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2010 Tax Form

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2010 Tax Form

2010 tax form 3. 2010 tax form   Section 501(c)(3) Organizations Table of Contents IntroductionChild care organizations. 2010 tax form Topics - This chapter discusses: Useful Items - You may want to see: Contributions to 501(c)(3) OrganizationsCertain annuity contracts. 2010 tax form Certain contracts held by a charitable remainder trust. 2010 tax form Excise Taxes. 2010 tax form Indoor tanning services. 2010 tax form Application for Recognition of ExemptionPolitical activity. 2010 tax form Private delivery service. 2010 tax form Amendments to organizing documents required. 2010 tax form How to show reasonable action and good faith. 2010 tax form Not acting reasonably and in good faith. 2010 tax form Prejudicing the interest of the Government. 2010 tax form Procedure for requesting extension. 2010 tax form More information. 2010 tax form Organizations Not Required To File Form 1023 Articles of OrganizationOrganizational Test Dedication and Distribution of Assets Educational Organizations and Private SchoolsEducational Organizations Private Schools Organizations Providing InsuranceCharitable Risk Pools Other Section 501(c)(3) OrganizationsCharitable Organizations Religious Organizations Scientific Organizations Literary Organizations Amateur Athletic Organizations Prevention of Cruelty to Children or Animals Private Foundations and Public CharitiesPrivate Foundations Public Charities Private Operating Foundations Lobbying ExpendituresLobbying expenditures. 2010 tax form Grass roots expenditures. 2010 tax form Lobbying nontaxable amount. 2010 tax form Grass roots nontaxable amount. 2010 tax form Organization that no longer qualifies. 2010 tax form Tax on organization. 2010 tax form Tax on managers. 2010 tax form Taxes on organizations. 2010 tax form Taxes on managers. 2010 tax form Political expenditures. 2010 tax form Correction of expenditure. 2010 tax form Introduction An organization may qualify for exemption from federal income tax if it is organized and operated exclusively for one or more of the following purposes. 2010 tax form Religious. 2010 tax form Charitable. 2010 tax form Scientific. 2010 tax form Testing for public safety. 2010 tax form Literary. 2010 tax form Educational. 2010 tax form Fostering national or international amateur sports competition (but only if none of its activities involve providing athletic facilities or equipment; however, see Amateur Athletic Organizations , later in this chapter). 2010 tax form The prevention of cruelty to children or animals. 2010 tax form To qualify, the organization must be a corporation, community chest, fund, articles of association, or foundation. 2010 tax form A trust is a fund or foundation and will qualify. 2010 tax form However, an individual or a partnership will not qualify. 2010 tax form Examples. 2010 tax form   Qualifying organizations include: Nonprofit old-age homes, Parent-teacher associations, Charitable hospitals or other charitable organizations, Alumni associations, Schools, Chapters of the Red Cross, Boys' or Girls' Clubs, and Churches. 2010 tax form Child care organizations. 2010 tax form   The term educational purposes includes providing for care of children away from their homes if substantially all the care provided is to enable individuals (the parents) to be gainfully employed and the services are available to the general public. 2010 tax form Instrumentalities. 2010 tax form   A state or municipal instrumentality may qualify under section 501(c)(3) if it is organized as a separate entity from the governmental unit that created it and if it otherwise meets the organizational and operational tests of section 501(c)(3). 2010 tax form Examples of a qualifying instrumentality might include state schools, universities, or hospitals. 2010 tax form However, if an organization is an integral part of the local government or possesses governmental powers, it does not qualify for exemption. 2010 tax form A state or municipality itself does not qualify for exemption. 2010 tax form Topics - This chapter discusses: Contributions to 501(c)(3) organizations, Applications for recognition of exemption, Articles of Organization, Educational organizations and private schools, Organizations providing insurance, Other section 501(c)(3) organizations, Private foundations and public charities, and Lobbying expenditures. 2010 tax form Useful Items - You may want to see: Forms (and Instructions) 1023 Application for Recognition of Exemption Under Section 501(c)(3) of the Internal Revenue Code See chapter 6 for information about getting publications and forms. 2010 tax form Contributions to 501(c)(3) Organizations Contributions to domestic organizations described in this chapter, except organizations testing for public safety, are deductible as charitable contributions on the donor's federal income tax return. 2010 tax form Fundraising events. 2010 tax form   If the donor receives something of value in return for the contribution, a common occurrence with fundraising efforts, part or all of the contribution may not be deductible. 2010 tax form This may apply to fundraising activities such as charity balls, bazaars, banquets, auctions, concerts, athletic events, and solicitations for membership or contributions when merchandise or benefits are given in return for payment of a specified minimum contribution. 2010 tax form   If the donor receives or expects to receive goods or services in return for a contribution to your organization, the donor cannot deduct any part of the contribution unless the donor intends to, and does, make a payment greater than the fair market value of the goods or services. 2010 tax form If a deduction is allowed, the donor can deduct only the part of the contribution, if any, that is more than the fair market value of the goods or services received. 2010 tax form You should determine in advance the fair market value of any goods or services to be given to contributors and tell them, when you publicize the fundraising event or solicit their contributions, how much is deductible and how much is for the goods or services. 2010 tax form See Disclosure of Quid Pro Quo Contributions in chapter 2. 2010 tax form Exemption application not filed. 2010 tax form   Donors cannot deduct any charitable contribution to an organization that is required to apply for recognition of exemption but has not done so. 2010 tax form Separate fund—contributions that are deductible. 2010 tax form   An organization that is exempt from federal income tax other than as an organization described in section 501(c)(3) can, if it desires, establish a fund, separate and apart from its other funds, exclusively for religious, charitable, scientific, literary, or educational purposes, fostering national or international amateur sports competition, or for the prevention of cruelty to children or animals. 2010 tax form   If the fund is organized and operated exclusively for these purposes, it may qualify for exemption as an organization described in section 501(c)(3), and contributions made to it will be deductible as provided by section 170. 2010 tax form A fund with these characteristics must be organized in such a manner as to prohibit the use of its funds upon dissolution, or otherwise, for the general purposes of the organization creating it. 2010 tax form Personal benefit contracts. 2010 tax form   Generally, charitable deductions will not be allowed for a transfer to, or for the use of, a section 501(c)(3) or (c)(4) organization if in connection with the transfer: The organization directly or indirectly pays, or previously paid, a premium on a personal benefit contract for the transferor, or There is an understanding or expectation that anyone will directly or indirectly pay a premium on a personal benefit contract for the transferor. 2010 tax form   A personal benefit contract with respect to the transferor is any life insurance, annuity, or endowment contract, if any direct or indirect beneficiary under the contract is the transferor, any member of the transferor's family, or any other person designated by the transferor. 2010 tax form Certain annuity contracts. 2010 tax form   If an organization incurs an obligation to pay a charitable gift annuity, and the organization purchases an annuity contract to fund the obligation, individuals receiving payments under the charitable gift annuity will not be treated as indirect beneficiaries if the organization owns all of the incidents of ownership under the contract, is entitled to all payments under the contract, and the timing and amount of the payments are substantially the same as the timing and amount of payments to each person under the obligation (as such obligation is in effect at the time of the transfer). 2010 tax form Certain contracts held by a charitable remainder trust. 2010 tax form   An individual will not be considered an indirect beneficiary under a life insurance, annuity, or endowment contract held by a charitable remainder annuity trust or a charitable remainder unitrust solely by reason of being entitled to the payment if the trust owns all of the incidents of ownership under the contract, and the trust is entitled to all payments under the contract. 2010 tax form Excise tax. 2010 tax form   If the premiums are paid in connection with a transfer for which a deduction is not allowable under the deduction denial rule, without regard to when the transfer to the charitable organization was made, an excise tax will be applied that is equal to the amount of the premiums paid by the organization on any life insurance, annuity, or endowment contract. 2010 tax form The excise tax does not apply if all of the direct and indirect beneficiaries under the contract are organizations. 2010 tax form Excise Taxes. 2010 tax form   A charitable organization liable for excise taxes must file Form 4720, Return of Certain Excise Taxes Under Chapters 41 and 42 of the Internal Revenue Code. 2010 tax form Generally, the due date for filing Form 4720 occurs on the fifteenth day of the fifth month following the close of the organization's tax year. 2010 tax form Indoor tanning services. 2010 tax form   If your organization provides an indoor tanning bed service, the ACA imposed a 10% excise tax on services provided after June 30, 2010. 2010 tax form For more information, go to IRS. 2010 tax form gov and select Affordable Care Act Tax Provisions. 2010 tax form Application for Recognition of Exemption This discussion describes certain information to be provided upon application for recognition of exemption by all organizations created for any of the purposes described earlier in this chapter. 2010 tax form For example, the application must include a conformed copy of the organization's articles of incorporation, as discussed under Articles of Organization , later in this chapter. 2010 tax form See the organization headings that follow for specific information your organization may need to provide. 2010 tax form Form 1023. 2010 tax form   Your organization must file its application for recognition of exemption on Form 1023. 2010 tax form See chapter 1 and the instructions accompanying Form 1023 for the procedures to follow in applying. 2010 tax form Some organizations are not required to file Form 1023. 2010 tax form See Organizations Not Required To File Form 1023, later. 2010 tax form    Additional information to help you complete your application can be found online. 2010 tax form Go to Exemption Requirement – Section 501(c)(3) Organizations and select the link at the bottom of the Web page for step by step help with the application process. 2010 tax form See Exemption Requirements - Section 501(c)(3) Organizations. 2010 tax form   Form 1023 and accompanying statements must show that all of the following are true. 2010 tax form The organization is organized exclusively for, and will be operated exclusively for, one or more of the purposes (religious, charitable, etc. 2010 tax form ) specified in the introduction to this chapter. 2010 tax form No part of the organization's net earnings will inure to the benefit of private shareholders or individuals. 2010 tax form You must establish that your organization will not be organized or operated for the benefit of private interests, such as the creator or the creator's family, shareholders of the organization, other designated individuals, or persons controlled directly or indirectly by such private interests. 2010 tax form The organization will not, as a substantial part of its activities, attempt to influence legislation (unless it elects to come under the provisions allowing certain lobbying expenditures) or participate to any extent in a political campaign for or against any candidate for public office. 2010 tax form See Political activity, next, and Lobbying Expenditures , near the end of this chapter. 2010 tax form Political activity. 2010 tax form   If any of the activities (whether or not substantial) of your organization consist of participating in, or intervening in, any political campaign on behalf of (or in opposition to) any candidate for public office, your organization will not qualify for tax-exempt status under section 501(c)(3). 2010 tax form Such participation or intervention includes the publishing or distributing of statements. 2010 tax form   Whether your organization is participating or intervening, directly or indirectly, in any political campaign on behalf of (or in opposition to) any candidate for public office depends upon all of the facts and circumstances of each case. 2010 tax form Certain voter education activities or public forums conducted in a nonpartisan manner may not be prohibited political activity under section 501(c)(3), while other so-called voter education activities may be prohibited. 2010 tax form Effective date of exemption. 2010 tax form   Most organizations described in this chapter that were organized after October 9, 1969, will not be treated as tax exempt unless they apply for recognition of exemption by filing Form 1023. 2010 tax form These organizations will not be treated as tax exempt for any period before they file Form 1023, unless they file the form within 27 months from the end of the month in which they were organized. 2010 tax form If the organization files the application within this 27-month period, the organization's exemption will be recognized retroactively to the date it was organized. 2010 tax form Otherwise, exemption will be recognized only from the date of receipt. 2010 tax form The date of receipt is the date of the U. 2010 tax form S. 2010 tax form postmark on the cover in which an exemption application is mailed or, if no postmark appears on the cover, the date the application is stamped as received by the IRS. 2010 tax form Private delivery service. 2010 tax form   If a private delivery service designated by the IRS, rather than the U. 2010 tax form S. 2010 tax form Postal Service, is used to deliver the application, the date of receipt is the date recorded or marked by the private delivery service. 2010 tax form The following private delivery services have been designated by the IRS. 2010 tax form DHL Express (DHL): DHL “Same Day” Service. 2010 tax form Federal Express (FedEx): FedEx Priority Overnight, FedEx Standard Overnight, FedEx 2Day, FedEx International Priority, and FedEx International First. 2010 tax form United Parcel Service (UPS): UPS Next Day Air, UPS Next Day Air Saver, UPS 2nd Day Air, UPS 2nd Day Air A. 2010 tax form M. 2010 tax form , UPS Worldwide Express Plus, and UPS Worldwide Express. 2010 tax form Amendments to organizing documents required. 2010 tax form   If an organization is required to alter its activities or to make substantive amendments to its organizing document, the ruling or determination letter recognizing its exempt status will be effective as of the date the changes are made. 2010 tax form If only a nonsubstantive amendment is made, exempt status will be effective as of the date it was organized, if the application was filed within the 15-month period, or the date the application was filed. 2010 tax form Extensions of time for filing. 2010 tax form   There are two ways organizations seeking exemption can receive an extension of time for filing Form 1023. 2010 tax form Automatic 12-month extension. 2010 tax form Organizations will receive an automatic 12-month extension if they file an application for recognition of exemption with the IRS within 12 months of the original deadline. 2010 tax form To get this extension, an organization must add the following statement at the top of its application: “Filed Pursuant to Section 301. 2010 tax form 9100-2. 2010 tax form ” Discretionary extensions. 2010 tax form An organization that fails to file a Form 1023 within the extended 12-month period will be granted an extension to file if it submits evidence (including affidavits) to establish that: It acted reasonably and in good faith, and Granting a discretionary extension will not prejudice the interests of the government. 2010 tax form How to show reasonable action and good faith. 2010 tax form   An organization acted reasonably and showed good faith if at least one of the following is true. 2010 tax form The organization requests relief before its failure to file is discovered by the IRS. 2010 tax form The organization failed to file because of intervening events beyond its control. 2010 tax form The organization exercised reasonable diligence (taking into account the complexity of the return or issue and the organization's experience in these matters) but was not aware of the filing requirement. 