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Free State Income Tax E File

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Free State Income Tax E File

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

The Internal Revenue Code provides for dollar limitations on benefits and contributions under qualified retirement plans. IRC Section 415 requires the limits to be adjusted annually for cost-of-living increases. The IRS announced on October 31, 2013 cost-of-living adjustments applicable to dollar limitations for pension plans and other items for tax year 2014.

Please see our COLA Increases Table for prior years' dollar limitations and Internal Revenue Code references.


 

  2014 2013

2012

IRAs

IRA Contribution Limit 5,500 5,500 $5,000
IRA Catch-Up Contributions 1,000 1,000 1,000

IRA AGI Deduction Phase-out Starting at

Joint Return 96,000 95,000 92,000
Single or Head of Household 60,000 59,000 58,000

SEP

SEP Minimum Compensation 550 550 550
SEP Maximum Contribution 52,000 51,000 50,000
SEP Maximum Compensation 260,000 255,000 250,000

SIMPLE Plans

SIMPLE Maximum Contributions 12,000 12,000 11,500
Catch-up Contributions 2,500 2,500 2,500

401(k), 403(b), Profit-Sharing Plans, etc.

Annual Compensation 260,000 255,000 250,000
Elective Deferrals 17,500 17,500 17,000
Catch-up Contributions 5,500 5,500 5,500
Defined Contribution Limits 52,000 51,000 50,000
ESOP Limits 1,050,000
210,000

1,035,000

205,000

1,015,000

200,000

Other

HCE Threshold 115,000 115,000 115,000
Defined Benefit Limits 210,000 205,000 200,000
Key Employee 170,000 165,000 165,000
457 Elective Deferrals 17,500 17,500 17,000
Control Employee (board member or officer) 105,000 100,000 100,000
Control Employee (compensation-based) 210,000 205,000 205,000
Taxable Wage Base 117,000 113,700 110,100

 

