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Amendment 1040x

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Amendment 1040x

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The Amendment 1040x

Amendment 1040x 23. Amendment 1040x   Interest Expense Table of Contents Introduction Useful Items - You may want to see: Home Mortgage InterestAmount Deductible Points Mortgage Insurance Premiums Form 1098, Mortgage Interest Statement Investment InterestInvestment Property Allocation of Interest Expense Limit on Deduction Items You Cannot DeductPersonal Interest Allocation of Interest How To ReportMore than one borrower. Amendment 1040x Mortgage proceeds used for business or investment. Amendment 1040x Introduction This chapter discusses what interest expenses you can deduct. Amendment 1040x Interest is the amount you pay for the use of borrowed money. Amendment 1040x The following are types of interest you can deduct as itemized deductions on Schedule A (Form 1040). Amendment 1040x Home mortgage interest, including certain points and mortgage insurance premiums. Amendment 1040x Investment interest. Amendment 1040x This chapter explains these deductions. Amendment 1040x It also explains where to deduct other types of interest and lists some types of interest you cannot deduct. Amendment 1040x Use Table 23-1 to find out where to get more information on various types of interest, including investment interest. Amendment 1040x Useful Items - You may want to see: Publication 936 Home Mortgage Interest Deduction 550 Investment Income and Expenses Home Mortgage Interest Generally, home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). Amendment 1040x The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan. Amendment 1040x You can deduct home mortgage interest if all the following conditions are met. Amendment 1040x You file Form 1040 and itemize deductions on Schedule A (Form 1040). Amendment 1040x The mortgage is a secured debt on a qualified home in which you have an ownership interest. Amendment 1040x (Generally, your mortgage is a secured debt if you put your home up as collateral to protect the interest of the lender. Amendment 1040x The term “qualified home” means your main home or second home. Amendment 1040x For details, see Publication 936. Amendment 1040x )  Both you and the lender must intend that the loan be repaid. Amendment 1040x Amount Deductible In most cases, you can deduct all of your home mortgage interest. Amendment 1040x How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds. Amendment 1040x Fully deductible interest. Amendment 1040x   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. Amendment 1040x (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. Amendment 1040x )   The three categories are as follows: Mortgages you took out on or before October 13, 1987 (called grandfathered debt). Amendment 1040x 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). Amendment 1040x 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). Amendment 1040x The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home. Amendment 1040x   See Part II of Publication 936 for more detailed definitions of grandfathered, home acquisition, and home equity debt. Amendment 1040x    You can use Figure 23-A to check whether your home mortgage interest is fully deductible. Amendment 1040x Figure 23-A. Amendment 1040x Is My Home Mortgage Interest Fully Deductible? Please click here for the text description of the image. Amendment 1040x Figure 23-A. Amendment 1040x Is My Interest Fully Deductible? Limits on deduction. Amendment 1040x   You cannot fully deduct interest on a mortgage that does not fit into any of the three categories listed earlier. Amendment 1040x If this applies to you, see Part II of Publication 936 to figure the amount of interest you can deduct. Amendment 1040x Special Situations This section describes certain items that can be included as home mortgage interest and others that cannot. Amendment 1040x It also describes certain special situations that may affect your deduction. Amendment 1040x Late payment charge on mortgage payment. Amendment 1040x   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. Amendment 1040x Mortgage prepayment penalty. Amendment 1040x   If you pay off your home mortgage early, you may have to pay a penalty. Amendment 1040x 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. Amendment 1040x Sale of home. Amendment 1040x   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 sale. Amendment 1040x Example. Amendment 1040x John and Peggy Harris sold their home on May 7. Amendment 1040x Through April 30, they made home mortgage interest payments of $1,220. Amendment 1040x 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. Amendment 1040x Their mortgage interest deduction is $1,270 ($1,220 + $50). Amendment 1040x Prepaid interest. Amendment 1040x   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. Amendment 1040x You can deduct in each year only the interest that qualifies as home mortgage interest for that year. Amendment 1040x However, there is an exception that applies to points, discussed later. Amendment 1040x Mortgage interest credit. Amendment 1040x   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. Amendment 