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Hrblock free tax return Publication 529 - Main Content Table of Contents Deductions Subject to the 2% LimitUnreimbursed Employee Expenses Tax Preparation Fees Other Expenses Deductions Not Subject to the 2% LimitList of Deductions Nondeductible ExpensesList of Nondeductible Expenses How To ReportWho can use Form 2106-EZ. Hrblock free tax return Computer used in a home office. Hrblock free tax return Example How To Get Tax HelpLow Income Taxpayer Clinics Deductions Subject to the 2% Limit You can deduct certain expenses as miscellaneous itemized deductions on Schedule A (Form 1040 or Form 1040NR). Hrblock free tax return You can claim the amount of expenses that is more than 2% of your adjusted gross income. Hrblock free tax return You figure your deduction on Schedule A by subtracting 2% of your adjusted gross income from the total amount of these expenses. Hrblock free tax return Your adjusted gross income is the amount on Form 1040, line 38, or Form 1040NR, line 37. Hrblock free tax return Generally, you apply the 2% limit after you apply any other deduction limit. Hrblock free tax return For example, you apply the 50% (or 80%) limit on business-related meals and entertainment (discussed later under Travel, Transportation, Meals, Entertainment, Gifts, and Local Lodging ) before you apply the 2% limit. Hrblock free tax return Deductions subject to the 2% limit are discussed in the following three categories. Hrblock free tax return Unreimbursed employee expenses (Schedule A (Form 1040), line 21 or Schedule A (Form 1040NR), line 7). Hrblock free tax return Tax preparation fees (Schedule A (Form 1040), line 22 or Schedule A (Form 1040NR), line 8). Hrblock free tax return Other expenses (Schedule A (Form 1040), line 23 or Schedule A (Form 1040NR), line 9). Hrblock free tax return Unreimbursed Employee Expenses Generally, the following expenses are deducted on Schedule A (Form 1040), line 21, or Schedule A (Form 1040NR), line 7. Hrblock free tax return You can deduct only unreimbursed employee expenses that are: Paid or incurred during your tax year, For carrying on your trade or business of being an employee, and Ordinary and necessary. Hrblock free tax return An expense is ordinary if it is common and accepted in your trade, business, or profession. Hrblock free tax return An expense is necessary if it is appropriate and helpful to your business. Hrblock free tax return An expense does not have to be required to be considered necessary. Hrblock free tax return You may be able to deduct the following items as unreimbursed employee expenses. Hrblock free tax return Business bad debt of an employee. Hrblock free tax return Business liability insurance premiums. Hrblock free tax return Damages paid to a former employer for breach of an employment contract. Hrblock free tax return Depreciation on a computer your employer requires you to use in your work. Hrblock free tax return Dues to a chamber of commerce if membership helps you do your job. Hrblock free tax return Dues to professional societies. Hrblock free tax return Educator expenses. Hrblock free tax return Home office or part of your home used regularly and exclusively in your work. Hrblock free tax return Job search expenses in your present occupation. Hrblock free tax return Laboratory breakage fees. Hrblock free tax return Legal fees related to your job. Hrblock free tax return Licenses and regulatory fees. Hrblock free tax return Malpractice insurance premiums. Hrblock free tax return Medical examinations required by an employer. Hrblock free tax return Occupational taxes. Hrblock free tax return Passport for a business trip. Hrblock free tax return Repayment of an income aid payment received under an employer's plan. Hrblock free tax return Research expenses of a college professor. Hrblock free tax return Rural mail carriers' vehicle expenses. Hrblock free tax return Subscriptions to professional journals and trade magazines related to your work. Hrblock free tax return Tools and supplies used in your work. Hrblock free tax return Travel, transportation, meals, entertainment, gifts, and local lodging related to your work. Hrblock free tax return Union dues and expenses. Hrblock free tax return Work clothes and uniforms if required and not suitable for everyday use. Hrblock free tax return Work-related education. Hrblock free tax return Business Bad Debt A business bad debt is a loss from a debt created or acquired in your trade or business. Hrblock free tax return Any other worthless debt is a business bad debt only if there is a very close relationship between the debt and your trade or business when the debt becomes worthless. Hrblock free tax return A debt has a very close relationship to your trade or business of being an employee if your main motive for incurring the debt is a business reason. Hrblock free tax return Example. Hrblock free tax return You make a bona fide loan to the corporation you work for. Hrblock free tax return It fails to pay you back. Hrblock free tax return You had to make the loan in order to keep your job. Hrblock free tax return You have a business bad debt as an employee. Hrblock free tax return More information. Hrblock free tax return   For more information on business bad debts, see chapter 10 in Publication 535. Hrblock free tax return For information on nonbusiness bad debts, see chapter 4 in Publication 550, Investment Income and Expenses. Hrblock free tax return Business Liability Insurance You can deduct insurance premiums you paid for protection against personal liability for wrongful acts on the job. Hrblock free tax return Damages for Breach of Employment Contract If you break an employment contract, you can deduct damages you pay your former employer if the damages are attributable to the pay you received from that employer. Hrblock free tax return Depreciation on Computers You can claim a depreciation deduction for a computer that you use in your work as an employee if its use is: For the convenience of your employer, and Required as a condition of your employment. Hrblock free tax return For the convenience of your employer. Hrblock free tax return   This means that your use of the computer is for a substantial business reason of your employer. Hrblock free tax return You must consider all facts in making this determination. Hrblock free tax return Use of your computer during your regular working hours to carry on your employer's business is generally for the convenience of your employer. Hrblock free tax return Required as a condition of your employment. Hrblock free tax return   This means that you cannot properly perform your duties without the computer. Hrblock free tax return Whether you can properly perform your duties without it depends on all the facts and circumstances. Hrblock free tax return It is not necessary that your employer explicitly requires you to use your computer. Hrblock free tax return But neither is it enough that your employer merely states that your use of the item is a condition of your employment. Hrblock free tax return Example. Hrblock free tax return You are an engineer with an engineering firm. Hrblock free tax return You occasionally take work home at night rather than work late at the office. Hrblock free tax return You own and use a computer that is similar to the one you use at the office to complete your work at home. Hrblock free tax return Since your use of the computer is not for the convenience of your employer and is not required as a condition of your employment, you cannot claim a depreciation deduction for it. Hrblock free tax return Which depreciation method to use. Hrblock free tax return   The depreciation method you use depends on whether you meet the more-than-50%-use test. Hrblock free tax return More-than-50%-use test met. Hrblock free tax return   You meet this test if you use the computer more than 50% in your work. Hrblock free tax return If you meet this test, you can claim accelerated depreciation under the General Depreciation System (GDS). Hrblock free tax return In addition, you may be able to take the section 179 deduction for the year you place the item in service. Hrblock free tax return More-than-50%-use test not met. Hrblock free tax return   If you do not meet the more-than-50%-use test, you are limited to the straight line method of depreciation under the Alternative Depreciation System (ADS). Hrblock free tax return You also cannot claim the section 179 deduction. Hrblock free tax return (But if you use your computer in a home office, see the exception below. Hrblock free tax return ) Investment use. Hrblock free tax return   Your use of a computer in connection with investments (described later under Other Expenses ) does not count as use in your work. Hrblock free tax return However, you can combine your investment use with your work use in figuring your depreciation deduction. Hrblock free tax return Exception for computer used in a home office. Hrblock free tax return   The more-than-50%-use test does not apply to a computer used only in a part of your home that meets the requirements described later under Home Office . Hrblock free tax return You can claim accelerated depreciation using GDS for a computer used in a qualifying home office, even if you do not use it more than 50% in your work. Hrblock free tax return You also may be able to take a section 179 deduction for the year you place the computer in service. Hrblock free tax return See Computer used in a home office under How To Report, later. Hrblock free tax return More information. Hrblock free tax return   For more information on depreciation and the section 179 deduction for computers and other items used in a home office, see Business Furniture and Equipment in Publication 587. Hrblock free tax return Publication 946 has detailed information about the section 179 deduction and depreciation deductions using GDS and ADS. Hrblock free tax return Reporting your depreciation deduction. Hrblock free tax return    See How To Report, later, for information about reporting a deduction for depreciation. Hrblock free tax return You must keep records to prove your percentage of business and investment use. Hrblock free tax return Dues to Chambers of Commerce and Professional Societies You may be able to deduct dues paid to professional organizations (such as bar associations and medical associations) and to chambers of commerce and similar organizations, if membership helps you carry out the duties of your job. Hrblock free tax return Similar organizations include: Boards of trade, Business leagues, Civic or public service organizations, Real estate boards, and Trade associations. Hrblock free tax return Lobbying and political activities. Hrblock free tax return    You may not be able to deduct that part of your dues that is for certain lobbying and political activities. Hrblock free tax return See Lobbying Expenses under Nondeductible Expenses, later. Hrblock free tax return Educator Expenses If you were an eligible educator in 2013, you can deduct up to $250 of qualified expenses you paid in 2013 as an adjustment to gross income on Form 1040, line 23, rather than as a miscellaneous itemized deduction. Hrblock free tax return If you file Form 1040A, you can deduct these expenses on line 16. Hrblock free tax return If you and your spouse are filing jointly and both of you were eligible educators, the maximum deduction is $500. Hrblock free tax return However, neither spouse can deduct more than $250 of his or her qualified expenses. Hrblock free tax return Eligible educator. Hrblock free tax return   An eligible educator is a kindergarten through grade 12 teacher, instructor, counselor, principal, or aide in school for at least 900 hours during a school year. Hrblock free tax return Qualified expenses. Hrblock free tax return   Qualified expenses include ordinary and necessary expenses paid in connection with books, supplies, equipment (including computer equipment, software, and services), and other materials used in the classroom. Hrblock free tax return An ordinary expense is one that is common and accepted in your educational field. Hrblock free tax return A necessary expense is one that is helpful and appropriate for your profession as an educator. Hrblock free tax return An expense does not have to be required to be considered necessary. Hrblock free tax return   Qualified expenses do not include expenses for home schooling or for nonathletic supplies for courses in health or physical education. Hrblock free tax return You must reduce your qualified expenses by the following amounts. Hrblock free tax return Excludable U. Hrblock free tax return S. Hrblock free tax return series EE and I savings bond interest from Form 8815. Hrblock free tax return Nontaxable qualified state tuition program earnings. Hrblock free tax return Nontaxable earnings from Coverdell education savings accounts. Hrblock free tax return Any reimbursements you received for those expenses that were not reported to you on your Form W-2, box 1. Hrblock free tax return Educator expenses over limit. Hrblock free tax return   If you were an educator in 2013 and you had qualified expenses that you cannot take as an adjustment to gross income, you can deduct the rest as an itemized deduction subject to the 2% limit. Hrblock free tax return Home Office If you use a part of your home regularly and exclusively for business purposes, you may be able to deduct a part of the operating expenses and depreciation of your home. Hrblock free tax return You can claim this deduction for the business use of a part of your home only if you use that part of your home regularly and exclusively: As your principal place of business for any trade or business, As a place to meet or deal with your patients, clients, or customers in the normal course of your trade or business, or In the case of a separate structure not attached to your home, in connection with your trade or business. Hrblock free tax return The regular and exclusive business use must be for the convenience of your employer and not just appropriate and helpful in your job. Hrblock free tax return Principal place of business. Hrblock free tax return   If you have more than one place of business, the business part of your home is your principal place of business if: You use it regularly and exclusively for administrative or management activities of your trade or business, and You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. Hrblock free tax return   Otherwise, the location of your principal place of business generally depends on the relative importance of the activities performed at each location and the time spent at each location. Hrblock free tax return You should keep records that will give the information needed to figure the deduction according to these rules. Hrblock free tax return Also keep canceled checks, substitute checks, or account statements and receipts of the expenses paid to prove the deductions you claim. Hrblock free tax return More information. Hrblock free tax return   See Publication 587 for more detailed information and a worksheet for figuring the deduction. Hrblock free tax return Job Search Expenses You can deduct certain expenses you have in looking for a new job in your present occupation, even if you do not get a new job. Hrblock free tax return You cannot deduct these expenses if: You are looking for a job in a new occupation, There was a substantial break between the ending of your last job and your looking for a new one, or You are looking for a job for the first time. Hrblock free tax return Employment and outplacement agency fees. Hrblock free tax return    You can deduct employment and outplacement agency fees you pay in looking for a new job in your present occupation. Hrblock free tax return Employer pays you back. Hrblock free tax return   If, in a later year, your employer pays you back for employment agency fees, you must include the amount you receive in your gross income up to the amount of your tax benefit in the earlier year. Hrblock free tax return See Recoveries in Publication 525. Hrblock free tax return Employer pays the employment agency. Hrblock free tax return   If your employer pays the fees directly to the employment agency and you are not responsible for them, you do not include them in your gross income. Hrblock free tax return Résumé. Hrblock free tax return   You can deduct amounts you spend for preparing and mailing copies of a résumé to prospective employers if you are looking for a new job in your present occupation. Hrblock free tax return Travel and transportation expenses. Hrblock free tax return   If you travel to an area and, while there, you look for a new job in your present occupation, you may be able to deduct travel expenses to and from the area. Hrblock free tax return You can deduct the travel expenses if the trip is primarily to look for a new job. Hrblock free tax return The amount of time you spend on personal activity compared to the amount of time you spend in looking for work is important in determining whether the trip is primarily personal or is primarily to look for a new job. Hrblock free tax return   Even if you cannot deduct the travel expenses to and from an area, you can deduct the expenses of looking for a new job in your present occupation while in the area. Hrblock free tax return    You can choose to use the standard mileage rate to figure your car expenses. Hrblock free tax return The 2013 rate for business use of a vehicle is 56½ cents per mile. Hrblock free tax return See Publication 463 for more information on travel and car expenses. Hrblock free tax return Legal Fees You can deduct legal fees related to doing or keeping your job. Hrblock free tax return Licenses and Regulatory Fees You can deduct the amount you pay each year to state or local governments for licenses and regulatory fees for your trade, business, or profession. Hrblock free tax return Occupational Taxes You can deduct an occupational tax charged at a flat rate by a locality for the privilege of working or conducting a business in the locality. Hrblock free tax return If you are an employee, you can claim occupational taxes only as a miscellaneous deduction subject to the 2% limit; you cannot claim them as a deduction for taxes elsewhere on your return. Hrblock free tax return Repayment of Income Aid Payment An “income aid payment” is one that is received under an employer's plan to aid employees who lose their jobs because of lack of work. Hrblock free tax return If you repay a lump-sum income aid payment that you received and included in income in an earlier year, you can deduct the repayment. Hrblock free tax return Research Expenses of a College Professor If you are a college professor, you can deduct your research expenses, including travel expenses, for teaching, lecturing, or writing and publishing on subjects that relate directly to your teaching duties. Hrblock free tax return You must have undertaken the research as a means of carrying out the duties expected of a professor and without expectation of profit apart from salary. Hrblock free tax return However, you cannot deduct the cost of travel as a form of education. Hrblock free tax return Rural Mail Carriers' Vehicle Expenses If your expenses to use a vehicle in performing services as a rural mail carrier are more than the amount of your reimbursements, you can deduct the unreimbursed expenses. Hrblock free tax return See chapter 4 of Publication 463 for more information. Hrblock free tax return Tools Used in Your Work Generally, you can deduct amounts you spend for tools used in your work if the tools wear out and are thrown away within 1 year from the date of purchase. Hrblock free tax return You can depreciate the cost of tools that have a useful life substantially beyond the tax year. Hrblock free tax