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Back tax debt 25. Back tax debt   Nonbusiness Casualty and Theft Losses Table of Contents What's New Introduction Useful Items - You may want to see: CasualtyFamily pet. Back tax debt Progressive deterioration. Back tax debt Damage from corrosive drywall. Back tax debt Theft Loss on Deposits Proof of Loss Figuring a LossDecrease in Fair Market Value Adjusted Basis Insurance and Other Reimbursements Single Casualty on Multiple Properties Deduction Limits$100 Rule 10% Rule When To Report Gains and LossesDisaster Area Loss How To Report Gains and Losses What's New New Section C of Form 4684 for Ponzi-type investment schemes. Back tax debt  Section C of Form 4684 is new for 2013. Back tax debt You must complete Section C if you are claiming a theft loss deduction due to a Ponzi-type investment scheme and are using Revenue Procedure 2009-20, as modified by Revenue Procedure 2011-58. Back tax debt Section C of Form 4684 replaces Appendix A in Revenue Procedure 2009-20. Back tax debt You do not need to complete Appendix A. Back tax debt For details, see Losses from Ponzi-type investment schemes , in this chapter. Back tax debt Introduction This chapter explains the tax treatment of personal (not business or investment related) casualty losses, theft losses, and losses on deposits. Back tax debt The chapter also explains the following  topics. Back tax debt How to figure the amount of your loss. Back tax debt How to treat insurance and other reimbursements you receive. Back tax debt The deduction limits. Back tax debt When and how to report a casualty or theft. Back tax debt Forms to file. Back tax debt    When you have a casualty or theft, you have to file Form 4684. Back tax debt You will also have to file one or more of the following forms. Back tax debt Schedule A (Form 1040), Itemized Deductions Schedule D (Form 1040), Capital Gains and Losses Condemnations. Back tax debt   For information on condemnations of property, see Involuntary Conversions in chapter 1 of Publication 544, Sales and Other Disposition of Assets. Back tax debt Workbook for casualties and thefts. Back tax debt    Publication 584 is available to help you make a list of your stolen or damaged personal-use property and figure your loss. Back tax debt It includes schedules to help you figure the loss on your home, its contents, and your motor vehicles. Back tax debt Business or investment-related losses. Back tax debt   For information on a casualty or theft loss of business or income-producing property, see Publication 547, Casualties, Disasters, and Thefts. Back tax debt Useful Items - You may want to see: Publication 544 Sales and Other Dispositions  of Assets 547 Casualties, Disasters, and   Thefts 584 Casualty, Disaster, and Theft   Loss Workbook (Personal-Use  Property) Form (and Instructions) Schedule A (Form 1040) Itemized Deductions Schedule D (Form 1040) Capital Gains and Losses 4684 Casualties and Thefts Casualty A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. Back tax debt A sudden event is one that is swift, not gradual or progressive. Back tax debt An unexpected event is one that is ordinarily unanticipated and unintended. Back tax debt An unusual event is one that is not a day-to-day occurrence and that is not typical of the activity in which you were engaged. Back tax debt Deductible losses. Back tax debt   Deductible casualty losses can result from a number of different causes, including the following. Back tax debt Car accidents (but see Nondeductible losses , next, for exceptions). Back tax debt Earthquakes. Back tax debt Fires (but see Nondeductible losses , next, for exceptions). Back tax debt Floods. Back tax debt Government-ordered demolition or relocation of a home that is unsafe to use because of a disaster as discussed under Disaster Area Losses in Publication 547. Back tax debt Mine cave-ins. Back tax debt Shipwrecks. Back tax debt Sonic booms. Back tax debt Storms, including hurricanes and tornadoes. Back tax debt Terrorist attacks. Back tax debt Vandalism. Back tax debt Volcanic eruptions. Back tax debt Nondeductible losses. Back tax debt   A casualty loss is not deductible if the damage or destruction is caused by the following. Back tax debt Accidentally breaking articles such as glassware or china under normal conditions. Back tax debt A family pet (explained below). Back tax debt A fire if you willfully set it or pay someone else to set it. Back tax debt A car accident if your willful negligence or willful act caused it. Back tax debt The same is true if the willful act or willful negligence of someone acting for you caused the accident. Back tax debt Progressive deterioration (explained later). Back tax debt Family pet. Back tax debt   Loss of property due to damage by a family pet is not deductible as a casualty loss unless the requirements discussed earlier under Casualty are met. Back tax debt Example. Back tax debt Your antique oriental rug was damaged by your new puppy before it was housebroken. Back tax debt Because the damage was not unexpected and unusual, the loss is not deductible as a casualty loss. Back tax debt Progressive deterioration. Back tax debt    Loss of property due to progressive deterioration is not deductible as a casualty loss. Back tax debt This is because the damage results from a steadily operating cause or a normal process, rather than from a sudden event. Back tax debt The following are examples of damage due to progressive deterioration. Back tax debt The steady weakening of a building due to normal wind and weather conditions. Back tax debt The deterioration and damage to a water heater that bursts. Back tax debt However, the rust and water damage to rugs and drapes caused by the bursting of a water heater does qualify as a casualty. Back tax debt Most losses of property caused by droughts. Back tax debt To be deductible, a drought-related loss generally must be incurred in a trade or business or in a transaction entered into for profit. Back tax debt Termite or moth damage. Back tax debt The damage or destruction of trees, shrubs, or other plants by a fungus, disease, insects, worms, or similar pests. Back tax debt However, a sudden destruction due to an unexpected or unusual infestation of beetles or other insects may result in a casualty loss. Back tax debt Damage from corrosive drywall. Back tax debt   Under a special procedure, you may be able to claim a casualty loss deduction for amounts you paid to repair damage to