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Ammending Taxes

Ammending taxes 6. Ammending taxes   Retail Tax on Heavy Trucks, Trailers, and Tractors Table of Contents Highway vehicle. Ammending taxes Vehicles not considered highway vehicles. Ammending taxes Idling reduction device. Ammending taxes Separate purchase. Ammending taxes Leases. Ammending taxes Exported vehicle. Ammending taxes Tax on resale of tax-paid trailers and semitrailers. Ammending taxes Use treated as sale. Ammending taxes Sale. Ammending taxes Long-term lease. Ammending taxes Short-term lease. Ammending taxes Related person. Ammending taxes Exclusions from tax base. Ammending taxes Sales not at arm's length. Ammending taxes Installment sales. Ammending taxes Repairs and modifications. Ammending taxes Further manufacture. Ammending taxes Rail trailers and rail vans. Ammending taxes Parts and accessories. Ammending taxes Trash containers. Ammending taxes House trailers. Ammending taxes Camper coaches or bodies for self-propelled mobile homes. Ammending taxes Farm feed, seed, and fertilizer equipment. Ammending taxes Ambulances and hearses. Ammending taxes Truck-tractors. Ammending taxes Concrete mixers. Ammending taxes Registration requirement. Ammending taxes Further manufacture. Ammending taxes A tax of 12% of the sales price is imposed on the first retail sale of the following articles, including related parts and accessories sold on or in connection with, or with the sale of, the articles. Ammending taxes Truck chassis and bodies. Ammending taxes Truck trailer and semitrailer chassis and bodies. Ammending taxes Tractors of the kind chiefly used for highway transportation in combination with a trailer or semitrailer. Ammending taxes A truck is a highway vehicle primarily designed to transport its load on the same chassis as the engine, even if it is equipped to tow a vehicle, such as a trailer or semitrailer. Ammending taxes A tractor is a highway vehicle designed to tow a vehicle, such as a trailer or semitrailer. Ammending taxes A tractor may carry incidental items of cargo when towing or limited amounts of cargo when not towing. Ammending taxes A sale of a truck, truck trailer, or semitrailer is considered a sale of a chassis and a body. Ammending taxes The seller is liable for the tax. Ammending taxes Chassis or body. Ammending taxes   A chassis or body is taxable only if you sell it for use as a component part of a highway vehicle that is a truck, truck trailer or semitrailer, or a tractor of the kind chiefly used for highway transportation in combination with a trailer or semitrailer. Ammending taxes Highway vehicle. Ammending taxes   A highway vehicle is any self-propelled vehicle designed to carry a load over public highways, whether or not it is also designed to perform other functions. Ammending taxes Examples of vehicles designed to carry a load over public highways are passenger automobiles, motorcycles, buses, and highway-type trucks and truck tractors. Ammending taxes A vehicle is a highway vehicle even though the vehicle's design allows it to perform a highway transportation function for only one of the following. Ammending taxes A particular type of load, such as passengers, furnishings, and personal effects (as in a house, office, or utility trailer). Ammending taxes A special kind of cargo, goods, supplies, or materials. Ammending taxes Some off-highway task unrelated to highway transportation, except as discussed next. Ammending taxes Vehicles not considered highway vehicles. Ammending taxes   Generally, the following kinds of vehicles are not considered highway vehicles for purposes of the retail tax. Ammending taxes Specially designed mobile machinery for nontransportation functions. Ammending taxes A self-propelled vehicle is not a highway vehicle if all the following apply. Ammending taxes The chassis has permanently mounted to it machinery or equipment used to perform certain operations (construction, manufacturing, drilling, mining, timbering, processing, farming, or similar operations) if the operation of the machinery or equipment is unrelated to transportation on or off the public highways. Ammending taxes The chassis has been specially designed to serve only as a mobile carriage and mount (and power source, if applicable) for the machinery or equipment, whether or not the machinery or equipment is in operation. Ammending taxes The chassis could not, because of its special design and without substantial structural modification, be used as part of a vehicle designed to carry any other load. Ammending taxes Vehicles specially designed for off-highway transportation. Ammending taxes A vehicle is not treated as a highway vehicle if the vehicle is specially designed for the primary function of transporting a particular type of load other than over the public highway and because of this special design, the vehicles's capability to transport a load over a public highway is substantially limited or impaired. Ammending taxes To make this determination, you can take into account the vehicle's size, whether the vehicle is subject to licensing, safety, or other requirements, and whether the vehicle can transport a load at a sustained speed of at least 25 miles per hour. Ammending taxes It does not matter that the vehicle can carry heavier loads off highway than it is allowed to carry over the highway. Ammending taxes Nontransportation trailers and semitrailers. Ammending taxes A trailer or semitrailer is not treated as a highway vehicle if it is specially designed to function only as an enclosed stationary shelter for carrying on a nontransportation function at an off-highway site. Ammending taxes For example, a trailer that is capable only of functioning as an office for an off-highway construction operation is not a highway vehicle. Ammending taxes Gross vehicle weight. Ammending taxes   The tax does not apply to truck chassis and bodies suitable for use with a vehicle that has a gross vehicle weight (defined below) of 33,000 pounds or less. Ammending taxes It also does not apply to truck trailer and semitrailer chassis and bodies suitable for use with a trailer or semitrailer that has a gross vehicle weight of 26,000 pounds or less. Ammending taxes Tractors that have a gross vehicle weight of 19,500 pounds or less and a gross combined weight of 33,000 pounds or less are excluded from the 12% retail tax. Ammending taxes   The following four classifications of truck body types meet the suitable for use standard and will be excluded from the retail excise tax. Ammending taxes Platform truck bodies 21 feet or less in length. Ammending taxes Dry freight and refrigerated truck van bodies 24 feet or less in length. Ammending taxes Dump truck bodies with load capacities of 8 cubic yards or less. Ammending taxes Refuse packer truck bodies with load capacities of 20 cubic yards or less. Ammending taxes For more information on these classifications, see Revenue Procedure 2005-19, which is on page 832 of I. Ammending taxes R. Ammending taxes B. Ammending taxes 2005-14 at www. Ammending taxes irs. Ammending taxes gov/pub/irs-irbs/irb05-14. Ammending taxes pdf. Ammending taxes   The gross vehicle weight means the maximum total weight of a loaded vehicle. Ammending taxes Generally, this maximum total weight is the gross vehicle weight rating provided by the manufacturer or determined by the seller of the completed article. Ammending taxes The seller's gross vehicle weight rating is determined solely on the basis of the strength of the chassis frame and the axle capacity and placement. Ammending taxes The seller may not take into account any readily attachable components (such as tires or rim assemblies) in determining the gross vehicle weight. Ammending taxes See Regulations section 145. Ammending taxes 4051-1(e)(3) for more information. Ammending taxes Parts or accessories. Ammending taxes   The tax applies to parts or accessories sold on or in connection with, or with the sale of, a taxable article. Ammending taxes For example, if at the time of the sale by the retailer, the part or accessory has been ordered from the retailer, the part or accessory will be considered as sold in connection with the sale of the vehicle. Ammending taxes The tax applies in this case whether or not the retailer bills the parts or accessories separately. Ammending taxes   If the retailer sells a taxable chassis, body, or tractor without parts or accessories considered essential for the operation or appearance of the taxable article, the sale of the parts or accessories by the retailer to the purchaser is considered made in connection with the sale of