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Free taxes online Publication 530 - Main Content Table of Contents What You Can and Cannot DeductHardest Hit Fund and Emergency Homeowners' Loan Programs Real Estate Taxes Sales Taxes Home Mortgage Interest Mortgage Insurance Premiums Mortgage Interest CreditFiguring the Credit BasisFiguring Your Basis Adjusted Basis Keeping Records How To Get Tax HelpLow Income Taxpayer Clinics What You Can and Cannot Deduct To deduct expenses of owning a home, you must file Form 1040, U. Free taxes online S. Free taxes online Individual Income Tax Return, and itemize your deductions on Schedule A (Form 1040). Free taxes online If you itemize, you cannot take the standard deduction. Free taxes online This section explains what expenses you can deduct as a homeowner. Free taxes online It also points out expenses that you cannot deduct. Free taxes online There are four primary discussions: real estate taxes, sales taxes, home mortgage interest, and mortgage insurance premiums. Free taxes online Generally, your real estate taxes, home mortgage interest, and mortgage insurance premiums are included in your house payment. Free taxes online Your house payment. Free taxes online   If you took out a mortgage (loan) to finance the purchase of your home, you probably have to make monthly house payments. Free taxes online Your house payment may include several costs of owning a home. Free taxes online The only costs you can deduct are real estate taxes actually paid to the taxing authority, interest that qualifies as home mortgage interest, and mortgage insurance premiums. Free taxes online These are discussed in more detail later. Free taxes online   Some nondeductible expenses that may be included in your house payment include: Fire or homeowner's insurance premiums, and The amount applied to reduce the principal of the mortgage. Free taxes online Minister's or military housing allowance. Free taxes online   If you are a minister or a member of the uniformed services and receive a housing allowance that is not taxable, you still can deduct your real estate taxes and your home mortgage interest. Free taxes online You do not have to reduce your deductions by your nontaxable allowance. Free taxes online For more information see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers, and Publication 3, Armed Forces' Tax Guide. Free taxes online Nondeductible payments. Free taxes online   You cannot deduct any of the following items. Free taxes online Insurance (other than mortgage insurance premiums), including fire and comprehensive coverage, and title insurance. Free taxes online Wages you pay for domestic help. Free taxes online Depreciation. Free taxes online The cost of utilities, such as gas, electricity, or water. Free taxes online Most settlement costs. Free taxes online See Settlement or closing costs under Cost as Basis, later, for more information. Free taxes online Forfeited deposits, down payments, or earnest money. Free taxes online Hardest Hit Fund and Emergency Homeowners' Loan Programs 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. Free taxes online 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. Free taxes online 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. Free taxes online 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), box 4 (mortgage insurance premiums) and box 5 (real property taxes). Free taxes online 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. Free taxes online Real Estate Taxes Most state and local governments charge an annual tax on the value of real property. Free taxes online This is called a real estate tax. Free taxes online You can deduct the tax if it is assessed uniformly at a like rate on all real property throughout the community. Free taxes online The proceeds must be for general community or governmental purposes and not be a payment for a special privilege granted or service rendered to you. Free taxes online Deductible Real Estate Taxes You can deduct real estate taxes imposed on you. Free taxes online You must have paid them either at settlement or closing, or to a taxing authority (either directly or through an escrow account) during the year. Free taxes online If you own a cooperative apartment, see Special Rules for Cooperatives , later. Free taxes online Where to deduct real estate taxes. Free taxes online   Enter the amount of your deductible real estate taxes on Schedule A (Form 1040), line 6. Free taxes online Real estate taxes paid at settlement or closing. Free taxes online   Real estate taxes are generally divided so that you and the seller each pay taxes for the part of the property tax year you owned the home. Free taxes online Your share of these taxes is fully deductible if you itemize your deductions. Free taxes online Division of real estate taxes. Free taxes online   For federal income tax purposes, the seller is treated as paying the property taxes up to, but not including, the date of sale. Free taxes online You (the buyer) are treated as paying the taxes beginning with the date of sale. Free taxes online This applies regardless of the lien dates under local law. Free taxes online Generally, this information is included on the settlement statement you get at closing. Free taxes online   You and the seller each are considered to have paid your own share of the taxes, even if one or the other paid the entire amount. Free taxes online You each can deduct your own share, if you itemize deductions, for the year the property is sold. Free taxes online Example. Free taxes online You bought your home on September 1. Free taxes online The property tax year (the period to which the tax relates) in your area is the calendar year. Free taxes online The tax for the year was $730 and was due and paid by the seller on August 15. Free taxes online You owned your new home during the property tax year for 122 days (September 1 to December 31, including your date of purchase). Free taxes online You figure your deduction for real estate taxes on your home as follows. Free taxes online 1. Free taxes online Enter the total real estate taxes for the real property tax year $730 2. Free taxes online Enter the number of days in the property tax year that you owned the property 122 3. Free taxes online Divide line 2 by 365 . Free taxes online 3342 4. Free taxes online Multiply line 1 by line 3. Free taxes online This is your deduction. Free taxes online Enter it on Schedule A (Form 1040), line 6 $244   You can deduct $244 on your return for the year if you itemize your deductions. Free taxes online You are considered to have paid this amount and can deduct it on your return even if, under the contract, you did not have to reimburse the seller. Free taxes online Delinquent taxes. Free taxes online   Delinquent taxes are unpaid taxes that were imposed on the seller for an earlier tax year. Free taxes online If you agree to pay delinquent taxes when you buy your home, you cannot deduct them. Free taxes online You treat them as part of the cost of your home. Free taxes online See Real estate taxes , later, under Basis. Free taxes online Escrow accounts. Free taxes online   Many monthly house payments include an amount placed in escrow (put in the care of a third party) for real estate taxes. Free taxes online You may not be able to deduct the total you pay into the escrow account. Free taxes online You can deduct only the real estate taxes that the lender actually paid from escrow to the taxing authority. Free taxes online Your real estate tax bill will show this amount. Free taxes online Refund or rebate of real estate taxes. Free taxes online   If you receive a refund or rebate of real estate taxes this year for amounts you paid this year, you must reduce your real estate tax deduction by the amount refunded to you. Free taxes online If the refund or rebate was for real estate taxes paid for a prior year, you may have to include some or all of the refund in your income. Free taxes online For more information, see Recoveries in Publication 525, Taxable and Nontaxable Income. Free taxes online Items You Cannot Deduct as Real Estate Taxes The following items are not deductible as real estate taxes. Free taxes online Charges for services. Free taxes online   An itemized charge for services to specific property or people is not a tax, even if the charge is paid to the taxing authority. Free taxes online You cannot deduct the charge as a real estate tax if it is: A unit fee for the delivery of a service (such as a $5 fee charged for every 1,000 gallons of water you use), A periodic charge for a residential service (such as a $20 per month or $240 annual fee charged for trash collection), or A flat fee charged for a single service provided by your local government (such as a $30 charge for mowing your lawn because it had grown higher than permitted under a local ordinance). Free taxes online    You must look at your real estate tax bill to decide if any nondeductible itemized charges, such as those listed above, are included in the bill. Free taxes online If your taxing authority (or lender) does not furnish you a copy of your real estate tax bill, ask for it. Free taxes online Contact the taxing authority if you need additional information about a specific charge on your real estate tax bill. Free taxes online Assessments for local benefits. Free taxes online   You cannot deduct amounts you pay for local benefits that tend to increase the value of your property. Free taxes online Local benefits include the construction of streets, sidewalks, or water and sewer systems. Free taxes online You must add these amounts to the basis of your property. Free taxes online   You can, however, deduct assessments (or taxes) for local benefits if they are for maintenance, repair, or interest charges related to those benefits. Free taxes online An example is a charge to repair an existing sidewalk and any interest included in that charge. Free taxes online   If only a part of the assessment is for maintenance, repair, or interest charges, you must be able to show the amount of that part to claim the deduction. Free taxes online If you cannot show what part of the assessment is for maintenance, repair, or interest charges, you cannot deduct any of it. Free taxes online   An assessment for a local benefit may be