return For more information about depreciation, see Publication 946. Hrblock free tax return Travel, Transportation, Meals, Entertainment, Gifts, and Local Lodging If you are an employee and have ordinary and necessary business-related expenses for travel away from home, local transportation, entertainment, and gifts, you may be able to deduct these expenses. Hrblock free tax return Generally, you must file Form 2106 or Form 2106-EZ to claim these expenses. Hrblock free tax return Travel expenses. Hrblock free tax return   Travel expenses are those incurred while traveling away from home for your employer. Hrblock free tax return You can deduct travel expenses paid or incurred in connection with a temporary work assignment. Hrblock free tax return Generally, you cannot deduct travel expenses paid or incurred in connection with an indefinite work assignment. Hrblock free tax return   Travel expenses may include: The cost of getting to and from your business destination (air, rail, bus, car, etc. Hrblock free tax return ), Meals and lodging while away from home, Taxi fares, Baggage charges, and Cleaning and laundry expenses. Hrblock free tax return   Travel expenses are discussed more fully in chapter 1 of Publication 463. Hrblock free tax return Temporary work assignment. Hrblock free tax return    If your assignment or job away from home in a single location is realistically expected to last (and does in fact last) for 1 year or less, it is temporary, unless there are facts and circumstances that indicate it is not. Hrblock free tax return Indefinite work assignment. Hrblock free tax return   If your assignment or job away from home in a single location is realistically expected to last for more than 1 year, it is indefinite, whether or not it actually lasts for more than 1 year. Hrblock free tax return If your assignment or job away from home in a single location is realistically expected to last for 1 year or less, but at some later date it is realistically expected to exceed 1 year, it will be treated as temporary (in the absence of facts and circumstances indicating otherwise) until the date that your realistic expectation changes, and it will be treated as indefinite after that date. Hrblock free tax return Federal crime investigation and prosecution. Hrblock free tax return   If you are a federal employee participating in a federal crime investigation or prosecution, you are not subject to the 1-year rule for deducting temporary travel expenses. Hrblock free tax return This means that you may be able to deduct travel expenses even if you are away from your tax home for more than 1 year. Hrblock free tax return   To qualify, the Attorney General must certify that you are traveling: For the Federal Government, In a temporary duty status, and To investigate, prosecute, or provide support services for the investigation or prosecution of a federal crime. Hrblock free tax return Armed Forces reservists traveling more than 100 miles from home. Hrblock free tax return   If you are a member of a reserve component of the Armed Forces of the United States and you travel more than 100 miles away from home in connection with your performance of services as a member of the reserves, you can deduct some of your travel expenses as an adjustment to gross income rather than as a miscellaneous itemized deduction. Hrblock free tax return The amount of expenses you can deduct as an adjustment to gross income is limited to the regular federal per diem rate (for lodging, meals, and incidental expenses) and the standard mileage rate (for car expenses) plus any parking fees, ferry fees, and tolls. Hrblock free tax return The balance, if any, is reported on Schedule A. Hrblock free tax return   You are a member of a reserve component of the Armed Forces of the United States if you are in the Army, Naval, Marine Corps, Air Force, Coast Guard Reserve, the Army National Guard of the United States, the Air National Guard of the United States, or the Reserve Corps of the Public Health Service. Hrblock free tax return   For more information on travel expenses, see Publication 463. Hrblock free tax return Local transportation expenses. Hrblock free tax return   Local transportation expenses are the expenses of getting from one workplace to another when you are not traveling away from home. Hrblock free tax return They include the cost of transportation by air, rail, bus, taxi, and the cost of using your car. Hrblock free tax return   You can choose to use the standard mileage rate to figure your car expenses. Hrblock free tax return The 2013 rate for business use of a vehicle is 56½ cents per mile. Hrblock free tax return    In general, the costs of commuting between your residence and your place of business are nondeductible. Hrblock free tax return Work at two places in a day. Hrblock free tax return   If you work at two places in a day, whether or not for the same employer, you can generally deduct the expenses of getting from one workplace to the other. Hrblock free tax return Temporary work location. Hrblock free tax return   You can deduct expenses incurred in going between your home and a temporary work location if at least one of the following applies. Hrblock free tax return The work location is outside the metropolitan area where you live and normally work. Hrblock free tax return You have at least one regular work location (other than your home) for the same trade or business. Hrblock free tax return (If this applies, the distance between your home and the temporary work location does not matter. Hrblock free tax return )   For this purpose, a work location is generally considered temporary if your work there is realistically expected to last (and does in fact last) for 1 year or less. Hrblock free tax return It is not temporary if your work there is realistically expected to last for more than 1 year, even if it actually lasts for 1 year or less. Hrblock free tax return If your work there initially is realistically expected to last for 1 year or less, but later is realistically expected to last for more than 1 year, the work location is generally considered temporary until the date your realistic expectation changes and not temporary after that date. Hrblock free tax return For more information, see chapter 1 of Publication 463. Hrblock free tax return Home office. Hrblock free tax return   You can deduct expenses incurred in going between your home and a workplace if your home is your principal place of business for the same trade or business. Hrblock free tax return (In this situation, whether the other workplace is temporary or regular and its distance from your home do not matter. Hrblock free tax return ) See Home Office , earlier, for a discussion on the use of your home as your principal place of business. Hrblock free tax return Meals and entertainment. Hrblock free tax return   Generally, you can deduct entertainment expenses (including entertainment-related meals) only if they are directly related to the active conduct of your trade or business. Hrblock free tax return However, the expense only needs to be associated with the active conduct of your trade or business if it directly precedes or follows a substantial and bona fide business-related discussion. Hrblock free tax return   You can deduct only 50% of your business-related meal and entertainment expenses unless the expenses meet certain exceptions. Hrblock free tax return You apply this 50% limit before you apply the 2%-of-adjusted-gross-income limit. Hrblock free tax return Meals when subject to “hours of service” limits. Hrblock free tax return   You can deduct 80% of your business-related meal expenses if you consume the meals during or incident to any period subject to the Department of Transportation's “hours of service” limits. Hrblock free tax return You apply this 80% limit before you apply the 2%-of-adjusted-gross-income limit. Hrblock free tax return Gift expenses. Hrblock free tax return   You can generally deduct up to $25 of business gifts you give to any one individual during the year. Hrblock free tax return The following items do not count toward the $25 limit. Hrblock free tax return Identical, widely distributed items costing $4 or less that have your name clearly and permanently imprinted. Hrblock free tax return Signs, racks, and promotional materials to be displayed on the business premises of the recipient. Hrblock free tax return Local lodging. Hrblock free tax return   If your employer provides or requires you to obtain lodging while you are not traveling away from home, you can deduct the cost of the lodging if it is: on a temporary basis, necessary for you to participate in or be available for a business meeting or employer function, and the costs are ordinary and necessary, but not lavish or extravagant. Hrblock free tax return   If your employer provides the lodging or reimburses you for the cost of the lodging, you can deduct the cost only if the value or the reimbursement is included in your gross income because it is reported as wages on your Form W-2. Hrblock free tax return Additional information. Hrblock free tax return    See Publication 463 for more information on travel, transportation, meal, entertainment, and gift expenses, and reimbursements for these expenses. Hrblock free tax return Union Dues and Expenses You can deduct dues and initiation fees you pay for union membership. Hrblock free tax return You can also deduct assessments for benefit payments to unemployed union members. Hrblock free tax return However, you cannot deduct the part of the assessments or contributions that provides funds for the payment of sick, accident, or death benefits. Hrblock free tax return Also, you cannot deduct contributions to a pension fund even if the union requires you to make the contributions. Hrblock free tax return You may not be able to deduct amounts you pay to the union that are related to certain lobbying and political activities. Hrblock free tax return See Lobbying Expenses under Nondeductible Expenses, later. Hrblock free tax return Work Clothes and Uniforms You can deduct the cost and upkeep of work clothes if the following two requirements are met. Hrblock free tax return You must wear them as a condition of your employment. Hrblock free tax return The clothes are not suitable for everyday wear. Hrblock free tax return It is not enough that you wear distinctive clothing. Hrblock free tax return The clothing must be specifically required by your employer. Hrblock free tax return Nor is it enough that you do not, in fact, wear your work clothes away from work. Hrblock free tax return The clothing must not be suitable for taking the place of your regular clothing. Hrblock free tax return Examples of workers who may be able to deduct the cost and upkeep of work clothes are: delivery workers, firefighters, health care workers, law enforcement officers, letter carriers, professional athletes, and transportation workers (air, rail, bus, etc. Hrblock free tax return ). Hrblock free tax return Musicians and entertainers can deduct the cost of theatrical clothing and accessories that are not suitable for everyday wear. Hrblock free tax return However, work clothing consisting of white cap, white shirt or white jacket, white bib overalls, and standard work shoes, which a painter is required by his union to wear on the job, is not distinctive in character or in the nature of a uniform. Hrblock free tax return Similarly, the costs of buying and maintaining blue work clothes worn by a welder at the request of a foreman are not deductible. Hrblock free tax return Protective clothing. Hrblock free tax return   You can deduct the cost of protective clothing required in your work, such as safety shoes or boots, safety glasses, hard hats, and work gloves. Hrblock free tax return   Examples of workers who may be required to wear safety items are: carpenters, cement workers, chemical workers, electricians, fishing boat crew members, machinists, oil field workers, pipe fitters, steamfitters, and truck drivers. Hrblock free tax return Military uniforms. Hrblock free tax return   You generally cannot deduct the cost of your uniforms if you are on full-time active duty in the armed forces. Hrblock free tax return However, if you are an armed forces reservist, you can deduct the unreimbursed cost of your uniform if military regulations restrict you from wearing it except while on duty as a reservist. Hrblock free tax return In figuring the deduction, you must reduce the cost by any nontaxable allowance you receive for these expenses. Hrblock free tax return   If local military rules do not allow you to wear fatigue uniforms when you are off duty, you can deduct the amount by which the cost of buying and keeping up these uniforms is more than the uniform allowance you receive. Hrblock free tax return   If you are a student at an armed forces academy, you cannot deduct the cost of your uniforms if they replace regular clothing. Hrblock free tax return However, you can deduct the cost of insignia, shoulder boards, and related items. Hrblock free tax return    You can deduct the cost of your uniforms if you are a civilian faculty or staff member of a military school. Hrblock free tax return Work-Related Education You can deduct expenses you have for education, even if the education may lead to a degree, if the education meets at least one of the following two tests. Hrblock free tax return It maintains or improves skills required in your present work. Hrblock free tax return It is required by your employer or the law to keep your salary, status, or job, and the requirement serves a business purpose of your employer. Hrblock free tax return You cannot deduct expenses you have for education, even though one or both of the preceding tests are met, if the education: Is needed to meet the minimum educational requirements to qualify you in your trade or business, or Is part of a program of study that will lead to qualifying you in a new trade or business. Hrblock free tax return If your education qualifies, you can deduct expenses for tuition, books, supplies, laboratory fees, and similar items, and certain transportation costs. Hrblock free tax return If the education qualifies you for a new trade or business, you cannot deduct the educational expenses even if you do not intend to enter that trade or business. Hrblock free tax return Travel as education. Hrblock free tax return   You cannot deduct the cost of travel that in itself constitutes a form of education. Hrblock free tax return For example, a French teacher who travels to France to maintain general familiarity with the French language and culture cannot deduct the cost of the trip as an educational expense. Hrblock free tax return More information. Hrblock free tax return    See Publication 970, Tax Benefits for Education, for a complete discussion of the deduction for work-related education expenses. Hrblock free tax return Education Expenses During Unemployment If you stop working for a year or less in order to get education in order to maintain or improve skills needed in your present work and then return to the same general type of work, your absence is considered temporary. Hrblock free tax return Education that you get during a temporary absence is qualifying work-related education if it maintains or improves skills needed in your present work. Hrblock free tax return Tax Preparation Fees You can usually deduct tax preparation fees on the return for the year in which you pay them. Hrblock free tax return Thus, on your 2013 return, you can deduct fees paid in 2013 for preparing your 2012 return. Hrblock free tax return These fees include the cost of tax preparation software programs and tax publications. Hrblock free tax return They also include any fee you paid for electronic filing of your return. Hrblock free tax return See Tax preparation fees under How To Report, later. Hrblock free tax return Other Expenses You can deduct certain other expenses as miscellaneous itemized deductions subject to the 2%-of-adjusted-gross-income limit. Hrblock free tax return On Schedule A (Form 1040), line 23, or Schedule A (Form 1040NR), line 9, you can deduct the ordinary and necessary expenses that you pay: To produce or collect income that must be included in your gross income, To manage, conserve, or maintain property held for producing such income, or To determine, contest, pay, or claim a refund of any tax. Hrblock free tax return You can deduct expenses you pay for the purposes in (1) and (2) above only if they are reasonable and closely related to these purposes. Hrblock free tax return These other expenses include the following items. Hrblock free tax return Appraisal fees for a casualty loss or charitable contribution. Hrblock free tax return Casualty and theft losses from property used in performing services as an employee. Hrblock free tax return Clerical help and office rent in caring for investments. Hrblock free tax return Depreciation on home computers used for investments. Hrblock free tax return Excess deductions (including administrative expenses) allowed a beneficiary on termination of an estate or trust. Hrblock free tax return Fees to collect interest and dividends. Hrblock free tax return Hobby expenses, but generally not more than hobby income. Hrblock free tax return Indirect miscellaneous deductions from pass-through entities. Hrblock free tax return Investment fees and expenses. Hrblock free tax return Legal fees related to producing or collecting taxable income or getting tax advice. Hrblock free tax return Loss on deposits in an insolvent or bankrupt financial institution. Hrblock free tax return Loss on traditional IRAs or Roth IRAs, when all amounts have been distributed to you. Hrblock free tax return Repayments of income. Hrblock free tax return Repayments of social security benefits. Hrblock free tax return Safe deposit box rental, except for storing jewelry and other personal effects. Hrblock free tax return Service charges on dividend reinvestment plans. Hrblock free tax return Tax advice fees. Hrblock free tax return Trustee's fees for your IRA, if separately billed and paid. Hrblock free tax return If the expenses you pay produce income that is only partially taxable, see Tax-Exempt Income Expenses, later, under Nondeductible Expenses. Hrblock free tax return Appraisal Fees You can deduct appraisal fees if you pay them to figure a casualty loss or the fair market value of donated property. Hrblock free tax return Casualty and Theft Losses You can deduct a casualty or theft loss as a miscellaneous itemized deduction subject to the 2% limit if you used the damaged or stolen property in performing services as an employee. Hrblock free tax return First report the loss in Section B of Form 4684, Casualties and Thefts. Hrblock free tax return You may also have to include the loss on Form 4797, Sales of Business Property, if you are otherwise required to file that form. Hrblock free tax return To figure your deduction, add all casualty or theft losses from this type of property included on Form 4684, lines 32 and 38b, or Form 4797, line 18a. Hrblock free tax return For more information on casualty and theft losses, see Publication 547, Casualties, Disasters, and Thefts. Hrblock free tax return Clerical Help and Office Rent You can deduct office expenses, such as rent and clerical help, that you have in connection with your investments and collecting the taxable income on them. Hrblock free tax return Credit or Debit Card Convenience Fees You can deduct the convenience fee charged by the card processor for paying your income tax (including estimated tax payments) by credit or debit card. Hrblock free tax return The fees are deductible on the return for the year in which you paid them. Hrblock free tax return For example, fees charged to payments made in 2013 can be claimed on the 2013 