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2010 Form 1040 Ez

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2010 Form 1040 Ez

2010 form 1040 ez Publication 596 - Introductory Material Table of Contents Future Developments What is the EIC? Can I Claim the EIC? Do I Need This Publication? Do I Have To Have A Child To Qualify For The EIC? How Do I Figure the Amount of EIC? How Can I Quickly Locate Specific information? Is There Help Online? What's New for 2013 Reminders Future Developments For the latest information about developments related to Publication 596, such as legislation enacted after it was published, go to www. 2010 form 1040 ez irs. 2010 form 1040 ez gov/pub596. 2010 form 1040 ez What is the EIC? The earned income credit (EIC) is a tax credit for certain people who work and have earned income under $51,567. 2010 form 1040 ez A tax credit usually means more money in your pocket. 2010 form 1040 ez It reduces the amount of tax you owe. 2010 form 1040 ez The EIC may also give you a refund. 2010 form 1040 ez Can I Claim the EIC? To claim the EIC, you must meet certain rules. 2010 form 1040 ez These rules are summarized in Table 1. 2010 form 1040 ez Table 1. 2010 form 1040 ez Earned Income Credit in a Nutshell First, you must meet all the rules in this column. 2010 form 1040 ez Second, you must meet all the rules in one of these columns, whichever applies. 2010 form 1040 ez Third, you must meet the rule in this column. 2010 form 1040 ez Chapter 1. 2010 form 1040 ez  Rules for Everyone Chapter 2. 2010 form 1040 ez  Rules If You Have a Qualifying Child Chapter 3. 2010 form 1040 ez  Rules If You Do Not Have a Qualifying Child Chapter 4. 2010 form 1040 ez  Figuring and Claiming the EIC 1. 2010 form 1040 ez Your adjusted gross income (AGI) must be less than:  • $46,227 ($51,567 for married filing jointly) if you have three or more qualifying children,  • $43,038 ($48,378 for married filing jointly) if you have two qualifying children,  • $37,870 ($43,210 for married filing jointly) if you have one qualifying child, or   • $14,340 ($19,680 for married filing jointly) if you do not have a qualifying child. 2010 form 1040 ez 2. 2010 form 1040 ez You must have a valid social security number. 2010 form 1040 ez   3. 2010 form 1040 ez Your filing status cannot be Married filing separately. 2010 form 1040 ez   4. 2010 form 1040 ez You must be a U. 2010 form 1040 ez S. 2010 form 1040 ez citizen or resident alien all year. 2010 form 1040 ez   5. 2010 form 1040 ez You cannot file Form 2555 or Form 2555-EZ (relating to foreign earned income). 2010 form 1040 ez   6. 2010 form 1040 ez Your investment income must be $3,300 or less. 2010 form 1040 ez    7. 2010 form 1040 ez You must have earned income. 2010 form 1040 ez 8. 2010 form 1040 ez Your child must meet the relationship, age, residency, and joint return tests. 2010 form 1040 ez   9. 2010 form 1040 ez Your qualifying child cannot be used by more than one person to claim the EIC. 2010 form 1040 ez   10. 2010 form 1040 ez You cannot be a qualifying child of another person. 2010 form 1040 ez 11. 2010 form 1040 ez You must be at least age 25 but under age 65. 2010 form 1040 ez    12. 2010 form 1040 ez You cannot be the dependent of another person. 2010 form 1040 ez   13. 2010 form 1040 ez You cannot be a qualifying child of another person. 2010 form 1040 ez   14. 2010 form 1040 ez You must have lived in the United States more than half of the year. 2010 form 1040 ez 15. 2010 form 1040 ez Your earned income must be less than:  • $46,227 ($51,567 for married filing jointly) if you have three or more qualifying children,  • $43,038 ($48,378 for married filing jointly) if you have two qualifying children,  • $37,870 ($43,210 for married filing jointly) if you have one qualifying child, or  • $14,340 ($19,680 for married filing jointly) if you do not have a qualifying child. 2010 form 1040 ez Do I Need This Publication? Certain people who file Form 1040 must use Worksheet 1 in this publication, instead of Step 2 in their Form 1040 instructions, when they are checking whether they can take the EIC. 2010 form 1040 ez You are one of those people if any of the following statements are true for 2013. 2010 form 1040 ez You are filing Schedule E (Form 1040). 2010 form 1040 ez You are reporting income from the rental of personal property not used in a trade or business. 2010 form 1040 ez You are reporting income on Form 1040, line 21, from Form 8814 (relating to election to report child's interest and dividends). 2010 form 1040 ez You are reporting an amount on Form 1040, line 13, that includes an amount from Form 4797. 2010 form 1040 ez If none of the statements above apply to you, your tax form instructions have all the information you need to find out if you can claim the EIC and to figure the amount of your EIC. 2010 form 1040 ez You do not need this publication. 2010 form 1040 ez But you can read it to find out whether you can take the EIC and to learn more about the EIC. 2010 form 1040 ez Do I Have To Have A Child To Qualify For The EIC? No, you can qualify for the EIC without a qualifying child if you are at least age 25 but under age 65 and your earned income is less than $14,340 ($19,680 if married filing jointly). 2010 form 1040 ez See chapter 3. 2010 form 1040 ez How Do I Figure the Amount of EIC? If you can claim the EIC, you can either have the IRS figure the amount of your credit, or you can figure it yourself. 2010 form 1040 ez To figure it yourself, you can complete a worksheet in the instructions for the form you file. 2010 form 1040 ez To find out how to have the IRS figure it for you, see chapter 4. 2010 form 1040 ez How Can I Quickly Locate Specific information? You can use the index to look up specific information. 2010 form 1040 ez In most cases, index entries will point you to headings, tables, or a worksheet. 2010 form 1040 ez Is There Help Online? Yes. 2010 form 1040 ez You can use the EITC Assistant at www. 2010 form 1040 ez irs. 2010 form 1040 ez gov/eitc to find out if you may be eligible for the credit. 2010 form 1040 ez The EITC Assistant is available in English and Spanish. 2010 form 1040 ez What's New for 2013 Earned income amount is more. 2010 form 1040 ez The maximum amount of income you can earn and still get the credit has increased. 2010 form 1040 ez You may be able to take the credit if: You have three or more qualifying children and you earned less than $46,227 ($51,567 if married filing jointly), You have two qualifying children and you earned less than $43,038 ($48,378 if married filing jointly), You have one qualifying child and you earned less than $37,870 ($43,210 if married filing jointly), or You do not have a qualifying child and you earned less than $14,340 ($19,680 if married filing jointly). 2010 form 1040 ez Your adjusted gross income also must be less than the amount in the above list that applies to you. 2010 form 1040 ez For details, see Rules 1 and 15. 2010 form 1040 ez Investment income amount is more. 2010 form 1040 ez The maximum amount of investment income you can have and still get the credit has increased to $3,300. 2010 form 1040 ez See Rule 6—Your Investment Income Must Be $3,300 or Less . 2010 form 1040 ez Reminders Increased EIC on certain joint returns. 2010 form 1040 ez . 2010 form 1040 ez  A married person filing a joint return may get more EIC than someone with the same income but a different filing status. 2010 form 1040 ez As a result, the EIC table has different columns for married persons filing jointly than for everyone else. 2010 form 1040 ez When you look up your EIC in the EIC Table, be sure to use the correct column for your filing status and the number of children you have. 2010 form 1040 ez Earned income credit has no effect on certain welfare benefits. 2010 form 1040 ez  Any refund you receive because of the EIC cannot be counted as income when determining whether you or anyone else is eligible for benefits or assistance, or how much you or anyone else can receive, under any federal program or under any state or local program financed in whole or in part with federal funds. 2010 form 1040 ez These programs include the following. 2010 form 1040 ez Temporary Assistance for Needy Families (TANF). 2010 form 1040 ez Medicaid. 2010 form 1040 ez Supplemental security income (SSI). 2010 form 1040 ez Supplemental Nutrition Assistance Program (food stamps). 2010 form 1040 ez Low-income housing. 