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The H&r Block Free Tax Prep

H&r block free tax prep 23. H&r block free tax prep   Interest Expense Table of Contents Introduction Useful Items - You may want to see: Home Mortgage InterestAmount Deductible Points Mortgage Insurance Premiums Form 1098, Mortgage Interest Statement Investment InterestInvestment Property Allocation of Interest Expense Limit on Deduction Items You Cannot DeductPersonal Interest Allocation of Interest How To ReportMore than one borrower. H&r block free tax prep Mortgage proceeds used for business or investment. H&r block free tax prep Introduction This chapter discusses what interest expenses you can deduct. H&r block free tax prep Interest is the amount you pay for the use of borrowed money. H&r block free tax prep The following are types of interest you can deduct as itemized deductions on Schedule A (Form 1040). H&r block free tax prep Home mortgage interest, including certain points and mortgage insurance premiums. H&r block free tax prep Investment interest. H&r block free tax prep This chapter explains these deductions. H&r block free tax prep It also explains where to deduct other types of interest and lists some types of interest you cannot deduct. H&r block free tax prep Use Table 23-1 to find out where to get more information on various types of interest, including investment interest. H&r block free tax prep Useful Items - You may want to see: Publication 936 Home Mortgage Interest Deduction 550 Investment Income and Expenses Home Mortgage Interest Generally, home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). H&r block free tax prep The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan. H&r block free tax prep You can deduct home mortgage interest if all the following conditions are met. H&r block free tax prep You file Form 1040 and itemize deductions on Schedule A (Form 1040). H&r block free tax prep The mortgage is a secured debt on a qualified home in which you have an ownership interest. H&r block free tax prep (Generally, your mortgage is a secured debt if you put your home up as collateral to protect the interest of the lender. H&r block free tax prep The term “qualified home” means your main home or second home. H&r block free tax prep For details, see Publication 936. H&r block free tax prep )  Both you and the lender must intend that the loan be repaid. H&r block free tax prep Amount Deductible In most cases, you can deduct all of your home mortgage interest. H&r block free tax prep How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds. H&r block free tax prep Fully deductible interest. H&r block free tax prep   If all of your mortgages fit into one or more of the following three categories at all times during the year, you can deduct all of the interest on those mortgages. H&r block free tax prep (If any one mortgage fits into more than one category, add the debt that fits in each category to your other debt in the same category. H&r block free tax prep )   The three categories are as follows: Mortgages you took out on or before October 13, 1987 (called grandfathered debt). H&r block free tax prep Mortgages you took out after October 13, 1987, to buy, build, or improve your home (called home acquisition debt), but only if throughout 2013 these mortgages plus any grandfathered debt totaled $1 million or less ($500,000 or less if married filing separately). H&r block free tax prep Mortgages you took out after October 13, 1987, other than to buy, build, or improve your home (called home equity debt), but only if throughout 2013 these mortgages totaled $100,000 or less ($50,000 or less if married filing separately) and totaled no more than the fair market value of your home reduced by (1) and (2). H&r block free tax prep The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home. H&r block free tax prep   See Part II of Publication 936 for more detailed definitions of grandfathered, home acquisition, and home equity debt. H&r block free tax prep    You can use Figure 23-A to check whether your home mortgage interest is fully deductible. H&r block free tax prep Figure 23-A. H&r block free tax prep Is My Home Mortgage Interest Fully Deductible? Please click here for the text description of the image. H&r block free tax prep Figure 23-A. H&r block free tax prep Is My Interest Fully Deductible? Limits on deduction. H&r block free tax prep   You cannot fully deduct interest on a mortgage that does not fit into any of the three categories listed earlier. H&r block free tax prep If this applies to you, see Part II of Publication 936 to figure the amount of interest you can deduct. H&r block free tax prep Special Situations This section describes certain items that can be included as home mortgage interest and others that cannot. H&r block free tax prep It also describes certain special situations that may affect your deduction. H&r block free tax prep Late payment charge on mortgage payment. H&r block free