your home and household appliances that resulted from corrosive drywall. Back tax debt For details, see Publication 547. Back tax debt Theft A theft is the taking and removing of money or property with the intent to deprive the owner of it. Back tax debt The taking of property must be illegal under the laws of the state where it occurred and it must have been done with criminal intent. Back tax debt You do not need to show a conviction for theft. Back tax debt Theft includes the taking of money or property by the following means. Back tax debt Blackmail. Back tax debt Burglary. Back tax debt Embezzlement. Back tax debt Extortion. Back tax debt Kidnapping for ransom. Back tax debt Larceny. Back tax debt Robbery. Back tax debt The taking of money or property through fraud or misrepresentation is theft if it is illegal under state or local law. Back tax debt Decline in market value of stock. Back tax debt   You cannot deduct as a theft loss the decline in market value of stock acquired on the open market for investment if the decline is caused by disclosure of accounting fraud or other illegal misconduct by the officers or directors of the corporation that issued the stock. Back tax debt However, you can deduct as a capital loss the loss you sustain when you sell or exchange the stock or the stock becomes completely worthless. Back tax debt You report a capital loss on Schedule D (Form 1040). Back tax debt For more information about stock sales, worthless stock, and capital losses, see chapter 4 of Publication 550. Back tax debt Mislaid or lost property. Back tax debt   The simple disappearance of money or property is not a theft. Back tax debt However, an accidental loss or disappearance of property can qualify as a casualty if it results from an identifiable event that is sudden, unexpected, or unusual. Back tax debt Sudden, unexpected, and unusual events are defined earlier. Back tax debt Example. Back tax debt A car door is accidentally slammed on your hand, breaking the setting of your diamond ring. Back tax debt The diamond falls from the ring and is never found. Back tax debt The loss of the diamond is a casualty. Back tax debt Losses from Ponzi-type investment schemes. Back tax debt   If you had a loss from a Ponzi-type investment scheme, see: Revenue Ruling 2009-9, 2009-14 I. Back tax debt R. Back tax debt B. Back tax debt 735 (available at www. Back tax debt irs. Back tax debt gov/irb/2009-14_IRB/ar07. Back tax debt html). Back tax debt Revenue Procedure 2009-20, 2009-14 I. Back tax debt R. Back tax debt B. Back tax debt 749 (available at www. Back tax debt irs. Back tax debt gov/irb/2009-14_IRB/ar11. Back tax debt html). Back tax debt Revenue Procedure 2011-58, 2011-50 I. Back tax debt R. Back tax debt B. Back tax debt 849 (available at www. Back tax debt irs. Back tax debt gov/irb/2011-50_IRB/ar11. Back tax debt html). Back tax debt If you qualify to use Revenue Procedure 2009-20, as modified by Revenue Procedure 2011-58, and you choose to follow the procedures in the guidance, first fill out Section C of Form 4684 to determine the amount to enter on Section B, line 28. Back tax debt Skip lines 19 to 27. Back tax debt Section C of Form 4684 replaces Appendix A in Revenue Procedure 2009-20. Back tax debt You do not need to complete Appendix A. Back tax debt For more information, see the above revenue ruling and revenue procedures, and the Instructions for Form 4684. Back tax debt   If you choose not to use the procedures in Revenue Procedure 2009-20, you may claim your theft loss by filling out Section B, lines 19 to 39, as appropriate. Back tax debt Loss on Deposits A loss on deposits can occur when a bank, credit union, or other financial institution becomes insolvent or bankrupt. Back tax debt If you incurred this type of loss, you can choose one of the following ways to deduct the loss. Back tax debt As a casualty loss. Back tax debt As an ordinary loss. Back tax debt As a nonbusiness bad debt. Back tax debt Casualty loss or ordinary loss. Back tax debt   You can choose to deduct a loss on deposits as a casualty loss or as an ordinary loss for any year in which you can reasonably estimate how much of your deposits you have lost in an insolvent or bankrupt financial institution. Back tax debt The choice is generally made on the return you file for that year and applies to all your losses on deposits for the year in that particular financial institution. Back tax debt If you treat the loss as a casualty or ordinary loss, you cannot treat the same amount of the loss as a nonbusiness bad debt when it actually becomes worthless. Back tax debt However, you can take a nonbusiness bad debt deduction for any amount of loss that is more than the estimated amount you deducted as a casualty or ordinary loss. Back tax debt Once you make this choice, you cannot change it without permission from the Internal Revenue Service. Back tax debt   If you claim an ordinary loss, report it as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23. Back tax debt The maximum amount you can claim is $20,000 ($10,000 if you are married filing separately) reduced by any expected state insurance proceeds. Back tax debt Your loss is subject to the 2%-of-adjusted-gross-income limit. Back tax debt You cannot choose to claim an ordinary loss if any part of the deposit is federally insured. Back tax debt Nonbusiness bad debt. Back tax debt   If you do not choose to deduct the loss as a casualty loss or as an ordinary loss, you must wait until the year the actual loss is determined and deduct the loss as a nonbusiness bad debt in that year. Back tax debt How to report. Back tax debt   The kind of deduction you choose for your loss on deposits determines how you report your loss. Back tax debt If you choose: Casualty loss — report it on Form 4684 first and then on Schedule A (Form 1040). Back tax debt Ordinary loss — report it on Schedule A (Form 1040) as a miscellaneous itemized deduction. Back tax debt Nonbusiness bad debt — report it on Form 8949 first and then on Schedule D (Form 1040). Back tax debt More information. Back tax debt   For more information, see Special Treatment for Losses on Deposits in Insolvent or Bankrupt Financial Institutions in the Instructions for Form 4684 or Deposit in Insolvent or Bankrupt Financial Institution in Publication 550. Back tax debt Proof of Loss To deduct a casualty or theft loss, you must be able to prove that you had a casualty or theft. Back tax debt You also must be able to support the amount