the taxable article even though they are shipped separately, at the same time, or on a different date. Ammending taxes The tax applies unless there is evidence to the contrary. Ammending taxes For example, if a retailer sells to any person a chassis and the bumpers for the chassis, or sells a taxable tractor and the fifth wheel and attachments, the tax applies to the parts or accessories regardless of the method of billing or the time at which the shipments were made. Ammending taxes The tax does not apply to parts and accessories that are spares or replacements. Ammending taxes   The tax imposed on parts and accessories sold on or in connection with the taxable articles listed earlier and the tax imposed on the separate purchase of parts and accessories (discussed next) for the taxable articles listed earlier do not apply to an idling reduction device or insulation that has an R value of at least R35 per inch. Ammending taxes Idling reduction device. Ammending taxes   An idling reduction device is any device or system of devices that provide the tractor with services, such as heat, air conditioning, and electricity, without the use of the main drive engine while the tractor is temporarily parked or stationary. Ammending taxes The device must be affixed to the tractor and determined by the Administrator of the EPA, in consultation with the Secretary of Energy and Secretary of Transportation, to reduce idling while parked or stationary. Ammending taxes The EPA discusses idling reduction technologies on its website at www. Ammending taxes epa. Ammending taxes gov/smartway/technology/idling. Ammending taxes htm. Ammending taxes Separate purchase. Ammending taxes   The tax generally applies to the price of a part or accessory and its installation if the following conditions are met. Ammending taxes The owner, lessee, or operator of any vehicle that contains a taxable article installs any part or accessory on the vehicle. Ammending taxes The installation occurs within 6 months after the vehicle is first placed in service. Ammending taxes   The owners of the trade or business installing the parts or accessories are secondarily liable for the tax. Ammending taxes   A vehicle is placed in service on the date the owner takes actual possession of the vehicle. Ammending taxes This date is established by a signed delivery ticket or other comparable document indicating delivery to and acceptance by the owner. Ammending taxes   The tax does not apply if the installed part or accessory is a replacement part or accessory. Ammending taxes The tax also does not apply if the total price of the parts and accessories, including installation charges, during the 6-month period is $1,000 or less. Ammending taxes However, if the total price is more than $1,000, the tax applies to the cost of all parts and accessories (and installation charges) during that period. Ammending taxes Example. Ammending taxes You bought a taxable vehicle and placed it in service on April 8. Ammending taxes On May 3, you bought and installed parts and accessories at a cost of $850. Ammending taxes On July 15, you bought and installed parts and accessories for $300. Ammending taxes Tax of $138 (12% of $1,150) applies on July 15. Ammending taxes Also, tax will apply to any costs of additional parts and accessories installed on the vehicle before October 8. Ammending taxes First retail sale defined. Ammending taxes   The sale of an article is treated as the first retail sale, and the seller will be liable for the tax imposed on the sale unless one of the following exceptions applies. Ammending taxes There has been a prior taxable sale, lease, or use of the article (however, see Tax on resale of tax-paid trailers and semitrailers, later). Ammending taxes The sale qualifies as a tax-free sale under section 4221 (see Sales exempt from tax, later). Ammending taxes The seller in good faith accepts from the purchaser a statement signed under penalties of perjury and executed in good faith that the purchaser intends to resell the article or lease it on a long-term basis. Ammending taxes There is no registration requirement. Ammending taxes Leases. Ammending taxes   A long-term lease (a lease with a term of 1 year or more, taking into account options to renew) before a first retail sale is treated as a taxable sale. Ammending taxes The tax is imposed on the lessor at the time of the lease. Ammending taxes   A short-term lease (a lease with a term of less than 1 year, taking into account options to renew) before a first retail sale is treated as a taxable use. Ammending taxes The tax is imposed on the lessor at the time of the lease. Ammending taxes Exported vehicle. Ammending taxes   A vehicle exported before its first retail sale, used in a foreign country, and then returned to the United States is subject to the retail tax on its first domestic use or retail sale after importation. Ammending taxes Tax on resale of tax-paid trailers and semitrailers. Ammending taxes   The tax applies to a trailer or semitrailer resold within 6 months after having been sold in a taxable sale. Ammending taxes The seller liable for the tax on the resale can claim a credit equal to the tax paid on the prior taxable sale. Ammending taxes The credit cannot exceed the tax on the resale. Ammending taxes See Regulations section 145. Ammending taxes 4052-1(a)(4) for information on the conditions to allowance for the credit. Ammending taxes Use treated as sale. Ammending taxes   If any person uses a taxable article before the first retail sale of the article, that person is liable for the tax as if the article had been sold at retail by that person. Ammending taxes Figure the tax on the price at which similar articles are sold in the ordinary course of trade by retailers. Ammending taxes The tax attaches when the use begins. Ammending taxes   If the seller of an article regularly sells the articles at retail in arm's-length transactions, figure the tax on its use on the lowest established retail price for the articles in effect at the time of the taxable use. Ammending taxes   If the seller of an article does not regularly sell the articles at retail in arm's-length transactions, a constructive price on which the tax is figured will be determined by the IRS after considering the selling practices and price structures of sellers of similar articles. Ammending taxes   If a seller of an article incurs liability for tax on the use of the article and later sells or leases the article in a transaction that otherwise would be taxable, liability for tax is not incurred on the later sale or lease. Ammending taxes Presumptive retail sales price. Ammending taxes   There are rules to ensure that the tax base of transactions considered to be taxable sales includes either an actual or presumed markup percentage. Ammending taxes If the person liable for tax is the vehicle's manufacturer, producer, or importer, the following discussions show how you figure the presumptive retail sales price depending on the type of transaction and the persons involved in the transaction. Ammending taxes Table 6-1 outlines the appropriate tax base calculation for various transactions. Ammending taxes   The presumed markup percentage to be used for trucks and truck-tractors is 4%. Ammending taxes But for truck trailers and semitrailers and remanufactured trucks and tractors, the presumed markup percentage is zero. Ammending taxes Sale. Ammending taxes   For a taxable sale by a manufacturer, producer, importer, or related person, you generally figure the tax on a tax base of the sales price plus an amount equal to the presumed markup percentage times that sales price. Ammending taxes Long-term lease. Ammending taxes   In the case of a long-term lease by a manufacturer, producer, importer, or related person, figure the tax on a tax base of the constructive sales price plus an amount equal to the presumed markup percentage times the constructive sales price. Ammending taxes Short-term lease. Ammending taxes   When a manufacturer, producer, importer, or related person leases an article in a short-term lease considered a taxable use, figure the tax on a constructive sales price at which those or similar articles generally are sold in the ordinary course of trade by retailers. Ammending taxes   But if the lessor in this situation regularly sells articles at retail in arm's-length transactions, figure the tax on the lowest established retail price in effect at the time of the taxable use. Ammending taxes   If a person other than the manufacturer, producer, importer, or related person leases an article in a short-term lease considered a taxable