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H & R Block Free Tax Filing

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H & R Block Free Tax Filing

H & r block free tax filing 3. H & r block free tax filing   Investment Expenses Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Limits on DeductionsPassive activity. H & r block free tax filing Other income (nonpassive income). H & r block free tax filing Expenses. H & r block free tax filing Additional information. H & r block free tax filing Interest ExpensesInvestment Interest Limit on Deduction Bond Premium AmortizationSpecial rules to determine amounts payable on a bond. H & r block free tax filing Basis. H & r block free tax filing How To Figure Amortization Choosing To Amortize How To Report Amortization Expenses of Producing IncomeFees to buy or sell. H & r block free tax filing Including mutual fund or REMIC expenses in income. H & r block free tax filing Nondeductible ExpensesUsed as collateral. H & r block free tax filing Short-sale expenses. H & r block free tax filing Expenses for both tax-exempt and taxable income. H & r block free tax filing State income taxes. H & r block free tax filing Nondeductible amount. H & r block free tax filing Basis adjustment. H & r block free tax filing 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 . H & r block free tax filing 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. H & r block free tax filing 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. H & r block free tax filing The at-risk rules and passive activity rules are explained briefly in this section. H & r block free tax filing The limit on investment interest is explained later in this chapter under Interest Expenses . H & r block free tax filing The 2% limit is explained later in this chapter under Expenses of Producing Income . H & r block free tax filing At-risk rules. H & r block free tax filing   Special at-risk rules apply to most income-producing activities. H & r block free tax filing These rules limit the amount of loss you can deduct to the amount you risk losing in the activity. H & r block free tax filing Generally, this is the cash and the adjusted basis of property you contribute to the activity. H & r block free tax filing 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. H & r block free tax filing For more information, see Publication 925. H & r block free tax filing Passive activity losses and credits. H & r block free tax filing   The amount of losses and tax credits you can claim from passive activities is limited. H & r block free tax filing Generally, you are allowed to deduct passive activity losses only up to the amount of your passive activity income. H & r block free tax filing Also, you can use credits from passive activities only against tax on the income from passive activities. H & r block free tax filing There are exceptions for certain activities, such as rental real estate activities. H & r block free tax filing Passive activity. H & r block free tax filing   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. H & r block free tax filing However, if you are involved in renting real estate, the activity is not a passive activity if both of the following are true. H & r block free tax filing 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. H & r block free tax filing You perform more than 750 hours of services during the year in real property trades or businesses in which you materially participate. H & r block free tax filing  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. H & r block free tax filing However, it does not include rental activities or certain activities treated as incidental to holding property for investment. H & r block free tax filing   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. H & r block free tax filing Other income (nonpassive income). H & r block free tax filing    Generally, you can use losses from passive activities only to offset income from passive activities. H & r block free tax filing You cannot use passive activity losses to offset your other income, such as your wages or your portfolio income. H & r block free tax filing Portfolio income includes gross income from interest, dividends, annuities, or royalties that is not derived in the ordinary course of a trade or business. H & r block free tax filing 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. H & r block free tax filing This includes capital gain distributions from mutual funds (and other regulated investment companies) and real estate investment trusts. H & r block free tax filing   You cannot use passive activity losses to offset Alaska Permanent Fund dividends. H & r block free tax filing Expenses. H & r block free tax filing   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. H & r block free tax filing However, this interest and other expenses may be subject to other limits. H & r block free tax filing These limits are explained in the rest of this chapter. H & r block free tax filing Additional information. H & r block free tax filing   For more information about determining and reporting income and losses from passive activities, see Publication 925. H & r block free tax filing Interest Expenses This section discusses interest expenses you may be able to deduct as an investor. H & r block free tax filing For information on business interest, see chapter 4 of Publication 535. H & r block free tax filing 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. H & r block free tax filing Investment Interest If you borrow money to buy property you hold for investment, the interest you pay is investment interest. H & r block free tax filing You can deduct investment interest subject to the limit discussed later. H & r block free tax filing However, you cannot deduct interest you incurred to produce tax-exempt income. H & r block free tax filing See Tax-exempt income under Nondeductible Expenses, later. H & r block free tax filing You also cannot deduct interest expenses on straddles discussed under Interest expense and carrying charges on straddles , later. H & r block free tax filing 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. H & r block free tax filing Investment property. H & r block free tax filing   Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. H & r block free tax filing 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). H & r block free tax filing Investment property also includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity). H & r block free tax filing Partners, shareholders, and beneficiaries. H & r block free tax filing   To determine your investment interest, combine your share of investment interest from a partnership, S corporation, estate, or trust with your other investment interest. H & r block free tax filing 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. H & r block free tax filing Only the interest expense on the part of the debt used for investment purposes is treated as investment interest. H & r block free tax filing The allocation is not affected by the use of property that secures the debt. H & r block free tax filing Example 1. H & r block free tax filing You borrow $10,000 and use $8,000 to buy stock. H & r block free tax filing You use the other $2,000 to buy items for your home. H & r block free tax filing Since 80% of the debt is used for, and allocated to, investment purposes, 80% of the interest on that debt is investment interest. H & r block free tax filing The other 20% is nondeductible personal interest. H & r block free tax filing