2010 tax form The organization reasonably relied upon the written advice of the IRS. 2010 tax form The organization reasonably relied upon the advice of a qualified tax professional who failed to file or advise the organization to file Form 1023. 2010 tax form An organization cannot rely on the advice of a tax professional if it knows or should know that he or she is not competent to render advice on filing exemption applications or is not aware of all the relevant facts. 2010 tax form Not acting reasonably and in good faith. 2010 tax form   An organization has not acted reasonably and in good faith under the following circumstances. 2010 tax form It seeks to change a return position for which an accuracy-related penalty has been or could be imposed at the time the relief is requested. 2010 tax form It was informed of the requirement to file and related tax consequences, but chose not to file. 2010 tax form It uses hindsight in requesting relief. 2010 tax form The IRS will not ordinarily grant an extension if specific facts have changed since the due date that makes filing an application advantageous to an organization. 2010 tax form Prejudicing the interest of the Government. 2010 tax form   Prejudice to the interest of the Government results if granting an extension of time to file to an organization results in a lower total tax liability for the years to which the filing applies than would have been the case if the organization had filed on time. 2010 tax form Before granting an extension, the IRS can require the organization requesting it to submit a statement from an independent auditor certifying that no prejudice will result if the extension is granted. 2010 tax form The interests of the Government are ordinarily prejudiced if the tax year in which the application should have been filed (or any tax year that would have been affected had the filing been timely) are closed by the statute of limitations before relief is granted. 2010 tax form The IRS can condition a grant of relief on the organization providing the IRS with a statement from an independent auditor certifying that the interests of the Government are not prejudiced. 2010 tax form Procedure for requesting extension. 2010 tax form   To request a discretionary extension, an organization must submit (to the IRS address shown on Form 1023 and Notice 1382) the following. 2010 tax form A statement showing the date Form 1023 was required to have been filed and the date it was actually filed. 2010 tax form Any documents relevant to the application. 2010 tax form An affidavit describing in detail the events that led to the failure to apply and to the discovery of that failure. 2010 tax form If the organization relied on a tax professional's advice, the affidavit must describe the engagement and responsibilities of the professional and the extent to which the organization relied on him or her. 2010 tax form This affidavit must be accompanied by a dated declaration, signed by an individual who has personal knowledge of the facts and circumstances, who is authorized to act for the organization, which states, “Under penalties of perjury, I declare that I have examined this request, including accompanying documents, and, to the best of my knowledge and belief, the request contains all the relevant facts relating to the request, and such facts are true, correct, and complete. 2010 tax form ” Detailed affidavits from individuals having knowledge or information about the events that led to the failure to make the application and to the discovery of that failure. 2010 tax form This includes the organization's return preparer, and any accountant or attorney, knowledgeable in tax matters, who advised the taxpayer on the application. 2010 tax form The affidavits must describe the engagement and responsibilities of the individual and the advice that he or she provided. 2010 tax form These affidavits must include the name, current address, and taxpayer identification number of the individual, and be accompanied by a dated declaration, signed by the individual, which states: “Under penalties of perjury, I declare that I have examined this request, including accompanying documents, and, to the best of my knowledge and belief, the request contains all the relevant facts relating to the request, and such facts are true, correct, and complete. 2010 tax form ” The organization must state whether the returns for the tax year in which the application should have been filed or any tax years that would have been affected by the application had it been timely made are being examined by the IRS, an appeals office, or a federal court. 2010 tax form The organization must notify the IRS office considering the request for relief if the IRS starts an examination of any such return while the organization's request for relief is pending. 2010 tax form The organization, if requested, has to submit copies of its tax returns, and copies of the returns of other affected taxpayers. 2010 tax form   A request for this relief in connection with an application for exemption does not require payment of an additional user fee. 2010 tax form Also, a request for relief under the automatic 12-month extension does not require payment of a user fee. 2010 tax form More information. 2010 tax form   For more information about these procedures, see Regulations sections 301. 2010 tax form 9100-1, 301. 2010 tax form 9100-2, 301. 2010 tax form 9100-3, Revenue Procedure 2013-4, section 6. 2010 tax form 04, 2013-1 I. 2010 tax form R. 2010 tax form B. 2010 tax form 126, and Revenue Procedure 2013-8, 2013-1 I. 2010 tax form R. 2010 tax form B. 2010 tax form 237. 2010 tax form See Revenue Procedure 2013-4 and Revenue Procedure 2013-8. 2010 tax form Notification from the IRS. 2010 tax form   Organizations filing Form 1023 and satisfying all requirements of section 501(c)(3) will be notified of their exempt status in writing. 2010 tax form Organizations Not Required To File Form 1023 Some organizations are not required to file Form 1023. 2010 tax form These include: Churches, interchurch organizations of local units of a church, conventions or associations of churches, or integrated auxiliaries of a church, such as a men's or women's organization, religious school, mission society, or youth group. 2010 tax form Any organization (other than a private foundation) normally having annual gross receipts of not more than $5,000 (see Gross receipts test, later). 2010 tax form These organizations are exempt automatically if they meet the requirements of section 501(c)(3). 2010 tax form Filing Form 1023 to establish exemption. 2010 tax form   If the organization wants to establish its exemption with the IRS and receive a ruling or determination letter recognizing its exempt status, it should file Form 1023. 2010 tax form By establishing its exemption, potential contributors are assured by the IRS that contributions will be deductible. 2010 tax form A subordinate organization (other than a private foundation) covered by a group exemption letter does not have to submit a Form 1023 for itself. 2010 tax form Private foundations. 2010 tax form   See Private Foundations and Public Charities, later in this chapter, for more information about the additional notice required from an organization in order for it not to be presumed to be a private foundation and for the additional information required from a private foundation claiming to be an operating foundation. 2010 tax form Gross receipts test. 2010 tax form   For purposes of the gross receipts test, an organization normally does not have more than $5,000 annually in gross receipts if: During its first tax year the organization received gross receipts of $7,500 or less, During its first 2 years the organization had a total of $12,000 or less in gross receipts, and In the case of an organization that has been in existence for at least 3 years, the total gross receipts received by the organization during the immediately preceding 2 years, plus the current year, are $15,000 or less. 2010 tax form   An organization with gross receipts more than the amounts in the gross receipts test, unless otherwise exempt from filing Form 1023, must file a Form 1023 within 90 days after the end of the period in which the amounts are exceeded. 2010 tax form For example, an organization's gross receipts for its first tax year were less than $7,500, but at the end of its second tax year its gross receipts for the 2-year period were more than $12,000. 2010 tax form The organization must file Form 1023 within 90 days after the end of its second tax year. 2010 tax form   If the organization had existed for at least 3 tax years and had met the gross receipts test for all prior tax years but fails to meet the requirement for the current tax year, its tax-exempt status for the prior years will not be lost even if Form 1023 is not filed within 90 days after the close of the current tax year. 2010 tax form However, the organization will not be treated as a section 501(c)(3) organization for the period beginning with the current tax year and ending with the filing of Form 1023. 2010 tax form Example. 2010 tax form   An organization is organized and operated exclusively for charitable purposes and is not a private foundation. 2010 tax form It was incorporated on January 1, 2009, and files returns on a calendar-year basis. 2010 tax form It did not file a Form 1023. 2010 tax form The organization's gross receipts during the years 2009 through 2012 were as follows: 2009 $3,600 2010 2,900 2011 400 2012 12,600   The organization's total gross receipts for 2009, 2010, and 2011 were $6,900. 2010 tax form Therefore, it did not have to file Form 1023 and is exempt for those years. 2010 tax form However, for 2010, 2011, and 2012 the total gross receipts were $15,900. 2010 tax form Therefore, the organization must file Form 1023 within 90 days after the end of its 2012 tax year. 2010 tax form If it does not file within this time period, it will not be exempt under section 501(c)(3) for the period beginning with tax year 2012 ending when the Form 1023 is received by the IRS. 2010 tax form The organization, however, will not lose its exempt status for the tax years ending before January 1, 2012. 2010 tax form   The IRS will consider applying the Commissioner's discretionary authority to extend the time for filing Form 1023. 2010 tax form See the procedures for this extension discussed earlier. 2010 tax form Articles of Organization Your organization must include a conformed copy of its articles of organization with the application for recognition of exemption. 2010 tax form This may be its trust instrument, corporate charter, articles of association, or any other written instrument by which it is created. 2010 tax form Organizational Test The articles of organization must limit the organization's purposes to one or more of those described at the beginning of this chapter and must not expressly empower it to engage, other than as an insubstantial part of its activities, in activities that do not further one or more of those purposes. 2010 tax form These conditions for exemption are referred to as the organizational test. 2010 tax form Section 501(c)(3) is the provision of law that grants exemption to the organizations described in this chapter. 2010 tax form Therefore, the organizational test may be met if the purposes stated in the articles of organization are limited in some way by reference to section 501(c)(3). 2010 tax form The requirement that your organization's purposes and powers must be limited by the articles of organization is not satisfied if the limit is contained only in the bylaws or other rules or regulations. 2010 tax form Moreover, the organizational test is not satisfied by statements of your organization's officers that you intend to operate only for exempt purposes. 2010 tax form Also, the test is not satisfied by the fact that your actual operations are for exempt purposes. 2010 tax form In interpreting an organization's articles, the law of the state where the organization was created is controlling. 2010 tax form If an organization contends that the terms of its articles have a different meaning under state law than their generally accepted meaning, such meaning must be established by a clear and convincing reference to relevant court decisions, opinions of the state attorney general, or other appropriate state authorities. 2010 tax form The following are examples illustrating the organizational test. 2010 tax form Example 1. 2010 tax form Articles of organization state that an organization is formed exclusively for literary and scientific purposes within the meaning of section 501(c)(3). 2010 tax form These articles appropriately limit the organization's purposes. 2010 tax form The organization meets the organizational test. 2010 tax form Example 2. 2010 tax form An organization, by the terms of its articles, is formed to engage in research without any further description or limitation. 2010 tax form The organization will not be properly limited as to its purposes since all research is not scientific. 2010 tax form The organization does not meet the organizational test. 2010 tax form Example 3. 2010 tax form An organization's articles state that its purpose is to receive contributions and pay them over to organizations that are described in section 501(c)(3) and exempt from taxation under section 501(a). 2010 tax form The organization meets the organizational test. 2010 tax form Example 4. 2010 tax form If a stated purpose in the articles is the conduct of a school of adult education and its manner of operation is described in detail, such a purpose will be satisfactorily limited. 2010 tax form Example 5. 2010 tax form If the articles state the organization is formed for charitable purposes, without any further description, such language ordinarily will be sufficient since the term charitable has a generally accepted legal meaning. 2010 tax form On the other hand, if the purposes are stated to be charitable, philanthropic, and benevolent, the organizational requirement will not be met since the terms philanthropic and benevolent have no generally accepted legal meaning and, therefore, the stated purposes may, under the laws of the state, permit activities that are broader than those intended by the exemption law. 2010 tax form Example 6. 2010 tax form If the articles state an organization is formed to promote American ideals, or to foster the best interests of the people, or to further the common welfare and well-being of the community, without any limitation or provision restricting such purposes to accomplishment only in a charitable manner, the purposes will not be sufficiently limited. 2010 tax form Such purposes are vague and may be accomplished other than in an exempt manner. 2010 tax form Example 7. 2010 tax form A stated purpose to operate a hospital does not meet the organizational test since it is not necessarily charitable. 2010 tax form A hospital may or may not be exempt depending on the manner in which it is operated. 2010 tax form Example 8. 2010 tax form An organization that is expressly empowered by its articles to carry on social activities will not be sufficiently limited as to its power, even if its articles state that it is organized and will be operated exclusively for charitable purposes. 2010 tax form Dedication and Distribution of Assets Assets of an organization must be permanently dedicated to an exempt purpose. 2010 tax form This means that should an organization dissolve, its assets must be distributed for an exempt purpose described in this chapter, or to the Federal Government or to a state or local government for a public purpose. 2010 tax form If the assets could be distributed to members or private individuals or for any other purpose, the organizational test is not met. 2010 tax form Dedication. 2010 tax form   To establish that your organization's assets will be permanently dedicated to an exempt purpose, the articles of organization should contain a provision ensuring their distribution for an exempt purpose in the event of dissolution. 2010 tax form Although reliance can be placed upon state law to establish permanent dedication of assets for exempt purposes, your organization's application probably can be processed much more rapidly if its articles of organization include a provision ensuring permanent dedication of assets for exempt purposes. 2010 tax form Distribution. 2010 tax form   Revenue Procedure 82-2, 1982-1 C. 2010 tax form B. 2010 tax form 367, identifies the states and circumstances in which the IRS will not require an express provision for the distribution of assets upon dissolution in the articles of organization. 2010 tax form The procedure also provides a sample of an acceptable dissolution provision for organizations required to have one. 2010 tax form   If a named beneficiary is to be the distributee, it must be one that would qualify and would be exempt within the meaning of section 501(c)(3) at the time the dissolution takes place. 2010 tax form Since the named beneficiary at the time of dissolution may not be qualified, may not be in existence, or may be unwilling or unable to accept the assets of the dissolving organization, a provision should be made for distribution of the assets for one or more of the purposes specified in this chapter in the event of any such contingency. 2010 tax form Sample articles of organization. 2010 tax form   See sample articles of organization in the Appendix in the back of this publication. 