tax prep   You can deduct as home mortgage interest a late payment charge if it was not for a specific service performed in connection with your mortgage loan. H&r block free tax prep Mortgage prepayment penalty. H&r block free tax prep   If you pay off your home mortgage early, you may have to pay a penalty. H&r block free tax prep 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. H&r block free tax prep Sale of home. H&r block free tax prep   If you sell your home, you can deduct your home mortgage interest (subject to any limits that apply) paid up to, but not including, the date of sale. H&r block free tax prep Example. H&r block free tax prep John and Peggy Harris sold their home on May 7. H&r block free tax prep Through April 30, they made home mortgage interest payments of $1,220. H&r block free tax prep The settlement sheet for the sale of the home showed $50 interest for the 6-day period in May up to, but not including, the date of sale. H&r block free tax prep Their mortgage interest deduction is $1,270 ($1,220 + $50). H&r block free tax prep Prepaid interest. H&r block free tax prep   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. H&r block free tax prep You can deduct in each year only the interest that qualifies as home mortgage interest for that year. H&r block free tax prep However, there is an exception that applies to points, discussed later. H&r block free tax prep Mortgage interest credit. H&r block free tax prep   You may be able to claim a mortgage interest credit if you were issued a mortgage credit certificate (MCC) by a state or local government. H&r block free tax prep Figure the credit on Form 8396, Mortgage Interest Credit. H&r block free tax prep If you take this credit, you must reduce your mortgage interest deduction by the amount of the credit. H&r block free tax prep   For more information on the credit, see chapter 37. H&r block free tax prep Ministers' and military housing allowance. H&r block free tax prep   If you are a minister or a member of the uniformed services and receive a housing allowance that is not taxable, you can still deduct your home mortgage interest. H&r block free tax prep Hardest Hit Fund and Emergency Homeowners' Loan Programs. H&r block free tax prep   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. H&r block free tax prep 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. H&r block free tax prep 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. H&r block free tax prep If you meet these tests, then you can deduct all of the payments you actually made during the year to your mortgage servicer, the State HFA, or HUD on the home mortgage (including the amount shown on box 3 of Form 1098-MA, Mortgage Assistance Payments), but not more than the sum of the amounts shown on Form 1098, Mortgage Interest Statement, in box 1 (mortgage interest received from payer(s) / borrower(s)), box 4 (mortgage insurance premiums) and box 5 (real property taxes). H&r block free tax prep 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. H&r block free tax prep Mortgage assistance payments under section 235 of the National Housing Act. H&r block free tax prep   If you qualify for mortgage assistance payments for lower-income families under section 235 of the National Housing Act, part or all of the interest on your mortgage may be paid for you. H&r block free tax prep You cannot deduct the interest that is paid for you. H&r block free tax prep No other effect on taxes. H&r block free tax prep   Do not include these mortgage assistance payments in your income. H&r block free tax prep Also, do not use these payments to reduce other deductions, such as real estate taxes. H&r block free tax prep Divorced or separated individuals. H&r block free tax prep   If a divorce or separation agreement requires you or your spouse or former spouse to pay home mortgage interest on a home owned by both of you, the payment of interest may be alimony. H&r block free tax prep See the discussion of Payments for jointly-owned home in chapter 18. H&r block free tax prep Redeemable ground rents. H&r block free tax prep   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct them as mortgage interest. H&r block free tax prep   Payments made to end the lease and to buy the lessor's entire interest in the land are not deductible as mortgage interest. H&r block free tax prep For more information, see Publication 936. H&r block free tax prep Nonredeemable ground rents. H&r block free tax prep   Payments on a nonredeemable ground rent are not mortgage interest. H&r block free tax prep You can deduct them as rent if they are a business expense or if they are for rental property. H&r block free tax prep Reverse mortgages. H&r block free tax prep   A reverse mortgage is a loan where the lender pays you (in a lump sum, a monthly advance, a line of credit, or a combination of all three) while you continue to live in your home. H&r block free tax prep With a reverse mortgage, you retain