listed as an item in your real estate tax bill. Free taxes online If so, use the rules in this section to find how much of it, if any, you can deduct. Free taxes online Transfer taxes (or stamp taxes). Free taxes online   You cannot deduct transfer taxes and similar taxes and charges on the sale of a personal home. Free taxes online If you are the buyer and you pay them, include them in the cost basis of the property. Free taxes online If you are the seller and you pay them, they are expenses of the sale and reduce the amount realized on the sale. Free taxes online Homeowners association assessments. Free taxes online   You cannot deduct these assessments because the homeowners association, rather than a state or local government, imposes them. Free taxes online Special Rules for Cooperatives If you own a cooperative apartment, some special rules apply to you, though you generally receive the same tax treatment as other homeowners. Free taxes online As an owner of a cooperative apartment, you own shares of stock in a corporation that owns or leases housing facilities. Free taxes online You can deduct your share of the corporation's deductible real estate taxes if the cooperative housing corporation meets the following conditions: The corporation has only one class of stock outstanding, Each stockholder, solely because of ownership of the stock, can live in a house, apartment, or house trailer owned or leased by the corporation, No stockholder can receive any distribution out of capital, except on a partial or complete liquidation of the corporation, and At least one of the following: At least 80% of the corporation's gross income for the tax year was paid by the tenant-stockholders. Free taxes online For this purpose, gross income means all income received during the entire tax year, including any received before the corporation changed to cooperative ownership. Free taxes online At least 80% of the total square footage of the corporation's property must be available for use by the tenant-stockholders during the entire tax year. Free taxes online At least 90% of the expenditures paid or incurred by the corporation were used for the acquisition, construction, management, maintenance, or care of the property for the benefit of the tenant-shareholders during the entire tax year. Free taxes online Tenant-stockholders. Free taxes online   A tenant-stockholder can be any entity (such as a corporation, trust, estate, partnership, or association) as well as an individual. Free taxes online The tenant-stockholder does not have to live in any of the cooperative's dwelling units. Free taxes online The units that the tenant-stockholder has the right to occupy can be rented to others. Free taxes online Deductible taxes. Free taxes online   You figure your share of real estate taxes in the following way. Free taxes online Divide the number of your shares of stock by the total number of shares outstanding, including any shares held by the corporation. Free taxes online Multiply the corporation's deductible real estate taxes by the number you figured in (1). Free taxes online This is your share of the real estate taxes. Free taxes online   Generally, the corporation will tell you your share of its real estate tax. Free taxes online This is the amount you can deduct if it reasonably reflects the cost of real estate taxes for your dwelling unit. Free taxes online Refund of real estate taxes. Free taxes online   If the corporation receives a refund of real estate taxes it paid in an earlier year, it must reduce the amount of real estate taxes paid this year when it allocates the tax expense to you. Free taxes online Your deduction for real estate taxes the corporation paid this year is reduced by your share of the refund the corporation received. Free taxes online Sales Taxes Generally, you can elect to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction on Schedule A (Form 1040). Free taxes online Deductible sales taxes may include sales taxes paid on your home (including mobile and prefabricated), or home building materials if the tax rate was the same as the general sales tax rate. Free taxes online For information on figuring your deduction, see the Instructions for Schedule A (Form 1040). Free taxes online If you elect to deduct the sales taxes paid on your home, or home building materials, you cannot include them as part of your cost basis in the home. Free taxes online Home Mortgage Interest This section of the publication gives you basic information about home mortgage interest, including information on interest paid at settlement, points, and Form 1098, Mortgage Interest Statement. Free taxes online Most home buyers take out a mortgage (loan) to buy their home. Free taxes online They then make monthly payments to either the mortgage holder or someone collecting the payments for the mortgage holder. Free taxes online Usually, you can deduct the entire part of your payment that is for mortgage interest, if you itemize your deductions on Schedule A (Form 1040). Free taxes online However, your deduction may be limited if: Your total mortgage balance is more than $1 million ($500,000 if married filing separately), or You took out a mortgage for reasons other than to buy, build, or improve your home. Free taxes online If either of these situations applies to you, see Publication 936 for more information. Free taxes online Also see Publication 936 if you later refinance your mortgage or buy a second home. Free taxes online Refund of home mortgage interest. Free taxes online   If you receive a refund of home mortgage interest that you deducted in an earlier year and that reduced your tax, you generally must include the refund in income in the year you receive it. Free taxes online For more information, see Recoveries in Publication 525. Free taxes online The amount of the refund will usually be shown on the mortgage interest statement you receive from your mortgage lender. Free taxes online See Mortgage Interest Statement , later. Free taxes online Deductible Mortgage Interest To be deductible, the interest you pay must be on a loan secured by your main home or a second home. Free taxes online The loan can be a first or second mortgage, a home improvement loan, or a home equity loan. Free taxes online Prepaid interest. Free taxes online   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. Free taxes online Generally, you can deduct in each year only the interest that qualifies as home mortgage interest for that year. Free taxes online An exception (discussed later) applies to points. Free taxes online Late payment charge on mortgage payment. Free taxes online   You can deduct as home mortgage interest a late payment charge if it was not for a specific service in connection with your mortgage loan. Free taxes online Mortgage prepayment penalty. Free taxes online   If you pay off your home mortgage early, you may have to pay a penalty. Free taxes online 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. Free taxes online Ground rent. Free taxes online   In some states (such as Maryland), you may buy your home subject to a ground rent. Free taxes online A ground rent is an obligation you assume to pay a fixed amount per year on the property. Free taxes online Under this arrangement, you are leasing (rather than buying) the land on which your home is located. Free taxes online Redeemable ground rents. Free taxes online   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct the payments as mortgage interest. Free taxes online The ground rent is a redeemable ground rent only if all of the following are true. Free taxes online Your lease, including renewal periods, is for more than 15 years. Free taxes online You can freely assign the lease. Free taxes online You have a present or future right (under state or local law) to end the lease and buy the lessor's entire interest in the land by paying a specified amount. Free taxes online The lessor's interest in the land is primarily a security interest to protect the rental payments to which he or she is entitled. Free taxes online   Payments made to end the lease and buy the lessor's entire interest in the land are not redeemable ground rents. Free taxes online You cannot deduct them. Free taxes online Nonredeemable ground rents. Free taxes online   Payments on a nonredeemable ground rent are not mortgage interest. Free taxes online You can deduct them as rent only if they are a business expense or if they are for rental property. Free taxes online Cooperative apartment. Free taxes online   You can usually treat the interest on a loan you took out to buy stock in a cooperative housing corporation as home mortgage interest if you own a cooperative apartment, and the cooperative housing corporation meets the conditions described earlier under Special Rules for Cooperatives . Free taxes online In addition, you can treat as home mortgage interest your share of the corporation's deductible mortgage interest. Free taxes online Figure your share of mortgage interest the same way that is shown for figuring your share of real estate taxes in the Example under Division of real estate taxes, earlier. Free taxes online For more information on cooperatives, see Special Rule for Tenant-Stockholders in Cooperative Housing Corporations in Publication 936. Free taxes online Refund of cooperative's mortgage interest. Free taxes online   You must reduce your mortgage interest deduction by your share of any cash portion of a patronage dividend that the cooperative receives. Free taxes online The patronage dividend is a partial refund to the cooperative housing corporation of mortgage interest it paid in a prior year. Free taxes online   If you receive a Form 1098 from the cooperative housing corporation, the form should show only the amount you can deduct. Free taxes online Mortgage Interest Paid at Settlement One item that normally appears on a settlement or closing statement is home mortgage interest. Free taxes online You can deduct the interest that you pay at settlement if you itemize your deductions on Schedule A (Form 1040). Free taxes online This amount should be included in the mortgage interest statement provided by your lender. Free taxes online See the discussion under Mortgage Interest Statement , later. Free taxes online Also, if you pay interest in advance, see