2010 form 1040 ez In addition, when determining eligibility, the refund cannot be counted as a resource for at least 12 months after you receive it. 2010 form 1040 ez Check with your local benefit coordinator to find out if your refund will affect your benefits. 2010 form 1040 ez Do not overlook your state credit. 2010 form 1040 ez  If you can claim the EIC on your federal income tax return, you may be able to take a similar credit on your state or local income tax return. 2010 form 1040 ez For a list of states that offer a state EIC, go to www. 2010 form 1040 ez irs. 2010 form 1040 ez gov/eitc. 2010 form 1040 ez EIC questioned by IRS. 2010 form 1040 ez  The IRS may ask you to provide documents to prove you are entitled to claim the EIC. 2010 form 1040 ez We will tell you what documents to send us. 2010 form 1040 ez These may include: birth certificates, school records, etc. 2010 form 1040 ez The process of establishing your eligibility will delay your refund. 2010 form 1040 ez Spanish version of Publication 596. 2010 form 1040 ez  You can order Publicación 596SP, Crédito por Ingreso del Trabajo, from the IRS. 2010 form 1040 ez It is a Spanish translation of Publication 596. 2010 form 1040 ez See How To Get Tax Help to find out how to order this and other IRS forms and publications. 2010 form 1040 ez Photographs of missing children. 2010 form 1040 ez  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. 2010 form 1040 ez Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. 2010 form 1040 ez You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. 2010 form 1040 ez Comments and suggestions. 2010 form 1040 ez  We welcome your comments about this publication and your suggestions for future editions. 2010 form 1040 ez You can write to us at the following address:  Internal Revenue Service Individual Forms and Publications Branch 1111 Constitution Ave. 2010 form 1040 ez NW, IR-6526 Washington, DC 20224 We respond to many letters by telephone. 2010 form 1040 ez Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. 2010 form 1040 ez You can send your comments from www. 2010 form 1040 ez irs. 2010 form 1040 ez gov/formspubs/. 2010 form 1040 ez Click on “More Information” and then on “Comment on Tax Forms and Publications. 2010 form 1040 ez ” Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. 2010 form 1040 ez Ordering forms and publications. 2010 form 1040 ez  Visit www. 2010 form 1040 ez irs. 2010 form 1040 ez gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. 2010 form 1040 ez  Internal Revenue Service 1201 N. 2010 form 1040 ez Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. 2010 form 1040 ez  If you have a tax question, check the information available on IRS. 2010 form 1040 ez gov or call 1-800-829-1040. 2010 form 1040 ez We cannot answer tax questions sent to either of the above addresses. 2010 form 1040 ez Prev  Up  Next   Home   More Online Publications
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Page Last Reviewed or Updated: 14-Feb-2014

The 2010 Form 1040 Ez

2010 form 1040 ez 3. 2010 form 1040 ez   Investment Expenses Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Limits on DeductionsPassive activity. 2010 form 1040 ez Other income (nonpassive income). 2010 form 1040 ez Expenses. 2010 form 1040 ez Additional information. 2010 form 1040 ez Interest ExpensesInvestment Interest Limit on Deduction Bond Premium AmortizationSpecial rules to determine amounts payable on a bond. 2010 form 1040 ez Basis. 2010 form 1040 ez How To Figure Amortization Choosing To Amortize How To Report Amortization Expenses of Producing IncomeFees to buy or sell. 2010 form 1040 ez Including mutual fund or REMIC expenses in income. 2010 form 1040 ez Nondeductible ExpensesUsed as collateral. 2010 form 1040 ez Short-sale expenses. 2010 form 1040 ez Expenses for both tax-exempt and taxable income. 2010 form 1040 ez State income taxes. 2010 form 1040 ez Nondeductible amount. 2010 form 1040 ez Basis adjustment. 2010 form 1040 ez How To Report Investment Expenses When To Report Investment Expenses Topics - This chapter discusses: Limits on Deductions , Interest Expenses , Bond Premium Amortization , Expenses of Producing Income , Nondeductible Expenses , How To Report Investment Expenses , and When To Report Investment Expenses . 2010 form 1040 ez Useful Items - You may want to see: Publication 535 Business Expenses 925 Passive Activity and At-Risk Rules 929 Tax Rules for Children and Dependents Form (and Instructions) Schedule A (Form 1040) Itemized Deductions 4952 Investment Interest Expense Deduction See chapter 5, How To Get Tax Help , for information about getting these publications and forms. 2010 form 1040 ez Limits on Deductions Your deductions for investment expenses may be limited by: The at-risk rules, The passive activity loss limits, The limit on investment interest, or The 2% limit on certain miscellaneous itemized deductions. 2010 form 1040 ez The at-risk rules and passive activity rules are explained briefly in this section. 2010 form 1040 ez The limit on investment interest is explained later in this chapter under Interest Expenses . 2010 form 1040 ez The 2% limit is explained later in this chapter under Expenses of Producing Income . 2010 form 1040 ez At-risk rules. 2010 form 1040 ez   Special at-risk rules apply to most income-producing activities. 2010 form 1040 ez These rules limit the amount of loss you can deduct to the amount you risk losing in the activity. 2010 form 1040 ez Generally, this is the cash and the adjusted basis of property you contribute to the activity. 2010 form 1040 ez It also includes money you borrow for use in the activity if you are personally liable for repayment or if you use property not used in the activity as security for the loan. 2010 form 1040 ez For more information, see Publication 925. 2010 form 1040 ez Passive activity losses and credits. 2010 form 1040 ez   The amount of losses and tax credits you can claim from passive activities is limited. 2010 form 1040 ez Generally, you are allowed to deduct passive activity losses only up to the amount of your passive activity income. 2010 form 1040 ez Also, you can use credits from passive activities only against tax on the income from passive activities. 2010 form 1040 ez There are exceptions for certain activities, such as rental real estate activities. 2010 form 1040 ez Passive activity. 2010 form 1040 ez   A passive activity generally is any activity involving the conduct of any trade or business in which you do not materially participate and any rental activity. 2010 form 1040 ez However, if you are involved in renting real estate, the activity is not a passive activity if both of the following are true. 2010 form 1040 ez More than one-half of the personal services you perform during the year in all trades or businesses are performed in real property trades or businesses in which you materially participate. 2010 form 1040 ez You perform more than 750 hours of services during the year in real property trades or businesses in which you materially participate. 2010 form 1040 ez  The term “trade or business” generally means any activity that involves the conduct of a trade or business, is conducted in anticipation of starting a trade or business, or involves certain research or experimental expenditures. 2010 form 1040 ez However, it does not include rental activities or certain activities treated as incidental to holding property for investment. 2010 form 1040 ez   You are considered to materially participate in an activity if you are involved on a regular, continuous, and substantial basis in the operations of the activity. 2010 form 1040 ez Other income (nonpassive income). 2010 form 1040 ez    Generally, you can use losses from passive activities only to offset income from passive activities. 2010 form 1040 ez You cannot use passive activity losses to offset your other income, such as your wages or your portfolio income. 2010 form 1040 ez Portfolio income includes gross income from interest, dividends, annuities, or royalties that is not derived in the ordinary course of a trade or business. 2010 form 1040 ez It also includes gains or losses (not derived in the ordinary course of a trade or business) from the sale or trade of property (other than an interest in a passive activity) producing portfolio income or held for investment. 2010 form 1040 ez This includes capital gain distributions from mutual funds (and other regulated investment companies) and real estate investment trusts. 