use, figure the tax on a tax base of the price for which the article was sold to the lessor plus the cost of parts and accessories installed by the lessor and a presumed markup percentage. Ammending taxes Related person. Ammending taxes   A related person is any member of the same controlled group as the manufacturer, producer, or importer. Ammending taxes Do not treat as a related person a person that sells the articles through a permanent retail establishment in the normal course of being a retailer if that person has records to prove the article was sold for a price that included a markup equal to or greater than the presumed markup percentage. Ammending taxes Table 6-1. Ammending taxes Tax Base IF the transaction is a. Ammending taxes . Ammending taxes . Ammending taxes THEN figuring the base by using the. Ammending taxes . Ammending taxes . Ammending taxes Sale by the manufacturer, producer, importer, or related person Sales price plus (presumed markup percentage × sales price) Sale by the dealer Total consideration paid for the item including any charges incident to placing it in a condition ready for use Long-term lease by the manufacturer, producer, importer, or related person Constructive sales price plus (presumed markup percentage × constructive sales price) Short-term lease by the manufacturer, producer, importer, or related person Constructive sales price at which such or similar articles are sold Short-term lease by a lessor other than the manufacturer, producer, importer, or related person Price for which the article was sold to the lessor plus the cost of parts and accessories installed by the lessor plus a presumed markup percentage Short-term lease where the articles are regularly sold at arm's length Lowest established retail price in effect at the time of the taxable use General rule for sales by dealers to the consumer. Ammending taxes   For a taxable sale, other than a long-term lease, by a person other than a manufacturer, producer, importer, or related person, your tax base is the retail sales price as discussed next under Determination of tax base. Ammending taxes   When you sell an article to the consumer, generally you do not add a presumed markup to the tax base. Ammending taxes However, you do add a markup if all the following apply. Ammending taxes You do not perform any significant activities relating to the processing of the sale of a taxable article. Ammending taxes The main reason for processing the sale through you is to avoid or evade the presumed markup. Ammending taxes You do not have records proving that the article was sold for a price that included a markup equal to or greater than the presumed markup percentage. Ammending taxes In these situations, your tax base is the sales price plus an amount equal to the presumed markup percentage times that selling price. Ammending taxes Determination of tax base. Ammending taxes   These rules apply to both normal retail sales price and presumptive retail sales price computations. Ammending taxes To arrive at the tax base, the price is the total consideration paid (including trade-in allowance) for the item and includes any charge incident to placing the article in a condition ready for use. Ammending taxes However, see Presumptive retail sales price, earlier. Ammending taxes Exclusions from tax base. Ammending taxes   Exclude from the tax base the retail excise tax imposed on the sale. Ammending taxes Exclude any state or local retail sales tax if stated as a separate charge from the price whether the sales tax is imposed on the seller or purchaser. Ammending taxes Also exclude the value of any used component of the article furnished by the first user of the article. Ammending taxes   Exclude charges for transportation, delivery, insurance, and installation (other than installation charges for parts and accessories, discussed earlier) and other expenses incurred in connection with the delivery of an article to a purchaser. Ammending taxes These expenses are those incurred in delivery from the retail dealer to the customer. Ammending taxes In the case of delivery directly from the manufacturer to the dealer's customer, include the transportation and delivery charges to the extent the charges do not exceed what it would have cost to ship the article to the dealer. Ammending taxes   Exclude amounts charged for machinery or equipment that does not contribute to the highway transportation function of the vehicle, provided those charges are supported by adequate records. Ammending taxes For example, for an industrial vacuum loader vehicle, exclude amounts charged for the vacuum pump and hose, filter system, material separator, silencer or muffler, control cabinet, and ladder. Ammending taxes Similarly, for a sewer cleaning vehicle, exclude amounts charged for the high pressure water pump, hose components, and the vacuum pipe. Ammending taxes Sales not at arm's length. Ammending taxes   For any taxable article sold (not at arm's length) at less than the fair market price, figure the excise tax on the price for which similar articles are sold at retail in the ordinary course of trade. Ammending taxes   A sale is not at arm's length if either of the following apply. Ammending taxes One of the parties is controlled (in law or in fact) by the other or there is common control, whether or not the control is actually exercised to influence the sales price. Ammending taxes The sale is made under special arrangements between a seller and a purchaser. Ammending taxes Installment sales. Ammending taxes   If the first retail sale is an installment sale, or other form of sale in which the sales price is paid in installments, tax liability arises at the time of the sale. Ammending taxes The tax is figured on the entire sales price. Ammending taxes No part of the tax is deferred because the sales price is paid in installments. Ammending taxes Repairs and modifications. Ammending taxes   The tax does not apply to the sale or use of an article that has been repaired or modified unless the cost of the repairs and modifications is more than 75% of the retail price of a comparable new article. Ammending taxes This includes modifications that change the transportation function of an article or restore a wrecked article to a functional condition. Ammending taxes However, this exception generally does not apply to an article that was not subject to the tax when it was new. Ammending taxes Further manufacture. Ammending taxes   The tax does not apply to the use by a person of a taxable article as material in the manufacture or production of, or as a component part of, another article to be manufactured or produced by that person. Ammending taxes Do not treat a person as engaged in the manufacture of any article merely because that person combines the article with a: Coupling device (including any fifth wheel); Wrecker crane; Loading and unloading equipment (including any crane, hoist, winch, or power liftgate); Aerial ladder or tower; Ice and snow control equipment; Earth moving, excavation, and construction equipment; Spreader; Sleeper cab; Cab shield; or Wood or metal floor. Ammending taxes Combining an article with an item in this list does not give rise to taxability. Ammending taxes However, see Parts or accessories discussed earlier. Ammending taxes Articles exempt from tax. Ammending taxes   The tax on heavy trucks, trailers, and tractors does not apply to sales of the articles described in the following discussions. Ammending taxes Rail trailers and rail vans. Ammending taxes   This is any chassis or body of a trailer or semitrailer designed for use both as a highway vehicle and a railroad car (including any parts and accessories designed primarily for use on and in connection with it). Ammending taxes Do not treat a piggyback trailer or semitrailer as designed for use as a railroad car. Ammending taxes Parts and accessories. Ammending taxes   This is any part or accessory sold separately from the truck or trailer, except as described earlier under Parts or accessories and Separate purchase. Ammending taxes Trash containers. Ammending taxes   This is any box, container, receptacle, bin, or similar article that meets all the following conditions. Ammending taxes It is designed to be used as a trash container. Ammending taxes It is not designed to carry freight other than trash. Ammending taxes It is not designed to be permanently mounted on or affixed to a truck chassis or body. Ammending taxes House trailers. Ammending taxes   This is any house trailer (regardless of size) suitable for use in connection with either passenger automobiles or trucks. Ammending taxes