title to your home. H&r block free tax prep Depending on the plan, your reverse mortgage becomes due with interest when you move, sell your home, reach the end of a pre-selected loan period, or die. H&r block free tax prep Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable. H&r block free tax prep Any interest (including original issue discount) accrued on a reverse mortgage is not deductible until the loan is paid in full. H&r block free tax prep Your deduction may be limited because a reverse mortgage loan generally is subject to the limit on Home Equity Debt discussed in Publication 936. H&r block free tax prep Rental payments. H&r block free tax prep   If you live in a house before final settlement on the purchase, any payments you make for that period are rent and not interest. H&r block free tax prep This is true even if the settlement papers call them interest. H&r block free tax prep You cannot deduct these payments as home mortgage interest. H&r block free tax prep Mortgage proceeds invested in tax-exempt securities. H&r block free tax prep   You cannot deduct the home mortgage interest on grandfathered debt or home equity debt if you used the proceeds of the mortgage to buy securities or certificates that produce tax-free income. H&r block free tax prep “Grandfathered debt” and “home equity debt” are defined earlier under Amount Deductible. H&r block free tax prep Refunds of interest. H&r block free tax prep   If you receive a refund of interest in the same tax year you paid it, you must reduce your interest expense by the amount refunded to you. H&r block free tax prep If you receive a refund of interest you deducted in an earlier year, you generally must include the refund in income in the year you receive it. H&r block free tax prep However, you need to include it only up to the amount of the deduction that reduced your tax in the earlier year. H&r block free tax prep This is true whether the interest overcharge was refunded to you or was used to reduce the outstanding principal on your mortgage. H&r block free tax prep    If you received a refund of interest you overpaid in an earlier year, you generally will receive a Form 1098, Mortgage Interest Statement, showing the refund in box 3. H&r block free tax prep For information about Form 1098, see Form 1098, Mortgage Interest Statement , later. H&r block free tax prep   For more information on how to treat refunds of interest deducted in earlier years, see Recoveries in chapter 12. H&r block free tax prep Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. H&r block free tax prep Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. H&r block free tax prep A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. H&r block free tax prep See Points paid by the seller , later. H&r block free tax prep General Rule You generally cannot deduct the full amount of points in the year paid. H&r block free tax prep Because they are prepaid interest, you generally deduct them ratably over the life (term) of the mortgage. H&r block free tax prep See Deduction Allowed Ratably , next. H&r block free tax prep For exceptions to the general rule, see Deduction Allowed in Year Paid , later. H&r block free tax prep Deduction Allowed Ratably If you do not meet the tests listed under Deduction Allowed in Year Paid , later, the loan is not a home improvement loan, or you choose not to deduct your points in full in the year paid, you can deduct the points ratably (equally) over the life of the loan if you meet all the following tests. H&r block free tax prep You use the cash method of accounting. H&r block free tax prep This means you report income in the year you receive it and deduct expenses in the year you pay them. H&r block free tax prep Most individuals use this method. H&r block free tax prep Your loan is secured by a home. H&r block free tax prep (The home does not need to be your main home. H&r block free tax prep ) Your loan period is not more than 30 years. H&r block free tax prep If your loan period is more than 10 years, the terms of your loan are the same as other loans offered in your area for the same or longer period. H&r block free tax prep Either your loan amount is $250,000 or less, or the number of points is not more than: 4, if your loan period is 15 years or less, or 6, if your loan period is more than 15 years. H&r block free tax prep Deduction Allowed in Year Paid You can fully deduct points in the year paid if you meet all the following tests. H&r block free tax prep (You can use Figure 23-B as a quick guide to see whether your points are fully deductible in the year paid. H&r block free tax prep ) Your loan is secured by your main home. H&r block free tax prep (Your main home is the one you ordinarily live in most of the time. H&r block free tax prep ) Paying points is an established business practice in the area where the loan was made. H&r block free tax prep The points paid were not more than the points generally charged in that area. H&r