Page Last Reviewed or Updated: 08-Nov-2013

The Free State Income Tax E File

Free state income tax e file 1. Free state income tax e file   Deducting Business Expenses Table of Contents What's New Introduction Topics - This chapter discusses: Useful Items - You may want to see: What Can I Deduct?Cost of Goods Sold Capital Expenses Capital versus Deductible Expenses Personal versus Business Expenses How Much Can I Deduct?Not-for-profit limits. Free state income tax e file At-risk limits. Free state income tax e file Passive activities. Free state income tax e file Net operating loss. Free state income tax e file When Can I Deduct an Expense?Economic performance. Free state income tax e file Not-for-Profit ActivitiesGross Income Limit on Deductions What's New Optional safe harbor method to determine the business use of a home deduction. Free state income tax e file  Beginning in 2013, you can use the optional safe harbor method to determine the deduction for the business use of your home. Free state income tax e file See Optional safe harbor method under Business use of your home , later. Free state income tax e file Introduction This chapter covers the general rules for deducting business expenses. Free state income tax e file Business expenses are the costs of carrying on a trade or business, and they are usually deductible if the business is operated to make a profit. Free state income tax e file Topics - This chapter discusses: What you can deduct How much you can deduct When you can deduct Not-for-profit activities Useful Items - You may want to see: Publication 334 Tax Guide for Small Business 463 Travel, Entertainment, Gift, and Car Expenses 525 Taxable and Nontaxable Income 529 Miscellaneous Deductions 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 538 Accounting Periods and Methods 542 Corporations 547 Casualties, Disasters, and Thefts 587 Business Use of Your Home 925 Passive Activity and At-Risk Rules 936 Home Mortgage Interest Deduction 946 How To Depreciate Property Form (and Instructions) Sch A (Form 1040) Itemized Deductions 5213 Election To Postpone Determination as To Whether the Presumption Applies That an Activity Is Engaged in for Profit See chapter 12 for information about getting publications and forms. Free state income tax e file What Can I Deduct? To be deductible, a business expense must be both ordinary and necessary. Free state income tax e file An ordinary expense is one that is common and accepted in your industry. Free state income tax e file A necessary expense is one that is helpful and appropriate for your trade or business. Free state income tax e file An expense does not have to be indispensable to be considered necessary. Free state income tax e file Even though an expense may be ordinary and necessary, you may not be allowed to deduct the expense in the year you paid or incurred it. Free state income tax e file In some cases you may not be allowed to deduct the expense at all. Free state income tax e file Therefore, it is important to distinguish usual business expenses from expenses that include the following. Free state income tax e file The expenses used to figure cost of goods sold, Capital expenses, and Personal expenses. Free state income tax e file Cost of Goods Sold If your business manufactures products or purchases them for resale, you generally must value inventory at the beginning and end of each tax year to determine your cost of goods sold. Free state income tax e file Some of your business expenses may be included in figuring cost of goods sold. Free state income tax e file Cost of goods sold is deducted from your gross receipts to figure your gross profit for the year. Free state income tax e file If you include an expense in the cost of goods sold, you cannot deduct it again as a business expense. Free state income tax e file The following are types of expenses that go into figuring cost of goods sold. Free state income tax e file The cost of products or raw materials, including freight. Free state income tax e file Storage. Free state income tax e file Direct labor (including contributions to pension or annuity plans) for workers who produce the products. Free state income tax e file Factory overhead. Free state income tax e file Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for certain production or resale activities. Free state income tax e file Indirect costs include rent, interest, taxes, storage, purchasing, processing, repackaging, handling, and administrative costs. Free state income tax e file This rule does not apply to personal property you acquire for resale if your average annual gross receipts (or those of your predecessor) for the preceding 3 tax years are not more than $10 million. Free state income tax e file For more information, see the following sources. Free state income tax e file Cost of goods sold—chapter 6 of Publication 334. Free state income tax e file Inventories—Publication 538. Free state income tax e file Uniform capitalization rules—Publication 538 and section 263A of the Internal Revenue Code and the related regulations. Free state income tax e file Capital Expenses You must capitalize, rather than deduct, some costs. Free state income tax e file These costs are a part of your investment in your business and are called “capital expenses. Free state income tax e file ” Capital expenses are considered assets in your business. Free state income tax e file In general, you capitalize three types of costs. Free state income tax e file Business start-up costs (See Tip below). Free state income tax e file Business assets. Free state income tax e file Improvements. Free state income tax e file You can elect to deduct or amortize certain business start-up costs. Free state income tax e file See chapters 7 and 8. Free state income tax e file Cost recovery. Free state income tax e file   Although you generally cannot take a current deduction for a capital expense, you may be able to recover the amount you spend through depreciation, amortization, or depletion. Free state income tax e file These recovery methods allow you to deduct part of your cost each year. Free state income tax e file In this way, you are able to recover your capital expense. Free state income tax e file See Amortization (chapter 8) and Depletion (chapter 9) in this publication. Free state income tax e file A taxpayer can elect to deduct a portion of the costs of certain depreciable property as a section 179 deduction. Free