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Irs Form 1040 2010

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Irs Form 1040 2010

Irs form 1040 2010 8. Irs form 1040 2010   Business Expenses Table of Contents Introduction Useful Items - You may want to see: Bad DebtsAccrual method. Irs form 1040 2010 Cash method. Irs form 1040 2010 Car and Truck ExpensesOffice in the home. Irs form 1040 2010 Methods for Deducting Car and Truck Expenses Reimbursing Your Employees for Expenses Depreciation Employees' PayFringe benefits. Irs form 1040 2010 InsuranceHow to figure the deduction. Irs form 1040 2010 Interest Legal and Professional FeesTax preparation fees. Irs form 1040 2010 Pension Plans Rent Expense Taxes Travel, Meals, and EntertainmentTransportation. Irs form 1040 2010 Taxi, commuter bus, and limousine. Irs form 1040 2010 Baggage and shipping. Irs form 1040 2010 Car or truck. Irs form 1040 2010 Meals and lodging. Irs form 1040 2010 Cleaning. Irs form 1040 2010 Telephone. Irs form 1040 2010 Tips. Irs form 1040 2010 More information. Irs form 1040 2010 Business Use of Your HomeExceptions to exclusive use. Irs form 1040 2010 Other Expenses You Can Deduct Expenses You Cannot Deduct Introduction You can deduct the costs of operating your business. Irs form 1040 2010 These costs are known as business expenses. Irs form 1040 2010 These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year. Irs form 1040 2010 To be deductible, a business expense must be both ordinary and necessary. Irs form 1040 2010 An ordinary expense is one that is common and accepted in your field of business. Irs form 1040 2010 A necessary expense is one that is helpful and appropriate for your business. Irs form 1040 2010 An expense does not have to be indispensable to be considered necessary. Irs form 1040 2010 For more information about the general rules for deducting business expenses, see chapter 1 in Publication 535, Business Expenses. Irs form 1040 2010 If you have an expense that is partly for business and partly personal, separate the personal part from the business part. Irs form 1040 2010 The personal part is not deductible. Irs form 1040 2010 Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 535 Business Expenses 946 How To Depreciate Property See chapter 12 for information about getting publications and forms. Irs form 1040 2010 Bad Debts If someone owes you money you cannot collect, you have a bad debt. Irs form 1040 2010 There are two kinds of bad debts, business bad debts and nonbusiness bad debts. Irs form 1040 2010 A business bad debt is generally one that comes from operating your trade or business. Irs form 1040 2010 You may be able to deduct business bad debts as an expense on your business tax return. Irs form 1040 2010 Business bad debt. Irs form 1040 2010   A business bad debt is a loss from the worthlessness of a debt that was either of the following. Irs form 1040 2010 Created or acquired in your business. Irs form 1040 2010 Closely related to your business when it became partly or totally worthless. Irs form 1040 2010 A debt is closely related to your business if your primary motive for incurring the debt is a business reason. Irs form 1040 2010   Business bad debts are mainly the result of credit sales to customers. Irs form 1040 2010 They can also be the result of loans to suppliers, clients, employees, or distributors. Irs form 1040 2010 Goods and services customers have not paid for are shown in your books as either accounts receivable or notes receivable. Irs form 1040 2010 If you are unable to collect any part of these accounts or notes receivable, the uncollectible part is a business bad debt. Irs form 1040 2010    You can take a bad debt deduction for these accounts and notes receivable only if the amount you were owed was included in your gross income either for the year the deduction is claimed or for a prior year. Irs form 1040 2010 Accrual method. Irs form 1040 2010   If you use an accrual method of accounting, you normally report income as you earn it. Irs form 1040 2010 You can take a bad debt deduction for an uncollectible receivable if you have included the uncollectible amount in income. Irs form 1040 2010 Cash method. Irs form 1040 2010   If you use the cash method of accounting, you normally report income when you receive payment. Irs form 1040 2010 You cannot take a bad debt deduction for amounts owed to you that you have not received and cannot collect if you never included those amounts in income. Irs form 1040 2010 More information. Irs form 1040 2010   For more information about business bad debts, see chapter 10 in Publication 535. Irs form 1040 2010 Nonbusiness bad debts. Irs form 1040 2010   All other bad debts are nonbusiness bad debts and are deductible as short-term capital losses on Form 8949 and Schedule D (Form 1040). Irs form 1040 2010 For more information on nonbusiness bad debts, see Publication 550, Investment Income and Expenses. Irs form 1040 2010 Car and Truck Expenses If you use your car or truck in your business, you may be able to deduct the costs of operating and maintaining your vehicle. Irs form 1040 2010 You also may be able to deduct other costs of local transportation and traveling away from home overnight on business. Irs form 1040 2010 You may qualify for a tax credit for qualified plug-in electric vehicles, qualified plug-in electric drive motor vehicles, and alternative motor vehicles you place in service during the year. Irs form 1040 2010 See Form 8936 and Form 8910 for more information. Irs form 1040 2010 Local transportation expenses. Irs form 1040 2010   Local transportation expenses include the ordinary and necessary costs of all the following. Irs form 1040 2010 Getting from one workplace to another in the course of your business or profession when you are traveling within the city or general area that is your tax home. Irs form 1040 2010 Tax home is defined later. Irs form 1040 2010 Visiting clients or customers. Irs form 1040 2010 Going to a business meeting away from your regular workplace. Irs form 1040 2010 Getting from your home to a temporary workplace when you have one or more regular places of work. Irs form 1040 2010 These temporary workplaces can be either within the area of your tax home or outside that area. Irs form 1040 2010 Local business transportation does not include expenses you have while traveling away from home overnight. Irs form 1040 2010 Those expenses are deductible as travel expenses and are discussed later under Travel, Meals, and Entertainment. Irs form 1040 2010 However, if you use your car while traveling away from home overnight, use the rules in this section to figure your car expense deduction. Irs form 1040 2010   Generally, your tax home is your regular place of business, regardless of where you maintain your family home. Irs form 1040 2010 It includes the entire city or general area in which your business or work is located. Irs form 1040 2010 Example. Irs form 1040 2010 You operate a printing business out of rented office space. Irs form 1040 2010 You use your van to deliver completed jobs to your customers. Irs form 1040 2010 You can deduct the cost of round-trip transportation between your customers and your print shop. Irs form 1040 2010    You cannot deduct the costs of driving your car or truck between your home and your main or regular workplace. Irs form 1040 2010 These costs are personal commuting expenses. Irs form 1040 2010 Office in the home. Irs form 1040 2010   Your workplace can be your home if you have an office in your home that qualifies as your principal place of business. Irs form 1040 2010 For more information, see Business Use of Your Home, later. Irs form 1040 2010 Example. Irs form 1040 2010 You are a graphics designer. Irs form 1040 2010 You operate your business out of your home. Irs form 1040 2010 Your home qualifies as your principal place of business. Irs form 1040 2010 You occasionally have to drive to your clients to deliver your completed work. Irs form 1040 2010 You can deduct the cost of the round-trip transportation between your home and your clients. Irs form 1040 2010 Methods for Deducting Car and Truck Expenses For local transportation or overnight travel by car or truck, you generally can use one of the following methods to figure your expenses. Irs form 1040 2010 Standard mileage rate. Irs form 1040 2010 Actual expenses. Irs form 1040 2010 Standard mileage rate. Irs form 1040 2010   You may be able to use the standard mileage rate to figure the deductible costs of operating your car, van, pickup, or panel truck for business purposes. Irs form 1040 2010 For 2013, the standard mileage rate is 56. Irs form 1040 2010 5 cents per mile. Irs form 1040 2010    If you choose to use the standard mileage rate for a year, you cannot deduct your actual expenses for that year except for business-related parking fees and tolls. Irs form 1040 2010 Choosing the standard mileage rate. Irs form 1040 2010   If you want to use the standard mileage rate for a car or truck you own, you must choose to use it in the first year the car is available for use in your business. Irs form 1040 2010 In later years, you can choose to use either the standard mileage rate or actual expenses. Irs form 1040 2010   If you use the standard mileage rate for a car you lease, you must choose to use it for the entire lease period (including renewals). Irs form 1040 2010 Standard mileage rate not allowed. Irs form 1040 2010   You cannot use the standard mileage rate if you: Operate five or more cars at the same time, Claimed a depreciation deduction using any method other than straight line, for example, ACRS or MACRS, Claimed a section 179 deduction on the car, Claimed the special depreciation allowance on the car, Claimed actual car expenses for a car you leased, or Are a rural mail carrier who received a qualified reimbursement. Irs form 1040 2010 Parking fees and tolls. Irs form 1040 2010   In addition to using the standard mileage rate, you can deduct any business-related parking fees and tolls. Irs form 1040 2010 (Parking fees you pay to park your car at your place of work are nondeductible commuting expenses. Irs form 1040 2010 ) Actual expenses. Irs form 1040 2010   If you do not choose to use the standard mileage rate, you may be able to deduct your actual car or truck expenses. Irs form 1040 2010    If you qualify to use both methods, figure your deduction both ways to see which gives you a larger deduction. Irs form 1040 2010   Actual car expenses include the costs of the following items. Irs form 1040 2010 Depreciation Lease payments Registration Garage rent Licenses Repairs Gas Oil Tires Insurance Parking fees Tolls   If you use your vehicle for both business and personal purposes, you must divide your expenses between business and personal use. Irs form 1040 2010 You can divide your expenses based on the miles driven for each purpose. Irs form 1040 2010 Example. Irs form 1040 2010 You are the sole proprietor of a flower shop. Irs form 1040 2010 You drove your van 20,000 miles during the year. Irs form 1040 2010 16,000 miles were for delivering flowers to customers and 4,000 miles were for personal use (including commuting miles). Irs form 1040 2010 You can claim only 80% (16,000 ÷ 20,000) of the cost of operating your van as a business expense. Irs form 1040 2010 More information. Irs form 1040 2010   For more information about the rules for claiming car and truck expenses, see Publication 463. Irs form 1040 2010 Reimbursing Your Employees for Expenses You generally can deduct the amount you reimburse your employees for car and truck expenses. Irs form 1040 2010 The reimbursement you deduct and the manner in which you deduct it depend in part on whether you reimburse the expenses under an accountable plan or a nonaccountable plan. Irs form 1040 2010 For details, see chapter 11 in Publication 535. Irs form 1040 2010 That chapter explains accountable and nonaccountable plans and tells you whether to report the reimbursement on your employee's Form W-2, Wage and Tax Statement. Irs form 1040 2010 Depreciation If property you acquire to use in your business is expected to last more than 1 year, you generally cannot deduct the entire cost as a business expense in the year you acquire it. Irs form 1040 2010 You must spread the cost over more than 1 tax year and deduct part of it each year on Schedule C. Irs form 1040 2010 This method of deducting the cost of business property is called depreciation. Irs form 1040 2010 The discussion here is brief. Irs form 1040 2010 You will find more information about depreciation in Publication 946. Irs form 1040 2010 What property can be depreciated?   You can depreciate property if it meets all the following requirements. Irs form 1040 2010 It must be property you own. Irs form 1040 2010 It must be used in business or held to produce income. Irs form 1040 2010 You never can depreciate inventory (explained in chapter 2) because it is not held for use in your business. Irs form 1040 2010 It must have a useful life that extends substantially beyond the year it is placed in service. Irs form 1040 2010 It must have a determinable useful life, which means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. Irs form 1040 2010 You never can depreciate the cost of land because land does not wear out, become obsolete, or get used up. Irs form 1040 2010 It must not be excepted property. Irs form 1040 2010 This includes property placed in service and disposed of in the same year. Irs form 1040 2010 Repairs. Irs form 1040 2010    You cannot depreciate repairs and replacements that do not increase the value of your property, make it more useful, or lengthen its useful life. Irs form 1040 2010 You can deduct these amounts on line 21 of Schedule C or line 2 of Schedule C-EZ. Irs form 1040 2010 Depreciation method. Irs form 1040 2010   The method for depreciating most business and investment property placed in service after 1986 is called the Modified Accelerated Cost Recovery System (MACRS). Irs form 1040 2010 MACRS is discussed in detail in Publication 946. Irs form 1040 2010 Section 179 deduction. Irs form 1040 2010   You can elect to deduct a limited amount of the cost of certain depreciable property in the year you place the property in service. Irs form 1040 2010 This deduction is known as the “section 179 deduction. Irs form 1040 2010 ” The maximum amount you can elect to deduct during 2013 is generally $500,000 (higher limits apply to certain property). Irs form 1040 2010 See IRC 179(e). Irs form 1040 2010   This limit is generally reduced by the amount by which the cost of the property placed in service during the tax year exceeds $2 million. Irs form 1040 2010 The total amount of depreciation (including the section 179 deduction) you can take for a passenger automobile you use in your business and first place in service in 2013 is $3,160 ($11,160 if you take the special depreciation allowance for qualified passenger automobiles placed in service in 2013). Irs form 1040 2010 Special rules apply to trucks and vans. Irs form 1040 2010 For more information, see Publication 946. Irs form 1040 2010 It explains what property qualifies for the deduction, what limits apply to the deduction, and when and how to recapture the deduction. Irs form 1040 2010    Your section 179 election for the cost of any sport utility vehicle (SUV) and certain other vehicles is limited to $25,000. Irs form 1040 2010 For more information, see the Instructions for Form 4562 or Publication 946. Irs form 1040 2010 Listed property. Irs form 1040 2010   You must follow special rules and recordkeeping requirements when depreciating listed property. Irs form 1040 2010 Listed property is any of the following. Irs form 1040 2010 Most passenger automobiles. Irs form 1040 2010 Most other property used for transportation. Irs form 1040 2010 Any property of a type generally used for entertainment, recreation, or amusement. Irs form 1040 2010 Certain computers and related peripheral equipment. Irs form 1040 2010   For more information about listed property, see Publication 946. Irs form 1040 2010 Form 4562. Irs form 1040 2010   Use Form 4562, Depreciation and Amortization, if you are claiming any of the following. Irs form 1040 2010 Depreciation on property placed in service during the current tax year. Irs form 1040 2010 A section 179 deduction. Irs form 1040 2010 Depreciation on any listed property (regardless of when it was placed in service). Irs form 1040 2010    If you have to use Form 4562, you must file Schedule C. Irs form 1040 2010 You cannot use Schedule C-EZ. Irs form 1040 2010   Employees' Pay You can generally deduct on Schedule C the pay you give your employees for the services they perform for your business. Irs form 1040 2010 The pay may be in cash, property, or services. Irs form 1040 2010 To be deductible, your employees' pay must be an ordinary and necessary expense and you must pay or incur it in the tax year. Irs form 1040 2010 In addition, the pay must meet both the following tests. Irs form 1040 2010 The pay must be reasonable. Irs