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Taxact 2010 Free Version

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Taxact 2010 Free Version

Taxact 2010 free version Publication 515 - Main Content Table of Contents Withholding of TaxWithholding Agent Withholding and Reporting Obligations Persons Subject to NRA WithholdingIdentifying the Payee Foreign Persons DocumentationBeneficial Owners Foreign Intermediaries and Foreign Flow-Through Entities Standards of Knowledge Presumption Rules Income Subject to NRA WithholdingSource of Income Fixed or Determinable Annual or Periodical Income (FDAP) Withholding on Specific IncomeEffectively Connected Income Income Not Effectively Connected Pay for Personal Services Performed Artists and Athletes (Income Codes 42 and 43) Other Income Foreign Governments and Certain Other Foreign Organizations U. Taxact 2010 free version S. Taxact 2010 free version Taxpayer Identification NumbersUnexpected payment. Taxact 2010 free version Depositing Withheld TaxesWhen Deposits Are Required Adjustment for Overwithholding Returns RequiredJoint owners. Taxact 2010 free version Electronic reporting. Taxact 2010 free version Partnership Withholding on Effectively Connected IncomeWho Must Withhold Foreign Partner Publicly Traded Partnerships U. Taxact 2010 free version S. Taxact 2010 free version Real Property InterestForeign corporations. Taxact 2010 free version Domestic corporations. Taxact 2010 free version U. Taxact 2010 free version S. Taxact 2010 free version real property holding corporations. Taxact 2010 free version Partnerships. Taxact 2010 free version Trusts and estates. Taxact 2010 free version Domestically controlled QIE. Taxact 2010 free version Late filing of certifications or notices. Taxact 2010 free version Certifications. Taxact 2010 free version Liability of agent or qualified substitute. Taxact 2010 free version Reporting and Paying the Tax Withholding Certificates Tax Treaty TablesTable 1 Table 2 Table 3 How To Get Tax HelpLow Income Taxpayer Clinics (LITCs). Taxact 2010 free version Withholding of Tax In most cases, a foreign person is subject to U. Taxact 2010 free version S. Taxact 2010 free version tax on its U. Taxact 2010 free version S. Taxact 2010 free version source income. Taxact 2010 free version Most types of U. Taxact 2010 free version S. Taxact 2010 free version source income received by a foreign person are subject to U. Taxact 2010 free version S. Taxact 2010 free version tax of 30%. Taxact 2010 free version A reduced rate, including exemption, may apply if there is a tax treaty between the foreign person's country of residence and the United States. Taxact 2010 free version The tax is generally withheld (NRA withholding) from the payment made to the foreign person. Taxact 2010 free version The term “NRA withholding” is used in this publication descriptively to refer to withholding required under sections 1441, 1442, and 1443 of the Internal Revenue Code. Taxact 2010 free version In most cases, NRA withholding describes the withholding regime that requires withholding on a payment of U. Taxact 2010 free version S. Taxact 2010 free version source income. Taxact 2010 free version Payments to foreign persons, including nonresident alien individuals, foreign entities, and governments, may be subject to NRA withholding. Taxact 2010 free version NRA withholding does not include withholding under section 1445 of the Code (see U. Taxact 2010 free version S. Taxact 2010 free version Real Property Interest, later) or under section 1446 of the Code (see Partnership Withholding on Effectively Connected Income , later). Taxact 2010 free version A withholding agent (defined next) is the person responsible for withholding on payments made to a foreign person. Taxact 2010 free version However, a withholding agent that can reliably associate the payment with documentation (discussed later) from a U. Taxact 2010 free version S. Taxact 2010 free version person is not required to withhold. Taxact 2010 free version In addition, a withholding agent may apply a reduced rate of withholding (including an exemption from withholding) if it can reliably associate the payment with documentation from a beneficial owner that is a foreign person entitled to a reduced rate of withholding. Taxact 2010 free version Withholding Agent You are a withholding agent if you are a U. Taxact 2010 free version S. Taxact 2010 free version or foreign person that has control, receipt, custody, disposal, or payment of any item of income of a foreign person that is subject to withholding. Taxact 2010 free version A withholding agent may be an individual, corporation, partnership, trust, association, nominee (under section 1446 of the Code), or any other entity, including any foreign intermediary, foreign partnership, or U. Taxact 2010 free version S. Taxact 2010 free version branch of certain foreign banks and insurance companies. Taxact 2010 free version You may be a withholding agent even if there is no requirement to withhold from a payment or even if another person has withheld the required amount from the payment. Taxact 2010 free version Although several persons may be withholding agents for a single payment, the full tax is required to be withheld only once. Taxact 2010 free version In most cases, the U. Taxact 2010 free version S. Taxact 2010 free version person who pays an amount subject to NRA withholding is the person responsible for withholding. Taxact 2010 free version However, other persons may be required to withhold. Taxact 2010 free version For example, a payment made by a flow-through entity or nonqualified intermediary that knows, or has reason to know, that the full amount of NRA withholding was not done by the person from which it receives a payment is required to do the appropriate withholding since it also falls within the definition of a withholding agent. Taxact 2010 free version In addition, withholding must be done by any qualified intermediary, withholding foreign partnership, or withholding foreign trust in accordance with the terms of its withholding agreement, discussed later. Taxact 2010 free version Liability for tax. Taxact 2010 free version   As a withholding agent, you are personally liable for any tax required to be withheld. Taxact 2010 free version This liability is independent of the tax liability of the foreign person to whom the payment is made. Taxact 2010 free version If you fail to withhold and the foreign payee fails to satisfy its U. Taxact 2010 free version S. Taxact 2010 free version tax liability, then both you and the foreign person are liable for tax, as well as interest and any applicable penalties. Taxact 2010 free version   The applicable tax will be collected only once. Taxact 2010 free version If the foreign person satisfies its U. Taxact 2010 free version S. Taxact 2010 free version tax liability, you are not liable for the tax but remain liable for any interest and penalties for failure to withhold. Taxact 2010 free version Determination of amount to withhold. Taxact 2010 free version   You must withhold on the gross amount subject to NRA withholding. Taxact 2010 free version You cannot reduce the gross amount by any deductions. Taxact 2010 free version However, see Scholarships and Fellowship Grants and Pay for Personal Services Performed , later, for when a deduction for a personal exemption may be allowed. Taxact 2010 free version   If the determination of the source of the income or the amount subject to tax depends on facts that are not known at the time of payment, you must withhold an amount sufficient to ensure that at least 30% of the amount subsequently determined to be subject to withholding is withheld. Taxact 2010 free version In no case, however, should you withhold more than 30% of the total amount paid. Taxact 2010 free version Or, you may make a reasonable estimate of the amount from U. Taxact 2010 free version S. Taxact 2010 free version sources and put a corresponding part of the amount due in escrow until the amount from U. Taxact 2010 free version S. Taxact 2010 free version sources can be determined, at which time withholding becomes due. Taxact 2010 free version When to withhold. Taxact 2010 free version   Withholding is required at the time you make a payment of an amount subject to withholding. Taxact 2010 free version A payment is made to a person if that person realizes income, whether or not there is an actual transfer of cash or other property. Taxact 2010 free version A payment is considered made to a person if it is paid for that person's benefit. Taxact 2010 free version For example, a payment made to a creditor of a person in satisfaction of that person's debt to the creditor is considered made to the person. Taxact 2010 free version A payment also is considered made to a person if it is made to that person's agent. Taxact 2010 free version   A U. Taxact 2010 free version S. Taxact 2010 free version partnership should withhold when any distributions that include amounts subject to withholding are made. Taxact 2010 free version However, if a foreign partner's distributive share of income subject to withholding is not actually distributed, the U. Taxact 2010 free version S. Taxact 2010 free version partnership must withhold on the foreign partner's distributive share of the income on the earlier of the date that a Schedule K-1 (Form 1065) is provided or mailed to the partner or the due date for furnishing that schedule. Taxact 2010 free version If the distributable amount consists of effectively connected income, see Partnership Withholding on Effectively Connected Income , later. Taxact 2010 free version A U. Taxact 2010 free version S. Taxact 2010 free version trust is required to withhold on the amount includible in the gross income of a foreign beneficiary to the extent the trust's distributable net income consists of an amount subject to withholding. Taxact 2010 free version To the extent a U. Taxact 2010 free version S. Taxact 2010 free version trust is required to distribute an amount subject to withholding but does not actually distribute the amount, it must withhold on the foreign beneficiary's allocable share at the time the income is required to be reported on Form 1042-S. Taxact 2010 free version Withholding and Reporting Obligations You are required to report payments subject to NRA withholding on Form 1042-S and to file a tax return on Form 1042. Taxact 2010 free version (See Returns Required , later. Taxact 2010 free version ) An exception from reporting may apply to individuals who are not required to withhold from a payment and who do not make the payment in the course of their trade or business. Taxact 2010 free version Form 1099 reporting and backup withholding. Taxact 2010 free version    You also may be responsible as a payer for reporting on Form 1099 payments made to a U. Taxact 2010 free version S. Taxact 2010 free version person. Taxact 2010 free version You must withhold 28% (backup withholding rate) from a reportable payment made to a U. Taxact 2010 free version S. Taxact 2010 free version person that is subject to Form 1099 reporting if any of the following apply. Taxact 2010 free version The U. Taxact 2010 free version S. Taxact 2010 free version person has not provided its taxpayer identification number (TIN) in the manner required. Taxact 2010 free version The IRS notifies you that the TIN furnished by the payee is incorrect. Taxact 2010 free version There has been a notified payee underreporting. Taxact 2010 free version There has been a payee certification failure. Taxact 2010 free version In most cases, a TIN must be provided by a U. Taxact 2010 free version S. Taxact 2010 free version non-exempt recipient on Form W-9, Request for Taxpayer Identification Number and Certification. Taxact 2010 free version A payer files a tax return on Form 945, Annual Return of Withheld Federal Income Tax, for backup withholding. Taxact 2010 free version You may be required to file Form 1099 and, if appropriate, backup withhold, even if you do not make the payments directly to that U. Taxact 2010 free version S. Taxact 2010 free version person. Taxact 2010 free version For example, you are required to report income paid to a foreign intermediary or flow-through entity that collects for a U. Taxact 2010 free version S. Taxact 2010 free version person subject to Form 1099 reporting. Taxact 2010 free version See Identifying the Payee , later, for more information. Taxact 2010 free version Also see Section S. Taxact 2010 free version Special Rules for Reporting Payments Made Through Foreign Intermediaries and Foreign Flow-Through Entities on Form 1099 in the General Instructions for Certain Information Returns. Taxact 2010 free version Foreign persons who provide Form W-8BEN, Form W-8ECI, or Form W-8EXP (or applicable documentary evidence) are exempt from backup withholding and Form 1099 reporting. Taxact 2010 free version Wages paid to employees. Taxact 2010 free version   If you are the employer of a nonresident alien, you generally must withhold taxes at graduated rates. Taxact 2010 free version See Pay for Personal Services Performed , later. Taxact 2010 free version Effectively connected income by partnerships. Taxact 2010 free version   A withholding agent that is a partnership (whether U. Taxact 2010 free version S. Taxact 2010 free version or foreign) is also responsible for withholding on its income effectively connected with a U. Taxact 2010 free version S. Taxact 2010 free version trade or business that is allocable to foreign partners. Taxact 2010 free version See Partnership Withholding on Effectively Connected Income , later, for more information. Taxact 2010 free version U. Taxact 2010 free version S. Taxact 2010 free version real property interest. Taxact 2010 free version   A withholding agent also may be responsible for withholding if a foreign person transfers a U. Taxact 2010 free version S. Taxact 2010 free version real property interest to the agent, or if it is a corporation, partnership, trust, or estate that distributes a U. Taxact 2010 free version S. Taxact 2010 free version real property interest to a shareholder, partner, or beneficiary that is a foreign person. Taxact 2010 free version See U. Taxact 2010 free version S. Taxact 2010 free version Real Property Interest , later. Taxact 2010 free version Persons Subject to NRA Withholding NRA withholding applies only to payments made to a payee that is a foreign person. Taxact 2010 free version It does not apply to payments made to U. Taxact 2010 free version S. Taxact 2010 free version persons. Taxact 2010 free version Usually, you determine the payee's status as a U. Taxact 2010 free version S. Taxact 2010 free version or foreign person based on the documentation that person provides. Taxact 2010 free version See Documentation , later. Taxact 2010 free version However, if you have received no documentation or you cannot reliably associate all or a part of a payment with documentation, then you must apply certain presumption rules, discussed later. Taxact 2010 free version Identifying the Payee In most cases, the payee is the person to whom you make the payment, regardless of whether that person is the beneficial owner of the income. Taxact 2010 free version However, there are situations in which the payee is a person other than the one to whom you actually make a payment. Taxact 2010 free version U. Taxact 2010 free version S. Taxact 2010 free version agent of foreign person. Taxact 2010 free version   If you make a payment to a U. Taxact 2010 free version S. Taxact 2010 free version person and you have actual knowledge that the U. Taxact 2010 free version S. Taxact 2010 free version person is receiving the payment as an agent of a foreign person, you must treat the payment as made to the foreign person. Taxact 2010 free version However, if the U. Taxact 2010 free version S. Taxact 2010 free version person is a financial institution, you may treat the institution as the payee provided you have no reason to believe that the institution will not comply with its own obligation to withhold. Taxact 2010 free version   If the payment is not subject to NRA withholding (for example, gross proceeds from the sales of securities), you must treat the payment as made to a U. Taxact 2010 free version S. Taxact 2010 free version person and not as a payment to a foreign person. Taxact 2010 free version You may be required to report the payment on Form 1099 and, if applicable, backup withhold. Taxact 2010 free version Disregarded entities. Taxact 2010 free version   A business entity that is not a corporation and that has a single owner may be disregarded as an entity separate from its owner (a disregarded entity) for federal tax purposes. Taxact 2010 free version The payee of a payment made to a disregarded entity is the owner of the entity. Taxact 2010 free version   If the owner of the entity is a foreign person, you must apply NRA withholding unless you can treat the foreign owner as a beneficial owner entitled to a reduced rate of withholding. Taxact 2010 free version   If the owner is a U. Taxact 2010 free version S. Taxact 2010 free version person, you do not apply NRA withholding. Taxact 2010 free version However, you may be required to report the payment on Form 1099 and, if applicable, backup withhold. Taxact 2010 free version You may assume that a foreign entity is not a disregarded entity unless you can reliably associate the payment with documentation provided by the owner or you have actual knowledge or reason to know that the foreign entity is a disregarded entity. Taxact 2010 free version Flow-Through Entities The payees of payments (other than income effectively connected with a U. Taxact 2010 free version S. Taxact 2010 free version trade or business) made to a foreign flow-through entity are the owners or beneficiaries of the flow-through entity. Taxact 2010 free version This rule applies for purposes of NRA withholding and for Form 1099 reporting and backup withholding. Taxact 2010 free version Income that is, or is deemed to be, effectively connected with the conduct of a U. Taxact 2010 free version S. Taxact 2010 free version trade or business of a flow-through entity is treated as paid to the entity. Taxact 2010 free version All of the following are flow-through entities. Taxact 2010 free version A foreign partnership (other than a withholding foreign partnership). Taxact 2010 free version A foreign simple or foreign grantor trust (other than a withholding foreign trust). Taxact 2010 free version A fiscally transparent entity receiving income for which treaty benefits are claimed. Taxact 2010 free version See Fiscally transparent entity , later. Taxact 2010 free version In most cases, you treat a payee as a flow-through entity if it provides you with a Form W-8IMY (see Documentation , later) on which it claims such status. Taxact 2010 free version You also may be required to treat the entity as a flow-through entity under the presumption rules, discussed later. Taxact 2010 free version You must determine whether the owners or beneficiaries of a flow-through entity are U. Taxact 2010 free version S. Taxact 2010 free version or foreign persons, how much of the payment relates to each owner or beneficiary, and, if the owner or beneficiary is foreign, whether a reduced rate of NRA withholding applies. Taxact 2010 free version You make these determinations based on the documentation and other information (contained in a withholding statement) that is associated with the flow-through entity's Form W-8IMY. Taxact 2010 free version If you do not have all of the information that is required to reliably associate a payment with a specific payee, you must apply the presumption rules. Taxact 2010 free version See Documentation and Presumption Rules , later. Taxact 2010 free version Withholding foreign partnerships and withholding foreign trusts are not flow-through entities. Taxact 2010 free version Foreign partnerships. Taxact 2010 free version    A foreign partnership is any partnership that is not organized under the laws of any state of the United States or the District of Columbia or any partnership that is treated as foreign under the income tax regulations. Taxact 2010 free version If a foreign partnership is not a withholding foreign partnership, the payees of income are the