tax return. Hrblock free tax return Depreciation on Home Computer You can deduct depreciation on your home computer if you use it to produce income (for example, to manage your investments that produce taxable income). Hrblock free tax return You generally must depreciate the computer using the straight line method over the Alternative Depreciation System (ADS) recovery period. Hrblock free tax return But if you work as an employee and also use the computer in that work, see Depreciation on Computers under Unreimbursed Employee Expenses, earlier. Hrblock free tax return For more information on depreciation, see Publication 946. Hrblock free tax return Excess Deductions of an Estate If an estate's total deductions in its last tax year are more than its gross income for that year, the beneficiaries succeeding to the estate's property can deduct the excess. Hrblock free tax return Do not include deductions for the estate's personal exemption and charitable contributions when figuring the estate's total deductions. Hrblock free tax return The beneficiaries can claim the deduction only for the tax year in which, or with which, the estate terminates, whether the year of termination is a normal year or a short tax year. Hrblock free tax return For more information, see Termination of Estate in Publication 559, Survivors, Executors, and Administrators. Hrblock free tax return Fees To Collect Interest and Dividends You can deduct fees you pay to a broker, bank, trustee, or similar agent to collect your taxable bond interest or dividends on shares of stock. Hrblock free tax return But you cannot deduct a fee you pay to a broker to buy investment property, such as stocks or bonds. Hrblock free tax return You must add the fee to the cost of the property. Hrblock free tax return You cannot deduct the fee you pay to a broker to sell securities. Hrblock free tax return You can use the fee only to figure gain or loss from the sale. Hrblock free tax return See the instructions for Schedule D (Form 1040) for information on how to report the fee. Hrblock free tax return Hobby Expenses You can generally deduct hobby expenses, but only up to the amount of hobby income. Hrblock free tax return A hobby is not a business because it is not carried on to make a profit. Hrblock free tax return See Not-for-Profit Activities in chapter 1 of Publication 535. Hrblock free tax return Indirect Deductions of Pass-Through Entities Pass-through entities include partnerships, S corporations, and mutual funds that are not publicly offered. Hrblock free tax return Deductions of pass-through entities are passed through to the partners or shareholders. Hrblock free tax return The partners or shareholders can deduct their share of passed-through deductions for investment expenses as miscellaneous itemized deductions subject to the 2% limit. Hrblock free tax return Example. Hrblock free tax return You are a member of an investment club that is formed solely to invest in securities. Hrblock free tax return The club is treated as a partnership. Hrblock free tax return The partnership's income is solely from taxable dividends, interest, and gains from sales of securities. Hrblock free tax return In this case, you can deduct your share of the partnership's operating expenses as miscellaneous itemized deductions subject to the 2% limit. Hrblock free tax return However, if the investment club partnership has investments that also produce nontaxable income, you cannot deduct your share of the partnership's expenses that produce the nontaxable income. Hrblock free tax return Publicly offered mutual funds. Hrblock free tax return   Publicly offered mutual funds do not pass deductions for investment expenses through to shareholders. Hrblock free tax return A mutual fund is “publicly offered” if it is: Continuously offered pursuant to a public offering, Regularly traded on an established securities market, or Held by or for at least 500 persons at all times during the tax year. Hrblock free tax return   A publicly offered mutual fund will send you a Form 1099-DIV, Dividends and Distributions, or a substitute form, showing the net amount of dividend income (gross dividends minus investment expenses). Hrblock free tax return This net figure is the amount you report on your return as income. Hrblock free tax return You cannot further deduct investment expenses related to publicly offered mutual funds because they are already included as part of the net income amount. Hrblock free tax return Information returns. Hrblock free tax return   You should receive information returns from pass-through entities. Hrblock free tax return Partnerships and S corporations. Hrblock free tax return   These entities issue Schedule K-1, which lists the items and amounts you must report, and identifies the tax return schedules and lines to use. Hrblock free tax return Nonpublicly offered mutual funds. Hrblock free tax return   These funds will send you a Form 1099-DIV, or a substitute form, showing your share of gross income and investment expenses. Hrblock free tax return You can claim the expenses only as a miscellaneous itemized deduction subject to the 2% limit. Hrblock free tax return Investment Fees and Expenses You can deduct investment fees, custodial fees, trust administration fees, and other expenses you paid for managing your investments that produce taxable income. Hrblock free tax return Legal Expenses You can usually deduct legal expenses that you incur in attempting to produce or collect taxable income or that you pay in connection with the determination, collection, or refund of any tax. Hrblock free tax return You can also deduct legal expenses that are: Related to either doing or keeping your job, such as those you paid to defend yourself against criminal charges arising out of your trade or business, For tax advice related to a divorce if the bill specifies how much is for tax advice and it is determined in a reasonable way, or To collect taxable alimony. Hrblock free tax return You can deduct expenses of resolving tax issues relating to profit or loss from business (Schedule C or C-EZ), rentals or royalties (Schedule E), or farm income and expenses (Schedule F) on the appropriate schedule. Hrblock free tax return You deduct expenses of resolving nonbusiness tax issues on Schedule A (Form 1040 or Form 1040NR). Hrblock free tax return See Tax Preparation Fees, earlier. Hrblock free tax return Unlawful discrimination claims. Hrblock free tax return   You may be able to deduct, as an adjustment to income on Form 1040, line 36, or Form 1040NR, line 35, rather than as a miscellaneous itemized deduction, attorney fees and court costs for actions settled or decided after October 22, 2004, involving a claim of unlawful discrimination, a claim against the U. Hrblock free tax return S. Hrblock free tax return Government, or a claim made under section 1862(b)(3)(A) of the Social Security Act. Hrblock free tax return However, the amount you can deduct on Form 1040, line 36, or Form 1040NR, line 35, is limited to the amount of the judgment or settlement you are including in income for the tax year. Hrblock free tax return See Publication 525 for more information. Hrblock free tax return Loss on Deposits A loss on deposits can occur when a bank, credit union, or other financial institution becomes insolvent or bankrupt. Hrblock free tax return If you can reasonably estimate the amount of your loss on money you have on deposit in a financial institution that becomes insolvent or bankrupt, you can generally choose to deduct it in the current year even though its exact amount has not been finally determined. Hrblock free tax return If elected, the casualty loss is subject to certain deduction limitations. Hrblock free tax return The election is made on Form 4684. Hrblock free tax return Once you make this choice, you cannot change it without IRS approval. Hrblock free tax return If none of the deposit is federally insured, you can deduct the loss in either of the following ways. Hrblock free tax return As an ordinary loss (as a miscellaneous itemized deduction subject to the 2% limit). Hrblock free tax return Write the name of the financial institution and “Insolvent Financial Institution” beside the amount on Schedule A (Form 1040), line 23, or Schedule A (Form 1040NR), line 9. Hrblock free tax return This deduction is limited to $20,000 ($10,000 if you are married filing separately) for each financial institution, reduced by any expected state insurance proceeds. Hrblock free tax return As a casualty loss. Hrblock free tax return Report it on Form 4684 first and then on Schedule A (Form 1040). Hrblock free tax return See Publication 547 for details. Hrblock free tax return As a nonbusiness bad debt. Hrblock free tax return Report it on Schedule D (Form 1040). Hrblock free tax return If any part of the deposit is federally insured, you can deduct the loss only as a casualty loss. Hrblock free tax return Exception. Hrblock free tax return   You cannot make this choice if you are a 1%-or-more-owner or an officer of the financial institution, or are related to such owner or officer. Hrblock free tax return For a definition of “related,” see Deposit in Insolvent or Bankrupt Financial Institution in chapter 4 of Publication 550. Hrblock free tax return Actual loss different from estimated loss. Hrblock free tax return   If you make this choice and your actual loss is less than your estimated loss, you must include the excess in income. Hrblock free tax return See Recoveries in Publication 525. Hrblock free tax return If your actual loss is more than your estimated loss, treat the excess loss as explained under Choice not made, next. Hrblock free tax return Choice not made. Hrblock free tax return   If you do not make this choice (or if you have an excess actual loss after choosing to deduct your estimated loss), treat your loss (or excess loss) as a nonbusiness bad debt (deductible as a short-term capital loss) in the year its amount is finally determined. Hrblock free tax return See Nonbusiness Bad Debts in chapter 4 of Publication 550. Hrblock free tax return Loss on IRA If you have a loss on your traditional IRA (or Roth IRA) investment, you can deduct the loss as a miscellaneous itemized deduction subject to the 2% limit, but only when all the amounts in all your traditional IRA (or Roth IRA) accounts have been distributed to you and the total distributions are less than your unrecovered basis. Hrblock free tax return For more information, see Publication 590, Individual Retirement Arrangements (IRAs). Hrblock free tax return Repayments of Income If you had to repay an amount that you included in income in an earlier year, you may be able to deduct the amount you repaid. Hrblock free tax return If the amount you had to repay was ordinary income of $3,000 or less, the deduction is subject to the 2% limit. Hrblock free tax return If it was more than $3,000, see Repayments Under Claim of Right under Deductions Not Subject to the 2% Limit, later. Hrblock free tax return Repayments of Social Security Benefits If the total of the amounts in box 5 (net benefits for 2013) of all your Forms SSA-1099, Social Security Benefit Statement, and Forms RRB-1099, Payments By the Railroad Retirement Board, is a negative figure (a figure in parentheses), you may be able to take a miscellaneous itemized deduction subject to the 2% limit. Hrblock free tax return The amount you can deduct is the part of the negative figure that represents an amount you included in gross income in an earlier year. Hrblock free tax return The amount in box 5 of Form SSA-1099 or RRB-1099 is the net amount of your benefits for the year. Hrblock free tax return It will be a negative figure if the amount of benefits you repaid in 2013 (box 4) is more than the gross amount of benefits paid to you in 2013 (box 3). Hrblock free tax return If the deduction is more than $3,000, you will have to use a special computation to figure your tax. Hrblock free tax return See Publication 915, Social Security and Equivalent Railroad Retirement Benefits, for additional information. Hrblock free tax return Safe Deposit Box Rent You can deduct safe deposit box rent if you use the box to store taxable income-producing stocks, bonds, or investment-related papers and documents. Hrblock free tax return You cannot deduct the rent if you use the box only for jewelry, other personal items, or tax-exempt securities. Hrblock free tax return Service Charges on Dividend Reinvestment Plans You can deduct service charges you pay as a subscriber in a dividend reinvestment plan. Hrblock free tax return These service charges include payments for: Holding shares acquired through a plan, Collecting and reinvesting cash dividends, and Keeping individual records and providing detailed statements of accounts. Hrblock free tax return Trustee's Administrative Fees for IRA Trustee's administrative fees that are billed separately and paid by you in connection with your IRA are deductible (if they are ordinary and necessary) as a miscellaneous itemized deduction subject to the 2% limit. Hrblock free tax return Deductions Not Subject to the 2% Limit You can deduct the items listed below as miscellaneous itemized deductions. Hrblock free tax return They are not subject to the 2% limit. Hrblock free tax return Report these items on Schedule A (Form 1040), line 28, or Schedule A (Form 1040NR), line 14. Hrblock free tax return List of Deductions Amortizable premium on taxable bonds. Hrblock free tax return Casualty and theft losses from income-producing property. Hrblock free tax return Federal estate tax on income in respect of a decedent. Hrblock free tax return Gambling losses up to the amount of gambling winnings. Hrblock free tax return Impairment-related work expenses of persons with disabilities. Hrblock free tax return Loss from other activities from Schedule K-1 (Form 1065-B), box 2. Hrblock free tax return Losses from Ponzi-type investment schemes. Hrblock free tax return Repayments of more than $3,000 under a claim of right. Hrblock free tax return Unrecovered investment in an annuity. Hrblock free tax return Amortizable Premium on Taxable Bonds In general, if the amount you pay for a bond is greater than its stated principal amount, the excess is bond premium. Hrblock free tax return You can elect to amortize the premium on taxable bonds. Hrblock free tax return The amortization of the premium is generally an offset to interest income on the bond rather than a separate deduction item. Hrblock free tax return Pre-1998 election to amortize bond premium. Hrblock free tax return   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. Hrblock free tax return Bonds acquired after October 22, 1986, and before 1988. Hrblock free tax return   The amortization of the premium on these bonds is investment interest expense subject to the investment interest limit, unless you chose to treat it as an offset to interest income on the bond. Hrblock free tax return Bonds acquired before October 23, 1986. Hrblock free tax return   The amortization of the premium on these bonds is a miscellaneous itemized deduction not subject to the 2% limit. Hrblock free tax return Deduction for excess premium. Hrblock free tax return   On certain bonds (such as bonds that pay a variable rate of interest or that provide for an interest-free period), the amount of bond premium allocable to a period may exceed the amount of stated interest allocable to the period. Hrblock free tax return If this occurs, treat the excess as a miscellaneous itemized deduction that is not subject to the 2% limit. Hrblock free tax return However, the amount deductible is limited to the amount by which your total interest inclusions on the bond in prior periods exceed the total amount you treated as a bond premium deduction on the bond in prior periods. Hrblock free tax return If any of the excess bond premium cannot be deducted because of the limit, this amount is carried forward to the next period and is treated as bond premium allocable to that period. Hrblock free tax return    Pre-1998 choice to amortize bond premium. Hrblock free tax return If you made the choice to amortize the premium on taxable bonds before 1998, you can deduct the bond premium amortization that is more than your interest income only for bonds acquired during 1998 and later years. Hrblock free tax return More information. Hrblock free tax return    For more information on bond premium, see Bond Premium Amortization in chapter 3 of Publication 550. Hrblock free tax return Casualty and Theft Losses of Income-Producing Property You can deduct a casualty or theft loss as a miscellaneous itemized deduction not subject to the 2% limit if the damaged or stolen property was income-producing property (property held for investment, such as stocks, notes, bonds, gold, silver, vacant lots, and works of art). Hrblock free tax return First report the loss in Section B of Form 4684. Hrblock free tax return You may also have to include the loss on Form 4797, Sales of Business Property, if you are otherwise required to file that form. Hrblock free tax return To figure your deduction, add all casualty or theft losses from this type of property included on Form 4684, lines 32 and 38b, or Form 4797, line 18a. Hrblock free tax return For more information on casualty and theft losses, see Publication 547. Hrblock free tax return Federal Estate Tax on Income in Respect of a Decedent You can deduct the federal estate tax attributable to income in respect of a decedent that you as a beneficiary include in your gross income. Hrblock free tax return Income in respect of the decedent is gross income that the decedent would have received had death not occurred and that was not properly includible in the decedent's final income tax return. Hrblock free tax return See Publication 559 for information about figuring the amount of this deduction. Hrblock free tax return Gambling Losses Up to the Amount of Gambling Winnings You must report the full amount of your gambling winnings for the year on Form 1040, line 21. Hrblock free tax return You deduct your gambling losses for the year on Schedule A (Form 1040), line 28. Hrblock free tax return You cannot deduct gambling losses that are more than your winnings. Hrblock free tax return Generally, nonresident aliens cannot deduct gambling losses on Schedule A (Form 1040NR). Hrblock free tax return You cannot reduce your gambling winnings by your gambling losses and report the difference. Hrblock free tax return You must report the full amount of your winnings as income and claim your losses (up to the amount of winnings) as an itemized deduction. Hrblock free tax return Therefore, your records should show your winnings separately from your losses. Hrblock free tax return Diary of winnings and losses. Hrblock free tax return You must keep an accurate diary or similar record of your losses and winnings. Hrblock free tax return Your diary should contain at least the following information. Hrblock free tax return The date and type of your specific wager or wagering activity. Hrblock free tax return The name and address or location of the gambling establishment. Hrblock free tax return The names of other persons present with you at the gambling establishment. Hrblock free tax return The amount(s) you won or lost. Hrblock free tax return Proof of winnings and losses. Hrblock free tax return   In addition to your diary, you should also have other documentation. Hrblock free tax return You can generally prove your winnings and losses through Form W-2G, Certain Gambling Winnings, Form 5754, Statement by Person(s) Receiving Gambling Winnings, wagering tickets, canceled checks, substitute checks, credit records, bank withdrawals, and statements of actual winnings or payment slips provided to you by the gambling establishment. Hrblock free tax return   For