2010 tax form Educational Organizations and Private Schools If your organization wants to obtain recognition of exemption as an educational organization, you must submit complete information as to how your organization carries on or plans to carry on its educational activities, such as by conducting a school, by panels, discussions, lectures, forums, radio and television programs, or through various cultural media such as museums, symphony orchestras, or art exhibits. 2010 tax form In each instance, you must explain by whom and where these activities are or will be conducted and the amount of admission fees, if any. 2010 tax form You must submit a copy of the pertinent contracts, agreements, publications, programs, etc. 2010 tax form If you are organized to conduct a school, you must submit full information regarding your tuition charges, number of faculty members, number of full-time and part-time students enrolled, courses of study and degrees conferred, together with a copy of your school catalog. 2010 tax form See also Private Schools , discussed later. 2010 tax form Educational Organizations The term educational relates to: The instruction or training of individuals for the purpose of improving or developing their capabilities, or The instruction of the public on subjects useful to individuals and beneficial to the community. 2010 tax form Advocacy of a position. 2010 tax form   Advocacy of a particular position or viewpoint may be educational if there is a sufficiently full and fair exposition of pertinent facts to permit an individual or the public to form an independent opinion or conclusion. 2010 tax form The mere presentation of unsupported opinion is not educational. 2010 tax form Method not educational. 2010 tax form   The method used by an organization to develop and present its views is a factor in determining if an organization qualifies as educational within the meaning of section 501(c)(3). 2010 tax form The following factors may indicate that the method is not educational. 2010 tax form The presentation of viewpoints unsupported by facts is a significant part of the organization's communications. 2010 tax form The facts that purport to support the viewpoint are distorted. 2010 tax form The organization's presentations make substantial use of inflammatory and disparaging terms and express conclusions more on the basis of emotion than of objective evaluations. 2010 tax form The approach used is not aimed at developing an understanding on the part of the audience because it does not consider their background or training. 2010 tax form   Exceptional circumstances, however, may exist where an organization's advocacy may be educational even if one or more of the factors listed above are present. 2010 tax form Qualifying organizations. 2010 tax form   The following types of organizations may qualify as educational: An organization, such as a primary or secondary school, a college, or a professional or trade school, that has a regularly scheduled curriculum, a regular faculty, and a regularly enrolled student body in attendance at a place where the educational activities are regularly carried on, An organization whose activities consist of conducting public discussion groups, forums, panels, lectures, or other similar programs, An organization that presents a course of instruction by correspondence or through the use of television or radio, A museum, zoo, planetarium, symphony orchestra, or other similar organization, A nonprofit children's day-care center, and A credit counseling organization. 2010 tax form College book stores, cafeterias, restaurants, etc. 2010 tax form   These and other on-campus organizations should submit information to show that they are controlled by and operated for the convenience of the faculty and student body or by whom they are controlled and whom they serve. 2010 tax form Alumni association. 2010 tax form   An alumni association should establish that it is organized to promote the welfare of the university with which it is affiliated, is subject to the control of the university as to its policies and destination of funds, and is operated as an integral part of the university or is otherwise organized to promote the welfare of the college or university. 2010 tax form If your association does not have these characteristics, it may still be exempt as a social club if it meets the requirements described in chapter 4, under 501(c)(7) - Social and Recreation Clubs . 2010 tax form Athletic organization. 2010 tax form   This type of organization must submit evidence that it is engaged in activities such as directing and controlling interscholastic athletic competitions, conducting tournaments, and prescribing eligibility rules for contestants. 2010 tax form If it is not so engaged, your organization may be exempt as a social club described in chapter 4. 2010 tax form Raising funds to be used for travel and other activities to interview and persuade prospective students with outstanding athletic ability to attend a particular university does not show an exempt purpose. 2010 tax form If your organization is not exempt as an educational organization, see Amateur Athletic Organizations , later in this chapter. 2010 tax form Private Schools Every private school filing an application for recognition of tax-exempt status must supply the IRS (on Schedule B, Form 1023) with the following information. 2010 tax form The racial composition of the student body, and of the faculty and administrative staff, as of the current academic year. 2010 tax form (This information also must be projected, so far as may be feasible, for the next academic year. 2010 tax form ) The amount of scholarship and loan funds, if any, awarded to students enrolled and the racial composition of students who have received the awards. 2010 tax form A list of the school's incorporators, founders, board members, and donors of land or buildings, whether individuals or organizations. 2010 tax form A statement indicating whether any of the organizations described in item (3) above have an objective of maintaining segregated public or private school education at the time the application is filed and, if so, whether any of the individuals described in item (3) are officers or active members of those organizations at the time the application is filed. 2010 tax form The public school district and county in which the school is located. 2010 tax form How to determine racial composition. 2010 tax form   The racial composition of the student body, faculty, and administrative staff can be an estimate based on the best information readily available to the school, without requiring student applicants, students, faculty, or administrative staff to submit to the school information that the school otherwise does not require. 2010 tax form Nevertheless, a statement of the method by which the racial composition was determined must be supplied. 2010 tax form The identity of individual students or members of the faculty and administrative staff should not be included with this information. 2010 tax form   A school that is a state or municipal instrumentality (see Instrumentalities , near the beginning of this chapter), whether or not it qualifies for exemption under section 501(c)(3), is not considered to be a private school for purposes of the following discussion. 2010 tax form Racially Nondiscriminatory Policy To qualify as an organization exempt from federal income tax, a private school must include a statement in its charter, bylaws, or other governing instrument, or in a resolution of its governing body, that it has a racially nondiscriminatory policy as to students and that it does not discriminate against applicants and students on the basis of race, color, or national or ethnic origin. 2010 tax form Also, the school must circulate information that clearly states the school's admission policies. 2010 tax form A racially nondiscriminatory policy toward students means that the school admits the students of any race to all the rights, privileges, programs, and activities generally accorded or made available to students at that school and that the school does not discriminate on the basis of race in administering its educational policies, admission policies, scholarship and loan programs, and athletic and other school-administered programs. 2010 tax form The IRS considers discrimination on the basis of race to include discrimination on the basis of color or national or ethnic origin. 2010 tax form The existence of a racially discriminatory policy with respect to the employment of faculty and administrative staff is indicative of a racially discriminatory policy as to students. 2010 tax form Conversely, the absence of racial discrimination in the employment of faculty and administrative staff is indicative of a racially nondiscriminatory policy as to students. 2010 tax form A policy of a school that favors racial minority groups with respect to admissions, facilities and programs, and financial assistance is not discrimination on the basis of race when the purpose and effect of this policy is to promote establishing and maintaining the school's nondiscriminatory policy. 2010 tax form A school that selects students on the basis of membership in a religious denomination or unit is not discriminating if membership in the denomination or unit is open to all on a racially nondiscriminatory basis. 2010 tax form Policy statement. 2010 tax form   The school must include a statement of its racially nondiscriminatory policy in all its brochures and catalogs dealing with student admissions, programs, and scholarships. 2010 tax form Also, the school must include a reference to its racially nondiscriminatory policy in other written advertising that it uses to inform prospective students of its programs. 2010 tax form Publicity requirement. 2010 tax form   The school must make its racially nondiscriminatory policy known to all segments of the general community served by the school. 2010 tax form Selective communication of a racially nondiscriminatory policy that a school provides solely to leaders of racial groups will not be considered an effective means of communication to make the policy known to all segments of the community. 2010 tax form To satisfy this requirement, the school must use one of the following two methods. 2010 tax form Method one. 2010 tax form   The school can publish a notice of its racially nondiscriminatory policy in a newspaper of general circulation that serves all racial segments of the community. 2010 tax form Such publication must be repeated at least once annually during the period of the school's solicitation for students or, in the absence of a solicitation program, during the school's registration period. 2010 tax form When more than one community is served by a school, the school can publish the notice in those newspapers that are reasonably likely to be read by all racial segments in the communities that the school serves. 2010 tax form If this method is used, the notice must meet the following printing requirements. 2010 tax form It must appear in a section of the newspaper likely to be read by prospective students and their families. 2010 tax form It must occupy at least 3 column inches. 2010 tax form It must have its title printed in at least 12 point bold face type. 2010 tax form It must have the remaining text printed in at least 8 point type. 2010 tax form The following is an acceptable example of the notice:   NOTICE OF NONDISCRIMINATORY POLICY AS TO STUDENTS     The M School admits students of any race, color, national and ethnic origin to all the rights, privileges, programs, and activities generally accorded or made available to students at the school. 2010 tax form It does not discriminate on the basis of race, color, national and ethnic origin in administration of its educational policies, admissions policies, scholarship and loan programs, and athletic and other school-administered programs. 2010 tax form   Method two. 2010 tax form   The school can use the broadcast media to publicize its racially nondiscriminatory policy if this use makes the policy known to all segments of the general community the school serves. 2010 tax form If the school uses this method, it must provide documentation showing that the means by which this policy was communicated to all segments of the general community was reasonably expected to be effective. 2010 tax form In this case, appropriate documentation would include copies of the tapes or scripts used and records showing that there was an adequate number of announcements. 2010 tax form The documentation also would include proof that these announcements were made during hours when they were likely to be communicated to all segments of the general community, that they were long enough to convey the message clearly, and that they were broadcast on radio or television stations likely to be listened to by substantial numbers of members of all racial segments of the general community. 2010 tax form Announcements must be made during the period of the school's solicitation for students or, in the absence of a solicitation program, during the school's registration period. 2010 tax form Exceptions. 2010 tax form   The publicity requirements will not apply in the following situations. 2010 tax form First, if for the preceding 3 years the enrollment of a parochial or other church-related school consists of students at least 75% of whom are members of the sponsoring religious denomination or unit, the school can make known its racially nondiscriminatory policy in whatever newspapers or circulars the religious denomination or unit uses in the communities from which the students are drawn. 2010 tax form These newspapers and circulars can be distributed by a particular religious denomination or unit or by an association that represents a number of religious organizations of the same denomination. 2010 tax form If, however, the school advertises in newspapers of general circulation in the community or communities from which its students are drawn and the second exception (discussed next) does not apply to the school, then it must comply with either of the publicity requirements explained earlier. 2010 tax form Second, if a school customarily draws a substantial percentage of its students nationwide, worldwide, from a large geographic section or sections of the United States, or from local communities, and if the school follows a racially nondiscriminatory policy as to its students, the school may satisfy the publicity requirement by complying with the instructions explained earlier under Policy statement . 2010 tax form   The school can demonstrate that it follows a racially nondiscriminatory policy either by showing that it currently enrolls students of racial minority groups in meaningful numbers or, except for local community schools, when minority students are not enrolled in meaningful numbers, that its promotional activities and recruiting efforts in each geographic area were reasonably designed to inform students of all racial segments in the general communities within the area of the availability of the school. 2010 tax form The question as to whether a school demonstrates such a policy satisfactorily will be determined on the basis of the facts and circumstances of each case. 2010 tax form   The IRS recognizes that the failure by a school drawing its students from local communities to enroll racial minority group students may not necessarily indicate the absence of a racially nondiscriminatory policy when there are relatively few or no such students in these communities. 2010 tax form Actual enrollment is, however, a meaningful indication of a racially nondiscriminatory policy in a community in which a public school or schools became subject to a desegregation order of a federal court or are otherwise expressly obligated to implement a desegregation plan under the terms of any written contract or other commitment to which any federal agency was a party. 2010 tax form   The IRS encourages schools to satisfy the publicity requirement by using either of the methods described earlier, even though a school considers itself to be within one of the Exceptions. 2010 tax form The IRS believes that these publicity requirements are the most effective methods to make known a school's racially nondiscriminatory policy. 2010 tax form In this regard, it is each school's responsibility to determine whether either of the exceptions applies. 2010 tax form Such responsibility will prepare the school, if it is audited by the IRS, to demonstrate that the failure to publish its racially nondiscriminatory policy in accordance with either one of the publicity requirements was justified by one of the exceptions. 2010 tax form Also, a school must be prepared to demonstrate that it has publicly disavowed or repudiated any statements purported to have been made on its behalf (after November 6, 1975) that are contrary to its publicity of a racially nondiscriminatory policy as to students, to the extent that the school or its principal official was aware of these statements. 2010 tax form Facilities and programs. 2010 tax form   A school must be able to show that all of its programs and facilities are operated in a racially nondiscriminatory manner. 2010 tax form Scholarship and loan programs. 2010 tax form   As a general rule, all scholarship or other comparable benefits obtainable at the school must be offered on a racially nondiscriminatory basis. 2010 tax form This must be known throughout the general community being served by the school and should be referred to in its publicity. 2010 tax form Financial assistance programs, as well as scholarships and loans made under financial assistance programs, that favor members of one or more racial minority groups and that do not significantly detract from or are designed to promote a school's racially nondiscriminatory policy will not adversely affect the school's exempt status. 