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Amending Irs Return

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Amending Irs Return

Amending irs return 28. Amending irs return   Miscellaneous Deductions Table of Contents What's New Introduction Useful Items - You may want to see: Deductions Subject to the 2% LimitUnreimbursed Employee Expenses (Line 21) Tax Preparation Fees (Line 22) Other Expenses (Line 23) Deductions Not Subject to the 2% LimitList of Deductions Nondeductible ExpensesList of Nondeductible Expenses What's New Standard mileage rate. Amending irs return  The 2013 rate for business use of a vehicle is 56½ cents per mile. Amending irs return Introduction This chapter explains which expenses you can claim as miscellaneous itemized deductions on Schedule A (Form 1040). Amending irs return You must reduce the total of most miscellaneous itemized deductions by 2% of your adjusted gross income. Amending irs return This chapter covers the following topics. Amending irs return Deductions subject to the 2% limit. Amending irs return Deductions not subject to the 2% limit. Amending irs return Expenses you cannot deduct. Amending irs return You must keep records to verify your deductions. Amending irs return You should keep receipts, canceled checks, substitute checks, financial account statements, and other documentary evidence. Amending irs return For more information on recordkeeping, get Publication 552, Record- keeping for Individuals. Amending irs return Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 525 Taxable and Nontaxable Income 529 Miscellaneous Deductions 535 Business Expenses 587 Business Use of Your Home (Including Use by Daycare Providers) 946 How To Depreciate Property Form (and Instructions) Schedule A (Form 1040) Itemized Deductions 2106 Employee Business Expenses 2106-EZ Unreimbursed Employee Business Expenses Deductions Subject to the 2% Limit You can deduct certain expenses as miscellaneous itemized deductions on Schedule A (Form 1040). Amending irs return You can claim the amount of expenses that is more than 2% of your adjusted gross income. Amending irs return You figure your deduction on Schedule A by subtracting 2% of your adjusted gross income from the total amount of these expenses. Amending irs return Your adjusted gross income is the amount on Form 1040, line 38. Amending irs return Generally, you apply the 2% limit after you apply any other deduction limit. Amending irs return For example, you apply the 50% (or 80%) limit on business-related meals and entertainment (discussed in chapter 26) before you apply the 2% limit. Amending irs return Deductions subject to the 2% limit are discussed in the three categories in which you report them on Schedule A (Form 1040). Amending irs return Unreimbursed employee expenses (line 21). Amending irs return Tax preparation fees (line 22). Amending irs return Other expenses (line 23). Amending irs return Unreimbursed Employee Expenses (Line 21) Generally, you can deduct on Schedule A (Form 1040), line 21, unreimbursed employee expenses that are: Paid or incurred during your tax year, For carrying on your trade or business of being an employee, and Ordinary and necessary. Amending irs return An expense is ordinary if it is common and accepted in your trade, business, or profession. Amending irs return An expense is necessary if it is appropriate and helpful to your business. Amending irs return An expense does not have to be required to be considered necessary. Amending irs return Examples of unreimbursed employee expenses are listed next. Amending irs return The list is followed by discussions of additional unreimbursed employee expenses. Amending irs return Business bad debt of an employee. Amending irs return Education that is work related. Amending irs return (See chapter 27. Amending irs return ) Legal fees related to your job. Amending irs return Licenses and regulatory fees. Amending irs return Malpractice insurance premiums. Amending irs return Medical examinations required by an employer. Amending irs return Occupational taxes. Amending irs return Passport for a business trip. Amending irs return Subscriptions to professional journals and trade magazines related to your work. Amending irs return Travel, transportation, entertainment, and gifts related to your work. Amending irs return (See chapter 26. Amending irs return ) Business Liability Insurance You can deduct insurance premiums you paid for protection against personal liability for wrongful acts on the job. Amending irs return Damages for Breach of Employment Contract If you break an employment contract, you can deduct damages you pay your former employer that are attributable to the pay you received from that employer. Amending irs return Depreciation on Computers You can claim a depreciation deduction for a computer that you use in your work as an employee if its use is: For the convenience of your employer, and Required as a condition of your employment. Amending irs return For more information about the rules and exceptions to the rules affecting the allowable deductions for a home computer, see Publication 529. Amending irs return Dues to Chambers of Commerce and Professional Societies You may be able to deduct dues paid to professional organizations (such as bar associations and medical associations) and to chambers of commerce and similar organizations, if membership helps you carry out the duties of your job. Amending irs return Similar organizations include: Boards of trade, Business leagues, Civic or public service organizations, Real