2010 form 1040 ez   You cannot use passive activity losses to offset Alaska Permanent Fund dividends. 2010 form 1040 ez Expenses. 2010 form 1040 ez   Do not include in the computation of your passive activity income or loss: Expenses (other than interest) that are clearly and directly allocable to your portfolio income, or Interest expense properly allocable to portfolio income. 2010 form 1040 ez However, this interest and other expenses may be subject to other limits. 2010 form 1040 ez These limits are explained in the rest of this chapter. 2010 form 1040 ez Additional information. 2010 form 1040 ez   For more information about determining and reporting income and losses from passive activities, see Publication 925. 2010 form 1040 ez Interest Expenses This section discusses interest expenses you may be able to deduct as an investor. 2010 form 1040 ez For information on business interest, see chapter 4 of Publication 535. 2010 form 1040 ez You cannot deduct personal interest expenses other than qualified home mortgage interest, as explained in Publication 936, Home Mortgage Interest Deduction, and interest on certain student loans, as explained in Publication 970. 2010 form 1040 ez Investment Interest If you borrow money to buy property you hold for investment, the interest you pay is investment interest. 2010 form 1040 ez You can deduct investment interest subject to the limit discussed later. 2010 form 1040 ez However, you cannot deduct interest you incurred to produce tax-exempt income. 2010 form 1040 ez See Tax-exempt income under Nondeductible Expenses, later. 2010 form 1040 ez You also cannot deduct interest expenses on straddles discussed under Interest expense and carrying charges on straddles , later. 2010 form 1040 ez Investment interest does not include any qualified home mortgage interest or any interest taken into account in computing income or loss from a passive activity. 2010 form 1040 ez Investment property. 2010 form 1040 ez   Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. 2010 form 1040 ez It also includes property that produces gain or loss (not derived in the ordinary course of a trade or business) from the sale or trade of property producing these types of income or held for investment (other than an interest in a passive activity). 2010 form 1040 ez Investment property also includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity). 2010 form 1040 ez Partners, shareholders, and beneficiaries. 2010 form 1040 ez   To determine your investment interest, combine your share of investment interest from a partnership, S corporation, estate, or trust with your other investment interest. 2010 form 1040 ez Allocation of Interest Expense If you borrow money for business or personal purposes as well as for investment, you must allocate the debt among those purposes. 2010 form 1040 ez Only the interest expense on the part of the debt used for investment purposes is treated as investment interest. 2010 form 1040 ez The allocation is not affected by the use of property that secures the debt. 2010 form 1040 ez Example 1. 2010 form 1040 ez You borrow $10,000 and use $8,000 to buy stock. 2010 form 1040 ez You use the other $2,000 to buy items for your home. 2010 form 1040 ez Since 80% of the debt is used for, and allocated to, investment purposes, 80% of the interest on that debt is investment interest. 2010 form 1040 ez The other 20% is nondeductible personal interest. 2010 form 1040 ez Debt proceeds received in cash. 2010 form 1040 ez   If you receive debt proceeds in cash, the proceeds are generally not treated as investment property. 2010 form 1040 ez Debt proceeds deposited in account. 2010 form 1040 ez   If you deposit debt proceeds in an account, that deposit is treated as investment property, regardless of whether the account bears interest. 2010 form 1040 ez But, if you withdraw the funds and use them for another purpose, you must reallocate the debt to determine the amount considered to be for investment purposes. 2010 form 1040 ez Example 2. 2010 form 1040 ez Assume in Example 1 that you borrowed the money on March 1 and immediately bought the stock for $8,000. 2010 form 1040 ez You did not buy the household items until June 1. 2010 form 1040 ez You had deposited the $2,000 in the bank. 2010 form 1040 ez You had no other transactions on the bank account until June. 2010 form 1040 ez You did not sell the stock, and you made no principal payments on the debt. 2010 form 1040 ez You paid interest from another account. 2010 form 1040 ez The $8,000 is treated as being used for an investment purpose. 2010 form 1040 ez The $2,000 is treated as being used for an investment purpose for the 3-month period. 2010 form 1040 ez Your total interest expense for 3 months on this debt is investment interest. 2010 form 1040 ez In June, when you spend the $2,000 for household items, you must begin to allocate 80% of the debt and the interest expense to investment purposes and 20% to personal purposes. 2010 form 1040 ez Amounts paid within 30 days. 2010 form 1040 ez   If you receive loan proceeds in cash or if the loan proceeds are deposited in an account, you can treat any payment (up to the amount of the proceeds) made from any account you own, or from cash, as made from those proceeds. 2010 form 1040 ez This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. 2010 form 1040 ez   If you received the loan proceeds in cash, you can treat the payment as made on the date you received the cash instead of the date you actually made the payment. 2010 form 1040 ez Payments on debt may require new allocation. 2010 form 1040 ez   As you repay a debt used for more than one purpose, you must reallocate the balance. 2010 form 1040 ez You must first reduce the amount allocated to personal purposes by the repayment. 2010 form 1040 ez You then reallocate the rest of the debt to find what part is for investment purposes. 2010 form 1040 ez Example 3. 2010 form 1040 ez If, in Example 2 , you repay $500 on November 1, the entire repayment is applied against the amount allocated to personal purposes. 2010 form 1040 ez The debt balance is now allocated as $8,000 for investment purposes and $1,500 for personal purposes. 2010 form 1040 ez Until the next reallocation is necessary, 84% ($8,000 ÷ $9,500) of the debt and the interest expense is allocated to investment. 2010 form 1040 ez Pass-through entities. 2010 form 1040 ez   If you use borrowed funds to buy an interest in a partnership or S corporation, then the interest on those funds must be allocated based on the assets of the entity. 2010 form 1040 ez If you contribute to the capital of the entity, you can make the allocation using any reasonable method. 2010 form 1040 ez Additional allocation rules. 2010 form 1040 ez   For more information about allocating interest expense, see chapter 4 of Publication 535. 2010 form 1040 ez When To Deduct Investment Interest If you use the cash method of accounting, you must pay the interest before you can deduct it. 2010 form 1040 ez If you use an accrual method of accounting, you can deduct interest over the period it accrues, regardless of when you pay it. 2010 form 1040 ez For an exception, see Unpaid expenses owed to related party under When To Report Investment Expenses, later in this chapter. 2010 form 1040 ez Example. 2010 form 1040 ez You borrowed $1,000 on August 26, 2013, payable in 90 days at 12% interest. 2010 form 1040 ez On November 26, 2013, you paid this with a new note for $1,030, due on February 26, 2014. 2010 form 1040 ez If you use the cash method of accounting, you cannot deduct any part of the $30 interest on your return for 2013 because you did not actually pay it. 2010 form 1040 ez If you use an accrual method, you may be able to deduct a portion of the interest on the loans through December 31, 2013, on your return for 2013. 2010 form 1040 ez Interest paid in advance. 2010 form 1040 ez   Generally, if you pay interest in advance for a period that goes beyond the end of the tax year, you must spread the interest over the tax years to which it belongs under the OID rules discussed in chapter 1. 2010 form 1040 ez You can deduct in each year only the interest for that year. 2010 form 1040 ez Interest on margin accounts. 2010 form 1040 ez   If you are a cash method taxpayer, you can deduct interest on margin accounts to buy taxable securities as investment interest in the year you paid it. 2010 form 1040 ez You are considered to have paid interest on these accounts only when you actually pay the broker or when payment becomes available to the broker through your account. 