Camper coaches or bodies for self-propelled mobile homes. Ammending taxes   This is any article designed to be mounted or placed on trucks, truck chassis, or automobile chassis and to be used primarily as living quarters or camping accommodations. Ammending taxes Further, the tax does not apply to chassis specifically designed and constructed to accommodate and transport self-propelled mobile home bodies. Ammending taxes Farm feed, seed, and fertilizer equipment. Ammending taxes   This is any body primarily designed to process or prepare, haul, spread, load, or unload feed, seed, or fertilizer to or on farms. Ammending taxes This exemption applies only to the farm equipment body (and parts and accessories) and not to the chassis upon which the farm equipment is mounted. Ammending taxes Ambulances and hearses. Ammending taxes   This is any ambulance, hearse, or combination ambulance-hearse. Ammending taxes Truck-tractors. Ammending taxes   This is any truck-tractor specifically designed for use in shifting semitrailers in and around freight yards and freight terminals. Ammending taxes Concrete mixers. Ammending taxes   This is any article designed to be placed or mounted on a truck, truck trailer, or semitrailer chassis to be used to process or prepare concrete. Ammending taxes This exemption does not apply to the chassis on which the article is mounted. Ammending taxes Sales exempt from tax. Ammending taxes   The following sales are ordinarily exempt from tax. Ammending taxes Sales to a state or local government for its exclusive use. Ammending taxes Sales to Indian tribal governments, but only if the transaction involves the exercise of an essential tribal government function. Ammending taxes Sales to a nonprofit educational organization for its exclusive use. Ammending taxes Sales to a qualified blood collector organization (as defined under Communications Tax in chapter 4) for its exclusive use in the collection, storage, or transportation of blood. Ammending taxes Sales for use by the purchaser for further manufacture of other taxable articles (see below). Ammending taxes Sales for export or for resale by the purchaser to a second purchaser for export. Ammending taxes Sales to the United Nations for official use. Ammending taxes Registration requirement. Ammending taxes   In general, the seller and buyer must be registered for a sale to be tax free. Ammending taxes See the Form 637 instructions for more information. Ammending taxes Certain registration exceptions apply in the case of sales to state and local governments, sales to foreign purchasers for export, and sales for resale or long term leasing. Ammending taxes Further manufacture. Ammending taxes   If you buy articles tax free and resell or use them other than in the manufacture of another article, you are liable for the tax on their resale or use just as if you had manufactured and made the first retail sale of them. Ammending taxes Credits or refunds. Ammending taxes   A credit or refund (without interest) of the retail tax on the taxable articles described earlier may be allowable if the tax has been paid with respect to an article and, before any other use, such article is used by any person as a component part of another taxable article manufactured or produced. Ammending taxes The person using the article as a component part is eligible for the credit or refund. Ammending taxes   A credit or refund is allowable if, before any other use, an article is, by any person: Exported, Used or sold for use as supplies for vessels, Sold to a state or local government for its exclusive use, Sold to a nonprofit educational organization for its exclusive use, or Sold to a qualified blood collector organization (as defined under Communications Tax in chapter 4) for its exclusive use in the collection, storage, or transportation of blood. Ammending taxes A credit or refund is also allowable if there is a price readjustment by reason of the return or repossession of an article or by reason of a bona fide discount, rebate, or allowance. Ammending taxes   See also Conditions to allowance in chapter 5. Ammending taxes Tire credit. Ammending taxes   A credit is allowed against the retail tax on the taxable articles described earlier if taxable tires are sold on or in connection with the sale of the article. Ammending taxes The credit is equal to the manufacturers excise tax imposed on the taxable tires (discussed earlier). Ammending taxes This is the section 4051(d) taxable tire credit and is claimed on Schedule C (Form 720) for the same quarter for which the tax on the heavy vehicle is reported. Ammending taxes Prev  Up  Next   Home   More Online Publications
 
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The Ammending Taxes

Ammending taxes 23. Ammending taxes   Interest Expense Table of Contents Introduction Useful Items - You may want to see: Home Mortgage InterestAmount Deductible Points Mortgage Insurance Premiums Form 1098, Mortgage Interest Statement Investment InterestInvestment Property Allocation of Interest Expense Limit on Deduction Items You Cannot DeductPersonal Interest Allocation of Interest How To ReportMore than one borrower. Ammending taxes Mortgage proceeds used for business or investment. Ammending taxes Introduction This chapter discusses what interest expenses you can deduct. Ammending taxes Interest is the amount you pay for the use of borrowed money. Ammending taxes The following are types of interest you can deduct as itemized deductions on Schedule A (Form 1040). Ammending taxes Home mortgage interest, including certain points and mortgage insurance premiums. Ammending taxes Investment interest. Ammending taxes This chapter explains these deductions. Ammending taxes It also explains where to deduct other types of interest and lists some types of interest you cannot deduct. Ammending taxes Use Table 23-1 to find out where to get more information on various types of interest, including investment interest. Ammending taxes Useful Items - You may want to see: Publication 936 Home Mortgage Interest Deduction 550 Investment Income and Expenses Home Mortgage Interest Generally, home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). Ammending taxes The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan. Ammending taxes You can deduct home mortgage interest if all the following conditions are met. Ammending taxes You file Form 1040 and itemize deductions on Schedule A (Form 1040). Ammending taxes The mortgage is a secured debt on a qualified home in which you have an ownership interest. Ammending taxes (Generally, your mortgage is a secured debt if you put your home up as collateral to protect the interest of the lender. Ammending taxes The term “qualified home” means your main home or second home. Ammending taxes For details, see Publication 936. Ammending taxes )  Both you and the lender must intend that the loan be repaid. Ammending taxes Amount Deductible In most cases, you can deduct all of your home mortgage interest. Ammending taxes How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds. Ammending taxes Fully deductible interest. Ammending taxes   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. Ammending taxes (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. Ammending taxes )   The three categories are as follows: Mortgages you took out on or before October 13, 1987 (called grandfathered debt). Ammending taxes 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). Ammending taxes 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). Ammending taxes The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home. Ammending taxes   See Part II of Publication 936 for more detailed definitions of grandfathered, home acquisition, and home equity debt. Ammending taxes    You can use Figure 23-A to check whether your home mortgage interest is fully deductible. Ammending taxes Figure 23-A. Ammending taxes Is My Home Mortgage Interest Fully Deductible? Please click here for the text description of the image. Ammending taxes Figure 23-A. Ammending taxes Is My Interest Fully Deductible? Limits on deduction. Ammending taxes   You cannot fully deduct interest on a mortgage that does not fit into any of the three categories listed earlier. Ammending taxes If this applies to you, see Part II of Publication 936 to figure the amount of interest you can deduct. Ammending taxes Special Situations This section describes certain items that can be included as home mortgage interest and others that cannot. Ammending taxes It also describes certain special situations that may affect your deduction. Ammending taxes Late payment charge