you take as a deduction. Back tax debt Casualty loss proof. Back tax debt   For a casualty loss, your records should show all the following. Back tax debt The type of casualty (car accident, fire, storm, etc. Back tax debt ) and when it occurred. Back tax debt That the loss was a direct result of the casualty. Back tax debt That you were the owner of the property or, if you leased the property from someone else, that you were contractually liable to the owner for the damage. Back tax debt Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery. Back tax debt Theft loss proof. Back tax debt   For a theft loss, your records should show all the following. Back tax debt When you discovered that your property was missing. Back tax debt That your property was stolen. Back tax debt That you were the owner of the property. Back tax debt Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery. Back tax debt It is important that you have records that will prove your deduction. Back tax debt If you do not have the actual records to support your deduction, you can use other satisfactory evidence to support it. Back tax debt Figuring a Loss Figure the amount of your loss using the following steps. Back tax debt Determine your adjusted basis in the property before the casualty or theft. Back tax debt Determine the decrease in fair market value of the property as a result of the casualty or theft. Back tax debt From the smaller of the amounts you determined in (1) and (2), subtract any insurance or other reimbursement you received or expect to receive. Back tax debt For personal-use property and property used in performing services as an employee, apply the deduction limits, discussed later, to determine the amount of your deductible loss. Back tax debt Gain from reimbursement. Back tax debt   If your reimbursement is more than your adjusted basis in the property, you have a gain. Back tax debt This is true even if the decrease in the FMV of the property is smaller than your adjusted basis. Back tax debt If you have a gain, you may have to pay tax on it, or you may be able to postpone reporting the gain. Back tax debt See Publication 547 for more information on how to treat a gain from a reimbursement for a casualty or theft. Back tax debt Leased property. Back tax debt   If you are liable for casualty damage to property you lease, your loss is the amount you must pay to repair the property minus any insurance or other reimbursement you receive or expect to receive. Back tax debt Decrease in Fair Market Value Fair market value (FMV) is the price for which you could sell your property to a willing buyer when neither of you has to sell or buy and both of you know all the relevant facts. Back tax debt The decrease in FMV used to figure the amount of a casualty or theft loss is the difference between the property's fair market value immediately before and immediately after the casualty or theft. Back tax debt FMV of stolen property. Back tax debt   The FMV of property immediately after a theft is considered to be zero, since you no longer have the property. Back tax debt Example. Back tax debt Several years ago, you purchased silver dollars at face value for $150. Back tax debt This is your adjusted basis in the property. Back tax debt Your silver dollars were stolen this year. Back tax debt The FMV of the coins was $1,000 just before they were stolen, and insurance did not cover them. Back tax debt Your theft loss is $150. Back tax debt Recovered stolen property. Back tax debt   Recovered stolen property is your property that was stolen and later returned to you. Back tax debt If you recovered property after you had already taken a theft loss deduction, you must refigure your loss using the smaller of the property's adjusted basis (explained later) or the decrease in FMV from the time just before it was stolen until the time it was recovered. Back tax debt Use this amount to refigure your total loss for the year in which the loss was deducted. Back tax debt   If your refigured loss is less than the loss you deducted, you generally have to report the difference as income in the recovery year. Back tax debt But report the difference only up to the amount of the loss that reduced your tax. Back tax debt For more information on the amount to report, see Recoveries in chapter 12. Back tax debt Figuring Decrease in FMV— Items To Consider To figure the decrease in FMV because of a casualty or theft, you generally need a competent appraisal. Back tax debt However, other measures can also be used to establish certain decreases. Back tax debt Appraisal. Back tax debt   An appraisal to determine the difference between the FMV of the property immediately before a casualty or theft and immediately afterward should be made by a competent appraiser. Back tax debt The appraiser must recognize the effects of any general market decline that may occur along with the casualty. Back tax debt This information is needed to limit any deduction to the actual loss resulting from damage to the property. Back tax debt   Several factors are important in evaluating the accuracy of an appraisal, including the following. Back tax debt The appraiser's familiarity with your property before and after the casualty or theft. Back tax debt The appraiser's knowledge of sales of comparable property in the area. Back tax debt The appraiser's knowledge of conditions in the area of the casualty. Back tax debt The appraiser's method of appraisal. Back tax debt    You may be able to use an appraisal that you used to get a federal loan (or a federal loan guarantee) as the result of a federally declared disaster to establish the amount of your disaster loss. Back tax debt For more information on disasters, see Disaster Area Losses, in Pub. Back tax debt 547. Back tax debt Cost of cleaning up or making repairs. Back tax debt   The cost of repairing damaged property is not part of a casualty loss. Back tax debt Neither is the cost of cleaning up after a casualty. Back tax debt But you can use the cost of cleaning up or making repairs after a casualty as a measure of the decrease in FMV if you meet all the following conditions. Back tax debt The repairs are actually made. Back tax debt The repairs are necessary to bring the property back to its condition before the casualty. Back tax debt The amount spent for repairs is not excessive. Back tax debt The repairs take care of the damage only. Back tax debt The value of the property after the repairs is not, due to the repairs, more