partners of the partnership, provided the partners are not themselves a flow-through entity or a foreign intermediary. Taxact 2010 free version However, the payee is the partnership itself if the partnership is claiming treaty benefits on the basis that it is not fiscally transparent and that it meets all the other requirements for claiming treaty benefits. Taxact 2010 free version If a partner is a foreign flow-through entity or a foreign intermediary, you apply the payee determination rules to that partner to determine the payees. Taxact 2010 free version Example 1. Taxact 2010 free version A nonwithholding foreign partnership has three partners: a nonresident alien individual; a foreign corporation; and a U. Taxact 2010 free version S. Taxact 2010 free version citizen. Taxact 2010 free version You make a payment of U. Taxact 2010 free version S. Taxact 2010 free version source interest to the partnership. Taxact 2010 free version It gives you a Form W-8IMY with which it associates Form W-8BEN from the nonresident alien; Form W-8BEN from the foreign corporation; and Form W-9 from the U. Taxact 2010 free version S. Taxact 2010 free version citizen. Taxact 2010 free version The partnership also gives you a complete withholding statement that enables you to associate a part of the interest payment to each partner. Taxact 2010 free version You must treat all three partners as the payees of the interest payment as if the payment were made directly to them. Taxact 2010 free version Report the payment to the nonresident alien and the foreign corporation on Forms 1042-S. Taxact 2010 free version Report the payment to the U. Taxact 2010 free version S. Taxact 2010 free version citizen on Form 1099-INT. Taxact 2010 free version Example 2. Taxact 2010 free version A nonwithholding foreign partnership has two partners: a foreign corporation and a nonwithholding foreign partnership. Taxact 2010 free version The second partnership has two partners, both nonresident alien individuals. Taxact 2010 free version You make a payment of U. Taxact 2010 free version S. Taxact 2010 free version source interest to the first partnership. Taxact 2010 free version It gives you a valid Form W-8IMY with which it associates a Form W-8BEN from the foreign corporation and a Form W-8IMY from the second partnership. Taxact 2010 free version In addition, Forms W-8BEN from the partners are associated with the Form W-8IMY from the second partnership. Taxact 2010 free version The Forms W-8IMY from the partnerships have complete withholding statements associated with them. Taxact 2010 free version Because you can reliably associate a part of the interest payment with the Form W-8BEN provided by the foreign corporation and the Forms W-8BEN provided by the nonresident alien individual partners as a result of the withholding statements, you must treat them as the payees of the interest. Taxact 2010 free version Example 3. Taxact 2010 free version You make a payment of U. Taxact 2010 free version S. Taxact 2010 free version source dividends to a withholding foreign partnership. Taxact 2010 free version The partnership has two partners, both foreign corporations. Taxact 2010 free version You can reliably associate the payment with a valid Form W-8IMY from the partnership on which it represents that it is a withholding foreign partnership. Taxact 2010 free version You must treat the partnership as the payee of the dividends. Taxact 2010 free version Foreign simple and grantor trust. Taxact 2010 free version   A trust is foreign unless it meets both of the following tests. Taxact 2010 free version A court within the United States is able to exercise primary supervision over the administration of the trust. Taxact 2010 free version One or more U. Taxact 2010 free version S. Taxact 2010 free version persons have the authority to control all substantial decisions of the trust. Taxact 2010 free version   In most cases, a foreign simple trust is a foreign trust that is required to distribute all of its income annually. Taxact 2010 free version A foreign grantor trust is a foreign trust that is treated as a grantor trust under sections 671 through 679 of the Code. Taxact 2010 free version   The payees of a payment made to a foreign simple trust are the beneficiaries of the trust. Taxact 2010 free version The payees of a payment made to a foreign grantor trust are the owners of the trust. Taxact 2010 free version However, the payee is the foreign simple or grantor trust itself if the trust is claiming treaty benefits on the basis that it is not fiscally transparent and that it meets all the other requirements for claiming treaty benefits. Taxact 2010 free version If the beneficiaries or owners are themselves flow-through entities or foreign intermediaries, you apply the payee determination rules to that beneficiary or owner to determine the payees. Taxact 2010 free version Example. Taxact 2010 free version A foreign simple trust has three beneficiaries: two nonresident alien individuals and a U. Taxact 2010 free version S. Taxact 2010 free version citizen. Taxact 2010 free version You make a payment of interest to the foreign trust. Taxact 2010 free version It gives you a Form W-8IMY with which it associates Forms W-8BEN from the nonresident aliens and a Form W-9 from the U. Taxact 2010 free version S. Taxact 2010 free version citizen. Taxact 2010 free version The trust also gives you a complete withholding statement that enables you to associate a part of the interest payment with the forms provided by each beneficiary. Taxact 2010 free version You must treat all three beneficiaries as the payees of the interest payment as if the payment were made directly to them. Taxact 2010 free version Report the payment to the nonresident aliens on Forms 1042-S. Taxact 2010 free version Report the payment to the U. Taxact 2010 free version S. Taxact 2010 free version citizen on Form 1099-INT. Taxact 2010 free version Fiscally transparent entity. Taxact 2010 free version   If a reduced rate of withholding under an income tax treaty is claimed, a flow-through entity includes any entity in which the interest holder must treat the entity as fiscally transparent. Taxact 2010 free version The determination of whether an entity is fiscally transparent is made on an item of income basis (that is, the determination is made separately for interest, dividends, royalties, etc. Taxact 2010 free version ). Taxact 2010 free version The interest holder in an entity makes the determination by applying the laws of the jurisdiction where the interest holder is organized, incorporated, or otherwise considered a resident. Taxact 2010 free version An entity is considered to be fiscally transparent for the income to the extent the laws of that jurisdiction require the interest holder to separately take into account on a current basis the interest holder's share of the income, whether or not distributed to the interest holder, and the character and source of the income to the interest holder are determined as if the income was realized directly from the source that paid it to the entity. Taxact 2010 free version Subject to the standards of knowledge rules discussed later, you generally make the determination that an entity is fiscally transparent based on a Form W-8IMY provided by the entity. Taxact 2010 free version   The payees of a payment made to a fiscally transparent entity are the interest holders of the entity. Taxact 2010 free version Example. Taxact 2010 free version Entity A is a business organization organized under the laws of country X that has an income tax treaty in force with the United States. Taxact 2010 free version A has two interest holders, B and C. Taxact 2010 free version B is a corporation organized under the laws of country Y. Taxact 2010 free version C is a corporation organized under the laws of country Z. Taxact 2010 free version Both countries Y and Z have an income tax treaty in force with the United States. Taxact 2010 free version A receives royalty income from U. Taxact 2010 free version S. Taxact 2010 free version sources that is not effectively connected with the conduct of a trade or business in the United States. Taxact 2010 free version For U. Taxact 2010 free version S. Taxact 2010 free version income tax purposes, A is treated as a partnership. Taxact 2010 free version Country X treats A as a partnership and requires the interest holders in A to separately take into account on a current basis their respective shares of the income paid to A even if the income is not distributed. Taxact 2010 free version The laws of country X provide that the character and source of the income to A's interest holders are determined as if the income was realized directly from the source that paid it to A. Taxact 2010 free version Accordingly, A is fiscally transparent in its jurisdiction, country X. Taxact 2010 free version B and C are not fiscally transparent under the laws of their respective countries of incorporation. Taxact 2010 free version Country Y requires B to separately take into account on a current basis B's share of the income paid to A, and the character and source of the income to B is determined as if the income was realized directly from the source that paid it to A. Taxact 2010 free version Accordingly, A is fiscally transparent for that income under the laws of country Y, and B is treated as deriving its share of the U. Taxact 2010 free version S. Taxact 2010 free version source royalty income for purposes of the U. Taxact 2010 free version S. Taxact 2010 free version -Y income tax treaty. Taxact 2010 free version Country Z, on the other hand, treats A as a corporation and does not require C to take into account its share of A's income on a current basis whether or not distributed. Taxact 2010 free version Therefore, A is not treated as fiscally transparent under the laws of country Z. Taxact 2010 free version Accordingly, C is not treated as deriving its share of the U. Taxact 2010 free version S. Taxact 2010 free version source royalty income for purposes of the U. Taxact 2010 free version S. Taxact 2010 free version -Z income tax treaty. Taxact 2010 free version Foreign Intermediaries In most cases, if you make payments to a foreign intermediary, the payees are the persons for whom the foreign intermediary collects the payment, such as account holders or customers, not the intermediary itself. Taxact 2010 free version This rule applies for purposes of NRA withholding and for Form 1099 reporting and backup withholding. Taxact 2010 free version You may, however, treat a qualified intermediary that has assumed primary withholding responsibility for a payment as the payee, and you are not required to withhold. Taxact 2010 free version An intermediary is a custodian, broker, nominee, or any other person that acts as an agent for another person. Taxact 2010 free version A foreign intermediary is either a qualified intermediary or a nonqualified intermediary. Taxact 2010 free version In most cases, you determine whether an entity is a qualified intermediary or a nonqualified intermediary based on the representations the intermediary makes on Form W-8IMY. Taxact 2010 free version You must determine whether the customers or account holders of a foreign intermediary are U. Taxact 2010 free version S. Taxact 2010 free version or foreign persons and, if the account holder or customer is foreign, whether a reduced rate of NRA withholding applies. Taxact 2010 free version You make these determinations based on the foreign intermediary's Form W-8IMY and associated information and documentation. Taxact 2010 free version If you do not have all of the information or documentation that is required to reliably associate a payment with a payee, you must apply the presumption rules. Taxact 2010 free version See Documentation and Presumption Rules , later. Taxact 2010 free version Nonqualified intermediary. Taxact 2010 free version   A nonqualified intermediary (NQI) is any intermediary that is a foreign person and that is not a qualified intermediary. Taxact 2010 free version The payees of a payment made to an NQI are the customers or account holders on whose behalf the NQI is acting. Taxact 2010 free version Example. Taxact 2010 free version You make a payment of interest to a foreign bank that is a nonqualified intermediary. Taxact 2010 free version The bank gives you a Form W-8IMY and the Forms W-8BEN of two foreign persons, and a Form W-9 from a U. Taxact 2010 free version S. Taxact 2010 free version person for whom the bank is collecting the payments. Taxact 2010 free version The bank also associates with its Form W-8IMY a withholding statement on which it allocates the interest payment to each account holder and provides all other information required to be on the withholding statement. Taxact 2010 free version The account holders are the payees of the interest payment. Taxact 2010 free version You should report the part of the interest paid to the two foreign persons on Forms 1042-S and the part paid to the U. Taxact 2010 free version S. Taxact 2010 free version person on Form 1099-INT. Taxact 2010 free version Qualified intermediary. Taxact 2010 free version   A qualified intermediary (QI) is any foreign intermediary (or foreign branch of a U. Taxact 2010 free version S. Taxact 2010 free version intermediary) that has entered into a qualified intermediary withholding agreement (discussed later) with the IRS. Taxact 2010 free version You may treat a QI as a payee to the extent the QI assumes primary withholding responsibility or primary Form 1099 reporting and backup withholding responsibility for a payment. Taxact 2010 free version In this situation, the QI is required to withhold the tax. Taxact 2010 free version You can determine whether a QI has assumed responsibility from the Form W-8IMY provided by the QI. Taxact 2010 free version   A payment to a QI to the extent it does not assume primary NRA withholding responsibility is considered made to the person on whose behalf the QI acts. Taxact 2010 free version If a QI does not assume Form 1099 reporting and backup withholding responsibility, you must report on Form 1099 and, if applicable, backup withhold as if you were making the payment directly to the U. Taxact 2010 free version S. Taxact 2010 free version person. Taxact 2010 free version Branches of financial institutions. Taxact 2010 free version   Branches of financial institutions are not permitted to operate as QIs if they are located outside of countries having approved “know-your-customer” (KYC) rules. Taxact 2010 free version The countries with approved KYC rules are listed on IRS. Taxact 2010 free version gov. Taxact 2010 free version QI withholding agreement. Taxact 2010 free version   Foreign financial institutions and foreign branches of U. Taxact 2010 free version S. Taxact 2010 free version financial institutions can enter into an agreement with the IRS to be a qualified intermediary. Taxact 2010 free version   A QI is entitled to certain simplified withholding and reporting rules. Taxact 2010 free version In general, there are three major areas whereby intermediaries with QI status are afforded such simplified treatment. Taxact 2010 free version   To apply for QI status, complete Form 14345, Qualified Intermediary Application, and Form SS-4, Application for Employer Identification Number. Taxact 2010 free version These forms, and the procedures required to obtain a QI withholding agreement are available at www. Taxact 2010 free version irs. Taxact 2010 free version gov/Businesses/Corporations/Qualified-Intermediaries-(QI). Taxact 2010 free version Documentation. Taxact 2010 free version   A QI is not required to forward documentation obtained from foreign account holders to the U. Taxact 2010 free version S. Taxact 2010 free version withholding agent from whom the QI receives a payment of U. Taxact 2010 free version S. Taxact 2010 free version source income. Taxact 2010 free version The QI maintains such documentation at its location and provides the U. Taxact 2010 free version S. Taxact 2010 free version withholding agent with withholding rate pools. Taxact 2010 free version A withholding rate pool is a payment of a single type of income that is subject to a single rate of withholding. Taxact 2010 free version   A QI is required to provide the U. Taxact 2010 free version S. Taxact 2010 free version withholding agent with information regarding U. Taxact 2010 free version S. Taxact 2010 free version persons subject to Form 1099 information reporting unless the QI assumes the primary obligation to do Form 1099 reporting and backup withholding. Taxact 2010 free version   If a QI obtains documentary evidence under the “know-your-customer” rules that apply to the QI under local law, and the documentary evidence is of a type specified in an attachment to the QI agreement, the documentary evidence remains valid until there is a change in circumstances or the QI knows the information is incorrect. Taxact 2010 free version This indefinite validity period rule does not apply to Forms W-8 or to documentary evidence that is not of the type specified in the attachment to the agreement. Taxact 2010 free version Form 1042-S reporting. Taxact 2010 free version   A QI is permitted to report payments made to its direct foreign account holders on a pooled basis rather than reporting payments to each direct account holder specifically. Taxact 2010 free version Pooled basis reporting is not available for payments to certain account holders, such as a nonqualified intermediary or a flow-through entity (discussed earlier). Taxact 2010 free version Collective refund procedures. Taxact 2010 free version   A QI may seek a refund on behalf of its direct account holders. Taxact 2010 free version The direct account holders, therefore, are not required to file returns with the IRS to obtain refunds, but rather may obtain them from the QI. Taxact 2010 free version U. Taxact 2010 free version S. Taxact 2010 free version branches of foreign banks and foreign insurance companies. Taxact 2010 free version   Special rules apply to a U. Taxact 2010 free version S. Taxact 2010 free version branch of a foreign bank subject to Federal Reserve Board supervision or a foreign insurance company subject to state regulatory supervision. Taxact 2010 free version If you agree to treat the branch as a U. Taxact 2010 free version S. Taxact 2010 free version person, you may treat the branch as a U. Taxact 2010 free version S. Taxact 2010 free version payee for a payment subject to NRA withholding provided you receive a Form W-8IMY from the U. Taxact 2010 free version S. Taxact 2010 free version branch on which the agreement is evidenced. Taxact 2010 free version If you treat the branch as a U. Taxact 2010 free version S. Taxact 2010 free version payee, you are not required to withhold. Taxact 2010 free version Even though you agree to treat the branch as a U. Taxact 2010 free version S. Taxact 2010 free version person, you must report the payment on Form 1042-S. Taxact 2010 free version   A financial institution organized in a U. Taxact 2010 free version S. Taxact 2010 free version possession is treated as a U. Taxact 2010 free version S. Taxact 2010 free version branch. Taxact 2010 free version The special rules discussed in this section apply to a possessions financial institution. Taxact 2010 free version   If you are paying a U. Taxact 2010 free version S. Taxact 2010 free version branch an amount that is not subject to NRA withholding, treat the payment as made to a foreign person, irrespective of any agreement to treat the branch as a U. Taxact 2010 free version S. Taxact 2010 free version person for amounts subject to NRA withholding. Taxact 2010 free version Consequently, amounts not subject to NRA withholding that are paid to a U. Taxact 2010 free version S. Taxact 2010 free version branch are not subject to Form 1099 reporting or backup withholding. Taxact 2010 free version   Alternatively, a U. Taxact 2010 free version S. Taxact 2010 free version branch may provide you with a Form W-8IMY with which it associates the documentation of the persons on whose behalf it acts. Taxact 2010 free version In this situation, the payees are the persons on whose behalf the branch acts provided you can reliably associate the payment with valid documentation from those persons. Taxact 