form 1040 2010 The pay must be for services performed. Irs form 1040 2010 Chapter 2 in Publication 535 explains and defines these requirements. Irs form 1040 2010 You cannot deduct your own salary or any personal withdrawals you make from your business. Irs form 1040 2010 As a sole proprietor, you are not an employee of the business. Irs form 1040 2010 If you had employees during the year, you must use Schedule C. Irs form 1040 2010 You cannot use Schedule C-EZ. Irs form 1040 2010 Kinds of pay. Irs form 1040 2010   Some of the ways you may provide pay to your employees are listed below. Irs form 1040 2010 For an explanation of each of these items, see chapter 2 in Publication 535. Irs form 1040 2010 Awards. Irs form 1040 2010 Bonuses. Irs form 1040 2010 Education expenses. Irs form 1040 2010 Fringe benefits (discussed later). Irs form 1040 2010 Loans or advances you do not expect the employee to repay if they are for personal services actually performed. Irs form 1040 2010 Property you transfer to an employee as payment for services. Irs form 1040 2010 Reimbursements for employee business expenses. Irs form 1040 2010 Sick pay. Irs form 1040 2010 Vacation pay. Irs form 1040 2010 Fringe benefits. Irs form 1040 2010   A fringe benefit is a form of pay for the performance of services. Irs form 1040 2010 The following are examples of fringe benefits. Irs form 1040 2010 Benefits under qualified employee benefit programs. Irs form 1040 2010 Meals and lodging. Irs form 1040 2010 The use of a car. Irs form 1040 2010 Flights on airplanes. Irs form 1040 2010 Discounts on property or services. Irs form 1040 2010 Memberships in country clubs or other social clubs. Irs form 1040 2010 Tickets to entertainment or sporting events. Irs form 1040 2010   Employee benefit programs include the following. Irs form 1040 2010 Accident and health plans. Irs form 1040 2010 Adoption assistance. Irs form 1040 2010 Cafeteria plans. Irs form 1040 2010 Dependent care assistance. Irs form 1040 2010 Educational assistance. Irs form 1040 2010 Group-term life insurance coverage. Irs form 1040 2010 Welfare benefit funds. Irs form 1040 2010   You can generally deduct the cost of fringe benefits you provide on your Schedule C in whatever category the cost falls. Irs form 1040 2010 For example, if you allow an employee to use a car or other property you lease, deduct the cost of the lease as a rent or lease expense. Irs form 1040 2010 If you own the property, include your deduction for its cost or other basis as a section 179 deduction or a depreciation deduction. Irs form 1040 2010    You may be able to exclude all or part of the fringe benefits you provide from your employees' wages. Irs form 1040 2010 For more information about fringe benefits and the exclusion of benefits, see Publication 15-B, Employer's Tax Guide to Fringe Benefits. Irs form 1040 2010 Insurance You can generally deduct premiums you pay for the following kinds of insurance related to your business. Irs form 1040 2010 Fire, theft, flood, or similar insurance. Irs form 1040 2010 Credit insurance that covers losses from business bad debts. Irs form 1040 2010 Group hospitalization and medical insurance for employees, including long-term care insurance. Irs form 1040 2010 Liability insurance. Irs form 1040 2010 Malpractice insurance that covers your personal liability for professional negligence resulting in injury or damage to patients or clients. Irs form 1040 2010 Workers' compensation insurance set by state law that covers any claims for bodily injuries or job-related diseases suffered by employees in your business, regardless of fault. Irs form 1040 2010 Contributions to a state unemployment insurance fund are deductible as taxes if they are considered taxes under state law. Irs form 1040 2010 Overhead insurance that pays for business overhead expenses you have during long periods of disability caused by your injury or sickness. Irs form 1040 2010 Car and other vehicle insurance that covers vehicles used in your business for liability, damages, and other losses. Irs form 1040 2010 If you operate a vehicle partly for personal use, deduct only the part of the insurance premium that applies to the business use of the vehicle. Irs form 1040 2010 If you use the standard mileage rate to figure your car expenses, you cannot deduct any car insurance premiums. Irs form 1040 2010 Life insurance covering your employees if you are not directly or indirectly the beneficiary under the contract. Irs form 1040 2010 Business interruption insurance that pays for lost profits if your business is shut down due to a fire or other cause. Irs form 1040 2010 Nondeductible premiums. Irs form 1040 2010   You cannot deduct premiums on the following kinds of insurance. Irs form 1040 2010 Self-insurance reserve funds. Irs form 1040 2010 You cannot deduct amounts credited to a reserve set up for self-insurance. Irs form 1040 2010 This applies even if you cannot get business insurance coverage for certain business risks. Irs form 1040 2010 However, your actual losses may be deductible. Irs form 1040 2010 For more information, see Publication 547, Casualties, Disasters, and Thefts. Irs form 1040 2010 Loss of earnings. Irs form 1040 2010 You cannot deduct premiums for a policy that pays for your lost earnings due to sickness or disability. Irs form 1040 2010 However, see item (8) in the previous list. Irs form 1040 2010 Certain life insurance and annuities. Irs form 1040 2010 For contracts issued before June 9, 1997, you cannot deduct the premiums on a life insurance policy covering you, an employee, or any person with a financial interest in your business if you are directly or indirectly a beneficiary of the policy. Irs form 1040 2010 You are included among possible beneficiaries of the policy if the policy owner is obligated to repay a loan from you using the proceeds of the policy. Irs form 1040 2010 A person has a financial interest in your business if the person is an owner or part owner of the business or has lent money to the business. Irs form 1040 2010 For contracts issued after June 8, 1997, you generally cannot deduct the premiums on any life insurance policy, endowment contract, or annuity contract if you are directly or indirectly a beneficiary. Irs form 1040 2010 The disallowance applies without regard to whom the policy covers. Irs form 1040 2010 Insurance to secure a loan. Irs form 1040 2010 If you take out a policy on your life or on the life of another person with a financial interest in your business to get or protect a business loan, you cannot deduct the premiums as a business expense. Irs form 1040 2010 Nor can you deduct the premiums as interest on business loans or as an expense of financing loans. Irs form 1040 2010 In the event of death, the proceeds of the policy are not taxed as income even if they are used to liquidate the debt. Irs form 1040 2010 Self-employed health insurance deduction. Irs form 1040 2010   You may be able to deduct the amount you paid for medical and dental insurance and qualified long-term care insurance for you and your family. Irs form 1040 2010 How to figure the deduction. Irs form 1040 2010   Generally, you can use the worksheet in the Form 1040 instructions to figure your deduction. Irs form 1040 2010 However, if any of the following apply, you must use the worksheet in chapter 6 of Publication 535. Irs form 1040 2010 You have more than one source of income subject to self-employment tax. Irs form 1040 2010 You file Form 2555 or Form 2555-EZ (relating to foreign earned income). Irs form 1040 2010 You are using amounts paid for qualified long-term care insurance to figure the deduction. Irs form 1040 2010 Prepayment. Irs form 1040 2010   You cannot deduct expenses in advance, even if you pay them in advance. Irs form 1040 2010 This rule applies to any expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. Irs form 1040 2010 Example. Irs form 1040 2010 In 2013, you signed a 3-year insurance contract. Irs form 1040 2010 Even though you paid the premiums for 2013, 2014, and 2015 when you signed the contract, you can only deduct the premium for 2013 on your 2013 tax return. Irs form 1040 2010 You can deduct in 2014 and 2015 the premium allocable to those years. Irs form 1040 2010 More information. Irs form 1040 2010   For more information about deducting insurance, see chapter 6 in Publication 535. Irs form 1040 2010 Interest You can generally deduct as a business expense all interest you pay or accrue during the tax year on debts related to your business. Irs form 1040 2010 Interest relates to your business if you use the proceeds of the loan for a business expense. Irs form 1040 2010 It does not matter what type of property secures the loan. Irs form 1040 2010 You can deduct interest on a debt only if you meet all of the following requirements. Irs form 1040 2010 You are legally liable for that debt. Irs form 1040 2010 Both you and the lender intend that the debt be repaid. Irs form 1040 2010 You and the lender have a true debtor-creditor relationship. Irs form 1040 2010 You cannot deduct on Schedule C or C-EZ the interest you paid on personal loans. Irs form 1040 2010 If a loan is part business and part personal, you must divide the interest between the personal part and the business part. Irs form 1040 2010 Example. Irs form 1040 2010 In 2013, you paid $600 interest on a car loan. Irs form 1040 2010 During 2013, you used the car 60% for business and 40% for personal purposes. Irs form 1040 2010 You are claiming actual expenses on the car. Irs form 1040 2010 You can only deduct $360 (60% × $600) for 2013 on Schedule C or C-EZ. Irs form 1040 2010 The remaining interest of $240 is a nondeductible personal expense. Irs form 1040 2010 More information. Irs form 1040 2010   For more information about deducting interest, see chapter 4 in Publication 535. Irs form 1040 2010 That chapter explains the following items. Irs form 1040 2010 Interest you can deduct. Irs form 1040 2010 Interest you cannot deduct. Irs form 1040 2010 How to allocate interest between personal and business use. Irs form 1040 2010 When to deduct interest. Irs form 1040 2010 The rules for a below-market interest rate loan. Irs form 1040 2010 (This is generally a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. Irs form 1040 2010 ) Legal and Professional Fees Legal and professional fees, such as fees charged by accountants, that are ordinary and necessary expenses directly related to operating your business are deductible on Schedule C or C-EZ. Irs form 1040 2010 However, you usually cannot deduct legal fees you pay to acquire business assets. Irs form 1040 2010 Add them to the basis of the property. Irs form 1040 2010 If the fees include payments for work of a personal nature (such as making a will), you can take a business deduction only for the part of the fee related to your business. Irs form 1040 2010 The personal part of legal fees for producing or collecting taxable income, doing or keeping your job, or for tax advice may be deductible on Schedule A (Form 1040) if you itemize deductions. Irs form 1040 2010 For more information, see Publication 529, Miscellaneous Deductions. Irs form 1040 2010 Tax preparation fees. Irs form 1040 2010   You can deduct on Schedule C or C-EZ the cost of preparing that part of your tax return relating to your business as a sole proprietor or statutory employee. Irs form 1040 2010 You can deduct the remaining cost on Schedule A (Form 1040) if you itemize your deductions. Irs form 1040 2010   You can also deduct on Schedule C or C-EZ the amount you pay or incur in resolving asserted tax deficiencies for your business as a sole proprietor or statutory employee. Irs form 1040 2010 Pension Plans You can set up and maintain the following small business retirement plans for yourself and your employees. Irs form 1040 2010 SEP (Simplified Employee Pension) plans. Irs form 1040 2010 SIMPLE (Savings Incentive Match Plan for Employees) plans. Irs form 1040 2010 Qualified plans (including Keogh or H. Irs form 1040 2010 R. Irs form 1040 2010 10 plans). Irs form 1040 2010 SEP, SIMPLE, and qualified plans offer you and your employees a tax favored way to save for retirement. Irs form 1040 2010 You can deduct contributions you make to the plan for your employees on line 19 of Schedule C. Irs form 1040 2010 If you are a sole proprietor, you can deduct contributions you make to the plan for yourself on line 28 of Form 1040. Irs form 1040 2010 You can also deduct trustees' fees if contributions to the plan do not cover them. Irs form 1040 2010 Earnings on the contributions are generally tax free until you or your employees receive distributions from the plan. Irs form 1040 2010 You may also be able to claim a tax credit of 50% of the first $1,000 of qualified startup costs if you begin a new qualified defined benefit or defined contribution plan (including a 401(k) plan), SIMPLE plan, or simplified employee pension. Irs form 1040 2010 Under certain plans, employees can have you contribute limited amounts of their before-tax pay to a plan. Irs form 1040 2010 These amounts (and earnings on them) are generally tax free until your employees receive distributions from the plan. Irs form 1040 2010 For more information on retirement plans for small business, see Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans). Irs form 1040 2010 Publication 590, Individual Retirement Arrangements (IRAs), discusses other tax favored ways to save for retirement. Irs form 1040 2010 Rent Expense Rent is any amount you pay for the use of property you do not own. Irs form 1040 2010 In general, you can deduct rent as a business expense only if the rent is for property you use in your business. Irs form 1040 2010 If you have or will receive equity in or title to the property, you cannot deduct the rent. Irs form 1040 2010 Unreasonable rent. Irs form 1040 2010   You cannot take a rental deduction for unreasonable rents. Irs form 1040 2010 Ordinarily, the issue of reasonableness arises only if you and the lessor are related. Irs form 1040 2010 Rent paid to a related person is reasonable if it is the same amount you would pay to a stranger for use of the same property. Irs form 1040 2010 Rent is not unreasonable just because it is figured as a percentage of gross receipts. Irs form 1040 2010   Related persons include members of your immediate family, including only brothers and sisters (either whole or half), your spouse, ancestors, and lineal descendants. Irs form 1040 2010 For a list of the other related persons, see section 267 of the Internal Revenue Code. Irs form 1040 2010 Rent on your home. Irs form 1040 2010   If you rent your home and use part of it as your place of business, you may be able to deduct the rent you pay for that part. Irs form 1040 2010 You must meet the requirements for business use of your home. Irs form 1040 2010 For more information, see Business Use of Your Home , later. Irs form 1040 2010 Rent paid in advance. Irs form 1040 2010   Generally, rent paid in your business is deductible in the year paid or accrued. Irs form 1040 2010 If you pay rent in advance, you can deduct only the amount that applies to your use of the rented property during the tax year. Irs form 1040 2010 You can deduct the rest of your payment only over the period to which it applies. Irs form 1040 2010 More information. Irs form 1040 2010   For more information about rent, see chapter 3 in Publication 535. Irs form 1040 2010 Taxes You can deduct on Schedule C or C-EZ various federal, state, local, and foreign taxes directly attributable to your business. Irs form 1040 2010 Income taxes. Irs form 1040 2010   You can deduct on Schedule C or C-EZ a state tax on gross income (as distinguished from net income) directly attributable to your business. Irs form 1040 2010 You can deduct other state and local income taxes on Schedule A (Form 1040) if you itemize your deductions. Irs form 1040 2010 Do not deduct federal income tax. Irs form 1040 2010 Employment taxes. Irs form 1040 2010   You can deduct the social security, Medicare, and federal unemployment (FUTA) taxes you paid out of your own funds as an employer. Irs form 1040 2010 Employment taxes are discussed briefly in chapter 1. Irs form 1040 2010 You can also deduct payments you made as an employer to a state unemployment compensation fund or to a state disability benefit fund. Irs form 1040 2010 Deduct these payments as taxes. Irs form 1040 2010 Self-employment tax. Irs form 1040 2010   You can deduct one-half of your self-employment tax on line 27 of Form 1040. Irs form 1040 2010 Self-employment tax is discussed in chapters 1 and 10. Irs form 1040 2010 Personal property tax. Irs form 1040 2010   You can deduct on Schedule C or C-EZ any tax imposed by a state or local government on personal property used in your business. Irs form 1040 2010   You can also deduct registration fees for the right to use property within a state or local area. Irs form 1040 2010 Example. Irs form 1040 2010 May and Julius Winter drove their car 7,000 business miles out of a total of 10,000 miles. Irs form 1040 2010 