2010 form 1040 ez Payment may become available to the broker through your account when the broker collects dividends or interest for your account, or sells securities held for you or received from you. 2010 form 1040 ez   You cannot deduct any interest on money borrowed for personal reasons. 2010 form 1040 ez Limit on interest deduction for market discount bonds. 2010 form 1040 ez   The amount you can deduct for interest expense you paid or accrued during the year to buy or carry a market discount bond may be limited. 2010 form 1040 ez This limit does not apply if you accrue the market discount and include it in your income currently. 2010 form 1040 ez   Under this limit, the interest is deductible only to the extent it is more than: The total interest and OID includible in gross income for the bond for the year, plus The market discount for the number of days you held the bond during the year. 2010 form 1040 ez Figure the amount in (2) above using the rules for figuring accrued market discount in chapter 1 under Market Discount Bonds . 2010 form 1040 ez Interest not deducted due to limit. 2010 form 1040 ez   In the year you dispose of the bond, you can deduct any interest expense you were not allowed to deduct in earlier years because of the limit. 2010 form 1040 ez Choosing to deduct disallowed interest expense before the year of disposition. 2010 form 1040 ez   You can choose to deduct disallowed interest expense in any year before the year you dispose of the bond, up to your net interest income from the bond during the year. 2010 form 1040 ez The rest of the disallowed interest expense remains deductible in the year you dispose of the bond. 2010 form 1040 ez Net interest income. 2010 form 1040 ez   This is the interest income (including OID) from the bond that you include in income for the year, minus the interest expense paid or accrued during the year to purchase or carry the bond. 2010 form 1040 ez Limit on interest deduction for short-term obligations. 2010 form 1040 ez   If the current income inclusion rules discussed in chapter 1 under Discount on Short-Term Obligations do not apply to you, the amount you can deduct for interest expense you paid or accrued during the year to buy or carry a short-term obligation is limited. 2010 form 1040 ez   The interest is deductible only to the extent it is more than: The amount of acquisition discount or OID on the obligation for the tax year, plus The amount of any interest payable on the obligation for the year that is not included in income because of your accounting method (other than interest taken into account in determining the amount of acquisition discount or OID). 2010 form 1040 ez The method of determining acquisition discount and OID for short-term obligations is discussed in chapter 1 under Discount on Short-Term Obligations . 2010 form 1040 ez Interest not deducted due to limit. 2010 form 1040 ez   In the year you dispose of the obligation, or, if you choose, in another year in which you have net interest income from the obligation, you can deduct any interest expense you were not allowed to deduct for an earlier year because of the limit. 2010 form 1040 ez Follow the same rules provided in the earlier discussion under Limit on interest deduction for market discount bonds , earlier. 2010 form 1040 ez Limit on Deduction Generally, your deduction for investment interest expense is limited to your net investment income. 2010 form 1040 ez You can carry over the amount of investment interest you could not deduct because of this limit to the next tax year. 2010 form 1040 ez The interest carried over is treated as investment interest paid or accrued in that next year. 2010 form 1040 ez You can carry over disallowed investment interest to the next tax year even if it is more than your taxable income in the year the interest was paid or accrued. 2010 form 1040 ez Net Investment Income Determine the amount of your net investment income by subtracting your investment expenses (other than interest expense) from your investment income. 2010 form 1040 ez Investment income. 2010 form 1040 ez   This generally includes your gross income from property held for investment (such as interest, dividends, annuities, and royalties). 2010 form 1040 ez Investment income does not include Alaska Permanent Fund dividends. 2010 form 1040 ez It also does not include qualified dividends or net capital gain unless you choose to include them. 2010 form 1040 ez Choosing to include qualified dividends. 2010 form 1040 ez   Investment income generally does not include qualified dividends, discussed in chapter 1. 2010 form 1040 ez However, you can choose to include all or part of your qualified dividends in investment income. 2010 form 1040 ez   You make this choice by completing Form 4952, line 4g, according to its instructions. 2010 form 1040 ez   If you choose to include any of your qualified dividends in investment income, you must reduce your qualified dividends that are eligible for the lower capital gains tax rates by the same amount. 2010 form 1040 ez Choosing to include net capital gain. 2010 form 1040 ez    Investment income generally does not include net capital gain from disposing of investment property (including capital gain distributions from mutual funds). 2010 form 1040 ez However, you can choose to include all or part of your net capital gain in investment income. 2010 form 1040 ez   You make this choice by completing Form 4952, line 4g, according to its instructions. 2010 form 1040 ez   If you choose to include any of your net capital gain in investment income, you must reduce your net capital gain that is eligible for the lower capital gains tax rates by the same amount. 2010 form 1040 ez   For more information about the capital gains rates, see Capital Gain Tax Rates in chapter 4. 2010 form 1040 ez    Before making either choice, consider the overall effect on your tax liability. 2010 form 1040 ez Compare your tax if you make one or both of these choices with your tax if you do not. 2010 form 1040 ez Investment income of child reported on parent's return. 2010 form 1040 ez   Investment income includes the part of your child's interest and dividend income you choose to report on your return. 2010 form 1040 ez If the child does not have qualified dividends, Alaska Permanent Fund dividends, or capital gain distributions, this is the amount on line 6 of Form 8814. 2010 form 1040 ez Include it on line 4a of Form 4952. 2010 form 1040 ez Example. 2010 form 1040 ez Your 8-year-old son has interest income of $2,200, which you choose to report on your own return. 2010 form 1040 ez You enter $2,200 on Form 8814, lines 1a and 4, and $200 on lines 6 and 12 and complete Part II. 2010 form 1040 ez Also enter $200 on Form 1040, line 21. 2010 form 1040 ez Your investment income includes this $200. 2010 form 1040 ez Child's qualified dividends. 2010 form 1040 ez   If part of the amount you report is your child's qualified dividends, that part (which is reported on Form 1040, line 9b) generally does not count as investment income. 2010 form 1040 ez However, you can choose to include all or part of it in investment income, as explained under Choosing to include qualified dividends , earlier. 2010 form 1040 ez   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured next under Child's Alaska Permanent Fund dividends). 2010 form 1040 ez Child's Alaska Permanent Fund dividends. 2010 form 1040 ez   If part of the amount you report is your child's Alaska Permanent Fund dividends, that part does not count as investment income. 2010 form 1040 ez To figure the amount of your child's income that you can consider your investment income, start with the amount on Form 8814, line 6. 2010 form 1040 ez Multiply that amount by a percentage that is equal to the Alaska Permanent Fund dividends divided by the total amount on Form 8814, line 4. 2010 form 1040 ez Subtract the result from the amount on Form 8814, line 12. 2010 form 1040 ez Example. 2010 form 1040 ez Your 10-year-old child has taxable interest income of $4,000 and Alaska Permanent Fund dividends of $2,000. 2010 form 1040 ez You choose to report this on your return. 2010 form 1040 ez You enter $4,000 on Form 8814, line 1a, $2,000 on line 2a, and $6,000 on line 4. 2010 form 1040 ez You then enter $4,000 on Form 8814, lines 6 and 12, and Form 1040, line 21. 