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Free Self Tax Preparation Online

Free self tax preparation online Publication 544 - Introductory Material Table of Contents Future Developments What's New Important Reminders IntroductionOrdering forms and publications. Free self tax preparation online Tax questions. Free self tax preparation online Future Developments For the latest information about developments related to Publication 544, such as legislation enacted after it was published, go to www. Free self tax preparation online irs. Free self tax preparation online gov/pub544. Free self tax preparation online What's New Direct reporting on Schedule D. Free self tax preparation online   For 2013, certain transactions may be combined and the totals reported directly on Schedule D. Free self tax preparation online If you choose to do that, you do not need to include these transactions on Form 8949, Sales and Other Dispositions of Capital Assets. Free self tax preparation online For additional information, see Schedule D and Form 8949 in chapter 4. Free self tax preparation online Tax rate on net capital gain and qualified dividends. Free self tax preparation online   The maximum tax rate of 15% on net capital gain and qualified dividends has increased to 20% for some taxpayers. Free self tax preparation online See Capital Gains Tax Rates in chapter 4. Free self tax preparation online Important Reminders Dispositions of U. Free self tax preparation online S. Free self tax preparation online real property interests by foreign persons. Free self tax preparation online  If you are a foreign person or firm and you sell or otherwise dispose of a U. Free self tax preparation online S. Free self tax preparation online real property interest, the buyer (or other transferee) may have to withhold income tax on the amount you receive for the property (including cash, the fair market value of other property, and any assumed liability). Free self tax preparation online Corporations, partnerships, trusts, and estates also may have to withhold on certain U. Free self tax preparation online S. Free self tax preparation online real property interests they distribute to you. Free self tax preparation online You must report these dispositions and distributions and any income tax withheld on your U. Free self tax preparation online S. Free self tax preparation online income tax return. Free self tax preparation online For more information on dispositions of U. Free self tax preparation online S. Free self tax preparation online real property interests, see Publication 519, U. Free self tax preparation online S. Free self tax preparation online Tax Guide for Aliens. Free self tax preparation online Also see Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities. Free self tax preparation online Foreign source income. Free self tax preparation online  If you are a U. Free self tax preparation online S. Free self tax preparation online citizen with income from dispositions of property outside the United States (foreign income), you must report all such income on your tax return unless it is exempt from U. Free self tax preparation online S. Free self tax preparation online law. Free self tax preparation online This is true whether you reside inside or outside the United States and whether or not you receive a Form 1099 from the foreign payor. Free self tax preparation online Photographs of missing children. Free self tax preparation online  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Free self tax preparation online Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Free self tax preparation online You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Free self tax preparation online Introduction You dispose of property when any of the following occurs. Free self tax preparation online You sell property. Free self tax preparation online You exchange property for other property. Free self tax preparation online Your property is condemned or disposed of under threat of condemnation. Free self tax preparation online Your property is repossessed. Free self tax preparation online You abandon property. Free self tax preparation online You give property away. Free self tax preparation online This publication explains the tax rules that apply when you dispose of property. Free self tax preparation online It discusses the following topics. Free self tax preparation online How to figure a gain or loss. Free self tax preparation online Whether your gain or loss is ordinary or capital. Free self tax preparation online How to treat your gain or loss when you dispose of business property. Free self tax preparation online How to report a gain or loss. Free self tax preparation online This publication also explains whether your gain is taxable or your loss is deductible. Free self tax preparation online This publication does not discuss certain transactions covered in other IRS publications. Free self tax preparation online These include the following. Free self tax preparation online Most transactions involving stocks, bonds, options, forward and futures contracts, and similar investments. Free self tax preparation online See chapter 4 of Publication 550, Investment Income and Expenses. Free self tax preparation online Sale of your main home. Free self tax preparation online See Publication 523, Selling Your Home. Free self tax preparation online Installment sales. Free self tax preparation online See Publication 537, Installment Sales. Free self tax preparation online Transfers of property at death. Free self tax preparation online See Publication 559, Survivors, Executors, and Administrators. Free self tax preparation online Forms to file. Free self tax preparation online   When you dispose of property, you usually will have to file one or more of the following forms. Free self tax preparation online Schedule D, Capital Gains and Losses. Free self tax preparation online Form 4797, Sales of Business Property. Free self tax preparation online Form 8824, Like-Kind Exchanges. Free self tax preparation online Form 8949, Sales and Other Dispositions of Capital Assets. Free self tax preparation online    Although the discussions in this publication may at times refer mainly to individuals, many of the rules discussed also apply to taxpayers other than individuals. Free self tax preparation online However, the rules for property held for personal use usually will not apply to taxpayers other than individuals. Free self tax preparation online Comments and suggestions. Free self tax preparation online   We welcome your comments about this publication and your suggestions for future editions. Free self tax preparation online   You can send your comments to the following address. Free self tax preparation online Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. Free self tax preparation online NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Free self tax preparation online Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Free self tax preparation online You can also send us comments from www. Free self tax preparation online irs. Free self tax preparation online gov/formspubs/. Free self tax preparation online Click on “More Information ” and then on “Give us feedback. Free self tax preparation online ” Although we cannot respond individually to each email, we do appreciate your feedback and will consider your comments as we revise our tax products. Free self tax preparation online Ordering forms and publications. Free self tax preparation online   Visit www. Free self tax preparation online irs. Free self tax preparation online gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. Free self tax preparation online Internal Revenue Service 1201 N. Free self tax preparation online Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. Free self tax preparation online   If you have a tax question, check the information available on IRS. Free self tax preparation online gov or call 1-800-829-1040. Free self tax preparation online We cannot answer tax questions sent to either of the above addresses. 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Consumer Protection Offices