specific wagering transactions, you can use the following items to support your winnings and losses. Hrblock free tax return    These recordkeeping suggestions are intended as general guidelines to help you establish your winnings and losses. Hrblock free tax return They are not all-inclusive. Hrblock free tax return Your tax liability depends on your particular facts and circumstances. Hrblock free tax return Keno. Hrblock free tax return   Copies of the keno tickets you purchased that were validated by the gambling establishment, copies of your casino credit records, and copies of your casino check cashing records. Hrblock free tax return Slot machines. Hrblock free tax return   A record of the machine number and all winnings by date and time the machine was played. Hrblock free tax return Table games (twenty-one (blackjack), craps, poker, baccarat, roulette, wheel of fortune, etc. Hrblock free tax return ). Hrblock free tax return   The number of the table at which you were playing. Hrblock free tax return Casino credit card data indicating whether the credit was issued in the pit or at the cashier's cage. Hrblock free tax return Bingo. Hrblock free tax return   A record of the number of games played, cost of tickets purchased, and amounts collected on winning tickets. Hrblock free tax return Supplemental records include any receipts from the casino, parlor, etc. Hrblock free tax return Racing (horse, harness, dog, etc. Hrblock free tax return ). Hrblock free tax return   A record of the races, amounts of wagers, amounts collected on winning tickets, and amounts lost on losing tickets. Hrblock free tax return Supplemental records include unredeemed tickets and payment records from the racetrack. Hrblock free tax return Lotteries. Hrblock free tax return   A record of ticket purchases, dates, winnings, and losses. Hrblock free tax return Supplemental records include unredeemed tickets, payment slips, and winnings statements. Hrblock free tax return Impairment-Related Work Expenses If you have a physical or mental disability that limits your being employed, or substantially limits one or more of your major life activities, such as performing manual tasks, walking, speaking, breathing, learning, and working, you can deduct your impairment-related work expenses. Hrblock free tax return Impairment-related work expenses are ordinary and necessary business expenses for attendant care services at your place of work and other expenses in connection with your place of work that are necessary for you to be able to work. Hrblock free tax return Example. Hrblock free tax return You are blind. Hrblock free tax return You must use a reader to do your work. Hrblock free tax return You use the reader both during your regular working hours at your place of work and outside your regular working hours away from your place of work. Hrblock free tax return The reader's services are only for your work. Hrblock free tax return You can deduct your expenses for the reader as impairment-related work expenses. Hrblock free tax return Self-employed. Hrblock free tax return   If you are self-employed, enter your impairment-related work expenses on the appropriate form (Schedule C, C-EZ, E, or F) used to report your business income and expenses. Hrblock free tax return See Impairment-related work expenses. Hrblock free tax return , later under How To Report. Hrblock free tax return Loss From Other Activities From Schedule K-1 (Form 1065-B), Box 2 If the amount reported in Schedule K-1 (Form 1065-B), box 2, is a loss, report it on Schedule A (Form 1040), line 28, or Schedule A (Form 1040NR), line 14 (only if effectively connected with a U. Hrblock free tax return S. Hrblock free tax return trade or business). Hrblock free tax return It is not subject to the passive activity limitations. Hrblock free tax return Officials Paid on a Fee Basis If you are a fee-basis official, you can claim your expenses in performing services in that job as an adjustment to income rather than as a miscellaneous itemized deduction. Hrblock free tax return See Publication 463 for more information. Hrblock free tax return Performing Artists If you are a qualified performing artist, you can deduct your employee business expenses as an adjustment to income rather than as a miscellaneous itemized deduction. Hrblock free tax return If you are an employee, complete Form 2106 or Form 2106-EZ. Hrblock free tax return See Publication 463 for more information. Hrblock free tax return Losses From Ponzi-type Investment Schemes These losses are deductible as theft losses of income-producing property on your tax return for the year the loss was discovered. Hrblock free tax return You figure the deductible loss in Section B of Form 4684. Hrblock free tax return However, if you qualify to use Revenue Procedure 2009-20 (as modified by Revenue Procedure 2011-58) and you choose to follow the procedures in the guidance, complete Section C of Form 4684 before completing Section B. Hrblock free tax return Section C of Form 4684 replaces Appendix A in Revenue Procedure 2009-20. Hrblock free tax return You do not need to complete Appendix A. Hrblock free tax return See the Form 4684 instructions and Publication 547, Casualties, Disasters, and Thefts, for more information. Hrblock free tax return Repayments Under Claim of Right If you had to repay more than $3,000 that you included in your income in an earlier year because at the time you thought you had an unrestricted right to it, you may be able to deduct the amount you repaid, or take a credit against your tax. Hrblock free tax return See Repayments in Publication 525 for more information. Hrblock free tax return Unrecovered Investment in Annuity A retiree who contributed to the cost of an annuity can exclude from income a part of each payment received as a tax-free return of the retiree's investment. Hrblock free tax return If the retiree dies before the entire investment is recovered tax free, any unrecovered investment can be deducted on the retiree's final income tax return. Hrblock free tax return See Publication 575, Pension and Annuity Income, for more information about the tax treatment of pensions and annuities. Hrblock free tax return Nondeductible Expenses You cannot deduct the following expenses. Hrblock free tax return List of Nondeductible Expenses Adoption expenses. Hrblock free tax return Broker's commissions. Hrblock free tax return Burial or funeral expenses, including the cost of a cemetery lot. Hrblock free tax return Campaign expenses. Hrblock free tax return Capital expenses. Hrblock free tax return Check-writing fees. Hrblock free tax return Club dues. Hrblock free tax return Commuting expenses. Hrblock free tax return Fees and licenses, such as car licenses, marriage licenses, and dog tags. Hrblock free tax return Fines and penalties, such as parking tickets. Hrblock free tax return Health spa expenses. Hrblock free tax return Hobby losses—but see Hobby Expenses, earlier. Hrblock free tax return Home repairs, insurance, and rent. Hrblock free tax return Home security system. Hrblock free tax return Illegal bribes and kickbacks—see Bribes and kickbacks in chapter 11 of Publication 535. Hrblock free tax return Investment-related seminars. Hrblock free tax return Life insurance premiums paid by the insured. Hrblock free tax return Lobbying expenses. Hrblock free tax return Losses from the sale of your home, furniture, personal car, etc. Hrblock free tax return Lost or misplaced cash or property. Hrblock free tax return Lunches with co-workers. Hrblock free tax return Meals while working late. Hrblock free tax return Medical expenses as business expenses other than medical examinations required by your employer. Hrblock free tax return Personal disability insurance premiums. Hrblock free tax return Personal legal expenses. Hrblock free tax return Personal, living, or family expenses. Hrblock free tax return Political contributions. Hrblock free tax return Professional accreditation fees. Hrblock free tax return Professional reputation, expenses to improve. Hrblock free tax return Relief fund contributions. Hrblock free tax return Residential telephone line. Hrblock free tax return Stockholders' meeting, expenses of attending. Hrblock free tax return Tax-exempt income, expenses of earning or collecting. Hrblock free tax return The value of wages never received or lost vacation time. Hrblock free tax return Travel expenses for another individual. Hrblock free tax return Voluntary unemployment benefit fund contributions. Hrblock free tax return Wristwatches. Hrblock free tax return Adoption Expenses You cannot deduct the expenses of adopting a child but you may be able to take a credit for those expenses. Hrblock free tax return For details, see Form 8839, Qualified Adoption Expenses. Hrblock free tax return Commissions Commissions paid on the purchase of securities are not deductible, either as business or nonbusiness expenses. Hrblock free tax return Instead, these fees must be added to the taxpayer's cost of the securities. Hrblock free tax return Commissions paid on the sale are deductible as business expenses only by dealers. Hrblock free tax return Campaign Expenses You cannot deduct campaign expenses of a candidate for any office, even if the candidate is running for reelection to the office. Hrblock free tax return These include qualification and registration fees for primary elections. Hrblock free tax return Legal fees. Hrblock free tax return   You cannot deduct legal fees paid to defend charges that arise from participation in a political campaign. Hrblock free tax return Capital Expenses You cannot currently deduct amounts paid to buy property that has a useful life substantially beyond the tax year or amounts paid to increase the value or prolong the life of property. Hrblock free tax return If you use such property in your work, you may be able to take a depreciation deduction. Hrblock free tax return See Publication 946. Hrblock free tax return If the property is a car used in your work, also see Publication 463. Hrblock free tax return Check-Writing Fees on Personal Account If you have a personal checking account, you cannot deduct fees charged by the bank for the privilege of writing checks, even if the account pays interest. Hrblock free tax return Club Dues Generally, you cannot deduct the cost of membership in any club organized for business, pleasure, recreation, or other social purpose. Hrblock free tax return This includes business, social, athletic, luncheon, sporting, airline, hotel, golf, and country clubs. Hrblock free tax return You cannot deduct dues paid to an organization if one of its main purposes is to: Conduct entertainment activities for members or their guests, or Provide members or their guests with access to entertainment facilities. Hrblock free tax return Dues paid to airline, hotel, and luncheon clubs are not deductible. Hrblock free tax return Commuting Expenses You cannot deduct commuting expenses (the cost of transportation between your home and your main or regular place of work). Hrblock free tax return If you haul tools, instruments, or other items in your car to and from work, you can deduct only the additional cost of hauling the items, such as the rent on a trailer to carry the items. Hrblock free tax return Fines or Penalties You cannot deduct fines or penalties you pay to a governmental unit for violating a law. Hrblock free tax return This includes an amount paid in settlement of your actual or potential liability for a fine or penalty (civil or criminal). Hrblock free tax return Fines or penalties include parking tickets, tax penalties, and penalties deducted from teachers' paychecks after an illegal strike. Hrblock free tax return Health Spa Expenses You cannot deduct health spa expenses, even if there is a job requirement to stay in excellent physical condition, such as might be required of a law enforcement officer. Hrblock free tax return Home Security System You cannot deduct the cost of a home security system as a miscellaneous deduction. Hrblock free tax return However, you may be able to claim a deduction for a home security system as a business expense if you have a home office. Hrblock free tax return See Home Office under Unreimbursed Employee Expenses, earlier, and Publication 587. Hrblock free tax return Investment-Related Seminars You cannot deduct any expenses for attending a convention, seminar, or similar meeting for investment purposes. Hrblock free tax return Life Insurance Premiums You cannot deduct premiums you pay on your life insurance. Hrblock free tax return You may be able to deduct, as alimony, premiums you pay on life insurance policies assigned to your former spouse. Hrblock free tax return See Publication 504, Divorced or Separated Individuals, for information on alimony. Hrblock free tax return Lobbying Expenses You generally cannot deduct amounts paid or incurred for lobbying expenses. Hrblock free tax return These include expenses to: Influence legislation, Participate, or intervene, in any political campaign for, or against, any candidate for public office, Attempt to influence the general public, or segments of the public, about elections, legislative matters, or referendums, or Communicate directly with covered executive branch officials in any attempt to influence the official actions or positions of those officials. Hrblock free tax return Lobbying expenses also include any amounts paid or incurred for research, preparation, planning, or coordination of any of these activities. Hrblock free tax return Covered executive branch official. Hrblock free tax return   A covered executive branch official, for the purpose of (4) above, is any of the following officials. Hrblock free tax return The President. Hrblock free tax return The Vice President. Hrblock free tax return Any officer or employee of the White House Office of the Executive Office of the President, and the two most senior level officers of each of the other agencies in the Executive Office. Hrblock free tax return Any individual serving in a position in Level I of the Executive Schedule under section 5312 of Title 5, United States Code, any other individual designated by the President as having Cabinet-level status, and any immediate deputy of one of these individuals. Hrblock free tax return Dues used for lobbying. Hrblock free tax return   If a tax-exempt organization notifies you that part of the dues or other amounts you pay to the organization are used to pay nondeductible lobbying expenses, you cannot deduct that part. Hrblock free tax return Exceptions. Hrblock free tax return   You can deduct certain lobbying expenses if they are ordinary and necessary expenses of carrying on your trade or business. Hrblock free tax return You can deduct expenses for attempting to influence the legislation of any local council or similar governing body (local legislation). Hrblock free tax return An Indian tribal government is considered a local council or similar governing body. Hrblock free tax return You can deduct in-house expenses for influencing legislation or communicating directly with a covered executive branch official if the expenses for the tax year are not more than $2,000 (not counting overhead expenses). Hrblock free tax return If you are a professional lobbyist, you can deduct the expenses you incur in the trade or business of lobbying on behalf of another person. Hrblock free tax return Payments by the other person to you for lobbying activities cannot be deducted. Hrblock free tax return Lost or Mislaid Cash or Property You cannot deduct a loss based on the mere disappearance of money or property. Hrblock free tax return However, an accidental loss or disappearance of property can qualify as a casualty if it results from an identifiable event that is sudden, unexpected, or unusual. Hrblock free tax return See Publication 547. Hrblock free tax return Example. Hrblock free tax return A car door is accidentally slammed on your hand, breaking the setting of your diamond ring. Hrblock free tax return The diamond falls from the ring and is never found. Hrblock free tax return The loss of the diamond is a casualty. Hrblock free tax return Lunches With Co-workers You cannot deduct the expenses of lunches with co-workers, except while traveling away from home on business. Hrblock free tax return See Publication 463 for information on deductible expenses while traveling away from home. Hrblock free tax return Meals While Working Late You cannot deduct the cost of meals while working late. Hrblock free tax return However, you may be able to claim a deduction if the cost of the meals is a deductible entertainment expense, or if you are traveling away from home. Hrblock free tax return See Publication 463 for information on deductible entertainment expenses and expenses while traveling away from home. Hrblock free tax return Personal Legal Expenses You cannot deduct personal legal expenses such as those for the following. Hrblock free tax return Custody of children. Hrblock free tax return Breach of promise to marry suit. Hrblock free tax return Civil or criminal charges resulting from a personal relationship. Hrblock free tax return Damages for personal injury (except certain whistleblower claims and unlawful discrimination claims). Hrblock free tax return For more information about unlawful discrimination claims, see Deductions Subject to the 2% Limit, earlier. Hrblock free tax return Preparation of a title (or defense or perfection of a title). Hrblock free tax return Preparation of a will. Hrblock free tax return Property claims or property settlement in a divorce. Hrblock free tax return You cannot deduct these expenses even if a result of the legal proceeding is the loss of income-producing property. Hrblock free tax return Political Contributions You cannot deduct contributions made to a political candidate, a campaign committee, or a newsletter fund. Hrblock free tax return Advertisements in convention bulletins and admissions to dinners or programs that benefit a political party or political candidate are not deductible. Hrblock free tax return Professional Accreditation Fees You cannot deduct professional accreditation fees such as the following. Hrblock free tax return Accounting certificate fees paid for the initial right to practice accounting. Hrblock free tax return Bar exam fees and incidental expenses in securing initial admission to the bar. Hrblock free tax return Medical and dental license fees paid to get initial licensing. Hrblock free tax return Professional Reputation You cannot deduct expenses of radio and TV appearances to increase your personal prestige or establish your professional reputation. Hrblock free tax return Relief Fund Contributions You cannot deduct contributions paid to a private plan that pays benefits to any covered employee who cannot work because of any injury or illness not related to the job. Hrblock free tax return Residential Telephone Service You cannot deduct any charge (including taxes) for basic local telephone service for the first telephone line to your residence, even if it is used in a trade or business. Hrblock free tax return Stockholders' Meetings You cannot deduct transportation and other expenses you pay to attend stockholders' meetings of companies in which you own stock but have no other interest. Hrblock free tax return You cannot deduct these expenses even if you are attending the meeting to get information that would be useful in making further investments. Hrblock free tax return Tax-Exempt Income Expenses You cannot deduct expenses to produce tax-exempt income. Hrblock free tax return You cannot deduct interest on a debt incurred or continued to buy or carry tax-exempt securities. Hrblock free tax return If you have expenses to p
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Phone Forums - Retirement Plans