2010 free version See Nonqualified Intermediaries under  Documentation, later. Taxact 2010 free version   If the U. Taxact 2010 free version S. Taxact 2010 free version branch does not provide you with a Form W-8IMY, then you should treat a payment subject to NRA withholding as made to the foreign person of which the branch is a part and the income as effectively connected with the conduct of a trade or business in the United States. Taxact 2010 free version Withholding foreign partnership and foreign trust. Taxact 2010 free version   A withholding foreign partnership (WP) is any foreign partnership that has entered into a WP withholding agreement with the IRS and is acting in that capacity. Taxact 2010 free version A withholding foreign trust (WT) is a foreign simple or grantor trust that has entered into a WT withholding agreement with the IRS and is acting in that capacity. Taxact 2010 free version   A WP or WT may act in that capacity only for payments of amounts subject to NRA withholding that are distributed to, or included in the distributive share of, its direct partners, beneficiaries, or owners. Taxact 2010 free version A WP or WT acting in that capacity must assume NRA withholding responsibility for these amounts. Taxact 2010 free version You may treat a WP or WT as a payee if it has provided you with documentation (discussed later) that represents that it is acting as a WP or WT for such amounts. Taxact 2010 free version WP and WT withholding agreements. Taxact 2010 free version   The WP and WT withholding agreements and the application procedures for the agreements are in Revenue Procedure 2003-64. Taxact 2010 free version Also see the following items. Taxact 2010 free version Revenue Procedure 2004-21. Taxact 2010 free version Revenue Procedure 2005-77. Taxact 2010 free version Employer identification number (EIN). Taxact 2010 free version   A completed Form SS-4 must be submitted with the application for being a WP or WT. Taxact 2010 free version The WP or WT will be assigned a WP-EIN or WT-EIN to be used only when acting in that capacity. Taxact 2010 free version Documentation. Taxact 2010 free version   A WP or WT must provide you with a Form W-8IMY that certifies that the WP or WT is acting in that capacity and a written statement identifying the amounts for which it is so acting. Taxact 2010 free version The statement is not required to contain withholding rate pool information or any information relating to the identity of a direct partner, beneficiary, or owner. Taxact 2010 free version The Form W-8IMY must contain the WP-EIN or WT-EIN. Taxact 2010 free version Foreign Persons A payee is subject to NRA withholding only if it is a foreign person. Taxact 2010 free version A foreign person includes a nonresident alien individual, foreign corporation, foreign partnership, foreign trust, foreign estate, and any other person that is not a U. Taxact 2010 free version S. Taxact 2010 free version person. Taxact 2010 free version It also includes a foreign branch of a U. Taxact 2010 free version S. Taxact 2010 free version financial institution if the foreign branch is a qualified intermediary. Taxact 2010 free version In most cases, the U. Taxact 2010 free version S. Taxact 2010 free version branch of a foreign corporation or partnership is treated as a foreign person. Taxact 2010 free version Nonresident alien. Taxact 2010 free version   A nonresident alien is an individual who is not a U. Taxact 2010 free version S. Taxact 2010 free version citizen or a resident alien. Taxact 2010 free version A resident of a foreign country under the residence article of an income tax treaty is a nonresident alien individual for purposes of withholding. Taxact 2010 free version Married to U. Taxact 2010 free version S. Taxact 2010 free version citizen or resident alien. Taxact 2010 free version   Nonresident alien individuals married to U. Taxact 2010 free version S. Taxact 2010 free version citizens or resident aliens may choose to be treated as resident aliens for certain income tax purposes. Taxact 2010 free version However, these individuals are still subject to the NRA withholding rules that apply to nonresident aliens for all income except wages. Taxact 2010 free version Wages paid to these individuals are subject to graduated withholding. Taxact 2010 free version See Wages Paid to Employees—Graduated Withholding . Taxact 2010 free version Resident alien. Taxact 2010 free version   A resident alien is an individual who is not a citizen or national of the United States and who meets either the green card test or the substantial presence test for the calendar year. Taxact 2010 free version Green card test. Taxact 2010 free version An alien is a resident alien if the individual was a lawful permanent resident of the United States at any time during the calendar year. Taxact 2010 free version This is known as the green card test because these aliens hold immigrant visas (also known as green cards). Taxact 2010 free version Substantial presence test. Taxact 2010 free version An alien is considered a resident alien if the individual meets the substantial presence test for the calendar year. Taxact 2010 free version Under this test, the individual must be physically present in the United States on at least: 31 days during the current calendar year, and 183 days during the current year and the 2 preceding years, counting all the days of physical presence in the current year, but only 1/3 the number of days of presence in the first preceding year, and only 1/6 the number of days in the second preceding year. Taxact 2010 free version   In most cases, the days the alien is in the United States as a teacher, student, or trainee on an “F,” “J,” “M,” or “Q” visa are not counted. Taxact 2010 free version This exception is for a limited period of time. Taxact 2010 free version   For more information on resident and nonresident status, the tests for residence, and the exceptions to them, see Publication 519. Taxact 2010 free version Note. Taxact 2010 free version   If your employee is late in notifying you that his or her status changed from nonresident alien to resident alien, you may have to make an adjustment to Form 941 if that employee was exempt from withholding of social security and Medicare taxes as a nonresident alien. Taxact 2010 free version For more information on making adjustments, see chapter 13 of Publication 15 (Circular E). Taxact 2010 free version Resident of a U. Taxact 2010 free version S. Taxact 2010 free version possession. Taxact 2010 free version   A bona fide resident of Puerto Rico, the U. Taxact 2010 free version S. Taxact 2010 free version Virgin Islands, Guam, the Commonwealth of the Northern Mariana Islands (CNMI), or American Samoa who is not a U. Taxact 2010 free version S. Taxact 2010 free version citizen or a U. Taxact 2010 free version S. Taxact 2010 free version national is treated as a nonresident alien for the withholding rules explained here. Taxact 2010 free version A bona fide resident of a possession is someone who: Meets the presence test, Does not have a tax home outside the possession, and Does not have a closer connection to the United States or to a foreign country than to the possession. Taxact 2010 free version   For more information, see Publication 570, Tax Guide for Individuals With Income From U. Taxact 2010 free version S. Taxact 2010 free version Possessions. Taxact 2010 free version Foreign corporations. Taxact 2010 free version   A foreign corporation is one that does not fit the definition of a domestic corporation. Taxact 2010 free version A domestic corporation is one that was created or organized in the United States or under the laws of the United States, any of its states, or the District of Columbia. Taxact 2010 free version Guam or Northern Mariana Islands corporations. Taxact 2010 free version   A corporation created or organized in, or under the laws of, Guam or the CNMI is not considered a foreign corporation for the purpose of withholding tax for the tax year if: At all times during the tax year less than 25% in value of the corporation's stock is owned, directly or indirectly, by foreign persons; and At least 20% of the corporation's gross income is derived from sources within Guam or the CNMI for the 3-year period ending with the close of the preceding tax year of the corporation (or the period the corporation has been in existence, if less). Taxact 2010 free version Note. Taxact 2010 free version   The provisions discussed below under U. Taxact 2010 free version S. Taxact 2010 free version Virgin Islands and American Samoa corporations will apply to Guam or CNMI corporations when an implementing agreement is in effect between the United States and that possession. Taxact 2010 free version U. Taxact 2010 free version S. Taxact 2010 free version Virgin Islands and American Samoa corporations. Taxact 2010 free version   A corporation created or organized in, or under the laws of, the U. Taxact 2010 free version S. Taxact 2010 free version Virgin Islands or American Samoa is not considered a foreign corporation for the purposes of withholding tax for the tax year if: At all times during the tax year less than 25% in value of the corporation's stock is owned, directly or indirectly, by foreign persons, At least 65% of the corporation's gross income is effectively connected with the conduct of a trade or business in the U. Taxact 2010 free version S. Taxact 2010 free version Virgin Islands, American Samoa, Guam, the CNMI, or the United States for the 3-year period ending with the close of the tax year of the corporation (or the period the corporation or any predecessor has been in existence, if less), and No substantial part of the income of the corporation is used, directly or indirectly, to satisfy obligations to a person who is not a bona fide resident of the U. Taxact 2010 free version S. Taxact 2010 free version Virgin Islands, American Samoa, Guam, the CNMI, or the United States. Taxact 2010 free version Foreign private foundations. Taxact 2010 free version   A private foundation that was created or organized under the laws of a foreign country is a foreign private foundation. Taxact 2010 free version Gross investment income from sources within the United States paid to a qualified foreign private foundation is subject to NRA withholding at a 4% rate (unless exempted by a treaty) rather than the ordinary statutory 30% rate. Taxact 2010 free version Other foreign organizations, associations, and charitable institutions. Taxact 2010 free version   An organization may be exempt from income tax under section 501(a) of the Internal Revenue Code even if it was formed under foreign law. Taxact 2010 free version In most cases, you do not have to withhold tax on payments of income to these foreign tax-exempt organizations unless the IRS has determined that they are foreign private foundations. Taxact 2010 free version   Payments to these organizations, however, must be reported on Form 1042-S, even though no tax is withheld. Taxact 2010 free version   You must withhold tax on the unrelated business income (as described in Publication 598, Tax on Unrelated Business Income of Exempt Organizations) of foreign tax-exempt organizations in the same way that you would withhold tax on similar income of nonexempt organizations. Taxact 2010 free version U. Taxact 2010 free version S. Taxact 2010 free version branches of foreign persons. Taxact 2010 free version   In most cases, a payment to a U. Taxact 2010 free version S. Taxact 2010 free version branch of a foreign person is a payment made to the foreign person. Taxact 2010 free version However, you may treat payments to U. Taxact 2010 free version S. Taxact 2010 free version branches of foreign banks and foreign insurance companies (discussed earlier) that are subject to U. Taxact 2010 free version S. Taxact 2010 free version regulatory supervision as payments made to a U. Taxact 2010 free version S. Taxact 2010 free version person, if you and the U. Taxact 2010 free version S. Taxact 2010 free version branch have agreed to do so, and if their agreement is evidenced by a withholding certificate, Form W-8IMY. Taxact 2010 free version For this purpose, a financial institution organized under the laws of a U. Taxact 2010 free version S. Taxact 2010 free version possession is treated as a U. Taxact 2010 free version S. Taxact 2010 free version branch. Taxact 2010 free version Documentation In most cases, you must withhold 30% from the gross amount paid to a foreign payee unless you can reliably associate the payment with valid documentation that establishes either of the following. Taxact 2010 free version The payee is a U. Taxact 2010 free version S. Taxact 2010 free version person. Taxact 2010 free version The payee is a foreign person that is the beneficial owner of the income and is entitled to a reduced rate of withholding. Taxact 2010 free version In most cases, you must get the documentation before you make the payment. Taxact 2010 free version The documentation is not valid if you know, or have reason to know, that it is unreliable or incorrect. Taxact 2010 free version See Standards of Knowledge , later. Taxact 2010 free version If you cannot reliably associate a payment with valid documentation, you must use the presumption rules discussed later. Taxact 2010 free version For example, if you do not have documentation or you cannot determine the part of a payment that is allocable to specific documentation, you must use the presumption rules. Taxact 2010 free version The specific types of documentation are discussed in this section. Taxact 2010 free version However, see Withholding on Specific Income , later, as well as the instructions to the particular forms. Taxact 2010 free version As the withholding agent, you also may want to see the Instructions for the Requester of Forms W-8BEN, W-8ECI, W-8EXP, and W-8IMY. Taxact 2010 free version Section 1446 withholding. Taxact 2010 free version   Under section 1446 of the Code, a partnership must withhold tax on its effectively connected income allocable to a foreign partner. Taxact 2010 free version In most cases, a partnership determines if a partner is a foreign partner and the partner's tax classification based on the withholding certificate provided by the partner. Taxact 2010 free version This is the same documentation that is filed for NRA withholding, but may require additional information as discussed under each of the forms in this section. Taxact 2010 free version Joint owners. Taxact 2010 free version    If you make a payment to joint owners, you need to get documentation from each owner. Taxact 2010 free version Form W-9. Taxact 2010 free version   In most cases, you can treat the payee as a U. Taxact 2010 free version S. Taxact 2010 free version person if the payee gives you a Form W-9. Taxact 2010 free version The Form W-9 can be used only by a U. Taxact 2010 free version S. Taxact 2010 free version person and must contain the payee's taxpayer identification number (TIN). Taxact 2010 free version If there is more than one owner, you may treat the total amount as paid to a U. Taxact 2010 free version S. Taxact 2010 free version person if any one of the owners gives you a Form W-9. Taxact 2010 free version See U. Taxact 2010 free version S. Taxact 2010 free version Taxpayer Identification Numbers , later. Taxact 2010 free version U. Taxact 2010 free version S. Taxact 2010 free version persons are not subject to NRA withholding, but may be subject to Form 1099 reporting and backup withholding. Taxact 2010 free version Form W-8. Taxact 2010 free version   In most cases, a foreign payee of the income should give you a form in the Form W-8 series. Taxact 2010 free version Until further notice, you can rely upon Forms W-8 that contain a P. Taxact 2010 free version O. Taxact 2010 free version box as a permanent residence address provided you do not know, or have reason to know, that the person providing the form is a U. Taxact 2010 free version S. Taxact 2010 free version person and that a street address is available. Taxact 2010 free version You may rely on Forms W-8 for which there is a U. Taxact 2010 free version S. Taxact 2010 free version mailing address provided you received the form prior to December 31, 2001. Taxact 2010 free version   If certain requirements are met, the foreign person can give you documentary evidence, rather than a Form W-8. Taxact 2010 free version You can rely on documentary evidence in lieu of a Form W-8 for a payment made in a U. Taxact 2010 free version S. Taxact 2010 free version possession. Taxact 2010 free version Other documentation. Taxact 2010 free version   Other documentation may be required to claim an exemption from, or a reduced rate of, withholding on pay for personal services. Taxact 2010 free version The nonresident alien individual may have to give you a Form W-4 or a Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual. Taxact 2010 free version These forms are discussed in Pay for Personal Services Performed under Withholding on Specific Income. Taxact 2010 free version Beneficial Owners If all the appropriate requirements have been established on a Form W-8BEN, W-8ECI, W-8EXP or, if applicable, on documentary evidence, you may treat the payee as a foreign beneficial owner. Taxact 2010 free version Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding. Taxact 2010 free version   This form is used by a foreign person to: Establish foreign status; Claim that such person is the beneficial owner of the income for which the form is being furnished or a partner in a partnership subject to section 1446 withholding; and If applicable, claim a reduced rate of, or exemption from, withholding under an income tax treaty. Taxact 2010 free version   Form W-8BEN also may be used to claim that the foreign person is exempt from Form 1099 reporting and backup withholding for income that is not subject to NRA withholding. Taxact 2010 free version For example, a foreign person may provide a Form W-8BEN to a broker to establish that the gross proceeds from the sale of securities are not subject to Form 1099 reporting or backup withholding. Taxact 2010 free version Claiming treaty benefits. Taxact 2010 free version   You may apply a reduced rate of withholding to a foreign person that provides a Form W-8BEN claiming a reduced rate of withholding under an income tax treaty only if the person provides a U. Taxact 2010 free version S. Taxact 2010 free version TIN and certifies that: It is a resident of a treaty country; It is the beneficial owner of the income; If it is an entity, it derives the income within the meaning of section 894 of the Internal Revenue Code (it is not fiscally transparent); and It meets any limitation on benefits provision contained in the treaty, if applicable. Taxact 2010 free version   If the foreign beneficial owner claiming a treaty benefit is related to you, the foreign beneficial owner also must certify on Form W-8BEN that it will file Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), if the amount subject to NRA withholding received during a calendar year exceeds, in the aggregate, $500,000. Taxact 2010 free version   An entity derives income for which it is claiming treaty benefits only if the entity is not treated as fiscally transparent for that income. Taxact 2010 free version See Fiscally transparent entity discussed earlier under Flow-Through Entities. Taxact 2010 free version   Limitations on benefits provisions generally prohibit third country residents from obtaining treaty benefits. Taxact 2010 free version For example, a foreign corporation may not be entitled to a reduced rate of withholding unless a minimum percentage of its owners are citizens or residents of the United States or the treaty country. Taxact 2010 free version   The exemptions from, or reduced rates of, U. Taxact 2010 free version S. Taxact 2010 free version tax vary under each treaty. Taxact 2010 free version You must check the provisions of the tax treaty that apply. Taxact 2010 free version Tables at the end of this publication show the countries with which the United States has income tax treaties and the rates of withholding that apply in cases where all conditions of the particular treaty articles are satisfied. Taxact 2010 free version   If you know, or have reason to know, that