2010 tax form Certification. 2010 tax form   An individual authorized to take official action on behalf of a school that claims to be racially nondiscriminatory as to students must certify annually, under penalties of perjury, on Schedule E (Form 990 or 990-EZ) or Form 5578, Annual Certification of Racial Nondiscrimination for a Private School Exempt From Federal Income Tax, whichever applies, that to the best of his or her knowledge and belief the school has satisfied all requirements that apply, as previously explained. 2010 tax form   Failure to comply with the guidelines ordinarily will result in the proposed revocation of the exempt status of a school. 2010 tax form Recordkeeping requirements. 2010 tax form With certain exceptions, given later, each exempt private school must maintain the following records for a minimum period of 3 years, beginning with the year after the year of compilation or acquisition. 2010 tax form Records indicating the racial composition of the student body, faculty, and administrative staff for each academic year. 2010 tax form Records sufficient to document that scholarship and other financial assistance is awarded on a racially nondiscriminatory basis. 2010 tax form Copies of all materials used by or on behalf of the school to solicit contributions. 2010 tax form Copies of all brochures, catalogs, and advertising dealing with student admissions, programs, and scholarships. 2010 tax form (Schools advertising nationally or in a large geographic segment or segments of the United States need only maintain a record sufficient to indicate when and in what publications their advertisements were placed. 2010 tax form ) The racial composition of the student body, faculty, and administrative staff can be determined in the same manner as that described at the beginning of this section. 2010 tax form However, a school cannot discontinue maintaining a system of records that reflect the racial composition of its students, faculty, and administrative staff used on November 6, 1975, unless it substitutes a different system that compiles substantially the same information, without advance approval of the IRS. 2010 tax form The IRS does not require that a school release any personally identifiable records or personal information except in accordance with the requirements of the Family Educational Rights and Privacy Act of 1974. 2010 tax form Similarly, the IRS does not require a school to keep records prohibited under state or federal law. 2010 tax form Exceptions. 2010 tax form   The school does not have to independently maintain these records for IRS use if both of the following are true. 2010 tax form Substantially the same information has been included in a report or reports filed with an agency or agencies of federal, state, or local governments, and this information is current within 1 year. 2010 tax form The school maintains copies of these reports from which this information is readily obtainable. 2010 tax form If these reports do not include all of the information required, as discussed earlier, records providing such remaining information must be maintained by the school for IRS use. 2010 tax form Failure to maintain records. 2010 tax form   Failure to maintain or to produce the required records and information, upon proper request, will create a presumption that the organization has failed to comply with these guidelines. 2010 tax form Organizations Providing Insurance An organization described in sections 501(c)(3) or 501(c)(4) may be exempt from tax only if no substantial part of its activities consists of providing commercial-type insurance. 2010 tax form However, this rule does not apply to state-sponsored organizations described in sections 501(c)(26) or 501(c)(27), which are discussed in chapter 4, or to charitable risk pools, discussed next. 2010 tax form Charitable Risk Pools A charitable risk pool is treated as organized and operated exclusively for charitable purposes if it: Is organized and operated only to pool insurable risks of its members (not including risks related to medical malpractice) and to provide information to its members about loss control and risk management, Consists only of members that are section 501(c)(3) organizations exempt from tax under section 501(a), Is organized under state law authorizing this type of risk pooling, Is exempt from state income tax (or will be after qualifying as a section 501(c)(3) organization), Has obtained at least $1,000,000 in startup capital from nonmember charitable organizations, Is controlled by a board of directors elected by its members, and Is organized under documents requiring that: Each member be a section 501(c)(3) organization exempt from tax under section 501(a), Each member that receives a final determination that it no longer qualifies under section 501(c)(3) notify the pool immediately, and Each insurance policy issued by the pool provide that it will not cover events occurring after a final determination described in (b). 2010 tax form Other Section 501(c)(3) Organizations In addition to the information required for all organizations, as described earlier, you should include any other information described in this section. 2010 tax form Charitable Organizations If your organization is applying for recognition of exemption as a charitable organization, it must show that it is organized and operated for purposes that are beneficial to the public interest. 2010 tax form Some examples of this type of organization are those organized for: Relief of the poor, the distressed, or the underprivileged, Advancement of religion, Advancement of education or science, Erection or maintenance of public buildings, monuments, or works, Lessening the burdens of government, Lessening of neighborhood tensions, Elimination of prejudice and discrimination, Defense of human and civil rights secured by law, and Combating community deterioration and juvenile delinquency. 2010 tax form The rest of this section contains a description of the information to be provided by certain specific organizations. 2010 tax form This information is in addition to the required inclusions described in chapter 1, and other statements requested on Form 1023. 2010 tax form Each of the following organizations must submit the information described. 2010 tax form Charitable organization supporting education. 2010 tax form   Submit information showing how your organization supports education — for example, contributes to an existing educational institution, endows a professorial chair, contributes toward paying teachers' salaries, or contributes to an educational institution to enable it to carry on research. 2010 tax form Scholarships. 2010 tax form   If the organization awards or plans to award scholarships, complete Schedule H of Form 1023. 2010 tax form Also, submit the following: Criteria used for selecting recipients, including the rules of eligibility. 2010 tax form How and by whom the recipients are or will be selected. 2010 tax form If awards are or will be made directly to individuals, whether information is required assuring that the student remains in school. 2010 tax form If awards are or will be made to recipients of a particular class, for example, children of employees of a particular employer— Whether any preference is or will be accorded an applicant by reason of the parent's position, length of employment, or salary, Whether as a condition of the award the recipient must upon graduation accept employment with the company, and Whether the award will be continued even if the parent's employment ends. 2010 tax form A copy of the scholarship application form and any brochures or literature describing the scholarship program. 2010 tax form Hospital. 2010 tax form   If you are organized to operate a charitable hospital, complete and attach Section I of Schedule C, Form 1023. 2010 tax form   If your hospital was transferred to you from proprietary ownership, complete and attach Schedule G of Form 1023. 2010 tax form You must attach a list showing: The names of the active and courtesy staff members of the proprietary hospital, as well as the names of your medical staff members after the transfer to nonprofit ownership, and The names of any doctors who continued to lease office space in the hospital after its transfer to nonprofit ownership and the amount of rent paid. 2010 tax form Submit also an appraisal showing the fair rental value of the rented space. 2010 tax form Clinic. 2010 tax form   If you are organized to operate a clinic, attach a statement including: A description of the facilities and services, To whom the services are offered, such as the public at large or a specific group, How charges are determined, such as on a profit basis, to recover costs, or at less than cost, By whom administered and controlled, Whether any of the professional staff (that is, those who perform or will perform the clinical services) also serve or will serve in an administrative capacity, and How compensation paid the professional staff is or will be determined. 2010 tax form Home for the aged. 2010 tax form   If you are organized to operate a home for the aged, complete and attach Schedule F of Form 1023 and required attachments. 2010 tax form Community nursing bureau. 2010 tax form   If you provide a nursing register or community nursing bureau, provide information showing that your organization will be operated as a community project and will receive its primary support from public contributions to maintain a nonprofit register of qualified nursing personnel, including graduate nurses, unregistered nursing school graduates, licensed attendants and practical nurses for the benefit of hospitals, health agencies, doctors, and individuals. 2010 tax form Organization providing loans. 2010 tax form   If you make, or will make, loans for charitable and educational purposes, submit the following information. 2010 tax form An explanation of the circumstances under which such loans are, or will be, made. 2010 tax form Criteria for selection, including the rules of eligibility. 2010 tax form How and by whom the recipients are or will be selected. 2010 tax form Manner of repayment of the loan. 2010 tax form Security required, if any. 2010 tax form Interest charged, if any, and when payable. 2010 tax form Copies in duplicate of the loan application and any brochures or literature describing the loan program. 2010 tax form Public-interest law firms. 2010 tax form   If your organization was formed to litigate in the public interest (as opposed to providing legal services to the poor), such as in the area of protection of the environment, you should submit the following information. 2010 tax form How the litigation can reasonably be said to be representative of a broad public interest rather than a private one. 2010 tax form Whether the organization will accept fees for its services. 2010 tax form A description of the cases litigated or to be litigated and how they benefit the public generally. 2010 tax form Whether the policies and program of the organization are the responsibility of a board or committee representative of the public interest, which is neither controlled by employees or persons who litigate on behalf of the organization nor by any organization that is not itself an organization described in this chapter. 2010 tax form Whether the organization is operated, through sharing of office space or otherwise, in a way to create identification or confusion with a particular private law firm. 2010 tax form Whether there is an arrangement to provide, directly or indirectly, a deduction for the cost of litigation that is for the private benefit of the donor. 2010 tax form Acceptance of attorneys' fees. 2010 tax form   A nonprofit public-interest law firm can accept attorneys' fees in public-interest cases if the fees are paid directly by its clients and the fees are not more than the actual costs incurred in the case. 2010 tax form Upon undertaking a representation, the organization cannot withdraw from the case because the litigant is unable to pay the fee. 2010 tax form   Firms can accept fees awarded or approved by a court or an administrative agency and paid by an opposing party if the firms do not use the likelihood or probability of fee awards as a consideration in the selection of cases. 2010 tax form All fee awards must be paid to the organization and not to its individual staff attorneys. 2010 tax form Instead, a public-interest law firm can reasonably compensate its staff attorneys, but only on a straight salary basis. 2010 tax form Private attorneys, whose services are retained by the firm to assist it in particular cases, can be compensated by the firm, but only on a fixed fee or salary basis. 2010 tax form   The total amount of all attorneys' fees (court awarded and those received from clients) must not be more than 50% of the total cost of operations of the organization's legal functions, calculated over a 5-year period. 2010 tax form   If, in order to carry out its program, an organization violates applicable canons of ethics, disrupts the judicial system, or engages in any illegal action, the organization will jeopardize its exemption. 2010 tax form Religious Organizations To determine whether an organization meets the religious purposes test of section 501(c)(3), the IRS maintains two basic guidelines. 2010 tax form That the particular religious beliefs of the organization are truly and sincerely held. 2010 tax form That the practices and rituals associated with the organization's religious belief or creed are not illegal or contrary to clearly defined public policy. 2010 tax form Therefore, your group (or organization) may not qualify for treatment as an exempt religious organization for tax purposes if its actions, as contrasted with its beliefs, are contrary to well established and clearly defined public policy. 2010 tax form If there is a clear showing that the beliefs (or doctrines) are sincerely held by those professing them, the IRS will not question the religious nature of those beliefs. 2010 tax form Churches. 2010 tax form   Although a church, its integrated auxiliaries, or a convention or association of churches is not required to file Form 1023 to be exempt from federal income tax or to receive tax deductible contributions, the organization may find it advantageous to obtain recognition of exemption. 2010 tax form In this event, you should submit information showing that your organization is a church, synagogue, association or convention of churches, religious order, or religious organization that is an integral part of a church, and that it is engaged in carrying out the function of a church. 2010 tax form   In determining whether an admittedly religious organization is also a church, the IRS does not accept every assertion that the organization is a church. 2010 tax form Because beliefs and practices vary so widely, there is no single definition of the word church for tax purposes. 2010 tax form The IRS considers the facts and circumstances of each organization applying for church status. 2010 tax form Convention or association of churches. 2010 tax form   Any organization that is otherwise a convention or association of churches will not fail to qualify as a church merely because the membership of the organization includes individuals as well as churches or because the individuals have voting rights in the organization. 2010 tax form Integrated auxiliaries. 2010 tax form   An organization is an integrated auxiliary of a church if all the following are true. 2010 tax form The organization is described both in sections 501(c)(3) and 509(a)(1), 509(a)(2), or 509(a)(3). 2010 tax form It is affiliated with a church or a convention or association of churches. 2010 tax form It is internally supported. 2010 tax form An organization is internally supported unless both of the following are true. 2010 tax form It offers admissions, goods, services, or facilities for sale, other than on an incidental basis, to the general public (except goods, services, or facilities sold at a nominal charge or for a small part of the cost). 2010 tax form It normally gets more than 50% of its support from a combination of governmental sources, public solicitation of contributions, and receipts from the sale of admissions, goods, performance of services, or furnishing of facilities in activities that are not unrelated trades or businesses. 2010 tax form Special rule. 2010 tax form   Men's and women's organizations, seminaries, mission societies, and youth groups that satisfy (1) and (2) shown earlier are integrated auxiliaries of a church even if they are not internally supported. 2010 tax form   In order for an organization (including a church and religious organization) to qualify for tax exemption, no part of its net earnings can inure to any individual. 2010 tax form   Although an individual is entitled to a charitable deduction for contributions to a church, the assignment or similar transfer of compensation for personal services to a church generally does not relieve a taxpayer of federal income tax liability on the compensation, regardless of the motivation behind the transfer. 2010 tax form Scientific Organizations You must show that your organization's research will be carried on in the public interest. 2010 tax form Scientific research will be considered to be in the public interest if the results of the research (including any patents, copyrights, processes, or formulas) are made available to the public on a nondiscriminatory basis; if the research is performed for the United States or a state, county, or municipal government; or if the research is carried on for one of the following purposes. 2010 tax form Aiding in the scientific education of college or university students. 2010 tax form Obtaining scientific information that is published in a treatise, thesis, trade publication, or in any other form th