than the value of the property before the casualty. Back tax debt Landscaping. Back tax debt   The cost of restoring landscaping to its original condition after a casualty may indicate the decrease in FMV. Back tax debt You may be able to measure your loss by what you spend on the following. Back tax debt Removing destroyed or damaged trees and shrubs minus any salvage you receive. Back tax debt Pruning and other measures taken to preserve damaged trees and shrubs. Back tax debt Replanting necessary to restore the property to its approximate value before the casualty. Back tax debt Car value. Back tax debt    Books issued by various automobile organizations that list your car may be useful in figuring the value of your car. Back tax debt You can use the book's retail values and modify them by such factors as mileage and the condition of your car to figure its value. Back tax debt The prices are not official, but they may be useful in determining value and suggesting relative prices for comparison with current sales and offerings in your area. Back tax debt If your car is not listed in the books, determine its value from other sources. Back tax debt A dealer's offer for your car as a trade-in on a new car is not usually a measure of its true value. Back tax debt Figuring Decrease in FMV— Items Not To Consider You generally should not consider the following items when attempting to establish the decrease in FMV of your property. Back tax debt Cost of protection. Back tax debt   The cost of protecting your property against a casualty or theft is not part of a casualty or theft loss. Back tax debt The amount you spend on insurance or to board up your house against a storm is not part of your loss. Back tax debt   If you make permanent improvements to your property to protect it against a casualty or theft, add the cost of these improvements to your basis in the property. Back tax debt An example would be the cost of a dike to prevent flooding. Back tax debt Exception. Back tax debt   You cannot increase your basis in the property by, or deduct as a business expense, any expenditures you made with respect to qualified disaster mitigation payments. Back tax debt See Disaster Area Losses in Publication 547. Back tax debt Incidental expenses. Back tax debt   Any incidental expenses you have due to a casualty or theft, such as expenses for the treatment of personal injuries, for temporary housing, or for a rental car, are not part of your casualty or theft loss. Back tax debt Replacement cost. Back tax debt   The cost of replacing stolen or destroyed property is not part of a casualty or theft loss. Back tax debt Sentimental value. Back tax debt   Do not consider sentimental value when determining your loss. Back tax debt If a family portrait, heirloom, or keepsake is damaged, destroyed, or stolen, you must base your loss on its FMV, as limited by your adjusted basis in the property. Back tax debt Decline in market value of property in or near casualty area. Back tax debt   A decrease in the value of your property because it is in or near an area that suffered a casualty, or that might again suffer a casualty, is not to be taken into consideration. Back tax debt You have a loss only for actual casualty damage to your property. Back tax debt However, if your home is in a federally declared disaster area, see Disaster Area Losses in Publication 547. Back tax debt Costs of photographs and appraisals. Back tax debt    Photographs taken after a casualty will be helpful in establishing the condition and value of the property after it was damaged. Back tax debt Photographs showing the condition of the property after it was repaired, restored, or replaced may also be helpful. Back tax debt    Appraisals are used to figure the decrease in FMV because of a casualty or theft. Back tax debt See Appraisal , earlier, under Figuring Decrease in FMV — Items To Consider, for information about appraisals. Back tax debt   The costs of photographs and appraisals used as evidence of the value and condition of property damaged as a result of a casualty are not a part of the loss. Back tax debt You can claim these costs as a miscellaneous itemized deduction subject to the 2%-of-adjusted-gross-income limit on Schedule A (Form 1040). Back tax debt For information about miscellaneous deductions, see chapter 28. Back tax debt Adjusted Basis Adjusted basis is your basis in the property (usually cost) increased or decreased by various events, such as improvements and casualty losses. Back tax debt For more information, see chapter 13. Back tax debt Insurance and Other Reimbursements If you receive an insurance payment or other type of reimbursement, you must subtract the reimbursement when you figure your loss. Back tax debt You do not have a casualty or theft loss to the extent you are reimbursed. Back tax debt If you expect to be reimbursed for part or all of your loss, you must subtract the expected reimbursement when you figure your loss. Back tax debt You must reduce your loss even if you do not receive payment until a later tax year. Back tax debt See Reimbursement Received After Deducting Loss , later. Back tax debt Failure to file a claim for reimbursement. Back tax debt   If your property is covered by insurance, you must file a timely insurance claim for reimbursement of your loss. Back tax debt Otherwise, you cannot deduct this loss as a casualty or theft loss. Back tax debt However, this rule does not apply to the portion of the loss not covered by insurance (for example, a deductible). Back tax debt Example. Back tax debt You have a car insurance policy with a $1,000 deductible. Back tax debt Because your insurance did not cover the first $1,000 of an auto collision, the $1,000 would be deductible (subject to the deduction limits discussed later). Back tax debt This is true even if you do not file an insurance claim, because your insurance policy would never have reimbursed you for the deductible. Back tax debt Types of Reimbursements The most common type of reimbursement is an insurance payment for your stolen or damaged property. Back tax debt Other types of reimbursements are discussed next. Back tax debt Also see the Instructions for Form 4684. Back tax debt Employer's emergency disaster fund. Back tax debt   If you receive money from your employer's emergency disaster fund and you must use that money to rehabilitate or replace property on which you are claiming a casualty loss deduction, you must take that money into consideration