They had to pay $25 for their annual state license tags and $20 for their city registration sticker. Irs form 1040 2010 They also paid $235 in city personal property tax on the car, for a total of $280. Irs form 1040 2010 They are claiming their actual car expenses. Irs form 1040 2010 Because they used the car 70% for business, they can deduct 70% of the $280, or $196, as a business expense. Irs form 1040 2010 Real estate taxes. Irs form 1040 2010   You can deduct on Schedule C or C-EZ the real estate taxes you pay on your business property. Irs form 1040 2010 Deductible real estate taxes are any state, local, or foreign taxes on real estate levied for the general public welfare. Irs form 1040 2010 The taxing authority must base the taxes on the assessed value of the real estate and charge them uniformly against all property under its jurisdiction. Irs form 1040 2010   For more information about real estate taxes, see chapter 5 in Publication 535. Irs form 1040 2010 That chapter explains special rules for deducting the following items. Irs form 1040 2010 Taxes for local benefits, such as those for sidewalks, streets, water mains, and sewer lines. Irs form 1040 2010 Real estate taxes when you buy or sell property during the year. Irs form 1040 2010 Real estate taxes if you use an accrual method of accounting and choose to accrue real estate tax related to a definite period ratably over that period. Irs form 1040 2010 Sales tax. Irs form 1040 2010   Treat any sales tax you pay on a service or on the purchase or use of property as part of the cost of the service or property. Irs form 1040 2010 If the service or the cost or use of the property is a deductible business expense, you can deduct the tax as part of that service or cost. Irs form 1040 2010 If the property is merchandise bought for resale, the sales tax is part of the cost of the merchandise. Irs form 1040 2010 If the property is depreciable, add the sales tax to the basis for depreciation. Irs form 1040 2010 For information on the basis of property, see Publication 551, Basis of Assets. Irs form 1040 2010    Do not deduct state and local sales taxes imposed on the buyer that you must collect and pay over to the state or local government. Irs form 1040 2010 Do not include these taxes in gross receipts or sales. Irs form 1040 2010 Excise taxes. Irs form 1040 2010   You can deduct on Schedule C or C-EZ all excise taxes that are ordinary and necessary expenses of carrying on your business. Irs form 1040 2010 Excise taxes are discussed briefly in chapter 1. Irs form 1040 2010 Fuel taxes. Irs form 1040 2010   Taxes on gasoline, diesel fuel, and other motor fuels you use in your business are usually included as part of the cost of the fuel. Irs form 1040 2010 Do not deduct these taxes as a separate item. Irs form 1040 2010   You may be entitled to a credit or refund for federal excise tax you paid on fuels used for certain purposes. Irs form 1040 2010 For more information, see Publication 510, Excise Taxes. Irs form 1040 2010 Travel, Meals, and Entertainment This section briefly explains the kinds of travel and entertainment expenses you can deduct on Schedule C or C-EZ. Irs form 1040 2010 Table 8-1. Irs form 1040 2010 When Are Entertainment Expenses Deductible? (Note. Irs form 1040 2010 The following is a summary of the rules for deducting entertainment expenses. Irs form 1040 2010 For more details about these rules, see Publication 463. Irs form 1040 2010 ) General rule You can deduct ordinary and necessary expenses to entertain a client, customer, or employee if the expenses meet the directly-related test or the associated test. Irs form 1040 2010 Definitions Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation, and includes meals provided to a customer or client. Irs form 1040 2010 An ordinary expense is one that is common and accepted in your field of business, trade, or profession. Irs form 1040 2010 A necessary expense is one that is helpful and appropriate, although not necessarily required, for your business. Irs form 1040 2010 Tests to be met Directly-related test Entertainment took place in a clear business setting, or Main purpose of entertainment was the active conduct of business, and You did engage in business with the person during the entertainment period, and You had more than a general expectation of getting income or some other specific business benefit. Irs form 1040 2010   Associated test Entertainment is associated with your trade or business, and Entertainment directly precedes or follows a substantial business discussion. Irs form 1040 2010 Other rules You cannot deduct the cost of your meal as an entertainment expense if you are claiming the meal as a travel expense. Irs form 1040 2010 You cannot deduct expenses that are lavish or extravagant under the circumstances. Irs form 1040 2010 You generally can deduct only 50% of your unreimbursed entertainment expenses. Irs form 1040 2010 Travel expenses. Irs form 1040 2010   These are the ordinary and necessary expenses of traveling away from home for your business. Irs form 1040 2010 You are traveling away from home if both the following conditions are met. Irs form 1040 2010 Your duties require you to be away from the general area of your tax home (defined later) substantially longer than an ordinary day's work. Irs form 1040 2010 You need to get sleep or rest to meet the demands of your work while away from home. Irs form 1040 2010 Generally, your tax home is your regular place of business, regardless of where you maintain your family home. Irs form 1040 2010 It includes the entire city or general area in which your business is located. Irs form 1040 2010 See Publication 463 for more information. Irs form 1040 2010   The following is a brief discussion of the expenses you can deduct. Irs form 1040 2010 Transportation. Irs form 1040 2010   You can deduct the cost of travel by airplane, train, bus, or car between your home and your business destination. Irs form 1040 2010 Taxi, commuter bus, and limousine. Irs form 1040 2010   You can deduct fares for these and other types of transportation between the airport or station and your hotel, or between the hotel and your work location away from home. Irs form 1040 2010 Baggage and shipping. Irs form 1040 2010   You can deduct the cost of sending baggage and sample or display material between your regular and temporary work locations. Irs form 1040 2010 Car or truck. Irs form 1040 2010   You can deduct the costs of operating and maintaining your vehicle when traveling away from home on business. Irs form 1040 2010 You can deduct actual expenses or the standard mileage rate (discussed earlier under Car and Truck Expenses), as well as business-related tolls and parking. Irs form 1040 2010 If you rent a car while away from home on business, you can deduct only the business-use portion of the expenses. Irs form 1040 2010 Meals and lodging. Irs form 1040 2010   You can deduct the cost of meals and lodging if your business trip is overnight or long enough that you need to stop for sleep or rest to properly perform your duties. Irs form 1040 2010 In most cases, you can deduct only 50% of your meal expenses. Irs form 1040 2010 Cleaning. Irs form 1040 2010   You can deduct the costs of dry cleaning and laundry while on your business trip. Irs form 1040 2010 Telephone. Irs form 1040 2010   You can deduct the cost of business calls while on your business trip, including business communication by fax machine or other communication devices. Irs form 1040 2010 Tips. Irs form 1040 2010   You can deduct the tips you pay for any expense in this list. Irs form 1040 2010 More information. Irs form 1040 2010   For more information about travel expenses, see Publication 463. Irs form 1040 2010 Entertainment expenses. Irs form 1040 2010   You may be able to deduct business-related entertainment expenses for entertaining a client, customer, or employee. Irs form 1040 2010 In most cases, you can deduct only 50% of these expenses. Irs form 1040 2010   The following are examples of entertainment expenses. Irs form 1040 2010 Entertaining guests at nightclubs, athletic clubs, theaters, or sporting events. Irs form 1040 2010 Providing meals, a hotel suite, or a car to business customers or their families. Irs form 1040 2010 To be deductible, the expenses must meet the rules listed in Table 8-1. Irs form 1040 2010 For details about these rules, see Publication 463. Irs form 1040 2010 Reimbursing your employees for expenses. Irs form 1040 2010   You generally can deduct the amount you reimburse your employees for travel and entertainment expenses. Irs form 1040 2010 The reimbursement you deduct and the manner in which you deduct it depend in part on whether you reimburse the expenses under an accountable plan or a nonaccountable plan. Irs form 1040 2010 For details, see chapter 11 in Publication 535. Irs form 1040 2010 That chapter explains accountable and nonaccountable plans and tells you whether to report the reimbursement on your employee's Form W-2, Wage and Tax Statement. Irs form 1040 2010 Business Use of Your Home To deduct expenses related to the part of your home used for business, you must meet specific requirements. Irs form 1040 2010 Even then, your deduction may be limited. Irs form 1040 2010 To qualify to claim expenses for business use of your home, you must meet the following tests. Irs form 1040 2010 Your use of the business part of your home must be: Exclusive (however, see Exceptions to exclusive use , later), Regular, For your business, and The business part of your home must be one of the following: Your principal place of business (defined later), A place where you meet or deal with patients, clients, or customers in the normal course of your business, or A separate structure (not attached to your home) you use in connection with your business. Irs form 1040 2010 Exclusive use. Irs form 1040 2010   To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. Irs form 1040 2010 The area used for business can be a room or other separately identifiable space. Irs form 1040 2010 The space does not need to be marked off by a permanent partition. Irs form 1040 2010   You do not meet the requirements of the exclusive use test if you use the area in question both for business and for personal purposes. Irs form 1040 2010 Example. Irs form 1040 2010 You are an attorney and use a den in your home to write legal briefs and prepare clients' tax returns. Irs form 1040 2010 Your family also uses the den for recreation. Irs form 1040 2010 The den is not used exclusively in your profession, so you cannot claim a business deduction for its use. Irs form 1040 2010 Exceptions to exclusive use. Irs form 1040 2010   You do not have to meet the exclusive use test if you use part of your home in either of the following ways. Irs form 1040 2010 For the storage of inventory or product samples. Irs form 1040 2010 As a daycare facility. Irs form 1040 2010 For an explanation of these exceptions, see Publication 587, Business Use of Your Home (Including Use by Daycare Providers). Irs form 1040 2010 Regular use. Irs form 1040 2010   To qualify under the regular use test, you must use a specific area of your home for business on a continuing basis. Irs form 1040 2010 You do not meet the test if your business use of the area is only occasional or incidental, even if you do not use that area for any other purpose. Irs form 1040 2010 Principal place of business. Irs form 1040 2010   You can have more than one business location, including your home, for a single trade or business. Irs form 1040 2010 To qualify to deduct the expenses for the business use of your home under the principal place of business test, your home must be your principal place of business for that business. Irs form 1040 2010 To determine your principal place of business, you must consider all the facts and circumstances. Irs form 1040 2010   Your home office will qualify as your principal place of business for deducting expenses for its use if you meet the following requirements. Irs form 1040 2010 You use it exclusively and regularly for administrative or management activities of your business. Irs form 1040 2010 You have no other fixed location where you conduct substantial administrative or management activities of your business. Irs form 1040 2010   Alternatively, if you use your home exclusively and regularly for your business, but your home office does not qualify as your principal place of business based on the previous rules, you determine your principal place of business based on the following factors. Irs form 1040 2010 The relative importance of the activities performed at each location. Irs form 1040 2010 If the relative importance factor does not determine your principal place of business, you can also consider the time spent at each location. Irs form 1040 2010   If, after considering your business locations, your home cannot be identified as your principal place of business, you cannot deduct home office expenses. Irs form 1040 2010 However, for other ways to qualify to deduct home office expenses, see Publication 587. Irs form 1040 2010 Deduction limit. Irs form 1040 2010   If your gross income from the business use of your home equals or exceeds your total business expenses (including depreciation), you can deduct all your business expenses related to the use of your home. Irs form 1040 2010 If your gross income from the business use is less than your total business expenses, your deduction for certain expenses for the business use of your home is limited. Irs form 1040 2010   Your deduction of otherwise nondeductible expenses, such as insurance, utilities, and depreciation (with depreciation taken last), allocable to the business is limited to the gross income from the business use of your home minus the sum of the following. Irs form 1040 2010 The business part of expenses you could deduct even if you did not use your home for business (such as mortgage interest, real estate taxes, and casualty and theft losses that are allowable as itemized deductions on Schedule A (Form 1040)). Irs form 1040 2010 The business expenses that relate to the business activity in the home (for example, business phone, supplies, and depreciation on equipment), but not to the use of the home itself. Irs form 1040 2010 Do not include in (2) above your deduction for one-half of your self-employment tax. Irs form 1040 2010   Use Form 8829, Expenses for Business Use of Your Home, to figure your deduction. Irs form 1040 2010 New simplified method. Irs form 1040 2010    The IRS now provides a simplified method to determine your expenses for business use of your home. Irs form 1040 2010 The simplified method is an alternative to calculating and substantiating actual expenses. Irs form 1040 2010 In most cases, you will figure your deduction by multiplying $5 by the area of your home used for a qualified business use. Irs form 1040 2010 The area you use to figure your deduction is limited to 300 square feet. Irs form 1040 2010 For more information, see the Instructions for Schedule C. Irs form 1040 2010 More information. Irs form 1040 2010   For more information on deducting expenses for the business use of your home, see Publication 587. Irs form 1040 2010 Other Expenses You Can Deduct You may also be able to deduct the following expenses. Irs form 1040 2010 See Publication 535 to find out whether you can deduct them. Irs form 1040 2010 Advertising. Irs form 1040 2010 Bank fees. Irs form 1040 2010 Donations to business organizations. Irs form 1040 2010 Education expenses. Irs form 1040 2010 Energy efficient commercial buildings deduction expenses. Irs form 1040 2010 Impairment-related expenses. Irs form 1040 2010 Interview expense allowances. Irs form 1040 2010 Licenses and regulatory fees. Irs form 1040 2010 Moving machinery. Irs form 1040 2010 Outplacement services. Irs form 1040 2010 Penalties and fines you pay for late performance or nonperformance of a contract. Irs form 1040 2010 Repairs that keep your property in a normal efficient operating condition. Irs form 1040 2010 Repayments of income. Irs form 1040 2010 Subscriptions to trade or professional publications. Irs form 1040 2010 Supplies and materials. Irs form 1040 2010 Utilities. Irs form 1040 2010 Expenses You Cannot Deduct You usually cannot deduct the following as business expenses. Irs form 1040 2010 For more information, see Publication 535. Irs form 1040 2010 Bribes and kickbacks. Irs form 1040 2010 Charitable contributions. Irs form 1040 2010 Demolition expenses or losses. Irs form 1040 2010 Dues to business, social, athletic, luncheon, sporting, airline, and hotel clubs. Irs form 1040 2010 Lobbying expenses. Irs form 1040 2010 Penalties and fines you pay to a governmental agency or instrumentality because you broke the law. Irs form 1040 2010 Personal, living, and family expenses. Irs form 1040 2010 Political contributions. Irs form 1040 2010 Repairs that add to the value of your property or significantly increase its life. 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What is My Filing Status?