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The 2010 Tax Form

2010 tax form Publication 936 - Main Content Table of Contents Part I. 2010 tax form Home Mortgage InterestSecured Debt Qualified Home Special Situations Points Mortgage Insurance Premiums Form 1098, Mortgage Interest Statement How To Report Special Rule for Tenant-Stockholders in Cooperative Housing Corporations Part II. 2010 tax form Limits on Home Mortgage Interest DeductionHome Acquisition Debt Home Equity Debt Grandfathered Debt Table 1 Instructions How To Get Tax HelpLow Income Taxpayer Clinics Part I. 2010 tax form Home Mortgage Interest This part explains what you can deduct as home mortgage interest. 2010 tax form It includes discussions on points, mortgage insurance premiums, and how to report deductible interest on your tax return. 2010 tax form Generally, home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). 2010 tax form The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan. 2010 tax form You can deduct home mortgage interest if all the following conditions are met. 2010 tax form You file Form 1040 and itemize deductions on Schedule A (Form 1040). 2010 tax form The mortgage is a secured debt on a qualified home in which you have an ownership interest. 2010 tax form Secured Debt and Qualified Home are explained later. 2010 tax form  Both you and the lender must intend that the loan be repaid. 2010 tax form Fully deductible interest. 2010 tax form   In most cases, you can deduct all of your home mortgage interest. 2010 tax form How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds. 2010 tax form   If all of your mortgages fit into one or more of the following three categories at all times during the year, you can deduct all of the interest on those mortgages. 2010 tax form (If any one mortgage fits into more than one category, add the debt that fits in each category to your other debt in the same category. 2010 tax form ) If one or more of your mortgages does not fit into any of these categories, use Part II of this publication to figure the amount of interest you can deduct. 2010 tax form   The three categories are as follows. 2010 tax form Mortgages you took out on or before October 13, 1987 (called grandfathered debt). 2010 tax form Mortgages you took out after October 13, 1987, to buy, build, or improve your home (called home acquisition debt), but only if throughout 2013 these mortgages plus any grandfathered debt totaled $1 million or less ($500,000 or less if married filing separately). 2010 tax form Mortgages you took out after October 13, 1987, other than to buy, build, or improve your home (called home equity debt), but only if throughout 2013 these mortgages totaled $100,000 or less ($50,000 or less if married filing separately) and totaled no more than the fair market value of your home reduced by (1) and (2). 2010 tax form The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home. 2010 tax form   See Part II for more detailed definitions of grandfathered, home acquisition, and home equity debt. 2010 tax form    You can use Figure A to check whether your home mortgage interest is fully deductible. 2010 tax form This image is too large to be displayed in the current screen. 2010 tax form Please click the link to view the image. 2010 tax form Figure A. 2010 tax form Is My Home Mortgage Interest Fully Deductible? Secured Debt You can deduct your home mortgage interest only if your mortgage is a secured debt. 2010 tax form A secured debt is one in which you sign an instrument (such as a mortgage, deed of trust, or land contract) that: Makes your ownership in a qualified home security for payment of the debt, Provides, in case of default, that your home could satisfy the debt, and Is recorded or is otherwise perfected under any state or local law that applies. 2010 tax form In other words, your mortgage is a secured debt if you put your home up as collateral to protect the interests of the lender. 2010 tax form If you cannot pay the debt, your home can then serve as payment to the lender to satisfy (pay) the debt. 2010 tax form In this publication, mortgage will refer to secured debt. 2010 tax form Debt not secured by home. 2010 tax form   A debt is not secured by your home if it is secured solely because of a lien on your general assets or if it is a security interest that attaches to the property without your consent (such as a mechanic's lien or judgment lien). 2010 tax form   A debt is not secured by your home if it once was, but is no longer secured by your home. 2010 tax form Wraparound mortgage. 2010 tax form   This is not a secured debt unless it is recorded or otherwise perfected under state law. 2010 tax form Example. 2010 tax form Beth owns a home subject to a mortgage of $40,000. 2010 tax form She sells the home for $100,000 to John, who takes it subject to the $40,000 mortgage. 2010 tax form Beth continues to make the payments on the $40,000 note. 2010 tax form John pays $10,000 down and gives Beth a $90,000 note secured by a wraparound mortgage on the home. 2010 tax form Beth does not record or otherwise perfect the $90,000 mortgage under the state law that applies. 2010 tax form Therefore, the mortgage is not a secured debt and John cannot deduct any of the interest he pays on it as home mortgage interest. 2010 tax form Choice to treat the debt as not secured by your home. 2010 tax form   You can choose to treat any debt secured by your qualified home as not secured by the home. 2010 tax form This treatment begins with the tax year for which you make the choice and continues for all later tax years. 2010 tax form You can revoke your choice only with the consent of the Internal Revenue Service (IRS). 2010 tax form   You may want to treat a debt as not secured by your home if the interest on that debt is fully deductible (for example, as a business expense) whether or not it qualifies as home mortgage interest. 2010 tax form This may allow you, if the limits in Part II apply, more of a deduction for interest on other debts that are deductible only as home mortgage interest. 2010 tax form Cooperative apartment owner. 2010 tax form   If you own stock in a cooperative housing corporation, see the Special Rule for Tenant-Stockholders in Cooperative Housing Corporations , near the end of this Part I. 2010 tax form Qualified Home For you to take a home mortgage interest deduction, your debt must be secured by a qualified home. 2010 tax form This means your main home or your second home. 2010 tax form A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities. 2010 tax form The interest you pay on a mortgage on a home other than your main or second home may be deductible if the proceeds of the loan were used for business, investment, or other deductible purposes. 2010 tax form Otherwise, it is considered personal interest and is not deductible. 2010 tax form Main home. 2010 tax form   You can have only one main home at any one time. 2010 tax form This is the home where you ordinarily live most of the time. 2010 tax form Second home. 2010 tax form   A second home is a home that you choose to treat as your second home. 2010 tax form Second home not rented out. 2010 tax form   If you have a second home that you do not hold out for rent or resale to others at any time during the year, you can treat it as a qualified home. 2010 tax form You do not have to use the home during the year. 2010 tax form Second home rented out. 2010 tax form   If you have a second home and rent it out part of the year, you also must use it as a home during the year for it to be a qualified home. 2010 tax form You must use this home more than 14 days or more than 10% of the number of days during the year that the home is rented at a fair rental, whichever is longer. 2010 tax form If you do not use the home long enough, it is considered rental property and not a second home. 2010 tax form For information on residential rental property, see Publication 527. 2010 tax form More than one second home. 2010 tax form   If you have more than one second home, you can treat only one as the qualified second home during any year. 2010 tax form However, you can change the home you treat as a second home during the year in the following situations. 2010 tax form If you get a new home during the year, you can choose to treat the new home as your second home as of the day you buy it. 2010 tax form If your main home no longer qualifies as your main home, you can choose to treat it as your second home as of the day you stop using it as your main home. 2010 tax form If your second home is sold during the year or becomes your main home, you can choose a new second home as of the day you sell the old one or begin using it as your main home. 2010 tax form Divided use of your home. 2010 tax form   The only part of your home that is considered a qualified home is the part you use for residential living. 2010 tax form If you use part of your home for other than residential living, such as a home office, you must allocate the use of your home. 2010 tax form You must then divide both the cost and fair market value of your home between the part that is a qualified home and the part that is not. 2010 tax form Dividing the cost may affect the amount of your home acquisition debt, which is limited to the cost of your home plus the cost of any improvements. 2010 tax form (See Home Acquisition Debt in Part II. 2010 tax form ) Dividing the fair market value may affect your home equity debt limit, also explained in Part II . 2010 tax form Renting out part of home. 2010 tax form   If you rent out part of a qualified home to another person (tenant), you can treat the rented part as being used by you for residential living only if all of the following conditions apply. 2010 tax form The rented part of your home is used by the tenant primarily for residential living. 2010 tax form The rented part of your home is not a self-contained residential unit having separate sleeping, cooking, and toilet facilities. 2010 tax form You do not rent (directly or by sublease) the same or different parts of your home to more than two tenants at any time during the tax year. 2010 tax form If two persons (and dependents of either) share the same sleeping quarters, they are treated as one tenant. 2010 tax form Office in home. 2010 tax form   If you have an office in your home that you use in your business, see Publication 587, Business Use of Your Home. 2010 tax form It explains how to figure your deduction for the business use of your home, which includes the business part of your home mortgage interest. 2010 tax form Home under construction. 2010 tax form   You can treat a home under construction as a qualified home for a period of up to 24 months, but only if it becomes your qualified home at the time it is ready for occupancy. 2010 tax form   The 24-month period can start any time on or after the day construction begins. 2010 tax form Home destroyed. 2010 tax form   You may be able to continue treating your home as a qualified home even after it is destroyed in a fire, storm, tornado, earthquake, or other casualty. 2010 tax form This means you can continue to deduct the interest you pay on your home mortgage, subject to the limits described in this publication. 2010 tax form   You can continue treating a destroyed home as a qualified home if, within a reasonable period of time after the home is destroyed, you: Rebuild the destroyed home and move into it, or Sell the land on which the home was located. 2010 tax form   This rule applies to your main home and to a second home that you treat as a qualified home. 2010 tax form Time-sharing arrangements. 2010 tax form   You can treat a home you own under a time-sharing plan as a qualified home if it meets all the requirements. 2010 tax form A time-sharing plan is an arrangement between two or more people that limits each person's interest in the home or right to use it to a certain part of the year. 2010 tax form Rental of time-share. 2010 tax form   If you rent out your time-share, it qualifies as a second home only if you also use it as a home during the year. 2010 tax form See Second home rented out , earlier, for the use requirement. 2010 tax form To know whether you meet that requirement, count your days of use and rental of the home only during the time you have a right to use it or to receive any benefits from the rental of it. 2010 tax form Married taxpayers. 2010 tax form   If you are married and file a joint return, your qualified home(s) can be owned either jointly or by only one spouse. 2010 tax form Separate returns. 2010 tax form   If you are married filing separately and you and your spouse own more than one home, you can each take into account only one home as a qualified home. 2010 tax form However, if you both consent in writing, then one spouse can take both the main home and a second home into account. 2010 tax form Special Situations This section describes certain items that can be included as home mortgage interest and others that cannot. 2010 tax form It also describes certain special situations that may affect your deduction. 2010 tax form Late payment charge on mortgage payment. 2010 tax form   You can deduct as home mortgage interest a late payment charge if it was not for a specific service performed in connection with your mortgage loan. 2010 tax form Mortgage prepayment penalty. 2010 tax form   If you pay off your home mortgage early, you may have to pay a penalty. 2010 tax form 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. 2010 tax form Sale of home. 2010 tax form   If you sell your home, you can deduct your home mortgage interest (subject to any limits that apply) paid up to, but not including, the date of the sale. 2010 tax form Example. 2010 tax form John and Peggy Harris sold their home on May 7. 2010 tax form Through April 30, they made home mortgage interest payments of $1,220. 2010 tax form The settlement sheet for the sale of the home showed $50 interest for the 6-day period in May up to, but not including, the date of sale. 2010 tax form Their mortgage interest deduction is $1,270 ($1,220 + $50). 2010 tax form Prepaid interest. 2010 tax form   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. 2010 tax form You can deduct in each year only the interest that qualifies as home mortgage interest for that year. 2010 tax form However, there is an exception that applies to points, discussed later. 2010 tax form Mortgage interest credit. 2010 tax form    You may be able to claim a mortgage interest credit if you were issued a mortgage credit certificate (MCC) by a state or local government. 2010 tax form Figure the credit on Form 8396, Mortgage Interest Credit. 2010 tax form If you take this credit, you must reduce your mortgage interest deduction by the amount of the credit. 2010 tax form   See Form 8396 and Publication 530 for more information on the mortgage interest credit. 2010 tax form Ministers' and military housing allowance. 2010 tax form   If you are a minister or a member of the uniformed services and receive a housing allowance that is not taxable, you can still deduct your home mortgage interest. 2010 tax form Hardest Hit Fund and Emergency Homeowners' Loan Programs. 2010 tax form   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. 2010 tax form 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. 2010 tax form 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. 2010 tax form If you meet these tests, then you can deduct all of the payments you actually made during the year to your mortgage servicer, the State HFA, or HUD on the home mortgage (including the amount shown on box 3 of Form 1098–MA, Mortgage Assistance Payments), but not more than the sum of the amounts shown on Form 1098, Mortgage Interest Statement, in box 1 (mortgage interest received from payer(s) / borrower(s)), box 4 (mortgage insurance premiums), and box 5 (other information including real property taxes paid). 2010 tax form 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. 2010 tax form Mortgage assistance payments under section 235 of the National Housing Act. 2010 tax form   If you qualify for mortgage assistance payments for lower-income families under section 235 of the National Housing Act, part or all of the interest on your mortgage may be paid for you. 2010 tax form You cannot deduct the interest that is paid for you. 2010 tax form No other effect on taxes. 2010 tax form   Do not include these mortgage assistance payments in your income. 2010 tax form Also, do not use these payments to reduce other deductions, such as real estate taxes. 2010 tax form Divorced or separated individuals. 2010 tax form   If a divorce or separation agreement requires you or your spouse or former spouse to pay home mortgage interest on a home owned by both of you, the payment of interest may be alimony. 2010 tax form See the discussion of Payments for jointly-owned home under Alimony in Publication 504, Divorced or Separated Individuals. 2010 tax form Redeemable ground rents. 2010 tax form   In some states (such as Maryland), you can buy your home subject to a ground rent. 2010 tax form A ground rent is an obligation you assume to pay a fixed amount per year on the property. 2010 tax form Under this arrangement, you are leasing (rather than buying) the land on which your home is located. 2010 tax form   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct them as mortgage interest. 