in computing the casualty loss deduction. Back tax debt Take into consideration only the amount you used to replace your destroyed or damaged property. Back tax debt Example. Back tax debt Your home was extensively damaged by a tornado. Back tax debt Your loss after reimbursement from your insurance company was $10,000. Back tax debt Your employer set up a disaster relief fund for its employees. Back tax debt Employees receiving money from the fund had to use it to rehabilitate or replace their damaged or destroyed property. Back tax debt You received $4,000 from the fund and spent the entire amount on repairs to your home. Back tax debt In figuring your casualty loss, you must reduce your unreimbursed loss ($10,000) by the $4,000 you received from your employer's fund. Back tax debt Your casualty loss before applying the deduction limits discussed later is $6,000. Back tax debt Cash gifts. Back tax debt   If you receive excludable cash gifts as a disaster victim and there are no limits on how you can use the money, you do not reduce your casualty loss by these excludable cash gifts. Back tax debt This applies even if you use the money to pay for repairs to property damaged in the disaster. Back tax debt Example. Back tax debt Your home was damaged by a hurricane. Back tax debt Relatives and neighbors made cash gifts to you that were excludable from your income. Back tax debt You used part of the cash gifts to pay for repairs to your home. Back tax debt There were no limits or restrictions on how you could use the cash gifts. Back tax debt Because it was an excludable gift, the money you received and used to pay for repairs to your home does not reduce your casualty loss on the damaged home. Back tax debt Insurance payments for living expenses. Back tax debt   You do not reduce your casualty loss by insurance payments you receive to cover living expenses in either of the following situations. Back tax debt You lose the use of your main home because of a casualty. Back tax debt Government authorities do not allow you access to your main home because of a casualty or threat of one. Back tax debt Inclusion in income. Back tax debt   If these insurance payments are more than the temporary increase in your living expenses, you must include the excess in your income. Back tax debt Report this amount on Form 1040, line 21. Back tax debt However, if the casualty occurs in a federally declared disaster area, none of the insurance payments are taxable. Back tax debt See Qualified disaster relief payments, under Disaster Area Losses in Publication 547. Back tax debt   A temporary increase in your living expenses is the difference between the actual living expenses you and your family incurred during the period you could not use your home and your normal living expenses for that period. Back tax debt Actual living expenses are the reasonable and necessary expenses incurred because of the loss of your main home. Back tax debt Generally, these expenses include the amounts you pay for the following. Back tax debt Rent for suitable housing. Back tax debt Transportation. Back tax debt Food. Back tax debt Utilities. Back tax debt Miscellaneous services. Back tax debt Normal living expenses consist of these same expenses that you would have incurred but did not because of the casualty or the threat of one. Back tax debt Example. Back tax debt As a result of a fire, you vacated your apartment for a month and moved to a motel. Back tax debt You normally pay $525 a month for rent. Back tax debt None was charged for the month the apartment was vacated. Back tax debt Your motel rent for this month was $1,200. Back tax debt You normally pay $200 a month for food. Back tax debt Your food expenses for the month you lived in the motel were $400. Back tax debt You received $1,100 from your insurance company to cover your living expenses. Back tax debt You determine the payment you must include in income as follows. Back tax debt 1) Insurance payment for living expenses $1,100 2) Actual expenses during the month you are unable to use your home because of fire 1,600   3) Normal living expenses 725   4) Temporary increase in living  expenses: Subtract line 3 from line 2 875 5) Amount of payment includible  in income: Subtract line 4  from line 1 $ 225 Tax year of inclusion. Back tax debt   You include the taxable part of the insurance payment in income for the year you regain the use of your main home or, if later, for the year you receive the taxable part of the insurance payment. Back tax debt Example. Back tax debt Your main home was destroyed by a tornado in August 2011. Back tax debt You regained use of your home in November 2012. Back tax debt The insurance payments you received in 2011 and 2012 were $1,500 more than the temporary increase in your living expenses during those years. Back tax debt You include this amount in income on your 2012 Form 1040. Back tax debt If, in 2013, you receive further payments to cover the living expenses you had in 2011 and 2012, you must include those payments in income on your 2013 Form 1040. Back tax debt Disaster relief. Back tax debt   Food, medical supplies, and other forms of assistance you receive do not reduce your casualty loss unless they are replacements for lost or destroyed property. Back tax debt Qualified disaster relief payments you receive for expenses you incurred as a result of a federally declared disaster are not taxable income to you. Back tax debt For more information, see Disaster Area Losses in Publication 547. Back tax debt Disaster unemployment assistance payments are unemployment benefits that are taxable. Back tax debt Generally, disaster relief grants and qualified disaster mitigation payments made under the Robert T. Back tax debt Stafford Disaster Relief and Emergency Assistance Act or the National Flood Insurance Act (as in effect on April 15, 2005) are not includible in your income. Back tax debt See Disaster Area Losses in Publication 547. Back tax debt Reimbursement Received After Deducting Loss If you figured your casualty or theft loss using your expected reimbursement, you may have to adjust your tax return for the tax year in which you receive your actual reimbursement. Back tax debt This section explains the adjustment you may have to make. Back tax debt Actual reimbursement less than expected. Back tax debt   If you later receive less reimbursement than you expected, include that difference as a loss with your other losses (if any) on your return for the year