on mortgage payment. Ammending taxes   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. Ammending taxes Mortgage prepayment penalty. Ammending taxes   If you pay off your home mortgage early, you may have to pay a penalty. Ammending taxes 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. Ammending taxes Sale of home. Ammending taxes   If you sell your home, you can deduct your home mortgage interest (subject to any limits that apply) paid up to, but not including, the date of sale. Ammending taxes Example. Ammending taxes John and Peggy Harris sold their home on May 7. Ammending taxes Through April 30, they made home mortgage interest payments of $1,220. Ammending taxes 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. Ammending taxes Their mortgage interest deduction is $1,270 ($1,220 + $50). Ammending taxes Prepaid interest. Ammending taxes   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. Ammending taxes You can deduct in each year only the interest that qualifies as home mortgage interest for that year. Ammending taxes However, there is an exception that applies to points, discussed later. Ammending taxes Mortgage interest credit. Ammending taxes   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. Ammending taxes Figure the credit on Form 8396, Mortgage Interest Credit. Ammending taxes If you take this credit, you must reduce your mortgage interest deduction by the amount of the credit. Ammending taxes   For more information on the credit, see chapter 37. Ammending taxes Ministers' and military housing allowance. Ammending taxes   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. Ammending taxes Hardest Hit Fund and Emergency Homeowners' Loan Programs. Ammending taxes   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. Ammending taxes 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. Ammending taxes 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. Ammending taxes If you meet these tests, then you can deduct all of the payments you actually made during the year to your mortgage servicer, the State HFA, or HUD on the home mortgage (including the amount shown on box 3 of Form 1098-MA, Mortgage Assistance Payments), but not more than the sum of the amounts shown on Form 1098, Mortgage Interest Statement, in box 1 (mortgage interest received from payer(s) / borrower(s)), box 4 (mortgage insurance premiums) and box 5 (real property taxes). Ammending taxes 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. Ammending taxes Mortgage assistance payments under section 235 of the National Housing Act. Ammending taxes   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. Ammending taxes You cannot deduct the interest that is paid for you. Ammending taxes No other effect on taxes. Ammending taxes   Do not include these mortgage assistance payments in your income. Ammending taxes Also, do not use these payments to reduce other deductions, such as real estate taxes. Ammending taxes Divorced or separated individuals. Ammending taxes   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. Ammending taxes See the discussion of Payments for jointly-owned home in chapter 18. Ammending taxes Redeemable ground rents. Ammending taxes   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct them as mortgage interest. Ammending taxes   Payments made to end the lease and to buy the lessor's entire interest in the land are not deductible as mortgage interest. Ammending taxes For more information, see Publication 936. Ammending taxes Nonredeemable ground rents. Ammending taxes   Payments on a nonredeemable ground rent are not mortgage interest. Ammending taxes You can deduct them as rent if they are a business expense or if they are for rental property. Ammending taxes Reverse mortgages. Ammending taxes   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. Ammending taxes With a reverse mortgage, you retain title to your home. Ammending taxes 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. Ammending taxes Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable. Ammending taxes Any interest (including original issue discount) accrued on a reverse mortgage is not deductible until the loan is paid in full. Ammending taxes Your deduction may be limited because a reverse mortgage loan generally is subject to the limit on Home Equity Debt discussed in Publication 936. Ammending taxes Rental payments. Ammending taxes   If you live in a house before final settlement on the purchase, any payments you make for that period are rent and not interest. Ammending taxes This is true even if the settlement papers call them interest. Ammending taxes You cannot deduct these payments as home mortgage interest. Ammending taxes Mortgage proceeds invested in tax-exempt securities. Ammending taxes   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. Ammending taxes “Grandfathered debt” and “home equity debt” are defined earlier under Amount Deductible. Ammending taxes Refunds of interest. Ammending taxes   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. Ammending taxes 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. Ammending taxes However, you need to include it only up to the amount of the deduction that reduced your tax in the earlier year. Ammending taxes This is true whether the interest overcharge was refunded to you or was used to reduce the outstanding principal on your mortgage. Ammending taxes    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. Ammending taxes For information about Form 1098, see Form 1098, Mortgage Interest Statement , later. Ammending taxes   For more information on how to treat refunds of interest deducted in earlier years, see Recoveries in chapter 12. Ammending taxes Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Ammending taxes Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. Ammending taxes A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. Ammending taxes See Points paid by the seller , later. Ammending taxes General Rule You generally cannot deduct the full amount of points in the year paid. Ammending taxes Because they are prepaid interest, you generally deduct them ratably over the life (term) of the mortgage. Ammending taxes See Deduction Allowed Ratably , next. Ammending taxes For exceptions to the general rule, see Deduction Allowed in Year Paid , later. Ammending taxes 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. Ammending taxes You use the cash method of accounting. Ammending taxes This means you report income in the year you receive it and deduct expenses in the year you pay them. Ammending taxes Most individuals use this method. Ammending taxes Your loan is secured by a home. Ammending taxes (The home does not need to be your main home. Ammending taxes ) Your loan period is not more than 30 years. Ammending taxes 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. Ammending taxes 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. Ammending taxes Deduction Allowed in Year Paid You can fully deduct points in the year paid if you meet all the following tests. Ammending taxes (You can use Figure 23-B as a quick guide to see whether your points are fully deductible in the year paid. Ammending taxes ) Your loan is secured by your main home. Ammending taxes (Your main home is the one you ordinarily live in most of the time. Ammending taxes ) Paying points is an established business practice in the area where the loan was made. Ammending taxes The points paid were not more than the points generally charged in that area. Ammending taxes You use the cash method of accounting. Ammending taxes This means you report income in the year you receive it and deduct expenses in the year you pay them. Ammending taxes (If you want more information about this method, see Accounting Methods in chapter 1. Ammending taxes ) 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. Ammending taxes The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. Ammending taxes The funds you provided are not required to have been applied to the points. Ammending taxes They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. Ammending taxes You cannot have borrowed these funds from your lender or mortgage broker. Ammending taxes You use your loan to buy or build your main home. Ammending taxes The points were computed as a percentage of the principal amount of the mortgage. Ammending taxes The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. Ammending taxes The points may be shown as paid from either your funds or the seller's. Ammending taxes Figure 23-B. Ammending taxes Are My Points Fully Deductible This Year? Please click