2010 form 1040 ez You figure the amount of your child's income that you can consider your investment income as follows: $4,000 − ($4,000 × ($2,000 ÷ $6,000)) = $2,667 You include the result, $2,667, on Form 4952, line 4a. 2010 form 1040 ez Child's capital gain distributions. 2010 form 1040 ez   If part of the amount you report is your child's capital gain distributions, that part (which is reported on Schedule D (Form 1040), line 13, or Form 1040, line 13) generally does not count as investment income. 2010 form 1040 ez However, you can choose to include all or part of it in investment income, as explained in Choosing to include net capital gain , earlier. 2010 form 1040 ez   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured under Child's Alaska Permanent Fund dividends , earlier). 2010 form 1040 ez Investment expenses. 2010 form 1040 ez   Investment expenses are your allowed deductions (other than interest expense) directly connected with the production of investment income. 2010 form 1040 ez Investment expenses that are included as a miscellaneous itemized deduction on Schedule A (Form 1040) are allowable deductions after applying the 2% limit that applies to miscellaneous itemized deductions. 2010 form 1040 ez Use the smaller of: The investment expenses included on Schedule A (Form 1040), line 23, or The amount on Schedule A (Form 1040), line 27. 2010 form 1040 ez See Expenses of Producing Income , later, for a discussion of the 2% limit. 2010 form 1040 ez Losses from passive activities. 2010 form 1040 ez   Income or expenses that you used in computing income or loss from a passive activity are not included in determining your investment income or investment expenses (including investment interest expense). 2010 form 1040 ez See Publication 925 for information about passive activities. 2010 form 1040 ez Example. 2010 form 1040 ez Ted is a partner in a partnership that operates a business. 2010 form 1040 ez However, he does not materially participate in the partnership's business. 2010 form 1040 ez Ted's interest in the partnership is considered a passive activity. 2010 form 1040 ez Ted's investment income from interest and dividends (other than qualified dividends) is $10,000. 2010 form 1040 ez His investment expenses (other than interest) are $3,200 after taking into account the 2% limit on miscellaneous itemized deductions. 2010 form 1040 ez His investment interest expense is $8,000. 2010 form 1040 ez Ted also has income from the partnership of $2,000. 2010 form 1040 ez Ted figures his net investment income and the limit on his investment interest expense deduction in the following way: Total investment income $10,000 Minus: Investment expenses (other than interest) 3,200 Net investment income $6,800 Deductible investment interest expense for the year $6,800 The $2,000 of income from the passive activity is not used in determining Ted's net investment income. 2010 form 1040 ez His investment interest deduction for the year is limited to $6,800, the amount of his net investment income. 2010 form 1040 ez Form 4952 Use Form 4952 to figure your deduction for investment interest. 2010 form 1040 ez See Form 4952 for more information. 2010 form 1040 ez Exception to use of Form 4952. 2010 form 1040 ez   You do not have to complete Form 4952 or attach it to your return if you meet all of the following tests. 2010 form 1040 ez Your investment interest expense is not more than your investment income from interest and ordinary dividends minus any qualified dividends. 2010 form 1040 ez You do not have any other deductible investment expenses. 2010 form 1040 ez You have no carryover of investment interest expense from 2012. 2010 form 1040 ez   If you meet all of these tests, you can deduct all of your investment interest. 2010 form 1040 ez    Bond Premium Amortization If you pay a premium to buy a bond, the premium is part of your basis in the bond. 2010 form 1040 ez If the bond yields taxable interest, you can choose to amortize the premium. 2010 form 1040 ez This generally means that each year, over the life of the bond, you use a part of the premium to reduce the amount of interest includible in your income. 2010 form 1040 ez If you make this choice, you must reduce your basis in the bond by the amortization for the year. 2010 form 1040 ez If the bond yields tax-exempt interest, you must amortize the premium. 2010 form 1040 ez This amortized amount is not deductible in determining taxable income. 2010 form 1040 ez However, each year you must reduce your basis in the bond (and tax-exempt interest otherwise reportable on Form 1040, line 8b) by the amortization for the year. 2010 form 1040 ez Bond premium. 2010 form 1040 ez   Bond premium is the amount by which your basis in the bond right after you get it is more than the total of all amounts payable on the bond after you get it (other than payments of qualified stated interest). 2010 form 1040 ez For example, a bond with a maturity value of $1,000 generally would have a $50 premium if you buy it for $1,050. 2010 form 1040 ez Special rules to determine amounts payable on a bond. 2010 form 1040 ez   For special rules that apply to determine the amounts payable on a variable rate bond, an inflation-indexed debt instrument, a bond that provides for certain alternative payment schedules (for example, a bond callable prior to the stated maturity date of the bond), or a bond that provides for remote or incidental contingencies, see Regulations section 1. 2010 form 1040 ez 171-3. 2010 form 1040 ez Basis. 2010 form 1040 ez   In general, your basis for figuring bond premium amortization is the same as your basis for figuring any loss on the sale of the bond. 2010 form 1040 ez However, you may need to use a different basis for: Convertible bonds, Bonds you got in a trade, and Bonds whose basis has to be determined using the basis of the person who transferred the bond to you. 2010 form 1040 ez See Regulations section 1. 2010 form 1040 ez 171-1(e). 2010 form 1040 ez Dealers. 2010 form 1040 ez   A dealer in taxable bonds (or anyone who holds them mainly for sale to customers in the ordinary course of a trade or business or who would properly include bonds in inventory at the close of the tax year) cannot claim a deduction for amortizable bond premium. 2010 form 1040 ez   See section 75 of the Internal Revenue Code for the treatment of bond premium by a dealer in tax-exempt bonds. 2010 form 1040 ez How To Figure Amortization For bonds issued after September 27, 1985, you must amortize bond premium using a constant yield method on the basis of the bond's yield to maturity, determined by using the bond's basis and compounding at the close of each accrual period. 2010 form 1040 ez Constant yield method. 2010 form 1040 ez   Figure the bond premium amortization for each accrual period as follows. 2010 form 1040 ez Step 1: Determine your yield. 2010 form 1040 ez   Your yield is the discount rate that, when used in figuring the present value of all remaining payments to be made on the bond (including payments of qualified stated interest), produces an amount equal to your basis in the bond. 2010 form 1040 ez Figure the yield as of the date you got the bond. 2010 form 1040 ez It must be constant over the term of the bond and must be figured to at least two decimal places when expressed as a percentage. 2010 form 1040 ez   If you do not know the yield, consult your broker or tax advisor. 2010 form 1040 ez Databases available to them are likely to show the yield at the date of purchase. 2010 form 1040 ez Step 2: Determine the accrual periods. 2010 form 1040 ez   You can choose the accrual periods to use. 2010 form 1040 ez They may be of any length and may vary in length over the term of the bond, but each accrual period can be no longer than 1 year and each scheduled payment of principal or interest must occur either on the first or the final day of an accrual period. 2010 form 1040 ez The computation is simplest if accrual periods are the same as the intervals between interest payment dates. 2010 form 1040 ez Step 3: Determine the bond premium for the accrual period. 2010 form 1040 ez   To do this, multiply your adjusted acquisition price at the beginning of the accrual period by your yield. 2010 form 1040 ez Then subtract the result from the qualified stated interest for the period. 2010 form 1040 ez   Your adjusted acquisition price at the beginning of the first accrual period is the same as your basis. 