block free tax prep You use the cash method of accounting. H&r block free tax prep This means you report income in the year you receive it and deduct expenses in the year you pay them. H&r block free tax prep (If you want more information about this method, see Accounting Methods in chapter 1. H&r block free tax prep ) 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. H&r block free tax prep The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. H&r block free tax prep The funds you provided are not required to have been applied to the points. H&r block free tax prep They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. H&r block free tax prep You cannot have borrowed these funds from your lender or mortgage broker. H&r block free tax prep You use your loan to buy or build your main home. H&r block free tax prep The points were computed as a percentage of the principal amount of the mortgage. H&r block free tax prep The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. H&r block free tax prep The points may be shown as paid from either your funds or the seller's. H&r block free tax prep Figure 23-B. H&r block free tax prep Are My Points Fully Deductible This Year? Please click here for the text description of the image. H&r block free tax prep Figure 23-B. H&r block free tax prep Are My Points Fully Deductible This Year? Note. H&r block free tax prep If you meet all of these tests, you can choose to either fully deduct the points in the year paid, or deduct them over the life of the loan. H&r block free tax prep Home improvement loan. H&r block free tax prep   You can also fully deduct in the year paid points paid on a loan to improve your main home, if tests (1) through (6) are met. H&r block free tax prep Second home. H&r block free tax prep You cannot fully deduct in the year paid points you pay on loans secured by your second home. H&r block free tax prep You can deduct these points only over the life of the loan. H&r block free tax prep Refinancing. H&r block free tax prep   Generally, points you pay to refinance a mortgage are not deductible in full in the year you pay them. H&r block free tax prep This is true even if the new mortgage is secured by your main home. H&r block free tax prep   However, if you use part of the refinanced mortgage proceeds to improve your main home and you meet the first 6 tests listed under Deduction Allowed in Year Paid , earlier, you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. H&r block free tax prep You can deduct the rest of the points over the life of the loan. H&r block free tax prep Example 1. H&r block free tax prep In 1998, Bill Fields got a mortgage to buy a home. H&r block free tax prep In 2013, Bill refinanced that mortgage with a 15-year $100,000 mortgage loan. H&r block free tax prep The mortgage is secured by his home. H&r block free tax prep To get the new loan, he had to pay three points ($3,000). H&r block free tax prep Two points ($2,000) were for prepaid interest, and one point ($1,000) was charged for services, in place of amounts that ordinarily are stated separately on the settlement statement. H&r block free tax prep Bill paid the points out of his private funds, rather than out of the proceeds of the new loan. H&r block free tax prep The payment of points is an established practice in the area, and the points charged are not more than the amount generally charged there. H&r block free tax prep Bill's first payment on the new loan was due July 1. H&r block free tax prep He made six payments on the loan in 2013 and is a cash basis taxpayer. H&r block free tax prep Bill used the funds from the new mortgage to repay his existing mortgage. H&r block free tax prep Although the new mortgage loan was for Bill's continued ownership of his main home, it was not for the purchase or improvement of that home. H&r block free tax prep He cannot deduct all of the points in 2013. H&r block free tax prep He can deduct two points ($2,000) ratably over the life of the loan. H&r block free tax prep He deducts $67 [($2,000 ÷ 180 months) × 6 payments] of the points in 2013. H&r block free tax prep The other point ($1,000) was a fee for services and is not deductible. H&r block free tax prep Example 2. H&r block free tax prep The facts are the same as in Example 1, except that Bill used $25,000 of the loan proceeds to improve his home and $75,000 to repay his existing mortgage. H&r block free tax prep Bill deducts 25% ($25,000 ÷ $100,000) of the points ($2,000) in 2013. H&r block free tax prep His deduction is $500 ($2,000 × 25%). H&r block free tax prep Bill also deducts the ratable part of the remaining $1,500 ($2,000 − $500) that must be spread over the life of the loan. H&r block free tax prep This is $50 [($1,500 ÷ 180 months) × 6 payments] in 2013. H&r block free tax prep The total amount Bill deducts in 2013 is $550 ($500 + $50). H&r block free tax prep Special Situations This section describes certain special situations that may affect your