1040x Figure the credit on Form 8396, Mortgage Interest Credit. Amendment 1040x If you take this credit, you must reduce your mortgage interest deduction by the amount of the credit. Amendment 1040x   For more information on the credit, see chapter 37. Amendment 1040x Ministers' and military housing allowance. Amendment 1040x   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. Amendment 1040x Hardest Hit Fund and Emergency Homeowners' Loan Programs. Amendment 1040x   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. Amendment 1040x 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. Amendment 1040x 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. Amendment 1040x 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 (real property taxes). Amendment 1040x 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. Amendment 1040x Mortgage assistance payments under section 235 of the National Housing Act. Amendment 1040x   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. Amendment 1040x You cannot deduct the interest that is paid for you. Amendment 1040x No other effect on taxes. Amendment 1040x   Do not include these mortgage assistance payments in your income. Amendment 1040x Also, do not use these payments to reduce other deductions, such as real estate taxes. Amendment 1040x Divorced or separated individuals. Amendment 1040x   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. Amendment 1040x See the discussion of Payments for jointly-owned home in chapter 18. Amendment 1040x Redeemable ground rents. Amendment 1040x   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct them as mortgage interest. Amendment 1040x   Payments made to end the lease and to buy the lessor's entire interest in the land are not deductible as mortgage interest. Amendment 1040x For more information, see Publication 936. Amendment 1040x Nonredeemable ground rents. Amendment 1040x   Payments on a nonredeemable ground rent are not mortgage interest. Amendment 1040x You can deduct them as rent if they are a business expense or if they are for rental property. Amendment 1040x Reverse mortgages. Amendment 1040x   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. Amendment 1040x With a reverse mortgage, you retain title to your home. Amendment 1040x 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. Amendment 1040x Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable. Amendment 1040x Any interest (including original issue discount) accrued on a reverse mortgage is not deductible until the loan is paid in full. Amendment 1040x Your deduction may be limited because a reverse mortgage loan generally is subject to the limit on Home Equity Debt discussed in Publication 936. Amendment 1040x Rental payments. Amendment 1040x   If you live in a house before final settlement on the purchase, any payments you make for that period are rent and not interest. Amendment 1040x This is true even if the settlement papers call them interest. Amendment 1040x You cannot deduct these payments as home mortgage interest. Amendment 1040x Mortgage proceeds invested in tax-exempt securities. Amendment 1040x   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. Amendment 1040x “Grandfathered debt” and “home equity debt” are defined earlier under Amount Deductible. Amendment 1040x Refunds of interest. Amendment 1040x   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. Amendment 1040x 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. Amendment 1040x However, you need to include it only up to the amount of the deduction that reduced your tax in the earlier year. Amendment 1040x This is true whether the interest overcharge was refunded to you or was used to reduce the outstanding principal on your mortgage. Amendment 1040x    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. Amendment 1040x For information about Form 1098, see Form 1098, Mortgage Interest Statement , later. Amendment 1040x   For more information on how to treat refunds of interest deducted in earlier years, see Recoveries in chapter 12. Amendment 1040x Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Amendment 1040x Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. Amendment 1040x A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. Amendment 1040x See Points paid by the seller , later. Amendment 1040x General Rule You generally cannot deduct the full amount of points in the year paid. Amendment 1040x Because they are prepaid interest, you generally deduct them ratably over the life (term) of the mortgage. Amendment 1040x See Deduction Allowed Ratably , next. Amendment 1040x For exceptions to the general rule, see Deduction Allowed in Year Paid , later. Amendment 1040x 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. Amendment 1040x You use the cash method of accounting. Amendment 1040x This means you report income in the year you receive it and deduct expenses in the year you pay them. Amendment 1040x Most individuals use this method. Amendment 1040x Your loan is secured by a home. Amendment 1040x (The home does not need to be your main home. Amendment 1040x ) Your loan period is not more than 30 years. Amendment 1040x 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. Amendment 