an owner of income is not eligible for treaty benefits claimed, you must not apply the treaty rate. Taxact 2010 free version You are not, however, responsible for misstatements on a Form W-8, documentary evidence, or statements accompanying documentary evidence for which you did not have actual knowledge, or reason to know, that the statements were incorrect. Taxact 2010 free version Exceptions to TIN requirement. Taxact 2010 free version   A foreign person does not have to provide a TIN to claim a reduced rate of withholding under a treaty if the requirements for the following exceptions are met. Taxact 2010 free version Income from marketable securities (discussed next). Taxact 2010 free version Unexpected payments to an individual (discussed under U. Taxact 2010 free version S. Taxact 2010 free version Taxpayer Identification Numbers ). Taxact 2010 free version Marketable securities. Taxact 2010 free version   A Form W-8BEN provided to claim treaty benefits does not need a U. Taxact 2010 free version S. Taxact 2010 free version TIN if the foreign beneficial owner is claiming the benefits on income from marketable securities. Taxact 2010 free version For this purpose, income from a marketable security consists of the following items. Taxact 2010 free version Dividends and interest from stocks and debt obligations that are actively traded. Taxact 2010 free version Dividends from any redeemable security issued by an investment company registered under the Investment Company Act of 1940 (mutual fund). Taxact 2010 free version Dividends, interest, or royalties from units of beneficial interest in a unit investment trust that are (or were upon issuance) publicly offered and are registered with the SEC under the Securities Act of 1933. Taxact 2010 free version Income related to loans of any of the above securities. Taxact 2010 free version Offshore accounts. Taxact 2010 free version   If a payment is made outside the United States to an offshore account, a payee may give you documentary evidence, rather than Form W-8BEN. Taxact 2010 free version   In most cases, a payment is made outside the United States if you complete the acts necessary to effect the payment outside the United States. Taxact 2010 free version However, an amount paid by a bank or other financial institution on a deposit or account usually will be treated as paid at the branch or office where the amount is credited. Taxact 2010 free version An offshore account is an account maintained at an office or branch of a U. Taxact 2010 free version S. Taxact 2010 free version or foreign bank or other financial institution at any location outside the United States. Taxact 2010 free version   You may rely on documentary evidence given to you by a nonqualified intermediary or a flow-through entity with its Form W-8IMY. Taxact 2010 free version This rule applies even though you make the payment to a nonqualified intermediary or flow-through entity in the United States. Taxact 2010 free version In most cases, the nonqualified intermediary or flow-through entity that gives you documentary evidence also will have to give you a withholding statement, discussed later. Taxact 2010 free version Documentary evidence. Taxact 2010 free version   You may apply a reduced rate of withholding to income from marketable securities (discussed earlier) paid outside the United States to an offshore account if the beneficial owner gives you documentary evidence in place of a Form W-8BEN. Taxact 2010 free version To claim treaty benefits, the documentary evidence must be one of the following: A certificate of residence that: Is issued by a tax official of the treaty country of which the foreign beneficial owner claims to be a resident, States that the person has filed its most recent income tax return as a resident of that country, and Is issued within 3 years prior to being presented to you. Taxact 2010 free version Documentation for an individual that: Includes the individual's name, address, and photograph, Is an official document issued by an authorized governmental body, and Is issued no more than 3 years prior to being presented to you. Taxact 2010 free version Documentation for an entity that: Includes the name of the entity, Includes the address of its principal office in the treaty country, and Is an official document issued by an authorized governmental body. Taxact 2010 free version In addition to the documentary evidence, a foreign beneficial owner that is an entity must provide a statement that it derives the income for which it claims treaty benefits and that it meets one or more of the conditions set forth in a limitation on benefits article, if any, (or similar provision) contained in the applicable treaty. Taxact 2010 free version Form W-8ECI, Certificate of Foreign Person's Claim That Income Is Effectively Connected With the Conduct of a Trade or Business in the United States. Taxact 2010 free version   This form is used by a foreign person to: Establish foreign status, Claim that such person is the beneficial owner of the income for which the form is being furnished, and Claim that the income is effectively connected with the conduct of a trade or business in the United States. Taxact 2010 free version (See Effectively Connected Income , later. Taxact 2010 free version )   Effectively connected income for which a valid Form W-8ECI has been provided is generally not subject to NRA withholding. Taxact 2010 free version   If a partner submits this form to a partnership, the income claimed to be effectively connected with the conduct of a U. Taxact 2010 free version S. Taxact 2010 free version trade or business is subject to withholding under section 1446. Taxact 2010 free version If the partner has made, or will make, an election under section 871(d) or 882(d), the partner must submit Form W-8ECI, and attach a copy of the election, or a statement of intent to elect, to the form. Taxact 2010 free version    If the partner's only effectively connected income is the income allocated from the partnership and the partner is not making the election under section 871(d) or 882(d), the partner should provide Form W-8BEN to the partnership. Taxact 2010 free version Form W-8EXP, Certificate of Foreign Government or Other Foreign Organization for United States Tax Withholding. Taxact 2010 free version   This form is used by a foreign government, international organization, foreign central bank of issue, foreign tax-exempt organization, foreign private foundation, or government of a U. Taxact 2010 free version S. Taxact 2010 free version possession to: Establish foreign status, Claim that such person is the beneficial owner of the income for which the form is being furnished, and Claim a reduced rate of, or an exemption from, withholding as such an entity. Taxact 2010 free version   If the government or organization is a partner in a partnership carrying on a trade or business in the United States, the effectively connected income allocable to the partner is subject to withholding under section 1446. Taxact 2010 free version   See Foreign Governments and Certain Other Foreign Organizations , later. Taxact 2010 free version Foreign Intermediaries and Foreign Flow-Through Entities Payments made to a foreign intermediary or foreign flow-through entity are treated as made to the payees on whose behalf the intermediary or entity acts. Taxact 2010 free version The Form W-8IMY provided by a foreign intermediary or flow-through entity must be accompanied by additional information for you to be able to reliably associate the payment with a payee. Taxact 2010 free version The additional information required depends on the type of intermediary or flow-through entity and the extent of the withholding responsibilities it assumes. Taxact 2010 free version Form W-8IMY, Certificate of Foreign Intermediary, Foreign Flow-Through Entity, or Certain U. Taxact 2010 free version S. Taxact 2010 free version Branches for United States Tax Withholding. Taxact 2010 free version   This form is used by foreign intermediaries and foreign flow-through entities, as well as certain U. Taxact 2010 free version S. Taxact 2010 free version branches, to: Represent that a foreign person is a qualified intermediary or nonqualified intermediary, Represent, if applicable, that the qualified intermediary is assuming primary NRA withholding responsibility and/or primary Form 1099 reporting and backup withholding responsibility, Represent that a foreign partnership or a foreign simple or grantor trust is a withholding foreign partnership or a withholding foreign trust, Represent that a foreign flow-through entity is a nonwithholding foreign partnership, or a nonwithholding foreign trust and that the income is not effectively connected with the conduct of a trade or business in the United States, Represent that the provider is a U. Taxact 2010 free version S. Taxact 2010 free version branch of a foreign bank or insurance company and either is agreeing to be treated as a U. Taxact 2010 free version S. Taxact 2010 free version person or is transmitting documentation of the persons on whose behalf it is acting, or Represent that, for purposes of section 1446, it is an upper-tier foreign partnership or a foreign grantor trust and that the form is being used to transmit the required documentation. Taxact 2010 free version For information on qualifying as an upper-tier foreign partnership, see Regulations section 1. Taxact 2010 free version 1446-5. Taxact 2010 free version Qualified Intermediaries In most cases, a QI is any foreign intermediary that has entered into a QI withholding agreement (discussed earlier) with the IRS. Taxact 2010 free version A foreign intermediary that has received a QI employer identification number (QI-EIN) may represent on Form W-8IMY that it is a QI before it receives a fully executed agreement. Taxact 2010 free version The intermediary can claim that it is a QI until the IRS revokes its QI-EIN. Taxact 2010 free version The IRS will revoke a QI-EIN if the QI agreement is not executed and returned to the IRS within a reasonable period of time after the agreement was sent to the intermediary for signature. Taxact 2010 free version Responsibilities. Taxact 2010 free version   Payments made to a QI that does not assume NRA withholding responsibility are treated as paid to its account holders and customers. Taxact 2010 free version However, a QI is not required to provide you with documentation it obtains from its foreign account holders and customers. Taxact 2010 free version Instead, it provides you with a withholding statement that contains withholding rate pool information. Taxact 2010 free version A withholding rate pool is a payment of a single type of income, determined in accordance with the categories of income reported on Form 1042-S that is subject to a single rate of withholding. Taxact 2010 free version A qualified intermediary is required to provide you with information regarding U. Taxact 2010 free version S. Taxact 2010 free version persons subject to Form 1099 reporting and to provide you withholding rate pool information separately for each such U. Taxact 2010 free version S. Taxact 2010 free version person unless it has assumed Form 1099 reporting and backup withholding responsibility. Taxact 2010 free version For the alternative procedure for providing rate pool information for U. Taxact 2010 free version S. Taxact 2010 free version non-exempt persons, see the Form W-8IMY instructions. Taxact 2010 free version   The withholding statement must: Designate those accounts for which it acts as a qualified intermediary, Designate those accounts for which it assumes primary NRA withholding responsibility and/or primary Form 1099 and backup withholding responsibility, and Provide sufficient information for you to allocate the payment to a withholding rate pool. Taxact 2010 free version   The extent to which you must have withholding rate pool information depends on the withholding and reporting obligations assumed by the QI. Taxact 2010 free version Primary responsibility not assumed. Taxact 2010 free version   If a QI does not assume primary NRA withholding responsibility or primary Form 1099 reporting and backup withholding responsibility for the payment, you can reliably associate the payment with valid documentation only to the extent you can reliably determine the part of the payment that relates to each withholding rate pool for foreign payees. Taxact 2010 free version Unless the alternative procedure applies, the qualified intermediary must provide you with a separate withholding rate pool for each U. Taxact 2010 free version S. Taxact 2010 free version person subject to Form 1099 reporting and/or backup withholding. Taxact 2010 free version The QI must provide a Form W-9 or, in the absence of the form, the name, address, and TIN, if available, for such person. Taxact 2010 free version Primary NRA withholding responsibility assumed. Taxact 2010 free version   If you make a payment to a QI that assumes primary NRA withholding responsibility (but not primary Form 1099 reporting and backup withholding responsibility), you can reliably associate the payment with valid documentation only to the extent you can reliably determine the part of the payment that relates to the withholding rate pool for which the QI assumes primary NRA withholding responsibility and the part of the payment attributable to withholding rate pools for each U. Taxact 2010 free version S. Taxact 2010 free version person, unless the alternative procedure applies, subject to Form 1099 reporting and/or backup withholding. Taxact 2010 free version The QI must provide a Form W-9 or, in the absence of the form, the name, address, and TIN, if available, for such person. Taxact 2010 free version Primary NRA and Form 1099 responsibility assumed. Taxact 2010 free version   If you make a payment to a QI that assumes both primary NRA withholding responsibility and primary Form 1099 reporting and backup withholding responsibility, you can reliably associate a payment with valid documentation provided that you receive a valid Form W-8IMY. Taxact 2010 free version It is not necessary to associate the payment with withholding rate pools. Taxact 2010 free version Example. Taxact 2010 free version You make a payment of dividends to a QI. Taxact 2010 free version It has five customers: two are foreign persons who have provided documentation entitling them to a 15% rate of withholding on dividends; two are foreign persons subject to a 30% rate of withholding on dividends; and one is a U. Taxact 2010 free version S. Taxact 2010 free version individual who provides it with a Form W-9. Taxact 2010 free version Each customer is entitled to 20% of the dividend payment. Taxact 2010 free version The QI does not assume any primary withholding responsibility. Taxact 2010 free version The QI gives you a Form W-8IMY with which it associates the Form W-9 and a withholding statement that allocates 40% of the dividend to a 15% withholding rate pool, 40% to a 30% withholding rate pool, and 20% to the U. Taxact 2010 free version S. Taxact 2010 free version individual. Taxact 2010 free version You should report on Forms 1042-S 40% of the payment as made to a 15% rate dividend pool and 40% of the payment as made to a 30% rate dividend pool. Taxact 2010 free version The part of the payment allocable to the U. Taxact 2010 free version S. Taxact 2010 free version individual (20%) is reportable on Form 1099-DIV. Taxact 2010 free version Smaller partnerships and trusts. Taxact 2010 free version   A QI may apply special rules to a smaller partnership or trust (Joint Account Provision) only if the partnership or trust meets the following conditions. Taxact 2010 free version It is a foreign partnership or foreign simple or grantor trust. Taxact 2010 free version It is a direct account holder of the QI. Taxact 2010 free version It does not have any partner, beneficiary, or owner that is a U. Taxact 2010 free version S. Taxact 2010 free version person or a pass- through partner, beneficiary, or owner. Taxact 2010 free version   For information on these rules, see section 4A. Taxact 2010 free version 01 of the QI agreement. Taxact 2010 free version This is found in Appendix 3 of Revenue Procedure 2003-64. Taxact 2010 free version Also see Revenue Procedure 2004-21. Taxact 2010 free version Related partnerships and trusts. Taxact 2010 free version    A QI may apply special rules to a related partnership or trust only if the partnership or trust meets the following conditions. Taxact 2010 free version It is a foreign partnership or foreign simple or grantor trust. Taxact 2010 free version It is either: A direct account holder of the QI, or An indirect account holder of the QI that is a direct partner, beneficiary, or owner of a partnership or trust to which the QI has applied this rule. Taxact 2010 free version For information on these rules, see section 4A. Taxact 2010 free version 02 of the QI agreement. Taxact 2010 free version This is found in Appendix 3 of Revenue Procedure 2003-64. Taxact 2010 free version Also see Revenue Procedure 2005-77. Taxact 2010 free version Nonqualified Intermediaries If you are making a payment to an NQI, foreign flow-through entity, or U. Taxact 2010 free version S. Taxact 2010 free version branch that is using Form W-8IMY to transmit information about the branch's account holders or customers, you can treat the payment (or a part of the payment) as reliably associated with valid documentation from a specific payee only if, prior to making the payment: You can allocate the payment to a valid Form W-8IMY, You can reliably determine how much of the payment relates to valid documentation provided by a payee (a person that is not itself a foreign intermediary, flow- through entity, or U. Taxact 2010 free version S. Taxact 2010 free version branch), and You have sufficient information to report the payment on Form 1042-S or Form 1099, if reporting is required. Taxact 2010 free version The NQI, flow-through entity, or U. Taxact 2010 free version S. Taxact 2010 free version branch must give you certain information on a withholding statement that is associated with the Form W-8IMY. Taxact 2010 free version A withholding statement must be updated to keep the information accurate prior to each payment. Taxact 2010 free version Withholding statement. Taxact 2010 free version   In most cases, a withholding statement must contain the following information. Taxact 2010 free version The name, address, and TIN (if any, or if required) of each person for whom documentation is provided. Taxact 2010 free version The type of documentation (documentary evidence, Form W-8, or Form W-9) for every person for whom documentation has been provided. Taxact 2010 free version The status of the person for whom the documentation has been provided, such as whether the person is a U. Taxact 2010 free version S. Taxact 2010 free version exempt recipient (U. Taxact 2010 free version S. Taxact 2010 free version person exempt from Form 1099 reporting), U. Taxact 2010 free version S. Taxact 2010 free version non-exempt recipient (U. Taxact 2010 free version S. Taxact 2010 free version person subject to Form 1099 reporting), or a foreign person. Taxact 2010 free version For a foreign person, the statement must indicate whether the person is a beneficial owner or a foreign intermediary, flow-through entity, or a U. Taxact 2010 free version S. Taxact 2010 free version branch. Taxact 2010 free version The type of recipient the person is, based on the recipient codes used on Form 1042-S. Taxact 2010 free version Information allocating each payment, by income type, to each payee (including U. Taxact 2010 free version S. Taxact 2010 free version exempt and U. Taxact 2010 free version S. Taxact 2010 free version non-exempt recipients) for whom documentation has been provided. Taxact 2010 free version The rate of withholding that applies to each foreign person to whom a payment is allocated. Taxact 2010 free version A foreign payee's country of residence. Taxact 2010 free version If a reduced rate of withholding is claimed, the basis for a reduced rate of withholding (for example, portfolio interest, treaty benefit, etc. Taxact 2010 free version ). Taxact 2010 free version In the case of treaty benefits claimed by entities, whether the applicable limitation on benefits statement and the statement that the foreign person derives the income for which treaty benefits are claimed, have been made. Taxact 2010 free version The name, address, and TIN (if any) of any other NQI, flow-through entity, or U. Taxact 2010 free version S. Taxact 2010 free version branch from which the payee will directly receive a payment. Taxact 2010 free version Any other information a withholding agent requests to fulfill its reporting and withholding obligations. Taxact 2010 free version Alternative procedure. Taxact 2010 free version   Under this alternative procedure the NQI can give you the information that allocates each payment to each foreign and U. Taxact 2010 free version S. Taxact 2010 free version exempt recipient by January 31 following the calendar year of payment, rather than prior to the payment being made as otherwise required. Taxact 2010 free version To take advantage of this procedure, the NQI must: (a) inform you, on its withholding statement, that it is using the alternative procedure; and (b) obtain your consent. Taxact 2010 free version You must receive the withholding statement with all the required information (other than item 5) prior to making the payment. Taxact 2010 free version    This alternative procedure cannot be used for payments to U. Taxact 2010 free version S. Taxact 2010 free version non-exempt recipients. Taxact 2010 free version Therefore, an NQI must always provide you with allocation information for all U. Taxact 2010 free version S. Taxact 2010 free version non-exempt recipients prior to a payment being made. Taxact 2010 free version Pooled withholding information. Taxact 2010 free version   If an NQI uses the alternative procedure, it must provide you with withholding rate pool information, as opposed to individual allocation information, prior to the payment of a reportable amount. Taxact 2010 free version A withholding rate pool is a payment of a single type of income (as determined by the income categories on Form 1042-S) that is subject to a single rate of withholding. Taxact 2010 free version For example, an NQI that has foreign account holders receiving royalties and dividends, both subject to the 15% rate, will provide you with information for two withholding rate pools (one for royalties and one for dividends). Taxact 2010 free version The NQI must provide you with the payee specific allocation information (information allocating each payment to each payee) by January 31 following the calendar year of payment. Taxact 2010 free version Failure to provide allocation information. Taxact 2010 free version   If an NQI fails to provide you with the payee specific allocation information for a withholding rate pool by January 31, you must not apply the alternative procedure to any of the NQI's withholding rate pools from that date forward. Taxact 2010 free version You must treat the payees as undocumented and apply the presumption rules, discussed later in Presumption Rules . Taxact 2010 free version An NQI is deemed to have f