estate boards, and Trade associations. Amending irs return Lobbying and political activities. Amending irs return   You may not be able to deduct that part of your dues that is for certain lobbying and political activities. Amending irs return See Dues used for lobbying under Nondeductible Expenses, later. Amending irs return Educator Expenses If you were an eligible educator in 2013, you can deduct up to $250 of qualified expenses you paid in 2013 as an adjustment to gross income on Form 1040, line 23, rather than as a miscellaneous itemized deduction. Amending irs return If you file Form 1040A, you can deduct these expenses on line 16. Amending irs return If you and your spouse are filing jointly and both of you were eligible educators, the maximum deduction is $500. Amending irs return However, neither spouse can deduct more than $250 of his or her qualified expenses. Amending irs return Home Office If you use a part of your home regularly and exclusively for business purposes, you may be able to deduct a part of the operating expenses and depreciation of your home. Amending irs return You can claim this deduction for the business use of a part of your home only if you use that part of your home regularly and exclusively: As your principal place of business for any trade or business, As a place to meet or deal with your patients, clients, or customers in the normal course of your trade or business, or In the case of a separate structure not attached to your home, in connection with your trade or business. Amending irs return The regular and exclusive business use must be for the convenience of your employer and not just appropriate and helpful in your job. Amending irs return See Publication 587 for more detailed information and a worksheet. Amending irs return Job Search Expenses You can deduct certain expenses you have in looking for a new job in your present occupation, even if you do not get a new job. Amending irs return You cannot deduct these expenses if: You are looking for a job in a new occupation, There was a substantial break between the ending of your last job and your looking for a new one, or You are looking for a job for the first time. Amending irs return Employment and outplacement agency fees. Amending irs return   You can deduct employment and outplacement agency fees you pay in looking for a new job in your present occupation. Amending irs return Employer pays you back. Amending irs return   If, in a later year, your employer pays you back for employment agency fees, you must include the amount you receive in your gross income up to the amount of your tax benefit in the earlier year. Amending irs return (See Recoveries in chapter 12. Amending irs return ) Employer pays the employment agency. Amending irs return   If your employer pays the fees directly to the employment agency and you are not responsible for them, you do not include them in your gross income. Amending irs return Résumé. Amending irs return   You can deduct amounts you spend for preparing and mailing copies of a résumé to prospective employers if you are looking for a new job in your present occupation. Amending irs return Travel and transportation expenses. Amending irs return   If you travel to an area and, while there, you look for a new job in your present occupation, you may be able to deduct travel expenses to and from the area. Amending irs return You can deduct the travel expenses if the trip is primarily to look for a new job. Amending irs return The amount of time you spend on personal activity compared to the amount of time you spend in looking for work is important in determining whether the trip is primarily personal or is primarily to look for a new job. Amending irs return   Even if you cannot deduct the travel expenses to and from an area, you can deduct the expenses of looking for a new job in your present occupation while in the area. Amending irs return   You can choose to use the standard mileage rate to figure your car expenses. Amending irs return The 2013 rate for business use of a vehicle is 56½ cents per mile. Amending irs return See chapter 26 for more information. Amending irs return Licenses and Regulatory Fees You can deduct the amount you pay each year to state or local governments for licenses and regulatory fees for your trade, business, or profession. Amending irs return Occupational Taxes You can deduct an occupational tax charged at a flat rate by a locality for the privilege of working or conducting a business in the locality. Amending irs return If you are an employee, you can claim occupational taxes only as a miscellaneous deduction subject to the 2% limit; you cannot claim them as a deduction for taxes elsewhere on your return. Amending irs return Repayment of Income Aid Payment An “income aid payment” is one that is received under an employer's plan to aid employees who lose their jobs because of lack of work. Amending irs return If you repay a lump-sum income aid payment that you received and included in income in an earlier year, you can deduct the repayment. Amending irs return Research Expenses of a College Professor If you are a college professor, you can deduct research expenses, including travel expenses, for teaching, lecturing, or writing and publishing on subjects that relate directly to your teaching duties. Amending irs return You must have undertaken the research as a means of carrying out the duties expected of a professor and without expectation of profit apart from salary. Amending irs return However, you cannot deduct the cost of travel as