choose to amortize the premium. Free ez file This generally means that each year, over the life of the bond, you use a part of the premium to reduce the amount of interest includible in your income. Free ez file If you make this choice, you must reduce your basis in the bond by the amortization for the year. Free ez file If the bond yields tax-exempt interest, you must amortize the premium. Free ez file This amortized amount is not deductible in determining taxable income. Free ez file However, each year you must reduce your basis in the bond (and tax-exempt interest otherwise reportable on Form 1040, line 8b) by the amortization for the year. Free ez file Bond premium. Free ez file   Bond premium is the amount by which your basis in the bond right after you get it is more than the total of all amounts payable on the bond after you get it (other than payments of qualified stated interest). Free ez file For example, a bond with a maturity value of $1,000 generally would have a $50 premium if you buy it for $1,050. Free ez file Special rules to determine amounts payable on a bond. Free ez file   For special rules that apply to determine the amounts payable on a variable rate bond, an inflation-indexed debt instrument, a bond that provides for certain alternative payment schedules (for example, a bond callable prior to the stated maturity date of the bond), or a bond that provides for remote or incidental contingencies, see Regulations section 1. Free ez file 171-3. Free ez file Basis. Free ez file   In general, your basis for figuring bond premium amortization is the same as your basis for figuring any loss on the sale of the bond. Free ez file However, you may need to use a different basis for: Convertible bonds, Bonds you got in a trade, and Bonds whose basis has to be determined using the basis of the person who transferred the bond to you. Free ez file See Regulations section 1. Free ez file 171-1(e). Free ez file Dealers. Free ez file   A dealer in taxable bonds (or anyone who holds them mainly for sale to customers in the ordinary course of a trade or business or who would properly include bonds in inventory at the close of the tax year) cannot claim a deduction for amortizable bond premium. Free ez file   See section 75 of the Internal Revenue Code for the treatment of bond premium by a dealer in tax-exempt bonds. Free ez file How To Figure Amortization For bonds issued after September 27, 1985, you must amortize bond premium using a constant yield method on the basis of the bond's yield to maturity, determined by using the bond's basis and compounding at the close of each accrual period. Free ez file Constant yield method. Free ez file   Figure the bond premium amortization for each accrual period as follows. Free ez file Step 1: Determine your yield. Free ez file   Your yield is the discount rate that, when used in figuring the present value of all remaining payments to be made on the bond (including payments of qualified stated interest), produces an amount equal to your basis in the bond. Free ez file Figure the yield as of the date you got the bond. Free ez file It must be constant over the term of the bond and must be figured to at least two decimal places when expressed as a percentage. Free ez file   If you do not know the yield, consult your broker or tax advisor. Free ez file Databases available to them are likely to show the yield at the date of purchase. Free ez file Step 2: Determine the accrual periods. Free ez file   You can choose the accrual periods to use. Free ez file They may be of any length and may vary in length over the term of the bond, but each accrual period can be no longer than 1 year and each scheduled payment of principal or interest must occur either on the first or the final day of an accrual period. Free ez file The computation is simplest if accrual periods are the same as the intervals between interest payment dates. Free ez file Step 3: Determine the bond premium for the accrual period. Free ez file   To do this, multiply your adjusted acquisition price at the beginning of the accrual period by your yield. Free ez file Then subtract the result from the qualified stated interest for the period. Free ez file   Your adjusted acquisition price at the beginning of the first accrual period is the same as your basis. Free ez file After that, it is your basis decreased by the amount of bond premium amortized for earlier periods and the amount of any payment previously made on the bond other than a payment of qualified stated interest. Free ez file Example. Free ez file On February 1, 2012, you bought a taxable bond for $110,000. Free ez file The bond has a stated principal amount of $100,000, payable at maturity on February 1, 2019, making your premium $10,000 ($110,000 − $100,000). Free ez file The bond pays qualified stated interest of $10,000 on February 1 of each year. Free ez file Your yield is 8. Free ez file 07439% compounded annually. Free ez file You choose to use annual accrual periods ending on February 1 of each year. Free ez file To find your bond premium amortization for the accrual period ending on February 1, 2013, you multiply the adjusted acquisition price at the beginning of the period ($110,000) by your yield. Free ez file When you subtract the result ($8,881. Free ez file 83) from the qualified stated interest for the period ($10,000), you find that your bond premium amortization for the period is $1,118. Free ez file 17. Free ez file Special rules to figure amortization. Free ez file   For special rules to figure the bond premium amortization on a variable rate bond, an inflation-indexed debt instrument, a bond that provides for certain alternative payment schedules (for example, a bond callable prior to the stated maturity