1040x 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. Amendment 1040x Deduction Allowed in Year Paid You can fully deduct points in the year paid if you meet all the following tests. Amendment 1040x (You can use Figure 23-B as a quick guide to see whether your points are fully deductible in the year paid. Amendment 1040x ) Your loan is secured by your main home. Amendment 1040x (Your main home is the one you ordinarily live in most of the time. Amendment 1040x ) Paying points is an established business practice in the area where the loan was made. Amendment 1040x The points paid were not more than the points generally charged in that area. Amendment 1040x You use the cash method of accounting. Amendment 1040x This means you report income in the year you receive it and deduct expenses in the year you pay them. Amendment 1040x (If you want more information about this method, see Accounting Methods in chapter 1. Amendment 1040x ) 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. Amendment 1040x The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. Amendment 1040x The funds you provided are not required to have been applied to the points. Amendment 1040x They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. Amendment 1040x You cannot have borrowed these funds from your lender or mortgage broker. Amendment 1040x You use your loan to buy or build your main home. Amendment 1040x The points were computed as a percentage of the principal amount of the mortgage. Amendment 1040x The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. Amendment 1040x The points may be shown as paid from either your funds or the seller's. Amendment 1040x Figure 23-B. Amendment 1040x Are My Points Fully Deductible This Year? Please click here for the text description of the image. Amendment 1040x Figure 23-B. Amendment 1040x Are My Points Fully Deductible This Year? Note. Amendment 1040x 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. Amendment 1040x Home improvement loan. Amendment 1040x   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. Amendment 1040x Second home. Amendment 1040x You cannot fully deduct in the year paid points you pay on loans secured by your second home. Amendment 1040x You can deduct these points only over the life of the loan. Amendment 1040x Refinancing. Amendment 1040x   Generally, points you pay to refinance a mortgage are not deductible in full in the year you pay them. Amendment 1040x This is true even if the new mortgage is secured by your main home. Amendment 1040x   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 , earlier, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. Amendment 1040x You can deduct the rest of the points over the life of the loan. Amendment 1040x Example 1. Amendment 1040x In 1998, Bill Fields got a mortgage to buy a home. Amendment 1040x In 2013, Bill refinanced that mortgage with a 15-year $100,000 mortgage loan. Amendment 1040x The mortgage is secured by his home. Amendment 1040x To get the new loan, he had to pay three points ($3,000). Amendment 1040x 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. Amendment 1040x Bill paid the points out of his private funds, rather than out of the proceeds of the new loan. Amendment 1040x The payment of points is an established practice in the area, and the points charged are not more than the amount generally charged there. Amendment 1040x Bill's first payment on the new loan was due July 1. Amendment 1040x He made six payments on the loan in 2013 and is a cash basis taxpayer. Amendment 1040x Bill used the funds from the new mortgage to repay his existing mortgage. Amendment 1040x 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. Amendment 1040x He cannot deduct all of the points in 2013. Amendment 1040x He can deduct two points ($2,000) ratably over the life of the loan. Amendment 1040x He deducts $67 [($2,000 ÷ 180 months) × 6 payments] of the points in 2013. Amendment 1040x The other point ($1,000) was a fee for services and is not deductible. Amendment 1040x Example 2. Amendment 1040x 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. Amendment 1040x Bill deducts 25% ($25,000 ÷ $100,000) of the points ($2,000) in 2013. Amendment 1040x His deduction is $500 ($2,000 × 25%). Amendment 1040x Bill also deducts the ratable part of the remaining $1,500 ($2,000 − $500) that must be spread over the life of the loan. Amendment 1040x This is $50 [($1,500 ÷ 180 months) × 6 payments] in 2013. Amendment 1040x The total amount Bill deducts in 2013 is $550 ($500 + $50). Amendment 1040x Special Situations This section describes certain special situations that may affect your deduction of points. Amendment 1040x Original issue discount. Amendment 1040x   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. Amendment 1040x This reduction results in original issue discount, which is discussed in chapter 4 of Publication 535. Amendment 1040x Amounts charged for services. Amendment 1040x   Amounts charged by the lender for specific services connected to the loan are not interest. Amendment 1040x Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. Amendment 1040x You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. Amendment 1040x