Your filing status is used to determine your filing requirements, standard deduction, eligibility for certain credits, and your correct tax. If more than one filing status applies to you, this interview will choose the one that will result in the lowest amount of tax.

Information You Will Need:

  • Marital status and spouse's year of death (if applicable)
  • The percentage of the costs that your household members paid towards keeping up a home

Estimated Completion Time: 5 minutes. However: 5 minutes of inactivity will end the interview and you will be forced to start over.

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Page Last Reviewed or Updated: 14-Feb-2014

The Irs Form 1040 2010

Irs form 1040 2010 Publication 530 - Main Content Table of Contents What You Can and Cannot DeductHardest Hit Fund and Emergency Homeowners' Loan Programs Real Estate Taxes Sales Taxes Home Mortgage Interest Mortgage Insurance Premiums Mortgage Interest CreditFiguring the Credit BasisFiguring Your Basis Adjusted Basis Keeping Records How To Get Tax HelpLow Income Taxpayer Clinics What You Can and Cannot Deduct To deduct expenses of owning a home, you must file Form 1040, U. Irs form 1040 2010 S. Irs form 1040 2010 Individual Income Tax Return, and itemize your deductions on Schedule A (Form 1040). Irs form 1040 2010 If you itemize, you cannot take the standard deduction. Irs form 1040 2010 This section explains what expenses you can deduct as a homeowner. Irs form 1040 2010 It also points out expenses that you cannot deduct. Irs form 1040 2010 There are four primary discussions: real estate taxes, sales taxes, home mortgage interest, and mortgage insurance premiums. Irs form 1040 2010 Generally, your real estate taxes, home mortgage interest, and mortgage insurance premiums are included in your house payment. Irs form 1040 2010 Your house payment. Irs form 1040 2010   If you took out a mortgage (loan) to finance the purchase of your home, you probably have to make monthly house payments. Irs form 1040 2010 Your house payment may include several costs of owning a home. Irs form 1040 2010 The only costs you can deduct are real estate taxes actually paid to the taxing authority, interest that qualifies as home mortgage interest, and mortgage insurance premiums. Irs form 1040 2010 These are discussed in more detail later. Irs form 1040 2010   Some nondeductible expenses that may be included in your house payment include: Fire or homeowner's insurance premiums, and The amount applied to reduce the principal of the mortgage. Irs form 1040 2010 Minister's or military housing allowance. Irs form 1040 2010   If you are a minister or a member of the uniformed services and receive a housing allowance that is not taxable, you still can deduct your real estate taxes and your home mortgage interest. Irs form 1040 2010 You do not have to reduce your deductions by your nontaxable allowance. Irs form 1040 2010 For more information see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers, and Publication 3, Armed Forces' Tax Guide. Irs form 1040 2010 Nondeductible payments. Irs form 1040 2010   You cannot deduct any of the following items. Irs form 1040 2010 Insurance (other than mortgage insurance premiums), including fire and comprehensive coverage, and title insurance. Irs form 1040 2010 Wages you pay for domestic help. Irs form 1040 2010 Depreciation. Irs form 1040 2010 The cost of utilities, such as gas, electricity, or water. Irs form 1040 2010 Most settlement costs. Irs form 1040 2010 See Settlement or closing costs under Cost as Basis, later, for more information. Irs form 1040 2010 Forfeited deposits, down payments, or earnest money. Irs form 1040 2010 Hardest Hit Fund and Emergency Homeowners' Loan Programs You can use a special method to compute your deduction for mortgage interest and real estate taxes on your main home if you meet the following two conditions. Irs form 1040 2010 You received assistance under: A State Housing Finance Agency (State HFA) Hardest Hit Fund program in which program payments could be used to pay mortgage interest, or An Emergency Homeowners' Loan Program administered by the Department of Housing and Urban Development (HUD) or a state. Irs form 1040 2010 You meet the rules to deduct all of the mortgage interest on your loan and all of the real estate taxes on your main home. Irs form 1040 2010 If you meet these tests, then you can deduct all of the payments you actually made during the year to your mortgage servicer, the State HFA, or HUD on the home mortgage (including the amount shown on box 3 of Form 1098-MA, Mortgage Assistance Payments), but not more than the sum of the amounts shown on Form 1098, Mortgage Interest Statement, in box 1 (mortgage interest received), box 4 (mortgage insurance premiums) and box 5 (real property taxes). Irs form 1040 2010 However, you are not required to use this special method to compute your deduction for mortgage interest and real estate taxes on your main home. Irs form 1040 2010 Real Estate Taxes Most state and local governments charge an annual tax on the value of real property. Irs form 1040 2010 This is called a real estate tax. Irs form 1040 2010 You can deduct the tax if it is assessed uniformly at a like rate on all real property throughout the community. Irs form 1040 2010 The proceeds must be for general community or governmental purposes and not be a payment for a special privilege granted or service rendered to you. Irs form 1040 2010 Deductible Real Estate Taxes You can deduct real estate taxes imposed on you. Irs form 1040 2010 You must have paid them either at settlement or closing, or to a taxing authority (either directly or through an escrow account) during the year. Irs form 1040 2010 If you own a cooperative apartment, see Special Rules for Cooperatives , later. Irs form 1040 2010 Where to deduct real estate taxes. Irs form 1040 2010   Enter the amount of your deductible real estate taxes on Schedule A (Form 1040), line 6. Irs form 1040 2010 Real estate taxes paid at settlement or closing. Irs form 1040 2010   Real estate taxes are generally divided so that you and the seller each pay taxes for the part of the property tax year you owned the home. Irs form 1040 2010 Your share of these taxes is fully deductible if you itemize your deductions. Irs form 1040 2010 Division of real estate taxes. Irs form 1040 2010   For federal income tax purposes, the seller is treated as paying the property taxes up to, but not including, the date of sale. Irs form 1040 2010 You (the buyer) are treated as paying the taxes beginning with the date of sale. Irs form 1040 2010 This applies regardless of the lien dates under local law. Irs form 1040 2010 Generally, this information is included on the settlement statement you get at closing. Irs form 1040 2010   You and the seller each are considered to have paid your own share of the taxes, even if one or the other paid the entire amount. Irs form 1040 2010 You each can deduct your own share, if you itemize deductions, for the year the property is sold. Irs form 1040 2010 Example. Irs form 1040 2010 You bought your home on September 1. Irs form 1040 2010 The property tax year (the period to which the tax relates) in your area is the calendar year. Irs form 1040 2010 The tax for the year was $730 and was due and paid by the seller on August 15. Irs form 1040 2010 You owned your new home during the property tax year for 122 days (September 1 to December 31, including your date of purchase). Irs form 1040 2010 You figure your deduction for real estate taxes on your home as follows. Irs form 1040 2010 1. Irs form 1040 2010 Enter the total real estate taxes for the real property tax year $730 2. Irs form 1040 2010 Enter the number of days in the property tax year that you owned the property 122 3. Irs form 1040 2010 Divide line 2 by 365 . Irs form 1040 2010 3342 4. Irs form 1040 2010 Multiply line 1 by line 3. Irs form 1040 2010 This is your deduction. Irs form 1040 2010 Enter it on Schedule A (Form 1040), line 6 $244   You can deduct $244 on your return for the year if you itemize your deductions. Irs form 1040 2010 You are considered to have paid this amount and can deduct it on your return even if, under the contract, you did not have to reimburse the seller. Irs form 1040 2010 Delinquent taxes. Irs form 1040 2010   Delinquent taxes are unpaid taxes that were imposed on the seller for an earlier tax year. Irs form 1040 2010 If you agree to pay delinquent taxes when you buy your home, you cannot deduct them. Irs form 1040 2010 You treat them as part of the cost of your home. Irs form 1040 2010 See Real estate taxes , later, under Basis. Irs form 1040 2010 Escrow accounts. Irs form 1040 2010   Many monthly house payments include an amount placed in escrow (put in the care of a third party) for real estate taxes. Irs form 1040 2010 You may not be able to deduct the total you pay into the escrow account. Irs form 1040 2010 You can deduct only the real estate taxes that the lender actually paid from escrow to the taxing authority. Irs form 1040 2010 Your real estate tax bill will show this amount. Irs form 1040 2010 Refund or rebate of real estate taxes. Irs form 1040 2010   If you receive a refund or rebate of real estate taxes this year for amounts you paid this year, you must reduce your real estate tax deduction by the amount refunded to you. Irs form 1040 2010 If the refund or rebate was for real estate taxes paid for a prior year, you may have to include some or all of the refund in your income. Irs form 1040 2010 For more information, see Recoveries in Publication 525, Taxable and Nontaxable Income. Irs form 1040 2010 Items You Cannot Deduct as Real Estate Taxes The following items are not deductible as real estate taxes. Irs form 1040 2010 Charges for services. Irs form 1040 2010   An itemized charge for services to specific property or people is not a tax, even if the charge is paid to the taxing authority. Irs form 1040 2010 You cannot deduct the charge as a real estate tax if it is: A unit fee for the delivery of a service (such as a $5 fee charged for every 1,000 gallons of water you use), A periodic charge for a residential service (such as a $20 per month or $240 annual fee charged for trash collection), or A flat fee charged for a single service provided by your local government (such as a $30 charge for mowing your lawn because it had grown higher than permitted under a local ordinance). Irs form 1040 2010    You must look at your real estate tax bill to decide if any nondeductible itemized charges, such as those listed above, are included in the bill. Irs form 1040 2010 If your taxing authority (or lender) does not furnish you a copy of your real estate tax bill, ask for it. Irs form 1040 2010 Contact the taxing authority if you need additional information about a specific charge on your real estate tax bill. Irs form 1040 2010 Assessments for local benefits. Irs form 1040 2010   You cannot deduct amounts you pay for local benefits that tend to increase the value of your property. Irs form 1040 2010 Local benefits include the construction of streets, sidewalks, or water and sewer systems. Irs form 1040 2010 You must add these amounts to the basis of your property. Irs form 1040 2010   You can, however, deduct assessments (or taxes) for local benefits if they are for maintenance, repair, or interest charges related to those benefits. Irs form 1040 2010 An example is a charge to repair an existing sidewalk and any interest included in that charge. Irs form 1040 2010   If only a part of the assessment is for maintenance, repair, or interest charges, you must be able to show the amount of that part to claim the deduction. Irs form 1040 2010 If you cannot show what part of the assessment is for maintenance, repair, or interest charges, you cannot deduct any of it. Irs form 1040 2010   An assessment for a local benefit may be listed as an item in your real estate tax bill. Irs form 1040 2010 If so, use the rules in this section to find how much of it, if any, you can deduct. Irs form 1040 2010 Transfer taxes (or stamp taxes). Irs form 1040 2010   You cannot deduct transfer taxes and similar taxes and charges on the sale of a personal home. Irs form 1040 2010 If you are the buyer and you pay them, include them in the cost basis of the property. Irs form 1040 2010 If you are the seller and you pay them, they are expenses of the sale and reduce the amount realized on the sale. Irs form 1040 2010 Homeowners association assessments. Irs form 1040 2010   You cannot deduct these assessments because the homeowners association, rather than a state or local government, imposes them. Irs form 1040 2010 Special Rules for Cooperatives If you own a cooperative apartment, some special rules apply to you, though you generally receive the same tax treatment as other homeowners. Irs form 1040 2010 As an owner of a cooperative apartment, you own shares of stock in a corporation that owns or leases housing facilities. Irs form 1040 2010 You can deduct your share of the corporation's deductible real estate taxes if the cooperative housing corporation meets the following conditions: The corporation has only one class of stock outstanding, Each stockholder, solely because of ownership of the stock, can live in a house, apartment, or house trailer owned or leased by the corporation, No stockholder can receive any distribution out of capital, except on a partial or complete liquidation of the corporation, and At least one of the following: At least 80% of the corporation's gross income for the tax year was paid by the tenant-stockholders. Irs form 1040 2010 For this purpose, gross income means all income received during the entire tax year, including any received before the corporation changed to cooperative ownership. Irs form 1040 2010 At least 80% of the total square footage of the corporation's property must be available for use by the tenant-stockholders during the entire tax year. Irs form 1040 2010 At least 90% of the expenditures paid or incurred by the corporation were used for the acquisition, construction, management, maintenance, or care of the property for the benefit of the tenant-shareholders during the entire tax year. Irs form 1040 2010 Tenant-stockholders. Irs form 1040 2010   A tenant-stockholder can be any entity (such as a corporation, trust, estate, partnership, or association) as well as an individual. Irs form 1040 2010 The tenant-stockholder does not have to live in any of the cooperative's dwelling units. Irs form 1040 2010 The units that the tenant-stockholder has the right to occupy can be rented to others. Irs form 1040 2010 Deductible taxes. Irs form 1040 2010   You figure your share of real estate taxes in the following way. Irs form 1040 2010 Divide the number of your shares of stock by the total number of shares outstanding, including any shares held by the corporation. Irs form 1040 2010 Multiply the corporation's deductible real estate taxes by the number you figured in (1). Irs form 1040 2010 This is your share of the real estate taxes. Irs form 1040 2010   Generally, the corporation