2010 form 1040 ez After that, it is your basis decreased by the amount of bond premium amortized for earlier periods and the amount of any payment previously made on the bond other than a payment of qualified stated interest. 2010 form 1040 ez Example. 2010 form 1040 ez On February 1, 2012, you bought a taxable bond for $110,000. 2010 form 1040 ez The bond has a stated principal amount of $100,000, payable at maturity on February 1, 2019, making your premium $10,000 ($110,000 − $100,000). 2010 form 1040 ez The bond pays qualified stated interest of $10,000 on February 1 of each year. 2010 form 1040 ez Your yield is 8. 2010 form 1040 ez 07439% compounded annually. 2010 form 1040 ez You choose to use annual accrual periods ending on February 1 of each year. 2010 form 1040 ez To find your bond premium amortization for the accrual period ending on February 1, 2013, you multiply the adjusted acquisition price at the beginning of the period ($110,000) by your yield. 2010 form 1040 ez When you subtract the result ($8,881. 2010 form 1040 ez 83) from the qualified stated interest for the period ($10,000), you find that your bond premium amortization for the period is $1,118. 2010 form 1040 ez 17. 2010 form 1040 ez Special rules to figure amortization. 2010 form 1040 ez   For special rules to figure the bond premium amortization on a variable rate bond, an inflation-indexed debt instrument, a bond that provides for certain alternative payment schedules (for example, a bond callable prior to the stated maturity date of the bond), or a bond that provides for remote or incidental contingencies, see Regulations section 1. 2010 form 1040 ez 171-3. 2010 form 1040 ez Bonds Issued Before September 28, 1985 For these bonds, you can amortize bond premium using any reasonable method. 2010 form 1040 ez Reasonable methods include: The straight-line method, and The Revenue Ruling 82-10 method. 2010 form 1040 ez Straight-line method. 2010 form 1040 ez   Under this method, the amount of your bond premium amortization is the same each month. 2010 form 1040 ez Divide the number of months you held the bond during the year by the number of months from the beginning of the tax year (or, if later, the date of acquisition) to the date of maturity or earlier call date. 2010 form 1040 ez Then multiply the result by the bond premium (reduced by any bond premium amortization claimed in earlier years). 2010 form 1040 ez This gives you your bond premium amortization for the year. 2010 form 1040 ez Revenue Ruling 82-10 method. 2010 form 1040 ez   Under this method, the amount of your bond premium amortization increases each month over the life of the bond. 2010 form 1040 ez This method is explained in Revenue Ruling 82-10, 1982-1 C. 2010 form 1040 ez B. 2010 form 1040 ez 46. 2010 form 1040 ez Choosing To Amortize You choose to amortize the premium on taxable bonds by reporting the amortization for the year on your income tax return for the first tax year you want the choice to apply. 2010 form 1040 ez You should attach a statement to your return that you are making this choice under section 171. 2010 form 1040 ez See How To Report Amortization, next. 2010 form 1040 ez This choice is binding for the year you make it and for later tax years. 2010 form 1040 ez It applies to all taxable bonds you own in the year you make the choice and also to those you acquire in later years. 2010 form 1040 ez You can change your decision to amortize bond premium only with the written approval of the IRS. 2010 form 1040 ez To request approval, use Form 3115. 2010 form 1040 ez For more information on requesting approval, see section 5 of the Appendix to Revenue Procedure 2011-14 in Internal Revenue Bulletin 2011-4. 2010 form 1040 ez You can find Revenue Procedure 2011-14 at www. 2010 form 1040 ez irs. 2010 form 1040 ez gov/irb/2011-04_IRB/ar08. 2010 form 1040 ez html. 2010 form 1040 ez How To Report Amortization Subtract the bond premium amortization from your interest income from these bonds. 2010 form 1040 ez Report the bond's interest on Schedule B (Form 1040A or 1040), line 1. 2010 form 1040 ez Under your last entry on line 1, put a subtotal of all interest listed on line 1. 2010 form 1040 ez Below this subtotal, print “ABP Adjustment,” and the total interest you received. 2010 form 1040 ez Subtract this amount from the subtotal, and enter the result on line 2. 2010 form 1040 ez Bond premium amortization more than interest. 2010 form 1040 ez   If the amount of your bond premium amortization for an accrual period is more than the qualified stated interest for the period, you can deduct the difference as a miscellaneous itemized deduction on Schedule A (Form 1040), line 28. 2010 form 1040 ez    But your deduction is limited to the amount by which your total interest inclusions on the bond in prior accrual periods is more than your total bond premium deductions on the bond in prior periods. 2010 form 1040 ez Any amount you cannot deduct because of this limit can be carried forward to the next accrual period. 2010 form 1040 ez Pre-1998 election to amortize bond premium. 2010 form 1040 ez   Generally, if you first elected to amortize bond premium before 1998, the above treatment of the premium does not apply to bonds you acquired before 1988. 2010 form 1040 ez Bonds acquired before October 23, 1986. 2010 form 1040 ez   The amortization of the premium on these bonds is a miscellaneous itemized deduction not subject to the 2%-of-adjusted-gross-income limit. 2010 form 1040 ez Bonds acquired after October 22, 1986, but before 1988. 2010 form 1040 ez    The amortization of the premium on these bonds is investment interest expense subject to the investment interest limit, unless you choose to treat it as an offset to interest income on the bond. 2010 form 1040 ez Expenses of Producing Income You deduct investment expenses (other than interest expenses) as miscellaneous itemized deductions on Schedule A (Form 1040). 2010 form 1040 ez To be deductible, these expenses must be ordinary and necessary expenses paid or incurred: To produce or collect income, or To manage property held for producing income. 2010 form 1040 ez The expenses must be directly related to the income or income-producing property, and the income must be taxable to you. 2010 form 1040 ez The deduction for most income-producing expenses is subject to a 2% limit that also applies to certain other miscellaneous itemized deductions. 2010 form 1040 ez The amount deductible is limited to the total of these miscellaneous deductions that is more than 2% of your adjusted gross income. 2010 form 1040 ez For information on how to report expenses of producing income, see How To Report Investment Expenses , later. 2010 form 1040 ez Attorney or accounting fees. 2010 form 1040 ez   You can deduct attorney or accounting fees that are necessary to produce or collect taxable income. 2010 form 1040 ez However, in some cases, attorney or accounting fees are part of the basis of property. 2010 form 1040 ez See Basis of Investment Property in chapter 4. 2010 form 1040 ez Automatic investment service and dividend reinvestment plans. 2010 form 1040 ez   A bank may offer its checking account customers an automatic investment service so that, for a charge, each customer can choose to invest a part of the checking account each month in common stock. 2010 form 1040 ez Or a bank that is a dividend disbursing agent for a number of publicly-owned corporations may set up an automatic dividend reinvestment service. 2010 form 1040 ez Through that service, cash dividends are reinvested in more shares of stock after the bank deducts a service charge. 2010 form 1040 ez   A corporation in which you own stock also may have a dividend reinvestment plan. 2010 form 1040 ez This plan lets you choose to use your dividends to buy more shares of stock in the corporation instead of receiving the dividends in cash. 2010 form 1040 ez   You can deduct the monthly service charge you pay to a bank to participate in an automatic investment service. 2010 form 1040 ez If you participate in a dividend reinvestment plan, you can deduct any service charge subtracted from your cash dividends before the dividends are used to buy more shares of stock. 2010 form 1040 ez Deduct the charges in the year you pay them. 2010 form 1040 ez Clerical help and office rent. 2010 form 1040 ez   You can deduct office expenses, such as rent and clerical help, you incurred in connection with your investments and collecting the taxable income on your investments. 2010 form 1040 ez Cost of replacing missing securities. 