Points paid by the seller. Amendment 1040x   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. Amendment 1040x Treatment by seller. Amendment 1040x   The seller cannot deduct these fees as interest. Amendment 1040x But they are a selling expense that reduces the amount realized by the seller. Amendment 1040x See chapter 15 for information on selling your home. Amendment 1040x Treatment by buyer. Amendment 1040x    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. Amendment 1040x If all the tests under Deduction Allowed in Year Paid , earlier, are met, the buyer can deduct the points in the year paid. Amendment 1040x If any of those tests are not met, the buyer deducts the points over the life of the loan. Amendment 1040x   For information about basis, see chapter 13. Amendment 1040x Funds provided are less than points. Amendment 1040x   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. Amendment 1040x In addition, you can deduct any points paid by the seller. Amendment 1040x Example 1. Amendment 1040x When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). Amendment 1040x You meet all the tests for deducting points in the year paid, except the only funds you provided were a $750 down payment. Amendment 1040x Of the $1,000 charged for points, you can deduct $750 in the year paid. Amendment 1040x You spread the remaining $250 over the life of the mortgage. Amendment 1040x Example 2. Amendment 1040x 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. Amendment 1040x In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). Amendment 1040x You spread the remaining $250 over the life of the mortgage. Amendment 1040x You must reduce the basis of your home by the $1,000 paid by the seller. Amendment 1040x Excess points. Amendment 1040x   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. Amendment 1040x You must spread any additional points over the life of the mortgage. Amendment 1040x Mortgage ending early. Amendment 1040x   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. Amendment 1040x However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. Amendment 1040x Instead, deduct the remaining balance over the term of the new loan. Amendment 1040x    A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. Amendment 1040x Example. Amendment 1040x Dan paid $3,000 in points in 2002 that he had to spread out over the 15-year life of the mortgage. Amendment 1040x He deducts $200 points per year. Amendment 1040x Through 2012, Dan has deducted $2,200 of the points. Amendment 1040x Dan prepaid his mortgage in full in 2013. Amendment 1040x He can deduct the remaining $800 of points in 2013. Amendment 1040x Limits on deduction. Amendment 1040x   You cannot fully deduct points paid on a mortgage unless the mortgage fits into one of the categories listed earlier under Fully deductible interest . Amendment 1040x See Publication 936 for details. Amendment 1040x Mortgage Insurance Premiums You can treat amounts you paid during 2013 for qualified mortgage insurance as home mortgage interest. Amendment 1040x The insurance must be in connection with home acquisition debt and the insurance contract must have been issued after 2006. Amendment 1040x Qualified mortgage insurance. Amendment 1040x   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). Amendment 1040x   Mortgage insurance provided by the Department of Veterans Affairs is commonly known as a funding fee. Amendment 1040x If provided by the Rural Housing Service, it is commonly known as a guarantee fee. Amendment 1040x These fees can be deducted fully in 2013 if the mortgage insurance contract was issued in 2013. Amendment 1040x Contact the mortgage insurance issuer to determine the deductible amount if it is not reported in box 4 of Form 1098. Amendment 1040x Special rules for prepaid mortgage insurance. Amendment 1040x   Generally, if you paid premiums for qualified mortgage insurance that are allocable to periods after the close of the tax year, such premiums are treated as paid in the period to which they are allocated. Amendment 1040x 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. Amendment 1040x No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term. Amendment 1040x This paragraph does not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service. Amendment 1040x See the Example below. Amendment 1040x Example. Amendment 1040x Ryan purchased a home in May of 2012 and financed the home with a 15-year mortgage. Amendment 1040x Ryan also prepaid all of the $9,240 in private mortgage insurance required at the time of closing in May. Amendment 1040x 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. Amendment 1040x Ryan's adjusted gross income (AGI) for 2012 is $76,000. Amendment 1040x Ryan can deduct $880 ($9,240 ÷ 84 × 8 months) for qualified mortgage insurance premiums in 2012. Amendment 1040x For 2013, Ryan can deduct $1,320 ($9,240 ÷ 84 × 12 months) if his AGI is $100,000 or less. Amendment 1040x 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). Amendment 1040x Limit on deduction. Amendment 1040x   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. Amendment 1040x 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. Amendment 1040x If your adjusted gross income