a form of education. Amending irs return Tools Used in Your Work Generally, you can deduct amounts you spend for tools used in your work if the tools wear out and are thrown away within 1 year from the date of purchase. Amending irs return You can depreciate the cost of tools that have a useful life substantially beyond the tax year. Amending irs return For more information about depreciation, see Publication 946. Amending irs return Union Dues and Expenses You can deduct dues and initiation fees you pay for union membership. Amending irs return You can also deduct assessments for benefit payments to unemployed union members. Amending irs return However, you cannot deduct the part of the assessments or contributions that provides funds for the payment of sick, accident, or death benefits. Amending irs return Also, you cannot deduct contributions to a pension fund, even if the union requires you to make the contributions. Amending irs return You may not be able to deduct amounts you pay to the union that are related to certain lobbying and political activities. Amending irs return See Lobbying Expenses under Nondeductible Expenses, later. Amending irs return Work Clothes and Uniforms You can deduct the cost and upkeep of work clothes if the following two requirements are met. Amending irs return You must wear them as a condition of your employment. Amending irs return The clothes are not suitable for everyday wear. Amending irs return It is not enough that you wear distinctive clothing. Amending irs return The clothing must be specifically required by your employer. Amending irs return Nor is it enough that you do not, in fact, wear your work clothes away from work. Amending irs return The clothing must not be suitable for taking the place of your regular clothing. Amending irs return Examples of workers who may be able to deduct the cost and upkeep of work clothes are: delivery workers, firefighters, health care workers, law enforcement officers, letter carriers, professional athletes, and transportation workers (air, rail, bus, etc. Amending irs return ). Amending irs return Musicians and entertainers can deduct the cost of theatrical clothing and accessories that are not suitable for everyday wear. Amending irs return However, work clothing consisting of white cap, white shirt or white jacket, white bib overalls, and standard work shoes, which a painter is required by his union to wear on the job, is not distinctive in character or in the nature of a uniform. Amending irs return Similarly, the costs of buying and maintaining blue work clothes worn by a welder at the request of a foreman are not deductible. Amending irs return Protective clothing. Amending irs return   You can deduct the cost of protective clothing required in your work, such as safety shoes or boots, safety glasses, hard hats, and work gloves. Amending irs return   Examples of workers who may be required to wear safety items are: carpenters, cement workers, chemical workers, electricians, fishing boat crew members, machinists, oil field workers, pipe fitters, steamfitters, and truck drivers. Amending irs return Military uniforms. Amending irs return   You generally cannot deduct the cost of your uniforms if you are on full-time active duty in the armed forces. Amending irs return However, if you are an armed forces reservist, you can deduct the unreimbursed cost of your uniform if military regulations restrict you from wearing it except while on duty as a reservist. Amending irs return In figuring the deduction, you must reduce the cost by any nontaxable allowance you receive for these expenses. Amending irs return   If local military rules do not allow you to wear fatigue uniforms when you are off duty, you can deduct the amount by which the cost of buying and keeping up these uniforms is more than the uniform allowance you receive. Amending irs return   You can deduct the cost of your uniforms if you are a civilian faculty or staff member of a military school. Amending irs return Tax Preparation Fees (Line 22) You can usually deduct tax preparation fees in the year you pay them. Amending irs return Thus, on your 2013 return, you can deduct fees paid in 2013 for preparing your 2012 return. Amending irs return These fees include the cost of tax preparation software programs and tax publications. Amending irs return They also include any fee you paid for electronic filing of your return. Amending irs return Other Expenses (Line 23) You can deduct certain other expenses as miscellaneous itemized deductions subject to the 2% limit. Amending irs return On Schedule A (Form 1040), line 23, you can deduct expenses that you pay: To produce or collect income that must be included in your gross income, To manage, conserve, or maintain property held for producing such income, or To determine, contest, pay, or claim a refund of any tax. Amending irs return You can deduct expenses you pay for the purposes in (1) and (2) above only if they are reasonably and closely related to these purposes. Amending irs return Some of these other expenses are explained in the following discussions. Amending irs return If the expenses you pay produce income that is only partially taxable, see Tax-Exempt Income Expenses , later, under Nondeductible Expenses. Amending irs return Appraisal Fees You can deduct appraisal fees if you pay them to figure a casualty loss or the fair market value of donated property. Amending irs return Casualty and Theft Losses You can deduct a casualty or theft loss as a miscellaneous itemized deduction subject to the 2% limit if