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Federal Tax Software

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

Chattanooga, TN

Website: Better Business Bureau

Email: tngabbb@chattanooga.bbb.org

Address: Better Business Bureau
508 N. Market St.
Chattanooga, TN 37405

Phone Number: 423-266-6144

Clarksville, TN

Website: Better Business Bureau

Email: bbbclarks@gobbb.org

Address: Better Business Bureau
214 Main St.
Clarksville, TN 37040

Phone Number: 931-503-2222

Columbia, TN

Website: Better Business Bureau

Email: bbbTNVal@gobbb.org

Address: Better Business Bureau
502 N. Garden St., Suite 201
Columbia, TN 38401

Phone Number: 931-388-9222

Cookeville, TN

Website: Better Business Bureau

Email: bbbcumberland@gobbb.org

Address: Better Business Bureau
18 N. Jefferson St.
Cookeville, TN 38501

Phone Number: 931-520-0008

Franklin, TN

Website: Better Business Bureau

Email: BBBWilliamsonCty@gobbb.org

Address: Better Business Bureau
367 Riverside Dr., Suite 110
Franklin, TN 37064

Phone Number: 615-250-7431

Knoxville, TN

Website: Better Business Bureau

Email: info@knoxville.bbb.org

Address: Better Business Bureau
255 N. Peters Rd., Suite A
Knoxville, TN 37923

Phone Number: 865-692-1600

Memphis, TN

Website: Better Business Bureau

Address: Better Business Bureau
3693 Tyndale Dr.
Memphis, TN 38125

Phone Number: 901-759-1300

Toll-free: 1-800-222-8754

Murfreesboro, TN

Website: Better Business Bureau

Email: BBBMurf@gobbb.org

Address: Better Business Bureau
530 Uptown Square
Murfreesboro, TN 37129

Phone Number: 615-242-4222

Nashville, TN

Website: Better Business Bureau

Email: BBBNash@gobbb.org

Address: Better Business Bureau
201 4th Ave. N., Suite 100
Nashville, TN 37219

Phone Number: 615-242-4222

The Federal Tax Software

Federal tax software Index A Adjusted basis, Adjusted Basis Assessments For local benefits, Assessments for local benefits. Federal tax software Homeowners association, Homeowners association assessments. Federal tax software Assistance (see Tax help) B Basis, Basis C Certificate, mortgage credit, Who qualifies. Federal tax software Construction, Construction. Federal tax software Cooperatives, Special Rules for Cooperatives, Cooperative apartment. Federal tax software Cost basis, Cost as Basis Credit Mortgage interest, Mortgage Interest Credit D Deduction Home mortgage interest, Deductible Mortgage Interest Real estate taxes, Deductible Real Estate Taxes E Emergency Homeowners' Loan Program, Hardest Hit Fund and Emergency Homeowners' Loan Programs Escrow accounts, Escrow accounts. Federal tax software F Fire insurance premiums, Items not added to basis and not deductible. Federal tax software Form 1098, Mortgage Interest Statement 8396, How to claim the credit. Federal tax software , Figuring the Credit Free tax services, Free help with your tax return. Federal tax software G Gift of home, Gift Ground rent, Ground rent. Federal tax software H Help (see Tax help) HFA Hardest Hit Fund, Hardest Hit Fund and Emergency Homeowners' Loan Programs Home Acquisition debt, Home Acquisition Debt Inherited, Inheritance Mortgage interest, Home Mortgage Interest Purchase of, Purchase. Federal tax software Received as gift, Gift Homeowners association assessments, Homeowners association assessments. Federal tax software House payment, Your house payment. Federal tax software Housing allowance, minister or military, Minister's or military housing allowance. Federal tax software I Improvements, Improvements. Federal tax software Inheritance, Inheritance Insurance, Nondeductible payments. Federal tax software , Items not added to basis and not deductible. Federal tax software Interest Home mortgage, Home Mortgage Interest Prepaid, Prepaid interest. Federal tax software K Keeping records, Keeping Records L Late payment charge, Late payment charge on mortgage payment. Federal tax software Local benefits, assessments for, Assessments for local benefits. Federal tax software M MCC (Mortgage credit certificate), Who qualifies. Federal tax software Minister's or military housing allowance, Minister's or military housing allowance. Federal tax software Mortgage credit certificate (MCC), Who qualifies. Federal tax software Mortgage debt forgiveness, Discharges of qualified principal residence indebtedness. Federal tax software Mortgage insurance premiums, Mortgage Insurance Premiums Mortgage interest Credit, Mortgage Interest Credit Deduction, Deductible Mortgage Interest Late payment charge, Late payment charge on mortgage payment. Federal tax software Paid at settlement, Mortgage Interest Paid at Settlement Refund, Refund of home mortgage interest. Federal tax software , Refund of overpaid interest. Federal tax software Statement, Mortgage Interest Statement Mortgage prepayment penalty, Mortgage prepayment penalty. Federal tax software N Nondeductible payments, Nondeductible payments. Federal tax software , Items not added to basis and not deductible. Federal tax software P Points, Points Prepaid interest, Prepaid interest. Federal tax software Publications (see Tax help) R Real estate taxes, Real Estate Taxes Deductible, Deductible Real Estate Taxes Paid at settlement or closing, Real estate taxes paid at settlement or closing. Federal tax software , Real estate taxes. Federal tax software Refund or rebate, Refund or rebate of real estate taxes. Federal tax software Recordkeeping, Keeping Records Refund of Mortgage interest, Refund of home mortgage interest. Federal tax software , Refund of overpaid interest. Federal tax software Real estate taxes, Refund or rebate of real estate taxes. Federal tax software Repairs, Repairs versus improvements. Federal tax software S Sales taxes, Sales Taxes Settlement or closing costs Basis of home, Settlement or closing costs. Federal tax software Mortgage interest, Mortgage Interest Paid at Settlement Real estate taxes, Real estate taxes paid at settlement or closing. Federal tax software , Real estate taxes. Federal tax software Stamp taxes, Transfer taxes (or stamp taxes). Federal tax software Statement, mortgage interest, Mortgage Interest Statement T Tax help, How To Get Tax Help Taxes Real estate, Real Estate Taxes, Refund of real estate taxes. Federal tax software Transfer taxes, Transfer taxes (or stamp taxes). Federal tax software W What you can and cannot deduct, What You Can and Cannot Deduct Prev  Up     Home   More Online Publications