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Understanding Your CP2566 Notice

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Page Last Reviewed or Updated: 28-Feb-2014

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The Taxact 2010 Free Version

Taxact 2010 free version Publication 936 - Main Content Table of Contents Part I. Taxact 2010 free version Home Mortgage InterestSecured Debt Qualified Home Special Situations Points Mortgage Insurance Premiums Form 1098, Mortgage Interest Statement How To Report Special Rule for Tenant-Stockholders in Cooperative Housing Corporations Part II. Taxact 2010 free version Limits on Home Mortgage Interest DeductionHome Acquisition Debt Home Equity Debt Grandfathered Debt Table 1 Instructions How To Get Tax HelpLow Income Taxpayer Clinics Part I. Taxact 2010 free version Home Mortgage Interest This part explains what you can deduct as home mortgage interest. Taxact 2010 free version It includes discussions on points, mortgage insurance premiums, and how to report deductible interest on your tax return. Taxact 2010 free version Generally, home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). Taxact 2010 free version The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan. Taxact 2010 free version You can deduct home mortgage interest if all the following conditions are met. Taxact 2010 free version You file Form 1040 and itemize deductions on Schedule A (Form 1040). Taxact 2010 free version The mortgage is a secured debt on a qualified home in which you have an ownership interest. Taxact 2010 free version Secured Debt and Qualified Home are explained later. Taxact 2010 free version  Both you and the lender must intend that the loan be repaid. Taxact 2010 free version Fully deductible interest. Taxact 2010 free version   In most cases, you can deduct all of your home mortgage interest. Taxact 2010 free version How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds. Taxact 2010 free version   If all of your mortgages fit into one or more of the following three categories at all times during the year, you can deduct all of the interest on those mortgages. Taxact 2010 free version (If any one mortgage fits into more than one category, add the debt that fits in each category to your other debt in the same category. Taxact 2010 free version ) If one or more of your mortgages does not fit into any of these categories, use Part II of this publication to figure the amount of interest you can deduct. Taxact 2010 free version   The three categories are as follows. Taxact 2010 free version Mortgages you took out on or before October 13, 1987 (called grandfathered debt). Taxact 2010 free version Mortgages you took out after October 13, 1987, to buy, build, or improve your home (called home acquisition debt), but only if throughout 2013 these mortgages plus any grandfathered debt totaled $1 million or less ($500,000 or less if married filing separately). Taxact 2010 free version Mortgages you took out after October 13, 1987, other than to buy, build, or improve your home (called home equity debt), but only if throughout 2013 these mortgages totaled $100,000 or less ($50,000 or less if married filing separately) and totaled no more than the fair market value of your home reduced by (1) and (2). Taxact 2010 free version The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home. Taxact 2010 free version   See Part II for more detailed definitions of grandfathered, home acquisition, and home equity debt. Taxact 2010 free version    You can use Figure A to check whether your home mortgage interest is fully deductible. Taxact 2010 free version This image is too large to be displayed in the current screen. Taxact 2010 free version Please click the link to view the image. Taxact 2010 free version Figure A. Taxact 2010 free version Is My Home Mortgage Interest Fully Deductible? Secured Debt You can deduct your home mortgage interest only if your mortgage is a secured debt. Taxact 2010 free version A secured debt is one in which you sign an instrument (such as a mortgage, deed of trust, or land contract) that: Makes your ownership in a qualified home security for payment of the debt, Provides, in case of default, that your home could satisfy the debt, and Is recorded or is otherwise perfected under any state or local law that applies. Taxact 2010 free version In other words, your mortgage is a secured debt if you put your home up as collateral to protect the interests of the lender. Taxact 2010 free version If you cannot pay the debt, your home can then serve as payment to the lender to satisfy (pay) the debt. Taxact 2010 free version In this publication, mortgage will refer to secured debt. Taxact 2010 free version Debt not secured by home. Taxact 2010 free version   A debt is not secured by your home if it is secured solely because of a lien on your general assets or if it is a security interest that attaches to the property without your consent (such as a mechanic's lien or judgment lien). Taxact 2010 free version   A debt is not secured by your home if it once was, but is no longer secured by your home. Taxact 2010 free version Wraparound mortgage. Taxact 2010 free version   This is not a secured debt unless it is recorded or otherwise perfected under state law. Taxact 2010 free version Example. Taxact 2010 free version Beth owns a home subject to a mortgage of $40,000. Taxact 2010 free version She sells the home for $100,000 to John, who takes it subject to the $40,000 mortgage. Taxact 2010 free version Beth continues to make the payments on the $40,000 note. Taxact 2010 free version John pays $10,000 down and gives Beth a $90,000 note secured by a wraparound mortgage on the home. Taxact 2010 free version Beth does not record or otherwise perfect the $90,000 mortgage under the state law that applies. Taxact 2010 free version Therefore, the mortgage is not a secured debt and John cannot deduct any of the interest he pays on it as home mortgage interest. Taxact 2010 free version Choice to treat the debt as not secured by your home. Taxact 2010 free version   You can choose to treat any debt secured by your qualified home as not secured by the home. Taxact 2010 free version This treatment begins with the tax year for which you make the choice and continues for all later tax years. Taxact 2010 free version You can revoke your choice only with the consent of the Internal Revenue Service (IRS). Taxact 2010 free version   You may want to treat a debt as not secured by your home if the interest on that debt is fully deductible (for example, as a business expense) whether or not it qualifies as home mortgage interest. Taxact 2010 free version This may allow you, if the limits in Part II apply, more of a deduction for interest on other debts that are deductible only as home mortgage interest. Taxact 2010 free version Cooperative apartment owner. Taxact 2010 free version   If you own stock in a cooperative housing corporation, see the Special Rule for Tenant-Stockholders in Cooperative Housing Corporations , near the end of this Part I. Taxact 2010 free version Qualified Home For you to take a home mortgage interest deduction, your debt must be secured by a qualified home. Taxact 2010 free version This means your main home or your second home. Taxact 2010 free version A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities. Taxact 2010 free version The interest you pay on a mortgage on a home other than your main or second home may be deductible if the proceeds of the loan were used for business, investment, or other deductible purposes. Taxact 2010 free version Otherwise, it is considered personal interest and is not deductible. Taxact 2010 free version Main home. Taxact 2010 free version   You can have only one main home at any one time. Taxact 2010 free version This is the home where you ordinarily live most of the time. Taxact 2010 free version Second home. Taxact 2010 free version   A second home is a home that you choose to treat as your second home. Taxact 2010 free version Second home not rented out. Taxact 2010 free version   If you have a second home that you do not hold out for rent or resale to others at any time during the year, you can treat it as a qualified home. Taxact 2010 free version You do not have to use the home during the year. Taxact 2010 free version Second home rented out. Taxact 2010 free version   If you have a second home and rent it out part of the year, you also must use it as a home during the year for it to be a qualified home. Taxact 2010 free version You must use this home more than 14 days or more than 10% of the number of days during the year that the home is rented at a fair rental, whichever is longer. Taxact 2010 free version If you do not use the home long enough, it is considered rental property and not a second home. Taxact 2010 free version For information on residential rental property, see Publication 527. Taxact 2010 free version More than one second home. Taxact 2010 free version   If you have more than one second home, you can treat only one as the qualified second home during any year. Taxact 2010 free version However, you can change the home you treat as a second home during the year in the following situations. Taxact 2010 free version If you get a new home during the year, you can choose to treat the new home as your second home as of the day you buy it. Taxact 2010 free version If your main home no longer qualifies as your main home, you can choose to treat it as your second home as of the day you stop using it as your main home. Taxact 2010 free version If your second home is sold during the year or becomes your main home, you can choose a new second home as of the day you sell the old one or begin using it as your main home. Taxact 2010 free version Divided use of your home. Taxact 2010 free version   The only part of your home that is considered a qualified home is the part you use for residential living. Taxact 2010 free version If you use part of your home for other than residential living, such as a home office, you must allocate the use of your home. Taxact 2010 free version You must then divide both the cost and fair market value of your home between the part that is a qualified home and the part that is not. Taxact 2010 free version Dividing the cost may affect the amount of your home acquisition debt, which is limited to the cost of your home plus the cost of any improvements. Taxact 2010 free version (See Home Acquisition Debt in Part II. Taxact 2010 free version ) Dividing the fair market value may affect your home equity debt limit, also explained in Part II . Taxact 2010 free version Renting out part of home. Taxact 2010 free version   If you rent out part of a qualified home to another person (tenant), you can treat the rented part as being used by you for residential living only if all of the following conditions apply. Taxact 2010 free version The rented part of your home is used by the tenant primarily for residential living. Taxact 2010 free version The rented part of your home is not a self-contained residential unit having separate sleeping, cooking, and toilet facilities. Taxact 2010 free version You do not rent (directly or by sublease) the same or different parts of your home to more than two tenants at any time during the tax year. Taxact 2010 free version If two persons (and dependents of either) share the same sleeping quarters, they are treated as one tenant. Taxact 2010 free version Office in home. Taxact 2010 free version   If you have an office in your home that you use in your business, see Publication 587, Business Use of Your Home. Taxact 2010 free version It explains how to figure your deduction for the business use of your home, which includes the business part of your home mortgage interest. Taxact 2010 free version Home under construction. Taxact 2010 free version   You can treat a home under construction as a qualified home for a period of up to 24 months, but only if it becomes your qualified home at the time it is ready for occupancy. Taxact 2010 free version   The 24-month period can start any time on or after the day construction begins. Taxact 2010 free version Home destroyed. Taxact 2010 free version   You may be able to continue treating your home as a qualified home even after it is destroyed in a fire, storm, tornado, earthquake, or other casualty. Taxact 2010 free version This means you can continue to deduct the interest you pay on your home mortgage, subject to the limits described in this publication. Taxact 2010 free version   You can continue treating a destroyed home as a qualified home if, within a reasonable period of time after the home is destroyed, you: Rebuild the destroyed home and move into it, or Sell the land on which the home was located. Taxact 2010 free version   This rule applies to your main home and to a second home that you treat as a qualified home. Taxact 2010 free version Time-sharing arrangements. Taxact 2010 free version   You can treat a home you own under a time-sharing plan as a qualified home if it meets all the requirements. Taxact 2010 free version A time-sharing plan is an arrangement between two or more people that limits each person's interest in the home or right to use it to a certain part of the year. Taxact 2010 free version Rental of time-share. Taxact 2010 free version   If you rent out your time-share, it qualifies as a second home only if you also use it as a home during the year. Taxact 2010 free version See Second home rented out , earlier, for the use requirement. Taxact 2010 free version To know whether you meet that requirement, count your days of use and rental of the home only during the time you have a right to use it or to receive any benefits from the rental of it. Taxact 2010 free version Married taxpayers. Taxact 2010 free version   If you are married and file a joint return, your qualified home(s) can be owned either jointly or by only one spouse. Taxact 2010 free version Separate returns. Taxact 2010 free version   If you are married filing separately and you and your spouse own more than one home, you can each take into account only one home as a qualified home. Taxact 2010 free version However, if you both consent in writing, then one spouse can take both the main home and a second home into account. Taxact 2010 free version Special Situations This section describes certain items that can be included as home mortgage interest and others that cannot. Taxact 2010 free version It also describes certain special situations that may affect your deduction. Taxact 2010 free version Late payment charge on mortgage payment. Taxact 2010 free version   You can deduct as home mortgage interest a late payment charge if it was not for a specific service performed in connection with your mortgage loan. Taxact 2010 free version Mortgage prepayment penalty. Taxact 2010 free version   If you pay off your home mortgage early, you may have to pay a penalty. Taxact 2010 free version 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. Taxact 2010 free version Sale of home. Taxact 2010 free version   If you sell your home, you can deduct your home mortgage interest (subject to any limits that apply) paid up to, but not including, the date of the sale. Taxact 2010 free version Example. Taxact 2010 free version John and Peggy Harris sold their home on May 7. Taxact 2010 free version Through April 30, they made home mortgage interest payments of $1,220. Taxact 2010 free version The settlement sheet for the sale of the home showed $50 interest for the 6-day period in May up to, but not including, the date of sale. Taxact 2010 free version Their mortgage interest deduction is $1,270 ($1,220 + $50). Taxact 2010 free version Prepaid interest. Taxact 2010 free version   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. Taxact 2010 free version You can deduct in each year only the interest that qualifies as home mortgage interest for that year. Taxact 2010 free version However, there is an exception that applies to points, discussed later. Taxact 2010 free version Mortgage interest credit. Taxact 2010 free version    You may be able to claim a mortgage interest credit if you were issued a mortgage credit certificate (MCC) by a state or local government. Taxact 2010 free version Figure the credit on Form 8396, Mortgage Interest Credit. Taxact 2010 free version If you take this credit, you must reduce your mortgage interest deduction by the amount of the credit. Taxact 2010 free version   See Form 8396 and Publication 530 for more information on the mortgage interest credit. Taxact 2010 free version Ministers' and military housing allowance. Taxact 2010 free version   If you are a minister or a member of the uniformed services and receive a housing allowance that is not taxable, you can still deduct your home mortgage interest. Taxact 2010 free version Hardest Hit Fund and Emergency Homeowners' Loan Programs. Taxact 2010 free version   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. Taxact 2010 free version 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. Taxact 2010 free version 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. Taxact 2010 free version If you meet these tests, then you can deduct all of the payments you actually made during the year to your mortgage servicer, the State