you used the damaged or stolen property in performing services as an employee. Amending irs return First report the loss in Section B of Form 4684, Casualties and Thefts. Amending irs return You may also have to include the loss on Form 4797, Sales of Business Property, if you are otherwise required to file that form. Amending irs return To figure your deduction, add all casualty or theft losses from this type of property included on Form 4684, lines 32 and 38b, or Form 4797, line 18a. Amending irs return For other casualty and theft losses, see chapter 25. Amending irs return Clerical Help and Office Rent You can deduct office expenses, such as rent and clerical help, that you have in connection with your investments and collecting the taxable income on them. Amending irs return Credit or Debit Card Convenience Fees You can deduct the convenience fee charged by the card processor for paying your income tax (including estimated tax payments) by credit or debit card. Amending irs return The fees are deductible in the year paid. Amending irs return Depreciation on Home Computer You can deduct depreciation on your home computer if you use it to produce income (for example, to manage your investments that produce taxable income). Amending irs return You generally must depreciate the computer using the straight line method over the Alternative Depreciation System (ADS) recovery period. Amending irs return But if you work as an employee and also use the computer in that work, see Publication 946. Amending irs return Excess Deductions of an Estate If an estate's total deductions in its last tax year are more than its gross income for that year, the beneficiaries succeeding to the estate's property can deduct the excess. Amending irs return Do not include deductions for the estate's personal exemption and charitable contributions when figuring the estate's total deductions. Amending irs return The beneficiaries can claim the deduction only for the tax year in which, or with which, the estate terminates, whether the year of termination is a normal year or a short tax year. Amending irs return For more information, see Termination of Estate in Publication 559, Survivors, Executors, and Administrators. Amending irs return Fees to Collect Interest and Dividends You can deduct fees you pay to a broker, bank, trustee, or similar agent to collect your taxable bond interest or dividends on shares of stock. Amending irs return But you cannot deduct a fee you pay to a broker to buy investment property, such as stocks or bonds. Amending irs return You must add the fee to the cost of the property. Amending irs return You cannot deduct the fee you pay to a broker to sell securities. Amending irs return You can use the fee only to figure gain or loss from the sale. Amending irs return See the Instructions for Form 8949 for information on how to report the fee. Amending irs return Hobby Expenses You can generally deduct hobby expenses, but only up to the amount of hobby income. Amending irs return A hobby is not a business because it is not carried on to make a profit. Amending irs return See Activity not for profit in chapter 12 under Other Income. Amending irs return Indirect Deductions of Pass-Through Entities Pass-through entities include partnerships, S corporations, and mutual funds that are not publicly offered. Amending irs return Deductions of pass-through entities are passed through to the partners or shareholders. Amending irs return The partners or shareholders can deduct their share of passed-through deductions for investment expenses as miscellaneous itemized deductions subject to the 2% limit. Amending irs return Example. Amending irs return You are a member of an investment club that is formed solely to invest in securities. Amending irs return The club is treated as a partnership. Amending irs return The partnership's income is solely from taxable dividends, interest, and gains from sales of securities. Amending irs return In this case, you can deduct your share of the partnership's operating expenses as miscellaneous itemized deductions subject to the 2% limit. Amending irs return However, if the investment club partnership has investments that also produce nontaxable income, you cannot deduct your share of the partnership's expenses that produce the nontaxable income. Amending irs return Publicly offered mutual funds. Amending irs return   Publicly offered mutual funds do not pass deductions for investment expenses through to shareholders. Amending irs return A mutual fund is “publicly offered” if it is: Continuously offered pursuant to a public offering, Regularly traded on an established securities market, or Held by or for at least 500 persons at all times during the tax year. Amending irs return   A publicly offered mutual fund will send you a Form 1099-DIV, Dividends and Distributions, or a substitute form, showing the net amount of dividend income (gross dividends minus investment expenses). Amending irs return This net figure is the amount you report on your return as income. Amending irs return You cannot further deduct investment expenses related to publicly offered mutual funds because they are already included as part of the net income amount. Amending irs return Information returns. Amending irs return   You should receive information returns from pass-through entities. Amending irs return Partnerships and S corporations. Amending irs return   These entities issue Schedule K-1, which lists the items and amounts you must report and identifies the tax return schedules and lines to