Free phone forums featuring IRS employees discussing retirement plan topics.

Upcoming Phone Forums

Check back for upcoming phone forums.


Continuing Education (CE) Credits

  • Enrolled Agents and Enrolled Retirement Plan Agents may earn CE credit for attending the entire phone forum. The forum is also intended to meet the CE requirements for Enrolled Actuaries, but the final decision rests with the Joint Board for the Enrollment of Actuaries. Other professional groups should consult with their licensing agencies regarding CE credit.
  • Participants must register individually and use their own assigned User ID to receive CE credit.
  • Each participant must use an individual phone line to establish attendance and the length of time attending the forum.
  • A Certificate of Completion will be emailed to the participants who meet the attendance requirement about a week after the forum.
  • Interested in other opportunities to earn free CE credits?

If you have question(s), please contact us at ep.phoneforum@irs.gov.



Recently Held Phone Forums

An Overview of the 2013 Cumulative List of Changes in Plan Qualification- March 13, 2014 - Discussed the list of changes plan sponsors and practitioners must make to a plan before submitting determination letter applications beginning February 1, 2014 (Notice 2013-84). 
Handouts: An Overview of the 2013 Cumulative List of Changes in Plan Qualification presentation and Notice 2013-84

Upcoming Employee Plans Guidance Phone Forum - February 26, 2014 (scheduled previously for October 29, 2013) - Reviewed retirement benefit items on the 2013-2014 Priority Guidance Plan released on August 9 and other projects in EP Technical Guidance.
Handout: Employee Plans Technical Guidance

Ethical Standards of Employee Benefits Practice – What to Ask and Say to Clients, and What to Tell the IRS - January 29, 2014 (rebroadcast February 6, 2014) - Discussed an employee benefits practitioner’s ethical standards of conduct under Circular 230 for communications with clients and the IRS. 
Handout: Ethical Standards for Employee Benefits Practitioners

The Employee Plans Team Audit Program - November 21, 2013 -(transcript) - Discussed EPTA, our large case audit program. 
Handout: The Employee Plans Team Audit Program Presentation

How to prepare for an IRS Employee Plans Audit - August 29, 2013 - Two Sessions - Discussed latest information about the Employee Plans Examinations process.
Handout: Tools to Prepare for an Audit presentation

The Importance of Good Internal Controls - August 8, 2013 - (transcript) - Discussed how effective internal controls are essential to preventing costly mistakes that could jeopardize a retirement plan’s tax-favored status.
Handout: The Importance of Good Internal Controls presentation

EPCRS: Correcting 401(k) Plan Mistakes – Two Sessions - July 25, 2013 - (transcript) - Discussed correcting common 401(k) plan mistakes under EPCRS Revenue Procedure 2013-12, and how to find, fix and avoid them.
Handout: EPCRS: Correcting 401(k) Plan Mistakes presentation

What You Need to Know about the 403(b) Pre-Approved Plan Program - June 25, 2013 - (audio) - Discussed the upcoming 403(b) Pre-Approved Plan Program outlined in Revenue Procedure 2013-22.
Handout: 403(b) Pre-Approved Plan Program Presentation

403(b) Corrections and Examination Trends - May 23, 2013 - (audio) Discussed Revenue Procedure 2013-12 including guidance on correcting 403(b) plan failures and updates to the Employee Plans Compliance Resolution System.
Handout: 403(b) Plan Correction Issues Presentation

What You Need to Know About the IRS Final 401(k) Questionnaire Report and Next Steps - May 13, 2013 - Discussed significant findings and next steps (including outreach, guidance and compliance projects) and a new self-audit tool to help 401(k) plan sponsors avoid costly mistakes. 
Handout: Final 401(k) Questionnaire Report Presentation (Updated)

Defined Benefit Plan Update - April 23, 2013 - (transcript) - Discussed recent developments affecting defined benefit plans.
Handout: Defined Benefit Plan Update Presentation

International Issues Involving Retirement Plans in U.S. Territories  - March 21, 2013 - Discussed audit results and recurring issues of retirement plans in U.S. Territories, and Employee Plans’ 2013 fiscal year strategies and operating priorities.
Handout: International Issues Involving Retirement Plans in U.S. Territories Presentation

Overview of the 2012 Cumulative List of Plan Qualification Changes - February 28, 2013 - (audio) - Discussed the list of plan changes to by plan sponsors and practitioners submitting determination letter applications during the period beginning February 1, 2013 (Notice 2012-76).
Handout: Overview of the 2012 Cumulative List of Plan Qualification Changes Presentation

Employee Plans Compliance Resolution System Changes - February 21, 2013 - Session #1 & 2 - (audio) - Discussed Revenue Procedure 2013-12 and the various changes to the IRS correction programs.
Handout: EPCRS Changes Presentation

Ethical Standards for and Accountability of Practitioners Offering Tax Advice Relating to Employee Benefit Plans - February 13, 2013 (audio) - Discussed professional standards of conduct applicable to, and the accountability of, individuals that provide tax advice relating to employee benefit plans.  
Handout: Ethical Standards Presentation

Retirement plans can make loans, hardship distributions to Sandy victims - December 11, 2012 (audio)- Discussed Announcement 2012-44 and the options available to employees their families and plan sponsors.
Handout: Hurricane Sandy Relief Presentation

MAP-21: Changes to Segment Rates - September 27, 2012 - (audio) - Discussed the Moving Ahead for Progress in the 21st Century Act (MAP-21) and recently released related guidance.
Handout: MAP-21 Presentation

EPCRS: Correction of 401(k) Plan Mistakes (September 7, 2012) - (audio) - How to correct common mistakes in 401(k) plans.
Handouts: Correction Methods for 401(k) Failures Presentation

Lifetime Annuity Guidance (August 28, 2012) (Audio and Transcript) - Guidance designed to encourage lifetime annuity options for retirees. The presentation included Revenue Ruling 2012-3, Revenue Ruling 2012-4, and proposed regulations under sections 401(a)(9) and 417(e)(3) of the Code.
Handout: Lifetime Annuity Guidance Presentation

Operating Under the Written Plan Requirements and Common Issues Identified in 403(b) Plans (June 12, 2012) (transcript)- Frequent questions pertaining to the 403(b) written plan requirements and how the IRS is approaching the written plan requirement under audit.
Handouts: Operating Under the Written Plan Requirements and Common Issues Identified in 403(b) Plans Presentation

Governmental Plan Proposed Guidance (May 15, 2012) (transcript) - Proposed drafts of the general guidance on possible standards for determining if a retirement plan is a governmental plan under IRC section 414(d).