state income tax e file A greater portion of these costs can be deducted if the property is qualified disaster assistance property. Free state income tax e file See Publication 946 for details. Free state income tax e file Going Into Business The costs of getting started in business, before you actually begin business operations, are capital expenses. Free state income tax e file These costs may include expenses for advertising, travel, or wages for training employees. Free state income tax e file If you go into business. Free state income tax e file   When you go into business, treat all costs you had to get your business started as capital expenses. Free state income tax e file   Usually you recover costs for a particular asset through depreciation. Free state income tax e file Generally, you cannot recover other costs until you sell the business or otherwise go out of business. Free state income tax e file However, you can choose to amortize certain costs for setting up your business. Free state income tax e file See Starting a Business in chapter 8 for more information on business start-up costs. Free state income tax e file If your attempt to go into business is unsuccessful. Free state income tax e file   If you are an individual and your attempt to go into business is not successful, the expenses you had in trying to establish yourself in business fall into two categories. Free state income tax e file The costs you had before making a decision to acquire or begin a specific business. Free state income tax e file These costs are personal and nondeductible. Free state income tax e file They include any costs incurred during a general search for, or preliminary investigation of, a business or investment possibility. Free state income tax e file The costs you had in your attempt to acquire or begin a specific business. Free state income tax e file These costs are capital expenses and you can deduct them as a capital loss. Free state income tax e file   If you are a corporation and your attempt to go into a new trade or business is not successful, you may be able to deduct all investigatory costs as a loss. Free state income tax e file   The costs of any assets acquired during your unsuccessful attempt to go into business are a part of your basis in the assets. Free state income tax e file You cannot take a deduction for these costs. Free state income tax e file You will recover the costs of these assets when you dispose of them. Free state income tax e file Business Assets There are many different kinds of business assets; for example, land, buildings, machinery, furniture, trucks, patents, and franchise rights. Free state income tax e file You must fully capitalize the cost of these assets, including freight and installation charges. Free state income tax e file Certain property you produce for use in your trade or business must be capitalized under the uniform capitalization rules. Free state income tax e file See Regulations section 1. Free state income tax e file 263A-2 for information on these rules. Free state income tax e file Improvements Improvements are generally major expenditures. Free state income tax e file Some examples are: new electric wiring, a new roof, a new floor, new plumbing, bricking up windows to strengthen a wall, and lighting improvements. Free state income tax e file The costs of making improvements to a business asset are capital expenses if the improvements add to the value of the asset, appreciably lengthen the time you can use it, or adapt it to a different use. Free state income tax e file Beginning in 2014, you must capitalize as improvements costs that are for the betterment of a unit of property, restore the unit of property, or adapt the unit of property to a new or different use. Free state income tax e file Temporary regulations allow you to capitalize costs meeting the above criteria for tax years beginning after 2011. Free state income tax e file However, you can currently deduct repairs that keep your property in a normal efficient operating condition as a business expense. Free state income tax e file Treat as repairs amounts paid to replace parts of a machine that only keep it in a normal operating condition. Free state income tax e file Restoration plan. Free state income tax e file   Capitalize the cost of reconditioning, improving, or altering your property as part of a general restoration plan to make it suitable for your business. Free state income tax e file This applies even if some of the work would by itself be classified as repairs. Free state income tax e file Capital versus Deductible Expenses To help you distinguish between capital and deductible expenses, different examples are given below. Free state income tax e file Motor vehicles. Free state income tax e file   You usually capitalize the cost of a motor vehicle you use in your business. Free state income tax e file You can recover its cost through annual deductions for depreciation. Free state income tax e file   There are dollar limits on the depreciation you can claim each year on passenger automobiles used in your business. Free state income tax e file See Publication 463. Free state income tax e file   Generally, repairs you make to your business vehicle are currently deductible. Free state income tax e file However, amounts you pay to recondition and overhaul a business vehicle are capital expenses and are recovered through depreciation. Free state income tax e file Roads and driveways. Free state income tax e file    The cost of building a private road on your business property and the cost of replacing a gravel driveway with a concrete one are capital expenses you may be able to depreciate. Free state income tax e file The cost of maintaining a private road on your business property is a deductible expense. Free state income tax e file Tools. Free state income tax e file   Unless the uniform capitalization rules apply, amounts spent for tools used in your business are deductible expenses if the tools have a life expectancy of less than 1 year or their cost is minor. Free state income tax e file Machinery parts. Free state income tax e file   Unless the uniform capitalization rules apply, the cost of replacing short-lived parts of a machine to keep it in good working condition, but not add to its life, is a deductible expense. Free state income tax e file Heating equipment. Free state income tax e file   The cost of changing from one heating system to