use. Amending irs return Nonpublicly offered mutual funds. Amending irs return   These funds will send you a Form 1099-DIV, Dividends and Distributions, or a substitute form, showing your share of gross income and investment expenses. Amending irs return You can claim the expenses only as a miscellaneous itemized deduction subject to the 2% limit. Amending irs return Investment Fees and Expenses You can deduct investment fees, custodial fees, trust administration fees, and other expenses you paid for managing your investments that produce taxable income. Amending irs return Legal Expenses You can usually deduct legal expenses that you incur in attempting to produce or collect taxable income or that you pay in connection with the determination, collection, or refund of any tax. Amending irs return You can also deduct legal expenses that are: Related to either doing or keeping your job, such as those you paid to defend yourself against criminal charges arising out of your trade or business, For tax advice related to a divorce, if the bill specifies how much is for tax advice and it is determined in a reasonable way, or To collect taxable alimony. Amending irs return You can deduct expenses of resolving tax issues relating to profit or loss from business (Schedule C or C-EZ), rentals or royalties (Schedule E), or farm income and expenses (Schedule F), on the appropriate schedule. Amending irs return You deduct expenses of resolving nonbusiness tax issues on Schedule A (Form 1040). Amending irs return See Tax Preparation Fees , earlier. Amending irs return Loss on Deposits For information on whether, and if so, how, you may deduct a loss on your deposit in a qualified financial institution, see Loss on Deposits in chapter 25. Amending irs return Repayments of Income If you had to repay an amount that you included in income in an earlier year, you may be able to deduct the amount you repaid. Amending irs return If the amount you had to repay was ordinary income of $3,000 or less, the deduction is subject to the 2% limit. Amending irs return If it was more than $3,000, see Repayments Under Claim of Right under Deductions Not Subject to the 2% Limit, later. Amending irs return Repayments of Social Security Benefits For information on how to deduct your repayments of certain social security benefits, see Repayments More Than Gross Benefits in chapter 11. Amending irs return Safe Deposit Box Rent You can deduct safe deposit box rent if you use the box to store taxable income-producing stocks, bonds, or investment-related papers and documents. Amending irs return You cannot deduct the rent if you use the box only for jewelry, other personal items, or tax-exempt securities. Amending irs return Service Charges on Dividend Reinvestment Plans You can deduct service charges you pay as a subscriber in a dividend reinvestment plan. Amending irs return These service charges include payments for: Holding shares acquired through a plan, Collecting and reinvesting cash dividends, and Keeping individual records and providing detailed statements of accounts. Amending irs return Trustee's Administrative Fees for IRA Trustee's administrative fees that are billed separately and paid by you in connection with your individual retirement arrangement (IRA) are deductible (if they are ordinary and necessary) as a miscellaneous itemized deduction subject to the 2% limit. Amending irs return For more information about IRAs, see chapter 17. Amending irs return Deductions Not Subject to the 2% Limit You can deduct the items listed below as miscellaneous itemized deductions. Amending irs return They are not subject to the 2% limit. Amending irs return Report these items on Schedule A (Form 1040), line 28. Amending irs return List of Deductions Each of the following items is discussed in detail after the list (except where indicated). Amending irs return Amortizable premium on taxable bonds. Amending irs return Casualty and theft losses from income- producing property. Amending irs return Federal estate tax on income in respect of a decedent. Amending irs return Gambling losses up to the amount of gambling winnings. Amending irs return Impairment-related work expenses of persons with disabilities. Amending irs return Loss from other activities from Schedule K-1 (Form 1065-B), box 2. Amending irs return Losses from Ponzi-type investment schemes. Amending irs return See Losses from Ponzi-type investment schemes under Theft in chapter 25. Amending irs return Repayments of more than $3,000 under a claim of right. Amending irs return Unrecovered investment in an annuity. Amending irs return Amortizable Premium on Taxable Bonds In general, if the amount you pay for a bond is greater than its stated principal amount, the excess is bond premium. Amending irs return You can elect to amortize the premium on taxable bonds. Amending irs return The amortization of the premium is generally an offset to interest income on the bond rather than a separate deduction item. Amending irs return Part of the premium on some bonds may be a miscellaneous deduction not subject to the 2% limit. Amending irs return For more information, see Amortizable Premium on Taxable Bonds in Publication 529, and Bond Premium Amortization in chapter 3 of Publication 550, Investment Income and Expenses. Amending irs return Casualty and Theft Losses of Income-Producing Property You can deduct a casualty or theft loss as a miscellaneous itemized deduction not subject to the 2% limit if the damaged or stolen property was income-producing property (property held for investment, such