will tell you your share of its real estate tax. Irs form 1040 2010 This is the amount you can deduct if it reasonably reflects the cost of real estate taxes for your dwelling unit. Irs form 1040 2010 Refund of real estate taxes. Irs form 1040 2010   If the corporation receives a refund of real estate taxes it paid in an earlier year, it must reduce the amount of real estate taxes paid this year when it allocates the tax expense to you. Irs form 1040 2010 Your deduction for real estate taxes the corporation paid this year is reduced by your share of the refund the corporation received. Irs form 1040 2010 Sales Taxes Generally, you can elect to deduct state and local general sales taxes instead of state and local income taxes as an itemized deduction on Schedule A (Form 1040). Irs form 1040 2010 Deductible sales taxes may include sales taxes paid on your home (including mobile and prefabricated), or home building materials if the tax rate was the same as the general sales tax rate. Irs form 1040 2010 For information on figuring your deduction, see the Instructions for Schedule A (Form 1040). Irs form 1040 2010 If you elect to deduct the sales taxes paid on your home, or home building materials, you cannot include them as part of your cost basis in the home. Irs form 1040 2010 Home Mortgage Interest This section of the publication gives you basic information about home mortgage interest, including information on interest paid at settlement, points, and Form 1098, Mortgage Interest Statement. Irs form 1040 2010 Most home buyers take out a mortgage (loan) to buy their home. Irs form 1040 2010 They then make monthly payments to either the mortgage holder or someone collecting the payments for the mortgage holder. Irs form 1040 2010 Usually, you can deduct the entire part of your payment that is for mortgage interest, if you itemize your deductions on Schedule A (Form 1040). Irs form 1040 2010 However, your deduction may be limited if: Your total mortgage balance is more than $1 million ($500,000 if married filing separately), or You took out a mortgage for reasons other than to buy, build, or improve your home. Irs form 1040 2010 If either of these situations applies to you, see Publication 936 for more information. Irs form 1040 2010 Also see Publication 936 if you later refinance your mortgage or buy a second home. Irs form 1040 2010 Refund of home mortgage interest. Irs form 1040 2010   If you receive a refund of home mortgage interest that you deducted in an earlier year and that reduced your tax, you generally must include the refund in income in the year you receive it. Irs form 1040 2010 For more information, see Recoveries in Publication 525. Irs form 1040 2010 The amount of the refund will usually be shown on the mortgage interest statement you receive from your mortgage lender. Irs form 1040 2010 See Mortgage Interest Statement , later. Irs form 1040 2010 Deductible Mortgage Interest To be deductible, the interest you pay must be on a loan secured by your main home or a second home. Irs form 1040 2010 The loan can be a first or second mortgage, a home improvement loan, or a home equity loan. Irs form 1040 2010 Prepaid interest. Irs form 1040 2010   If you pay interest in advance for a period that goes beyond the end of the tax year, you must spread this interest over the tax years to which it applies. Irs form 1040 2010 Generally, you can deduct in each year only the interest that qualifies as home mortgage interest for that year. Irs form 1040 2010 An exception (discussed later) applies to points. Irs form 1040 2010 Late payment charge on mortgage payment. Irs form 1040 2010   You can deduct as home mortgage interest a late payment charge if it was not for a specific service in connection with your mortgage loan. Irs form 1040 2010 Mortgage prepayment penalty. Irs form 1040 2010   If you pay off your home mortgage early, you may have to pay a penalty. Irs form 1040 2010 You can deduct that penalty as home mortgage interest provided the penalty is not for a specific service performed or cost incurred in connection with your mortgage loan. Irs form 1040 2010 Ground rent. Irs form 1040 2010   In some states (such as Maryland), you may buy your home subject to a ground rent. Irs form 1040 2010 A ground rent is an obligation you assume to pay a fixed amount per year on the property. Irs form 1040 2010 Under this arrangement, you are leasing (rather than buying) the land on which your home is located. Irs form 1040 2010 Redeemable ground rents. Irs form 1040 2010   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct the payments as mortgage interest. Irs form 1040 2010 The ground rent is a redeemable ground rent only if all of the following are true. Irs form 1040 2010 Your lease, including renewal periods, is for more than 15 years. Irs form 1040 2010 You can freely assign the lease. Irs form 1040 2010 You have a present or future right (under state or local law) to end the lease and buy the lessor's entire interest in the land by paying a specified amount. Irs form 1040 2010 The lessor's interest in the land is primarily a security interest to protect the rental payments to which he or she is entitled. Irs form 1040 2010   Payments made to end the lease and buy the lessor's entire interest in the land are not redeemable ground rents. Irs form 1040 2010 You cannot deduct them. Irs form 1040 2010 Nonredeemable ground rents. Irs form 1040 2010   Payments on a nonredeemable ground rent are not mortgage interest. Irs form 1040 2010 You can deduct them as rent only if they are a business expense or if they are for rental property. Irs form 1040 2010 Cooperative apartment. Irs form 1040 2010   You can usually treat the interest on a loan you took out to buy stock in a cooperative housing corporation as home mortgage interest if you own a cooperative apartment, and the cooperative housing corporation meets the conditions described earlier under Special Rules for Cooperatives . Irs form 1040 2010 In addition, you can treat as home mortgage interest your share of the corporation's deductible mortgage interest. Irs form 1040 2010 Figure your share of mortgage interest the same way that is shown for figuring your share of real estate taxes in the Example under Division of real estate taxes, earlier. Irs form 1040 2010 For more information on cooperatives, see Special Rule for Tenant-Stockholders in Cooperative Housing Corporations in Publication 936. Irs form 1040 2010 Refund of cooperative's mortgage interest. Irs form 1040 2010   You must reduce your mortgage interest deduction by your share of any cash portion of a patronage dividend that the cooperative receives. Irs form 1040 2010 The patronage dividend is a partial refund to the cooperative housing corporation of mortgage interest it paid in a prior year. Irs form 1040 2010   If you receive a Form 1098 from the cooperative housing corporation, the form should show only the amount you can deduct. Irs form 1040 2010 Mortgage Interest Paid at Settlement One item that normally appears on a settlement or closing statement is home mortgage interest. Irs form 1040 2010 You can deduct the interest that you pay at settlement if you itemize your deductions on Schedule A (Form 1040). Irs form 1040 2010 This amount should be included in the mortgage interest statement provided by your lender. Irs form 1040 2010 See the discussion under Mortgage Interest Statement , later. Irs form 1040 2010 Also, if you pay interest in advance, see Prepaid interest , earlier, and Points , next. Irs form 1040 2010 Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Irs form 1040 2010 Points also may be called loan origination fees, maximum loan charges, loan discount, or discount points. Irs form 1040 2010 A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. Irs form 1040 2010 See Points paid by the seller , later. Irs form 1040 2010 General rule. Irs form 1040 2010   You cannot deduct the full amount of points in the year paid. Irs form 1040 2010 They are prepaid interest, so you generally must deduct them over the life (term) of the mortgage. Irs form 1040 2010 Exception. Irs form 1040 2010   You can deduct the full amount of points in the year paid if you meet all the following tests. Irs form 1040 2010 Your loan is secured by your main home. Irs form 1040 2010 (Generally, your main home is the one you live in most of the time. Irs form 1040 2010 ) Paying points is an established business practice in the area where the loan was made. Irs form 1040 2010 The points paid were not more than the points generally charged in that area. Irs form 1040 2010 You use the cash method of accounting. Irs form 1040 2010 This means you report income in the year you receive it and deduct expenses in the year you pay them. Irs form 1040 2010 Most individuals use this method. Irs form 1040 2010 The points were not paid in place of amounts that ordinarily are stated separately on the settlement statement, such as appraisal fees, inspection fees, title fees, attorney fees, and property taxes. Irs form 1040 2010 The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. Irs form 1040 2010 The funds you provided are not required to have been applied to the points. Irs form 1040 2010 They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. Irs form 1040 2010 You cannot have borrowed these funds. Irs form 1040 2010 You use your loan to buy or build your main home. Irs form 1040 2010 The points were computed as a percentage of the principal amount of the mortgage. Irs form 1040 2010 The amount is clearly shown on the settlement statement (such as the Uniform Settlement Statement, Form HUD-1) as points charged for the mortgage. Irs form 1040 2010 The points may be shown as paid from either your funds or the seller's. Irs form 1040 2010 Note. Irs form 1040 2010 If you meet all of the tests listed above and you itemize your deductions in the year you get the loan, you can either deduct the full amount of points in the year paid or deduct them over the life of the loan, beginning in the year you get the loan. Irs form 1040 2010 If you do not itemize your deductions in the year you get the loan, you can spread the points over the life of the loan and deduct the appropriate amount in each future year, if any, when you do itemize your deductions. Irs form 1040 2010 Home improvement loan. Irs form 1040 2010   You can also fully deduct in the year paid points paid on a loan to improve your main home, if you meet the first six tests listed earlier. Irs form 1040 2010 Refinanced loan. Irs form 1040 2010   If you use part of the refinanced mortgage proceeds to improve your main home and you meet the first six tests listed earlier, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. Irs form 1040 2010 You can deduct the rest of the points over the life of the loan. Irs form 1040 2010 Points not fully deductible in year paid. Irs form 1040 2010    If you do not qualify under the exception to deduct the full amount of points in the year paid (or choose not to do so), see Points in Publication 936 for the rules on when and how much you can deduct. Irs form 1040 2010 Figure A. Irs form 1040 2010   You can use Figure A, next, as a quick guide to see whether your points are fully deductible in the year paid. Irs form 1040 2010    Please click here for the text description of the image. Irs form 1040 2010 Figure A. Irs form 1040 2010 Are my points fully deductible this year? Amounts charged for services. Irs form 1040 2010   Amounts charged by the lender for specific services connected to the loan are not interest. Irs form 1040 2010 Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. Irs form 1040 2010 You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. Irs form 1040 2010 For information about the tax treatment of these amounts and other settlement fees and closing costs, see Basis , later. Irs form 1040 2010 Points paid by the seller. Irs form 1040 2010   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. Irs form 1040 2010 Treatment by seller. Irs form 1040 2010   The seller cannot deduct these fees as interest. Irs form 1040 2010 However, they are a selling expense that reduces the seller's amount realized. Irs form 1040 2010 See Publication 523 for more information. Irs form 1040 2010 Treatment by buyer. Irs form 1040 2010   The buyer treats seller-paid points as if he or she had paid them. Irs form 1040 2010 If all the tests listed earlier under Exception are met, the buyer can deduct the points in the year paid. Irs form 1040 2010 If any of those tests are not met, the buyer must deduct the points over the life of the loan. Irs form 1040 2010   The buyer must also reduce the basis of the home by the amount of the seller-paid points. Irs form 1040 2010 For more information about the basis of your home, see Basis , later. Irs form 1040 2010 Funds provided are less than points. Irs form 1040 2010   If you meet all the tests listed earlier under Exception except that the funds you provided were less than the points charged to you (test 6), you can deduct the points in the year paid up to the amount of funds you provided. Irs form 1040 2010 In addition, you can deduct any points paid by the seller. Irs form 1040 2010 Example 1. Irs form 1040 2010 When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). Irs form 1040 2010 You meet all the tests for deducting points in the year paid (see Exception , earlier), except the only funds you provided were a $750 down payment. Irs form 1040 2010 Of the $1,000 you were charged for points, you can deduct $750 in the year paid. Irs form 1040 2010 You spread the remaining $250 over the life of the mortgage. Irs form 1040 2010 Example 2. Irs form 1040 2010 The facts are the same as in Example 1 , except that the person who sold you your home also paid one point ($1,000) to help you get your mortgage. Irs form 1040 2010 In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). Irs form 1040 2010 You spread the remaining $250 over the life of the mortgage. Irs form 1040 2010 You must reduce the basis of your home by the $1,000 paid by the seller. Irs form 1040 2010 Excess points. Irs form 1040 2010   If you meet all the tests under Exception , earlier, except that the points paid were more than are generally charged in your area (test 3), you can deduct in the year paid only the points that are generally charged. Irs form 1040 2010 You must spread any additional points over the life of the mortgage. Irs form 1040 2010 Mortgage ending early. Irs form 1040 2010   If you spread your deduction for points over the life of the mortgage, you can deduct any remaining balance in the year the mortgage ends. Irs form 1040 2010 A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. Irs form 1040 2010 Example. Irs form 1040 2010 Dan paid $3,000 in points in 2006 that he had to spread out over the 15-year life of the mortgage. Irs form 1040 2010 He had deducted $1,400 of these points through 2012. Irs form 1040 2010 Dan prepaid his mortgage in full in 2013. Irs form 1040 2010 He can deduct the remaining $1,600 of points in 2013. Irs form 1040 2010 Exception. Irs form 1040 2010   