Debt proceeds received in cash. H & r block free tax filing   If you receive debt proceeds in cash, the proceeds are generally not treated as investment property. H & r block free tax filing Debt proceeds deposited in account. H & r block free tax filing   If you deposit debt proceeds in an account, that deposit is treated as investment property, regardless of whether the account bears interest. H & r block free tax filing 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. H & r block free tax filing Example 2. H & r block free tax filing Assume in Example 1 that you borrowed the money on March 1 and immediately bought the stock for $8,000. H & r block free tax filing You did not buy the household items until June 1. H & r block free tax filing You had deposited the $2,000 in the bank. H & r block free tax filing You had no other transactions on the bank account until June. H & r block free tax filing You did not sell the stock, and you made no principal payments on the debt. H & r block free tax filing You paid interest from another account. H & r block free tax filing The $8,000 is treated as being used for an investment purpose. H & r block free tax filing The $2,000 is treated as being used for an investment purpose for the 3-month period. H & r block free tax filing Your total interest expense for 3 months on this debt is investment interest. H & r block free tax filing 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. H & r block free tax filing Amounts paid within 30 days. H & r block free tax filing   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. H & r block free tax filing This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. H & r block free tax filing   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. H & r block free tax filing Payments on debt may require new allocation. H & r block free tax filing   As you repay a debt used for more than one purpose, you must reallocate the balance. H & r block free tax filing You must first reduce the amount allocated to personal purposes by the repayment. H & r block free tax filing You then reallocate the rest of the debt to find what part is for investment purposes. H & r block free tax filing Example 3. H & r block free tax filing If, in Example 2 , you repay $500 on November 1, the entire repayment is applied against the amount allocated to personal purposes. H & r block free tax filing The debt balance is now allocated as $8,000 for investment purposes and $1,500 for personal purposes. H & r block free tax filing Until the next reallocation is necessary, 84% ($8,000 ÷ $9,500) of the debt and the interest expense is allocated to investment. H & r block free tax filing Pass-through entities. H & r block free tax filing   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. H & r block free tax filing If you contribute to the capital of the entity, you can make the allocation using any reasonable method. H & r block free tax filing Additional allocation rules. H & r block free tax filing   For more information about allocating interest expense, see chapter 4 of Publication 535. H & r block free tax filing When To Deduct Investment Interest If you use the cash method of accounting, you must pay the interest before you can deduct it. H & r block free tax filing If you use an accrual method of accounting, you can deduct interest over the period it accrues, regardless of when you pay it. H & r block free tax filing For an exception, see Unpaid expenses owed to related party under When To Report Investment Expenses, later in this chapter. H & r block free tax filing Example. H & r block free tax filing You borrowed $1,000 on August 26, 2013, payable in 90 days at 12% interest. H & r block free tax filing On November 26, 2013, you paid this with a new note for $1,030, due on February 26, 2014. H & r block free tax filing 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. H & r block free tax filing 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. H & r block free tax filing Interest paid in advance. H & r block free tax filing   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. H & r block free tax filing You can deduct in each year only the interest for that year. H & r block free tax filing Interest on margin accounts. H & r block free tax filing   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. H & r block free tax filing 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. H & r block free tax filing 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. H & r block free tax filing   You cannot deduct any interest on money borrowed for personal reasons. H & r block free tax filing Limit on interest deduction for market discount bonds. H & r block free tax filing   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. H & r block free tax filing This limit does not apply if you accrue the market discount and include it in your income currently. H & r block free tax filing   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. H & r block free tax filing Figure the amount in (2) above using the rules for figuring accrued market discount in chapter 1 under Market Discount Bonds . H & r block free tax filing Interest not deducted due to limit. H & r block free tax filing   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. H & r block free tax filing Choosing to deduct disallowed interest expense before the year of disposition. H & r block free tax filing   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. H & r block free tax filing The rest of the disallowed interest expense remains deductible in the year you dispose of the bond. H & r block free tax filing Net interest income. H & r block free tax filing   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. H & r block free tax filing Limit on interest deduction for short-term obligations. H & r block free tax filing   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. H & r block free tax filing   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). H & r block free tax filing The method of determining acquisition discount and OID for short-term obligations is discussed in chapter 1 under Discount on Short-Term Obligations . H & r block free tax filing Interest not deducted due to limit. H & r block free tax filing   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. H & r block free tax filing Follow the same rules provided in the earlier discussion under Limit on interest deduction for market discount bonds , earlier. H & r block free tax filing Limit on Deduction Generally, your deduction for investment interest expense is limited to your net investment income. H & r block free tax filing You can carry over the amount of investment interest you could not deduct because of this limit to the next tax year. H & r block free tax filing The interest carried over is treated as investment interest paid or accrued in that next year. H & r block free tax filing 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. H & r block free tax filing Net Investment Income Determine the amount of your net investment income by subtracting your investment expenses (other than interest expense) from your investment income. H & r block free tax filing Investment income. H & r block free tax filing   This generally includes your gross income from property held for investment (such as interest, dividends, annuities, and royalties). H & r block free tax filing Investment income does not include Alaska Permanent Fund dividends. H & r block free tax filing It also does not include qualified dividends or net