is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. Amendment 1040x 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. Amendment 1040x You will receive the statement if you pay interest to a person (including a financial institution or a cooperative housing corporation) in the course of that person's trade or business. Amendment 1040x A governmental unit is a person for purposes of furnishing the statement. Amendment 1040x The statement for each year should be sent to you by January 31 of the following year. Amendment 1040x A copy of this form will also be sent to the IRS. Amendment 1040x 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. Amendment 1040x However, it should not show any interest that was paid for you by a government agency. Amendment 1040x As a general rule, Form 1098 will include only points that you can fully deduct in the year paid. Amendment 1040x However, certain points not included on Form 1098 also may be deductible, either in the year paid or over the life of the loan. Amendment 1040x See Points , earlier, to determine whether you can deduct points not shown on Form 1098. Amendment 1040x Prepaid interest on Form 1098. Amendment 1040x   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. Amendment 1040x However, you cannot deduct the prepaid amount for January 2014 in 2013. Amendment 1040x (See Prepaid interest , earlier. Amendment 1040x ) You will have to figure the interest that accrued for 2014 and subtract it from the amount in box 1. Amendment 1040x You will include the interest for January 2014 with the other interest you pay for 2014. Amendment 1040x See How To Report , later. Amendment 1040x Refunded interest. Amendment 1040x   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. Amendment 1040x See Refunds of interest , earlier. Amendment 1040x Mortgage insurance premiums. Amendment 1040x   The amount of mortgage insurance premiums you paid during 2013 may be shown in box 4 of Form 1098. Amendment 1040x See Mortgage Insurance Premiums, earlier. Amendment 1040x Investment Interest This section discusses interest expenses you may be able to deduct as an investor. Amendment 1040x If you borrow money to buy property you hold for investment, the interest you pay is investment interest. Amendment 1040x You can deduct investment interest subject to the limit discussed later. Amendment 1040x However, you cannot deduct interest you incurred to produce tax-exempt income. Amendment 1040x Nor can you deduct interest expenses on straddles. Amendment 1040x 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. Amendment 1040x Investment Property Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. Amendment 1040x 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). Amendment 1040x Investment property also includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity). Amendment 1040x Partners, shareholders, and beneficiaries. Amendment 1040x   To determine your investment interest, combine your share of investment interest from a partnership, S corporation, estate, or trust with your other investment interest. Amendment 1040x 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. Amendment 1040x Only the interest expense on the part of the debt used for investment purposes is treated as investment interest. Amendment 1040x The allocation is not affected by the use of property that secures the debt. Amendment 1040x Limit on Deduction Generally, your deduction for investment interest expense is limited to the amount of your net investment income. Amendment 1040x You can carry over the amount of investment interest that you could not deduct because of this limit to the next tax year. Amendment 1040x The interest carried over is treated as investment interest paid or accrued in that next year. Amendment 1040x 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. Amendment 1040x Net Investment Income Determine the amount of your net investment income by subtracting your investment expenses (other than interest expense) from your investment income. Amendment 1040x Investment income. Amendment 1040x    This generally includes your gross income from property held for investment (such as interest, dividends, annuities, and royalties). Amendment 1040x Investment income does not include Alaska Permanent Fund dividends. Amendment 1040x It also does not include qualified dividends or net capital gain unless you choose to include them. Amendment 1040x Choosing to include qualified dividends. Amendment 1040x   Investment income generally does not include qualified dividends, discussed in chapter 8. Amendment 1040x However, you can choose to include all or part of your qualified dividends in investment income. Amendment 1040x   You make this choice by completing Form 4952, line 4g, according to its instructions. Amendment 1040x   If you choose to include any amount 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. Amendment 1040x Choosing to include net capital gain. Amendment 1040x   Investment income generally does not include net capital gain from disposing of investment property (including capital gain distributions from mutual funds). Amendment 1040x However, you can choose to include all or part of your net capital gain in investment