If you refinance the mortgage with the same lender, you cannot deduct any remaining points for the year. Irs form 1040 2010 Instead, deduct them over the term of the new loan. Irs form 1040 2010 Form 1098. Irs form 1040 2010   The mortgage interest statement you receive should show not only the total interest paid during the year, but also your deductible points paid during the year. Irs form 1040 2010 See Mortgage Interest Statement , later. Irs form 1040 2010 Where To Deduct Home Mortgage Interest Enter on Schedule A (Form 1040), line 10, the home mortgage interest and points reported to you on Form 1098 (discussed next). Irs form 1040 2010 If you did not receive a Form 1098, enter your deductible interest on line 11, and any deductible points on line 12. Irs form 1040 2010 See Table 1 below for a summary of where to deduct home mortgage interest and real estate taxes. Irs form 1040 2010 If you paid home mortgage interest to the person from whom you bought your home, show that person's name, address, and social security number (SSN) or employer identification number (EIN) on the dotted lines next to line 11. Irs form 1040 2010 The seller must give you this number and you must give the seller your SSN. Irs form 1040 2010 Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. Irs form 1040 2010 Failure to meet either of these requirements may result in a $50 penalty for each failure. Irs form 1040 2010 Table 1. Irs form 1040 2010 Where To Deduct Interest and Taxes Paid on Your Home See the text for information on what expenses are eligible. Irs form 1040 2010 IF you are eligible to deduct . Irs form 1040 2010 . Irs form 1040 2010 . Irs form 1040 2010 THEN report the amount  on Schedule A (Form 1040) . Irs form 1040 2010 . Irs form 1040 2010 . Irs form 1040 2010 real estate taxes line 6. Irs form 1040 2010 home mortgage interest and points reported on Form 1098 line 10. Irs form 1040 2010 home mortgage interest not reported on  Form 1098 line 11. Irs form 1040 2010 points not reported on Form 1098 line 12. Irs form 1040 2010 qualified mortgage insurance premiums line 13. Irs form 1040 2010 Mortgage Interest Statement If you paid $600 or more of mortgage interest (including certain points and mortgage insurance premiums) during the year on any one mortgage to a mortgage holder in the course of that holder's trade or business, you should receive a Form 1098 or similar statement from the mortgage holder. Irs form 1040 2010 The statement will show the total interest paid on your mortgage during the year. Irs form 1040 2010 If you bought a main home during the year, it also will show the deductible points you paid and any points you can deduct that were paid by the person who sold you your home. Irs form 1040 2010 See Points , earlier. Irs form 1040 2010 The interest you paid at settlement should be included on the statement. Irs form 1040 2010 If it is not, add the interest from the settlement sheet that qualifies as home mortgage interest to the total shown on Form 1098 or similar statement. Irs form 1040 2010 Put the total on Schedule A (Form 1040), line 10, and attach a statement to your return explaining the difference. Irs form 1040 2010 Write “See attached” to the right of line 10. Irs form 1040 2010 A mortgage holder can be a financial institution, a governmental unit, or a cooperative housing corporation. Irs form 1040 2010 If a statement comes from a cooperative housing corporation, it generally will show your share of interest. Irs form 1040 2010 Your mortgage interest statement for 2013 should be provided or sent to you by January 31, 2014. Irs form 1040 2010 If it is mailed, you should allow adequate time to receive it before contacting the mortgage holder. Irs form 1040 2010 A copy of this form will be sent to the IRS also. Irs form 1040 2010 Example. Irs form 1040 2010 You bought a new home on May 3. Irs form 1040 2010 You paid no points on the purchase. Irs form 1040 2010 During the year, you made mortgage payments which included $4,480 deductible interest on your new home. Irs form 1040 2010 The settlement sheet for the purchase of the home included interest of $620 for 29 days in May. Irs form 1040 2010 The mortgage statement you receive from the lender includes total interest of $5,100 ($4,480 + $620). Irs form 1040 2010 You can deduct the $5,100 if you itemize your deductions. Irs form 1040 2010 Refund of overpaid interest. Irs form 1040 2010   If you receive a refund of mortgage interest you overpaid in a prior year, you generally will receive a Form 1098 showing the refund in box 3. Irs form 1040 2010 Generally, you must include the refund in income in the year you receive it. Irs form 1040 2010 See Refund of home mortgage interest , earlier, under Home Mortgage Interest. Irs form 1040 2010 More than one borrower. Irs form 1040 2010   If you and at least one other person (other than your spouse if you file a joint return) were liable for and paid interest on a mortgage that was for your home, and the other person received a Form 1098 showing the interest that was paid during the year, attach a statement to your return explaining this. Irs form 1040 2010 Show how much of the interest each of you paid, and give the name and address of the person who received the form. Irs form 1040 2010 Deduct your share of the interest on Schedule A (Form 1040), line 11, and write “See attached” to the right of that line. Irs form 1040 2010 Mortgage Insurance Premiums You may be able to take an itemized deduction on Schedule A (Form 1040), line 13, for premiums you pay or accrue during 2013 for qualified mortgage insurance in connection with home acquisition debt on your qualified home. Irs form 1040 2010 Mortgage insurance premiums you paid or accrued on any mortgage insurance contract issued before January 1, 2007, are not deductible as an itemized deduction. Irs form 1040 2010 Qualified Mortgage Insurance Qualified mortgage insurance is mortgage insurance provided by the Veterans Administration, the Federal Housing Administration, or the Rural Housing Administration, and private mortgage insurance (as defined in section 2 of the Homeowners Protection Act of 1998 as in effect on December 20, 2006). Irs form 1040 2010 Prepaid mortgage insurance premiums. Irs form 1040 2010   If you paid premiums that are allocable to periods after 2013, you must allocate them over the shorter of: The stated term of the mortgage, or 84 months, beginning with the month the insurance was obtained. Irs form 1040 2010 The premiums are treated as paid in the year to which they were allocated. Irs form 1040 2010 If the mortgage is satisfied before its term, no deduction is allowed for the unamortized balance. Irs form 1040 2010 See Publication 936 for details. Irs form 1040 2010 Exception for certain mortgage insurance. Irs form 1040 2010   The allocation rules, explained above, do not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or Rural Housing Service. Irs form 1040 2010 Home Acquisition Debt Home acquisition debt is a mortgage you took out after October 13, 1987, to buy, build, or substantially improve a qualified home. Irs form 1040 2010 It also must be secured by that home. Irs form 1040 2010 If the amount of your mortgage is more than the cost of the home plus the cost of any substantial improvements, only the debt that is not more than the cost of the home plus improvements qualifies as home acquisition debt. Irs form 1040 2010 Home acquisition debt limit. Irs form 1040 2010   The total amount you can treat as home acquisition debt at any time on your home cannot be more than $1 million ($500,000 if married filing separately). Irs form 1040 2010 Discharges of qualified principal residence indebtedness. Irs form 1040 2010   You can exclude from gross income any discharges of qualified principal residence indebtedness made after 2006 and before 2014. Irs form 1040 2010 You must reduce the basis of your principal residence (but not below zero) by the amount you exclude. Irs form 1040 2010 Principal residence. Irs form 1040 2010   Your principal residence is the home where you ordinarily live most of the time. Irs form 1040 2010 You can have only one principal residence at any one time. Irs form 1040 2010 Qualified principal residence indebtedness. Irs form 1040 2010   This is a mortgage that you took out to buy, build, or substantially improve your principal residence and that is secured by that residence. Irs form 1040 2010 If the amount of your original mortgage is more than the cost of your principal residence plus the cost of substantial improvements, qualified principal residence indebtedness cannot be more than the cost of your principal residence plus improvements. Irs form 1040 2010   Any debt secured by your principal residence that you use to refinance qualified principal residence indebtedness is qualified principal residence indebtedness up to the amount of your old mortgage principal just before the refinancing. Irs form 1040 2010 Additional debt incurred to substantially improve your principal residence is also qualified principal residence indebtedness. Irs form 1040 2010 Amount you can exclude. Irs form 1040 2010   You can only exclude debt discharged after 2006 and before 2014. Irs form 1040 2010 The most you can exclude is $2 million ($1 million if married filing separately). Irs form 1040 2010 You cannot exclude any amount that was discharged because of services performed for the lender or on account of any other factor not directly related either to a decline in the value of your residence or to your financial condition. Irs form 1040 2010 Ordering rule. Irs form 1040 2010   If only a part of a loan is qualified principal residence indebtedness, you can exclude only the amount of the discharge that is more than the amount of the loan (immediately before the discharge) that is not qualified principal residence indebtedness. Irs form 1040 2010 Qualified Home This means your main home or your second home. Irs form 1040 2010 A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities. Irs form 1040 2010 Main home. Irs form 1040 2010   You can have only one main home at any one time. Irs form 1040 2010 This is the home where you ordinarily live most of the time. Irs form 1040 2010 Second home and other special situations. Irs form 1040 2010   If you have a second home, use part of your home for other than residential living (such as a home office), rent out part of your home, or are having your home constructed, see Qualified Home in Publication 936. Irs form 1040 2010 Limit on Deduction If your adjusted gross income (AGI) on Form 1040, line 38, is more than $100,000 ($50,000 if your filing status is married filing separately), the amount of your mortgage insurance premiums that are deductible is reduced and may be eliminated. Irs form 1040 2010 See Line 13 in the instructions for Schedule A (Form 1040) and complete the Mortgage Insurance Premiums Deduction Worksheet to figure the amount you can deduct. Irs form 1040 2010 If your AGI is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. Irs form 1040 2010 Form 1098. Irs form 1040 2010   The amount of mortgage insurance premiums you paid during 2013 should be reported in box 4. Irs form 1040 2010 See Form 1098, Mortgage Interest Statement in Publication 936. Irs form 1040 2010 Mortgage Interest Credit The mortgage interest credit is intended to help lower-income individuals afford home ownership. Irs form 1040 2010 If you qualify, you can claim the credit on Form 8396 each year for part of the home mortgage interest you pay. Irs form 1040 2010 Who qualifies. Irs form 1040 2010   You may be eligible for the credit if you were issued a qualified Mortgage Credit Certificate (MCC) from your state or local government. Irs form 1040 2010 Generally, an MCC is issued only in connection with a new mortgage for the purchase of your main home. Irs form 1040 2010 The MCC will show the certificate credit rate you will use to figure your credit. Irs form 1040 2010 It also will show the certified indebtedness amount. Irs form 1040 2010 Only the interest on that amount qualifies for the credit. Irs form 1040 2010 See Figuring the Credit , later. Irs form 1040 2010 You must contact the appropriate government agency about getting an MCC before you get a mortgage and buy your home. Irs form 1040 2010 Contact your state or local housing finance agency for information about the availability of MCCs in your area. Irs form 1040 2010 How to claim the credit. Irs form 1040 2010   To claim the credit, complete Form 8396 and attach it to your Form 1040 or Form 1040NR, U. Irs form 1040 2010 S. Irs form 1040 2010 Nonresident Alien Income Tax Return. Irs form 1040 2010 Include the credit in your total for Form 1040, line 53, or Form 1040NR, line 50; be sure to check box c and write “Form 8396” on that line. Irs form 1040 2010 Reducing your home mortgage interest deduction. Irs form 1040 2010   If you itemize your deductions on Schedule A (Form 1040), you must reduce your home mortgage interest deduction by the amount of the mortgage interest credit shown on Form 8396, line 3. Irs form 1040 2010 You must do this even if part of that amount is to be carried forward to 2014. Irs form 1040 2010 Selling your home. Irs form 1040 2010   If you purchase a home after 1990 using an MCC, and you sell that home within 9 years, you may have to recapture (repay) all or part of the benefit you received from the MCC program. Irs form 1040 2010 For additional information, see Recapturing (Paying Back) a Federal Mortgage Subsidy, in Publication 523. Irs form 1040 2010 Figuring the Credit Figure your credit on Form 8396. Irs form 1040 2010 Mortgage not more than certified indebtedness. Irs form 1040 2010   If your mortgage loan amount is equal to (or smaller than) the certified indebtedness amount shown on your MCC, enter on Form 8396, line 1, all the interest you paid on your mortgage during the year. Irs form 1040 2010 Mortgage more than certified indebtedness. Irs form 1040 2010   If your mortgage loan amount is larger than the certified indebtedness amount shown on your MCC, you can figure the credit on only part of the interest you paid. Irs form 1040 2010 To find the amount to enter on line 1, multiply the total interest you paid during the year on your mortgage by the following fraction. Irs form 1040 2010 Certified indebtedness amount on your MCC Original amount of your mortgage   The fraction will not change as long as you are entitled to take the mortgage interest credit. Irs form 1040 2010 Example. Irs form 1040 2010 Emily bought a home this year. Irs form 1040 2010 Her mortgage loan is $125,000. Irs form 1040 2010 The certified indebtedness amount on her MCC is $100,000. Irs form 1040 2010 She paid $7,500 interest this year. Irs form 1040 2010 Emily figures the interest to enter on Form 8396, line 1, as follows:   $100,000 = 80% (. Irs form 1040 2010 80)       $125,000       $7,500 x . Irs form 1040 2010 80 = $6,000   Emily enters $6,000 on Form 8396, line 1. Irs form 1040 2010 In each later year, she will figure her credit using only 80% of the interest she pays for that year. Irs