capital gain unless you choose to include them. H & r block free tax filing Choosing to include qualified dividends. H & r block free tax filing   Investment income generally does not include qualified dividends, discussed in chapter 1. H & r block free tax filing However, you can choose to include all or part of your qualified dividends in investment income. H & r block free tax filing   You make this choice by completing Form 4952, line 4g, according to its instructions. H & r block free tax filing   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. H & r block free tax filing Choosing to include net capital gain. H & r block free tax filing    Investment income generally does not include net capital gain from disposing of investment property (including capital gain distributions from mutual funds). H & r block free tax filing However, you can choose to include all or part of your net capital gain in investment income. H & r block free tax filing   You make this choice by completing Form 4952, line 4g, according to its instructions. H & r block free tax filing   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. H & r block free tax filing   For more information about the capital gains rates, see Capital Gain Tax Rates in chapter 4. H & r block free tax filing    Before making either choice, consider the overall effect on your tax liability. H & r block free tax filing Compare your tax if you make one or both of these choices with your tax if you do not. H & r block free tax filing Investment income of child reported on parent's return. H & r block free tax filing   Investment income includes the part of your child's interest and dividend income you choose to report on your return. H & r block free tax filing 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. H & r block free tax filing Include it on line 4a of Form 4952. H & r block free tax filing Example. H & r block free tax filing Your 8-year-old son has interest income of $2,200, which you choose to report on your own return. H & r block free tax filing You enter $2,200 on Form 8814, lines 1a and 4, and $200 on lines 6 and 12 and complete Part II. H & r block free tax filing Also enter $200 on Form 1040, line 21. H & r block free tax filing Your investment income includes this $200. H & r block free tax filing Child's qualified dividends. H & r block free tax filing   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. H & r block free tax filing However, you can choose to include all or part of it in investment income, as explained under Choosing to include qualified dividends , earlier. H & r block free tax filing   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). H & r block free tax filing Child's Alaska Permanent Fund dividends. H & r block free tax filing   If part of the amount you report is your child's Alaska Permanent Fund dividends, that part does not count as investment income. H & r block free tax filing 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. H & r block free tax filing 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. H & r block free tax filing Subtract the result from the amount on Form 8814, line 12. H & r block free tax filing Example. H & r block free tax filing Your 10-year-old child has taxable interest income of $4,000 and Alaska Permanent Fund dividends of $2,000. H & r block free tax filing You choose to report this on your return. H & r block free tax filing You enter $4,000 on Form 8814, line 1a, $2,000 on line 2a, and $6,000 on line 4. H & r block free tax filing You then enter $4,000 on Form 8814, lines 6 and 12, and Form 1040, line 21. H & r block free tax filing 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. H & r block free tax filing Child's capital gain distributions. H & r block free tax filing   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. H & r block free tax filing However, you can choose to include all or part of it in investment income, as explained in Choosing to include net capital gain , earlier. H & r block free tax filing   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). H & r block free tax filing Investment expenses. H & r block free tax filing   Investment expenses are your allowed deductions (other than interest expense) directly connected with the production of investment income. H & r block free tax filing 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. H & r block free tax filing 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. H & r block free tax filing See Expenses of Producing Income , later, for a discussion of the 2% limit. H & r block free tax filing Losses from passive activities. H & r block free tax filing   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). H & r block free tax filing See Publication 925 for information about passive activities. H & r block free tax filing Example. H & r block free tax filing Ted is a partner in a partnership that operates a business. H & r block free tax filing However, he does not materially participate in the partnership's business. H & r block free tax filing Ted's interest in the partnership is considered a passive activity. H & r block free tax filing Ted's investment income from interest and dividends (other than qualified dividends) is $10,000. H & r block free tax filing His investment expenses (other than interest) are $3,200 after taking into account the 2% limit on miscellaneous itemized deductions. H & r block free tax filing His investment interest expense is $8,000. H & r block free tax filing Ted also has income from the partnership of $2,000. H & r block free tax filing 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. H & r block free tax filing His investment interest deduction for the year is limited to $6,800, the amount of his net investment income. H & r block free tax filing Form 4952 Use Form 4952 to figure your deduction for investment interest. H & r block free tax filing See Form 4952 for more information. H & r block free tax filing Exception to use of Form 4952. H & r block free tax filing   You do not have to complete Form 4952 or attach it to your return if you meet all of the following tests. H & r block free tax filing Your investment interest expense is not more than your investment income from interest and ordinary dividends minus any qualified dividends. H & r block free tax filing You do not have any other deductible investment expenses. H & r block free tax filing You have no carryover of investment interest expense from 2012. H & r block free tax filing   If you meet all of these tests, you can deduct all of your investment interest. H & r block free tax filing    Bond Premium Amortization If you pay a premium to buy a bond, the premium is part of your basis in the bond. H & r block free tax filing If the bond yields taxable interest, you can choose to amortize the premium. H & r block free tax filing 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. H & r block free tax filing If you make this choice, you must reduce your basis in the bond by the amortization for the year. H & r block free tax filing If the bond yields tax-exempt interest, you must amortize the premium. H & r block free tax filing This amortized amount is not deductible in determining taxable income. H & r block free tax filing 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. H & r block free tax filing Bond premium. H & r block free tax filing   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). H & r block free tax filing For example, a bond with a maturity value of $1,000 generally would have a $50 