2010 tax form   A ground rent is a redeemable ground rent if all of the following are true. 2010 tax form Your lease, including renewal periods, is for more than 15 years. 2010 tax form You can freely assign the lease. 2010 tax form 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 specific amount. 2010 tax form The lessor's interest in the land is primarily a security interest to protect the rental payments to which he or she is entitled. 2010 tax form   Payments made to end the lease and to buy the lessor's entire interest in the land are not deductible as mortgage interest. 2010 tax form Nonredeemable ground rents. 2010 tax form   Payments on a nonredeemable ground rent are not mortgage interest. 2010 tax form You can deduct them as rent if they are a business expense or if they are for rental property. 2010 tax form Reverse mortgages. 2010 tax form   A reverse mortgage is a loan where the lender pays you (in a lump sum, a monthly advance, a line of credit, or a combination of all three) while you continue to live in your home. 2010 tax form With a reverse mortgage, you retain title to your home. 2010 tax form Depending on the plan, your reverse mortgage becomes due with interest when you move, sell your home, reach the end of a pre-selected loan period, or die. 2010 tax form Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable. 2010 tax form Any interest (including original issue discount) accrued on a reverse mortgage is not deductible until you actually pay it, which is usually when you pay off the loan in full. 2010 tax form Your deduction may be limited because a reverse mortgage loan generally is subject to the limit on Home Equity Debt discussed in Part II. 2010 tax form Rental payments. 2010 tax form   If you live in a house before final settlement on the purchase, any payments you make for that period are rent and not interest. 2010 tax form This is true even if the settlement papers call them interest. 2010 tax form You cannot deduct these payments as home mortgage interest. 2010 tax form Mortgage proceeds invested in tax-exempt securities. 2010 tax form   You cannot deduct the home mortgage interest on grandfathered debt or home equity debt if you used the proceeds of the mortgage to buy securities or certificates that produce tax-free income. 2010 tax form “Grandfathered debt” and “home equity debt” are defined in Part II of this publication. 2010 tax form Refunds of interest. 2010 tax form   If you receive a refund of interest in the same tax year you paid it, you must reduce your interest expense by the amount refunded to you. 2010 tax form If you receive a refund of interest you deducted in an earlier year, you generally must include the refund in income in the year you receive it. 2010 tax form However, you need to include it only up to the amount of the deduction that reduced your tax in the earlier year. 2010 tax form This is true whether the interest overcharge was refunded to you or was used to reduce the outstanding principal on your mortgage. 2010 tax form If you need to include the refund in income, report it on Form 1040, line 21. 2010 tax form   If you received a refund of interest you overpaid in an earlier year, you generally will receive a Form 1098, Mortgage Interest Statement, showing the refund in box 3. 2010 tax form For information about Form 1098, see Form 1098, Mortgage Interest Statement , later. 2010 tax form   For more information on how to treat refunds of interest deducted in earlier years, see Recoveries in Publication 525, Taxable and Nontaxable Income. 2010 tax form Cooperative apartment owner. 2010 tax form   If you own a cooperative apartment, you must reduce your home mortgage interest deduction by your share of any cash portion of a patronage dividend that the cooperative receives. 2010 tax form The patronage dividend is a partial refund to the cooperative housing corporation of mortgage interest it paid in a prior year. 2010 tax form   If you receive a Form 1098 from the cooperative housing corporation, the form should show only the amount you can deduct. 2010 tax form Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. 2010 tax form Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. 2010 tax form This image is too large to be displayed in the current screen. 2010 tax form Please click the link to view the image. 2010 tax form Figure B. 2010 tax form Are My Points Fully Deductible This Year? A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. 2010 tax form See Points paid by the seller , later. 2010 tax form General Rule You generally cannot deduct the full amount of points in the year paid. 2010 tax form Because they are prepaid interest, you generally deduct them ratably over the life (term) of the mortgage. 2010 tax form See Deduction Allowed Ratably , next. 2010 tax form For exceptions to the general rule, see Deduction Allowed in Year Paid , later. 2010 tax form Deduction Allowed Ratably If you do not meet the tests listed under Deduction Allowed in Year Paid , later, the loan is not a home improvement loan, or you choose not to deduct your points in full in the year paid, you can deduct the points ratably (equally) over the life of the loan if you meet all the following tests. 2010 tax form You use the cash method of accounting. 2010 tax form This means you report income in the year you receive it and deduct expenses in the year you pay them. 2010 tax form Most individuals use this method. 2010 tax form Your loan is secured by a home. 2010 tax form (The home does not need to be your main home. 2010 tax form ) Your loan period is not more than 30 years. 2010 tax form If your loan period is more than 10 years, the terms of your loan are the same as other loans offered in your area for the same or longer period. 2010 tax form Either your loan amount is $250,000 or less, or the number of points is not more than: 4, if your loan period is 15 years or less, or 6, if your loan period is more than 15 years. 2010 tax form Example. 2010 tax form You use the cash method of accounting. 2010 tax form In 2013, you took out a $100,000 loan payable over 20 years. 2010 tax form The terms of the loan are the same as for other 20-year loans offered in your area. 2010 tax form You paid $4,800 in points. 2010 tax form You made 3 monthly payments on the loan in 2013. 2010 tax form You can deduct $60 [($4,800 ÷ 240 months) x 3 payments] in 2013. 2010 tax form In 2014, if you make all twelve payments, you will be able to deduct $240 ($20 x 12). 2010 tax form Deduction Allowed in Year Paid You can fully deduct points in the year paid if you meet all the following tests. 2010 tax form (You can use Figure B as a quick guide to see whether your points are fully deductible in the year paid. 2010 tax form ) Your loan is secured by your main home. 2010 tax form (Your main home is the one you ordinarily live in most of the time. 2010 tax form ) Paying points is an established business practice in the area where the loan was made. 2010 tax form The points paid were not more than the points generally charged in that area. 2010 tax form You use the cash method of accounting. 2010 tax form This means you report income in the year you receive it and deduct expenses in the year you pay them. 2010 tax form Most individuals use this method. 2010 tax form 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. 2010 tax form The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. 2010 tax form The funds you provided are not required to have been applied to the points. 2010 tax form They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. 2010 tax form You cannot have borrowed these funds from your lender or mortgage broker. 2010 tax form You use your loan to buy or build your main home. 2010 tax form The points were computed as a percentage of the principal amount of the mortgage. 2010 tax form The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. 2010 tax form The points may be shown as paid from either your funds or the seller's. 2010 tax form Note. 2010 tax form If you meet all of these tests, you can choose to either fully deduct the points in the year paid, or deduct them over the life of the loan. 2010 tax form Home improvement loan. 2010 tax form   You can also fully deduct in the year paid points paid on a loan to improve your main home, if tests (1) through (6) are met. 2010 tax form Second home. 2010 tax form You cannot fully deduct in the year paid points you pay on loans secured by your second home. 2010 tax form You can deduct these points only over the life of the loan. 2010 tax form Refinancing. 2010 tax form   Generally, points you pay to refinance a mortgage are not deductible in full in the year you pay them. 2010 tax form This is true even if the new mortgage is secured by your main home. 2010 tax form   However, if you use part of the refinanced mortgage proceeds to improve your main home and you meet the first 6 tests listed under Deduction Allowed in Year Paid , you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. 2010 tax form You can deduct the rest of the points over the life of the loan. 2010 tax form Example 1. 2010 tax form In 1998, Bill Fields got a mortgage to buy a home. 2010 tax form In 2013, Bill refinanced that mortgage with a 15-year $100,000 mortgage loan. 2010 tax form The mortgage is secured by his home. 2010 tax form To get the new loan, he had to pay three points ($3,000). 2010 tax form Two points ($2,000) were for prepaid interest, and one point ($1,000) was charged for services, in place of amounts that ordinarily are stated separately on the settlement statement. 2010 tax form Bill paid the points out of his private funds, rather than out of the proceeds of the new loan. 2010 tax form The payment of points is an established practice in the area, and the points charged are not more than the amount generally charged there. 2010 tax form Bill's first payment on the new loan was due July 1. 2010 tax form He made six payments on the loan in 2013 and is a cash basis taxpayer. 2010 tax form Bill used the funds from the new mortgage to repay his existing mortgage. 2010 tax form Although the new mortgage loan was for Bill's continued ownership of his main home, it was not for the purchase or improvement of that home. 2010 tax form He cannot deduct all of the points in 2013. 2010 tax form He can deduct two points ($2,000) ratably over the life of the loan. 2010 tax form He deducts $67 [($2,000 ÷ 180 months) × 6 payments] of the points in 2013. 2010 tax form The other point ($1,000) was a fee for services and is not deductible. 2010 tax form Example 2. 2010 tax form The facts are the same as in Example 1, except that Bill used $25,000 of the loan proceeds to improve his home and $75,000 to repay his existing mortgage. 2010 tax form Bill deducts 25% ($25,000 ÷ $100,000) of the points ($2,000) in 2013. 2010 tax form His deduction is $500 ($2,000 × 25%). 2010 tax form Bill also deducts the ratable part of the remaining $1,500 ($2,000 − $500) that must be spread over the life of the loan. 2010 tax form This is $50 [($1,500 ÷ 180 months) × 6 payments] in 2013. 2010 tax form The total amount Bill deducts in 2013 is $550 ($500 + $50). 2010 tax form Special Situations This section describes certain special situations that may affect your deduction of points. 2010 tax form Original issue discount. 2010 tax form   If you do not qualify to either deduct the points in the year paid or deduct them ratably over the life of the loan, or if you choose not to use either of these methods, the points reduce the issue price of the loan. 2010 tax form This reduction results in original issue discount, which is discussed in chapter 4 of Publication 535. 2010 tax form Amounts charged for services. 2010 tax form    Amounts charged by the lender for specific services connected to the loan are not interest. 2010 tax form Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. 2010 tax form  You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. 2010 tax form Points paid by the seller. 2010 tax form   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. 2010 tax form Treatment by seller. 2010 tax form   The seller cannot deduct these fees as interest. 2010 tax form But they are a selling expense that reduces the amount realized by the seller. 2010 tax form See Publication 523 for information on selling your home. 2010 tax form Treatment by buyer. 2010 tax form   The buyer reduces the basis of the home by the amount of the seller-paid points and treats the points as if he or she had paid them. 2010 tax form If all the tests under Deduction Allowed in Year Paid , earlier, are met, the buyer can deduct the points in the year paid. 2010 tax form If any of those tests are not met, the buyer deducts the points over the life of the loan. 2010 tax form   If you need information about the basis of your home, see Publication 523 or Publication 530. 2010 tax form Funds provided are less than points. 2010 tax form   If you meet all the tests in Deduction Allowed in Year Paid , earlier, except that the funds you provided were less than the points charged to you (test (6)), you can deduct the points in the year paid, up to the amount of funds you provided. 2010 tax form In addition, you can deduct any points paid by the seller. 2010 tax form Example 1. 2010 tax form When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). 2010 tax form You meet all the tests for deducting points in the year paid, except the only funds you provided were a $750 down payment. 2010 tax form Of the $1,000 charged for points, you can deduct $750 in the year paid. 2010 tax form You spread the remaining $250 over the life of the mortgage. 2010 tax form Example 2. 2010 tax form 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. 2010 tax form In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). 2010 tax form You spread the remaining $250 over the life of the mortgage. 2010 tax form You must reduce the basis of your home by the $1,000 paid by the seller. 2010 tax form Excess points. 2010 tax form   If you meet all the tests in Deduction Allowed in Year Paid , earlier, except that the points paid were more than generally paid in your area (test (3)), you deduct in the year paid only the points that are generally charged. 2010 tax form You must spread any additional points over the life of the mortgage. 2010 tax form Mortgage ending early. 2010 tax form   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. 2010 tax form However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. 2010 tax form Instead, deduct the remaining balance over the term of the new loan. 2010 tax form   A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. 2010 tax form Example. 2010 tax form Dan paid $3,000 in points in 2002 that he had to spread out over the 15-year life of the mortgage. 2010 tax form He deducts $200 points per year. 2010 tax form Through 2012, Dan has deducted $2,200 of the points. 2010 tax form Dan prepaid his mortgage in full in 2013. 2010 tax form He can deduct the remaining $800 of points in 2013. 2010 tax form Limits on deduction. 2010 tax form   You cannot fully deduct points paid on a mortgage that exceeds the limits discussed in Part II . 2010 tax form See the Table 1 Instructions for line 10. 2010 tax form Form 1098. 2010 tax form    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. 2010 tax form See Form 1098, Mortgage Interest Statement , later. 2010 tax form Mortgage Insurance Premiums You can treat amounts you paid during 2013 for qualified mortgage insurance as home mortgage interest. 2010 tax form The insurance must be in connection with home acquisition debt, and the insurance contract must have been issued after 2006. 2010 tax form Qualified mortgage insurance. 2010 tax form   Qualified mortgage insurance is mortgage insurance provided by the Department of Veterans Affairs, the Federal Housing Administration, or the Rural Housing Service, and private mortgage insurance (as defined in section 2 of the Homeowners Protection Act of 1998 as in effect on December 20, 2006). 2010 tax form   Mortgage insurance provided by the Department of Veterans Affairs is commonly known as a funding fee. 2010 tax form If provided by the Rural Housing Service, it is commonly known as a guarantee fee. 2010 tax form The funding fee and guarantee fee can either be included in the amount of the loan or paid in full at the time of closing. 2010 tax form These fees can be deducted fully in 2013 if the mortgage insurance contract was issued in 2013. 2010 tax form Contact the mortgage insurance issuer to determine the deductible amount if it is not reported in box 4 of Form 1098. 2010 tax form Special rules for prepaid mortgage insurance. 2010 tax form   Generally, if you paid premiums for qualified mortgage insurance that are properly allocable to periods after the close of the tax year, such premiums are treated as paid in the period to which they are allocated. 2010 tax form You must allocate the premiums over the shorter of the stated term of the mortgage or 84 months, beginning with the month the insurance was obtained. 2010 tax form No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term. 2010 tax form This paragraph does not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service. 2010 tax form Example. 2010 tax form Ryan purchased a home in May of 2012 and financed the home with a 15-year mortgage. 2010 tax form Ryan also prepaid all of the $9,240 in private mortgage insurance required at the time of closing in May. 2010 tax form Since the $9,240 in private mortgage insurance is allocable to periods after 2012, Ryan must allocate the $9,240 over the shorter of the life of the mortgage or 84 months. 2010 tax form Ryan's adjusted gross income (AGI) for 2012 is $76,000. 