Indian Tribal Government Retirement Plans (April 24, 2012) - Possible standards for determining whether a plan of an Indian Tribal Government is a governmental plan within the meaning of section 414(d) of the Code.

EP Determination Letter Program Update (March 30, 2012) (transcript) - Important changes to the Employee Plans determination letter program.
Handout: EP Determination Letter Program Update Presentation

401(k) Questionnaire Interim Report IRS Phone Forum (March 6, 2012) (transcript) - 401(k) Questionnaire Interim Report, its next steps, and current issues.
Handout: 401(k) Questionnaire Interim Report Presentation

Funding-Based Benefit Restrictions - (February 23, 2012) (transcript)- funding-based benefit restrictions under IRC section 436.
Handout: Funding-Based Benefit Restrictions Presentation

Self Correction Program (SCP) and Closing Agreement Program (CAP) (November 30, 2011) (transcript) - current EPCRS issues, procedures and CAP sanctions
Handout: SCP and CAP Presentation

Determination Letter Issues Regarding Employee Stock Ownership Plans (October 28, 2011) (transcript) - technical issues affecting ESOPs and recurring issues noted in ESOP determination letter submissions
Handout: Determination Letter Issues Regarding Employee Stock Ownership Plans Presentation

Current Developments and Issues from the office of Employee Plans Rulings and Agreements (September 21, 2011) (transcript) - technical guidance hot topics and voluntary compliance applications
Handout: Current Developments and Issues Presentation

Participant Loans (September 12, 2011) (transcript) - treatment of loans as distributions, taxability and IRC §4975
Handout: Participants Loans Presentation
Helpful Links: The Fix Is In: Common Plan Mistakes - Participant Loans in 401(k) Plans; The Fix Is In: Common Plan Mistakes - Plan Loan Failures and Deemed Distributions;  Retirement Plans FAQs regarding Loans

EPCRS: Plan Correction Issues (August 25, 2011)  (transcript) - recurring issues found in EPCRS and tips to avoid common mistakes
Handout: EPCRS: Plan Correction Issues Presentation

Ethics for Employee Plans Practitioners (July 29, 2011) (transcript)- ethical standards of practice before the IRS applicable to employee benefits practitioners
Handout: Ethics for Employee Plans Practitioners Presentation

Funding Standards and Relief for Single and Multiemployer Plans (April 28, 2011) (transcript) - funding standards applicable to single and multiemployer pension plans
Handout: Funding Standards Presentation

Form 5330 - Completion and Processing Tidbits (March 24, 2011) (transcript) - proper completion and processing of the Form 5330, along with ways to avoid common mistakes
Handouts:

EP Technical Guidance (March 4, 2011) (transcript) - recent published guidance and updates on current IRS initiatives
Handout: EP Technical Guidance Presentation

In-Plan Roth Rollover Phone Forum (December 20, 2010) (Transcript) - recent guidance on in-plan Roth rollovers for 401(k) and 403(b) plans
Handout: In-Plan Roth Rollover Phone Forum Presentation

Hybrid Plans (November 23, 2010) (Transcript) - new hybrid plan regulations
Handouts:

Page Last Reviewed or Updated: 14-Mar-2014

The Hrblock Free Tax Return

Hrblock free tax return 4. Hrblock free tax return   Interest Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Allocation of InterestOrder of funds spent. Hrblock free tax return Payments from checking accounts. Hrblock free tax return Amounts paid within 30 days. Hrblock free tax return Optional method for determining date of reallocation. Hrblock free tax return Interest on a segregated account. Hrblock free tax return How to report. Hrblock free tax return Interest You Can DeductStatement. Hrblock free tax return Expenses paid to obtain a mortgage. Hrblock free tax return Prepayment penalty. Hrblock free tax return De minimis OID. Hrblock free tax return Constant-yield method. Hrblock free tax return Loan or mortgage ends. Hrblock free tax return Interest You Cannot DeductPenalties. Hrblock free tax return Who is a key person? Exceptions for pre-June 1997 contracts. Hrblock free tax return Interest allocated to unborrowed policy cash value. Hrblock free tax return Capitalization of Interest When To Deduct InterestPrepaid interest. Hrblock free tax return Discounted loan. Hrblock free tax return Refunds of interest. Hrblock free tax return Prepaid interest. Hrblock free tax return Discounted loan. Hrblock free tax return Tax deficiency. Hrblock free tax return Related person. Hrblock free tax return Below-Market LoansLimit on forgone interest for gift loans of $100,000 or less. Hrblock free tax return Introduction This chapter discusses the tax treatment of business interest expense. Hrblock free tax return Business interest expense is an amount charged for the use of money you borrowed for business activities. Hrblock free tax return Topics - This chapter discusses: Allocation of interest Interest you can deduct Interest you cannot deduct Capitalization of interest When to deduct interest Below-market loans Useful Items - You may want to see: Publication 537 Installment Sales 550 Investment Income and Expenses 936 Home Mortgage Interest Deduction Form (and Instructions) Sch A (Form 1040) Itemized Deductions Sch E (Form 1040) Supplemental Income and Loss Sch K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc. Hrblock free tax return Sch K-1 (Form 1120S) Shareholder's Share of Income, Deductions, Credits, etc. Hrblock free tax return 1098 Mortgage Interest Statement 3115 Application for Change in Accounting Method 4952 Investment Interest Expense Deduction 8582 Passive Activity Loss Limitations See chapter 12 for information about getting publications and forms. Hrblock free tax return Allocation of Interest The rules for deducting interest vary, depending on whether the loan proceeds are used for business, personal, or investment activities. Hrblock free tax return If you use the proceeds of a loan for more than one type of expense, you must allocate the interest based on the use of the loan's proceeds. Hrblock free tax return Allocate your interest expense to the following categories. Hrblock free tax return Nonpassive trade or business activity interest Passive trade or business activity interest Investment interest Portfolio interest Personal interest In general, you allocate interest on a loan the same way you allocate the loan proceeds. Hrblock free tax return You allocate loan proceeds by tracing disbursements to specific uses. Hrblock free tax return The easiest way to trace disbursements to specific uses is to keep the proceeds of a particular loan separate from any other funds. Hrblock free tax return Secured loan. Hrblock free tax return   The allocation of loan proceeds and the related interest is not generally affected by the use of property that secures the loan. Hrblock free tax return Example. Hrblock free tax return You secure a loan with property used in your business. Hrblock free tax return You use the loan proceeds to buy an automobile for personal use. Hrblock free tax return You must allocate interest expense on the loan to personal use (purchase of the automobile) even though the loan is secured by business property. Hrblock free tax return    If the property that secures the loan is your home, you generally do not allocate the loan proceeds or the related interest. Hrblock free tax return The interest is usually deductible as qualified home mortgage interest, regardless of how the loan proceeds are used. Hrblock free tax return For more information, see Publication 936. Hrblock free tax return Allocation period. Hrblock free tax return   The period for which a loan is allocated to a particular use begins on the date the proceeds are used and ends on the earlier of the following dates. Hrblock free tax return The date the loan is repaid. Hrblock free tax return The date the loan is reallocated to another use. Hrblock free tax return Proceeds not disbursed to borrower. Hrblock free tax return   Even if the lender disburses the loan proceeds to a third party, the allocation of the loan is still based on your use of the funds. Hrblock free tax return This applies whether you pay for property, services, or anything else by incurring a loan, or you take property subject to a debt. Hrblock free tax return Proceeds deposited in borrower's account. Hrblock free tax return   Treat loan proceeds deposited in an account as property held for investment. Hrblock free tax return It does not matter whether the account pays interest. Hrblock free tax return Any interest you pay on the loan is investment interest expense. Hrblock free tax return If you withdraw the proceeds of the loan, you must reallocate the loan based on the use of the funds. Hrblock free tax return Example. Hrblock free tax return Celina, a calendar-year taxpayer, borrows $100,000 on January 4 and immediately uses the proceeds to open a checking account. Hrblock free tax return No other amounts are deposited in the account during the year and no part of the loan principal is repaid during the year. Hrblock free tax return On April 2, Celina uses $20,000 from the checking account for a passive activity expenditure. Hrblock free tax return On September 4, Celina uses an additional $40,000 from the account for personal purposes. Hrblock free tax return Under the interest allocation rules, the entire $100,000 loan is treated as property held for investment for the period from January 4 through April 1. Hrblock free tax return From April 2 through September 3, Celina must treat $20,000 of the loan as used in the passive activity and $80,000 of the loan as property held for investment. Hrblock free tax return From September 4 through December 31, she must treat $40,000 of the loan as used for personal purposes, $20,000 as used in the passive activity, and $40,000 as property held for investment. Hrblock free tax return Order of funds spent. Hrblock free tax return   Generally, you treat loan proceeds deposited in an account as used (spent) before either of the following amounts. Hrblock free tax return Any unborrowed amounts held in the same account. Hrblock free tax return Any amounts deposited after these loan proceeds. Hrblock free tax return Example. Hrblock free tax return On January 9, Olena opened a checking account, depositing $500 of the proceeds of Loan A and $1,000 of unborrowed funds. Hrblock free tax return The following table shows the transactions in her account during the tax year. Hrblock free tax return Date Transaction January 9 $500 proceeds of Loan A and $1,000 unborrowed funds deposited January 14 $500 proceeds of Loan B  deposited February 19 $800 used for personal purposes February 27 $700 used for passive activity June 19 $1,000 proceeds of Loan C  deposited November 20 $800 used for an investment December 18 $600 used for personal purposes Olena treats the $800 used for personal purposes as made from the $500 proceeds of Loan A and $300 of the proceeds of Loan B. Hrblock free tax return She treats the $700 used for a passive activity as made from the remaining $200 proceeds of Loan B and $500 of unborrowed funds. Hrblock free tax return She treats the $800 used for an investment as made entirely from the proceeds of Loan C. Hrblock free tax return She treats the $600 used for personal purposes as made from the remaining $200 proceeds of Loan C and $400 of unborrowed funds. Hrblock free tax return For the periods during which loan proceeds are held in the account, Olena treats them as property held for investment. Hrblock free tax return Payments from checking accounts. Hrblock free tax return   Generally, you treat a payment from a checking or similar account as made at the time the check is written if you mail or deliver it to the payee within a reasonable period after you write it. Hrblock free tax return You can treat checks written on the same day as written in any order. Hrblock free tax return Amounts paid within 30 days. Hrblock free tax return   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. Hrblock free tax return This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. Hrblock free tax return   If the loan proceeds are deposited in an account, you can apply this rule even if the rules stated earlier under Order of funds spent would otherwise require you to treat the proceeds as used for other purposes. Hrblock free tax return If you apply this rule to any payments, disregard those payments (and the proceeds from which they are made) when applying the rules stated under Order of funds spent. Hrblock free tax return   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. Hrblock free tax return Example. Hrblock free tax return Giovanni gets a loan of $1,000 on August 4 and receives the proceeds in cash. Hrblock free tax return Giovanni deposits $1,500 in an account on August 18 and on August 28 writes a check on the account for a passive activity expense. Hrblock free tax return Also, Giovanni deposits his paycheck, deposits other loan proceeds, and pays his bills during the same period. Hrblock free tax return Regardless of these other transactions, Giovanni can treat $1,000 of the deposit he made on August 18 as being paid on August 4 from the loan proceeds. Hrblock free tax return In addition, Giovanni can treat the passive activity expense he paid on August 28 as made from the $1,000 loan proceeds treated as deposited in the account. Hrblock free tax return Optional method for determining date of reallocation. Hrblock free tax return   You can use the following method to determine the date loan proceeds are reallocated to another use. Hrblock free tax return You can treat all payments from loan proceeds in the account during any month as taking place on the later of the following dates. Hrblock free tax return The first day of that month. Hrblock free tax return The date the loan proceeds are deposited in the account. Hrblock free tax return However, you can use this optional method only if you treat all payments from the account during the same calendar month in the same way. Hrblock free tax return Interest on a segregated account. Hrblock free tax return   If you have an account that contains only loan proceeds and interest earned on the account, you can treat any payment from that account as being made first from the interest. Hrblock free tax return When the interest earned is used up, any remaining payments are from loan proceeds. Hrblock free tax return Example. Hrblock free tax return You borrowed $20,000 and used the proceeds of this loan to open a new savings account. Hrblock free tax return When the account had earned interest of $867, you withdrew $20,000 for personal purposes. Hrblock free tax return You can treat the withdrawal as coming first from the interest earned on the account, $867, and then from the loan proceeds, $19,133 ($20,000 − $867). Hrblock free tax return All the interest charged on the loan from the time it was deposited in the account until the time of the withdrawal is investment interest expense. Hrblock free tax return The interest charged on the part of the proceeds used for personal purposes ($19,133) from the time you withdrew it until you either repay it or reallocate it to another use is personal interest expense. Hrblock free tax return The interest charged on the loan proceeds you left in the account ($867) continues to be investment interest expense until you either repay it or reallocate it to another use. Hrblock free tax return Loan repayment. Hrblock free tax return   When you repay any part of a loan allocated to more than one use, treat it as being repaid in the following order. Hrblock free tax return Personal use. Hrblock free tax return Investments and passive activities (other than those included in (3)). Hrblock free tax return Passive activities in connection with a rental real estate activity in which you actively participate. Hrblock free tax return Former passive activities. Hrblock free tax return Trade or business use and expenses for certain low-income housing projects. Hrblock free tax return Line of credit (continuous borrowings). Hrblock free tax return   The following rules apply if you have a line of credit or similar arrangement. Hrblock free tax return Treat all borrowed funds on which interest accrues at the same fixed or variable rate as a single loan. Hrblock free tax return Treat borrowed funds or parts of borrowed funds on which interest accrues at different fixed or variable rates as different loans. Hrblock free tax return Treat these loans as repaid in the order shown on the loan agreement. Hrblock free tax return Loan refinancing. Hrblock free tax return   Allocate the replacement loan to the same uses to which the repaid loan was allocated. Hrblock free tax return Make the allocation only to the extent you use the proceeds of the new loan to repay any part of the original loan. Hrblock free tax return Debt-financed distribution. Hrblock free tax return   A debt-financed distribution occurs when a partnership or S corporation borrows funds and allocates those funds to distributions made to partners or shareholders. Hrblock free tax return The manner in which you report the interest expense associated with the distributed debt proceeds depends on your use of those proceeds. Hrblock free tax return How to report. Hrblock free tax return   If the proceeds were used in a nonpassive trade or business activity, report the interest on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership or S corporation in column (a) and the amount in column (h). Hrblock free tax return If the proceeds were used in a passive activity, follow the Instructions for Form 8582, Passive Activity Loss Limitations, to determine the amount of interest expense that can be reported on Schedule E (Form 1040), line 28; enter “interest expense” and the name of the partnership in column (a) and the amount in column (f). Hrblock free tax return If the proceeds were used in an investment activity, enter the interest on Form 4952. Hrblock free tax return If the proceeds are used for personal purposes, the interest is generally not deductible. Hrblock free tax return Interest You Can Deduct You can generally deduct as a business expense all interest you pay or accrue during the tax year on debts related to your trade or business. Hrblock free tax return Interest relates to your trade or business if you use the proceeds of the loan for a trade or business expense. Hrblock free tax return It does not matter what type of property secures the loan. Hrblock free tax return You can deduct interest on a debt only if you meet all the following requirements. Hrblock free tax return You are legally liable for that debt. Hrblock free tax return Both you and the lender intend that the debt be repaid. Hrblock free tax return You and the lender have a true debtor-creditor relationship. Hrblock free tax return Partial liability. Hrblock free tax return   If you are liable for part of a business debt, you can deduct only your share of the total interest paid or accrued. Hrblock free tax return Example. Hrblock free tax return You and your brother borrow money. Hrblock free tax return You are liable for 50% of the note. Hrblock free tax return You use your half of the loan in your business, and you make one-half of the loan payments. Hrblock free tax return You can deduct your half of the total interest payments as a business deduction. Hrblock free tax return Mortgage. Hrblock free tax return   Generally, mortgage interest paid or accrued on real estate you own legally or equitably is deductible. Hrblock free tax return However, rather than deducting the interest currently, you may have to add it to the cost basis of the property as explained later under Capitalization of Interest. Hrblock free tax return Statement. Hrblock free tax return   If you paid $600 or more of mortgage interest (including certain points) during the year on any one mortgage, you generally will receive a Form 1098 or a similar statement. Hrblock free tax return 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. Hrblock free tax return A governmental unit is a person for purposes of furnishing the statement. Hrblock free tax return   If you receive a refund of interest you overpaid in an earlier year, this amount will be reported in box 3 of Form 1098. Hrblock free tax return You cannot deduct this amount. Hrblock free tax return For information on how to report this refund, see Refunds of interest, later in this chapter. Hrblock free tax return Expenses paid to obtain a mortgage. Hrblock free tax return   Certain expenses you pay to obtain a mortgage cannot be deducted as interest. Hrblock free tax return These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses. Hrblock free tax return If the property mortgaged is business or income-producing property, you can amortize the costs over the life of the mortgage. Hrblock free tax return Prepayment penalty. Hrblock free tax return   If you pay off your mortgage early and pay the lender a penalty for doing this, you can deduct the penalty as interest. Hrblock free tax return Interest on employment tax deficiency. Hrblock free tax return   Interest charged on employment taxes assessed on your business is deductible. Hrblock free tax return Original issue discount (OID). Hrblock free tax return   OID is a form of interest. Hrblock free tax return A loan (mortgage or other debt) generally has OID when its proceeds are less than its principal amount. Hrblock free tax return The OID is the difference between the stated redemption price at maturity and the issue price of the loan. Hrblock free tax return   A loan's stated redemption price at maturity is the sum of all amounts (principal and interest) payable on it other than qualified stated interest. Hrblock free tax return Qualified stated interest is stated interest that is unconditionally payable in cash or property (other than another loan of the issuer) at least annually over the term of the loan at a single fixed rate. Hrblock free tax return You generally deduct OID over the term of the loan. Hrblock free tax return Figure the amount to deduct each year using the constant-yield method, unless the OID on the loan is de minimis. Hrblock free tax return De minimis OID. Hrblock free tax return   The OID is de minimis if it is less than one-fourth of 1% (. Hrblock free tax return 0025) of the stated redemption price of the loan at maturity multiplied by the number of full years from the date of original issue to maturity (the term of the loan). Hrblock free tax return   If the OID is de minimis, you can choose one of the following ways to figure the amount you can deduct each year. Hrblock free tax return On a constant-yield basis over the term of the loan. Hrblock free tax return On a straight-line basis over the term of the loan. Hrblock free tax return In proportion to stated interest payments. Hrblock free tax return In its entirety at maturity of the loan. Hrblock free tax return You make this choice by deducting the OID in a manner consistent with the method chosen on your timely filed tax return for the tax year in which the loan is issued. Hrblock free tax return Example. Hrblock free tax return On January 1, 2013, you took out a $100,000 discounted loan and received $98,500 in proceeds. Hrblock free tax return The loan will mature on January 1, 2023 (a 10-year term), and the $100,000 principal is payable on that date. Hrblock free tax return Interest of $10,000 is payable on January 1 of each year, beginning January 1, 2014. Hrblock free tax return The $1,500 OID on the loan is de minimis because it is less than $2,500 ($100,000 × . Hrblock free tax return 0025 × 10). Hrblock free tax return You choose to deduct the OID on a straight-line basis over the term of the loan. Hrblock free tax return Beginning in 2013, you can deduct $150 each year for 10 years. Hrblock free tax return Constant-yield method. Hrblock free tax return   If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year. Hrblock free tax return You figure your deduction for the first year using the following steps. Hrblock free tax return Determine the issue price of the loan. Hrblock free tax return Generally, this equals the proceeds of the loan. Hrblock free tax return If you paid points on the loan (as discussed later), the issue price generally is the difference between the proceeds and the points. Hrblock free tax return Multiply the result in (1) by the yield to maturity. Hrblock free tax return Subtract any qualified stated interest payments from the result in (2). Hrblock free tax return This is the OID you can deduct in the first year. Hrblock free tax return   To figure your deduction in any subsequent year, follow the above steps, except determine the adjusted issue price in step (1). Hrblock free tax return To get the adjusted issue price, add to the issue price any OID previously deducted. Hrblock free tax return Then follow steps (2) and (3) above. Hrblock free tax return   The yield to maturity is generally shown in the literature you receive from your lender. Hrblock free tax return If you do not have this information, consult your lender or tax advisor. Hrblock free tax return In general, the yield to maturity is the discount rate that, when used in computing the present value of all principal and interest payments, produces an amount equal to the principal amount of the loan. Hrblock free tax return Example. Hrblock free tax return The facts are the same as in the previous example, except that you deduct the OID on a constant yield basis over the term of the loan. Hrblock free tax return The yield to maturity on your loan is 10. Hrblock free tax return 2467%, compounded annually. Hrblock free tax return For 2013, you can deduct $93 [($98,500 × . Hrblock free tax return 102467) − $10,000]. Hrblock free tax return For 2014, you can deduct $103 [($98,593 × . Hrblock free tax return 102467) − $10,000]. Hrblock free tax return Loan or mortgage ends. Hrblock free tax return   If your loan or mortgage ends, you may be able to deduct any remaining OID in the tax year in which the loan or mortgage ends. Hrblock free tax return A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. Hrblock free tax return If you refinance with the original lender, you generally cannot deduct the remaining OID in the year in which the refinancing occurs, but you may be able to deduct it over the term of the new mortgage or loan. Hrblock free tax return See Interest paid with funds borrowed from original lender under Interest You Cannot Deduct, later. Hrblock free tax return Points. Hrblock