deduction of points. H&r block free tax prep Original issue discount. H&r block free tax prep   If you do not qualify to either deduct the points in the year paid or deduct them ratably over the life of the loan, or if you choose not to use either of these methods, the points reduce the issue price of the loan. H&r block free tax prep This reduction results in original issue discount, which is discussed in chapter 4 of Publication 535. H&r block free tax prep Amounts charged for services. H&r block free tax prep   Amounts charged by the lender for specific services connected to the loan are not interest. H&r block free tax prep Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. H&r block free tax prep You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. H&r block free tax prep Points paid by the seller. H&r block free tax prep   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. H&r block free tax prep Treatment by seller. H&r block free tax prep   The seller cannot deduct these fees as interest. H&r block free tax prep But they are a selling expense that reduces the amount realized by the seller. H&r block free tax prep See chapter 15 for information on selling your home. H&r block free tax prep Treatment by buyer. H&r block free tax prep    The buyer reduces the basis of the home by the amount of the seller-paid points and treats the points as if he or she had paid them. H&r block free tax prep If all the tests under Deduction Allowed in Year Paid , earlier, are met, the buyer can deduct the points in the year paid. H&r block free tax prep If any of those tests are not met, the buyer deducts the points over the life of the loan. H&r block free tax prep   For information about basis, see chapter 13. H&r block free tax prep Funds provided are less than points. H&r block free tax prep   If you meet all the tests in Deduction Allowed in Year Paid , earlier, except that the funds you provided were less than the points charged to you (test (6)), you can deduct the points in the year paid, up to the amount of funds you provided. H&r block free tax prep In addition, you can deduct any points paid by the seller. H&r block free tax prep Example 1. H&r block free tax prep When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). H&r block free tax prep You meet all the tests for deducting points in the year paid, except the only funds you provided were a $750 down payment. H&r block free tax prep Of the $1,000 charged for points, you can deduct $750 in the year paid. H&r block free tax prep You spread the remaining $250 over the life of the mortgage. H&r block free tax prep Example 2. H&r block free tax prep 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. H&r block free tax prep In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). H&r block free tax prep You spread the remaining $250 over the life of the mortgage. H&r block free tax prep You must reduce the basis of your home by the $1,000 paid by the seller. H&r block free tax prep Excess points. H&r block free tax prep   If you meet all the tests in Deduction Allowed in Year Paid , earlier, except that the points paid were more than generally paid in your area (test (3)), you deduct in the year paid only the points that are generally charged. H&r block free tax prep You must spread any additional points over the life of the mortgage. H&r block free tax prep Mortgage ending early. H&r block free tax prep   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. H&r block free tax prep However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. H&r block free tax prep Instead, deduct the remaining balance over the term of the new loan. H&r block free tax prep    A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. H&r block free tax prep Example. H&r block free tax prep Dan paid $3,000 in points in 2002 that he had to spread out over the 15-year life of the mortgage. H&r block free tax prep He deducts $200 points per year. H&r block free tax prep Through 2012, Dan has deducted $2,200 of the points. H&r block free tax prep Dan prepaid his mortgage in full in 2013. H&r block free tax prep He can deduct the remaining $800 of points in 2013. H&r block free tax prep Limits on deduction. H&r block free tax prep   You cannot fully deduct points paid on a mortgage unless the mortgage fits into one of the categories listed earlier under Fully deductible interest . H&r block free tax prep See Publication 936 for details. H&r block free tax prep Mortgage Insurance Premiums You can treat amounts you paid during 2013 for qualified mortgage insurance as home mortgage interest. H&r block free tax prep The insurance must be in connection with home acquisition debt and the insurance contract must have been issued after 2006. H&r block free tax prep Qualified mortgage insurance. H&r block free tax prep   Qualified mortgage insurance is mortgage insurance provided by the Department of Veterans Affairs, the Federal Housing Administration, or the Rural Housing Service, and