another is a capital expense. Free state income tax e file Personal versus Business Expenses Generally, you cannot deduct personal, living, or family expenses. Free state income tax e file However, if you have an expense for something that is used partly for business and partly for personal purposes, divide the total cost between the business and personal parts. Free state income tax e file You can deduct the business part. Free state income tax e file For example, if you borrow money and use 70% of it for business and the other 30% for a family vacation, you generally can deduct 70% of the interest as a business expense. Free state income tax e file The remaining 30% is personal interest and generally is not deductible. Free state income tax e file See chapter 4 for information on deducting interest and the allocation rules. Free state income tax e file Business use of your home. Free state income tax e file   If you use part of your home for business, you may be able to deduct expenses for the business use of your home. Free state income tax e file These expenses may include mortgage interest, insurance, utilities, repairs, and depreciation. Free state income tax e file   To qualify to claim expenses for the business use of your home, you must meet both of the following tests. Free state income tax e file The business part of your home must be used exclusively and regularly for your trade or business. Free state income tax e file The business part of your home must be: Your principal place of business, or A place where you meet or deal with patients, clients, or customers in the normal course of your trade or business, or A separate structure (not attached to your home) used in connection with your trade or business. Free state income tax e file   You generally do not have to meet the exclusive use test for the part of your home that you regularly use either for the storage of inventory or product samples, or as a daycare facility. Free state income tax e file   Your home office qualifies as your principal place of business if you meet the following requirements. Free state income tax e file You use the office exclusively and regularly for administrative or management activities of your trade or business. Free state income tax e file You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. Free state income tax e file   If you have more than one business location, determine your principal place of business based on the following factors. Free state income tax e file The relative importance of the activities performed at each location. Free state income tax e file If the relative importance factor does not determine your principal place of business, consider the time spent at each location. Free state income tax e file Optional safe harbor method. Free state income tax e file   Beginning in 2013, individual taxpayers can use the optional safe harbor method to determine the amount of deductible expenses attributable to certain business use of a residence during the tax year. Free state income tax e file This method is an alternative to the calculation, allocation, and substantiation of actual expenses. Free state income tax e file   The deduction under the optional method is limited to $1,500 per year based on $5 a square foot for up to 300 square feet. Free state income tax e file Under this method, you claim your allowable mortgage interest, real estate taxes, and casualty losses on the home as itemized deductions on Schedule A (Form 1040). Free state income tax e file You are not required to allocate these deductions between personal and business use, as is required under the regular method. Free state income tax e file If you use the optional method, you cannot depreciate the portion of your home used in a trade or business. Free state income tax e file   Business expenses unrelated to the home, such as advertising, supplies, and wages paid to employees, are still fully deductible. Free state income tax e file All of the requirements discussed earlier under Business use of your home still apply. Free state income tax e file   For more information on the deduction for business use of your home, including the optional safe harbor method, see Publication 587. Free state income tax e file    If you were entitled to deduct depreciation on the part of your home used for business, you cannot exclude the part of the gain from the sale of your home that equals any depreciation you deducted (or could have deducted) for periods after May 6, 1997. Free state income tax e file Business use of your car. Free state income tax e file   If you use your car exclusively in your business, you can deduct car expenses. Free state income tax e file If you use your car for both business and personal purposes, you must divide your expenses based on actual mileage. Free state income tax e file Generally, commuting expenses between your home and your business location, within the area of your tax home, are not deductible. Free state income tax e file   You can deduct actual car expenses, which include depreciation (or lease payments), gas and oil, tires, repairs, tune-ups, insurance, and registration fees. Free state income tax e file Or, instead of figuring the business part of these actual expenses, you may be able to use the standard mileage rate to figure your deduction. Free state income tax e file Beginning in 2013, the standard mileage rate is 56. Free state income tax e file 5 cents per mile. Free state income tax e file   If you are self-employed, you can also deduct the business part of interest on your car loan, state and local personal property tax on the car, parking fees, and tolls, whether or not you claim the standard mileage rate. Free state income tax e file   For more information on car expenses and the rules for using the standard mileage rate, see Publication 463. Free state income tax e file How Much Can I Deduct? Generally, you can deduct the full amount of a business expense if it meets the criteria of ordinary and necessary and it is not a capital expense. Free state income tax e file Recovery of amount deducted (tax benefit rule). Free state income tax e file   If you recover part of an expense in the same tax year in which you would have claimed a deduction, reduce your current year expense by the amount of the recovery. Free state income tax e file If you have a recovery in a later year, include the recovered amount in income in that year. Free state income tax e file