income. Amendment 1040x    You make this choice by completing Form 4952, line 4g, according to its instructions. Amendment 1040x   If you choose to include any amount 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. Amendment 1040x    Before making either choice, consider the overall effect on your tax liability. Amendment 1040x Compare your tax if you make one or both of these choices with your tax if you do not. Amendment 1040x Investment income of child reported on parent's return. Amendment 1040x    Investment income includes the part of your child's interest and dividend income that you choose to report on your return. Amendment 1040x 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, Parents' Election To Report Child's Interest and Dividends. Amendment 1040x Child's qualified dividends. Amendment 1040x   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. Amendment 1040x However, you can choose to include all or part of it in investment income, as explained under Choosing to include qualified dividends , earlier. Amendment 1040x   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). Amendment 1040x Child's Alaska Permanent Fund dividends. Amendment 1040x   If part of the amount you report is your child's Alaska Permanent Fund dividends, that part does not count as investment income. Amendment 1040x 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. Amendment 1040x 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. Amendment 1040x Subtract the result from the amount on Form 8814, line 12. Amendment 1040x Child's capital gain distributions. Amendment 1040x    If part of the amount you report is your child's capital gain distributions, that part (which is reported on Schedule D, line 13, or Form 1040, line 13) generally does not count as investment income. Amendment 1040x However, you can choose to include all or part of it in investment income, as explained in Choosing to include net capital gain , earlier. Amendment 1040x   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). Amendment 1040x Investment expenses. Amendment 1040x   Investment expenses are your allowed deductions (other than interest expense) directly connected with the production of investment income. Amendment 1040x 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. Amendment 1040x Use the smaller of: The investment expenses included on Schedule A (Form 1040), line 23, or The amount on Schedule A, line 27. Amendment 1040x Losses from passive activities. Amendment 1040x   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). Amendment 1040x See Publication 925, Passive Activity and At-Risk Rules, for information about passive activities. Amendment 1040x Form 4952 Use Form 4952, Investment Interest Expense Deduction, to figure your deduction for investment interest. Amendment 1040x Exception to use of Form 4952. Amendment 1040x   You do not have to complete Form 4952 or attach it to your return if you meet all of the following tests. Amendment 1040x Your investment interest expense is not more than your investment income from interest and ordinary dividends minus any qualified dividends. Amendment 1040x You do not have any other deductible investment expenses. Amendment 1040x You have no carryover of investment interest expense from 2012. Amendment 1040x If you meet all of these tests, you can deduct all of your investment interest. Amendment 1040x More Information For more information on investment interest, see Interest Expenses in chapter 3 of Publication 550. Amendment 1040x Items You Cannot Deduct Some interest payments are not deductible. Amendment 1040x Certain expenses similar to interest also are not deductible. Amendment 1040x Nondeductible expenses include the following items. Amendment 1040x Personal interest (discussed later). Amendment 1040x Service charges (however, see Other Expenses (Line 23) in chapter 28). Amendment 1040x Annual fees for credit cards. Amendment 1040x Loan fees. Amendment 1040x Credit investigation fees. Amendment 1040x Interest to purchase or carry tax-exempt securities. Amendment 1040x Penalties. Amendment 1040x   You cannot deduct fines and penalties paid to a government for violations of law, regardless of their nature. Amendment 1040x Personal Interest Personal interest is not deductible. Amendment 1040x Personal interest is any interest that is not home mortgage interest, investment interest, business interest, or other deductible interest. Amendment 1040x It includes the following items. Amendment 1040x Interest on car loans (unless you use the car for business). Amendment 1040x Interest on federal, state, or local income tax. Amendment 1040x Finance charges on credit cards, retail installment contracts, and revolving charge accounts incurred for personal expenses. Amendment 1040x Late payment charges by a public utility. Amendment 1040x You may be able to deduct interest you pay on a qualified student loan. Amendment 1040x For details, see Publication 970, Tax Benefits for Education. Amendment 1040x Allocation of Interest If you use the proceeds of a loan for more than one purpose (for example, personal and business), you must allocate the interest on the loan to each use. Amendment 1040x However, you do not have to allocate