premium if you buy it for $1,050. H & r block free tax filing Special rules to determine amounts payable on a bond. H & r block free tax filing   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. H & r block free tax filing 171-3. H & r block free tax filing Basis. H & r block free tax filing   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. H & r block free tax filing 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. H & r block free tax filing See Regulations section 1. H & r block free tax filing 171-1(e). H & r block free tax filing Dealers. H & r block free tax filing   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. H & r block free tax filing   See section 75 of the Internal Revenue Code for the treatment of bond premium by a dealer in tax-exempt bonds. H & r block free tax filing 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. H & r block free tax filing Constant yield method. H & r block free tax filing   Figure the bond premium amortization for each accrual period as follows. H & r block free tax filing Step 1: Determine your yield. H & r block free tax filing   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. H & r block free tax filing Figure the yield as of the date you got the bond. H & r block free tax filing 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. H & r block free tax filing   If you do not know the yield, consult your broker or tax advisor. H & r block free tax filing Databases available to them are likely to show the yield at the date of purchase. H & r block free tax filing Step 2: Determine the accrual periods. H & r block free tax filing   You can choose the accrual periods to use. H & r block free tax filing 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. H & r block free tax filing The computation is simplest if accrual periods are the same as the intervals between interest payment dates. H & r block free tax filing Step 3: Determine the bond premium for the accrual period. H & r block free tax filing   To do this, multiply your adjusted acquisition price at the beginning of the accrual period by your yield. H & r block free tax filing Then subtract the result from the qualified stated interest for the period. H & r block free tax filing   Your adjusted acquisition price at the beginning of the first accrual period is the same as your basis. H & r block free tax filing 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. H & r block free tax filing Example. H & r block free tax filing On February 1, 2012, you bought a taxable bond for $110,000. H & r block free tax filing 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). H & r block free tax filing The bond pays qualified stated interest of $10,000 on February 1 of each year. H & r block free tax filing Your yield is 8. H & r block free tax filing 07439% compounded annually. H & r block free tax filing You choose to use annual accrual periods ending on February 1 of each year. H & r block free tax filing 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. H & r block free tax filing When you subtract the result ($8,881. H & r block free tax filing 83) from the qualified stated interest for the period ($10,000), you find that your bond premium amortization for the period is $1,118. H & r block free tax filing 17. H & r block free tax filing Special rules to figure amortization. H & r block free tax filing   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. H & r block free tax filing 171-3. H & r block free tax filing Bonds Issued Before September 28, 1985 For these bonds, you can amortize bond premium using any reasonable method. H & r block free tax filing Reasonable methods include: The straight-line method, and The Revenue Ruling 82-10 method. H & r block free tax filing Straight-line method. H & r block free tax filing   Under this method, the amount of your bond premium amortization is the same each month. H & r block free tax filing 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. H & r block free tax filing Then multiply the result by the bond premium (reduced by any bond premium amortization claimed in earlier years). H & r block free tax filing This gives you your bond premium amortization for the year. H & r block free tax filing Revenue Ruling 82-10 method. H & r block free tax filing   Under this method, the amount of your bond premium amortization increases each month over the life of the bond. H & r block free tax filing This method is explained in Revenue Ruling 82-10, 1982-1 C. H & r block free tax filing B. H & r block free tax filing 46. H & r block free tax filing 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. H & r block free tax filing You should attach a statement to your return that you are making this choice under section 171. H & r block free tax filing See How To Report Amortization, next. H & r block free tax filing This choice is binding for the year you make it and for later tax years. H & r block free tax filing It applies to all taxable bonds you own in the year you make the choice and also to those you acquire in later years. H & r block free tax filing You can change your decision to amortize bond premium only with the written approval of the IRS. H & r block free tax filing To request approval, use Form 3115. H & r block free tax filing For more information on requesting approval, see section 5 of the Appendix to Revenue Procedure 2011-14 in Internal Revenue Bulletin 2011-4. H & r block free tax filing You can find Revenue Procedure 2011-14 at www. H & r block free tax filing irs. H & r block free tax filing gov/irb/2011-04_IRB/ar08. H & r block free tax filing html. H & r block free tax filing How To Report Amortization Subtract the bond premium amortization from your interest income from these bonds. H & r block free tax filing Report the bond's interest on Schedule B (Form 1040A or 1040), line 1. H & r block free tax filing Under your last entry on line 1, put a subtotal of all interest listed on line 1. H & r block free tax filing Below this subtotal, print “ABP Adjustment,” and the total interest you received. H & r block free tax filing Subtract this amount from the subtotal, and enter the result on line 2. H & r block free tax filing Bond premium amortization more than interest. H & r block free tax filing   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. H & r block free tax filing    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. H & r block free tax filing Any amount you cannot deduct because of this limit can be carried forward to the next accrual period. H & r block free tax filing Pre-1998 election to amortize bond premium. H & r block free tax filing   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. H & r block free tax filing Bonds acquired before October 23, 1986. H & r block free tax filing   The amortization of the premium on these bonds is a miscellaneous itemized deduction not subject to the 2%-of-adjusted-gross-income limit. H & r block free tax filing Bonds acquired after October 22, 1986, but before 1988. H & r block free tax filing    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. H & r block free tax filing Expenses of Producing Income You deduct investment expenses (other than interest expenses) as miscellaneous itemized deductions on Schedule A (Form 1040). H & r block free tax filing 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. H & r block free tax filing The expenses must be directly related to the income or income-producing property, and the income must be taxable to you. H & r block free tax filing The