in which you can reasonably expect no more reimbursement. Back tax debt Example. Back tax debt Your personal car had an FMV of $2,000 when it was destroyed in a collision with another car in 2012. Back tax debt The accident was due to the negligence of the other driver. Back tax debt At the end of 2012, there was a reasonable prospect that the owner of the other car would reimburse you in full. Back tax debt You did not have a deductible loss in 2012. Back tax debt In January 2013, the court awarded you a judgment of $2,000. Back tax debt However, in July it became apparent that you will be unable to collect any amount from the other driver. Back tax debt You can deduct the loss in 2013 subject to the limits discussed later. Back tax debt Actual reimbursement more than expected. Back tax debt   If you later receive more reimbursement than you expected after you claimed a deduction for the loss, you may have to include the extra reimbursement in your income for the year you receive it. Back tax debt However, if any part of the original deduction did not reduce your tax for the earlier year, do not include that part of the reimbursement in your income. Back tax debt You do not refigure your tax for the year you claimed the deduction. Back tax debt For more information, see Recoveries in chapter 12. Back tax debt If the total of all the reimbursements you receive is more than your adjusted basis in the destroyed or stolen property, you will have a gain on the casualty or theft. Back tax debt If you have already taken a deduction for a loss and you receive the reimbursement in a later year, you may have to include the gain in your income for the later year. Back tax debt Include the gain as ordinary income up to the amount of your deduction that reduced your tax for the earlier year. Back tax debt See Figuring a Gain in Publication 547 for more information on how to treat a gain from the reimbursement of a casualty or theft. Back tax debt Actual reimbursement same as expected. Back tax debt   If you receive exactly the reimbursement you expected to receive, you do not have to include any of the reimbursement in your income and you cannot deduct any additional loss. Back tax debt Example. Back tax debt In December 2013, you had a collision while driving your personal car. Back tax debt Repairs to the car cost $950. Back tax debt You had $100 deductible collision insurance. Back tax debt Your insurance company agreed to reimburse you for the rest of the damage. Back tax debt Because you expected a reimbursement from the insurance company, you did not have a casualty loss deduction in 2013. Back tax debt Due to the $100 rule (discussed later under Deduction Limits ), you cannot deduct the $100 you paid as the deductible. Back tax debt When you receive the $850 from the insurance company in 2014, do not report it as income. Back tax debt Single Casualty on Multiple Properties Personal property. Back tax debt   Personal property is any property that is not real property. Back tax debt If your personal property is stolen or is damaged or destroyed by a casualty, you must figure your loss separately for each item of property. Back tax debt Then combine these separate losses to figure the total loss from that casualty or theft. Back tax debt Example. Back tax debt A fire in your home destroyed an upholstered chair, an oriental rug, and an antique table. Back tax debt You did not have fire insurance to cover your loss. Back tax debt (This was the only casualty or theft you had during the year. Back tax debt ) You paid $750 for the chair and you established that it had an FMV of $500 just before the fire. Back tax debt The rug cost $3,000 and had an FMV of $2,500 just before the fire. Back tax debt You bought the table at an auction for $100 before discovering it was an antique. Back tax debt It had been appraised at $900 before the fire. Back tax debt You figure your loss on each of these items as follows:     Chair Rug Table 1) Basis (cost) $750 $3,000 $100 2) FMV before fire $500 $2,500 $900 3) FMV after fire –0– –0– –0– 4) Decrease in FMV $500 $2,500 $900 5) Loss (smaller of (1) or  (4)) $500 $2,500 $100           6) Total loss     $3,100 Real property. Back tax debt   In figuring a casualty loss on personal-use real property, treat the entire property (including any improvements, such as buildings, trees, and shrubs) as one item. Back tax debt Figure the loss using the smaller of the adjusted basis or the decrease in FMV of the entire property. Back tax debt Example. Back tax debt You bought your home a few years ago. Back tax debt You paid $160,000 ($20,000 for the land and $140,000 for the house). Back tax debt You also spent $2,000 for landscaping. Back tax debt This year a fire destroyed your home. Back tax debt The fire also damaged the shrubbery and trees in your yard. Back tax debt The fire was your only casualty or theft loss this year. Back tax debt Competent appraisers valued the property as a whole at $200,000 before the fire, but only $30,000 after the fire. Back tax debt (The loss to your household furnishings is not shown in this example. Back tax debt It would be figured separately on each item, as explained earlier under Personal property . Back tax debt ) Shortly after the fire, the insurance company paid you $155,000 for the loss. Back tax debt You figure your casualty loss as follows: 1) Adjusted basis of the entire property (land, building, and landscaping) $162,000 2) FMV of entire property before fire $200,000 3) FMV of entire property after fire 30,000 4) Decrease in FMV of entire  property $170,000 5) Loss (smaller of (1) or (4)) $162,000 6) Subtract insurance 155,000 7) Amount of loss after reimbursement $7,000 Deduction Limits After you have figured your casualty or theft loss, you must figure how much of the loss you can deduct. Back tax debt If the loss was to property for your personal use or your family's use, there are two limits on the amount you can deduct for your casualty or theft loss. Back tax debt You must reduce each casualty or theft loss by $100 ($100 rule). Back tax debt You must further reduce the total of all your casualty or theft losses by 10% of your adjusted gross income (10% rule). Back tax debt You make these reductions on Form 4684. Back tax debt These rules are explained next and Table 25-1 summarizes how to apply the $100 rule and the 10% rule in various situations. Back tax debt For more detailed explanations and examples, see Publication 547. Back tax debt Table 