However, if part of the deduction for the expense did not reduce your tax, you do not have to include that part of the recovered amount in income. Free state income tax e file   For more information on recoveries and the tax benefit rule, see Publication 525. Free state income tax e file Payments in kind. Free state income tax e file   If you provide services to pay a business expense, the amount you can deduct is limited to your out-of-pocket costs. Free state income tax e file You cannot deduct the cost of your own labor. Free state income tax e file   Similarly, if you pay a business expense in goods or other property, you can deduct only what the property costs you. Free state income tax e file If these costs are included in the cost of goods sold, do not deduct them again as a business expense. Free state income tax e file Limits on losses. Free state income tax e file   If your deductions for an investment or business activity are more than the income it brings in, you have a loss. Free state income tax e file There may be limits on how much of the loss you can deduct. Free state income tax e file Not-for-profit limits. Free state income tax e file   If you carry on your business activity without the intention of making a profit, you cannot use a loss from it to offset other income. Free state income tax e file See Not-for-Profit Activities , later. Free state income tax e file At-risk limits. Free state income tax e file   Generally, a deductible loss from a trade or business or other income-producing activity is limited to the investment you have “at risk” in the activity. Free state income tax e file You are at risk in any activity for the following. Free state income tax e file The money and adjusted basis of property you contribute to the activity. Free state income tax e file Amounts you borrow for use in the activity if: You are personally liable for repayment, or You pledge property (other than property used in the activity) as security for the loan. Free state income tax e file For more information, see Publication 925. Free state income tax e file Passive activities. Free state income tax e file   Generally, you are in a passive activity if you have a trade or business activity in which you do not materially participate, or a rental activity. Free state income tax e file In general, deductions for losses from passive activities only offset income from passive activities. Free state income tax e file You cannot use any excess deductions to offset other income. Free state income tax e file In addition, passive activity credits can only offset the tax on net passive income. Free state income tax e file Any excess loss or credits are carried over to later years. Free state income tax e file Suspended passive losses are fully deductible in the year you completely dispose of the activity. Free state income tax e file For more information, see Publication 925. Free state income tax e file Net operating loss. Free state income tax e file   If your deductions are more than your income for the year, you may have a “net operating loss. Free state income tax e file ” You can use a net operating loss to lower your taxes in other years. Free state income tax e file See Publication 536 for more information. Free state income tax e file   See Publication 542 for information about net operating losses of corporations. Free state income tax e file When Can I Deduct an Expense? When you can deduct an expense depends on your accounting method. Free state income tax e file An accounting method is a set of rules used to determine when and how income and expenses are reported. Free state income tax e file The two basic methods are the cash method and the accrual method. Free state income tax e file Whichever method you choose must clearly reflect income. Free state income tax e file For more information on accounting methods, see Publication 538. Free state income tax e file Cash method. Free state income tax e file   Under the cash method of accounting, you generally deduct business expenses in the tax year you pay them. Free state income tax e file Accrual method. Free state income tax e file   Under an accrual method of accounting, you generally deduct business expenses when both of the following apply. Free state income tax e file The all-events test has been met. Free state income tax e file The test is met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. Free state income tax e file Economic performance has occurred. Free state income tax e file Economic performance. Free state income tax e file   You generally cannot deduct or capitalize a business expense until economic performance occurs. Free state income tax e file If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided, or the property is used. Free state income tax e file If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Free state income tax e file Example. Free state income tax e file Your tax year is the calendar year. Free state income tax e file In December 2013, the Field Plumbing Company did some repair work at your place of business and sent you a bill for $600. Free state income tax e file You paid it by check in January 2014. Free state income tax e file If you use the accrual method of accounting, deduct the $600 on your tax return for 2013 because all events have occurred to “fix” the fact of liability (in this case the work was completed), the liability can be determined, and economic performance occurred in that year. Free state income tax e file If you use the cash method of accounting, deduct the expense on your 2014 return. Free state income tax e file Prepayment. Free state income tax e file   You generally cannot deduct expenses in advance, even if you pay them in advance. Free state income tax e file This rule applies to both the cash and accrual methods. Free state income tax e file It applies to prepaid interest, prepaid insurance premiums, and any other expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. Free state income tax e file Example. Free state income tax e file In 2013, you sign a 10-year lease and immediately pay your rent for the first 3 years. Free state income tax e file Even though you paid the rent for 2013, 2014, and 2015, you can only deduct the rent for 2013 on your 2013 tax return. Free state income tax e file You can deduct the rent for 2014 and 2015 on your tax returns for those years. Free state income tax e file Contested liability. Free state income tax e