home mortgage interest if it is fully deductible, regardless of how the funds are used. Amendment 1040x You allocate interest (other than fully deductible home mortgage interest) on a loan in the same way as the loan itself is allocated. Amendment 1040x You do this by tracing disbursements of the debt proceeds to specific uses. Amendment 1040x For details on how to do this, see chapter 4 of Publication 535. Amendment 1040x How To Report You must file Form 1040 to deduct any home mortgage interest expense on your tax return. Amendment 1040x Where you deduct your interest expense generally depends on how you use the loan proceeds. Amendment 1040x See Table 23-1 for a summary of where to deduct your interest expense. Amendment 1040x Home mortgage interest and points. Amendment 1040x   Deduct the home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 10. Amendment 1040x 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. Amendment 1040x Attach a statement explaining the difference and print “See attached” next to line 10. Amendment 1040x    Deduct home mortgage interest that was not reported to you on Form 1098 on Schedule A (Form 1040), line 11. Amendment 1040x 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. Amendment 1040x The seller must give you this number and you must give the seller your TIN. Amendment 1040x A Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. Amendment 1040x Failure to meet any of these requirements may result in a $50 penalty for each failure. Amendment 1040x 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. Amendment 1040x See Social Security Number (SSN) in chapter 1 for more information about TINs. Amendment 1040x    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. Amendment 1040x   Deduct mortgage insurance premiums on Schedule A (Form 1040), line 13. Amendment 1040x More than one borrower. Amendment 1040x   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. Amendment 1040x Show how much of the interest each of you paid, and give the name and address of the person who received the form. Amendment 1040x Deduct your share of the interest on Schedule A (Form 1040), line 11, and print “See attached” next to the line. Amendment 1040x Also, deduct your share of any qualified mortgage insurance premiums on Schedule A (Form 1040), line 13. Amendment 1040x   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. Amendment 1040x You should let each of the other borrowers know what his or her share is. Amendment 1040x Mortgage proceeds used for business or investment. Amendment 1040x    If your home mortgage interest deduction is limited, but all or part of the mortgage proceeds were used for business, investment, or other deductible activities, see Table 23-1. Amendment 1040x It shows where to deduct the part of your excess interest that is for those activities. Amendment 1040x Investment interest. Amendment 1040x    Deduct investment interest, subject to certain limits discussed in Publication 550, on Schedule A (Form 1040), line 14. Amendment 1040x Amortization of bond premium. Amendment 1040x   There are various ways to treat the premium you pay to buy taxable bonds. Amendment 1040x See Bond Premium Amortization in Publication 550. Amendment 1040x Income-producing rental or royalty interest. Amendment 1040x   Deduct interest on a loan for income-producing rental or royalty property that is not used in your business in Part I of Schedule E (Form 1040). Amendment 1040x Example. Amendment 1040x You rent out part of your home and borrow money to make repairs. Amendment 1040x You can deduct only the interest payment for the rented part in Part I of Schedule E (Form 1040). Amendment 1040x Deduct the rest of the interest payment on Schedule A (Form 1040) if it is deductible home mortgage interest. Amendment 1040x Table 23-1. Amendment 1040x Where To Deduct Your Interest Expense IF you have . Amendment 1040x . Amendment 1040x . Amendment 1040x THEN deduct it on . Amendment 1040x . Amendment 1040x . Amendment 1040x AND for more information go to . Amendment 1040x . Amendment 1040x . Amendment 1040x deductible student loan interest Form 1040, line 33, or Form 1040A, line 18 Publication 970. Amendment 1040x deductible home mortgage interest and points reported on Form 1098 Schedule A (Form 1040), line 10 Publication 936. Amendment 1040x deductible home mortgage interest not reported on Form 1098 Schedule A (Form 1040), line 11 Publication 936. Amendment 1040x deductible points not reported on Form 1098 Schedule A (Form 1040), line 12 Publication 936. Amendment 1040x deductible mortgage insurance premiums Schedule A (Form 1040), line 13 Publication 936. Amendment 1040x deductible investment interest (other than incurred to produce rents or royalties) Schedule A (Form 1040), line 14 Publication 550. Amendment 1040x deductible business interest (non-farm) Schedule C or C-EZ (Form 1040) Publication 535. Amendment 1040x deductible farm business interest Schedule F (Form 1040) Publications 225 and 535. Amendment 1040x deductible interest incurred to produce rents or royalties Schedule E (Form 1040) Publications 527 and 535. Amendment 1040x personal interest not deductible. Amendment 1040x Prev  Up  Next   Home   More Online Publications