HFA, or HUD on the home mortgage (including the amount shown on box 3 of Form 1098–MA, Mortgage Assistance Payments), but not more than the sum of the amounts shown on Form 1098, Mortgage Interest Statement, in box 1 (mortgage interest received from payer(s) / borrower(s)), box 4 (mortgage insurance premiums), and box 5 (other information including real property taxes paid). Taxact 2010 free version 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. Taxact 2010 free version Mortgage assistance payments under section 235 of the National Housing Act. Taxact 2010 free version   If you qualify for mortgage assistance payments for lower-income families under section 235 of the National Housing Act, part or all of the interest on your mortgage may be paid for you. Taxact 2010 free version You cannot deduct the interest that is paid for you. Taxact 2010 free version No other effect on taxes. Taxact 2010 free version   Do not include these mortgage assistance payments in your income. Taxact 2010 free version Also, do not use these payments to reduce other deductions, such as real estate taxes. Taxact 2010 free version Divorced or separated individuals. Taxact 2010 free version   If a divorce or separation agreement requires you or your spouse or former spouse to pay home mortgage interest on a home owned by both of you, the payment of interest may be alimony. Taxact 2010 free version See the discussion of Payments for jointly-owned home under Alimony in Publication 504, Divorced or Separated Individuals. Taxact 2010 free version Redeemable ground rents. Taxact 2010 free version   In some states (such as Maryland), you can buy your home subject to a ground rent. Taxact 2010 free version A ground rent is an obligation you assume to pay a fixed amount per year on the property. Taxact 2010 free version Under this arrangement, you are leasing (rather than buying) the land on which your home is located. Taxact 2010 free version   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct them as mortgage interest. Taxact 2010 free version   A ground rent is a redeemable ground rent if all of the following are true. Taxact 2010 free version Your lease, including renewal periods, is for more than 15 years. Taxact 2010 free version You can freely assign the lease. Taxact 2010 free version 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 specific amount. Taxact 2010 free version The lessor's interest in the land is primarily a security interest to protect the rental payments to which he or she is entitled. Taxact 2010 free version   Payments made to end the lease and to buy the lessor's entire interest in the land are not deductible as mortgage interest. Taxact 2010 free version Nonredeemable ground rents. Taxact 2010 free version   Payments on a nonredeemable ground rent are not mortgage interest. Taxact 2010 free version You can deduct them as rent if they are a business expense or if they are for rental property. Taxact 2010 free version Reverse mortgages. Taxact 2010 free version   A reverse mortgage is a loan where the lender pays you (in a lump sum, a monthly advance, a line of credit, or a combination of all three) while you continue to live in your home. Taxact 2010 free version With a reverse mortgage, you retain title to your home. Taxact 2010 free version Depending on the plan, your reverse mortgage becomes due with interest when you move, sell your home, reach the end of a pre-selected loan period, or die. Taxact 2010 free version Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable. Taxact 2010 free version Any interest (including original issue discount) accrued on a reverse mortgage is not deductible until you actually pay it, which is usually when you pay off the loan in full. Taxact 2010 free version Your deduction may be limited because a reverse mortgage loan generally is subject to the limit on Home Equity Debt discussed in Part II. Taxact 2010 free version Rental payments. Taxact 2010 free version   If you live in a house before final settlement on the purchase, any payments you make for that period are rent and not interest. Taxact 2010 free version This is true even if the settlement papers call them interest. Taxact 2010 free version You cannot deduct these payments as home mortgage interest. Taxact 2010 free version Mortgage proceeds invested in tax-exempt securities. Taxact 2010 free version   You cannot deduct the home mortgage interest on grandfathered debt or home equity debt if you used the proceeds of the mortgage to buy securities or certificates that produce tax-free income. Taxact 2010 free version “Grandfathered debt” and “home equity debt” are defined in Part II of this publication. Taxact 2010 free version Refunds of interest. Taxact 2010 free version   If you receive a refund of interest in the same tax year you paid it, you must reduce your interest expense by the amount refunded to you. Taxact 2010 free version If you receive a refund of interest you deducted in an earlier year, you generally must include the refund in income in the year you receive it. Taxact 2010 free version However, you need to include it only up to the amount of the deduction that reduced your tax in the earlier year. Taxact 2010 free version This is true whether the interest overcharge was refunded to you or was used to reduce the outstanding principal on your mortgage. Taxact 2010 free version If you need to include the refund in income, report it on Form 1040, line 21. Taxact 2010 free version   If you received a refund of interest you overpaid in an earlier year, you generally will receive a Form 1098, Mortgage Interest Statement, showing the refund in box 3. Taxact 2010 free version For information about Form 1098, see Form 1098, Mortgage Interest Statement , later. Taxact 2010 free version   For more information on how to treat refunds of interest deducted in earlier years, see Recoveries in Publication 525, Taxable and Nontaxable Income. Taxact 2010 free version Cooperative apartment owner. Taxact 2010 free version   If you own a cooperative apartment, you must reduce your home mortgage interest deduction by your share of any cash portion of a patronage dividend that the cooperative receives. Taxact 2010 free version The patronage dividend is a partial refund to the cooperative housing corporation of mortgage interest it paid in a prior year. Taxact 2010 free version   If you receive a Form 1098 from the cooperative housing corporation, the form should show only the amount you can deduct. Taxact 2010 free version Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Taxact 2010 free version Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. Taxact 2010 free version This image is too large to be displayed in the current screen. Taxact 2010 free version Please click the link to view the image. Taxact 2010 free version Figure B. Taxact 2010 free version Are My Points Fully Deductible This Year? A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. Taxact 2010 free version See Points paid by the seller , later. Taxact 2010 free version General Rule You generally cannot deduct the full amount of points in the year paid. Taxact 2010 free version Because they are prepaid interest, you generally deduct them ratably over the life (term) of the mortgage. Taxact 2010 free version See Deduction Allowed Ratably , next. Taxact 2010 free version For exceptions to the general rule, see Deduction Allowed in Year Paid , later. Taxact 2010 free version Deduction Allowed Ratably If you do not meet the tests listed under Deduction Allowed in Year Paid , later, the loan is not a home improvement loan, or you choose not to deduct your points in full in the year paid, you can deduct the points ratably (equally) over the life of the loan if you meet all the following tests. Taxact 2010 free version You use the cash method of accounting. Taxact 2010 free version This means you report income in the year you receive it and deduct expenses in the year you pay them. Taxact 2010 free version Most individuals use this method. Taxact 2010 free version Your loan is secured by a home. Taxact 2010 free version (The home does not need to be your main home. Taxact 2010 free version ) Your loan period is not more than 30 years. Taxact 2010 free version If your loan period is more than 10 years, the terms of your loan are the same as other loans offered in your area for the same or longer period. Taxact 2010 free version Either your loan amount is $250,000 or less, or the number of points is not more than: 4, if your loan period is 15 years or less, or 6, if your loan period is more than 15 years. Taxact 2010 free version Example. Taxact 2010 free version You use the cash method of accounting. Taxact 2010 free version In 2013, you took out a $100,000 loan payable over 20 years. Taxact 2010 free version The terms of the loan are the same as for other 20-year loans offered in your area. Taxact 2010 free version You paid $4,800 in points. Taxact 2010 free version You made 3 monthly payments on the loan in 2013. Taxact 2010 free version You can deduct $60 [($4,800 ÷ 240 months) x 3 payments] in 2013. Taxact 2010 free version In 2014, if you make all twelve payments, you will be able to deduct $240 ($20 x 12). Taxact 2010 free version Deduction Allowed in Year Paid You can fully deduct points in the year paid if you meet all the following tests. Taxact 2010 free version (You can use Figure B as a quick guide to see whether your points are fully deductible in the year paid. Taxact 2010 free version ) Your loan is secured by your main home. Taxact 2010 free version (Your main home is the one you ordinarily live in most of the time. Taxact 2010 free version ) Paying points is an established business practice in the area where the loan was made. Taxact 2010 free version The points paid were not more than the points generally charged in that area. Taxact 2010 free version You use the cash method of accounting. Taxact 2010 free version This means you report income in the year you receive it and deduct expenses in the year you pay them. Taxact 2010 free version Most individuals use this method. Taxact 2010 free version 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. Taxact 2010 free version The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. Taxact 2010 free version The funds you provided are not required to have been applied to the points. Taxact 2010 free version They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. Taxact 2010 free version You cannot have borrowed these funds from your lender or mortgage broker. Taxact 2010 free version You use your loan to buy or build your main home. Taxact 2010 free version The points were computed as a percentage of the principal amount of the mortgage. Taxact 2010 free version The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. Taxact 2010 free version The points may be shown as paid from either your funds or the seller's. Taxact 2010 free version Note. Taxact 2010 free version If you meet all of these tests, you can choose to either fully deduct the points in the year paid, or deduct them over the life of the loan. Taxact 2010 free version Home improvement loan. Taxact 2010 free version   You can also fully deduct in the year paid points paid on a loan to improve your main home, if tests (1) through (6) are met. Taxact 2010 free version Second home. Taxact 2010 free version You cannot fully deduct in the year paid points you pay on loans secured by your second home. Taxact 2010 free version You can deduct these points only over the life of the loan. Taxact 2010 free version Refinancing. Taxact 2010 free version   Generally, points you pay to refinance a mortgage are not deductible in full in the year you pay them. Taxact 2010 free version This is true even if the new mortgage is secured by your main home. Taxact 2010 free version   However, if you use part of the refinanced mortgage proceeds to improve your main home and you meet the first 6 tests listed under Deduction Allowed in Year Paid , you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. Taxact 2010 free version You can deduct the rest of the points over the life of the loan. Taxact 2010 free version Example 1. Taxact 2010 free version In 1998, Bill Fields got a mortgage to buy a home. Taxact 2010 free version In 2013, Bill refinanced that mortgage with a 15-year $100,000 mortgage loan. Taxact 2010 free version The mortgage is secured by his home. Taxact 2010 free version To get the new loan, he had to pay three points ($3,000). Taxact 2010 free version Two points ($2,000) were for prepaid interest, and one point ($1,000) was charged for services, in place of amounts that ordinarily are stated separately on the settlement statement. Taxact 2010 free version Bill paid the points out of his private funds, rather than out of the proceeds of the new loan. Taxact 2010 free version The payment of points is an established practice in the area, and the points charged are not more than the amount generally charged there. Taxact 2010 free version Bill's first payment on the new loan was due July 1. Taxact 2010 free version He made six payments on the loan in 2013 and is a cash basis taxpayer. Taxact 2010 free version Bill used the funds from the new mortgage to repay his existing mortgage. Taxact 2010 free version Although the new mortgage loan was for Bill's continued ownership of his main home, it was not for the purchase or improvement of that home. Taxact 2010 free version He cannot deduct all of the points in 2013. Taxact 2010 free version He can deduct two points ($2,000) ratably over the life of the loan. Taxact 2010 free version He deducts $67 [($2,000 ÷ 180 months) × 6 payments] of the points in 2013. Taxact 2010 free version The other point ($1,000) was a fee for services and is not deductible. Taxact 2010 free version Example 2. Taxact 2010 free version The facts are the same as in Example 1, except that Bill used $25,000 of the loan proceeds to improve his home and $75,000 to repay his existing mortgage. Taxact 2010 free version Bill deducts 25% ($25,000 ÷ $100,000) of the points ($2,000) in 2013. Taxact 2010 free version His deduction is $500 ($2,000 × 25%). Taxact 2010 free version Bill also deducts the ratable part of the remaining $1,500 ($2,000 − $500) that must be spread over the life of the loan. Taxact 2010 free version This is $50 [($1,500 ÷ 180 months) × 6 payments] in 2013. Taxact 2010 free version The total amount Bill deducts in 2013 is $550 ($500 + $50). Taxact 2010 free version Special Situations This section describes certain special situations that may affect your deduction of points. Taxact 2010 free version Original issue discount. Taxact 2010 free version   If you do not qualify to either deduct the points in the year paid or deduct them ratably over the life of the loan, or if you choose not to use either of these methods, the points reduce the issue price of the loan. Taxact 2010 free version This reduction results in original issue discount, which is discussed in chapter 4 of Publication 535. Taxact 2010 free version Amounts charged for services. Taxact 2010 free version    Amounts charged by the lender for specific services connected to the loan are not interest. Taxact 2010 free version Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. Taxact 2010 free version  You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. Taxact 2010 free version Points paid by the seller. Taxact 2010 free version   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. Taxact 2010 free version Treatment by seller. Taxact 2010 free version   The seller cannot deduct these fees as interest. Taxact 2010 free version But they are a selling expense that reduces the amount realized by the seller. Taxact 2010 free version See Publication 523 for information on selling your home. Taxact 2010 free version Treatment by buyer. Taxact 2010 free version   The buyer reduces the basis of the home by the amount of the seller-paid points and treats the points as if he or she had paid them. Taxact 2010 free version If all the tests under Deduction Allowed in Year Paid , earlier, are met, the buyer can deduct the points in the year paid. Taxact 2010 free version If any of those tests are not met, the buyer deducts the points over the life of the loan. Taxact 2010 free version   If you need information about the basis of your home, see Publication 523 or Publication 530. Taxact 2010 free version Funds provided are less than points. Taxact 2010 free version   If you meet all the tests in Deduction Allowed in Year Paid , earlier, except that the funds you provided were less than the points charged to you (test (6)), you can deduct the points in the year paid, up to the amount of funds you provided. Taxact 2010 free version In addition, you can deduct any points paid by the seller. Taxact 2010 free version Example 1. Taxact 2010 free version When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). Taxact 2010 free version You meet all the tests for deducting points in the year paid, except the only funds you provided were a $750 down payment. Taxact 2010 free version Of the $1,000 charged for points, you can deduct $750 in the year paid. Taxact 2010 free version You spread the remaining $250 over the life of the mortgage. Taxact 2010 free version Example 2. Taxact 2010 free version 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. Taxact 2010 free version In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). Taxact 2010 free version You spread the remaining $250 over the life of the mortgage. Taxact 2010 free version You must reduce the basis of your home by the $1,000 paid by the seller. Taxact 2010 free version Excess points. Taxact 2010 free version   If you meet all the tests in Deduction Allowed in Year Paid , earlier, except that the points paid were more than generally paid in your area (test (3)), you deduct in the year paid only the points that are generally charged. Taxact 2010 free version You must spread any additional points over the life of the mortgage. Taxact 2010 free version Mortgage ending early. Taxact 2010 free version   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. Taxact 2010 free version However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. Taxact 2010 free version Instead, deduct the remaining balance over the term of the new loan. Taxact 2010 free version   A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. Taxact 2010 free version Example. Taxact 2010 free version Dan paid $3,000 in points in 2002 that he had to spread out over the 15-year life of the mortgage. Taxact 2010 free version He deducts $200 points per year. Taxact 2010 free version Through 2012, Dan has deducted $2,200 of the points. Taxact 2010 free version Dan prepaid his mortgage in full in 2013. Taxact 2010 free version He can deduct the remaining $800 of points in 2013. Taxact 2010 free version Limits on deduction. Taxact 2010 free version   You cannot fully deduct points paid on a mortgage that exceeds the limits discussed in Part II . Taxact 2010 free version See the Table 1 Instructions for line 10. Taxact 2010 free version Form 1098. Taxact 2010 free version    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. Taxact 2010 free version See Form 1098, Mortgage Interest Statement , later. Taxact 2010 free version Mortgage Insurance Premiums You can treat amounts you paid during 2013 for qualified mortgage insurance as home mortgage interest. Taxact 2010 free version The insurance must be in connection with home acquisition debt, and the insurance contract must have been issued after 2006. Taxact 2010 free version Qualified mortgage insurance. Taxact 2010 free version   Qualified mortgage insurance is mortgage insurance provided by the Department of Veterans Affairs, the Federal Housing Administration, or the Rural Housing Service, and private mortgage insurance (as defined in section 2 of the Homeowners Protection Act of 1998 as in effect on December 20, 2006). Taxact 2010 free version   Mortgage insurance provided by the Department of Veterans Affairs is commonly known as a funding fee. Taxact 2010 free version If provided by the Rural Housing Service, it is commonly known as a guarantee fee. Taxact 2010 free version The funding fee and guarantee fee can either be included in the amount of the loan or paid in full at the time of closing. Taxact 2010 free version These fees can