City, county, regional, and state consumer offices offer a variety of important services. They might mediate complaints, conduct investigations, prosecute offenders of consumer laws, license and regulate professional service providers, provide educational materials and advocate for consumer rights. To save time, call before sending a written complaint. Ask if the office handles the type of complaint you have and if complaint forms are provided.

State Consumer Protection Offices

Office of the Attorney General

Website: Office of the Attorney General

Address: Office of the Attorney General
Consumer Protection Division
PO Box 1789
Charleston, WV 25326-1789

Phone Number: 304-558-8986

Toll-free: 1-800-368-8808 (WV)

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Banking Authorities

The officials listed in this section regulate and supervise state-chartered banks. Many of them handle or refer problems and complaints about other types of financial institutions as well. Some also answer general questions about banking and consumer credit. If you are dealing with a federally chartered bank, check Federal Agencies.

Division of Banking

Website: Division of Banking

Address: Division of Banking
900 Pennsylvania Ave.
Suite 306
Charleston, WV 25302

Phone Number: 304-558-2294

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Insurance Regulators

Each state has its own laws and regulations for each type of insurance. The officials listed in this section enforce these laws. Many of these offices can also provide you with information to help you make informed insurance buying decisions.

Offices of the Insurance Commissioner

Website: Offices of the Insurance Commissioner

Address: Offices of the Insurance Commissioner
PO Box 50540
Charleston, WV 25305-0540

Phone Number: 304-558-3386

Toll-free: 1-888-879-9842 (WV)

TTY: 1-800-435-7381

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Securities Administrators

Each state has its own laws and regulations for securities brokers and securities - including stocks, mutual funds, commodities, real estate, etc. The officials and agencies listed in this section enforce these laws and regulations. Many of these offices can also provide information to help you make informed investment decisions.

State Auditors Office

Website: State Auditors Office

Address: State Auditors Office
Securities Commission
1900 Kanawha Blvd., E
Building 1, Room W-100
Charleston, WV 25305

Phone Number: 304-558-2251

Toll-free: 1-888-509-6567

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Utility Commissions

State Utility Commissions regulate services and rates for gas, electricity and telephones within your state. In some states, the utility commissions regulate other services such as water, transportation, and the moving of household goods. Many utility commissions handle consumer complaints. Sometimes, if a number of complaints are received about the same utility matter, they will conduct investigations.

Consumer Advocate Division

Website: Consumer Advocate Division

Address: Consumer Advocate Division
723 Kanawha Blvd., E
Union Building, Suite 700
Charleston, WV 25301

Phone Number: 304-558-0526

Public Service Commission

Website: Public Service Commission

Address: Public Service Commission
Customer Assistance
PO Box 812
201 Brooks St.
Charleston, WV 25323

Toll-free: 1-800-642-8544

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The Free Self Tax Preparation Online

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