date of the bond), or a bond that provides for remote or incidental contingencies, see Regulations section 1. Free ez file 171-3. Free ez file Bonds Issued Before September 28, 1985 For these bonds, you can amortize bond premium using any reasonable method. Free ez file Reasonable methods include: The straight-line method, and The Revenue Ruling 82-10 method. Free ez file Straight-line method. Free ez file   Under this method, the amount of your bond premium amortization is the same each month. Free ez file Divide the number of months you held the bond during the year by the number of months from the beginning of the tax year (or, if later, the date of acquisition) to the date of maturity or earlier call date. Free ez file Then multiply the result by the bond premium (reduced by any bond premium amortization claimed in earlier years). Free ez file This gives you your bond premium amortization for the year. Free ez file Revenue Ruling 82-10 method. Free ez file   Under this method, the amount of your bond premium amortization increases each month over the life of the bond. Free ez file This method is explained in Revenue Ruling 82-10, 1982-1 C. Free ez file B. Free ez file 46. Free ez file Choosing To Amortize You choose to amortize the premium on taxable bonds by reporting the amortization for the year on your income tax return for the first tax year you want the choice to apply. Free ez file You should attach a statement to your return that you are making this choice under section 171. Free ez file See How To Report Amortization, next. Free ez file This choice is binding for the year you make it and for later tax years. Free ez file It applies to all taxable bonds you own in the year you make the choice and also to those you acquire in later years. Free ez file You can change your decision to amortize bond premium only with the written approval of the IRS. Free ez file To request approval, use Form 3115. Free ez file For more information on requesting approval, see section 5 of the Appendix to Revenue Procedure 2011-14 in Internal Revenue Bulletin 2011-4. Free ez file You can find Revenue Procedure 2011-14 at www. Free ez file irs. Free ez file gov/irb/2011-04_IRB/ar08. Free ez file html. Free ez file How To Report Amortization Subtract the bond premium amortization from your interest income from these bonds. Free ez file Report the bond's interest on Schedule B (Form 1040A or 1040), line 1. Free ez file Under your last entry on line 1, put a subtotal of all interest listed on line 1. Free ez file Below this subtotal, print “ABP Adjustment,” and the total interest you received. Free ez file Subtract this amount from the subtotal, and enter the result on line 2. Free ez file Bond premium amortization more than interest. Free ez file   If the amount of your bond premium amortization for an accrual period is more than the qualified stated interest for the period, you can deduct the difference as a miscellaneous itemized deduction on Schedule A (Form 1040), line 28. Free ez file    But your deduction is limited to the amount by which your total interest inclusions on the bond in prior accrual periods is more than your total bond premium deductions on the bond in prior periods. Free ez file Any amount you cannot deduct because of this limit can be carried forward to the next accrual period. Free ez file Pre-1998 election to amortize bond premium. Free ez file   Generally, if you first elected to amortize bond premium before 1998, the above treatment of the premium does not apply to bonds you acquired before 1988. Free ez file Bonds acquired before October 23, 1986. Free ez file   The amortization of the premium on these bonds is a miscellaneous itemized deduction not subject to the 2%-of-adjusted-gross-income limit. Free ez file Bonds acquired after October 22, 1986, but before 1988. Free ez file    The amortization of the premium on these bonds is investment interest expense subject to the investment interest limit, unless you choose to treat it as an offset to interest income on the bond. Free ez file Expenses of Producing Income You deduct investment expenses (other than interest expenses) as miscellaneous itemized deductions on Schedule A (Form 1040). Free ez file To be deductible, these expenses must be ordinary and necessary expenses paid or incurred: To produce or collect income, or To manage property held for producing income. Free ez file The expenses must be directly related to the income or income-producing property, and the income must be taxable to you. Free ez file The deduction for most income-producing expenses is subject to a 2% limit that also applies to certain other miscellaneous itemized deductions. Free ez file The amount deductible is limited to the total of these miscellaneous deductions that is more than 2% of your adjusted gross income. Free ez file For information on how to report expenses of producing income, see How To Report Investment Expenses , later. Free ez file Attorney or accounting fees. Free ez file   You can deduct attorney or accounting fees that are necessary to produce or collect taxable income. Free ez file However, in some cases, attorney or accounting fees are part of the basis of property. Free ez file See Basis of Investment Property in chapter 4. Free ez file Automatic investment service and dividend reinvestment plans. Free ez file   A bank may offer its checking account customers an automatic investment service so that, for a charge, each customer can choose to invest a part of the checking account each month in common stock. Free ez file Or a bank that is a dividend disbursing agent for a number of publicly-owned corporations may set up an automatic dividend reinvestment service. Free ez file Through that service, cash dividends are