Prepaid interest , earlier, and Points , next. Free taxes online Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Free taxes online Points also may be called loan origination fees, maximum loan charges, loan discount, or discount points. Free taxes online A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. Free taxes online See Points paid by the seller , later. Free taxes online General rule. Free taxes online   You cannot deduct the full amount of points in the year paid. Free taxes online They are prepaid interest, so you generally must deduct them over the life (term) of the mortgage. Free taxes online Exception. Free taxes online   You can deduct the full amount of points in the year paid if you meet all the following tests. Free taxes online Your loan is secured by your main home. Free taxes online (Generally, your main home is the one you live in most of the time. Free taxes online ) Paying points is an established business practice in the area where the loan was made. Free taxes online The points paid were not more than the points generally charged in that area. Free taxes online You use the cash method of accounting. Free taxes online This means you report income in the year you receive it and deduct expenses in the year you pay them. Free taxes online Most individuals use this method. Free taxes online 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. Free taxes online The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. Free taxes online The funds you provided are not required to have been applied to the points. Free taxes online They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. Free taxes online You cannot have borrowed these funds. Free taxes online You use your loan to buy or build your main home. Free taxes online The points were computed as a percentage of the principal amount of the mortgage. Free taxes online The amount is clearly shown on the settlement statement (such as the Uniform Settlement Statement, Form HUD-1) as points charged for the mortgage. Free taxes online The points may be shown as paid from either your funds or the seller's. Free taxes online Note. Free taxes online If you meet all of the tests listed above and you itemize your deductions in the year you get the loan, you can either deduct the full amount of points in the year paid or deduct them over the life of the loan, beginning in the year you get the loan. Free taxes online If you do not itemize your deductions in the year you get the loan, you can spread the points over the life of the loan and deduct the appropriate amount in each future year, if any, when you do itemize your deductions. Free taxes online Home improvement loan. Free taxes online   You can also fully deduct in the year paid points paid on a loan to improve your main home, if you meet the first six tests listed earlier. Free taxes online Refinanced loan. Free taxes online   If you use part of the refinanced mortgage proceeds to improve your main home and you meet the first six tests listed earlier, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. Free taxes online You can deduct the rest of the points over the life of the loan. Free taxes online Points not fully deductible in year paid. Free taxes online    If you do not qualify under the exception to deduct the full amount of points in the year paid (or choose not to do so), see Points in Publication 936 for the rules on when and how much you can deduct. Free taxes online Figure A. Free taxes online   You can use Figure A, next, as a quick guide to see whether your points are fully deductible in the year paid. Free taxes online    Please click here for the text description of the image. Free taxes online Figure A. Free taxes online Are my points fully deductible this year? Amounts charged for services. Free taxes online   Amounts charged by the lender for specific services connected to the loan are not interest. Free taxes online Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. Free taxes online You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. Free taxes online For information about the tax treatment of these amounts and other settlement fees and closing costs, see Basis , later. Free taxes online Points paid by the seller. Free taxes online   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. Free taxes online Treatment by seller. Free taxes online   The seller cannot deduct these fees as interest. Free taxes online However, they are a selling expense that reduces the seller's amount realized. Free taxes online See Publication 523 for more information. Free taxes online Treatment by buyer. Free taxes online   The buyer treats seller-paid points as if he or she had paid them. Free taxes online If all the tests listed earlier under Exception are met, the buyer can deduct the points in the year paid. Free taxes online If any of those tests are not met, the buyer must deduct the points over the life of the loan. Free taxes online   The buyer must also reduce the basis of the home by the amount of the seller-paid points. Free taxes online For more information about the basis of your home, see Basis , later. Free taxes online Funds provided are less than points. Free taxes online   If you meet all the tests listed earlier under Exception 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. Free taxes online In addition, you can deduct any points paid by the seller. Free taxes online Example 1. Free taxes online When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). Free taxes online You meet all the tests for deducting points in the year paid (see Exception , earlier), except the only funds you provided were a $750 down payment. Free taxes online Of the $1,000 you were charged for points, you can deduct $750 in the year paid. Free taxes online You spread the remaining $250 over the life of the mortgage. Free taxes online Example 2. Free taxes online 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. Free taxes online In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). Free taxes online You spread the remaining $250 over the life of the mortgage. Free taxes online You must reduce the basis of your home by the $1,000 paid by the seller. Free taxes online Excess points. Free taxes online   If you meet all the tests under Exception , earlier, except that the points paid were more than are generally charged in your area (test 3), you can deduct in the year paid only the points that are generally charged. Free taxes online You must spread any additional points over the life of the mortgage. Free taxes online Mortgage ending early. Free taxes online   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. Free taxes online A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. Free taxes online Example. Free taxes online Dan paid $3,000 in points in 2006 that he had to spread out over the 15-year life of the mortgage. Free taxes online He had deducted $1,400 of these points through 2012. Free taxes online Dan prepaid his mortgage in full in 2013. Free taxes online He can deduct the remaining $1,600 of points in 2013. Free taxes online Exception. Free taxes online   If you refinance the mortgage with the same lender, you cannot deduct any remaining points for the year. Free taxes online Instead, deduct them over the term of the new loan. Free taxes online Form 1098. Free taxes online   The mortgage interest statement you receive should show not only the total interest paid during the year, but also your deductible points paid during the year. Free taxes online See Mortgage Interest Statement , later. Free taxes online Where To Deduct Home Mortgage Interest Enter on Schedule A (Form 1040), line 10, the home mortgage interest and points reported to you on Form 1098 (discussed next). Free taxes online If you did not receive a Form 1098, enter your deductible interest on line 11, and any deductible points on line 12. Free taxes online See Table 1 below for a summary of where to deduct home mortgage interest and real estate taxes. Free taxes online If you paid home mortgage interest to the person from whom you bought your home, show that person's name, address, and social security number (SSN) or employer identification number (EIN) on the dotted lines next to line 11. Free taxes online The seller must give you this number and you must give the seller your SSN. Free taxes online Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. Free taxes online Failure to meet either of these requirements may result in a $50 penalty for each failure. Free taxes online Table 1. Free taxes online Where To Deduct Interest and Taxes Paid on Your Home See the text for information on what expenses are eligible. Free taxes online IF you are eligible to deduct . Free taxes online . Free taxes online . Free taxes online THEN report the amount  on Schedule A (Form 1040) . Free taxes online . Free taxes online . Free taxes online real estate taxes line 6. Free taxes online home mortgage interest and points reported on Form 1098 line 10. Free taxes online home mortgage interest not reported on  Form 1098 line 11. Free taxes online points not reported on Form 1098 line 12. Free taxes online qualified mortgage insurance premiums line 13. Free taxes online 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 to a mortgage holder in the course of that holder's trade or business, you should receive a Form 1098 or similar statement from the mortgage holder. Free taxes online The statement will show the total interest paid on your mortgage during the year. Free taxes online If you bought a main home during the year, it also will show the deductible points you paid and any points you can deduct that were paid by the person who sold you your home. Free taxes online See Points , earlier. Free taxes online The interest you paid at settlement should be included on the statement. Free taxes online If it is not, add the interest from the settlement sheet that qualifies as home mortgage interest to the total shown on Form 1098 or similar statement. Free taxes online Put the total on Schedule A (Form 1040), line 10, and attach a statement to your return explaining the difference. Free taxes online Write “See attached” to the right of line 10. Free taxes online A mortgage holder can be a financial institution, a governmental unit, or a cooperative housing corporation. Free