25-1. Back tax debt How To Apply the Deduction Limits for Personal-Use Property   $100 Rule 10% Rule General Application You must reduce each casualty or theft loss by $100 when figuring your deduction. Back tax debt Apply this rule after you have figured the amount of your loss. Back tax debt You must reduce your total casualty or theft loss by 10% of your adjusted gross income. Back tax debt Apply this rule after you reduce each loss by $100 (the $100 rule). Back tax debt Single Event Apply this rule only once, even if many pieces of property are affected. Back tax debt Apply this rule only once, even if many pieces of property are affected. Back tax debt More Than One Event Apply to the loss from each event. Back tax debt Apply to the total of all your losses from all events. Back tax debt More Than One Person— With Loss From the Same Event (other than a married couple filing jointly) Apply separately to each person. Back tax debt Apply separately to each person. Back tax debt Married Couple—With Loss From the Same Event Filing Jointly Apply as if you were one person. Back tax debt Apply as if you were one person. Back tax debt Filing Separately Apply separately to each spouse. Back tax debt Apply separately to each spouse. Back tax debt More Than One Owner (other than a married couple filing jointly) Apply separately to each owner of jointly owned property. Back tax debt Apply separately to each owner of jointly owned property. Back tax debt Property used partly for business and partly for personal purposes. Back tax debt   When property is used partly for personal purposes and partly for business or income-producing purposes, the casualty or theft loss deduction must be figured separately for the personal-use part and for the business or income-producing part. Back tax debt You must figure each loss separately because the $100 rule and the 10% rule apply only to the loss on the personal-use part of the property. Back tax debt $100 Rule After you have figured your casualty or theft loss on personal-use property, you must reduce that loss by $100. Back tax debt This reduction applies to each total casualty or theft loss. Back tax debt It does not matter how many pieces of property are involved in an event. Back tax debt Only a single $100 reduction applies. Back tax debt Example. Back tax debt A hailstorm damages your home and your car. Back tax debt Determine the amount of loss, as discussed earlier, for each of these items. Back tax debt Since the losses are due to a single event, you combine the losses and reduce the combined amount by $100. Back tax debt Single event. Back tax debt   Generally, events closely related in origin cause a single casualty. Back tax debt It is a single casualty when the damage is from two or more closely related causes, such as wind and flood damage caused by the same storm. Back tax debt 10% Rule You must reduce the total of all your casualty or theft losses on personal-use property by 10% of your adjusted gross income. Back tax debt Apply this rule after you reduce each loss by $100. Back tax debt For more information, see the Form 4684 instructions. Back tax debt If you have both gains and losses from casualties or thefts, see Gains and losses , later in this discussion. Back tax debt Example 1. Back tax debt In June, you discovered that your house had been burglarized. Back tax debt Your loss after insurance reimbursement was $2,000. Back tax debt Your adjusted gross income for the year you discovered the theft is $29,500. Back tax debt You first apply the $100 rule and then the 10% rule. Back tax debt Figure your theft loss deduction as follows. Back tax debt 1) Loss after insurance $2,000 2) Subtract $100 100 3) Loss after $100 rule $1,900 4) Subtract 10% × $29,500 AGI 2,950 5) Theft loss deduction –0– You do not have a theft loss deduction because your loss after you apply the $100 rule ($1,900) is less than 10% of your adjusted gross income ($2,950). Back tax debt Example 2. Back tax debt In March, you had a car accident that totally destroyed your car. Back tax debt You did not have collision insurance on your car, so you did not receive any insurance reimbursement. Back tax debt Your loss on the car was $1,800. Back tax debt In November, a fire damaged your basement and totally destroyed the furniture, washer, dryer, and other items stored there. Back tax debt Your loss on the basement items after reimbursement was $2,100. Back tax debt Your adjusted gross income for the year that the accident and fire occurred is $25,000. Back tax debt You figure your casualty loss deduction as follows. Back tax debt       Base-     Car ment 1) Loss $1,800 $2,100 2) Subtract $100 per incident 100 100 3) Loss after $100 rule $1,700 $2,000 4) Total loss $3,700 5) Subtract 10% × $25,000 AGI 2,500 6) Casualty loss deduction $1,200 Gains and losses. Back tax debt   If you had both gains and losses from casualties or thefts to personal-use property, you must compare your total gains to your total losses. Back tax debt Do this after you have reduced each loss by any reimbursements and by $100, but before you have reduced the losses by 10% of your adjusted gross income. Back tax debt Casualty or theft gains do not include gains you choose to postpone. Back tax debt See Publication 547 for information on the postponement of gain. Back tax debt Losses more than gains. Back tax debt   If your losses are more than your recognized gains, subtract your gains from your losses and reduce the result by 10% of your adjusted gross income. Back tax debt The rest, if any, is your deductible loss from personal-use property. Back tax debt Gains more than losses. Back tax debt   If your recognized gains are more than your losses, subtract your losses from your gains. Back tax debt The difference is treated as capital gain and must be reported on Schedule D (Form 1040). Back tax debt The 10% rule does not apply to your gains. Back tax debt When To Report Gains and Losses Gains. Back tax debt   If you receive an insurance or other reimbursement that is more than your adjusted basis in the destroyed or stolen property, you have a gain from the casualty or theft. Back tax debt You must include this gain in your income in the year you receive the reimbursement, unless you choose to postpone reporting the gain as explained in Publication 547. Back tax debt If you have a loss, see Table 25-2 . Back tax debt Table 25-2. Back tax debt When To Deduct a Loss IF you have a loss. Back tax debt . Back tax debt . Back tax