deduction for most income-producing expenses is subject to a 2% limit that also applies to certain other miscellaneous itemized deductions. H & r block free tax filing The amount deductible is limited to the total of these miscellaneous deductions that is more than 2% of your adjusted gross income. H & r block free tax filing For information on how to report expenses of producing income, see How To Report Investment Expenses , later. H & r block free tax filing Attorney or accounting fees. H & r block free tax filing   You can deduct attorney or accounting fees that are necessary to produce or collect taxable income. H & r block free tax filing However, in some cases, attorney or accounting fees are part of the basis of property. H & r block free tax filing See Basis of Investment Property in chapter 4. H & r block free tax filing Automatic investment service and dividend reinvestment plans. H & r block free tax filing   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. H & r block free tax filing Or a bank that is a dividend disbursing agent for a number of publicly-owned corporations may set up an automatic dividend reinvestment service. H & r block free tax filing Through that service, cash dividends are reinvested in more shares of stock after the bank deducts a service charge. H & r block free tax filing   A corporation in which you own stock also may have a dividend reinvestment plan. H & r block free tax filing 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. H & r block free tax filing   You can deduct the monthly service charge you pay to a bank to participate in an automatic investment service. H & r block free tax filing 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. H & r block free tax filing Deduct the charges in the year you pay them. H & r block free tax filing Clerical help and office rent. H & r block free tax filing   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. H & r block free tax filing Cost of replacing missing securities. H & r block free tax filing   To replace your taxable securities that are mislaid, lost, stolen, or destroyed, you may have to post an indemnity bond. H & r block free tax filing You can deduct the premium you pay to buy the indemnity bond and the related incidental expenses. H & r block free tax filing   You may, however, get a refund of part of the bond premium if the missing securities are recovered within a specified time. H & r block free tax filing Under certain types of insurance policies, you can recover some of the expenses. H & r block free tax filing   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. H & r block free tax filing 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. H & r block free tax filing Fees to collect income. H & r block free tax filing   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. H & r block free tax filing Fees to buy or sell. H & r block free tax filing   You cannot deduct a fee you pay to a broker to acquire investment property, such as stocks or bonds. H & r block free tax filing You must add the fee to the cost of the property. H & r block free tax filing See Basis of Investment Property in chapter 4. H & r block free tax filing    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. H & r block free tax filing They can be used only to figure gain or loss from the sale. H & r block free tax filing See Reporting Capital Gains and Losses , in chapter 4, for more information about the treatment of these sale expenses. H & r block free tax filing Investment counsel and advice. H & r block free tax filing   You can deduct fees you pay for counsel and advice about investments that produce taxable income. H & r block free tax filing This includes amounts you pay for investment advisory services. H & r block free tax filing Safe deposit box rent. H & r block free tax filing   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. H & r block free tax filing If you also use the box to store tax-exempt securities or personal items, you can deduct only part of the rent. H & r block free tax filing See Tax-exempt income under Nondeductible Expenses, later, to figure what part you can deduct. H & r block free tax filing State and local transfer taxes. H & r block free tax filing   You cannot deduct the state and local transfer taxes you pay when you buy or sell securities. H & r block free tax filing If you pay these transfer taxes when you buy securities, you must treat them as part of the cost of the property. H & r block free tax filing If you pay these transfer taxes when you sell securities, you must treat them as a reduction in the amount realized. H & r block free tax filing Trustee's commissions for revocable trust. H & r block free tax filing   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. H & r block free tax filing 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. H & r block free tax filing   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. H & r block free tax filing You cannot deduct the entire amount in the year you pay it. H & r block free tax filing Investment expenses from pass-through entities. H & r block free tax filing   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. H & r block free tax filing 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). H & r block free tax filing A nonpublicly offered mutual fund will indicate your share of these expenses in box 5 of Form 1099-DIV (or substitute statement). H & r block free tax filing Publicly-offered mutual funds are discussed later. H & r block free tax filing   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. H & r block free tax filing 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). H & r block free tax filing   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. H & r block free tax filing Including mutual fund or REMIC expenses in income. H & r block free tax filing   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. H & r block free tax filing 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. H & r block free tax filing 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). H & r block free tax filing 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. H & r block free tax filing If you are a REMIC regular interest holder, you must include the amount of any expense allocation you received on Form 1040, line 8a. H & r block free tax filing Publicly-offered mutual funds. H & r block free tax filing   Most mutual funds are publicly offered. H & r block free tax filing These mutual funds, generally, are traded on an established securities exchange. H & r block free tax filing These funds do not pass investment expenses through to you. H & r block free tax filing 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. H & r block free tax filing As a result, you cannot deduct the expenses on your return. H & r block free tax filing   Include the amount from box 1a of Form 1099-DIV (or substitute statement) in your income. H & r block free tax filing    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. H & r block free tax filing Contact your mutual fund if you are not sure whether it is publicly offered. H & r block free tax filing Nondeductible Expenses Some expenses that you incur as an investor are not deductible. H & r block free tax filing Stockholders' meetings. H & r block free tax filing   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. H & r block free tax filing This is true even if your purpose in attending is to get information that would be useful in making further investments. H & r block free