reinvested in more shares of stock after the bank deducts a service charge. Free ez file   A corporation in which you own stock also may have a dividend reinvestment plan. Free ez file This plan lets you choose to use your dividends to buy more shares of stock in the corporation instead of receiving the dividends in cash. Free ez file   You can deduct the monthly service charge you pay to a bank to participate in an automatic investment service. Free ez file If you participate in a dividend reinvestment plan, you can deduct any service charge subtracted from your cash dividends before the dividends are used to buy more shares of stock. Free ez file Deduct the charges in the year you pay them. Free ez file Clerical help and office rent. Free ez file   You can deduct office expenses, such as rent and clerical help, you incurred in connection with your investments and collecting the taxable income on your investments. Free ez file Cost of replacing missing securities. Free ez file   To replace your taxable securities that are mislaid, lost, stolen, or destroyed, you may have to post an indemnity bond. Free ez file You can deduct the premium you pay to buy the indemnity bond and the related incidental expenses. Free ez file   You may, however, get a refund of part of the bond premium if the missing securities are recovered within a specified time. Free ez file Under certain types of insurance policies, you can recover some of the expenses. Free ez file   If you receive the refund in the tax year you pay the amounts, you can deduct only the difference between the expenses paid and the amount refunded. Free ez file If the refund is made in a later tax year, you must include the refund in income in the year you received it, but only to the extent that the expenses decreased your tax in the year you deducted them. Free ez file Fees to collect income. Free ez file   You can deduct fees you pay to a broker, bank, trustee, or similar agent to collect investment income, such as your taxable bond or mortgage interest, or your dividends on shares of stock. Free ez file Fees to buy or sell. Free ez file   You cannot deduct a fee you pay to a broker to acquire investment property, such as stocks or bonds. Free ez file You must add the fee to the cost of the property. Free ez file See Basis of Investment Property in chapter 4. Free ez file    You cannot deduct any broker's fees, commissions, or option premiums you pay (or that were netted out) in connection with the sale of investment property. Free ez file They can be used only to figure gain or loss from the sale. Free ez file See Reporting Capital Gains and Losses , in chapter 4, for more information about the treatment of these sale expenses. Free ez file Investment counsel and advice. Free ez file   You can deduct fees you pay for counsel and advice about investments that produce taxable income. Free ez file This includes amounts you pay for investment advisory services. Free ez file Safe deposit box rent. Free ez file   You can deduct rent you pay for a safe deposit box if you use the box to store taxable income-producing stocks, bonds, or other investment-related papers and documents. Free ez file If you also use the box to store tax-exempt securities or personal items, you can deduct only part of the rent. Free ez file See Tax-exempt income under Nondeductible Expenses, later, to figure what part you can deduct. Free ez file State and local transfer taxes. Free ez file   You cannot deduct the state and local transfer taxes you pay when you buy or sell securities. Free ez file If you pay these transfer taxes when you buy securities, you must treat them as part of the cost of the property. Free ez file If you pay these transfer taxes when you sell securities, you must treat them as a reduction in the amount realized. Free ez file Trustee's commissions for revocable trust. Free ez file   If you set up a revocable trust and have its income distributed to you, you can deduct the commission you pay the trustee for managing the trust to the extent it is to produce or collect taxable income or to manage property. Free ez file However, you cannot deduct any part of the commission used for producing or collecting tax-exempt income or for managing property that produces tax-exempt income. Free ez file   If you are a cash-basis taxpayer and pay the commissions for several years in advance, you must deduct a part of the commission each year. Free ez file You cannot deduct the entire amount in the year you pay it. Free ez file Investment expenses from pass-through entities. Free ez file   If you hold an interest in a partnership, S corporation, real estate mortgage investment conduit (REMIC), or a nonpublicly offered mutual fund, you can deduct your share of that entity's investment expenses. Free ez file A partnership or S corporation will show your share of these expenses on your Schedule K-1 (Form 1065) or Schedule K-1 (Form 1120S). Free ez file A nonpublicly offered mutual fund will indicate your share of these expenses in box 5 of Form 1099-DIV (or substitute statement). Free ez file Publicly-offered mutual funds are discussed later. Free ez file   If you hold an interest in a REMIC, any expenses relating to your residual interest investment will be shown on Schedule Q (Form 1066), line 3b. Free ez file Any expenses relating to your regular interest investment will appear in box 5 of Form 1099-INT (or substitute statement) or box 9 of Form 1099-OID (or substitute statement). Free ez file   Report your share of these investment expenses on Schedule A (Form 1040), subject to the 2% limit, in the same manner as your other investment expenses. Free ez file Including mutual fund or REMIC expenses in income. Free ez file   Your share of the investment expenses