taxes online If a statement comes from a cooperative housing corporation, it generally will show your share of interest. Free taxes online Your mortgage interest statement for 2013 should be provided or sent to you by January 31, 2014. Free taxes online If it is mailed, you should allow adequate time to receive it before contacting the mortgage holder. Free taxes online A copy of this form will be sent to the IRS also. Free taxes online Example. Free taxes online You bought a new home on May 3. Free taxes online You paid no points on the purchase. Free taxes online During the year, you made mortgage payments which included $4,480 deductible interest on your new home. Free taxes online The settlement sheet for the purchase of the home included interest of $620 for 29 days in May. Free taxes online The mortgage statement you receive from the lender includes total interest of $5,100 ($4,480 + $620). Free taxes online You can deduct the $5,100 if you itemize your deductions. Free taxes online Refund of overpaid interest. Free taxes online   If you receive a refund of mortgage interest you overpaid in a prior year, you generally will receive a Form 1098 showing the refund in box 3. Free taxes online Generally, you must include the refund in income in the year you receive it. Free taxes online See Refund of home mortgage interest , earlier, under Home Mortgage Interest. Free taxes online More than one borrower. Free taxes online   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. Free taxes online Show how much of the interest each of you paid, and give the name and address of the person who received the form. Free taxes online Deduct your share of the interest on Schedule A (Form 1040), line 11, and write “See attached” to the right of that line. Free taxes online Mortgage Insurance Premiums You may be able to take an itemized deduction on Schedule A (Form 1040), line 13, for premiums you pay or accrue during 2013 for qualified mortgage insurance in connection with home acquisition debt on your qualified home. Free taxes online Mortgage insurance premiums you paid or accrued on any mortgage insurance contract issued before January 1, 2007, are not deductible as an itemized deduction. Free taxes online Qualified Mortgage Insurance Qualified mortgage insurance is mortgage insurance provided by the Veterans Administration, the Federal Housing Administration, or the Rural Housing Administration, and private mortgage insurance (as defined in section 2 of the Homeowners Protection Act of 1998 as in effect on December 20, 2006). Free taxes online Prepaid mortgage insurance premiums. Free taxes online   If you paid premiums that are allocable to periods after 2013, you must allocate them over the shorter of: The stated term of the mortgage, or 84 months, beginning with the month the insurance was obtained. Free taxes online The premiums are treated as paid in the year to which they were allocated. Free taxes online If the mortgage is satisfied before its term, no deduction is allowed for the unamortized balance. Free taxes online See Publication 936 for details. Free taxes online Exception for certain mortgage insurance. Free taxes online   The allocation rules, explained above, do not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or Rural Housing Service. Free taxes online Home Acquisition Debt Home acquisition debt is a mortgage you took out after October 13, 1987, to buy, build, or substantially improve a qualified home. Free taxes online It also must be secured by that home. Free taxes online If the amount of your mortgage is more than the cost of the home plus the cost of any substantial improvements, only the debt that is not more than the cost of the home plus improvements qualifies as home acquisition debt. Free taxes online Home acquisition debt limit. Free taxes online   The total amount you can treat as home acquisition debt at any time on your home cannot be more than $1 million ($500,000 if married filing separately). Free taxes online Discharges of qualified principal residence indebtedness. Free taxes online   You can exclude from gross income any discharges of qualified principal residence indebtedness made after 2006 and before 2014. Free taxes online You must reduce the basis of your principal residence (but not below zero) by the amount you exclude. Free taxes online Principal residence. Free taxes online   Your principal residence is the home where you ordinarily live most of the time. Free taxes online You can have only one principal residence at any one time. Free taxes online Qualified principal residence indebtedness. Free taxes online   This is a mortgage that you took out to buy, build, or substantially improve your principal residence and that is secured by that residence. Free taxes online If the amount of your original mortgage is more than the cost of your principal residence plus the cost of substantial improvements, qualified principal residence indebtedness cannot be more than the cost of your principal residence plus improvements. Free taxes online   Any debt secured by your principal residence that you use to refinance qualified principal residence indebtedness is qualified principal residence indebtedness up to the amount of your old mortgage principal just before the refinancing. Free taxes online Additional debt incurred to substantially improve your principal residence is also qualified principal residence indebtedness. Free taxes online Amount you can exclude. Free taxes online   You can only exclude debt discharged after 2006 and before 2014. Free taxes online The most you can exclude is $2 million ($1 million if married filing separately). Free taxes online You cannot exclude any amount that was discharged because of services performed for the lender or on account of any other factor not directly related either to a decline in the value of your residence or to your financial condition. Free taxes online Ordering rule. Free taxes online   If only a part of a loan is qualified principal residence indebtedness, you can exclude only the amount of the discharge that is more than the amount of the loan (immediately before the discharge) that is not qualified principal residence indebtedness. Free taxes online Qualified Home This means your main home or your second home. Free taxes online A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities. Free taxes online Main home. Free taxes online   You can have only one main home at any one time. Free taxes online This is the home where you ordinarily live most of the time. Free taxes online Second home and other special situations. Free taxes online   If you have a second home, use part of your home for other than residential living (such as a home office), rent out part of your home, or are having your home constructed, see Qualified Home in Publication 936. Free taxes online Limit on Deduction If your adjusted gross income (AGI) 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 deductible is reduced and may be eliminated. Free taxes online 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. Free taxes online If your AGI is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. Free taxes online Form 1098. Free taxes online   The amount of mortgage insurance premiums you paid during 2013 should be reported in box 4. Free taxes online See Form 1098, Mortgage Interest Statement in Publication 936. Free taxes online Mortgage Interest Credit The mortgage interest credit is intended to help lower-income individuals afford home ownership. Free taxes online If you qualify, you can claim the credit on Form 8396 each year for part of the home mortgage interest you pay. Free taxes online Who qualifies. Free taxes online   You may be eligible for the credit if you were issued a qualified Mortgage Credit Certificate (MCC) from your state or local government. Free taxes online Generally, an MCC is issued only in connection with a new mortgage for the purchase of your main home. Free taxes online The MCC will show the certificate credit rate you will use to figure your credit. Free taxes online It also will show the certified indebtedness amount. Free taxes online Only the interest on that amount qualifies for the credit. Free taxes online See Figuring the Credit , later. Free taxes online You must contact the appropriate government agency about getting an MCC before you get a mortgage and buy your home. Free taxes online Contact your state or local housing finance agency for information about the availability of MCCs in your area. Free taxes online How to claim the credit. Free taxes online   To claim the credit, complete Form 8396 and attach it to your Form 1040 or Form 1040NR, U. Free taxes online S. Free taxes online Nonresident Alien Income Tax Return. Free taxes online Include the credit in your total for Form 1040, line 53, or Form 1040NR, line 50; be sure to check box c and write “Form 8396” on that line. Free taxes online Reducing your home mortgage interest deduction. Free taxes online   If you itemize your deductions on Schedule A (Form 1040), you must reduce your home mortgage interest deduction by the amount of the mortgage interest credit shown on Form 8396, line 3. Free taxes online You must do this even if part of that amount is to be carried forward to 2014. Free taxes online Selling your home. Free taxes online   If you purchase a home after 1990 using an MCC, and you sell that home within 9 years, you may have to recapture (repay) all or part of the benefit you received from the MCC program. Free taxes online For additional information, see Recapturing (Paying Back) a Federal Mortgage Subsidy, in Publication 523. Free taxes online Figuring the Credit Figure your credit on Form 8396. Free taxes online Mortgage not more than certified indebtedness. Free taxes online   If your mortgage loan amount is equal to (or smaller than) the certified indebtedness amount shown on your MCC, enter on Form 8396, line 1, all the interest you paid on your mortgage during the year. Free taxes online Mortgage more than certified indebtedness. Free taxes online   If your mortgage loan amount is larger than the certified indebtedness amount shown on your MCC, you can figure the credit on only part of the interest you paid. Free taxes online To find the amount to enter on line 1, multiply the total interest you paid