as stocks, notes, bonds, gold, silver, vacant lots, and works of art). Amending irs return First, report the loss in Form 4684, Section B. Amending irs return You may also have to include the loss on Form 4797, Sales of Business Property if you are otherwise required to file that form. Amending irs return To figure your deduction, add all casualty or theft losses from this type of property included on Form 4684, lines 32 and 38b, or Form 4797, line 18a. Amending irs return For more information on casualty and theft losses, see chapter 25. Amending irs return Federal Estate Tax on Income in Respect of a Decedent You can deduct the federal estate tax attributable to income in respect of a decedent that you as a beneficiary include in your gross income. Amending irs return Income in respect of the decedent is gross income that the decedent would have received had death not occurred and that was not properly includible in the decedent's final income tax return. Amending irs return See Publication 559 for more information. Amending irs return Gambling Losses Up to the Amount of Gambling Winnings You must report the full amount of your gambling winnings for the year on Form 1040, line 21. Amending irs return You deduct your gambling losses for the year on Schedule A (Form 1040), line 28. Amending irs return You cannot deduct gambling losses that are more than your winnings. Amending irs return You cannot reduce your gambling winnings by your gambling losses and report the difference. Amending irs return You must report the full amount of your winnings as income and claim your losses (up to the amount of winnings) as an itemized deduction. Amending irs return Therefore, your records should show your winnings separately from your losses. Amending irs return Diary of winnings and losses. Amending irs return You must keep an accurate diary or similar record of your losses and winnings. Amending irs return Your diary should contain at least the following information. Amending irs return The date and type of your specific wager or wagering activity. Amending irs return The name and address or location of the gambling establishment. Amending irs return The names of other persons present with you at the gambling establishment. Amending irs return The amount(s) you won or lost. Amending irs return See Publication 529 for more information. Amending irs return Impairment-Related Work Expenses If you have a physical or mental disability that limits your being employed, or substantially limits one or more of your major life activities, such as performing manual tasks, walking, speaking, breathing, learning, and working, you can deduct your impairment-related work expenses. Amending irs return Impairment-related work expenses are ordinary and necessary business expenses for attendant care services at your place of work and for other expenses in connection with your place of work that are necessary for you to be able to work. Amending irs return Self-employed. Amending irs return   If you are self-employed, enter your impairment-related work expenses on the appropriate form (Schedule C, C-EZ, E, or F) used to report your business income and expenses. Amending irs return Loss From Other Activities From Schedule K-1 (Form 1065-B), Box 2 If the amount reported in Schedule K-1 (Form 1065-B), box 2, is a loss, report it on Schedule A (Form 1040), line 28. Amending irs return It is not subject to the passive activity limitations. Amending irs return Repayments Under Claim of Right If you had to repay more than $3,000 that you included in your income in an earlier year because at the time you thought you had an unrestricted right to it, you may be able to deduct the amount you repaid or take a credit against your tax. Amending irs return See Repayments in chapter 12 for more information. Amending irs return Unrecovered Investment in Annuity A retiree who contributed to the cost of an annuity can exclude from income a part of each payment received as a tax-free return of the retiree's investment. Amending irs return If the retiree dies before the entire investment is recovered tax free, any unrecovered investment can be deducted on the retiree's final income tax return. Amending irs return See chapter 10 for more information about the tax treatment of pensions and annuities. Amending irs return Nondeductible Expenses Examples of nondeductible expenses are listed next. Amending irs return The list is followed by discussions of additional nondeductible expenses. Amending irs return List of Nondeductible Expenses Broker's commissions that you paid in connection with your IRA or other investment property. Amending irs return Burial or funeral expenses, including the cost of a cemetery lot. Amending irs return Capital expenses. Amending irs return Fees and licenses, such as car licenses, marriage licenses, and dog tags. Amending irs return Hobby losses, but see Hobby Expenses , earlier. Amending irs return Home repairs, insurance, and rent. Amending irs return Illegal bribes and kickbacks. Amending irs return See Bribes and kickbacks in chapter 11 of Publication 535. Amending irs return Losses from the sale of your home, furniture, personal car, etc. Amending irs return Personal disability insurance premiums. Amending irs return Personal, living, or family expenses. Amending irs return The value of wages never received or lost vacation time. Amending irs return Adoption Expenses You cannot deduct the expenses of adopting a child, but you may be able to take a credit for those expenses. Amending irs return See chapter 37. Amending