private mortgage insurance (as defined in section 2 of the Homeowners Protection Act of 1998 as in effect on December 20, 2006). H&r block free tax prep   Mortgage insurance provided by the Department of Veterans Affairs is commonly known as a funding fee. H&r block free tax prep If provided by the Rural Housing Service, it is commonly known as a guarantee fee. H&r block free tax prep These fees can be deducted fully in 2013 if the mortgage insurance contract was issued in 2013. H&r block free tax prep Contact the mortgage insurance issuer to determine the deductible amount if it is not reported in box 4 of Form 1098. H&r block free tax prep Special rules for prepaid mortgage insurance. H&r block free tax prep   Generally, if you paid premiums for qualified mortgage insurance that are allocable to periods after the close of the tax year, such premiums are treated as paid in the period to which they are allocated. H&r block free tax prep You must allocate the premiums over the shorter of the stated term of the mortgage or 84 months, beginning with the month the insurance was obtained. H&r block free tax prep No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term. H&r block free tax prep This paragraph does not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service. H&r block free tax prep See the Example below. H&r block free tax prep Example. H&r block free tax prep Ryan purchased a home in May of 2012 and financed the home with a 15-year mortgage. H&r block free tax prep Ryan also prepaid all of the $9,240 in private mortgage insurance required at the time of closing in May. H&r block free tax prep Since the $9,240 in private mortgage insurance is allocable to periods after 2012, Ryan must allocate the $9,240 over the shorter of the life of the mortgage or 84 months. H&r block free tax prep Ryan's adjusted gross income (AGI) for 2012 is $76,000. H&r block free tax prep Ryan can deduct $880 ($9,240 ÷ 84 × 8 months) for qualified mortgage insurance premiums in 2012. H&r block free tax prep For 2013, Ryan can deduct $1,320 ($9,240 ÷ 84 × 12 months) if his AGI is $100,000 or less. H&r block free tax prep In this example, the mortgage insurance premiums are allocated over 84 months, which is shorter than the life of the mortgage of 15 years (180 months). H&r block free tax prep Limit on deduction. H&r block free tax prep   If your adjusted gross income on Form 1040, line 38, is more than $100,000 ($50,000 if your filing status is married filing separately), the amount of your mortgage insurance premiums that are otherwise deductible is reduced and may be eliminated. H&r block free tax prep 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. H&r block free tax prep If your adjusted gross income is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. H&r block free tax prep Form 1098, Mortgage Interest Statement If you paid $600 or more of mortgage interest (including certain points and mortgage insurance premiums) during the year on any one mortgage, you generally will receive a Form 1098 or a similar statement from the mortgage holder. H&r block free tax prep You will receive the statement if you pay interest to a person (including a financial institution or a cooperative housing corporation) in the course of that person's trade or business. H&r block free tax prep A governmental unit is a person for purposes of furnishing the statement. H&r block free tax prep The statement for each year should be sent to you by January 31 of the following year. H&r block free tax prep A copy of this form will also be sent to the IRS. H&r block free tax prep The statement will show the total interest you paid during the year, any mortgage insurance premiums you paid, and if you purchased a main home during the year, it also will show the deductible points paid during the year, including seller-paid points. H&r block free tax prep However, it should not show any interest that was paid for you by a government agency. H&r block free tax prep As a general rule, Form 1098 will include only points that you can fully deduct in the year paid. H&r block free tax prep However, certain points not included on Form 1098 also may be deductible, either in the year paid or over the life of the loan. H&r block free tax prep See Points , earlier, to determine whether you can deduct points not shown on Form 1098. H&r block free tax prep Prepaid interest on Form 1098. H&r block free tax prep   If you prepaid interest in 2013 that accrued in full by January 15, 2014, this prepaid interest may be included in box 1 of Form 1098. H&r block free tax prep However, you cannot deduct the prepaid amount for January 2014 in 2013. H&r block free tax prep (See Prepaid interest , earlier. H&r block free tax prep ) You will have to figure the interest that accrued for 2014 and subtract it from the amount in box 1. H&r block free tax prep You will include the interest for January 2014 with the other interest you pay for 2014. H&r block free tax prep See