file   Under the cash method, you can deduct a contested liability only in the year you pay the liability. Free state income tax e file Under the accrual method, you can deduct contested liabilities such as taxes (except foreign or U. Free state income tax e file S. Free state income tax e file possession income, war profits, and excess profits taxes) either in the tax year you pay the liability (or transfer money or other property to satisfy the obligation) or in the tax year you settle the contest. Free state income tax e file However, to take the deduction in the year of payment or transfer, you must meet certain conditions. Free state income tax e file See Regulations section 1. Free state income tax e file 461-2. Free state income tax e file Related person. Free state income tax e file   Under an accrual method of accounting, you generally deduct expenses when you incur them, even if you have not yet paid them. Free state income tax e file However, if you and the person you owe are related and that person uses the cash method of accounting, you must pay the expense before you can deduct it. Free state income tax e file Your deduction is allowed when the amount is includible in income by the related cash method payee. Free state income tax e file See Related Persons in Publication 538. Free state income tax e file Not-for-Profit Activities If you do not carry on your business or investment activity to make a profit, you cannot use a loss from the activity to offset other income. Free state income tax e file Activities you do as a hobby, or mainly for sport or recreation, are often not entered into for profit. Free state income tax e file The limit on not-for-profit losses applies to individuals, partnerships, estates, trusts, and S corporations. Free state income tax e file It does not apply to corporations other than S corporations. Free state income tax e file In determining whether you are carrying on an activity for profit, several factors are taken into account. Free state income tax e file No one factor alone is decisive. Free state income tax e file Among the factors to consider are whether: You carry on the activity in a businesslike manner, The time and effort you put into the activity indicate you intend to make it profitable, You depend on the income for your livelihood, Your losses are due to circumstances beyond your control (or are normal in the start-up phase of your type of business), You change your methods of operation in an attempt to improve profitability, You (or your advisors) have the knowledge needed to carry on the activity as a successful business, You were successful in making a profit in similar activities in the past, The activity makes a profit in some years, and You can expect to make a future profit from the appreciation of the assets used in the activity. Free state income tax e file Presumption of profit. Free state income tax e file   An activity is presumed carried on for profit if it produced a profit in at least 3 of the last 5 tax years, including the current year. Free state income tax e file Activities that consist primarily of breeding, training, showing, or racing horses are presumed carried on for profit if they produced a profit in at least 2 of the last 7 tax years, including the current year. Free state income tax e file The activity must be substantially the same for each year within this period. Free state income tax e file You have a profit when the gross income from an activity exceeds the deductions. Free state income tax e file   If a taxpayer dies before the end of the 5-year (or 7-year) period, the “test” period ends on the date of the taxpayer's death. Free state income tax e file   If your business or investment activity passes this 3- (or 2-) years-of-profit test, the IRS will presume it is carried on for profit. Free state income tax e file This means the limits discussed here will not apply. Free state income tax e file You can take all your business deductions from the activity, even for the years that you have a loss. Free state income tax e file You can rely on this presumption unless the IRS later shows it to be invalid. Free state income tax e file Using the presumption later. Free state income tax e file   If you are starting an activity and do not have 3 (or 2) years showing a profit, you can elect to have the presumption made after you have the 5 (or 7) years of experience allowed by the test. Free state income tax e file   You can elect to do this by filing Form 5213. Free state income tax e file Filing this form postpones any determination that your activity is not carried on for profit until 5 (or 7) years have passed since you started the activity. Free state income tax e file   The benefit gained by making this election is that the IRS will not immediately question whether your activity is engaged in for profit. Free state income tax e file Accordingly, it will not restrict your deductions. Free state income tax e file Rather, you will gain time to earn a profit in the required number of years. Free state income tax e file If you show 3 (or 2) years of profit at the end of this period, your deductions are not limited under these rules. Free state income tax e file If you do not have 3 (or 2) years of profit, the limit can be applied retroactively to any year with a loss in the 5-year (or 7-year) period. Free state income tax e file   Filing Form 5213 automatically extends the period of limitations on any year in the 5-year (or 7-year) period to 2 years after the due date of the return for the last year of the period. Free state income tax e file The period is extended only for deductions of the activity and any related deductions that might be affected. Free state income tax e file    You must file Form 5213 within 3 years after the due date of your return (determined without extensions) for the year in which you first carried on the activity, or, if earlier, within 60 days after receiving written notice from the Internal Revenue Service proposing to disallow deductions attributable to the activity. Free state income tax e file Gross Income Gross income from a not-for-profit activity includes the total of all gains from the sale, exchange, or other disposition of property, and all other gross receipts derived from the activity. Free state income tax e file Gross income from the activity also includes capital gains and rents received for the use of property which is held in connection with the activity. Free