free tax return   The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a loan or a mortgage. Hrblock free tax return These charges are also called loan origination fees, maximum loan charges, discount points, or premium charges. Hrblock free tax return If any of these charges (points) are solely for the use of money, they are interest. Hrblock free tax return   Because points are prepaid interest, you generally cannot deduct the full amount in the year paid. Hrblock free tax return However, you can choose to fully deduct points in the year paid if you meet certain tests. Hrblock free tax return For exceptions to the general rule, see Publication 936. Hrblock free tax return The points reduce the issue price of the loan and result in original issue discount (OID), deductible as explained in the preceding discussion. Hrblock free tax return Partial payments on a nontax debt. Hrblock free tax return   If you make partial payments on a debt (other than a debt owed the IRS), the payments are applied, in general, first to interest and any remainder to principal. Hrblock free tax return You can deduct only the interest. Hrblock free tax return This rule does not apply when it can be inferred that the borrower and lender understood that a different allocation of the payments would be made. Hrblock free tax return Installment purchase. Hrblock free tax return   If you make an installment purchase of business property, the contract between you and the seller generally provides for the payment of interest. Hrblock free tax return If no interest or a low rate of interest is charged under the contract, a portion of the stated principal amount payable under the contract may be recharacterized as interest (unstated interest). Hrblock free tax return The amount recharacterized as interest reduces your basis in the property and increases your interest expense. Hrblock free tax return For more information on installment sales and unstated interest, see Publication 537. Hrblock free tax return Interest You Cannot Deduct Certain interest payments cannot be deducted. Hrblock free tax return In addition, certain other expenses that may seem to be interest but are not, cannot be deducted as interest. Hrblock free tax return You cannot currently deduct interest that must be capitalized, and you generally cannot deduct personal interest. Hrblock free tax return Interest paid with funds borrowed from original lender. Hrblock free tax return   If you use the cash method of accounting, you cannot deduct interest you pay with funds borrowed from the original lender through a second loan, an advance, or any other arrangement similar to a loan. Hrblock free tax return You can deduct the interest expense once you start making payments on the new loan. Hrblock free tax return   When you make a payment on the new loan, you first apply the payment to interest and then to the principal. Hrblock free tax return All amounts you apply to the interest on the first loan are deductible, along with any interest you pay on the second loan, subject to any limits that apply. Hrblock free tax return Capitalized interest. Hrblock free tax return   You cannot currently deduct interest you are required to capitalize under the uniform capitalization rules. Hrblock free tax return See Capitalization of Interest, later. Hrblock free tax return In addition, if you buy property and pay interest owed by the seller (for example, by assuming the debt and any interest accrued on the property), you cannot deduct the interest. Hrblock free tax return Add this interest to the basis of the property. Hrblock free tax return Commitment fees or standby charges. Hrblock free tax return   Fees you incur to have business funds available on a standby basis, but not for the actual use of the funds, are not deductible as interest payments. Hrblock free tax return You may be able to deduct them as business expenses. Hrblock free tax return   If the funds are for inventory or certain property used in your business, the fees are indirect costs and you generally must capitalize them under the uniform capitalization rules. Hrblock free tax return See Capitalization of Interest, later. Hrblock free tax return Interest on income tax. Hrblock free tax return   Interest charged on income tax assessed on your individual income tax return is not a business deduction even though the tax due is related to income from your trade or business. Hrblock free tax return Treat this interest as a business deduction only in figuring a net operating loss deduction. Hrblock free tax return Penalties. Hrblock free tax return   Penalties on underpaid deficiencies and underpaid estimated tax are not interest. Hrblock free tax return You cannot deduct them. Hrblock free tax return Generally, you cannot deduct any fines or penalties. Hrblock free tax return Interest on loans with respect to life insurance policies. Hrblock free tax return   You generally cannot deduct interest on a debt incurred with respect to any life insurance, annuity, or endowment contract that covers any individual unless that individual is a key person. Hrblock free tax return   If the policy or contract covers a key person, you can deduct the interest on up to $50,000 of debt for that person. Hrblock free tax return However, the deduction for any month cannot be more than the interest figured using Moody's Composite Yield on Seasoned Corporate Bonds (formerly known as Moody's Corporate Bond Yield Average-Monthly Average Corporates) (Moody's rate) for that month. Hrblock free tax return Who is a key person?   A key person is an officer or 20% owner. Hrblock free tax return However, the number of individuals you can treat as key persons is limited to the greater of the following. Hrblock free tax return Five individuals. Hrblock free tax return The lesser of 5% of the total officers and employees of the company or 20 individuals. Hrblock free tax return Exceptions for pre-June 1997 contracts. Hrblock free tax return   You can generally deduct the interest if the contract was issued before June 9, 1997, and the covered individual is someone other than an employee, officer, or someone financially interested in your business. Hrblock free tax return If the contract was purchased before June 21, 1986, you can generally deduct the interest no matter who is covered by the contract. Hrblock free tax return Interest allocated to unborrowed policy cash value. Hrblock free tax return   Corporations and partnerships generally cannot deduct any interest expense allocable to unborrowed cash values of life insurance, annuity, or endowment contracts. Hrblock free tax return This rule applies to contracts issued after June 8, 1997, that cover someone other than an officer, director, employee, or 20% owner. Hrblock free tax return For more information, see section 264(f) of the Internal Revenue Code. Hrblock free tax return Capitalization of Interest Under the uniform capitalization rules, you generally must capitalize interest on debt equal to your expenditures to produce real property or certain tangible personal property. Hrblock free tax return The property must be produced by you for use in your trade or business or for sale to customers. Hrblock free tax return You cannot capitalize interest related to property that you acquire in any other manner. Hrblock free tax return Interest you paid or incurred during the production period must be capitalized if the property produced is designated property. Hrblock free tax return Designated property is any of the following. Hrblock free tax return Real property. Hrblock free tax return Tangible personal property with a class life of 20 years or more. Hrblock free tax return Tangible personal property with an estimated production period of more than 2 years. Hrblock free tax return Tangible personal property with an estimated production period of more than 1 year if the estimated cost of production is more than $1 million. Hrblock free tax return Property you produce. Hrblock free tax return   You produce property if you construct, build, install, manufacture, develop, improve, create, raise, or grow it. Hrblock free tax return Treat property produced for you under a contract as produced by you up to the amount you pay or incur for the property. Hrblock free tax return Carrying charges. Hrblock free tax return   Carrying charges include taxes you pay to carry or develop real estate or to carry, transport, or install personal property. Hrblock free tax return You can choose to capitalize carrying charges not subject to the uniform capitalization rules if they are otherwise deductible. Hrblock free tax return For more information, see chapter 7. Hrblock free tax return Capitalized interest. Hrblock free tax return   Treat capitalized interest as a cost of the property produced. Hrblock free tax return You recover your interest when you sell or use the property. Hrblock free tax return If the property is inventory, recover capitalized interest through cost of goods sold. Hrblock free tax return If the property is used in your trade or business, recover capitalized interest through an adjustment to basis, depreciation, amortization, or other method. Hrblock free tax return Partnerships and S corporations. Hrblock free tax return   The interest capitalization rules are applied first at the partnership or S corporation level. Hrblock free tax return The rules are then applied at the partners' or shareholders' level to the extent the partnership or S corporation has insufficient debt to support the production or construction costs. Hrblock free tax return   If you are a partner or a shareholder, you may have to capitalize interest you incur during the tax year for the production costs of the partnership or S corporation. Hrblock free tax return You may also have to capitalize interest incurred by the partnership or S corporation for your own production costs. Hrblock free tax return To properly capitalize interest under these rules, you must be given the required information in an attachment to the Schedule K-1 you receive from the partnership or S corporation. Hrblock free tax return Additional information. Hrblock free tax return   The procedures for applying the uniform capitalization rules are beyond the scope of this publication. Hrblock free tax return For more information, see sections 1. Hrblock free tax return 263A-8 through 1. Hrblock free tax return 263A-15 of the regulations and Notice 88-99. Hrblock free tax return Notice 88-99 is in Cumulative Bulletin 1988-2. Hrblock free tax return When To Deduct Interest If the uniform capitalization rules, discussed under Capitalization of Interest, earlier, do not apply to you, deduct interest as follows. Hrblock free tax return Cash method. Hrblock free tax return   Under the cash method, you can generally deduct only the interest you actually paid during the tax year. Hrblock free tax return You cannot deduct a promissory note you gave as payment because it is a promise to pay and not an actual payment. Hrblock free tax return Prepaid interest. Hrblock free tax return   You generally cannot deduct any interest paid before the year it is due. Hrblock free tax return Interest paid in advance can be deducted only in the tax year in which it is due. Hrblock free tax return Discounted loan. Hrblock free tax return   If interest or a discount is subtracted from your loan proceeds, it is not a payment of interest and you cannot deduct it when you get the loan. Hrblock free tax return For more information, see Original issue discount (OID) under Interest You Can Deduct, earlier. Hrblock free tax return Refunds of interest. Hrblock free tax return   If you pay interest and then receive a refund in the same tax year of any part of the interest, reduce your interest deduction by the refund. Hrblock free tax return If you receive the refund in a later tax year, include the refund in your income to the extent the deduction for the interest reduced your tax. Hrblock free tax return Accrual method. Hrblock free tax return   Under an accrual method, you can deduct only interest that has accrued during the tax year. Hrblock free tax return Prepaid interest. Hrblock free tax return   See Prepaid interest, earlier. Hrblock free tax return Discounted loan. Hrblock free tax return   See Discounted loan, earlier. Hrblock free tax return Tax deficiency. Hrblock free tax return   If you contest a federal income tax deficiency, interest does not accrue until the tax year the final determination of liability is made. Hrblock free tax return If you do not contest the deficiency, then the interest accrues in the year the tax was asserted and agreed to by you. Hrblock free tax return   However, if you contest but pay the proposed tax deficiency and interest, and you do not designate the payment as a cash bond, then the interest is deductible in the year paid. Hrblock free tax return Related person. Hrblock free tax return   If you use an accrual method, you cannot deduct interest owed to a related person who uses the cash method until payment is made and the interest is includible in the gross income of that person. Hrblock free tax return The relationship is determined as of the end of the tax year for which the interest would otherwise be deductible. Hrblock free tax return See section 267 of the Internal Revenue Code for more information. Hrblock free tax return Below-Market Loans If you receive a below-market gift or demand loan and use the proceeds in your trade or business, you may be able to deduct the forgone interest. Hrblock free tax return See Treatment of gift and demand loans, later, in this discussion. Hrblock free tax return A below-market loan is a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. Hrblock free tax return A gift or demand loan that is a below-market loan generally is considered an arm's-length transaction in which you, the borrower, are considered as having received both the following. Hrblock free tax return A loan in exchange for a note that requires the payment of interest at the applicable federal rate. Hrblock free tax return An additional payment in an amount equal to the forgone interest. Hrblock free tax return The additional payment is treated as a gift, dividend, contribution to capital, payment of compensation, or other payment, depending on the substance of the transaction. Hrblock free tax return Forgone interest. Hrblock free tax return   For any period, forgone interest is The interest that would be payable for that period if interest accrued on the loan at the applicable federal rate and was payable annually on December 31, minus Any interest actually payable on the loan for the period. Hrblock free tax return Applicable federal rates are published by the IRS each month in the Internal Revenue Bulletin. Hrblock free tax return Internal Revenue Bulletins are available on the IRS web site at www. Hrblock free tax return irs. Hrblock free tax return gov/irb. Hrblock free tax return You can also contact an IRS office to get these rates. Hrblock free tax return Loans subject to the rules. Hrblock free tax return   The rules for below-market loans apply to the following. Hrblock free tax return Gift loans (below-market loans where the forgone interest is in the nature of a gift). Hrblock free tax return Compensation-related loans (below-market loans between an employer and an employee or between an independent contractor and a person for whom the contractor provides services). Hrblock free tax return Corporation-shareholder loans. Hrblock free tax return Tax avoidance loans (below-market loans where the avoidance of federal tax is one of the main purposes of the interest arrangement). Hrblock free tax return Loans to qualified continuing care facilities under a continuing care contract (made after October 11, 1985). Hrblock free tax return   Except as noted in (5) above, these rules apply to demand loans (loans payable in full at any time upon the lender's demand) outstanding after June 6, 1984, and to term loans (loans that are not demand loans) made after that date. Hrblock free tax return Treatment of gift and demand loans. Hrblock free tax return   If you receive a below-market gift loan or demand loan, you are treated as receiving an additional payment (as a gift, dividend, etc. Hrblock free tax return ) equal to the forgone interest on the loan. Hrblock free tax return You are then treated as transferring this amount back to the lender as interest. Hrblock free tax return These transfers are considered to occur annually, generally on December 31. Hrblock free tax return If you use the loan proceeds in your trade or business, you can deduct the forgone interest each year as a business interest expense. Hrblock free tax return The lender must report it as interest income. Hrblock free tax return Limit on forgone interest for gift loans of $100,000 or less. Hrblock free tax return   For gift loans between individuals, forgone interest treated as transferred back to the lender is limited to the borrower's net investment income for the year. Hrblock free tax return This limit applies if the outstanding loans between the lender and borrower total $100,000 or less. Hrblock free tax return If the borrower's net investment income is $1,000 or less, it is treated as zero. Hrblock free tax return This limit does not apply to a loan if the avoidance of any federal tax is one of the main purposes of the interest arrangement. Hrblock free tax return Treatment of term loans. Hrblock free tax return   If you receive a below-market term loan other than a gift or demand loan, you are treated as receiving an additional cash payment (as a dividend, etc. Hrblock free tax return ) on the date the loan is made. Hrblock free tax return This payment is equal to the loan amount minus the present value, at the applicable federal rate, of all payments due under the loan. Hrblock free tax return The same amount is treated as original issue discount on the loan. Hrblock free tax return See Original issue discount (OID) under Interest You Can Deduct, earlier. Hrblock free tax return Exceptions for loans of $10,000 or less. Hrblock free tax return   The rules for below-market loans do not apply to any day on which the total outstanding loans between the borrower and lender is $10,000 or less. Hrblock free tax return This exception applies only to the following. Hrblock free tax return Gift loans between individuals if the loan is not directly used to buy or carry income-producing assets. Hrblock free tax return Compensation-related loans or corporation-shareholder loans if the avoidance of any federal tax is not a principal purpose of the interest arrangement. Hrblock free tax return This exception does not apply to a term loan described in (2) above that was previously subject to the below-market loan rules. Hrblock free tax return Those rules will continue to apply even if the outstanding balance is reduced to $10,000 or less. Hrblock free tax return Exceptions for loans without significant tax effect. Hrblock free tax return   The following loans are specifically exempted from the rules for below-market loans because their interest arrangements do not have a significant effect on the federal tax liability of the borrower or the lender. Hrblock free tax return Loans made available by lenders to the general public on the same terms and conditions that are consistent with the lender's customary business practices. Hrblock free tax return Loans subsidized by a federal, state, or municipal government that are made available under a program of general application to the public. Hrblock free tax return Certain employee-relocation loans. Hrblock free tax return Certain loans to or from a foreign person, unless the interest income would be effectively connected with the conduct of a U. Hrblock free tax return S. Hrblock free tax return trade or business and not exempt from U. Hrblock free tax return S. Hrblock free tax return tax under an income tax treaty. Hrblock free tax return Any other loan if the taxpayer can show that the interest arrangement has no significant effect on the federal tax liability of the lender or the borrower. Hrblock free tax return Whether an interest arrangement has a significant effect on the federal tax liability of the lender or the borrower will be determined by all the facts and circumstances. Hrblock free tax return Consider all the following factors. Hrblock free tax return Whether items of income and deduction generated by the loan offset each other. Hrblock free tax return The amount of the items. Hrblock free tax return The cost of complying with the below-market loan provisions if they were to apply. Hrblock free tax return Any reasons, other than taxes, for structuring the transaction as a below-market loan. Hrblock free tax return Exception for loans to qualified continuing care facilities. Hrblock free tax return   The below-market interest rules do not apply to a loan owed by a qualified continuing care facility under a continuing care contract if the lender or lender's spouse is age 62 or older by the end of the calendar year. Hrblock free tax return A qualified continuing care facility is one or more facilities (excluding nursing homes) meeting the requirements listed below. Hrblock free tax return Designed to provide services under continuing care contracts (defined below). Hrblock free tax return Includes an independent living unit, and either an assisted living or nursing facility, or both. Hrblock free tax return Substantially all of the independent living unit residents are covered by continuing care contracts. Hrblock free tax return A continuing care contract is a written contract between an individual and a qualified continuing care facility that includes all of the following conditions. Hrblock free tax return The individual or individual's spouse must be entitled to use the facility for the rest of their life or lives. Hrblock free tax return The individual or individual's spouse will be provided with housing, as appropriate for the health of the individual or individual's spouse in an: independent living unit (which has additional available facilities outside the unit for the provision of meals and other personal care), and assisted living or nursing facility available in the continuing care facility. Hrblock free tax return The individual or individual's spouse will be provided with assisted living or nursing care available in the continuing care facility, as required for the health of the individual or the individual's spouse. Hrblock free tax return For more information, see section 7872(h) of the Internal Revenue Code. Hrblock free tax return Sale or exchange of property. Hrblock free tax return   Different rules generally apply to a loan connected with the sale or exchange of property. Hrblock free tax return If the loan does not provide adequate stated interest, part of the principal payment may be considered interest. Hrblock free tax return However, there are exceptions that may require you to apply the below-market interest rate rules to these loans. Hrblock free tax return See Unstated Interest and Original Issue Discount (OID) in Publication 537. Hrblock free tax return More information. Hrblock free tax return   For more information on below-market loans, see section 7872 of the Internal Revenue Code and section 1. Hrblock free tax return 7872-5 of the regulations. Hrblock free tax return Prev  Up  Next   Home   More Online Publications