of a REMIC or a nonpublicly offered mutual fund, as described above, are considered to be indirect deductions through that pass-through entity. Free ez file You must include in your gross income an amount equal to the expenses allocated to you, whether or not you are able to claim a deduction for those expenses. Free ez file If you are a shareholder in a nonpublicly offered mutual fund, you must include on your return the full amount of ordinary dividends or other distributions of stock, as shown in box 1a of Form 1099-DIV (or substitute statement). Free ez file If you are a residual interest holder in a REMIC, you must report as ordinary income on Schedule E (Form 1040) the total amounts shown on Schedule Q (Form 1066), lines 1b and 3b. Free ez file If you are a REMIC regular interest holder, you must include the amount of any expense allocation you received on Form 1040, line 8a. Free ez file Publicly-offered mutual funds. Free ez file   Most mutual funds are publicly offered. Free ez file These mutual funds, generally, are traded on an established securities exchange. Free ez file These funds do not pass investment expenses through to you. Free ez file Instead, the dividend income they report to you in box 1a of Form 1099-DIV (or substitute statement) is already reduced by your share of investment expenses. Free ez file As a result, you cannot deduct the expenses on your return. Free ez file   Include the amount from box 1a of Form 1099-DIV (or substitute statement) in your income. Free ez file    A publicly offered mutual fund is one that: Is continuously offered pursuant to a public offering, Is regularly traded on an established securities market, and Is held by or for no fewer than 500 persons at any time during the year. Free ez file Contact your mutual fund if you are not sure whether it is publicly offered. Free ez file Nondeductible Expenses Some expenses that you incur as an investor are not deductible. Free ez file Stockholders' meetings. Free ez file   You cannot deduct transportation and other expenses you pay to attend stockholders' meetings of companies in which you have no interest other than owning stock. Free ez file This is true even if your purpose in attending is to get information that would be useful in making further investments. Free ez file Investment-related seminar. Free ez file   You cannot deduct expenses for attending a convention, seminar, or similar meeting for investment purposes. Free ez file Single-premium life insurance, endowment, and annuity contracts. Free ez file   You cannot deduct interest on money you borrow to buy or carry a single-premium life insurance, endowment, or annuity contract. Free ez file Used as collateral. Free ez file   If you use a single premium annuity contract as collateral to obtain or continue a mortgage loan, you cannot deduct any interest on the loan that is collateralized by the annuity contract. Free ez file Figure the amount of interest expense disallowed by multiplying the current interest rate on the mortgage loan by the lesser of the amount of the annuity contract used as collateral or the amount of the loan. Free ez file Borrowing on insurance. Free ez file   Generally, you cannot deduct interest on money you borrow to buy or carry a life insurance, endowment, or annuity contract if you plan to systematically borrow part or all of the increases in the cash value of the contract. Free ez file This rule applies to the interest on the total amount borrowed to buy or carry the contract, not just the interest on the borrowed increases in the cash value. Free ez file Tax-exempt income. Free ez file   You cannot deduct expenses you incur to produce tax-exempt income. Free ez file Nor can you deduct interest on money you borrow to buy tax-exempt securities or shares in a mutual fund or other regulated investment company that distributes only exempt-interest dividends. Free ez file Short-sale expenses. Free ez file   The rule disallowing a deduction for interest expenses on tax-exempt securities applies to amounts you pay in connection with personal property used in a short sale or amounts paid by others for the use of any collateral in connection with the short sale. Free ez file However, it does not apply to the expenses you incur if you deposit cash as collateral for the property used in the short sale and the cash does not earn a material return during the period of the sale. Free ez file Short sales are discussed in Short Sales in chapter 4. Free ez file Expenses for both tax-exempt and taxable income. Free ez file   You may have expenses that are for both tax-exempt and taxable income. Free ez file If you cannot specifically identify what part of the expenses is for each type of income, you can divide the expenses, using reasonable proportions based on facts and circumstances. Free ez file You must attach a statement to your return showing how you divided the expenses and stating that each deduction claimed is not based on tax-exempt income. Free ez file   One accepted method for dividing expenses is to do it in the same proportion that each type of income is to the total income. Free ez file If the expenses relate in part to capital gains and losses, include the gains, but not the losses, in figuring this proportion. Free ez file To find the part of the expenses that is for the tax-exempt income, divide your tax-exempt income by the total income and multiply your expenses by the result. Free ez file Example. Free ez file You received $6,000 interest; $4,800 was tax-exempt and $1,200 was taxable. Free ez file In earning this income, you had $500 of expenses. Free ez file You cannot specifically identify the amount of each expense item that is for each income item, so you must divide your expenses. Free ez