2010 tax form Ryan can deduct $880 ($9,240 ÷ 84 x 8 months) for qualified mortgage insurance premiums in 2012. 2010 tax form For 2013, Ryan can deduct $1,320 ($9,240 ÷ 84 x 12 months) if his AGI is $100,000 or less. 2010 tax form In this example, the mortgage insurance premiums are allocated over 84 months, which is shorter than the life of the mortgage of 15 years (180 months). 2010 tax form Limit on deduction. 2010 tax form   If your adjusted gross income on Form 1040, line 38, is more than $100,000 ($50,000 if your filing status is married filing separately), the amount of your mortgage insurance premiums that are otherwise deductible is reduced and may be eliminated. 2010 tax form 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. 2010 tax form If your adjusted gross income is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. 2010 tax form Form 1098. 2010 tax form   The mortgage interest statement you receive should show not only the total interest paid during the year, but also your mortgage insurance premiums paid during the year, which may qualify to be treated as deductible mortgage interest. 2010 tax form See Form 1098, Mortgage Interest Statement, next. 2010 tax form Form 1098, Mortgage Interest Statement If you paid $600 or more of mortgage interest (including certain points and mortgage insurance premiums) during the year on any one mortgage, you generally will receive a Form 1098 or a similar statement from the mortgage holder. 2010 tax form You will receive the statement if you pay interest to a person (including a financial institution or cooperative housing corporation) in the course of that person's trade or business. 2010 tax form A governmental unit is a person for purposes of furnishing the statement. 2010 tax form The statement for each year should be sent to you by January 31 of the following year. 2010 tax form A copy of this form will also be sent to the IRS. 2010 tax form The statement will show the total interest you paid during the year, any mortgage insurance premiums you paid, and if you purchased a main home during the year, it also will show the deductible points paid during the year, including seller-paid points. 2010 tax form However, it should not show any interest that was paid for you by a government agency. 2010 tax form As a general rule, Form 1098 will include only points that you can fully deduct in the year paid. 2010 tax form However, certain points not included on Form 1098 also may be deductible, either in the year paid or over the life of the loan. 2010 tax form See the earlier discussion of Points to determine whether you can deduct points not shown on Form 1098. 2010 tax form Prepaid interest on Form 1098. 2010 tax form   If you prepaid interest in 2013 that accrued in full by January 15, 2014, this prepaid interest may be included in box 1 of Form 1098. 2010 tax form However, you cannot deduct the prepaid amount for January 2014 in 2013. 2010 tax form (See Prepaid interest , earlier. 2010 tax form ) You will have to figure the interest that accrued for 2014 and subtract it from the amount in box 1. 2010 tax form You will include the interest for January 2014 with other interest you pay for 2014. 2010 tax form Refunded interest. 2010 tax form   If you received a refund of mortgage interest you overpaid in an earlier year, you generally will receive a Form 1098 showing the refund in box 3. 2010 tax form See Refunds of interest , earlier. 2010 tax form Mortgage insurance premiums. 2010 tax form   The amount of mortgage insurance premiums you paid during 2013 may be shown in Box 4 of Form 1098. 2010 tax form See Mortgage Insurance Premiums , earlier. 2010 tax form How To Report Deduct the home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 10. 2010 tax form If you paid more deductible interest to the financial institution than the amount shown on Form 1098, show the larger deductible amount on line 10. 2010 tax form Attach a statement explaining the difference and print “See attached” next to line 10. 2010 tax form Deduct home mortgage interest that was not reported to you on Form 1098 on Schedule A (Form 1040), line 11. 2010 tax form If you paid home mortgage interest to the person from whom you bought your home, show that person's name, address, and taxpayer identification number (TIN) on the dotted lines next to line 11. 2010 tax form The seller must give you this number and you must give the seller your TIN. 2010 tax form A Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. 2010 tax form Failure to meet any of these requirements may result in a $50 penalty for each failure. 2010 tax form The TIN can be either a social security number, an individual taxpayer identification number (issued by the Internal Revenue Service), or an employer identification number. 2010 tax form If you can take a deduction for points that were not reported to you on Form 1098, deduct those points on Schedule A (Form 1040), line 12. 2010 tax form Deduct mortgage insurance premiums on Schedule A (Form 1040), line 13. 2010 tax form More than one borrower. 2010 tax form   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. 2010 tax form Show how much of the interest each of you paid, and give the name and address of the person who received the form. 2010 tax form Deduct your share of the interest on Schedule A (Form 1040), line 11, and print “See attached” next to the line. 2010 tax form Also, deduct your share of any qualified mortgage insurance premiums on Schedule A (Form 1040), line 13. 2010 tax form   Similarly, if you are the payer of record on a mortgage on which there are other borrowers entitled to a deduction for the interest shown on the Form 1098 you received, deduct only your share of the interest on Schedule A (Form 1040), line 10. 2010 tax form Let each of the other borrowers know what his or her share is. 2010 tax form Mortgage proceeds used for business or investment. 2010 tax form   If your home mortgage interest deduction is limited under the rules explained in Part II , but all or part of the mortgage proceeds were used for business, investment, or other deductible activities, see Table 2 near the end of this publication. 2010 tax form It shows where to deduct the part of your excess interest that is for those activities. 2010 tax form The Table 1 Instructions for line 13 in Part II explain how to divide the excess interest among the activities for which the mortgage proceeds were used. 2010 tax form Special Rule for Tenant-Stockholders in Cooperative Housing Corporations A qualified home includes stock in a cooperative housing corporation owned by a tenant-stockholder. 2010 tax form This applies only if the tenant-stockholder is entitled to live in the house or apartment because of owning stock in the cooperative. 2010 tax form Cooperative housing corporation. 2010 tax form   This is a corporation that meets all of the following conditions. 2010 tax form Has only one class of stock outstanding, Has no stockholders other than those who own the stock that can live in a house, apartment, or house trailer owned or leased by the corporation, Has no stockholders who can receive any distribution out of capital other than on a liquidation of the corporation, and Meets at least one of the following requirements. 2010 tax form Receives at least 80% of its gross income for the year in which the mortgage interest is paid or incurred from tenant-stockholders. 2010 tax form For this purpose, gross income is all income received during the entire year, including amounts received before the corporation changed to cooperative ownership. 2010 tax form At all times during the year, at least 80% of the total square footage of the corporation's property is used or available for use by the tenant-stockholders for residential or residential-related use. 2010 tax form At least 90% of the corporation's expenditures paid or incurred during the year are for the acquisition, construction, management, maintenance, or care of corporate property for the benefit of the tenant-stockholders. 2010 tax form Stock used to secure debt. 2010 tax form   In some cases, you cannot use your cooperative housing stock to secure a debt because of either: Restrictions under local or state law, or Restrictions in the cooperative agreement (other than restrictions in which the main purpose is to permit the tenant- stockholder to treat unsecured debt as secured debt). 2010 tax form However, you can treat a debt as secured by the stock to the extent that the proceeds are used to buy the stock under the allocation of interest rules. 2010 tax form See chapter 4 of Publication 535 for details on these rules. 2010 tax form Figuring deductible home mortgage interest. 2010 tax form   Generally, if you are a tenant-stockholder, you can deduct payments you make for your share of the interest paid or incurred by the cooperative. 2010 tax form The interest must be on a debt to buy, build, change, improve, or maintain the cooperative's housing, or on a debt to buy the land. 2010 tax form   Figure your share of this interest by multiplying the total by the following fraction. 2010 tax form      Your shares of stock in the cooperative   The total shares of stock in the cooperative Limits on deduction. 2010 tax form   To figure how the limits discussed in Part II apply to you, treat your share of the cooperative's debt as debt incurred by you. 2010 tax form The cooperative should determine your share of its grandfathered debt, its home acquisition debt, and its home equity debt. 2010 tax form (Your share of each of these types of debt is equal to the average balance of each debt multiplied by the fraction just given. 2010 tax form ) After your share of the average balance of each type of debt is determined, you include it with the average balance of that type of debt secured by your stock. 2010 tax form Form 1098. 2010 tax form    The cooperative should give you a Form 1098 showing your share of the interest. 2010 tax form Use the rules in this publication to determine your deductible mortgage interest. 2010 tax form Part II. 2010 tax form Limits on Home Mortgage Interest Deduction This part of the publication discusses the limits on deductible home mortgage interest. 2010 tax form These limits apply to your home mortgage interest expense if you have a home mortgage that does not fit into any of the three categories listed at the beginning of Part I under Fully deductible interest . 2010 tax form Your home mortgage interest deduction is limited to the interest on the part of your home mortgage debt that is not more than your qualified loan limit. 2010 tax form This is the part of your home mortgage debt that is grandfathered debt or that is not more than the limits for home acquisition debt and home equity debt. 2010 tax form Table 1 can help you figure your qualified loan limit and your deductible home mortgage interest. 2010 tax form 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 (your main or second home). 2010 tax form It also must be secured by that home. 2010 tax form 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. 2010 tax form The additional debt may qualify as home equity debt (discussed later). 2010 tax form Home acquisition debt limit. 2010 tax form   The total amount you can treat as home acquisition debt at any time on your main home and second home cannot be more than $1 million ($500,000 if married filing separately). 2010 tax form This limit is reduced (but not below zero) by the amount of your grandfathered debt (discussed later). 2010 tax form Debt over this limit may qualify as home equity debt (also discussed later). 2010 tax form Refinanced home acquisition debt. 2010 tax form   Any secured debt you use to refinance home acquisition debt is treated as home acquisition debt. 2010 tax form However, the new debt will qualify as home acquisition debt only up to the amount of the balance of the old mortgage principal just before the refinancing. 2010 tax form Any additional debt not used to buy, build, or substantially improve a qualified home is not home acquisition debt, but may qualify as home equity debt (discussed later). 2010 tax form Mortgage that qualifies later. 2010 tax form   A mortgage that does not qualify as home acquisition debt because it does not meet all the requirements may qualify at a later time. 2010 tax form For example, a debt that you use to buy your home may not qualify as home acquisition debt because it is not secured by the home. 2010 tax form However, if the debt is later secured by the home, it may qualify as home acquisition debt after that time. 2010 tax form Similarly, a debt that you use to buy property may not qualify because the property is not a qualified home. 2010 tax form However, if the property later becomes a qualified home, the debt may qualify after that time. 2010 tax form Mortgage treated as used to buy, build, or improve home. 2010 tax form   A mortgage secured by a qualified home may be treated as home acquisition debt, even if you do not actually use the proceeds to buy, build, or substantially improve the home. 2010 tax form This applies in the following situations. 2010 tax form You buy your home within 90 days before or after the date you take out the mortgage. 2010 tax form The home acquisition debt is limited to the home's cost, plus the cost of any substantial improvements within the limit described below in (2) or (3). 2010 tax form (See Example 1 later. 2010 tax form ) You build or improve your home and take out the mortgage before the work is completed. 2010 tax form The home acquisition debt is limited to the amount of the expenses incurred within 24 months before the date of the mortgage. 2010 tax form You build or improve your home and take out the mortgage within 90 days after the work is completed. 2010 tax form The home acquisition debt is limited to the amount of the expenses incurred within the period beginning 24 months before the work is completed and ending on the date of the mortgage. 2010 tax form (See Example 2 later. 2010 tax form ) Example 1. 2010 tax form You bought your main home on June 3 for $175,000. 2010 tax form You paid for the home with cash you got from the sale of your old home. 2010 tax form On July 15, you took out a mortgage of $150,000 secured by your main home. 2010 tax form You used the $150,000 to invest in stocks. 2010 tax form You can treat the mortgage as taken out to buy your home because you bought the home within 90 days before you took out the mortgage. 2010 tax form The entire mortgage qualifies as home acquisition debt because it was not more than the home's cost. 2010 tax form Example 2. 2010 tax form On January 31, John began building a home on the lot that he owned. 2010 tax form He used $45,000 of his personal funds to build the home. 2010 tax form The home was completed on October 31. 2010 tax form On November 21, John took out a $36,000 mortgage that was secured by the home. 2010 tax form The mortgage can be treated as used to build the home because it was taken out within 90 days after the home was completed. 2010 tax form The entire mortgage qualifies as home acquisition debt because it was not more than the expenses incurred within the period beginning 24 months before the home was completed. 2010 tax form This is illustrated by Figure C. 2010 tax form   Please click here for the text description of the image. 2010 tax form Figure C. 2010 tax form John's example Date of the mortgage. 2010 tax form   The date you take out your mortgage is the day the loan proceeds are disbursed. 2010 tax form This is generally the closing date. 2010 tax form You can treat the day you apply in writing for your mortgage as the date you take it out. 2010 tax form However, this applies only if you receive the loan proceeds within a reasonable time (such as within 30 days) after your application is approved. 2010 tax form If a timely application you make is rejected, a reasonable additional time will be allowed to make a new application. 2010 tax form Cost of home or improvements. 2010 tax form   To determine your cost, include amounts paid to acquire any interest in a qualified home or to substantially improve the home. 2010 tax form   The cost of building or substantially improving a qualified home includes the costs to acquire real property and building materials, fees for architects and design plans, and required building permits. 2010 tax form Substantial improvement. 2010 tax form   An improvement is substantial if it: Adds to the value of your home, Prolongs your home's useful life, or Adapts your home to new uses. 2010 tax form    Repairs that maintain your home in good condition, such as repainting your home, are not substantial improvements. 2010 tax form However, if you paint your home as part of a renovation that substantially improves your qualified home, you can include the painting costs in the cost of the improvements. 2010 tax form Acquiring an interest in a home because of a divorce. 2010 tax form   If you incur debt to acquire the interest of a spouse or former spouse in a home, because of a divorce or legal separation, you can treat that debt as home acquisition debt. 2010 tax form Part of home not a qualified home. 2010 tax form    To figure your home acquisition debt, you must divide the cost of your home and improvements between the part of your home that is a qualified home and any part that is not a qualified home. 2010 tax form See Divided use of your home under Qualified Home in Part I. 2010 tax form Home Equity Debt If you took out a loan for reasons other than to buy, build, or substantially improve your home, it may qualify as home equity debt. 2010 tax form In addition, debt you incurred to buy, build, or substantially improve your home, to the extent it is more than the home acquisition debt limit (discussed earlier), may qualify as home equity debt. 2010 tax form Home equity debt is a mortgage you took out after October 13, 1987, that: Does not qualify as home acquisition debt or as grandfathered debt, and Is secured by your qualified home. 2010 tax form Example. 