here for the text description of the image. Ammending taxes Figure 23-B. Ammending taxes Are My Points Fully Deductible This Year? Note. Ammending taxes 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. Ammending taxes Home improvement loan. Ammending taxes   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. Ammending taxes Second home. Ammending taxes You cannot fully deduct in the year paid points you pay on loans secured by your second home. Ammending taxes You can deduct these points only over the life of the loan. Ammending taxes Refinancing. Ammending taxes   Generally, points you pay to refinance a mortgage are not deductible in full in the year you pay them. Ammending taxes This is true even if the new mortgage is secured by your main home. Ammending taxes   However, if you use part of the refinanced mortgage proceeds to improve your main home and you meet the first 6 tests listed under Deduction Allowed in Year Paid , earlier, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. Ammending taxes You can deduct the rest of the points over the life of the loan. Ammending taxes Example 1. Ammending taxes In 1998, Bill Fields got a mortgage to buy a home. Ammending taxes In 2013, Bill refinanced that mortgage with a 15-year $100,000 mortgage loan. Ammending taxes The mortgage is secured by his home. Ammending taxes To get the new loan, he had to pay three points ($3,000). Ammending taxes 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. Ammending taxes Bill paid the points out of his private funds, rather than out of the proceeds of the new loan. Ammending taxes The payment of points is an established practice in the area, and the points charged are not more than the amount generally charged there. Ammending taxes Bill's first payment on the new loan was due July 1. Ammending taxes He made six payments on the loan in 2013 and is a cash basis taxpayer. Ammending taxes Bill used the funds from the new mortgage to repay his existing mortgage. Ammending taxes 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. Ammending taxes He cannot deduct all of the points in 2013. Ammending taxes He can deduct two points ($2,000) ratably over the life of the loan. Ammending taxes He deducts $67 [($2,000 ÷ 180 months) × 6 payments] of the points in 2013. Ammending taxes The other point ($1,000) was a fee for services and is not deductible. Ammending taxes Example 2. Ammending taxes 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. Ammending taxes Bill deducts 25% ($25,000 ÷ $100,000) of the points ($2,000) in 2013. Ammending taxes His deduction is $500 ($2,000 × 25%). Ammending taxes Bill also deducts the ratable part of the remaining $1,500 ($2,000 − $500) that must be spread over the life of the loan. Ammending taxes This is $50 [($1,500 ÷ 180 months) × 6 payments] in 2013. Ammending taxes The total amount Bill deducts in 2013 is $550 ($500 + $50). Ammending taxes Special Situations This section describes certain special situations that may affect your deduction of points. Ammending taxes Original issue discount. Ammending taxes   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. Ammending taxes This reduction results in original issue discount, which is discussed in chapter 4 of Publication 535. Ammending taxes Amounts charged for services. Ammending taxes   Amounts charged by the lender for specific services connected to the loan are not interest. Ammending taxes Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. Ammending taxes You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. Ammending taxes Points paid by the seller. Ammending taxes   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. Ammending taxes Treatment by seller. Ammending taxes   The seller cannot deduct these fees as interest. Ammending taxes But they are a selling expense that reduces the amount realized by the seller. Ammending taxes See chapter 15 for information on selling your home. Ammending taxes Treatment by buyer. Ammending taxes    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. Ammending taxes If all the tests under Deduction Allowed in Year Paid , earlier, are met, the buyer can deduct the points in the year paid. Ammending taxes If any of those tests are not met, the buyer deducts the points over the life of the loan. Ammending taxes   For information about basis, see chapter 13. Ammending taxes Funds provided are less than points. Ammending taxes   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. Ammending taxes In addition, you can deduct any points paid by the seller. Ammending taxes Example 1. Ammending taxes When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). Ammending taxes You meet all the tests for deducting points in the year paid, except the only funds you provided were a $750 down payment. Ammending taxes Of the $1,000 charged for points, you can deduct $750 in the year paid. Ammending taxes You spread the remaining $250 over the life of the mortgage. Ammending taxes Example 2. Ammending taxes 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. Ammending taxes In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). Ammending taxes You spread the remaining $250 over the life of the mortgage. Ammending taxes You must reduce the basis of your home by the $1,000 paid by the seller. Ammending taxes Excess points. Ammending taxes   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. Ammending taxes You must spread any additional points over the life of the mortgage. Ammending taxes Mortgage ending early. Ammending taxes   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. Ammending taxes However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. Ammending taxes Instead, deduct the remaining balance over the term of the new loan. Ammending taxes    A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. Ammending taxes Example. Ammending taxes Dan paid $3,000 in points in 2002 that he had to spread out over the 15-year life of the mortgage. Ammending taxes He deducts $200 points per year. Ammending taxes Through 2012, Dan has deducted $2,200 of the points. Ammending taxes Dan prepaid his mortgage in full in 2013. Ammending taxes He can deduct the remaining $800 of points in 2013. Ammending taxes Limits on deduction. Ammending taxes   You cannot fully deduct points paid on a mortgage unless the mortgage fits into one of the categories listed earlier under Fully deductible interest . Ammending taxes See Publication 936 for details. Ammending taxes Mortgage Insurance Premiums You can treat amounts you paid during 2013 for qualified mortgage insurance as home mortgage interest. Ammending taxes The insurance must be in connection with home acquisition debt and the insurance contract must have been issued after 2006. Ammending taxes Qualified mortgage insurance. Ammending taxes   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). Ammending taxes   Mortgage insurance provided by the Department of Veterans Affairs is commonly known as a funding fee. Ammending taxes If provided by the Rural Housing Service, it is commonly known as a guarantee fee. Ammending taxes These fees can be deducted fully in 2013 if the mortgage insurance contract was issued in 2013. Ammending taxes Contact the mortgage insurance issuer to determine the deductible amount if it is not reported in box 4 of Form 1098. Ammending taxes Special rules for prepaid mortgage insurance. Ammending taxes   Generally, if you paid premiums for qualified mortgage insurance that are allocable to periods after the close of the tax year, such premiums are treated as paid in the period to which they are allocated. Ammending taxes 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. Ammending taxes No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term. Ammending taxes This paragraph does not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service. Ammending taxes See the Example below. Ammending taxes Example. Ammending taxes Ryan purchased a home in May of 2012 and financed the home with a 15-year mortgage. Ammending taxes Ryan also prepaid all of the $9,240 in private mortgage insurance required at the time of closing in May. Ammending taxes 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. Ammending taxes Ryan's adjusted gross income (AGI) for 2012 is $76,000. Ammending taxes Ryan can deduct $880 ($9,240 ÷ 84 × 8 months) for qualified mortgage insurance premiums in 2012. Ammending taxes For 2013, Ryan can deduct $1,320 ($9,240 ÷ 84 × 12 months) if his AGI is $100,000 or less. Ammending taxes 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). Ammending taxes Limit on deduction. Ammending taxes   