be deducted fully in 2013 if the mortgage insurance contract was issued in 2013. Taxact 2010 free version Contact the mortgage insurance issuer to determine the deductible amount if it is not reported in box 4 of Form 1098. Taxact 2010 free version Special rules for prepaid mortgage insurance. Taxact 2010 free version   Generally, if you paid premiums for qualified mortgage insurance that are properly allocable to periods after the close of the tax year, such premiums are treated as paid in the period to which they are allocated. Taxact 2010 free version You must allocate the premiums over the shorter of the stated term of the mortgage or 84 months, beginning with the month the insurance was obtained. Taxact 2010 free version No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term. Taxact 2010 free version This paragraph does not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service. Taxact 2010 free version Example. Taxact 2010 free version Ryan purchased a home in May of 2012 and financed the home with a 15-year mortgage. Taxact 2010 free version Ryan also prepaid all of the $9,240 in private mortgage insurance required at the time of closing in May. Taxact 2010 free version Since the $9,240 in private mortgage insurance is allocable to periods after 2012, Ryan must allocate the $9,240 over the shorter of the life of the mortgage or 84 months. Taxact 2010 free version Ryan's adjusted gross income (AGI) for 2012 is $76,000. Taxact 2010 free version Ryan can deduct $880 ($9,240 ÷ 84 x 8 months) for qualified mortgage insurance premiums in 2012. Taxact 2010 free version For 2013, Ryan can deduct $1,320 ($9,240 ÷ 84 x 12 months) if his AGI is $100,000 or less. Taxact 2010 free version In this example, the mortgage insurance premiums are allocated over 84 months, which is shorter than the life of the mortgage of 15 years (180 months). Taxact 2010 free version Limit on deduction. Taxact 2010 free version   If your adjusted gross income on Form 1040, line 38, is more than $100,000 ($50,000 if your filing status is married filing separately), the amount of your mortgage insurance premiums that are otherwise deductible is reduced and may be eliminated. Taxact 2010 free version 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. Taxact 2010 free version If your adjusted gross income is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. Taxact 2010 free version Form 1098. Taxact 2010 free version   The mortgage interest statement you receive should show not only the total interest paid during the year, but also your mortgage insurance premiums paid during the year, which may qualify to be treated as deductible mortgage interest. Taxact 2010 free version See Form 1098, Mortgage Interest Statement, next. Taxact 2010 free version Form 1098, Mortgage Interest Statement If you paid $600 or more of mortgage interest (including certain points and mortgage insurance premiums) during the year on any one mortgage, you generally will receive a Form 1098 or a similar statement from the mortgage holder. Taxact 2010 free version You will receive the statement if you pay interest to a person (including a financial institution or cooperative housing corporation) in the course of that person's trade or business. Taxact 2010 free version A governmental unit is a person for purposes of furnishing the statement. Taxact 2010 free version The statement for each year should be sent to you by January 31 of the following year. Taxact 2010 free version A copy of this form will also be sent to the IRS. Taxact 2010 free version The statement will show the total interest you paid during the year, any mortgage insurance premiums you paid, and if you purchased a main home during the year, it also will show the deductible points paid during the year, including seller-paid points. Taxact 2010 free version However, it should not show any interest that was paid for you by a government agency. Taxact 2010 free version As a general rule, Form 1098 will include only points that you can fully deduct in the year paid. Taxact 2010 free version However, certain points not included on Form 1098 also may be deductible, either in the year paid or over the life of the loan. Taxact 2010 free version See the earlier discussion of Points to determine whether you can deduct points not shown on Form 1098. Taxact 2010 free version Prepaid interest on Form 1098. Taxact 2010 free version   If you prepaid interest in 2013 that accrued in full by January 15, 2014, this prepaid interest may be included in box 1 of Form 1098. Taxact 2010 free version However, you cannot deduct the prepaid amount for January 2014 in 2013. Taxact 2010 free version (See Prepaid interest , earlier. Taxact 2010 free version ) You will have to figure the interest that accrued for 2014 and subtract it from the amount in box 1. Taxact 2010 free version You will include the interest for January 2014 with other interest you pay for 2014. Taxact 2010 free version Refunded interest. Taxact 2010 free version   If you received a refund of mortgage interest you overpaid in an earlier year, you generally will receive a Form 1098 showing the refund in box 3. Taxact 2010 free version See Refunds of interest , earlier. Taxact 2010 free version Mortgage insurance premiums. Taxact 2010 free version   The amount of mortgage insurance premiums you paid during 2013 may be shown in Box 4 of Form 1098. Taxact 2010 free version See Mortgage Insurance Premiums , earlier. Taxact 2010 free version How To Report Deduct the home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 10. Taxact 2010 free version If you paid more deductible interest to the financial institution than the amount shown on Form 1098, show the larger deductible amount on line 10. Taxact 2010 free version Attach a statement explaining the difference and print “See attached” next to line 10. Taxact 2010 free version Deduct home mortgage interest that was not reported to you on Form 1098 on Schedule A (Form 1040), line 11. Taxact 2010 free version If you paid home mortgage interest to the person from whom you bought your home, show that person's name, address, and taxpayer identification number (TIN) on the dotted lines next to line 11. Taxact 2010 free version The seller must give you this number and you must give the seller your TIN. Taxact 2010 free version A Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. Taxact 2010 free version Failure to meet any of these requirements may result in a $50 penalty for each failure. Taxact 2010 free version The TIN can be either a social security number, an individual taxpayer identification number (issued by the Internal Revenue Service), or an employer identification number. Taxact 2010 free version If you can take a deduction for points that were not reported to you on Form 1098, deduct those points on Schedule A (Form 1040), line 12. Taxact 2010 free version Deduct mortgage insurance premiums on Schedule A (Form 1040), line 13. Taxact 2010 free version More than one borrower. Taxact 2010 free version   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. Taxact 2010 free version Show how much of the interest each of you paid, and give the name and address of the person who received the form. Taxact 2010 free version Deduct your share of the interest on Schedule A (Form 1040), line 11, and print “See attached” next to the line. Taxact 2010 free version Also, deduct your share of any qualified mortgage insurance premiums on Schedule A (Form 1040), line 13. Taxact 2010 free version   Similarly, if you are the payer of record on a mortgage on which there are other borrowers entitled to a deduction for the interest shown on the Form 1098 you received, deduct only your share of the interest on Schedule A (Form 1040), line 10. Taxact 2010 free version Let each of the other borrowers know what his or her share is. Taxact 2010 free version Mortgage proceeds used for business or investment. Taxact 2010 free version   If your home mortgage interest deduction is limited under the rules explained in Part II , but all or part of the mortgage proceeds were used for business, investment, or other deductible activities, see Table 2 near the end of this publication. Taxact 2010 free version It shows where to deduct the part of your excess interest that is for those activities. Taxact 2010 free version The Table 1 Instructions for line 13 in Part II explain how to divide the excess interest among the activities for which the mortgage proceeds were used. Taxact 2010 free version Special Rule for Tenant-Stockholders in Cooperative Housing Corporations A qualified home includes stock in a cooperative housing corporation owned by a tenant-stockholder. Taxact 2010 free version This applies only if the tenant-stockholder is entitled to live in the house or apartment because of owning stock in the cooperative. Taxact 2010 free version Cooperative housing corporation. Taxact 2010 free version   This is a corporation that meets all of the following conditions. Taxact 2010 free version Has only one class of stock outstanding, Has no stockholders other than those who own the stock that can live in a house, apartment, or house trailer owned or leased by the corporation, Has no stockholders who can receive any distribution out of capital other than on a liquidation of the corporation, and Meets at least one of the following requirements. Taxact 2010 free version Receives at least 80% of its gross income for the year in which the mortgage interest is paid or incurred from tenant-stockholders. Taxact 2010 free version For this purpose, gross income is all income received during the entire year, including amounts received before the corporation changed to cooperative ownership. Taxact 2010 free version At all times during the year, at least 80% of the total square footage of the corporation's property is used or available for use by the tenant-stockholders for residential or residential-related use. Taxact 2010 free version At least 90% of the corporation's expenditures paid or incurred during the year are for the acquisition, construction, management, maintenance, or care of corporate property for the benefit of the tenant-stockholders. Taxact 2010 free version Stock used to secure debt. Taxact 2010 free version   In some cases, you cannot use your cooperative housing stock to secure a debt because of either: Restrictions under local or state law, or Restrictions in the cooperative agreement (other than restrictions in which the main purpose is to permit the tenant- stockholder to treat unsecured debt as secured debt). Taxact 2010 free version However, you can treat a debt as secured by the stock to the extent that the proceeds are used to buy the stock under the allocation of interest rules. Taxact 2010 free version See chapter 4 of Publication 535 for details on these rules. Taxact 2010 free version Figuring deductible home mortgage interest. Taxact 2010 free version   Generally, if you are a tenant-stockholder, you can deduct payments you make for your share of the interest paid or incurred by the cooperative. Taxact 2010 free version The interest must be on a debt to buy, build, change, improve, or maintain the cooperative's housing, or on a debt to buy the land. Taxact 2010 free version   Figure your share of this interest by multiplying the total by the following fraction. Taxact 2010 free version      Your shares of stock in the cooperative   The total shares of stock in the cooperative Limits on deduction. Taxact 2010 free version   To figure how the limits discussed in Part II apply to you, treat your share of the cooperative's debt as debt incurred by you. Taxact 2010 free version The cooperative should determine your share of its grandfathered debt, its home acquisition debt, and its home equity debt. Taxact 2010 free version (Your share of each of these types of debt is equal to the average balance of each debt multiplied by the fraction just given. Taxact 2010 free version ) After your share of the average balance of each type of debt is determined, you include it with the average balance of that type of debt secured by your stock. Taxact 2010 free version Form 1098. Taxact 2010 free version    The cooperative should give you a Form 1098 showing your share of the interest. Taxact 2010 free version Use the rules in this publication to determine your deductible mortgage interest. Taxact 2010 free version Part II. Taxact 2010 free version Limits on Home Mortgage Interest Deduction This part of the publication discusses the limits on deductible home mortgage interest. Taxact 2010 free version These limits apply to your home mortgage interest expense if you have a home mortgage that does not fit into any of the three categories listed at the beginning of Part I under Fully deductible interest . Taxact 2010 free version Your home mortgage interest deduction is limited to the interest on the part of your home mortgage debt that is not more than your qualified loan limit. Taxact 2010 free version This is the part of your home mortgage debt that is grandfathered debt or that is not more than the limits for home acquisition debt and home equity debt. Taxact 2010 free version Table 1 can help you figure your qualified loan limit and your deductible home mortgage interest. Taxact 2010 free version 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 (your main or second home). Taxact 2010 free version It also must be secured by that home. Taxact 2010 free version 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. Taxact 2010 free version The additional debt may qualify as home equity debt (discussed later). Taxact 2010 free version Home acquisition debt limit. Taxact 2010 free version   The total amount you can treat as home acquisition debt at any time on your main home and second home cannot be more than $1 million ($500,000 if married filing separately). Taxact 2010 free version This limit is reduced (but not below zero) by the amount of your grandfathered debt (discussed later). Taxact 2010 free version Debt over this limit may qualify as home equity debt (also discussed later). Taxact 2010 free version Refinanced home acquisition debt. Taxact 2010 free version   Any secured debt you use to refinance home acquisition debt is treated as home acquisition debt. Taxact 2010 free version However, the new debt will qualify as home acquisition debt only up to the amount of the balance of the old mortgage principal just before the refinancing. Taxact 2010 free version Any additional debt not used to buy, build, or substantially improve a qualified home is not home acquisition debt, but may qualify as home equity debt (discussed later). Taxact 2010 free version Mortgage that qualifies later. Taxact 2010 free version   A mortgage that does not qualify as home acquisition debt because it does not meet all the requirements may qualify at a later time. Taxact 2010 free version For example, a debt that you use to buy your home may not qualify as home acquisition debt because it is not secured by the home. Taxact 2010 free version However, if the debt is later secured by the home, it may qualify as home acquisition debt after that time. Taxact 2010 free version Similarly, a debt that you use to buy property may not qualify because the property is not a qualified home. Taxact 2010 free version However, if the property later becomes a qualified home, the debt may qualify after that time. Taxact 2010 free version Mortgage treated as used to buy, build, or improve home. Taxact 2010 free version   A mortgage secured by a qualified home may be treated as home acquisition debt, even if you do not actually use the proceeds to buy, build, or substantially improve the home. Taxact 2010 free version This applies in the following situations. Taxact 2010 free version You buy your home within 90 days before or after the date you take out the mortgage. Taxact 2010 free version The home acquisition debt is limited to the home's cost, plus the cost of any substantial improvements within the limit described below in (2) or (3). Taxact 2010 free version (See Example 1 later. Taxact 2010 free version ) You build or improve your home and take out the mortgage before the work is completed. Taxact 2010 free version The home acquisition debt is limited to the amount of the expenses incurred within 24 months before the date of the mortgage. Taxact 2010 free version You build or improve your home and take out the mortgage within 90 days after the work is completed. Taxact 2010 free version The home acquisition debt is limited to the amount of the expenses incurred within the period beginning 24 months before the work is completed and ending on the date of the mortgage. Taxact 2010 free version (See Example 2 later. Taxact 2010 free version ) Example 1. Taxact 2010 free version You bought your main home on June 3 for $175,000. Taxact 2010 free version You paid for the home with cash you got from the sale of your old home. Taxact 2010 free version On July 15, you took out a mortgage of $150,000 secured by your main home. Taxact 2010 free version You used the $150,000 to invest in stocks. Taxact 2010 free version You can treat the mortgage as taken out to buy your home because you bought the home within 90 days before you took out the mortgage. Taxact 2010 free version The entire mortgage qualifies as home acquisition debt because it was not more than the home's cost. Taxact 2010 free version Example 2. Taxact 2010 free version On January 31, John began building a home on the lot that he owned. Taxact 2010 free version He used $45,000 of his personal funds to build the home. Taxact 2010 free version The home was completed on October 31. Taxact 2010 free version On November 21, John took out a $36,000 mortgage that was secured by the home. Taxact 2010 free version The mortgage can be treated as used to build the home because it was taken out within 90 days after the home was completed. Taxact 2010 free version The entire mortgage qualifies as home acquisition debt because it was not more than the expenses incurred within the period beginning 24 months before the home was completed. Taxact 2010 free version This is illustrated by Figure C. Taxact 2010 free version   Please click here for the text description of the image. Taxact 2010 free version Figure C. Taxact 2010 free version John's example Date of the mortgage. Taxact 2010 free version   The date you take out your mortgage is the day the loan proceeds are disbursed. Taxact 2010 free version This is generally the closing date. Taxact 2010 free version You can treat the day you apply in writing for your mortgage as the date you take it out. Taxact 2010 free version However, this applies only if you receive the loan proceeds within a reasonable time (such as within 30 days) after your application is approved. Taxact 2010 free version If a timely application you make is rejected, a reasonable additional time will be allowed to make a new application. Taxact 2010 free version Cost of home or improvements. Taxact 2010 free version   To determine your cost, include amounts paid to acquire any interest in a qualified home or to substantially improve the home. Taxact 2010 free version   The cost of building or substantially improving a qualified home includes the costs to acquire real property and building materials, fees for architects and design plans, and required building permits. Taxact 2010 free version Substantial improvement. Taxact 2010 free version   An improvement is substantial if it: Adds to the value of your home, Prolongs your home's useful life, or Adapts your home to new uses. Taxact 2010 free version    Repairs that maintain your home in good condition, such as repainting your home, are not substantial improvements. Taxact 2010 free version However, if you paint your home as part of a renovation that substantially improves your qualified home, you can include the painting costs in the cost of the improvements. Taxact 2010 free version Acquiring an interest in a home because of a divorce. Taxact 2010 free version   If you incur debt to acquire the interest of a spouse or former spouse in a home, because of a divorce or legal separation, you can treat that debt as home acquisition debt. Taxact 2010 free version Part of home not a qualified home. Taxact 2010 free version    To figure your home acquisition debt, you must divide the cost of your home and improvements