2010 tax form You bought your home for cash 10 years ago. 2010 tax form You did not have a mortgage on your home until last year, when you took out a $50,000 loan, secured by your home, to pay for your daughter's college tuition and your father's medical bills. 2010 tax form This loan is home equity debt. 2010 tax form Home equity debt limit. 2010 tax form   There is a limit on the amount of debt that can be treated as home equity debt. 2010 tax form The total home equity debt on your main home and second home is limited to the smaller of: $100,000 ($50,000 if married filing separately), or The total of each home's fair market value (FMV) reduced (but not below zero) by the amount of its home acquisition debt and grandfathered debt. 2010 tax form Determine the FMV and the outstanding home acquisition and grandfathered debt for each home on the date that the last debt was secured by the home. 2010 tax form Example. 2010 tax form You own one home that you bought in 2000. 2010 tax form Its FMV now is $110,000, and the current balance on your original mortgage (home acquisition debt) is $95,000. 2010 tax form Bank M offers you a home mortgage loan of 125% of the FMV of the home less any outstanding mortgages or other liens. 2010 tax form To consolidate some of your other debts, you take out a $42,500 home mortgage loan [(125% × $110,000) − $95,000] with Bank M. 2010 tax form Your home equity debt is limited to $15,000. 2010 tax form This is the smaller of: $100,000, the maximum limit, or $15,000, the amount that the FMV of $110,000 exceeds the amount of home acquisition debt of $95,000. 2010 tax form Debt higher than limit. 2010 tax form   Interest on amounts over the home equity debt limit (such as the interest on $27,500 [$42,500 − $15,000] in the preceding example) generally is treated as personal interest and is not deductible. 2010 tax form But if the proceeds of the loan were used for investment, business, or other deductible purposes, the interest may be deductible. 2010 tax form If it is, see the Table 1 Instructions for line 13 for an explanation of how to allocate the excess interest. 2010 tax form Part of home not a qualified home. 2010 tax form   To figure the limit on your home equity debt, you must divide the FMV of your home between the part that is a qualified home and any part that is not a qualified home. 2010 tax form See Divided use of your home under Qualified Home in Part I. 2010 tax form Fair market value (FMV). 2010 tax form    This is the price at which the home would change hands between you and a buyer, neither having to sell or buy, and both having reasonable knowledge of all relevant facts. 2010 tax form Sales of similar homes in your area, on about the same date your last debt was secured by the home, may be helpful in figuring the FMV. 2010 tax form Grandfathered Debt If you took out a mortgage on your home before October 14, 1987, or you refinanced such a mortgage, it may qualify as grandfathered debt. 2010 tax form To qualify, it must have been secured by your qualified home on October 13, 1987, and at all times after that date. 2010 tax form How you used the proceeds does not matter. 2010 tax form Grandfathered debt is not limited. 2010 tax form All of the interest you paid on grandfathered debt is fully deductible home mortgage interest. 2010 tax form However, the amount of your grandfathered debt reduces the $1 million limit for home acquisition debt and the limit based on your home's fair market value for home equity debt. 2010 tax form Refinanced grandfathered debt. 2010 tax form   If you refinanced grandfathered debt after October 13, 1987, for an amount that was not more than the mortgage principal left on the debt, then you still treat it as grandfathered debt. 2010 tax form To the extent the new debt is more than that mortgage principal, it is treated as home acquisition or home equity debt, and the mortgage is a mixed-use mortgage (discussed later under Average Mortgage Balance in the Table 1 instructions). 2010 tax form The debt must be secured by the qualified home. 2010 tax form   You treat grandfathered debt that was refinanced after October 13, 1987, as grandfathered debt only for the term left on the debt that was refinanced. 2010 tax form After that, you treat it as home acquisition debt or home equity debt, depending on how you used the proceeds. 2010 tax form Exception. 2010 tax form   If the debt before refinancing was like a balloon note (the principal on the debt was not amortized over the term of the debt), then you treat the refinanced debt as grandfathered debt for the term of the first refinancing. 2010 tax form This term cannot be more than 30 years. 2010 tax form Example. 2010 tax form Chester took out a $200,000 first mortgage on his home in 1986. 2010 tax form The mortgage was a five-year balloon note and the entire balance on the note was due in 1991. 2010 tax form Chester refinanced the debt in 1991 with a new 20-year mortgage. 2010 tax form The refinanced debt is treated as grandfathered debt for its entire term (20 years). 2010 tax form Line-of-credit mortgage. 2010 tax form    If you had a line-of-credit mortgage on October 13, 1987, and borrowed additional amounts against it after that date, then the additional amounts are either home acquisition debt or home equity debt depending on how you used the proceeds. 2010 tax form The balance on the mortgage before you borrowed the additional amounts is grandfathered debt. 2010 tax form The newly borrowed amounts are not grandfathered debt because the funds were borrowed after October 13, 1987. 2010 tax form See Average Mortgage Balance in the Table 1 Instructions that follow. 2010 tax form Table 1 Instructions Unless you are subject to the overall limit on itemized deductions, you can deduct all of the interest you paid during the year on mortgages secured by your main home or second home in either of the following two situations. 2010 tax form All the mortgages are grandfathered debt. 2010 tax form The total of the mortgage balances for the entire year is within the limits discussed earlier under Home Acquisition Debt and Home Equity Debt . 2010 tax form In either of those cases, you do not need Table 1. 2010 tax form Otherwise, you can use Table 1 to determine your qualified loan limit and deductible home mortgage interest. 2010 tax form Fill out only one Table 1 for both your main and second home regardless of how many mortgages you have. 2010 tax form Table 1. 2010 tax form Worksheet To Figure Your Qualified Loan Limit and Deductible Home Mortgage Interest For the Current Year See the Table 1 Instructions. 2010 tax form Part I Qualified Loan Limit 1. 2010 tax form Enter the average balance of all your grandfathered debt. 2010 tax form See line 1 instructions 1. 2010 tax form   2. 2010 tax form Enter the average balance of all your home acquisition debt. 2010 tax form See line 2 instructions 2. 2010 tax form   3. 2010 tax form Enter $1,000,000 ($500,000 if married filing separately) 3. 2010 tax form   4. 2010 tax form Enter the larger of the amount on line 1 or the amount on line 3 4. 2010 tax form   5. 2010 tax form Add the amounts on lines 1 and 2. 2010 tax form Enter the total here 5. 2010 tax form   6. 2010 tax form Enter the smaller of the amount on line 4 or the amount on line 5 6. 2010 tax form   7. 2010 tax form If you have home equity debt, enter the smaller of $100,000 ($50,000 if married filing separately) or your limited amount. 2010 tax form See the line 7 instructions for the limit which may apply to you. 2010 tax form 7. 2010 tax form   8. 2010 tax form Add the amounts on lines 6 and 7. 2010 tax form Enter the total. 2010 tax form This is your qualified loan limit. 2010 tax form 8. 2010 tax form   Part II Deductible Home Mortgage Interest 9. 2010 tax form Enter the total of the average balances of all mortgages on all qualified homes. 2010 tax form  See line 9 instructions 9. 2010 tax form     If line 8 is less than line 9, go on to line 10. 2010 tax form If line 8 is equal to or more than line 9, stop here. 2010 tax form All of your interest on all the mortgages included on line 9 is deductible as home mortgage interest on Schedule A (Form 1040). 2010 tax form     10. 2010 tax form Enter the total amount of interest that you paid. 2010 tax form See line 10 instructions 10. 2010 tax form   11. 2010 tax form Divide the amount on line 8 by the amount on line 9. 2010 tax form Enter the result as a decimal amount (rounded to three places) 11. 2010 tax form × . 2010 tax form 12. 2010 tax form Multiply the amount on line 10 by the decimal amount on line 11. 2010 tax form Enter the result. 2010 tax form This is your deductible home mortgage interest. 2010 tax form Enter this amount on Schedule A (Form 1040) 12. 2010 tax form   13. 2010 tax form Subtract the amount on line 12 from the amount on line 10. 2010 tax form Enter the result. 2010 tax form This is not home mortgage interest. 2010 tax form See line 13 instructions 13. 2010 tax form   Home equity debt only. 2010 tax form   If all of your mortgages are home equity debt, do not fill in lines 1 through 5. 2010 tax form Enter zero on line 6 and complete the rest of Table 1. 2010 tax form Average Mortgage Balance You have to figure the average balance of each mortgage to determine your qualified loan limit. 2010 tax form You need these amounts to complete lines 1, 2, and 9 of Table 1. 2010 tax form You can use the highest mortgage balances during the year, but you may benefit most by using the average balances. 2010 tax form The following are methods you can use to figure your average mortgage balances. 2010 tax form However, if a mortgage has more than one category of debt, see Mixed-use mortgages , later, in this section. 2010 tax form Average of first and last balance method. 2010 tax form   You can use this method if all the following apply. 2010 tax form You did not borrow any new amounts on the mortgage during the year. 2010 tax form (This does not include borrowing the original mortgage amount. 2010 tax form ) You did not prepay more than one month's principal during the year. 2010 tax form (This includes prepayment by refinancing your home or by applying proceeds from its sale. 2010 tax form ) You had to make level payments at fixed equal intervals on at least a semi-annual basis. 2010 tax form You treat your payments as level even if they were adjusted from time to time because of changes in the interest rate. 2010 tax form    To figure your average balance, complete the following worksheet. 2010 tax form    1. 2010 tax form Enter the balance as of the first day of the year that the mortgage was secured by your qualified home during the year (generally January 1)   2. 2010 tax form Enter the balance as of the last day of the year that the mortgage was secured by your qualified home during the year (generally December 31)   3. 2010 tax form Add amounts on lines 1 and 2   4. 2010 tax form Divide the amount on line 3 by 2. 2010 tax form Enter the result   Interest paid divided by interest rate method. 2010 tax form   You can use this method if at all times in 2013 the mortgage was secured by your qualified home and the interest was paid at least monthly. 2010 tax form    Complete the following worksheet to figure your average balance. 2010 tax form    1. 2010 tax form Enter the interest paid in 2013. 2010 tax form Do not include points, mortgage insurance premiums, or any interest paid in 2013 that is for a year after 2013. 2010 tax form However, do include interest that is for 2013 but was paid in an earlier year   2. 2010 tax form Enter the annual interest rate on the mortgage. 2010 tax form If the interest rate varied in 2013, use the lowest rate for the year   3. 2010 tax form Divide the amount on line 1 by the amount on line 2. 2010 tax form Enter the result   Example. 2010 tax form Mr. 2010 tax form Blue had a line of credit secured by his main home all year. 2010 tax form He paid interest of $2,500 on this loan. 2010 tax form The interest rate on the loan was 9% (. 2010 tax form 09) all year. 2010 tax form His average balance using this method is $27,778, figured as follows. 2010 tax form 1. 2010 tax form Enter the interest paid in 2013. 2010 tax form Do not include points, mortgage insurance premiums, or any interest paid in 2013 that is for a year after 2013. 2010 tax form However, do include interest that is for 2013 but was paid in an earlier year $2,500 2. 2010 tax form Enter the annual interest rate on the mortgage. 2010 tax form If the interest rate varied in 2013, use the lowest rate for the year . 2010 tax form 09 3. 2010 tax form Divide the amount on line 1 by the amount on line 2. 2010 tax form Enter the result $27,778 Statements provided by your lender. 2010 tax form   If you receive monthly statements showing the closing balance or the average balance for the month, you can use either to figure your average balance for the year. 2010 tax form You can treat the balance as zero for any month the mortgage was not secured by your qualified home. 2010 tax form   For each mortgage, figure your average balance by adding your monthly closing or average balances and dividing that total by the number of months the home secured by that mortgage was a qualified home during the year. 2010 tax form   If your lender can give you your average balance for the year, you can use that amount. 2010 tax form Example. 2010 tax form Ms. 2010 tax form Brown had a home equity loan secured by her main home all year. 2010 tax form She received monthly statements showing her average balance for each month. 2010 tax form She can figure her average balance for the year by adding her monthly average balances and dividing the total by 12. 2010 tax form Mixed-use mortgages. 2010 tax form   A mixed-use mortgage is a loan that consists of more than one of the three categories of debt (grandfathered debt, home acquisition debt, and home equity debt). 2010 tax form For example, a mortgage you took out during the year is a mixed-use mortgage if you used its proceeds partly to refinance a mortgage that you took out in an earlier year to buy your home (home acquisition debt) and partly to buy a car (home equity debt). 2010 tax form   Complete lines 1 and 2 of Table 1 by including the separate average balances of any grandfathered debt and home acquisition debt in your mixed-use mortgage. 2010 tax form Do not use the methods described earlier in this section to figure the average balance of either category. 2010 tax form Instead, for each category, use the following method. 2010 tax form Figure the balance of that category of debt for each month. 2010 tax form This is the amount of the loan proceeds allocated to that category, reduced by your principal payments on the mortgage previously applied to that category. 2010 tax form Principal payments on a mixed-use mortgage are applied in full to each category of debt, until its balance is zero, in the following order: First, any home equity debt, Next, any grandfathered debt, and Finally, any home acquisition debt. 2010 tax form Add together the monthly balances figured in (1). 2010 tax form Divide the result in (2) by 12. 2010 tax form   Complete line 9 of Table 1 by including the average balance of the entire mixed-use mortgage, figured under one of the methods described earlier in this section. 2010 tax form Example 1. 2010 tax form In 1986, Sharon took out a $1,400,000 mortgage to buy her main home (grandfathered debt). 2010 tax form On March 2, 2013, when the home had a fair market value of $1,700,000 and she owed $1,100,000 on the mortgage, Sharon took out a second mortgage for $200,000. 2010 tax form She used $180,000 of the proceeds to make substantial improvements to her home (home acquisition debt) and the remaining $20,000 to buy a car (home equity debt). 2010 tax form Under the loan agreement, Sharon must make principal payments of $1,000 at the end of each month. 2010 tax form During 2013, her principal payments on the second mortgage totaled $10,000. 2010 tax form To complete Table 1, line 2, Sharon must figure a separate average balance for the part of her second mortgage that is home acquisition debt. 2010 tax form The January and February balances were zero. 2010 tax form The March through December balances were all $180,000, because none of her principal payments are applied to the home acquisition debt. 2010 tax form (They are all applied to the home equity debt, reducing it to $10,000 [$20,000 − $10,000]. 2010 tax form ) The monthly balances of the home acquisition debt total $1,800,000 ($180,000 × 10). 2010 tax form Therefore, the average balance of the home acquisition debt for 2013 was $150,000 ($1,800,000 ÷ 12). 2010 tax form Example 2. 2010 tax form The facts are the same as in Example 1. 2010 tax form In 2014, Sharon's January through October principal payments on her second mortgage are applied to the home equity debt, reducing it to zero. 2010 tax form The balance of the home acquisition debt remains $180,000 for each of those months. 2010 tax form Because her November and December principal payments are applied to the home acquisition debt, the November balance is $179,000 ($180,000 − $1,000) and the December balance is $178,000 ($180,000 − $2,000). 2010 tax form The monthly balances total $2,157,000 [($180,000 × 10) + $179,000 + $178,000]. 2010 tax form Therefore, the average balance of the home acquisition debt for 2014 is $179,750 ($2,157,000 ÷ 12). 2010 tax form L