2010 form 1040 ez   To replace your taxable securities that are mislaid, lost, stolen, or destroyed, you may have to post an indemnity bond. 2010 form 1040 ez You can deduct the premium you pay to buy the indemnity bond and the related incidental expenses. 2010 form 1040 ez   You may, however, get a refund of part of the bond premium if the missing securities are recovered within a specified time. 2010 form 1040 ez Under certain types of insurance policies, you can recover some of the expenses. 2010 form 1040 ez   If you receive the refund in the tax year you pay the amounts, you can deduct only the difference between the expenses paid and the amount refunded. 2010 form 1040 ez If the refund is made in a later tax year, you must include the refund in income in the year you received it, but only to the extent that the expenses decreased your tax in the year you deducted them. 2010 form 1040 ez Fees to collect income. 2010 form 1040 ez   You can deduct fees you pay to a broker, bank, trustee, or similar agent to collect investment income, such as your taxable bond or mortgage interest, or your dividends on shares of stock. 2010 form 1040 ez Fees to buy or sell. 2010 form 1040 ez   You cannot deduct a fee you pay to a broker to acquire investment property, such as stocks or bonds. 2010 form 1040 ez You must add the fee to the cost of the property. 2010 form 1040 ez See Basis of Investment Property in chapter 4. 2010 form 1040 ez    You cannot deduct any broker's fees, commissions, or option premiums you pay (or that were netted out) in connection with the sale of investment property. 2010 form 1040 ez They can be used only to figure gain or loss from the sale. 2010 form 1040 ez See Reporting Capital Gains and Losses , in chapter 4, for more information about the treatment of these sale expenses. 2010 form 1040 ez Investment counsel and advice. 2010 form 1040 ez   You can deduct fees you pay for counsel and advice about investments that produce taxable income. 2010 form 1040 ez This includes amounts you pay for investment advisory services. 2010 form 1040 ez Safe deposit box rent. 2010 form 1040 ez   You can deduct rent you pay for a safe deposit box if you use the box to store taxable income-producing stocks, bonds, or other investment-related papers and documents. 2010 form 1040 ez If you also use the box to store tax-exempt securities or personal items, you can deduct only part of the rent. 2010 form 1040 ez See Tax-exempt income under Nondeductible Expenses, later, to figure what part you can deduct. 2010 form 1040 ez State and local transfer taxes. 2010 form 1040 ez   You cannot deduct the state and local transfer taxes you pay when you buy or sell securities. 2010 form 1040 ez If you pay these transfer taxes when you buy securities, you must treat them as part of the cost of the property. 2010 form 1040 ez If you pay these transfer taxes when you sell securities, you must treat them as a reduction in the amount realized. 2010 form 1040 ez Trustee's commissions for revocable trust. 2010 form 1040 ez   If you set up a revocable trust and have its income distributed to you, you can deduct the commission you pay the trustee for managing the trust to the extent it is to produce or collect taxable income or to manage property. 2010 form 1040 ez However, you cannot deduct any part of the commission used for producing or collecting tax-exempt income or for managing property that produces tax-exempt income. 2010 form 1040 ez   If you are a cash-basis taxpayer and pay the commissions for several years in advance, you must deduct a part of the commission each year. 2010 form 1040 ez You cannot deduct the entire amount in the year you pay it. 2010 form 1040 ez Investment expenses from pass-through entities. 2010 form 1040 ez   If you hold an interest in a partnership, S corporation, real estate mortgage investment conduit (REMIC), or a nonpublicly offered mutual fund, you can deduct your share of that entity's investment expenses. 2010 form 1040 ez A partnership or S corporation will show your share of these expenses on your Schedule K-1 (Form 1065) or Schedule K-1 (Form 1120S). 2010 form 1040 ez A nonpublicly offered mutual fund will indicate your share of these expenses in box 5 of Form 1099-DIV (or substitute statement). 2010 form 1040 ez Publicly-offered mutual funds are discussed later. 2010 form 1040 ez   If you hold an interest in a REMIC, any expenses relating to your residual interest investment will be shown on Schedule Q (Form 1066), line 3b. 2010 form 1040 ez Any expenses relating to your regular interest investment will appear in box 5 of Form 1099-INT (or substitute statement) or box 9 of Form 1099-OID (or substitute statement). 2010 form 1040 ez   Report your share of these investment expenses on Schedule A (Form 1040), subject to the 2% limit, in the same manner as your other investment expenses. 2010 form 1040 ez Including mutual fund or REMIC expenses in income. 2010 form 1040 ez   Your share of the investment expenses of a REMIC or a nonpublicly offered mutual fund, as described above, are considered to be indirect deductions through that pass-through entity. 2010 form 1040 ez You must include in your gross income an amount equal to the expenses allocated to you, whether or not you are able to claim a deduction for those expenses. 2010 form 1040 ez If you are a shareholder in a nonpublicly offered mutual fund, you must include on your return the full amount of ordinary dividends or other distributions of stock, as shown in box 1a of Form 1099-DIV (or substitute statement). 2010 form 1040 ez If you are a residual interest holder in a REMIC, you must report as ordinary income on Schedule E (Form 1040) the total amounts shown on Schedule Q (Form 1066), lines 1b and 3b. 2010 form 1040 ez If you are a REMIC regular interest holder, you must include the amount of any expense allocation you received on Form 1040, line 8a. 2010 form 1040 ez Publicly-offered mutual funds. 2010 form 1040 ez   Most mutual funds are publicly offered. 2010 form 1040 ez These mutual funds, generally, are traded on an established securities exchange. 2010 form 1040 ez These funds do not pass investment expenses through to you. 2010 form 1040 ez Instead, the dividend income they report to you in box 1a of Form 1099-DIV (or substitute statement) is already reduced by your share of investment expenses. 2010 form 1040 ez As a result, you cannot deduct the expenses on your return. 2010 form 1040 ez   Include the amount from box 1a of Form 1099-DIV (or substitute statement) in your income. 2010 form 1040 ez    A publicly offered mutual fund is one that: Is continuously offered pursuant to a public offering, Is regularly traded on an established securities market, and Is held by or for no fewer than 500 persons at any time during the year. 2010 form 1040 ez Contact your mutual fund if you are not sure whether it is publicly offered. 2010 form 1040 ez Nondeductible Expenses Some expenses that you incur as an investor are not deductible. 2010 form 1040 ez Stockholders' meetings. 2010 form 1040 ez   You cannot deduct transportation and other expenses you pay to attend stockholders' meetings of companies in which you have no interest other than owning stock. 2010 form 1040 ez This is true even if your purpose in attending is to get information that would be useful in making further investments. 2010 form 1040 ez Investment-related seminar. 2010 form 1040 ez   You cannot deduct expenses for attending a convention, seminar, or similar meeting for investment purposes. 2010 form 1040 ez Single-premium life insurance, endowment, and annuity contracts. 2010 form 1040 ez   You cannot deduct interest on money you borrow to buy or carry a single-premium life insurance, endowment, or annuity contract. 2010 form 1040 ez Used as collateral. 2010 form 1040 ez   If you use a single premium annuity contract as collateral to obtain or continue a mortgage loan, you cannot deduct any interest on the loan that is collateralized by the annuity contract. 2010 form 1040 ez Figure the amount of interest expense disallowed by multiplying the current interest rate on the mortgage loan by the lesser of the amount of the annuity contract used as collateral or the amount of the loan. 2010 form 1040 ez Borrowing on insurance. 2010 form 1040 ez   Generally, you cannot deduct interest on money you borrow to buy or carry a life insurance, endowment, or annuity contract if you plan to systematically borrow part or all of the increases in the cash value of the contract. 