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. Ammending taxes 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. Ammending taxes If your adjusted gross income is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. Ammending taxes 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. Ammending taxes 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. Ammending taxes A governmental unit is a person for purposes of furnishing the statement. Ammending taxes The statement for each year should be sent to you by January 31 of the following year. Ammending taxes A copy of this form will also be sent to the IRS. Ammending taxes 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. Ammending taxes However, it should not show any interest that was paid for you by a government agency. Ammending taxes As a general rule, Form 1098 will include only points that you can fully deduct in the year paid. Ammending taxes However, certain points not included on Form 1098 also may be deductible, either in the year paid or over the life of the loan. Ammending taxes See Points , earlier, to determine whether you can deduct points not shown on Form 1098. Ammending taxes Prepaid interest on Form 1098. Ammending taxes   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. Ammending taxes However, you cannot deduct the prepaid amount for January 2014 in 2013. Ammending taxes (See Prepaid interest , earlier. Ammending taxes ) You will have to figure the interest that accrued for 2014 and subtract it from the amount in box 1. Ammending taxes You will include the interest for January 2014 with the other interest you pay for 2014. Ammending taxes See How To Report , later. Ammending taxes Refunded interest. Ammending taxes   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. Ammending taxes See Refunds of interest , earlier. Ammending taxes Mortgage insurance premiums. Ammending taxes   The amount of mortgage insurance premiums you paid during 2013 may be shown in box 4 of Form 1098. Ammending taxes See Mortgage Insurance Premiums, earlier. Ammending taxes Investment Interest This section discusses interest expenses you may be able to deduct as an investor. Ammending taxes If you borrow money to buy property you hold for investment, the interest you pay is investment interest. Ammending taxes You can deduct investment interest subject to the limit discussed later. Ammending taxes However, you cannot deduct interest you incurred to produce tax-exempt income. Ammending taxes Nor can you deduct interest expenses on straddles. Ammending taxes Investment interest does not include any qualified home mortgage interest or any interest taken into account in computing income or loss from a passive activity. Ammending taxes Investment Property Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. Ammending taxes It also includes property that produces gain or loss (not derived in the ordinary course of a trade or business) from the sale or trade of property producing these types of income or held for investment (other than an interest in a passive activity). Ammending taxes Investment property also includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity). Ammending taxes Partners, shareholders, and beneficiaries. Ammending taxes   To determine your investment interest, combine your share of investment interest from a partnership, S corporation, estate, or trust with your other investment interest. Ammending taxes Allocation of Interest Expense If you borrow money for business or personal purposes as well as for investment, you must allocate the debt among those purposes. Ammending taxes Only the interest expense on the part of the debt used for investment purposes is treated as investment interest. Ammending taxes The allocation is not affected by the use of property that secures the debt. Ammending taxes Limit on Deduction Generally, your deduction for investment interest expense is limited to the amount of your net investment income. Ammending taxes You can carry over the amount of investment interest that you could not deduct because of this limit to the next tax year. Ammending taxes The interest carried over is treated as investment interest paid or accrued in that next year. Ammending taxes You can carry over disallowed investment interest to the next tax year even if it is more than your taxable income in the year the interest was paid or accrued. Ammending taxes Net Investment Income Determine the amount of your net investment income by subtracting your investment expenses (other than interest expense) from your investment income. Ammending taxes Investment income. Ammending taxes    This generally includes your gross income from property held for investment (such as interest, dividends, annuities, and royalties). Ammending taxes Investment income does not include Alaska Permanent Fund dividends. Ammending taxes It also does not include qualified dividends or net capital gain unless you choose to include them. Ammending taxes Choosing to include qualified dividends. Ammending taxes   Investment income generally does not include qualified dividends, discussed in chapter 8. Ammending taxes However, you can choose to include all or part of your qualified dividends in investment income. Ammending taxes   You make this choice by completing Form 4952, line 4g, according to its instructions. Ammending taxes   If you choose to include any amount of your qualified dividends in investment income, you must reduce your qualified dividends that are eligible for the lower capital gains tax rates by the same amount. Ammending taxes Choosing to include net capital gain. Ammending taxes   Investment income generally does not include net capital gain from disposing of investment property (including capital gain distributions from mutual funds). Ammending taxes However, you can choose to include all or part of your net capital gain in investment income. Ammending taxes    You make this choice by completing Form 4952, line 4g, according to its instructions. Ammending taxes   If you choose to include any amount of your net capital gain in investment income, you must reduce your net capital gain that is eligible for the lower capital gains tax rates by the same amount. Ammending taxes    Before making either choice, consider the overall effect on your tax liability. Ammending taxes Compare your tax if you make one or both of these choices with your tax if you do not. Ammending taxes Investment income of child reported on parent's return. Ammending taxes    Investment income includes the part of your child's interest and dividend income that you choose to report on your return. Ammending taxes If the child does not have qualified dividends, Alaska Permanent Fund dividends, or capital gain distributions, this is the amount on line 6 of Form 8814, Parents' Election To Report Child's Interest and Dividends. Ammending taxes Child's qualified dividends. Ammending taxes   If part of the amount you report is your child's qualified dividends, that part (which is reported on Form 1040, line 9b) generally does not count as investment income. Ammending taxes However, you can choose to include all or part of it in investment income, as explained under Choosing to include qualified dividends , earlier. Ammending taxes   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured next under Child's Alaska Permanent Fund dividends). Ammending taxes Child's Alaska Permanent Fund dividends. Ammending taxes   If part of the amount you report is your child's Alaska Permanent Fund dividends, that part does not count as investment income. Ammending taxes To figure the amount of your child's income that you can consider your investment income, start with the amount on Form 8814, line 6. Ammending taxes Multiply that amount by a percentage that is equal to the Alaska Permanent Fund dividends divided by the total amount on Form 8814, line 4. Ammending taxes Subtract the result from the amount on Form 8814, line 12. Ammending taxes Child's capital gain distributions. Ammending taxes    If part of the amount you report is your child's capital gain distributions, that part (which is reported on Schedule D, line 13, or Form 1040, line 13) generally does not count as investment income. Ammending taxes However, you can choose to include all or part of it in investment income, as explained in Choosing to include net capital gain , earlier. Ammending taxes   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured under Child's Alaska Permanent Fund dividends , earlier). Ammending taxes Investment expenses. Ammending taxes   Investment expenses are your allowed deductions (other