during the year on your mortgage by the following fraction. Free taxes online Certified indebtedness amount on your MCC Original amount of your mortgage   The fraction will not change as long as you are entitled to take the mortgage interest credit. Free taxes online Example. Free taxes online Emily bought a home this year. Free taxes online Her mortgage loan is $125,000. Free taxes online The certified indebtedness amount on her MCC is $100,000. Free taxes online She paid $7,500 interest this year. Free taxes online Emily figures the interest to enter on Form 8396, line 1, as follows:   $100,000 = 80% (. Free taxes online 80)       $125,000       $7,500 x . Free taxes online 80 = $6,000   Emily enters $6,000 on Form 8396, line 1. Free taxes online In each later year, she will figure her credit using only 80% of the interest she pays for that year. Free taxes online Limits Two limits may apply to your credit. Free taxes online A limit based on the credit rate, and A limit based on your tax. Free taxes online Limit based on credit rate. Free taxes online   If the certificate credit rate is higher than 20%, the credit you are allowed cannot be more than $2,000. Free taxes online Limit based on tax. Free taxes online   After applying the limit based on the credit rate, your credit generally cannot be more than your tax liability. Free taxes online See the Credit Limit Worksheet in the Form 8396 instructions to calculate the limit based on tax. Free taxes online Dividing the Credit If two or more persons (other than a married couple filing a joint return) hold an interest in the home to which the MCC relates, the credit must be divided based on the interest held by each person. Free taxes online Example. Free taxes online John and his brother, George, were issued an MCC. Free taxes online They used it to get a mortgage on their main home. Free taxes online John has a 60% ownership interest in the home, and George has a 40% ownership interest in the home. Free taxes online John paid $5,400 mortgage interest this year and George paid $3,600. Free taxes online The MCC shows a credit rate of 25% and a certified indebtedness amount of $130,000. Free taxes online The loan amount (mortgage) on their home is $120,000. Free taxes online The credit is limited to $2,000 because the credit rate is more than 20%. Free taxes online John figures the credit by multiplying the mortgage interest he paid this year ($5,400) by the certificate credit rate (25%) for a total of $1,350. Free taxes online His credit is limited to $1,200 ($2,000 × 60%). Free taxes online George figures the credit by multiplying the mortgage interest he paid this year ($3,600) by the certificate credit rate (25%) for a total of $900. Free taxes online His credit is limited to $800 ($2,000 × 40%). Free taxes online Carryforward If your allowable credit is reduced because of the limit based on your tax, you can carry forward the unused portion of the credit to the next 3 years or until used, whichever comes first. Free taxes online Example. Free taxes online You receive a mortgage credit certificate from State X. Free taxes online This year, your regular tax liability is $1,100, you owe no alternative minimum tax, and your mortgage interest credit is $1,700. Free taxes online You claim no other credits. Free taxes online Your unused mortgage interest credit for this year is $600 ($1,700 − $1,100). Free taxes online You can carry forward this amount to the next 3 years or until used, whichever comes first. Free taxes online Credit rate more than 20%. Free taxes online   If you are subject to the $2,000 limit because your certificate credit rate is more than 20%, you cannot carry forward any amount more than $2,000 (or your share of the $2,000 if you must divide the credit). Free taxes online Example. Free taxes online In the earlier example under Dividing the Credit , John and George used the entire $2,000 credit. Free taxes online The excess   John $1,350 − $1,200 = $150     George $900 − $800 = $100   $150 for John ($1,350 − $1,200) and $100 for George ($900 − $800) cannot be carried forward to future years, despite the respective tax liabilities for John and George. Free taxes online Refinancing If you refinance your original mortgage loan on which you had been given an MCC, you must get a new MCC to be able to claim the credit on the new loan. Free taxes online The amount of credit you can claim on the new loan may change. Free taxes online Table 2 below summarizes how to figure your credit if you refinance your original mortgage loan. Free taxes online Table 2. Free taxes online Effect of Refinancing on Your Credit IF you get a new (reissued) MCC and the amount of your new mortgage is . Free taxes online . Free taxes online . Free taxes online THEN the interest you claim on Form 8396, line 1, is* . Free taxes online . Free taxes online . Free taxes online smaller than or equal to the certified indebtedness amount on the new MCC all the interest paid during the year on your new mortgage. Free taxes online larger than the certified indebtedness amount on the new MCC interest paid during the year on your new mortgage multiplied by the following fraction. Free taxes online         certified indebtedness  amount on your new MCC       original amount of your  mortgage   *The credit using the new MCC cannot be more than the credit using the old MCC. Free taxes online  See New MCC cannot increase your credit above. Free taxes online An issuer may reissue an MCC after you refinance your mortgage. Free taxes online If you did not get a new MCC, you may want to contact the state or local housing finance agency that issued your original MCC for information about whether you can get a reissued MCC. Free taxes online Year of refinancing. Free taxes online   In the year of refinancing, add the applicable amount of interest paid on the old mortgage and the applicable amount of interest paid on the new mortgage, and enter the total on Form 8396, line 1. Free taxes online   If your new MCC has a credit rate different from the rate on the old MCC, you must attach a statement to Form 8396. Free taxes online The statement must show the calculation for lines 1, 2, and 3 for the part of the year when the old MCC was in effect. Free taxes online It must show a separate calculation for the part of the year when the new MCC was in effect. Free taxes online Combine the amounts from both calculations for line 3, enter the total on line 3 of the form, and write “See attached” on the dotted line next to line 2. Free taxes online New MCC cannot increase your credit. Free taxes online   The credit that you claim with your new MCC cannot be more than the credit that you could have claimed with your old MCC. Free taxes online   In most cases, the agency that issues your new MCC will make sure that it does not increase your credit. Free taxes online However, if either your old loan or your new loan has a variable (adjustable) interest rate, you will need to check this yourself. Free taxes online In that case, you will need to know the amount of the credit you could have claimed using the old MCC. Free taxes online   There are two methods for figuring the credit you could have claimed. Free taxes online Under one method, you figure the actual credit that would have been allowed. Free taxes online This means you use the credit rate on the old MCC and the interest you would have paid on the old loan. Free taxes online   If your old loan was a variable rate mortgage, you can use another method to determine the credit that you could have claimed. Free taxes online Under this method, you figure the credit using a payment schedule of a hypothetical self-amortizing mortgage with level payments projected to the final maturity date of the old mortgage. Free taxes online The interest rate of the hypothetical mortgage is the annual percentage rate (APR) of the new mortgage for purposes of the Federal Truth in Lending Act. Free taxes online The principal of the hypothetical mortgage is the remaining outstanding balance of the certified mortgage indebtedness shown on the old MCC. Free taxes online    You must choose one method and use it consistently beginning with the first tax year for which you claim the credit based on the new MCC. Free taxes online    As part of your tax records, you should keep your old MCC and the schedule of payments for your old mortgage. Free taxes online Basis Basis is your starting point for figuring a gain or loss if you later sell your home, or for figuring depreciation if you later use part of your home for business purposes or for rent. Free taxes online While you own your home, you may add certain items to your basis. Free taxes online You may subtract certain other items from your basis. Free taxes online These items are called adjustments to basis and are explained later under Adjusted Basis . Free taxes online It is important that you understand these terms when you first acquire your home because you must keep track of your basis and adjusted basis during the period you own your home. Free taxes online You also must keep records of the events that affect basis or adjusted basis. Free taxes online See Keeping Records , below. Free taxes online Figuring Your Basis How you figure your basis depends on how you acquire your home. Free taxes online If you buy or build your home, your cost is your basis. Free taxes online If you receive your home as a gift, your basis is usually the same as the adjusted basis of the person who gave you the property. Free taxes online If you inherit your home from a decedent, different rules apply depending on the date of the decedent's death. Free taxes online Each of these topics is discussed later. Free taxes online Property transferred from a spouse. Free taxes online   If your home is transferred to you from your spouse, or from your former spouse as a result of a divorce, your basis is the same as your spouse's (or former spouse's) adjusted basis just before the transfer. Free taxes online Publication 504, Divorced or Separated Individuals, fully discusses transfers between spouses. Free taxes online Cost as Basis The cost of your home, whether you purchased it or constructed it, is the amount you paid for it, including any debt you assumed. Free taxes online The cost of your home includes most settlement or closing