2010 form 1040 ez This rule applies to the interest on the total amount borrowed to buy or carry the contract, not just the interest on the borrowed increases in the cash value. 2010 form 1040 ez Tax-exempt income. 2010 form 1040 ez   You cannot deduct expenses you incur to produce tax-exempt income. 2010 form 1040 ez Nor can you deduct interest on money you borrow to buy tax-exempt securities or shares in a mutual fund or other regulated investment company that distributes only exempt-interest dividends. 2010 form 1040 ez Short-sale expenses. 2010 form 1040 ez   The rule disallowing a deduction for interest expenses on tax-exempt securities applies to amounts you pay in connection with personal property used in a short sale or amounts paid by others for the use of any collateral in connection with the short sale. 2010 form 1040 ez However, it does not apply to the expenses you incur if you deposit cash as collateral for the property used in the short sale and the cash does not earn a material return during the period of the sale. 2010 form 1040 ez Short sales are discussed in Short Sales in chapter 4. 2010 form 1040 ez Expenses for both tax-exempt and taxable income. 2010 form 1040 ez   You may have expenses that are for both tax-exempt and taxable income. 2010 form 1040 ez If you cannot specifically identify what part of the expenses is for each type of income, you can divide the expenses, using reasonable proportions based on facts and circumstances. 2010 form 1040 ez You must attach a statement to your return showing how you divided the expenses and stating that each deduction claimed is not based on tax-exempt income. 2010 form 1040 ez   One accepted method for dividing expenses is to do it in the same proportion that each type of income is to the total income. 2010 form 1040 ez If the expenses relate in part to capital gains and losses, include the gains, but not the losses, in figuring this proportion. 2010 form 1040 ez To find the part of the expenses that is for the tax-exempt income, divide your tax-exempt income by the total income and multiply your expenses by the result. 2010 form 1040 ez Example. 2010 form 1040 ez You received $6,000 interest; $4,800 was tax-exempt and $1,200 was taxable. 2010 form 1040 ez In earning this income, you had $500 of expenses. 2010 form 1040 ez You cannot specifically identify the amount of each expense item that is for each income item, so you must divide your expenses. 2010 form 1040 ez 80% ($4,800 tax-exempt interest divided by $6,000 total interest) of your expenses is for the tax-exempt income. 2010 form 1040 ez You cannot deduct $400 (80% of $500) of the expenses. 2010 form 1040 ez You can deduct $100 (the rest of the expenses) because they are for the taxable interest. 2010 form 1040 ez State income taxes. 2010 form 1040 ez   If you itemize your deductions, you can deduct, as taxes, state income taxes on interest income that is exempt from federal income tax. 2010 form 1040 ez But you cannot deduct, as either taxes or investment expenses, state income taxes on other exempt income. 2010 form 1040 ez Interest expense and carrying charges on straddles. 2010 form 1040 ez   You cannot deduct interest and carrying charges allocable to personal property that is part of a straddle. 2010 form 1040 ez The nondeductible interest and carrying charges are added to the basis of the straddle property. 2010 form 1040 ez However, this treatment does not apply if: All the offsetting positions making up the straddle either consist of one or more qualified covered call options and the optioned stock, or consist of section 1256 contracts (and the straddle is not part of a larger straddle); or The straddle is a hedging transaction. 2010 form 1040 ez  For information about straddles, including definitions of the terms used in this discussion, see Straddles in chapter 4. 2010 form 1040 ez   Interest includes any amount you pay or incur in connection with personal property used in a short sale. 2010 form 1040 ez However, you must first apply the rules discussed in Payments in lieu of dividends under Short Sales in chapter 4. 2010 form 1040 ez   To determine the interest on market discount bonds and short-term obligations that are part of a straddle, you must first apply the rules discussed under Limit on interest deduction for market discount bonds and Limit on interest deduction for short-term obligations (both under Interest Expenses, earlier). 2010 form 1040 ez Nondeductible amount. 2010 form 1040 ez   Figure the nondeductible interest and carrying charges on straddle property as follows. 2010 form 1040 ez Add: Interest on indebtedness incurred or continued to buy or carry the personal property, and All other amounts (including charges to insure, store, or transport the personal property) paid or incurred to carry the personal property. 2010 form 1040 ez Subtract from the amount in (1): Interest (including OID) includible in gross income for the year on the personal property, Any income from the personal property treated as ordinary income on the disposition of short-term government obligations or as ordinary income under the market discount and short-term bond provisions — see Discount on Debt Instruments in chapter 1, The dividends includible in gross income for the year from the personal property, and Any payment on a loan of the personal property for use in a short sale that is includible in gross income. 2010 form 1040 ez Basis adjustment. 2010 form 1040 ez   Add the nondeductible amount to the basis of your straddle property. 2010 form 1040 ez How To Report Investment Expenses To deduct your investment expenses, you must itemize deductions on Schedule A (Form 1040). 2010 form 1040 ez Enter your deductible investment interest expense on Schedule A (Form1040), line 14. 2010 form 1040 ez Include any deductible short sale expenses. 2010 form 1040 ez (See Short Sales in chapter 4 for information on these expenses. 2010 form 1040 ez ) Also attach a completed Form 4952 if you used that form to figure your investment interest expense. 2010 form 1040 ez Enter the total amount of your other investment expenses (other than interest expenses) on Schedule A (Form 1040), line 23. 2010 form 1040 ez List the type and amount of each expense on the dotted lines next to line 23. 2010 form 1040 ez (If necessary, you can show the required information on an attached statement. 2010 form 1040 ez ) For information on how to report amortizable bond premium, see Bond Premium Amortization , earlier in this chapter. 2010 form 1040 ez When To Report Investment Expenses If you use the cash method to report income and expenses, you generally deduct your expenses, except for certain prepaid interest, in the year you pay them. 2010 form 1040 ez If you use an accrual method, you generally deduct your expenses when you incur a liability for them, rather than when you pay them. 2010 form 1040 ez Also see When To Deduct Investment Interest , earlier in this chapter. 2010 form 1040 ez Unpaid expenses owed to related party. 2010 form 1040 ez   If you use an accrual method, you cannot deduct interest and other expenses owed to a related cash-basis person until payment is made and the amount is includible in the gross income of that person. 2010 form 1040 ez The relationship, for purposes of this rule, is determined as of the end of the tax year for which the interest or expense would otherwise be deductible. 2010 form 1040 ez If a deduction is denied under this rule, this rule will continue to apply even if your relationship with the person ceases to exist before the amount is includible in the gross income of that person. 2010 form 1040 ez   This rule generally applies to those relationships listed in chapter 4 under Related Party Transactions . 2010 form 1040 ez It also applies to accruals by partnerships to partners, partners to partnerships, shareholders to S corporations, and S corporations to shareholders. 2010 form 1040 ez   The postponement of deductions for unpaid expenses and interest under the related party rule does not apply to OID, regardless of when payment is made. 2010 form 1040 ez This rule also does not apply to loans with below-market interest rates or to certain payments for the use of property and services when the lender or recipient has to include payments periodically in income, even if a payment has not been made. 2010 form 1040 ez Prev  Up  Next   Home   More Online Publications