state income tax e file You can determine gross income from any not-for-profit activity by subtracting the cost of goods sold from your gross receipts. Free state income tax e file However, if you determine gross income by subtracting cost of goods sold from gross receipts, you must do so consistently, and in a manner that follows generally accepted methods of accounting. Free state income tax e file Limit on Deductions If your activity is not carried on for profit, take deductions in the following order and only to the extent stated in the three categories. Free state income tax e file If you are an individual, these deductions may be taken only if you itemize. Free state income tax e file These deductions may be taken on Schedule A (Form 1040). Free state income tax e file Category 1. Free state income tax e file   Deductions you can take for personal as well as for business activities are allowed in full. Free state income tax e file For individuals, all nonbusiness deductions, such as those for home mortgage interest, taxes, and casualty losses, belong in this category. Free state income tax e file Deduct them on the appropriate lines of Schedule A (Form 1040). Free state income tax e file For tax years beginning after December 31, 2008, you can deduct a casualty loss on property you own for personal use only to the extent it is more than $500 and exceeds 10% of your adjusted gross income (AGI). Free state income tax e file The 10% AGI limitation does not apply to net disaster losses resulting from federally declared disasters in 2008 and 2009, and individuals are allowed to claim the net disaster losses even if they do not itemize their deductions. Free state income tax e file The reduction amount returns to $100 for tax years beginning after December 31, 2009. Free state income tax e file See Publication 547 for more information on casualty losses. Free state income tax e file For the limits that apply to home mortgage interest, see Publication 936. Free state income tax e file Category 2. Free state income tax e file   Deductions that do not result in an adjustment to the basis of property are allowed next, but only to the extent your gross income from the activity is more than your deductions under the first category. Free state income tax e file Most business deductions, such as those for advertising, insurance premiums, interest, utilities, and wages, belong in this category. Free state income tax e file Category 3. Free state income tax e file   Business deductions that decrease the basis of property are allowed last, but only to the extent the gross income from the activity exceeds the deductions you take under the first two categories. Free state income tax e file Deductions for depreciation, amortization, and the part of a casualty loss an individual could not deduct in category (1) belong in this category. Free state income tax e file Where more than one asset is involved, allocate depreciation and these other deductions proportionally. Free state income tax e file    Individuals must claim the amounts in categories (2) and (3) as miscellaneous deductions on Schedule A (Form 1040). Free state income tax e file They are subject to the 2%-of-adjusted-gross-income limit. Free state income tax e file See Publication 529 for information on this limit. Free state income tax e file Example. Free state income tax e file Adriana is engaged in a not-for-profit activity. Free state income tax e file The income and expenses of the activity are as follows. Free state income tax e file Gross income $3,200 Subtract:     Real estate taxes $700   Home mortgage interest 900   Insurance 400   Utilities 700   Maintenance 200   Depreciation on an automobile 600   Depreciation on a machine 200 3,700 Loss $(500)   Adriana must limit her deductions to $3,200, the gross income she earned from the activity. Free state income tax e file The limit is reached in category (3), as follows. Free state income tax e file Limit on deduction $3,200 Category 1: Taxes and interest $1,600   Category 2: Insurance, utilities, and maintenance 1,300 2,900 Available for Category 3 $ 300   The $800 of depreciation is allocated between the automobile and machine as follows. Free state income tax e file $600 $800 x $300 = $225 depreciation for the automobile             $200 $800 x $300 = $75 depreciation for the machine The basis of each asset is reduced accordingly. Free state income tax e file Adriana includes the $3,200 of gross income on line 21 (other income) of Form 1040. Free state income tax e file The $1,600 for category (1) is deductible in full on the appropriate lines for taxes and interest on Schedule A (Form 1040). Free state income tax e file Adriana deducts the remaining $1,600 ($1,300 for category (2) and $300 for category (3)) as other miscellaneous deductions on Schedule A (Form 1040) subject to the 2%-of-adjusted-gross-income limit. Free state income tax e file Partnerships and S corporations. Free state income tax e file   If a partnership or S corporation carries on a not-for-profit activity, these limits apply at the partnership or S corporation level. Free state income tax e file They are reflected in the individual shareholder's or partner's distributive shares. Free state income tax e file More than one activity. Free state income tax e file   If you have several undertakings, each may be a separate activity or several undertakings may be combined. Free state income tax e file The following are the most significant facts and circumstances in making this determination. Free state income tax e file The degree of organizational and economic interrelationship of various undertakings. Free state income tax e file The business purpose that is (or might be) served by carrying on the various undertakings separately or together in a business or investment setting. Free state income tax e file The similarity of the undertakings. Free state income tax e file   The IRS will generally accept your characterization if it is supported by facts and circumstances. Free state income tax e file    If you are carrying on two or more different activities, keep the deductions and income from each one separate. Free state income tax e file Figure separately whether each is a not-for-profit activity. Free state income tax e file Then figure the limit on deductions and losses separately for each activity that is not for profit. Free state income tax e file Prev  Up  Next   Home   More Online Publications