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

Payment Plans, Installment Agreements
Make monthly payments through an installment agreement if you're not financially able to pay your tax debt immediately.

Offer in Compromise
An offer in compromise allows you to settle your tax debt for less than the full amount you owe.

The “What Ifs” for Struggling Taxpayers
Here are some “what if” scenarios and the possible tax impact.

Page Last Reviewed or Updated: 04-Feb-2014

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Free tax preparation sites Publication 595 - Introductory Material Table of Contents Introduction Important Reminder Introduction This publication discusses the Capital Construction Fund (CCF). Free tax preparation sites The CCF is a special investment program administered by the National Marine Fisheries Service (NMFS) and the Internal Revenue Service (IRS). Free tax preparation sites This program allows fishermen to defer paying income tax on certain income they invest in a CCF account and later use to acquire, build, or rebuild fishing vessels. Free tax preparation sites This publication does not discuss all the tax rules that may apply to your fishing trade or business. Free tax preparation sites For general information about the federal tax laws that apply to individuals, including commercial fishermen, who file Schedule C or C-EZ, see Publication 334, Tax Guide for Small Business. Free tax preparation sites If your trade or business is a partnership or corporation, see Publication 541, Partnerships, or Publication 542, Corporations. Free tax preparation sites Comments and suggestions. Free tax preparation sites   We welcome your comments about this publication and your suggestions for future editions. Free tax preparation sites   You can email us at *taxforms@irs. Free tax preparation sites gov. Free tax preparation sites Please put “Publications Comment” on the subject line. Free tax preparation sites   You can write to us at the following address: Internal Revenue Service Business Forms and Publications Branch SE:W:CAR:MP:T:B 1111 Constitution Ave. Free tax preparation sites NW, IR-6406 Washington, DC 20224   We respond to many letters by telephone. Free tax preparation sites Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Free tax preparation sites Important Reminder Photographs of missing children. Free tax preparation sites  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Free tax preparation sites Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Free tax preparation sites 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 tax preparation sites Prev  Up  Next   Home   More Online Publications