irs return Campaign Expenses You cannot deduct campaign expenses of a candidate for any office, even if the candidate is running for reelection to the office. Amending irs return These include qualification and registration fees for primary elections. Amending irs return Legal fees. Amending irs return   You cannot deduct legal fees paid to defend charges that arise from participation in a political campaign. Amending irs return Check-Writing Fees on Personal Account If you have a personal checking account, you cannot deduct fees charged by the bank for the privilege of writing checks, even if the account pays interest. Amending irs return Club Dues Generally, you cannot deduct the cost of membership in any club organized for business, pleasure, recreation, or other social purpose. Amending irs return This includes business, social, athletic, luncheon, sporting, airline, hotel, golf, and country clubs. Amending irs return You cannot deduct dues paid to an organization if one of its main purposes is to: Conduct entertainment activities for members or their guests, or Provide members or their guests with access to entertainment facilities. Amending irs return Dues paid to airline, hotel, and luncheon clubs are not deductible. Amending irs return Commuting Expenses You cannot deduct commuting expenses (the cost of transportation between your home and your main or regular place of work). Amending irs return If you haul tools, instruments, or other items, in your car to and from work, you can deduct only the additional cost of hauling the items such as the rent on a trailer to carry the items. Amending irs return Fines or Penalties You cannot deduct fines or penalties you pay to a governmental unit for violating a law. Amending irs return This includes an amount paid in settlement of your actual or potential liability for a fine or penalty (civil or criminal). Amending irs return Fines or penalties include parking tickets, tax penalties, and penalties deducted from teachers' paychecks after an illegal strike. Amending irs return Health Spa Expenses You cannot deduct health spa expenses, even if there is a job requirement to stay in excellent physical condition, such as might be required of a law enforcement officer. Amending irs return Home Security System You cannot deduct the cost of a home security system as a miscellaneous deduction. Amending irs return However, you may be able to claim a deduction for a home security system as a business expense if you have a home office. Amending irs return See Home Office under Unreimbursed Employee Expenses, earlier, and Security System under Deducting Expenses in Publication 587. Amending irs return Investment-Related Seminars You cannot deduct any expenses for attending a convention, seminar, or similar meeting for investment purposes. Amending irs return Life Insurance Premiums You cannot deduct premiums you pay on your life insurance. Amending irs return You may be able to deduct, as alimony, premiums you pay on life insurance policies assigned to your former spouse. Amending irs return See chapter 18 for information on alimony. Amending irs return Lobbying Expenses You generally cannot deduct amounts paid or incurred for lobbying expenses. Amending irs return These include expenses to: Influence legislation, Participate or intervene in any political campaign for, or against, any candidate for public office, Attempt to influence the general public, or segments of the public, about elections, legislative matters, or referendums, or Communicate directly with covered executive branch officials in any attempt to influence the official actions or positions of those officials. Amending irs return Lobbying expenses also include any amounts paid or incurred for research, preparation, planning, or coordination of any of these activities. Amending irs return Dues used for lobbying. Amending irs return   If a tax-exempt organization notifies you that part of the dues or other amounts you pay to the organization are used to pay nondeductible lobbying expenses, you cannot deduct that part. Amending irs return See Lobbying Expenses in Publication 529 for information on exceptions. Amending irs return Lost or Mislaid Cash or Property You cannot deduct a loss based on the mere disappearance of money or property. Amending irs return However, an accidental loss or disappearance of property can qualify as a casualty if it results from an identifiable event that is sudden, unexpected, or unusual. Amending irs return See chapter 25. Amending irs return Example. Amending irs return A car door is accidentally slammed on your hand, breaking the setting of your diamond ring. Amending irs return The diamond falls from the ring and is never found. Amending irs return The loss of the diamond is a casualty. Amending irs return Lunches with Co-workers You cannot deduct the expenses of lunches with co-workers, except while traveling away from home on business. Amending irs return See chapter 26 for information on deductible expenses while traveling away from home. Amending irs return Meals While Working Late You cannot deduct the cost of meals while working late. Amending irs return However, you may be able to claim a deduction if the cost of meals is a deductible entertainment expense, or if you are traveling away from home. Amending irs return See chapter 26 for information on deductible entertainment expenses and expenses while traveling away from home. Amending irs return Personal Legal Expenses You cannot deduct personal legal expenses such as those for the following. Amending