costs you paid when you bought the home. Free taxes online If you built your home, your cost includes most closing costs paid when you bought the land or settled on your mortgage. Free taxes online See Settlement or closing costs , later. Free taxes online If you elect to deduct the sales taxes on the purchase or construction of your home as an itemized deduction on Schedule A (Form 1040), you cannot include the sales taxes as part of your cost basis in the home. Free taxes online Purchase. Free taxes online   The basis of a home you bought is the amount you paid for it. Free taxes online This usually includes your down payment and any debt you assumed. Free taxes online The basis of a cooperative apartment is the amount you paid for your shares in the corporation that owns or controls the property. Free taxes online This amount includes any purchase commissions or other costs of acquiring the shares. Free taxes online Construction. Free taxes online   If you contracted to have your home built on land that you own, your basis in the home is your basis in the land plus the amount you paid to have the home built. Free taxes online This includes the cost of labor and materials, the amount you paid the contractor, any architect's fees, building permit charges, utility meter and connection charges, and legal fees that are directly connected with building your home. Free taxes online If you built all or part of your home yourself, your basis is the total amount it cost you to build it. Free taxes online You cannot include in basis the value of your own labor or any other labor for which you did not pay. Free taxes online Real estate taxes. Free taxes online   Real estate taxes are usually divided so that you and the seller each pay taxes for the part of the property tax year that each owned the home. Free taxes online See the earlier discussion of Real estate taxes paid at settlement or closing , under Real Estate Taxes, earlier, to figure the real estate taxes you paid or are considered to have paid. Free taxes online   If you pay any part of the seller's share of the real estate taxes (the taxes up to the date of sale), and the seller did not reimburse you, add those taxes to your basis in the home. Free taxes online You cannot deduct them as taxes paid. Free taxes online   If the seller paid any of your share of the real estate taxes (the taxes beginning with the date of sale), you can still deduct those taxes. Free taxes online Do not include those taxes in your basis. Free taxes online If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. Free taxes online Example 1. Free taxes online You bought your home on September 1. Free taxes online The property tax year in your area is the calendar year, and the tax is due on August 15. Free taxes online The real estate taxes on the home you bought were $1,275 for the year and had been paid by the seller on August 15. Free taxes online You did not reimburse the seller for your share of the real estate taxes from September 1 through December 31. Free taxes online You must reduce the basis of your home by the $426 [(122 ÷ 365) × $1,275] the seller paid for you. Free taxes online You can deduct your $426 share of real estate taxes on your return for the year you purchased your home. Free taxes online Example 2. Free taxes online You bought your home on May 3, 2013. Free taxes online The property tax year in your area is the calendar year. Free taxes online The taxes for the previous year are assessed on January 2 and are due on May 31 and November 30. Free taxes online Under state law, the taxes become a lien on May 31. Free taxes online You agreed to pay all taxes due after the date of sale. Free taxes online The taxes due in 2013 for 2012 were $1,375. Free taxes online The taxes due in 2014 for 2013 will be $1,425. Free taxes online You cannot deduct any of the taxes paid in 2013 because they relate to the 2012 property tax year and you did not own the home until 2013. Free taxes online Instead, you add the $1,375 to the cost (basis) of your home. Free taxes online You owned the home in 2013 for 243 days (May 3 to December 31), so you can take a tax deduction on your 2014 return of $949 [(243 ÷ 365) × $1,425] paid in 2014 for 2013. Free taxes online You add the remaining $476 ($1,425 − $949) of taxes paid in 2014 to the cost (basis) of your home. Free taxes online Settlement or closing costs. Free taxes online   If you bought your home, you probably paid settlement or closing costs in addition to the contract price. Free taxes online These costs are divided between you and the seller according to the sales contract, local custom, or understanding of the parties. Free taxes online If you built your home, you probably paid these costs when you bought the land or settled on your mortgage. Free taxes online   The only settlement or closing costs you can deduct are home mortgage interest and certain real estate taxes. Free taxes online You deduct them in the year you buy your home if you itemize your deductions. Free taxes online You can add certain other settlement or closing costs to the basis of your home. Free taxes online Items added to basis. Free taxes online   You can include in your basis the settlement fees and closing costs you paid for buying your home. Free taxes online A fee is for buying the home if you would have had to pay it even if you paid cash for the home. Free taxes online   The following are some of the settlement fees and closing costs that you can include in the original basis of your home. Free taxes online Abstract fees (abstract of title fees). Free taxes online Charges for installing utility services. Free taxes online Legal fees (including fees for the title search and preparation of the sales contract and deed). Free taxes online Recording fees. Free taxes online Surveys. Free taxes online Transfer or stamp taxes. Free taxes online Owner's title insurance. Free taxes online Any amount the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, cost for improvements or repairs, and sales commissions. Free taxes online   If the seller actually paid for any item for which you are liable and for which you can take a deduction (such as your share of the real estate taxes for the year of sale), you must reduce your basis by that amount unless you are charged for it in the settlement. Free taxes online Items not added to basis and not deductible. Free taxes online   Here are some settlement and closing costs that you cannot deduct or add to your basis. Free taxes online Fire insurance premiums. Free taxes online Charges for using utilities or other services related to occupancy of the home before closing. Free taxes online Rent for occupying the home before closing. Free taxes online Charges connected with getting or refinancing a mortgage loan, such as: Loan assumption fees, Cost of a credit report, and Fee for an appraisal required by a lender. Free taxes online Points paid by seller. Free taxes online   If you bought your home after April 3, 1994, you must reduce your basis by any points paid for your mortgage by the person who sold you your home. Free taxes online   If you bought your home after 1990 but before April 4, 1994, you must reduce your basis by seller-paid points only if you deducted them. Free taxes online See Points , earlier, for the rules on deducting points. Free taxes online Gift To figure the basis of property you receive as a gift, you must know its adjusted basis (defined later) to the donor just before it was given to you, its fair market value (FMV) at the time it was given to you, and any gift tax paid on it. Free taxes online Fair market value. Free taxes online   Fair market value (FMV) is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and who both have a reasonable knowledge of all the necessary facts. Free taxes online Donor's adjusted basis is more than FMV. Free taxes online   If someone gave you your home and the donor's adjusted basis, when it was given to you, was more than the FMV, your basis at the time of receipt is the same as the donor's adjusted basis. Free taxes online Disposition basis. Free taxes online   If the donor's adjusted basis at the time of the gift is more than the FMV, your basis (plus or minus any required adjustments, see Adjusted Basis , later) when you dispose of the property will depend on whether you have a gain or a loss. Free taxes online Your basis for figuring a gain is the same as the donor's adjusted basis. Free taxes online Your basis for figuring a loss is the FMV when you received the gift. Free taxes online If you use the donor's adjusted basis to figure a gain and it results in a loss, then you must use the FMV (at the time of the gift) to refigure the loss. Free taxes online However, if using the FMV results in a gain, then you neither have a gain nor a loss. Free taxes online Example 1. Free taxes online Andrew received a house as a gift from Ishmael (the donor). Free taxes online At the time of the gift, the home had an FMV of $80,000. Free taxes online Ishmael's adjusted basis was $100,000. Free taxes online After he received the house, no events occurred to increase or decrease the basis. Free taxes online If Andrew sells the house for $120,000, he will have a $20,000 gain because he must use the donor's adjusted basis ($100,000) at the time of the gift as his basis to figure the gain. Free taxes online Example 2. Free taxes online Same facts as Example 1 , except this time Andrew sells the house for $70,000. Free taxes online He will have a loss of $10,000 because he must use the FMV ($80,000) at the time of the gift as his basis to figure the loss. Free taxes online Example 3. Free taxes online Same facts as Example 1 , except this time Andrew sells the house for $90,000. Free taxes online Initially, he figures the gain using Ishmael's adjusted basis ($100,000), which results in a loss of $10,000. Free taxes online Since it is a loss, Andrew must now recalculate the loss using the FMV ($80,000), which results in a gain of $10,000. Free taxes online So in this situation, Andrew will neither have a gain nor a loss. Free taxes online Donor's adjusted basis equal to or less than the FMV. Free taxes online   If someone gave you your home after 1976 and the donor's adjusted basis, when it was given to you, was equal to or less than the FMV, your basis