How To Report , later. H&r block free tax prep Refunded interest. H&r block free tax prep   If you received a refund of mortgage interest you overpaid in an earlier year, you generally will receive a Form 1098 showing the refund in box 3. H&r block free tax prep See Refunds of interest , earlier. H&r block free tax prep Mortgage insurance premiums. H&r block free tax prep   The amount of mortgage insurance premiums you paid during 2013 may be shown in box 4 of Form 1098. H&r block free tax prep See Mortgage Insurance Premiums, earlier. H&r block free tax prep Investment Interest This section discusses interest expenses you may be able to deduct as an investor. H&r block free tax prep If you borrow money to buy property you hold for investment, the interest you pay is investment interest. H&r block free tax prep You can deduct investment interest subject to the limit discussed later. H&r block free tax prep However, you cannot deduct interest you incurred to produce tax-exempt income. H&r block free tax prep Nor can you deduct interest expenses on straddles. H&r block free tax prep Investment interest does not include any qualified home mortgage interest or any interest taken into account in computing income or loss from a passive activity. H&r block free tax prep Investment Property Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. H&r block free tax prep It also includes property that produces gain or loss (not derived in the ordinary course of a trade or business) from the sale or trade of property producing these types of income or held for investment (other than an interest in a passive activity). H&r block free tax prep Investment property also includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity). H&r block free tax prep Partners, shareholders, and beneficiaries. H&r block free tax prep   To determine your investment interest, combine your share of investment interest from a partnership, S corporation, estate, or trust with your other investment interest. H&r block free tax prep Allocation of Interest Expense If you borrow money for business or personal purposes as well as for investment, you must allocate the debt among those purposes. H&r block free tax prep Only the interest expense on the part of the debt used for investment purposes is treated as investment interest. H&r block free tax prep The allocation is not affected by the use of property that secures the debt. H&r block free tax prep Limit on Deduction Generally, your deduction for investment interest expense is limited to the amount of your net investment income. H&r block free tax prep You can carry over the amount of investment interest that you could not deduct because of this limit to the next tax year. H&r block free tax prep The interest carried over is treated as investment interest paid or accrued in that next year. H&r block free tax prep You can carry over disallowed investment interest to the next tax year even if it is more than your taxable income in the year the interest was paid or accrued. H&r block free tax prep Net Investment Income Determine the amount of your net investment income by subtracting your investment expenses (other than interest expense) from your investment income. H&r block free tax prep Investment income. H&r block free tax prep    This generally includes your gross income from property held for investment (such as interest, dividends, annuities, and royalties). H&r block free tax prep Investment income does not include Alaska Permanent Fund dividends. H&r block free tax prep It also does not include qualified dividends or net capital gain unless you choose to include them. H&r block free tax prep Choosing to include qualified dividends. H&r block free tax prep   Investment income generally does not include qualified dividends, discussed in chapter 8. H&r block free tax prep However, you can choose to include all or part of your qualified dividends in investment income. H&r block free tax prep   You make this choice by completing Form 4952, line 4g, according to its instructions. H&r block free tax prep   If you choose to include any amount of your qualified dividends in investment income, you must reduce your qualified dividends that are eligible for the lower capital gains tax rates by the same amount. H&r block free tax prep Choosing to include net capital gain. H&r block free tax prep   Investment income generally does not include net capital gain from disposing of investment property (including capital gain distributions from mutual funds). H&r block free tax prep However, you can choose to include all or part of your net capital gain in investment income. H&r block free tax prep    You make this choice by completing Form 4952, line 4g, according to its instructions. H&r block free tax prep   If you choose to include any amount of your net capital gain in investment income, you must reduce your net capital gain that is eligible for the lower capital gains tax rates by the same amount. H&r block