file 80% ($4,800 tax-exempt interest divided by $6,000 total interest) of your expenses is for the tax-exempt income. Free ez file You cannot deduct $400 (80% of $500) of the expenses. Free ez file You can deduct $100 (the rest of the expenses) because they are for the taxable interest. Free ez file State income taxes. Free ez file   If you itemize your deductions, you can deduct, as taxes, state income taxes on interest income that is exempt from federal income tax. Free ez file But you cannot deduct, as either taxes or investment expenses, state income taxes on other exempt income. Free ez file Interest expense and carrying charges on straddles. Free ez file   You cannot deduct interest and carrying charges allocable to personal property that is part of a straddle. Free ez file The nondeductible interest and carrying charges are added to the basis of the straddle property. Free ez file However, this treatment does not apply if: All the offsetting positions making up the straddle either consist of one or more qualified covered call options and the optioned stock, or consist of section 1256 contracts (and the straddle is not part of a larger straddle); or The straddle is a hedging transaction. Free ez file  For information about straddles, including definitions of the terms used in this discussion, see Straddles in chapter 4. Free ez file   Interest includes any amount you pay or incur in connection with personal property used in a short sale. Free ez file However, you must first apply the rules discussed in Payments in lieu of dividends under Short Sales in chapter 4. Free ez file   To determine the interest on market discount bonds and short-term obligations that are part of a straddle, you must first apply the rules discussed under Limit on interest deduction for market discount bonds and Limit on interest deduction for short-term obligations (both under Interest Expenses, earlier). Free ez file Nondeductible amount. Free ez file   Figure the nondeductible interest and carrying charges on straddle property as follows. Free ez file Add: Interest on indebtedness incurred or continued to buy or carry the personal property, and All other amounts (including charges to insure, store, or transport the personal property) paid or incurred to carry the personal property. Free ez file Subtract from the amount in (1): Interest (including OID) includible in gross income for the year on the personal property, Any income from the personal property treated as ordinary income on the disposition of short-term government obligations or as ordinary income under the market discount and short-term bond provisions — see Discount on Debt Instruments in chapter 1, The dividends includible in gross income for the year from the personal property, and Any payment on a loan of the personal property for use in a short sale that is includible in gross income. Free ez file Basis adjustment. Free ez file   Add the nondeductible amount to the basis of your straddle property. Free ez file How To Report Investment Expenses To deduct your investment expenses, you must itemize deductions on Schedule A (Form 1040). Free ez file Enter your deductible investment interest expense on Schedule A (Form1040), line 14. Free ez file Include any deductible short sale expenses. Free ez file (See Short Sales in chapter 4 for information on these expenses. Free ez file ) Also attach a completed Form 4952 if you used that form to figure your investment interest expense. Free ez file Enter the total amount of your other investment expenses (other than interest expenses) on Schedule A (Form 1040), line 23. Free ez file List the type and amount of each expense on the dotted lines next to line 23. Free ez file (If necessary, you can show the required information on an attached statement. Free ez file ) For information on how to report amortizable bond premium, see Bond Premium Amortization , earlier in this chapter. Free ez file When To Report Investment Expenses If you use the cash method to report income and expenses, you generally deduct your expenses, except for certain prepaid interest, in the year you pay them. Free ez file If you use an accrual method, you generally deduct your expenses when you incur a liability for them, rather than when you pay them. Free ez file Also see When To Deduct Investment Interest , earlier in this chapter. Free ez file Unpaid expenses owed to related party. Free ez file   If you use an accrual method, you cannot deduct interest and other expenses owed to a related cash-basis person until payment is made and the amount is includible in the gross income of that person. Free ez file The relationship, for purposes of this rule, is determined as of the end of the tax year for which the interest or expense would otherwise be deductible. Free ez file If a deduction is denied under this rule, this rule will continue to apply even if your relationship with the person ceases to exist before the amount is includible in the gross income of that person. Free ez file   This rule generally applies to those relationships listed in chapter 4 under Related Party Transactions . Free ez file It also applies to accruals by partnerships to partners, partners to partnerships, shareholders to S corporations, and S corporations to shareholders. Free ez file   The postponement of deductions for unpaid expenses and interest under the related party rule does not apply to OID, regardless of when payment is made. Free ez file This rule also does not apply to loans with below-market interest rates or to certain payments for the use of property and services when the lender or recipient has to include payments periodically in income, even if a payment has not been made. Free ez file Prev  Up  Next   Home   More Online Publications