at the time of receipt is the same as the donor's adjusted basis, plus the part of any federal gift tax paid that is due to the net increase in value of the home. Free taxes online Part of federal gift tax due to net increase in value. Free taxes online   Figure the part of the federal gift tax paid that is due to the net increase in value of the home by multiplying the total federal gift tax paid by a fraction. Free taxes online The numerator (top part) of the fraction is the net increase in the value of the home, and the denominator (bottom part) is the value of the home for gift tax purposes after reduction for any annual exclusion and marital or charitable deduction that applies to the gift. Free taxes online The net increase in the value of the home is its FMV minus the adjusted basis of the donor. Free taxes online Publication 551 gives more information, including examples, on figuring your basis when you receive property as a gift. Free taxes online Inheritance Your basis in a home you inherited is generally the fair market value of the home on the date of the decedent's death or on the alternative valuation date if the personal representative for the estate chooses to use alternative valuation. Free taxes online If an estate tax return was filed, your basis is generally the value of the home listed on the estate tax return. Free taxes online If an estate tax return was not filed, your basis is the appraised value of the home at the decedent's date of death for state inheritance or transmission taxes. Free taxes online Publication 551 and Publication 559, Survivors, Executors, and Administrators, have more information on the basis of inherited property. Free taxes online If you inherited your home from someone who died in 2010, and the executor of the decedent's estate made the election to file Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent, refer to the information provided by the executor or see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010. Free taxes online Adjusted Basis While you own your home, various events may take place that can change the original basis of your home. Free taxes online These events can increase or decrease your original basis. Free taxes online The result is called adjusted basis. Free taxes online See Table 3, on this page, for a list of some of the items that can adjust your basis. Free taxes online Table 3. Free taxes online Adjusted Basis This table lists examples of some items that generally will increase or decrease your basis in your home. Free taxes online It is not intended to be all-inclusive. Free taxes online Increases to Basis Decreases to Basis Improvements: Putting an addition on your home Replacing an entire roof Paving your driveway Installing central air conditioning Rewiring your home Assessments for local improvements (see Assessments for local benefits , under What You Can and Cannot Deduct, earlier) Amounts spent to restore damaged property Insurance or other reimbursement for casualty losses Deductible casualty loss not covered by insurance Payments received for easement or right-of-way granted Depreciation allowed or allowable if home is used for business or rental purposes Value of subsidy for energy conservation measure excluded from income Improvements. Free taxes online   An improvement materially adds to the value of your home, considerably prolongs its useful life, or adapts it to new uses. Free taxes online You must add the cost of any improvements to the basis of your home. Free taxes online You cannot deduct these costs. Free taxes online   Improvements include putting a recreation room in your unfinished basement, adding another bathroom or bedroom, putting up a fence, putting in new plumbing or wiring, installing a new roof, and paving your driveway. Free taxes online Amount added to basis. Free taxes online   The amount you add to your basis for improvements is your actual cost. Free taxes online This includes all costs for material and labor, except your own labor, and all expenses related to the improvement. Free taxes online For example, if you had your lot surveyed to put up a fence, the cost of the survey is a part of the cost of the fence. Free taxes online   You also must add to your basis state and local assessments for improvements such as streets and sidewalks if they increase the value of the property. Free taxes online These assessments are discussed earlier under Real Estate Taxes . Free taxes online Improvements no longer part of home. Free taxes online    Your home's adjusted basis does not include the cost of any improvements that are replaced and are no longer part of the home. Free taxes online Example. Free taxes online You put wall-to-wall carpeting in your home 15 years ago. Free taxes online Later, you replaced that carpeting with new wall-to-wall carpeting. Free taxes online The cost of the old carpeting you replaced is no longer part of your home's adjusted basis. Free taxes online Repairs versus improvements. Free taxes online   A repair keeps your home in an ordinary, efficient operating condition. Free taxes online It does not add to the value of your home or prolong its life. Free taxes online Repairs include repainting your home inside or outside, fixing your gutters or floors, fixing leaks or plastering, and replacing broken window panes. Free taxes online You cannot deduct repair costs and generally cannot add them to the basis of your home. Free taxes online   However, repairs that are done as part of an extensive remodeling or restoration of your home are considered improvements. Free taxes online You add them to the basis of your home. Free taxes online Records to keep. Free taxes online   You can use Table 4 (at the end of the publication) as a guide to help you keep track of improvements to your home. Free taxes online Also see Keeping Records , below. Free taxes online Energy conservation subsidy. Free taxes online   If a public utility gives you (directly or indirectly) a subsidy for the purchase or installation of an energy conservation measure for your home, do not include the value of that subsidy in your income. Free taxes online You must reduce the basis of your home by that value. Free taxes online   An energy conservation measure is an installation or modification primarily designed to reduce consumption of electricity or natural gas or to improve the management of energy demand. Free taxes online Keeping Records Keeping full and accurate records is vital to properly report your income and expenses, to support your deductions and credits, and to know the basis or adjusted basis of your home. Free taxes online These records include your purchase contract and settlement papers if you bought the property, or other objective evidence if you acquired it by gift, inheritance, or similar means. Free taxes online You should keep any receipts, canceled checks, and similar evidence for improvements or other additions to the basis. Free taxes online In addition, you should keep track of any decreases to the basis such as those listed in Table 3, earlier. Free taxes online How to keep records. Free taxes online   How you keep records is up to you, but they must be clear and accurate and must be available to the IRS. Free taxes online How long to keep records. Free taxes online   You must keep your records for as long as they are important for meeting any provision of the federal tax law. Free taxes online   Keep records that support an item of income, a deduction, or a credit appearing on a return until the period of limitations for the return runs out. Free taxes online (A period of limitations is the period of time after which no legal action can be brought. Free taxes online ) For assessment of tax you owe, this is generally 3 years from the date you filed the return. Free taxes online For filing a claim for credit or refund, this is generally 3 years from the date you filed the original return, or 2 years from the date you paid the tax, whichever is later. Free taxes online Returns filed before the due date are treated as filed on the due date. Free taxes online   You may need to keep records relating to the basis of property (discussed earlier) for longer than the period of limitations. Free taxes online Keep those records as long as they are important in figuring the basis of the original or replacement property. Free taxes online Generally, this means for as long as you own the property and, after you dispose of it, for the period of limitations that applies to you. Free taxes online Table 4. Free taxes online Record of Home Improvements Keep this for your records. Free taxes online Also, keep receipts or other proof of improvements. Free taxes online Remove from this record any improvements that are no longer part of your main home. Free taxes online For example, if you put wall-to-wall carpeting in your home and later replace it with new wall-to-wall carpeting, remove the cost of the first carpeting. Free taxes online (a) Type of Improvement (b) Date (c) Amount   (a) Type of Improvement (b) Date (c) Amount Additions:       Heating & Air  Conditioning:     Bedroom       Heating system     Bathroom       Central air conditioning     Deck       Furnace     Garage       Duct work     Porch       Central humidifier     Patio       Filtration system     Storage shed       Other     Fireplace       Electrical:     Other           Lawn & Grounds:       Lighting fixtures           Wiring upgrades     Landscaping       Other     Driveway       Plumbing:     Walkway           Fences       Water heater     Retaining wall       Soft water system     Sprinkler system       Filtration system     Swimming pool       Other     Exterior lighting       Insulation:     Other           Communications:       Attic           Walls     Satellite dish       Floors     Intercom       Pipes and duct work     Security system       Other     Other             Miscellaneous:       Interior  Improvements:     Storm windows and doors       Built-in appliances     Roof       Kitchen modernization     Central vacuum       Bathroom modernization     Other       Flooring             Wall-to-wall carpeting             Other     How To