tax filing Investment-related seminar. H & r block free tax filing   You cannot deduct expenses for attending a convention, seminar, or similar meeting for investment purposes. H & r block free tax filing Single-premium life insurance, endowment, and annuity contracts. H & r block free tax filing   You cannot deduct interest on money you borrow to buy or carry a single-premium life insurance, endowment, or annuity contract. H & r block free tax filing Used as collateral. H & r block free tax filing   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. H & r block free tax filing 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. H & r block free tax filing Borrowing on insurance. H & r block free tax filing   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. H & r block free tax filing 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. H & r block free tax filing Tax-exempt income. H & r block free tax filing   You cannot deduct expenses you incur to produce tax-exempt income. H & r block free tax filing 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. H & r block free tax filing Short-sale expenses. H & r block free tax filing   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. H & r block free tax filing 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. H & r block free tax filing Short sales are discussed in Short Sales in chapter 4. H & r block free tax filing Expenses for both tax-exempt and taxable income. H & r block free tax filing   You may have expenses that are for both tax-exempt and taxable income. H & r block free tax filing 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. H & r block free tax filing 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. H & r block free tax filing   One accepted method for dividing expenses is to do it in the same proportion that each type of income is to the total income. H & r block free tax filing If the expenses relate in part to capital gains and losses, include the gains, but not the losses, in figuring this proportion. H & r block free tax filing 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. H & r block free tax filing Example. H & r block free tax filing You received $6,000 interest; $4,800 was tax-exempt and $1,200 was taxable. H & r block free tax filing In earning this income, you had $500 of expenses. H & r block free tax filing You cannot specifically identify the amount of each expense item that is for each income item, so you must divide your expenses. H & r block free tax filing 80% ($4,800 tax-exempt interest divided by $6,000 total interest) of your expenses is for the tax-exempt income. H & r block free tax filing You cannot deduct $400 (80% of $500) of the expenses. H & r block free tax filing You can deduct $100 (the rest of the expenses) because they are for the taxable interest. H & r block free tax filing State income taxes. H & r block free tax filing   If you itemize your deductions, you can deduct, as taxes, state income taxes on interest income that is exempt from federal income tax. H & r block free tax filing But you cannot deduct, as either taxes or investment expenses, state income taxes on other exempt income. H & r block free tax filing Interest expense and carrying charges on straddles. H & r block free tax filing   You cannot deduct interest and carrying charges allocable to personal property that is part of a straddle. H & r block free tax filing The nondeductible interest and carrying charges are added to the basis of the straddle property. H & r block free tax filing 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. H & r block free tax filing  For information about straddles, including definitions of the terms used in this discussion, see Straddles in chapter 4. H & r block free tax filing   Interest includes any amount you pay or incur in connection with personal property used in a short sale. H & r block free tax filing However, you must first apply the rules discussed in Payments in lieu of dividends under Short Sales in chapter 4. H & r block free tax filing   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). H & r block free tax filing Nondeductible amount. H & r block free tax filing   Figure the nondeductible interest and carrying charges on straddle property as follows. H & r block free tax filing 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. H & r block free tax filing 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. H & r block free tax filing Basis adjustment. H & r block free tax filing   Add the nondeductible amount to the basis of your straddle property. H & r block free tax filing How To Report Investment Expenses To deduct your investment expenses, you must itemize deductions on Schedule A (Form 1040). H & r block free tax filing Enter your deductible investment interest expense on Schedule A (Form1040), line 14. H & r block free tax filing Include any deductible short sale expenses. H & r block free tax filing (See Short Sales in chapter 4 for information on these expenses. H & r block free tax filing ) Also attach a completed Form 4952 if you used that form to figure your investment interest expense. H & r block free tax filing Enter the total amount of your other investment expenses (other than interest expenses) on Schedule A (Form 1040), line 23. H & r block free tax filing List the type and amount of each expense on the dotted lines next to line 23. H & r block free tax filing (If necessary, you can show the required information on an attached statement. H & r block free tax filing ) For information on how to report amortizable bond premium, see Bond Premium Amortization , earlier in this chapter. H & r block free tax filing 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. H & r block free tax filing If you use an accrual method, you generally deduct your expenses when you incur a liability for them, rather than when you pay them. H & r block free tax filing Also see When To Deduct Investment Interest , earlier in this chapter. H & r block free tax filing Unpaid expenses owed to related party. H & r block free tax filing   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. H & r block free tax filing 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. H & r block free tax filing 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. H & r block free tax filing   This rule generally applies to those relationships listed in chapter 4 under Related Party Transactions . H & r block free tax filing It also applies to accruals by partnerships to partners, partners to partnerships, shareholders to S corporations, and S corporations to shareholders. H & r block free tax filing   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. H & r block free tax filing 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. H & r block free tax filing Prev  Up  Next   Home   More Online Publications
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The H & R Block Free Tax Filing