form 1040 2010 Limits Two limits may apply to your credit. Irs form 1040 2010 A limit based on the credit rate, and A limit based on your tax. Irs form 1040 2010 Limit based on credit rate. Irs form 1040 2010   If the certificate credit rate is higher than 20%, the credit you are allowed cannot be more than $2,000. Irs form 1040 2010 Limit based on tax. Irs form 1040 2010   After applying the limit based on the credit rate, your credit generally cannot be more than your tax liability. Irs form 1040 2010 See the Credit Limit Worksheet in the Form 8396 instructions to calculate the limit based on tax. Irs form 1040 2010 Dividing the Credit If two or more persons (other than a married couple filing a joint return) hold an interest in the home to which the MCC relates, the credit must be divided based on the interest held by each person. Irs form 1040 2010 Example. Irs form 1040 2010 John and his brother, George, were issued an MCC. Irs form 1040 2010 They used it to get a mortgage on their main home. Irs form 1040 2010 John has a 60% ownership interest in the home, and George has a 40% ownership interest in the home. Irs form 1040 2010 John paid $5,400 mortgage interest this year and George paid $3,600. Irs form 1040 2010 The MCC shows a credit rate of 25% and a certified indebtedness amount of $130,000. Irs form 1040 2010 The loan amount (mortgage) on their home is $120,000. Irs form 1040 2010 The credit is limited to $2,000 because the credit rate is more than 20%. Irs form 1040 2010 John figures the credit by multiplying the mortgage interest he paid this year ($5,400) by the certificate credit rate (25%) for a total of $1,350. Irs form 1040 2010 His credit is limited to $1,200 ($2,000 × 60%). Irs form 1040 2010 George figures the credit by multiplying the mortgage interest he paid this year ($3,600) by the certificate credit rate (25%) for a total of $900. Irs form 1040 2010 His credit is limited to $800 ($2,000 × 40%). Irs form 1040 2010 Carryforward If your allowable credit is reduced because of the limit based on your tax, you can carry forward the unused portion of the credit to the next 3 years or until used, whichever comes first. Irs form 1040 2010 Example. Irs form 1040 2010 You receive a mortgage credit certificate from State X. Irs form 1040 2010 This year, your regular tax liability is $1,100, you owe no alternative minimum tax, and your mortgage interest credit is $1,700. Irs form 1040 2010 You claim no other credits. Irs form 1040 2010 Your unused mortgage interest credit for this year is $600 ($1,700 − $1,100). Irs form 1040 2010 You can carry forward this amount to the next 3 years or until used, whichever comes first. Irs form 1040 2010 Credit rate more than 20%. Irs form 1040 2010   If you are subject to the $2,000 limit because your certificate credit rate is more than 20%, you cannot carry forward any amount more than $2,000 (or your share of the $2,000 if you must divide the credit). Irs form 1040 2010 Example. Irs form 1040 2010 In the earlier example under Dividing the Credit , John and George used the entire $2,000 credit. Irs form 1040 2010 The excess   John $1,350 − $1,200 = $150     George $900 − $800 = $100   $150 for John ($1,350 − $1,200) and $100 for George ($900 − $800) cannot be carried forward to future years, despite the respective tax liabilities for John and George. Irs form 1040 2010 Refinancing If you refinance your original mortgage loan on which you had been given an MCC, you must get a new MCC to be able to claim the credit on the new loan. Irs form 1040 2010 The amount of credit you can claim on the new loan may change. Irs form 1040 2010 Table 2 below summarizes how to figure your credit if you refinance your original mortgage loan. Irs form 1040 2010 Table 2. Irs form 1040 2010 Effect of Refinancing on Your Credit IF you get a new (reissued) MCC and the amount of your new mortgage is . Irs form 1040 2010 . Irs form 1040 2010 . Irs form 1040 2010 THEN the interest you claim on Form 8396, line 1, is* . Irs form 1040 2010 . Irs form 1040 2010 . Irs form 1040 2010 smaller than or equal to the certified indebtedness amount on the new MCC all the interest paid during the year on your new mortgage. Irs form 1040 2010 larger than the certified indebtedness amount on the new MCC interest paid during the year on your new mortgage multiplied by the following fraction. Irs form 1040 2010         certified indebtedness  amount on your new MCC       original amount of your  mortgage   *The credit using the new MCC cannot be more than the credit using the old MCC. Irs form 1040 2010  See New MCC cannot increase your credit above. Irs form 1040 2010 An issuer may reissue an MCC after you refinance your mortgage. Irs form 1040 2010 If you did not get a new MCC, you may want to contact the state or local housing finance agency that issued your original MCC for information about whether you can get a reissued MCC. Irs form 1040 2010 Year of refinancing. Irs form 1040 2010   In the year of refinancing, add the applicable amount of interest paid on the old mortgage and the applicable amount of interest paid on the new mortgage, and enter the total on Form 8396, line 1. Irs form 1040 2010   If your new MCC has a credit rate different from the rate on the old MCC, you must attach a statement to Form 8396. Irs form 1040 2010 The statement must show the calculation for lines 1, 2, and 3 for the part of the year when the old MCC was in effect. Irs form 1040 2010 It must show a separate calculation for the part of the year when the new MCC was in effect. Irs form 1040 2010 Combine the amounts from both calculations for line 3, enter the total on line 3 of the form, and write “See attached” on the dotted line next to line 2. Irs form 1040 2010 New MCC cannot increase your credit. Irs form 1040 2010   The credit that you claim with your new MCC cannot be more than the credit that you could have claimed with your old MCC. Irs form 1040 2010   In most cases, the agency that issues your new MCC will make sure that it does not increase your credit. Irs form 1040 2010 However, if either your old loan or your new loan has a variable (adjustable) interest rate, you will need to check this yourself. Irs form 1040 2010 In that case, you will need to know the amount of the credit you could have claimed using the old MCC. Irs form 1040 2010   There are two methods for figuring the credit you could have claimed. Irs form 1040 2010 Under one method, you figure the actual credit that would have been allowed. Irs form 1040 2010 This means you use the credit rate on the old MCC and the interest you would have paid on the old loan. Irs form 1040 2010   If your old loan was a variable rate mortgage, you can use another method to determine the credit that you could have claimed. Irs form 1040 2010 Under this method, you figure the credit using a payment schedule of a hypothetical self-amortizing mortgage with level payments projected to the final maturity date of the old mortgage. Irs form 1040 2010 The interest rate of the hypothetical mortgage is the annual percentage rate (APR) of the new mortgage for purposes of the Federal Truth in Lending Act. Irs form 1040 2010 The principal of the hypothetical mortgage is the remaining outstanding balance of the certified mortgage indebtedness shown on the old MCC. Irs form 1040 2010    You must choose one method and use it consistently beginning with the first tax year for which you claim the credit based on the new MCC. Irs form 1040 2010    As part of your tax records, you should keep your old MCC and the schedule of payments for your old mortgage. Irs form 1040 2010 Basis Basis is your starting point for figuring a gain or loss if you later sell your home, or for figuring depreciation if you later use part of your home for business purposes or for rent. Irs form 1040 2010 While you own your home, you may add certain items to your basis. Irs form 1040 2010 You may subtract certain other items from your basis. Irs form 1040 2010 These items are called adjustments to basis and are explained later under Adjusted Basis . Irs form 1040 2010 It is important that you understand these terms when you first acquire your home because you must keep track of your basis and adjusted basis during the period you own your home. Irs form 1040 2010 You also must keep records of the events that affect basis or adjusted basis. Irs form 1040 2010 See Keeping Records , below. Irs form 1040 2010 Figuring Your Basis How you figure your basis depends on how you acquire your home. Irs form 1040 2010 If you buy or build your home, your cost is your basis. Irs form 1040 2010 If you receive your home as a gift, your basis is usually the same as the adjusted basis of the person who gave you the property. Irs form 1040 2010 If you inherit your home from a decedent, different rules apply depending on the date of the decedent's death. Irs form 1040 2010 Each of these topics is discussed later. Irs form 1040 2010 Property transferred from a spouse. Irs form 1040 2010   If your home is transferred to you from your spouse, or from your former spouse as a result of a divorce, your basis is the same as your spouse's (or former spouse's) adjusted basis just before the transfer. Irs form 1040 2010 Publication 504, Divorced or Separated Individuals, fully discusses transfers between spouses. Irs form 1040 2010 Cost as Basis The cost of your home, whether you purchased it or constructed it, is the amount you paid for it, including any debt you assumed. Irs form 1040 2010 The cost of your home includes most settlement or closing costs you paid when you bought the home. Irs form 1040 2010 If you built your home, your cost includes most closing costs paid when you bought the land or settled on your mortgage. Irs form 1040 2010 See Settlement or closing costs , later. Irs form 1040 2010 If you elect to deduct the sales taxes on the purchase or construction of your home as an itemized deduction on Schedule A (Form 1040), you cannot include the sales taxes as part of your cost basis in the home. Irs form 1040 2010 Purchase. Irs form 1040 2010   The basis of a home you bought is the amount you paid for it. Irs form 1040 2010 This usually includes your down payment and any debt you assumed. Irs form 1040 2010 The basis of a cooperative apartment is the amount you paid for your shares in the corporation that owns or controls the property. Irs form 1040 2010 This amount includes any purchase commissions or other costs of acquiring the shares. Irs form 1040 2010 Construction. Irs form 1040 2010   If you contracted to have your home built on land that you own, your basis in the home is your basis in the land plus the amount you paid to have the home built. Irs form 1040 2010 This includes the cost of labor and materials, the amount you paid the contractor, any architect's fees, building permit charges, utility meter and connection charges, and legal fees that are directly connected with building your home. Irs form 1040 2010 If you built all or part of your home yourself, your basis is the total amount it cost you to build it. Irs form 1040 2010 You cannot include in basis the value of your own labor or any other labor for which you did not pay. Irs form 1040 2010 Real estate taxes. Irs form 1040 2010   Real estate taxes are usually divided so that you and the seller each pay taxes for the part of the property tax year that each owned the home. Irs form 1040 2010 See the earlier discussion of Real estate taxes paid at settlement or closing , under Real Estate Taxes, earlier, to figure the real estate taxes you paid or are considered to have paid. Irs form 1040 2010   If you pay any part of the seller's share of the real estate taxes (the taxes up to the date of sale), and the seller did not reimburse you, add those taxes to your basis in the home. Irs form 1040 2010 You cannot deduct them as taxes paid. Irs form 1040 2010   If the seller paid any of your share of the real estate taxes (the taxes beginning with the date of sale), you can still deduct those taxes. Irs form 1040 2010 Do not include those taxes in your basis. Irs form 1040 2010 If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. Irs form 1040 2010 Example 1. Irs form 1040 2010 You bought your home on September 1. Irs form 1040 2010 The property tax year in your area is the calendar year, and the tax is due on August 15. Irs form 1040 2010 The real estate taxes on the home you bought were $1,275 for the year and had been paid by the seller on August 15. Irs form 1040 2010 You did not reimburse the seller for your share of the real estate taxes from September 1 through December 31. Irs form 1040 2010 You must reduce the basis of your home by the $426 [(122 ÷ 365) × $1,275] the seller paid for you. Irs form 1040 2010 You can deduct your $426 share of real estate taxes on your return for the year you purchased your home. Irs form 1040 2010 Example 2. Irs form 1040 2010 You bought your home on May 3, 2013. Irs form 1040 2010 The property tax year in your area is the calendar year. Irs form 1040 2010 The taxes for the previous year are assessed on January 2 and are due on May 31 and November 30. Irs form 1040 2010 Under state law, the taxes become a lien on May 31. Irs form 1040 2010 You agreed to pay all taxes due after the date of sale. Irs form 1040 2010 The taxes due in 2013 for 2012 were $1,375. Irs form 1040 2010 The taxes due in 2014 for 2013 will be $1,425. Irs form 1040 2010 You cannot deduct any of the taxes paid in 2013 because they relate to the 2012 property tax year and you did not own the home until 2013. Irs form 1040 2010 Instead, you add the $1,375 to the cost (basis) of your home. Irs form 1040 2010 You owned the home in 2013 for 243 days (May 3 to December 31), so you can take a tax deduction on your 2014 return of $949 [(243 ÷ 365) × $1,425] paid in 2014 for 2013. Irs form 1040 2010 You add the remaining $476 ($1,425 − $949) of taxes paid in 2014 to the cost (basis) of your home. Irs form 1040 2010 Settlement or closing costs. Irs form 1040 2010   If you bought your home, you probably paid settlement or closing costs in addition to the contract price. Irs form 1040 2010 These costs are divided between you and the seller according to the sales contract, local custom, or understanding of the parties. Irs form 1040 2010 If you built your home, you probably paid these costs when you bought the land or settled on your mortgage. Irs form 1040 2010   The only settlement or closing costs you can deduct are home mortgage interest and certain real estate taxes. Irs form 1040 2010 You deduct them in the year you buy your home if you itemize your deductions. Irs form 1040 2010 You can add certain other settlement or closing costs to the basis of your home. Irs form 1040 2010 Items added to basis. Irs form 1040 2010   You can include in your basis the settlement fees and closing costs you paid for buying your home. Irs form 1040 2010 A fee is for buying the home if you would have had to pay it even if you paid cash for the home. Irs form 1040 2010   The following are some of the settlement fees and closing costs that you can include in the