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Free taxes online 1. Free taxes online   403(b) Plan Basics Table of Contents What Is a 403(b) Plan? What Are the Benefits of Contributing to a 403(b) Plan?Excluded. Free taxes online Deducted. Free taxes online Who Can Participate in a 403(b) Plan?Ministers. Free taxes online Who Can Set Up a 403(b) Account? How Can Contributions Be Made to My 403(b) Account? Do I Report Contributions on My Tax Return? How Much Can Be Contributed to My 403(b) Account? This chapter introduces you to 403(b) plans and accounts. Free taxes online Specifically, the chapter answers the following questions. Free taxes online What is a 403(b) plan? What are the benefits of contributing to a 403(b) plan? Who can participate in a 403(b) plan? Who can set up a 403(b) account? How can contributions be made to my 403(b) account? Do I report contributions on my tax return? How much can be contributed to my 403(b) account? What Is a 403(b) Plan? A 403(b) plan, also known as a tax-sheltered annuity (TSA) plan, is a retirement plan for certain employees of public schools, employees of certain tax-exempt organizations, and certain ministers. Free taxes online Individual accounts in a 403(b) plan can be any of the following types. Free taxes online An annuity contract, which is a contract provided through an insurance company, A custodial account, which is an account invested in mutual funds, or A retirement income account set up for church employees. Free taxes online Generally, retirement income accounts can invest in either annuities or mutual funds. Free taxes online We use the term “403(b) account” to refer to any one of these funding arrangements throughout this publication, unless otherwise specified. Free taxes online What Are the Benefits of Contributing to a 403(b) Plan?  There are three benefits to contributing to a 403(b) plan. Free taxes online The first benefit is that you do not pay income tax on allowable contributions until you begin making withdrawals from the plan, usually after you retire. Free taxes online Allowable contributions to a 403(b) plan are either excluded or deducted from your income. Free taxes online However, if your contributions are made to a Roth contribution program, this benefit does not apply. Free taxes online Instead, you pay income tax on the contributions to the plan but distributions from the plan (if certain requirements are met) are tax free. Free taxes online Note. Free taxes online Generally, employees must pay social security and Medicare tax on their contributions to a 403(b) plan, including those made under a salary reduction agreement. Free taxes online See chapter 4, Limit on Elective Deferrals , for more information. Free taxes online The second benefit is that earnings and gains on amounts in your 403(b) account are not taxed until you withdraw them. Free taxes online Earnings and gains on amounts in a Roth contribution program are not taxed if your withdrawals are qualified distributions. Free taxes online Otherwise, they are taxed when you withdraw them. Free taxes online The third benefit is that you may be eligible to take a credit for elective deferrals contributed to your 403(b) account. Free taxes online See chapter 10, Retirement Savings Contributions Credit (Saver's Credit) . Free taxes online Excluded. Free taxes online   If an amount is excluded from your income, it is not included in your total wages on your Form W-2. Free taxes online This means that you do not report the excluded amount on your tax return. Free taxes online Deducted. Free taxes online   If an amount is deducted from your income, it is included with your other wages on your Form W-2. Free taxes online You report this amount on your tax return, but you are allowed to subtract it when figuring the amount of income on which you must pay tax. Free taxes online Who Can Participate in a 403(b) Plan? Any eligible employee can participate in a 403(b) plan. Free taxes online Eligible employees. Free taxes online   The following employees are eligible to participate in a 403(b) plan. Free taxes online Employees of tax-exempt organizations established under section 501(c)(3). Free taxes online These organizations are usually referred to as section 501(c)(3) organizations or simply 501(c)(3) organizations. Free taxes online Employees of public school systems who are involved in the day-to-day operations of a school. Free taxes online Employees of cooperative hospital service organizations. Free taxes online Civilian faculty and staff of the Uniformed Services University of the Health Sciences. Free taxes online Employees of public school systems organized by Indian tribal governments. Free taxes online Certain ministers (explained next). Free taxes online Ministers. Free taxes online   The following ministers are eligible employees for whom a 403(b) account can be established. Free taxes online Ministers employed by section 501(c)(3) organizations. Free taxes online Self-employed ministers. Free taxes online A self-employed minister is treated as employed by a tax-exempt organization that is a qualified employer. Free taxes online Ministers (chaplains) who meet both of the following requirements. Free taxes online They are employed by organizations that are not section 501(c)(3) organizations. Free taxes online They function as ministers in their day-to-day professional responsibilities with their employers. Free taxes online   Throughout this publication, the term chaplain will be used to mean ministers described in the third category in the list above. Free taxes online Example. Free taxes online A minister employed as a chaplain by a state-run prison and a chaplain in the United States Armed Forces are eligible employees because their employers are not section 501(c)(3) organizations and they are employed as ministers. Free taxes online Who Can Set Up a 403(b) Account? You cannot set up your own 403(b) account. Free taxes online Only employers can set up 403(b) accounts. Free taxes online A self-employed minister cannot set up a 403(b) account for his or her benefit. Free taxes online If you are a self-employed minister, only the organization (denomination) with which you are associated can set up an account for your benefit. Free taxes online How Can Contributions Be Made to My 403(b) Account? Generally, only your employer can make contributions to your 403(b) account. Free taxes online However, some plans will allow you to make after-tax contributions (defined below). Free taxes online The following types of contributions can be made to 403(b) accounts. Free taxes online Elective deferrals . Free taxes online These are contributions made under a salary reduction agreement. Free taxes online This agreement allows your employer to withhold money from your paycheck to be contributed directly into a 403(b) account for your benefit. Free taxes online Except for Roth contributions, you do not pay income tax on these contributions until you withdraw them from the account. Free taxes online If your contributions are Roth contributions, you pay taxes on your contributions but any qualified distributions from your Roth account are tax free. Free taxes online Nonelective contributions . Free taxes online These are employer contributions that are not made under a salary reduction agreement. Free taxes online Nonelective contributions include matching contributions, discretionary contributions, and mandatory contributions from your employer. Free taxes online You do not pay income tax on these contributions until you withdraw them from the account. Free taxes online After-tax contributions . Free taxes online These are contributions (that are not Roth contributions) you make with funds that you must include in income on your tax return. Free taxes online A salary payment on which income tax has been withheld is a source of these contributions. Free taxes online If your plan allows you to make after-tax contributions, they are not excluded from income and you cannot deduct them on your tax return. Free taxes online A combination of any of the three contribution types listed above. Free taxes online Self-employed minister. Free taxes online   If you are a self-employed minister, you are considered both an employee and an employer, and you can contribute to a retirement income account for your own benefit. Free taxes online Do I Report Contributions on My Tax Return? Generally, you do not report contributions to your 403(b) account (except Roth contributions) on your tax return. Free taxes online Your employer will report contributions on your 2013 Form W-2. Free taxes online Elective deferrals will be shown in box 12 and the Retirement plan box will be checked in box 13. Free taxes online If you are a self-employed minister or chaplain, see the discussions next. Free taxes online Self-employed ministers. Free taxes online   If you are a self-employed minister, you must report the total contributions as a deduction on your tax return. Free taxes online Deduct your contributions on line 28 of the 2013 Form 1040. Free taxes online Chaplains. Free taxes online   If you are a chaplain and your employer does not exclude contributions made to your 403(b) account from your earned income, you may be able to take a deduction for those contributions on your tax return. Free taxes online    However, if your employer has agreed to exclude the contributions from your earned income, you will not be allowed a deduction on your tax return. Free taxes online   If you can take a deduction, include your contributions on line 36 of the 2013 Form 1040. Free taxes online Enter the amount of your deduction and write “403(b)” on the dotted line next to line 36. Free taxes online How Much Can Be Contributed to My 403(b) Account? There are limits on the amount of contributions that can be made to your 403(b) account each year. Free taxes online If contributions made to your 403(b) account are more than these contribution limits, penalties may apply. Free taxes online Chapters 2 through 6 provide information on how to determine the amount that can be contributed to your 403(b) account. Free taxes online Worksheets are provided in Chapter 9 to help you determine the maximum amount that can be contributed to your 403(b) account each year. Free taxes online Chapter 7, Excess Contributions , describes how to prevent excess contributions and how to get an excess contribution corrected. Free taxes online Prev  Up  Next   Home   More Online Publications