H & r block free tax filing 1. H & r block free tax filing   Canceled Debts Table of Contents General RulesForm 1099-C Discounts and loan modifications Sales or other dispositions (such as foreclosures and repossessions) Abandonments Stockholder debt This chapter discusses the tax treatment of canceled debts. H & r block free tax filing General Rules Generally, if a debt for which you are personally liable is forgiven or discharged for less than the full amount owed, the debt is considered canceled in whatever amount it remained unpaid. H & r block free tax filing There are exceptions to this rule, discussed under Exceptions , later. H & r block free tax filing Generally, you must include the canceled debt in your income. H & r block free tax filing However, you may be able to exclude the canceled debt. H & r block free tax filing See Exclusions , later. H & r block free tax filing Example. H & r block free tax filing John owed $1,000 to Mary. H & r block free tax filing Mary agreed to accept and John paid $400 in satisfaction of the entire debt. H & r block free tax filing John has canceled debt of $600. H & r block free tax filing Example. H & r block free tax filing Margaret owed $1,000 to Henry. H & r block free tax filing Henry and Margaret agreed that Margaret would provide Henry with services (instead of money) in full satisfaction of the debt. H & r block free tax filing Margaret does not have canceled debt. H & r block free tax filing Instead, she has income from services. H & r block free tax filing A debt includes any indebtedness: For which you are liable, or Subject to which you hold property. H & r block free tax filing Debt for which you are personally liable is recourse debt. H & r block free tax filing All other debt is nonrecourse debt. H & r block free tax filing If you are not personally liable for the debt, you do not have ordinary income from the cancellation of debt unless you retain the collateral and either: The lender offers a discount for the early payment of the debt, or The lender agrees to a loan modification that results in the reduction of the principal balance of the debt. H & r block free tax filing See Discounts and loan modifications , later. H & r block free tax filing However, upon the disposition of the property securing a nonrecourse debt, the amount realized includes the entire unpaid amount of the debt, not just the FMV of the property. H & r block free tax filing As a result, you may realize a gain or loss if the outstanding debt immediately before the disposition is more or less than your adjusted basis in the property. H & r block free tax filing For more details on figuring your gain or loss, see chapter 2 of this publication or see Publication 544. H & r block free tax filing There are several exceptions and exclusions that may result in part or all of a canceled debt being nontaxable. H & r block free tax filing See Exceptions and Exclusions, later. H & r block free tax filing You must report any taxable canceled debt as ordinary income on: Form 1040 or Form 1040NR, line 21, if the debt is a nonbusiness debt; Schedule C (Form 1040), line 6 (or Schedule C-EZ (Form 1040), line 1), if the debt is related to a nonfarm sole proprietorship; Schedule E (Form 1040), line 3, if the debt is related to nonfarm rental of real property; Form 4835, line 6, if the debt is related to a farm rental activity for which you use Form 4835 to report farm rental income based on crops or livestock produced by a tenant; or Schedule F (Form 1040), line 8, if the debt is farm debt and you are a farmer. H & r block free tax filing Form 1099-C If you receive a Form 1099-C, that means an applicable entity has reported an identifiable event to the IRS regarding a debt you owe. H & r block free tax filing The identifiable event may be an actual cancellation of the debt or it may be an event the applicable entity is required, solely for purposes of reporting to the IRS, to treat as a cancellation of debt. H & r block free tax filing For information on the reasons an applicable entity files Form 1099-C, see Identifiable event codes, later. H & r block free tax filing Unless you meet one of the exceptions or exclusions discussed later, this canceled debt is ordinary income and must be reported on the appropriate form discussed above. H & r block free tax filing An applicable entity includes: A federal government agency, A financial institution, A credit union, and Any organization a significant trade or business of which is lending money. H & r block free tax filing Identifiable event codes. H & r block free tax filing    Box 6 of Form 1099-C should indicate the reason the creditor filed this form. H & r block free tax filing The codes shown in box 6 are explained below. H & r block free tax filing Also see the chart after the explanation for a quick reference guide for the codes used in Box 6. H & r block free tax filing Note. H & r block free tax filing Codes A through G and I identify specific occurrences resulting from an actual discharge of indebtedness. H & r block free tax filing However, Code H, Expiration of nonpayment testing period, does not necessarily identify an actual discharge of indebtedness. H & r block free tax filing Code A — Bankruptcy. H & r block free tax filing Code A is used to identify cancellation of debt as a result of a title 11 bankruptcy case. H & r block free tax filing See Bankruptcy , later. H & r block free tax filing Code B — Other judicial debt relief. H & r block free tax filing Code B is used to identify cancellation of debt as a result of a receivership, foreclosure, or similar federal or state court proceeding other than bankruptcy. H & r block free tax filing Code C — Statute of limitations or expiration of deficiency period. H & r block free tax filing Code C is used to identify cancellation of debt either when the statute of limitations for collecting the debt expires or when the statutory period for filing a claim or beginning a deficiency judgment proceeding expires. H & r block free tax filing In the case of the expiration of a statute of limitations, an identifiable event occurs only if and when your affirmative defense of the statute of limitations is upheld in a final judgment or decision in a judicial proceeding, and the period for appealing the judgment or decision has expired. H & r block free tax filing Code D — Foreclosure election. H & r block free tax filing Code D is used to identify cancellation of debt when the creditor elects foreclosure remedies that statutorily end or bar the creditor's right to pursue collection of the debt. H & r block free tax filing This event applies to a mortgage lender or holder who is barred from pursuing debt collection after a power of sale in the mortgage or deed of trust is exercised. H & r block free tax filing Code E — Debt relief from probate or similar proceeding. H & r block free tax filing Code E is used to identify cancellation of debt as a result of a probate court or similar legal proceeding. H & r block free tax filing Code F — By agreement. H & r block free tax filing Code F is used to identify cancellation of debt as a result of an agreement between the creditor and the debtor to cancel the debt at less than full consideration. H & r block free tax filing Code G — Decision or policy to discontinue collection. H & r block free tax filing Code G is used to identify cancellation of debt as a result of a decision or a defined policy of the creditor to discontinue collection activity and cancel the debt. H & r block free tax filing For purposes of this identifiable event, a defined policy includes both a written policy and the creditor's established business practice. H & r block free tax filing Code H — Expiration of nonpayment testing period. H & r block free tax filing Code H is used to indicate that the creditor has not received a payment on the debt during a testing period ending on December 31, 2013. H & r block free tax filing The testing period is a 36-month period increased by the number of months the creditor was prevented from engaging in collection activity by a stay in bankruptcy or similar bar under state or local law. H & r block free tax filing