between the part of your home that is a qualified home and any part that is not a qualified home. Taxact 2010 free version See Divided use of your home under Qualified Home in Part I. Taxact 2010 free version Home Equity Debt If you took out a loan for reasons other than to buy, build, or substantially improve your home, it may qualify as home equity debt. Taxact 2010 free version In addition, debt you incurred to buy, build, or substantially improve your home, to the extent it is more than the home acquisition debt limit (discussed earlier), may qualify as home equity debt. Taxact 2010 free version Home equity debt is a mortgage you took out after October 13, 1987, that: Does not qualify as home acquisition debt or as grandfathered debt, and Is secured by your qualified home. Taxact 2010 free version Example. Taxact 2010 free version You bought your home for cash 10 years ago. Taxact 2010 free version You did not have a mortgage on your home until last year, when you took out a $50,000 loan, secured by your home, to pay for your daughter's college tuition and your father's medical bills. Taxact 2010 free version This loan is home equity debt. Taxact 2010 free version Home equity debt limit. Taxact 2010 free version   There is a limit on the amount of debt that can be treated as home equity debt. Taxact 2010 free version The total home equity debt on your main home and second home is limited to the smaller of: $100,000 ($50,000 if married filing separately), or The total of each home's fair market value (FMV) reduced (but not below zero) by the amount of its home acquisition debt and grandfathered debt. Taxact 2010 free version Determine the FMV and the outstanding home acquisition and grandfathered debt for each home on the date that the last debt was secured by the home. Taxact 2010 free version Example. Taxact 2010 free version You own one home that you bought in 2000. Taxact 2010 free version Its FMV now is $110,000, and the current balance on your original mortgage (home acquisition debt) is $95,000. Taxact 2010 free version Bank M offers you a home mortgage loan of 125% of the FMV of the home less any outstanding mortgages or other liens. Taxact 2010 free version To consolidate some of your other debts, you take out a $42,500 home mortgage loan [(125% × $110,000) − $95,000] with Bank M. Taxact 2010 free version Your home equity debt is limited to $15,000. Taxact 2010 free version This is the smaller of: $100,000, the maximum limit, or $15,000, the amount that the FMV of $110,000 exceeds the amount of home acquisition debt of $95,000. Taxact 2010 free version Debt higher than limit. Taxact 2010 free version   Interest on amounts over the home equity debt limit (such as the interest on $27,500 [$42,500 − $15,000] in the preceding example) generally is treated as personal interest and is not deductible. Taxact 2010 free version But if the proceeds of the loan were used for investment, business, or other deductible purposes, the interest may be deductible. Taxact 2010 free version If it is, see the Table 1 Instructions for line 13 for an explanation of how to allocate the excess interest. Taxact 2010 free version Part of home not a qualified home. Taxact 2010 free version   To figure the limit on your home equity debt, you must divide the FMV of your home between the part that is a qualified home and any part that is not a qualified home. Taxact 2010 free version See Divided use of your home under Qualified Home in Part I. Taxact 2010 free version Fair market value (FMV). Taxact 2010 free version    This is the price at which the home would change hands between you and a buyer, neither having to sell or buy, and both having reasonable knowledge of all relevant facts. Taxact 2010 free version Sales of similar homes in your area, on about the same date your last debt was secured by the home, may be helpful in figuring the FMV. Taxact 2010 free version Grandfathered Debt If you took out a mortgage on your home before October 14, 1987, or you refinanced such a mortgage, it may qualify as grandfathered debt. Taxact 2010 free version To qualify, it must have been secured by your qualified home on October 13, 1987, and at all times after that date. Taxact 2010 free version How you used the proceeds does not matter. Taxact 2010 free version Grandfathered debt is not limited. Taxact 2010 free version All of the interest you paid on grandfathered debt is fully deductible home mortgage interest. Taxact 2010 free version However, the amount of your grandfathered debt reduces the $1 million limit for home acquisition debt and the limit based on your home's fair market value for home equity debt. Taxact 2010 free version Refinanced grandfathered debt. Taxact 2010 free version   If you refinanced grandfathered debt after October 13, 1987, for an amount that was not more than the mortgage principal left on the debt, then you still treat it as grandfathered debt. Taxact 2010 free version To the extent the new debt is more than that mortgage principal, it is treated as home acquisition or home equity debt, and the mortgage is a mixed-use mortgage (discussed later under Average Mortgage Balance in the Table 1 instructions). Taxact 2010 free version The debt must be secured by the qualified home. Taxact 2010 free version   You treat grandfathered debt that was refinanced after October 13, 1987, as grandfathered debt only for the term left on the debt that was refinanced. Taxact 2010 free version After that, you treat it as home acquisition debt or home equity debt, depending on how you used the proceeds. Taxact 2010 free version Exception. Taxact 2010 free version   If the debt before refinancing was like a balloon note (the principal on the debt was not amortized over the term of the debt), then you treat the refinanced debt as grandfathered debt for the term of the first refinancing. Taxact 2010 free version This term cannot be more than 30 years. Taxact 2010 free version Example. Taxact 2010 free version Chester took out a $200,000 first mortgage on his home in 1986. Taxact 2010 free version The mortgage was a five-year balloon note and the entire balance on the note was due in 1991. Taxact 2010 free version Chester refinanced the debt in 1991 with a new 20-year mortgage. Taxact 2010 free version The refinanced debt is treated as grandfathered debt for its entire term (20 years). Taxact 2010 free version Line-of-credit mortgage. Taxact 2010 free version    If you had a line-of-credit mortgage on October 13, 1987, and borrowed additional amounts against it after that date, then the additional amounts are either home acquisition debt or home equity debt depending on how you used the proceeds. Taxact 2010 free version The balance on the mortgage before you borrowed the additional amounts is grandfathered debt. Taxact 2010 free version The newly borrowed amounts are not grandfathered debt because the funds were borrowed after October 13, 1987. Taxact 2010 free version See Average Mortgage Balance in the Table 1 Instructions that follow. Taxact 2010 free version Table 1 Instructions Unless you are subject to the overall limit on itemized deductions, you can deduct all of the interest you paid during the year on mortgages secured by your main home or second home in either of the following two situations. Taxact 2010 free version All the mortgages are grandfathered debt. Taxact 2010 free version The total of the mortgage balances for the entire year is within the limits discussed earlier under Home Acquisition Debt and Home Equity Debt . Taxact 2010 free version In either of those cases, you do not need Table 1. Taxact 2010 free version Otherwise, you can use Table 1 to determine your qualified loan limit and deductible home mortgage interest. Taxact 2010 free version Fill out only one Table 1 for both your main and second home regardless of how many mortgages you have. Taxact 2010 free version Table 1. Taxact 2010 free version Worksheet To Figure Your Qualified Loan Limit and Deductible Home Mortgage Interest For the Current Year See the Table 1 Instructions. Taxact 2010 free version Part I Qualified Loan Limit 1. Taxact 2010 free version Enter the average balance of all your grandfathered debt. Taxact 2010 free version See line 1 instructions 1. Taxact 2010 free version   2. Taxact 2010 free version Enter the average balance of all your home acquisition debt. Taxact 2010 free version See line 2 instructions 2. Taxact 2010 free version   3. Taxact 2010 free version Enter $1,000,000 ($500,000 if married filing separately) 3. Taxact 2010 free version   4. Taxact 2010 free version Enter the larger of the amount on line 1 or the amount on line 3 4. Taxact 2010 free version   5. Taxact 2010 free version Add the amounts on lines 1 and 2. Taxact 2010 free version Enter the total here 5. Taxact 2010 free version   6. Taxact 2010 free version Enter the smaller of the amount on line 4 or the amount on line 5 6. Taxact 2010 free version   7. Taxact 2010 free version If you have home equity debt, enter the smaller of $100,000 ($50,000 if married filing separately) or your limited amount. Taxact 2010 free version See the line 7 instructions for the limit which may apply to you. Taxact 2010 free version 7. Taxact 2010 free version   8. Taxact 2010 free version Add the amounts on lines 6 and 7. Taxact 2010 free version Enter the total. Taxact 2010 free version This is your qualified loan limit. Taxact 2010 free version 8. Taxact 2010 free version   Part II Deductible Home Mortgage Interest 9. Taxact 2010 free version Enter the total of the average balances of all mortgages on all qualified homes. Taxact 2010 free version  See line 9 instructions 9. Taxact 2010 free version     If line 8 is less than line 9, go on to line 10. Taxact 2010 free version If line 8 is equal to or more than line 9, stop here. Taxact 2010 free version All of your interest on all the mortgages included on line 9 is deductible as home mortgage interest on Schedule A (Form 1040). Taxact 2010 free version     10. Taxact 2010 free version Enter the total amount of interest that you paid. Taxact 2010 free version See line 10 instructions 10. Taxact 2010 free version   11. Taxact 2010 free version Divide the amount on line 8 by the amount on line 9. Taxact 2010 free version Enter the result as a decimal amount (rounded to three places) 11. Taxact 2010 free version × . Taxact 2010 free version 12. Taxact 2010 free version Multiply the amount on line 10 by the decimal amount on line 11. Taxact 2010 free version Enter the result. Taxact 2010 free version This is your deductible home mortgage interest. Taxact 2010 free version Enter this amount on Schedule A (Form 1040) 12. Taxact 2010 free version   13. Taxact 2010 free version Subtract the amount on line 12 from the amount on line 10. Taxact 2010 free version Enter the result. Taxact 2010 free version This is not home mortgage interest. Taxact 2010 free version See line 13 instructions 13. Taxact 2010 free version   Home equity debt only. Taxact 2010 free version   If all of your mortgages are home equity debt, do not fill in lines 1 through 5. Taxact 2010 free version Enter zero on line 6 and complete the rest of Table 1. Taxact 2010 free version Average Mortgage Balance You have to figure the average balance of each mortgage to determine your qualified loan limit. Taxact 2010 free version You need these amounts to complete lines 1, 2, and 9 of Table 1. Taxact 2010 free version You can use the highest mortgage balances during the year, but you may benefit most by using the average balances. Taxact 2010 free version The following are methods you can use to figure your average mortgage balances. Taxact 2010 free version However, if a mortgage has more than one category of debt, see Mixed-use mortgages , later, in this section. Taxact 2010 free version Average of first and last balance method. Taxact 2010 free version   You can use this method if all the following apply. Taxact 2010 free version You did not borrow any new amounts on the mortgage during the year. Taxact 2010 free version (This does not include borrowing the original mortgage amount. Taxact 2010 free version ) You did not prepay more than one month's principal during the year. Taxact 2010 free version (This includes prepayment by refinancing your home or by applying proceeds from its sale. Taxact 2010 free version ) You had to make level payments at fixed equal intervals on at least a semi-annual basis. Taxact 2010 free version You treat your payments as level even if they were adjusted from time to time because of changes in the interest rate. Taxact 2010 free version    To figure your average balance, complete the following worksheet. Taxact 2010 free version    1. Taxact 2010 free version Enter the balance as of the first day of the year that the mortgage was secured by your qualified home during the year (generally January 1)   2. Taxact 2010 free version Enter the balance as of the last day of the year that the mortgage was secured by your qualified home during the year (generally December 31)   3. Taxact 2010 free version Add amounts on lines 1 and 2   4. Taxact 2010 free version Divide the amount on line 3 by 2. Taxact 2010 free version Enter the result   Interest paid divided by interest rate method. Taxact 2010 free version   You can use this method if at all times in 2013 the mortgage was secured by your qualified home and the interest was paid at least monthly. Taxact 2010 free version    Complete the following worksheet to figure your average balance. Taxact 2010 free version    1. Taxact 2010 free version Enter the interest paid in 2013. Taxact 2010 free version Do not include points, mortgage insurance premiums, or any interest paid in 2013 that is for a year after 2013. Taxact 2010 free version However, do include interest that is for 2013 but was paid in an earlier year   2. Taxact 2010 free version Enter the annual interest rate on the mortgage. Taxact 2010 free version If the interest rate varied in 2013, use the lowest rate for the year   3. Taxact 2010 free version Divide the amount on line 1 by the amount on line 2. Taxact 2010 free version Enter the result   Example. Taxact 2010 free version Mr. Taxact 2010 free version Blue had a line of credit secured by his main home all year. Taxact 2010 free version He paid interest of $2,500 on this loan. Taxact 2010 free version The interest rate on the loan was 9% (. Taxact 2010 free version 09) all year. Taxact 2010 free version His average balance using this method is $27,778, figured as follows. Taxact 2010 free version 1. Taxact 2010 free version Enter the interest paid in 2013. Taxact 2010 free version Do not include points, mortgage insurance premiums, or any interest paid in 2013 that is for a year after 2013. Taxact 2010 free version However, do include interest that is for 2013 but was paid in an earlier year $2,500 2. Taxact 2010 free version Enter the annual interest rate on the mortgage. Taxact 2010 free version If the interest rate varied in 2013, use the lowest rate for the year . Taxact 2010 free version 09 3. Taxact 2010 free version Divide the amount on line 1 by the amount on line 2. Taxact 2010 free version Enter the result $27,778 Statements provided by your lender. Taxact 2010 free version   If you receive monthly statements showing the closing balance or the average balance for the month, you can use either to figure your average balance for the year. Taxact 2010 free version You can treat the balance as zero for any month the mortgage was not secured by your qualified home. Taxact 2010 free version   For each mortgage, figure your average balance by adding your monthly closing or average balances and dividing that total by the number of months the home secured by that mortgage was a qualified home during the year. Taxact 2010 free version   If your lender can give you your average balance for the year, you can use that amount. Taxact 2010 free version Example. Taxact 2010 free version Ms. Taxact 2010 free version Brown had a home equity loan secured by her main home all year. Taxact 2010 free version She received monthly statements showing her average balance for each month. Taxact 2010 free version She can figure her average balance for the year by adding her monthly average balances and dividing the total by 12. Taxact 2010 free version Mixed-use mortgages. Taxact 2010 free version   A mixed-use mortgage is a loan that consists of more than one of the three categories of debt (grandfathered debt, home acquisition debt, and home equity debt). Taxact 2010 free version For example, a mortgage you took out during the year is a mixed-use mortgage if you used its proceeds partly to refinance a mortgage that you took out in an earlier year to buy your home (home acquisition debt) and partly to buy a car (home equity debt). Taxact 2010 free version   Complete lines 1 and 2 of Table 1 by including the separate average balances of any grandfathered debt and home acquisition debt in your mixed-use mortgage. Taxact 2010 free version Do not use the methods described earlier in this section to figure the average balance of either category. Taxact 2010 free version Instead, for each category, use the following method. Taxact 2010 free version Figure the balance of that category of debt for each month. Taxact 2010 free version This is the amount of the loan proceeds allocated to that category, reduced by your principal payments on the mortgage previously applied to that category. Taxact 2010 free version Principal payments on a mixed-use mortgage are applied in full to each category of debt, until its balance is zero, in the following order: First, any home equity debt, Next, any grandfathered debt, and Finally, any home acquisition debt. Taxact 2010 free version Add together the monthly balances figured in (1). Taxact 2010 free version Divide the result in (2) by 12. Taxact 2010 free version   Complete line 9 of Table 1 by including the average balance of the entire mixed-use mortgage, figured under one of the methods described earlier in this section. Taxact 2010 free version Example 1. Taxact 2010 free version In 1986, Sharon took out a $1,400,000 mortgage to buy her main home (grandfathered debt). Taxact 2010 free version On March 2, 2013, when the home had a fair market value of $1,700,000 and she owed $1,100,000 on the mortgage, Sharon took out a second mortgage for $200,000. Taxact 2010 free version She used $180,000 of the proceeds to make substantial improvements to her home (home acquisition debt) and the remaining $20,000 to buy a car (home equity debt). Taxact 2010 free version Under the loan agreement, Sharon must make principal payments of $1,000 at the end of each month. Taxact 2010 free version During 2013, her principal payments on the second mortgage totaled $10,000. Taxact 2010 free version To complete Table 1, line 2, Sharon must figure a separate average balance for the part of her second mortgage that is home acquisition debt. Taxact 2010 free version The January and February balances were zero. Taxact 2010 free version The March through December balances were all $180,000, because none of her principal payments are applied to the home acquisition debt. Taxact 2010 free version (They are all applied to the home equity debt, reducing it to $10,000 [$20,000 − $10,000]. Taxact 2010 free version ) The monthly balances of the home acquisition debt total $1,800,000 ($180,000 × 10). Taxact 2010 free version Therefore, the average balance of the home acquisition debt for 2013 was $150,000 ($1,800,000 ÷ 12). Taxact 2010 free version Example 2. Taxact 2010 free version The facts are the same as in Example 1. Taxact 2010 free version In 2014, Sharon's January through October principal payments on her second mortgage are applied to the home equity debt, reducing it to zero. Taxact 2010 free version The balance of the home acquisition debt remains $180,000 for each of those months. Taxact 2010 free version Because her November and December principal payments are applied to the home acquisition debt, the November balance is $179,000 ($180,000 − $1,000) and the December balance is $178,000 ($180,000 − $2,000). Taxact 2010 free version The monthly balances total $2,157,000 [($180,000 × 10) + $179,000 + $178,000]. Taxact 2010 free version Therefore, the average balance of the home acquisition debt for 2014 is $179,750 ($2,157,000 ÷ 12). Taxact 2010 free version L