irs return Custody of children. Amending irs return Breach of promise to marry suit. Amending irs return Civil or criminal charges resulting from a personal relationship. Amending irs return Damages for personal injury, except for certain unlawful discrimination and whistleblower claims. Amending irs return Preparation of a title (or defense or perfection of a title). Amending irs return Preparation of a will. Amending irs return Property claims or property settlement in a divorce. Amending irs return You cannot deduct these expenses even if a result of the legal proceeding is the loss of income-producing property. Amending irs return Political Contributions You cannot deduct contributions made to a political candidate, a campaign committee, or a newsletter fund. Amending irs return Advertisements in convention bulletins and admissions to dinners or programs that benefit a political party or political candidate are not deductible. Amending irs return Professional Accreditation Fees You cannot deduct professional accreditation fees such as the following. Amending irs return Accounting certificate fees paid for the initial right to practice accounting. Amending irs return Bar exam fees and incidental expenses in securing initial admission to the bar. Amending irs return Medical and dental license fees paid to get initial licensing. Amending irs return Professional Reputation You cannot deduct expenses of radio and TV appearances to increase your personal prestige or establish your professional reputation. Amending irs return Relief Fund Contributions You cannot deduct contributions paid to a private plan that pays benefits to any covered employee who cannot work because of any injury or illness not related to the job. Amending irs return Residential Telephone Service You cannot deduct any charge (including taxes) for basic local telephone service for the first telephone line to your residence, even if it is used in a trade or business. Amending irs return Stockholders' Meetings You cannot deduct transportation and other expenses you pay to attend stockholders' meetings of companies in which you own stock but have no other interest. Amending irs return You cannot deduct these expenses even if you are attending the meeting to get information that would be useful in making further investments. Amending irs return Tax-Exempt Income Expenses You cannot deduct expenses to produce tax-exempt income. Amending irs return You cannot deduct interest on a debt incurred or continued to buy or carry  tax-exempt securities. Amending irs return If you have expenses to produce both taxable and tax-exempt income, but you cannot identify the expenses that produce each type of income, you must divide the expenses based on the amount of each type of income to determine the amount that you can deduct. Amending irs return Example. Amending irs return During the year, you received taxable interest of $4,800 and tax-exempt interest of $1,200. Amending irs return In earning this income, you had total expenses of $500 during the year. Amending irs return You cannot identify the amount of each expense item that is for each income item. Amending irs return Therefore, 80% ($4,800/$6,000) of the expense is for the taxable interest and 20% ($1,200/$6,000) is for the tax-exempt interest. Amending irs return You can deduct, subject to the 2% limit, expenses of $400 (80% of $500). Amending irs return Travel Expenses for Another Individual You generally cannot deduct travel expenses you pay or incur for a spouse, dependent, or other individual who accompanies you (or your employee) on business or personal travel unless the spouse, dependent, or other individual is an employee of the taxpayer, the travel is for a bona fide business purpose, and such expenses would otherwise be deductible by the spouse, dependent, or other individual. Amending irs return See chapter 26 for more information on deductible travel expenses. Amending irs return Voluntary Unemployment Benefit Fund Contributions You cannot deduct voluntary unemployment benefit fund contributions you make to a union fund or a private fund. Amending irs return However, you can deduct contributions as taxes if state law requires you to make them to a state unemployment fund that covers you for the loss of wages from unemployment caused by business conditions. Amending irs return Wristwatches You cannot deduct the cost of a wristwatch, even if there is a job requirement that you know the correct time to properly perform your duties. Amending irs return Prev  Up  Next   Home   More Online Publications
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Am I Eligible to Claim an Education Credit?

This application will help you determine if you are eligible for certain educational credits or deductions including the American Opportunity Credit, the Lifetime Learning Credit and the Tuition and Fees Deduction.

Information You Will Need:

  • Filing status
  • Student’s enrollment status
  • Your adjusted gross income
  • Who paid the expenses, when the expenses were paid and for what academic period 
  • If any expenses were paid with tax exempt funds
  • If any expenses were paid with distributions from a Coverdell Education Savings Account or Qualified Tuition Program

Estimated Completion Time: 10 minutes.  However: 5 minutes of inactivity will end the interview and you will be forced to start over.

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Page Last Reviewed or Updated: 14-Feb-2014

The Amending Irs Return

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