This identifiable event applies only for a creditor that is a financial institution or credit union (and certain of their subsidiaries), the Federal Deposit Insurance Corporation (FDIC), Resolution Trust Corporation (RTC), National Credit Union Administration (NCUA), and other Federal executive agencies. H & r block free tax filing Expiration of the nonpayment testing period does not necessarily result from an actual discharge of indebtedness. H & r block free tax filing Code I — Other actual discharge before identifiable event. H & r block free tax filing Code I is used to identify an actual cancellation of debt that occurs before any of the identifiable events described in codes A through H. H & r block free tax filing Form 1099-C Reference Guide for Box 6 Identifiable Event Codes A Bankruptcy B Other judicial debt relief C Statute of limitations or expiration of deficiency period D Foreclosure election E Debt relief from probate or similar proceeding F By agreement G Decision or policy to discontinue collection H Expiration of nonpayment testing period I Other actual discharge before identifiable event Even if you did not receive a Form 1099-C, you must report canceled debt as gross income on your tax return unless one of the exceptions or exclusions described later applies. H & r block free tax filing Amount of canceled debt. H & r block free tax filing    The amount in box 2 of Form 1099-C may represent some or all of the debt that has been canceled or treated as canceled. H & r block free tax filing The amount in box 2 will include principal and may include interest and other nonprincipal amounts (such as fees or penalties). H & r block free tax filing Unless you meet one of the exceptions or exclusions discussed later, the amount of the debt that has been canceled is ordinary income and must be reported on the appropriate form as discussed earlier. H & r block free tax filing Interest included in canceled debt. H & r block free tax filing    If any interest is included in the amount of canceled debt in box 2, it will be shown in box 3. H & r block free tax filing Whether the interest portion of the canceled debt must be included in your income depends on whether the interest would be deductible if you paid it. H & r block free tax filing See Deductible Debt under Exceptions, later. H & r block free tax filing Persons who each receive a Form 1099-C showing the full amount of debt. H & r block free tax filing    If you and another person were jointly and severally liable for a canceled debt, each of you may get a Form 1099-C showing the entire amount of the canceled debt. H & r block free tax filing However, you may not have to report that entire amount as income. H & r block free tax filing The amount, if any, you must report depends on all the facts and circumstances, including: State law, The amount of debt proceeds each person received, How much of any interest deduction from the debt was claimed by each person, How much of the basis of any co-owned property bought with the debt proceeds was allocated to each co-owner, and Whether the canceled debt qualifies for any of the exceptions or exclusions described in this publication. H & r block free tax filing See Example 3 under Insolvency, later. H & r block free tax filing Discounts and loan modifications If a lender discounts (reduces) the principal balance of a loan because you pay it off early, or agrees to a loan modification (a “workout”) that includes a reduction in the principal balance of a loan, the amount of the discount or the amount of principal reduction is canceled debt. H & r block free tax filing However, if the debt is nonrecourse and you did not retain the collateral, you do not have cancellation of the debt income. H & r block free tax filing The amount of the canceled debt must be included in income unless one of the exceptions or exclusions described later applies. H & r block free tax filing For more details, see Exceptions and Exclusions, later. H & r block free tax filing Sales or other dispositions (such as foreclosures and repossessions) Recourse debt. H & r block free tax filing   If you owned property that was subject to a recourse debt in excess of the FMV of the property, the lender's foreclosure or repossession of the property is treated as a sale or disposition of the property by you and may result in your realization of gain or loss. H & r block free tax filing The gain or loss on the disposition of the property is measured by the difference between the FMV of the property at the time of the disposition and your adjusted basis (usually your cost) in the property. H & r block free tax filing The character of the gain or loss (such as ordinary or capital) is determined by the character of the property. H & r block free tax filing If the lender forgives all or part of the amount of the debt in excess of the FMV of the property, the cancellation of the excess debt may result in ordinary income. H & r block free tax filing The ordinary income from the cancellation of debt (the excess of the canceled debt over the FMV of the property) must be included in your gross income reported on your tax return unless one of the exceptions or exclusions described later applies. H & r block free tax filing For more details, see Exceptions and Exclusions, later. H & r block free tax filing Nonrecourse debt. H & r block free tax filing   If you owned property that was subject to a nonrecourse debt in excess of the FMV of the property, the lender's foreclosure on the property does not result in ordinary income from the cancellation of debt. H & r block free tax filing The entire amount of the nonrecourse debt is treated as an amount realized on the disposition of the property. H & r block free tax filing The gain or loss on the disposition of the property is measured by the difference between the total amount realized (the entire amount of the nonrecourse debt plus the amount of cash and the FMV of any property received) and your adjusted basis in the property. H & r block free tax filing The character of the gain or loss is determined by the character of the property. H & r block free tax filing More information. H & r block free tax filing    See Publications 523, 544, and 551, and chapter 2 of this publication for more details. H & r block free tax filing Abandonments Recourse debt. H & r block free tax filing   If you abandon property that secures a debt for which you are personally liable (recourse debt) and the debt is canceled, you will realize ordinary income equal to the canceled debt. H & r block free tax filing You must report this income on your tax return unless one of the exceptions or exclusions described later applies. H & r block free tax filing For more details, see Exceptions and Exclusions, later. H & r block free tax filing This income is separate from any amount realized from the abandonment of the property. H & r block free tax filing For more details, see chapter 3. H & r block free tax filing Nonrecourse debt. H & r block free tax filing   If you abandon property that secures a debt for which you are not personally liable (nonrecourse debt), you may realize gain or loss but will not have cancellation of indebtedness income. H & r block free tax filing Stockholder debt If you are a stockholder in a corporation and the corporation cancels or forgives your debt to it, the canceled debt is a constructive distribution. H & r block free tax filing For more information, see Publication 542, Corporations. H & r block free tax filing Prev  Up  Next   Home   More Online Publications