original basis of your home. Irs form 1040 2010 Abstract fees (abstract of title fees). Irs form 1040 2010 Charges for installing utility services. Irs form 1040 2010 Legal fees (including fees for the title search and preparation of the sales contract and deed). Irs form 1040 2010 Recording fees. Irs form 1040 2010 Surveys. Irs form 1040 2010 Transfer or stamp taxes. Irs form 1040 2010 Owner's title insurance. Irs form 1040 2010 Any amount the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, cost for improvements or repairs, and sales commissions. Irs form 1040 2010   If the seller actually paid for any item for which you are liable and for which you can take a deduction (such as your share of the real estate taxes for the year of sale), you must reduce your basis by that amount unless you are charged for it in the settlement. Irs form 1040 2010 Items not added to basis and not deductible. Irs form 1040 2010   Here are some settlement and closing costs that you cannot deduct or add to your basis. Irs form 1040 2010 Fire insurance premiums. Irs form 1040 2010 Charges for using utilities or other services related to occupancy of the home before closing. Irs form 1040 2010 Rent for occupying the home before closing. Irs form 1040 2010 Charges connected with getting or refinancing a mortgage loan, such as: Loan assumption fees, Cost of a credit report, and Fee for an appraisal required by a lender. Irs form 1040 2010 Points paid by seller. Irs form 1040 2010   If you bought your home after April 3, 1994, you must reduce your basis by any points paid for your mortgage by the person who sold you your home. Irs form 1040 2010   If you bought your home after 1990 but before April 4, 1994, you must reduce your basis by seller-paid points only if you deducted them. Irs form 1040 2010 See Points , earlier, for the rules on deducting points. Irs form 1040 2010 Gift To figure the basis of property you receive as a gift, you must know its adjusted basis (defined later) to the donor just before it was given to you, its fair market value (FMV) at the time it was given to you, and any gift tax paid on it. Irs form 1040 2010 Fair market value. Irs form 1040 2010   Fair market value (FMV) is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and who both have a reasonable knowledge of all the necessary facts. Irs form 1040 2010 Donor's adjusted basis is more than FMV. Irs form 1040 2010   If someone gave you your home and the donor's adjusted basis, when it was given to you, was more than the FMV, your basis at the time of receipt is the same as the donor's adjusted basis. Irs form 1040 2010 Disposition basis. Irs form 1040 2010   If the donor's adjusted basis at the time of the gift is more than the FMV, your basis (plus or minus any required adjustments, see Adjusted Basis , later) when you dispose of the property will depend on whether you have a gain or a loss. Irs form 1040 2010 Your basis for figuring a gain is the same as the donor's adjusted basis. Irs form 1040 2010 Your basis for figuring a loss is the FMV when you received the gift. Irs form 1040 2010 If you use the donor's adjusted basis to figure a gain and it results in a loss, then you must use the FMV (at the time of the gift) to refigure the loss. Irs form 1040 2010 However, if using the FMV results in a gain, then you neither have a gain nor a loss. Irs form 1040 2010 Example 1. Irs form 1040 2010 Andrew received a house as a gift from Ishmael (the donor). Irs form 1040 2010 At the time of the gift, the home had an FMV of $80,000. Irs form 1040 2010 Ishmael's adjusted basis was $100,000. Irs form 1040 2010 After he received the house, no events occurred to increase or decrease the basis. Irs form 1040 2010 If Andrew sells the house for $120,000, he will have a $20,000 gain because he must use the donor's adjusted basis ($100,000) at the time of the gift as his basis to figure the gain. Irs form 1040 2010 Example 2. Irs form 1040 2010 Same facts as Example 1 , except this time Andrew sells the house for $70,000. Irs form 1040 2010 He will have a loss of $10,000 because he must use the FMV ($80,000) at the time of the gift as his basis to figure the loss. Irs form 1040 2010 Example 3. Irs form 1040 2010 Same facts as Example 1 , except this time Andrew sells the house for $90,000. Irs form 1040 2010 Initially, he figures the gain using Ishmael's adjusted basis ($100,000), which results in a loss of $10,000. Irs form 1040 2010 Since it is a loss, Andrew must now recalculate the loss using the FMV ($80,000), which results in a gain of $10,000. Irs form 1040 2010 So in this situation, Andrew will neither have a gain nor a loss. Irs form 1040 2010 Donor's adjusted basis equal to or less than the FMV. Irs form 1040 2010   If someone gave you your home after 1976 and the donor's adjusted basis, when it was given to you, was equal to or less than the FMV, your basis at the time of receipt is the same as the donor's adjusted basis, plus the part of any federal gift tax paid that is due to the net increase in value of the home. Irs form 1040 2010 Part of federal gift tax due to net increase in value. Irs form 1040 2010   Figure the part of the federal gift tax paid that is due to the net increase in value of the home by multiplying the total federal gift tax paid by a fraction. Irs form 1040 2010 The numerator (top part) of the fraction is the net increase in the value of the home, and the denominator (bottom part) is the value of the home for gift tax purposes after reduction for any annual exclusion and marital or charitable deduction that applies to the gift. Irs form 1040 2010 The net increase in the value of the home is its FMV minus the adjusted basis of the donor. Irs form 1040 2010 Publication 551 gives more information, including examples, on figuring your basis when you receive property as a gift. Irs form 1040 2010 Inheritance Your basis in a home you inherited is generally the fair market value of the home on the date of the decedent's death or on the alternative valuation date if the personal representative for the estate chooses to use alternative valuation. Irs form 1040 2010 If an estate tax return was filed, your basis is generally the value of the home listed on the estate tax return. Irs form 1040 2010 If an estate tax return was not filed, your basis is the appraised value of the home at the decedent's date of death for state inheritance or transmission taxes. Irs form 1040 2010 Publication 551 and Publication 559, Survivors, Executors, and Administrators, have more information on the basis of inherited property. Irs form 1040 2010 If you inherited your home from someone who died in 2010, and the executor of the decedent's estate made the election to file Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent, refer to the information provided by the executor or see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010. Irs form 1040 2010 Adjusted Basis While you own your home, various events may take place that can change the original basis of your home. Irs form 1040 2010 These events can increase or decrease your original basis. Irs form 1040 2010 The result is called adjusted basis. Irs form 1040 2010 See Table 3, on this page, for a list of some of the items that can adjust your basis. Irs form 1040 2010 Table 3. Irs form 1040 2010 Adjusted Basis This table lists examples of some items that generally will increase or decrease your basis in your home. Irs form 1040 2010 It is not intended to be all-inclusive. Irs form 1040 2010 Increases to Basis Decreases to Basis Improvements: Putting an addition on your home Replacing an entire roof Paving your driveway Installing central air conditioning Rewiring your home Assessments for local improvements (see Assessments for local benefits , under What You Can and Cannot Deduct, earlier) Amounts spent to restore damaged property Insurance or other reimbursement for casualty losses Deductible casualty loss not covered by insurance Payments received for easement or right-of-way granted Depreciation allowed or allowable if home is used for business or rental purposes Value of subsidy for energy conservation measure excluded from income Improvements. Irs form 1040 2010   An improvement materially adds to the value of your home, considerably prolongs its useful life, or adapts it to new uses. Irs form 1040 2010 You must add the cost of any improvements to the basis of your home. Irs form 1040 2010 You cannot deduct these costs. Irs form 1040 2010   Improvements include putting a recreation room in your unfinished basement, adding another bathroom or bedroom, putting up a fence, putting in new plumbing or wiring, installing a new roof, and paving your driveway. Irs form 1040 2010 Amount added to basis. Irs form 1040 2010   The amount you add to your basis for improvements is your actual cost. Irs form 1040 2010 This includes all costs for material and labor, except your own labor, and all expenses related to the improvement. Irs form 1040 2010 For example, if you had your lot surveyed to put up a fence, the cost of the survey is a part of the cost of the fence. Irs form 1040 2010   You also must add to your basis state and local assessments for improvements such as streets and sidewalks if they increase the value of the property. Irs form 1040 2010 These assessments are discussed earlier under Real Estate Taxes . Irs form 1040 2010 Improvements no longer part of home. Irs form 1040 2010    Your home's adjusted basis does not include the cost of any improvements that are replaced and are no longer part of the home. Irs form 1040 2010 Example. Irs form 1040 2010 You put wall-to-wall carpeting in your home 15 years ago. Irs form 1040 2010 Later, you replaced that carpeting with new wall-to-wall carpeting. Irs form 1040 2010 The cost of the old carpeting you replaced is no longer part of your home's adjusted basis. Irs form 1040 2010 Repairs versus improvements. Irs form 1040 2010   A repair keeps your home in an ordinary, efficient operating condition. Irs form 1040 2010 It does not add to the value of your home or prolong its life. Irs form 1040 2010 Repairs include repainting your home inside or outside, fixing your gutters or floors, fixing leaks or plastering, and replacing broken window panes. Irs form 1040 2010 You cannot deduct repair costs and generally cannot add them to the basis of your home. Irs form 1040 2010   However, repairs that are done as part of an extensive remodeling or restoration of your home are considered improvements. Irs form 1040 2010 You add them to the basis of your home. Irs form 1040 2010 Records to keep. Irs form 1040 2010   You can use Table 4 (at the end of the publication) as a guide to help you keep track of improvements to your home. Irs form 1040 2010 Also see Keeping Records , below. Irs form 1040 2010 Energy conservation subsidy. Irs form 1040 2010   If a public utility gives you (directly or indirectly) a subsidy for the purchase or installation of an energy conservation measure for your home, do not include the value of that subsidy in your income. Irs form 1040 2010 You must reduce the basis of your home by that value. Irs form 1040 2010   An energy conservation measure is an installation or modification primarily designed to reduce consumption of electricity or natural gas or to improve the management of energy demand. Irs form 1040 2010 Keeping Records Keeping full and accurate records is vital to properly report your income and expenses, to support your deductions and credits, and to know the basis or adjusted basis of your home. Irs form 1040 2010 These records include your purchase contract and settlement papers if you bought the property, or other objective evidence if you acquired it by gift, inheritance, or similar means. Irs form 1040 2010 You should keep any receipts, canceled checks, and similar evidence for improvements or other additions to the basis. Irs form 1040 2010 In addition, you should keep track of any decreases to the basis such as those listed in Table 3, earlier. Irs form 1040 2010 How to keep records. Irs form 1040 2010   How you keep records is up to you, but they must be clear and accurate and must be available to the IRS. Irs form 1040 2010 How long to keep records. Irs form 1040 2010   You must keep your records for as long as they are important for meeting any provision of the federal tax law. Irs form 1040 2010   Keep records that support an item of income, a deduction, or a credit appearing on a return until the period of limitations for the return runs out. Irs form 1040 2010 (A period of limitations is the period of time after which no legal action can be brought. Irs form 1040 2010 ) For assessment of tax you owe, this is generally 3 years from the date you filed the return. Irs form 1040 2010 For filing a claim for credit or refund, this is generally 3 years from the date you filed the original return, or 2 years from the date you paid the tax, whichever is later. Irs form 1040 2010 Returns filed before the due date are treated as filed on the due date. Irs form 1040 2010   You may need to keep records relating to the basis of property (discussed earlier) for longer than the period of limitations. Irs form 1040 2010 Keep those records as long as they are important in figuring the basis of the original or replacement property. Irs form 1040 2010 Generally, this means for as long as you own the property and, after you dispose of it, for the period of limitations that applies to you. Irs form 1040 2010 Table 4. Irs form 1040 2010 Record of Home Improvements Keep this for your records. Irs form 1040 2010 Also, keep receipts or other proof of improvements. Irs form 1040 2010 Remove from this record any improvements that are no longer part of your main home. Irs form 1040 2010 For example, if you put wall-to-wall carpeting in your home and later replace it with new wall-to-wall carpeting, remove the cost of the first carpeting. Irs form 1040 2010 (a) Type of Improvement (b) Date (c) Amount   (a) Type of Improvement (b) Date (c) Amount Additions:       Heating & Air  Conditioning:     Bedroom       Heating system     Bathroom       Central air conditioning     Deck       Furnace     Garage       Duct work     Porch       Central humidifier     Patio       Filtration system     Storage shed       Other     Fireplace       Electrical:     Other           Lawn & Grounds:       Lighting fixtures           Wiring upgrades     Landscaping       Other     Driveway       Plumbing:     Walkway           Fences       Water heater     Retaining wall       Soft water system     Sprinkler system       Filtration system     Swimming pool       Other     Exterior lighting       Insulation:     Other           Communications:       Attic           Walls     Satellite dish       Floors     Intercom       Pipes and duct work     Security system       Other     Other             Miscellaneous:       Interior  Improvements:     Storm windows and doors       Built-in appliances     Roof       Kitchen modernization     Central vacuum       Bathroom modernization     Other       Flooring             Wall-to-wall carpeting             Other     How To