than interest expense) directly connected with the production of investment income. Ammending taxes Investment expenses that are included as a miscellaneous itemized deduction on Schedule A (Form 1040) are allowable deductions after applying the 2% limit that applies to miscellaneous itemized deductions. Ammending taxes Use the smaller of: The investment expenses included on Schedule A (Form 1040), line 23, or The amount on Schedule A, line 27. Ammending taxes Losses from passive activities. Ammending taxes   Income or expenses that you used in computing income or loss from a passive activity are not included in determining your investment income or investment expenses (including investment interest expense). Ammending taxes See Publication 925, Passive Activity and At-Risk Rules, for information about passive activities. Ammending taxes Form 4952 Use Form 4952, Investment Interest Expense Deduction, to figure your deduction for investment interest. Ammending taxes Exception to use of Form 4952. Ammending taxes   You do not have to complete Form 4952 or attach it to your return if you meet all of the following tests. Ammending taxes Your investment interest expense is not more than your investment income from interest and ordinary dividends minus any qualified dividends. Ammending taxes You do not have any other deductible investment expenses. Ammending taxes You have no carryover of investment interest expense from 2012. Ammending taxes If you meet all of these tests, you can deduct all of your investment interest. Ammending taxes More Information For more information on investment interest, see Interest Expenses in chapter 3 of Publication 550. Ammending taxes Items You Cannot Deduct Some interest payments are not deductible. Ammending taxes Certain expenses similar to interest also are not deductible. Ammending taxes Nondeductible expenses include the following items. Ammending taxes Personal interest (discussed later). Ammending taxes Service charges (however, see Other Expenses (Line 23) in chapter 28). Ammending taxes Annual fees for credit cards. Ammending taxes Loan fees. Ammending taxes Credit investigation fees. Ammending taxes Interest to purchase or carry tax-exempt securities. Ammending taxes Penalties. Ammending taxes   You cannot deduct fines and penalties paid to a government for violations of law, regardless of their nature. Ammending taxes Personal Interest Personal interest is not deductible. Ammending taxes Personal interest is any interest that is not home mortgage interest, investment interest, business interest, or other deductible interest. Ammending taxes It includes the following items. Ammending taxes Interest on car loans (unless you use the car for business). Ammending taxes Interest on federal, state, or local income tax. Ammending taxes Finance charges on credit cards, retail installment contracts, and revolving charge accounts incurred for personal expenses. Ammending taxes Late payment charges by a public utility. Ammending taxes You may be able to deduct interest you pay on a qualified student loan. Ammending taxes For details, see Publication 970, Tax Benefits for Education. Ammending taxes Allocation of Interest If you use the proceeds of a loan for more than one purpose (for example, personal and business), you must allocate the interest on the loan to each use. Ammending taxes However, you do not have to allocate home mortgage interest if it is fully deductible, regardless of how the funds are used. Ammending taxes You allocate interest (other than fully deductible home mortgage interest) on a loan in the same way as the loan itself is allocated. Ammending taxes You do this by tracing disbursements of the debt proceeds to specific uses. Ammending taxes For details on how to do this, see chapter 4 of Publication 535. Ammending taxes How To Report You must file Form 1040 to deduct any home mortgage interest expense on your tax return. Ammending taxes Where you deduct your interest expense generally depends on how you use the loan proceeds. Ammending taxes See Table 23-1 for a summary of where to deduct your interest expense. Ammending taxes Home mortgage interest and points. Ammending taxes   Deduct the home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 10. Ammending taxes 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. Ammending taxes Attach a statement explaining the difference and print “See attached” next to line 10. Ammending taxes    Deduct home mortgage interest that was not reported to you on Form 1098 on Schedule A (Form 1040), line 11. Ammending taxes 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. Ammending taxes The seller must give you this number and you must give the seller your TIN. Ammending taxes A Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. Ammending taxes Failure to meet any of these requirements may result in a $50 penalty for each failure. Ammending taxes 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. Ammending taxes See Social Security Number (SSN) in chapter 1 for more information about TINs. Ammending taxes    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. Ammending taxes   Deduct mortgage insurance premiums on Schedule A (Form 1040), line 13. Ammending taxes More than one borrower. Ammending taxes   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. Ammending taxes Show how much of the interest each of you paid, and give the name and address of the person who received the form. Ammending taxes Deduct your share of the interest on Schedule A (Form 1040), line 11, and print “See attached” next to the line. Ammending taxes Also, deduct your share of any qualified mortgage insurance premiums on Schedule A (Form 1040), line 13. Ammending taxes   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. Ammending taxes You should let each of the other borrowers know what his or her share is. Ammending taxes Mortgage proceeds used for business or investment. Ammending taxes    If your home mortgage interest deduction is limited, but all or part of the mortgage proceeds were used for business, investment, or other deductible activities, see Table 23-1. Ammending taxes It shows where to deduct the part of your excess interest that is for those activities. Ammending taxes Investment interest. Ammending taxes    Deduct investment interest, subject to certain limits discussed in Publication 550, on Schedule A (Form 1040), line 14. Ammending taxes Amortization of bond premium. Ammending taxes   There are various ways to treat the premium you pay to buy taxable bonds. Ammending taxes See Bond Premium Amortization in Publication 550. Ammending taxes Income-producing rental or royalty interest. Ammending taxes   Deduct interest on a loan for income-producing rental or royalty property that is not used in your business in Part I of Schedule E (Form 1040). Ammending taxes Example. Ammending taxes You rent out part of your home and borrow money to make repairs. Ammending taxes You can deduct only the interest payment for the rented part in Part I of Schedule E (Form 1040). Ammending taxes Deduct the rest of the interest payment on Schedule A (Form 1040) if it is deductible home mortgage interest. Ammending taxes Table 23-1. Ammending taxes Where To Deduct Your Interest Expense IF you have . Ammending taxes . Ammending taxes . Ammending taxes THEN deduct it on . Ammending taxes . Ammending taxes . Ammending taxes AND for more information go to . Ammending taxes . Ammending taxes . Ammending taxes deductible student loan interest Form 1040, line 33, or Form 1040A, line 18 Publication 970. Ammending taxes deductible home mortgage interest and points reported on Form 1098 Schedule A (Form 1040), line 10 Publication 936. Ammending taxes deductible home mortgage interest not reported on Form 1098 Schedule A (Form 1040), line 11 Publication 936. Ammending taxes deductible points not reported on Form 1098 Schedule A (Form 1040), line 12 Publication 936. Ammending taxes deductible mortgage insurance premiums Schedule A (Form 1040), line 13 Publication 936. Ammending taxes deductible investment interest (other than incurred to produce rents or royalties) Schedule A (Form 1040), line 14 Publication 550. Ammending taxes deductible business interest (non-farm) Schedule C or C-EZ (Form 1040) Publication 535. Ammending taxes deductible farm business interest Schedule F (Form 1040) Publications 225 and 535. Ammending taxes deductible interest incurred to produce rents or royalties Schedule E (Form 1040) Publications 527 and 535. Ammending taxes personal interest not deductible. Ammending taxes Prev  Up  Next   Home   More Online Publications