debt THEN deduct it in the year. Back tax debt . Back tax debt . Back tax debt from a casualty, the loss occurred. Back tax debt in a federally declared disaster area, the disaster occurred or the year immediately before the disaster. Back tax debt from a theft, the theft was discovered. Back tax debt on a deposit treated as a:   • casualty or any ordinary loss, a reasonable estimate can be made. Back tax debt • bad debt, deposits are totally worthless. Back tax debt Losses. Back tax debt   Generally, you can deduct a casualty loss that is not reimbursable only in the tax year in which the casualty occurred. Back tax debt This is true even if you do not repair or replace the damaged property until a later year. Back tax debt   You can deduct theft losses that are not reimbursable only in the year you discover your property was stolen. Back tax debt   If you are not sure whether part of your casualty or theft loss will be reimbursed, do not deduct that part until the tax year when you become reasonably certain that it will not be reimbursed. Back tax debt Loss on deposits. Back tax debt   If your loss is a loss on deposits in an insolvent or bankrupt financial institution, see Loss on Deposits , earlier. Back tax debt Disaster Area Loss You generally must deduct a casualty loss in the year it occurred. Back tax debt However, if you have a casualty loss from a federally declared disaster that occurred in an area warranting public or individual assistance (or both), you can choose to deduct the loss on your tax return or amended return for either of the following years. Back tax debt The year the disaster occurred. Back tax debt The year immediately preceding the year the disaster occurred. Back tax debt Gains. Back tax debt    Special rules apply if you choose to postpone reporting gain on property damaged or destroyed in a federally declared disaster area. Back tax debt For those special rules, see Publication 547. Back tax debt Postponed tax deadlines. Back tax debt   The IRS may postpone for up to 1 year certain tax deadlines of taxpayers who are affected by a federally declared disaster. Back tax debt The tax deadlines the IRS may postpone include those for filing income and employment tax returns, paying income and employment taxes, and making contributions to a traditional IRA or Roth IRA. Back tax debt   If any tax deadline is postponed, the IRS will publicize the postponement in your area by publishing a news release, revenue ruling, revenue procedure, notice, announcement, or other guidance in the Internal Revenue Bulletin (IRB). Back tax debt Go to www. Back tax debt irs. Back tax debt gov/uac/Tax-Relief-in-Disaster-Situations to find out if a tax deadline has been postponed for your area. Back tax debt Who is eligible. Back tax debt   If the IRS postpones a tax deadline, the following taxpayers are eligible for the postponement. Back tax debt Any individual whose main home is located in a covered disaster area (defined next). Back tax debt Any business entity or sole proprietor whose principal place of business is located in a covered disaster area. Back tax debt Any individual who is a relief worker affiliated with a recognized government or philanthropic organization who is assisting in a covered disaster area. Back tax debt Any individual, business entity, or sole proprietorship whose records are needed to meet a postponed tax deadline, provided those records are maintained in a covered disaster area. Back tax debt The main home or principal place of business does not have to be located in the covered disaster area. Back tax debt Any estate or trust that has tax records necessary to meet a postponed tax deadline, provided those records are maintained in a covered disaster area. Back tax debt The spouse on a joint return with a taxpayer who is eligible for postponements. Back tax debt Any individual, business entity, or sole proprietorship not located in a covered disaster area, but whose records necessary to meet a postponed tax deadline are located in the covered disaster area. Back tax debt Any individual visiting the covered disaster area who was killed or injured as a result of the disaster. Back tax debt Any other person determined by the IRS to be affected by a federally declared disaster. Back tax debt Covered disaster area. Back tax debt   This is an area of a federally declared disaster in which the IRS has decided to postpone tax deadlines for up to 1 year. Back tax debt Abatement of interest and penalties. Back tax debt   The IRS may abate the interest and penalties on underpaid income tax for the length of any postponement of tax deadlines. Back tax debt More information. Back tax debt   For more information, see Disaster Area Losses in Publication 547. Back tax debt How To Report Gains and Losses Use Form 4684 to report a gain or a deductible loss from a casualty or theft. Back tax debt If you have more than one casualty or theft, use a separate Form 4684 to determine your gain or loss for each event. Back tax debt Combine the gains and losses on one Form 4684. Back tax debt Follow the form instructions as to which lines to fill out. Back tax debt In addition, you must use the appropriate schedule to report a gain or loss. Back tax debt The schedule you use depends on whether you have a gain or loss. Back tax debt If you have a: Report it on: Gain Schedule D (Form 1040) Loss Schedule A (Form 1040) Adjustments to basis. Back tax debt   If you have a casualty or theft loss, you must decrease your basis in the property by any insurance or other reimbursement you receive, and by any deductible loss. Back tax debt Amounts you spend to restore your property after a casualty increase your adjusted basis. Back tax debt See Adjusted Basis in chapter 13 for more information. Back tax debt Net operating loss (NOL). Back tax debt    If your casualty or theft loss deduction causes your deductions for the year to be more than your income for the year, you may have an NOL. Back tax debt You can use an NOL to lower your tax in an earlier year, allowing you to get a refund for tax you have already paid. Back tax debt Or, you can use it to lower your tax in a later year. Back tax debt You do not have to be in business to have an NOL from a casualty or theft loss. Back tax debt For more information, see Publication 536, Net Operating Losses (NOLs) for Individuals, Estates, and Trusts. 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The Back Tax Debt

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