free tax prep    Before making either choice, consider the overall effect on your tax liability. H&r block free tax prep Compare your tax if you make one or both of these choices with your tax if you do not. H&r block free tax prep Investment income of child reported on parent's return. H&r block free tax prep    Investment income includes the part of your child's interest and dividend income that you choose to report on your return. H&r block free tax prep If the child does not have qualified dividends, Alaska Permanent Fund dividends, or capital gain distributions, this is the amount on line 6 of Form 8814, Parents' Election To Report Child's Interest and Dividends. H&r block free tax prep Child's qualified dividends. H&r block free tax prep   If part of the amount you report is your child's qualified dividends, that part (which is reported on Form 1040, line 9b) generally does not count as investment income. H&r block free tax prep However, you can choose to include all or part of it in investment income, as explained under Choosing to include qualified dividends , earlier. H&r block free tax prep   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured next under Child's Alaska Permanent Fund dividends). H&r block free tax prep Child's Alaska Permanent Fund dividends. H&r block free tax prep   If part of the amount you report is your child's Alaska Permanent Fund dividends, that part does not count as investment income. H&r block free tax prep To figure the amount of your child's income that you can consider your investment income, start with the amount on Form 8814, line 6. H&r block free tax prep Multiply that amount by a percentage that is equal to the Alaska Permanent Fund dividends divided by the total amount on Form 8814, line 4. H&r block free tax prep Subtract the result from the amount on Form 8814, line 12. H&r block free tax prep Child's capital gain distributions. H&r block free tax prep    If part of the amount you report is your child's capital gain distributions, that part (which is reported on Schedule D, line 13, or Form 1040, line 13) generally does not count as investment income. H&r block free tax prep However, you can choose to include all or part of it in investment income, as explained in Choosing to include net capital gain , earlier. H&r block free tax prep   Your investment income also includes the amount on Form 8814, line 12 (or, if applicable, the reduced amount figured under Child's Alaska Permanent Fund dividends , earlier). H&r block free tax prep Investment expenses. H&r block free tax prep   Investment expenses are your allowed deductions (other than interest expense) directly connected with the production of investment income. H&r block free tax prep Investment expenses that are included as a miscellaneous itemized deduction on Schedule A (Form 1040) are allowable deductions after applying the 2% limit that applies to miscellaneous itemized deductions. H&r block free tax prep Use the smaller of: The investment expenses included on Schedule A (Form 1040), line 23, or The amount on Schedule A, line 27. H&r block free tax prep Losses from passive activities. H&r block free tax prep   Income or expenses that you used in computing income or loss from a passive activity are not included in determining your investment income or investment expenses (including investment interest expense). H&r block free tax prep See Publication 925, Passive Activity and At-Risk Rules, for information about passive activities. H&r block free tax prep Form 4952 Use Form 4952, Investment Interest Expense Deduction, to figure your deduction for investment interest. H&r block free tax prep Exception to use of Form 4952. H&r block free tax prep   You do not have to complete Form 4952 or attach it to your return if you meet all of the following tests. H&r block free tax prep Your investment interest expense is not more than your investment income from interest and ordinary dividends minus any qualified dividends. H&r block free tax prep You do not have any other deductible investment expenses. H&r block free tax prep You have no carryover of investment interest expense from 2012. H&r block free tax prep If you meet all of these tests, you can deduct all of your investment interest. H&r block free tax prep More Information For more information on investment interest, see Interest Expenses in chapter 3 of Publication 550. H&r block free tax prep Items You Cannot Deduct Some interest payments are not deductible. H&r block free tax prep Certain expenses similar to interest also are not deductible. H&r block free tax prep Nondeductible expenses include the following items. H&r block free tax prep Personal interest (discussed later). H&r block free tax prep Service charges (however, see Other Expenses (Line 23) in chapter 28). H&r block free tax prep Annual fees for credit cards. H&r block free tax prep Loan fees. H&r block free tax prep Credit investigation fees. H&r block free tax prep Interest to purchase or carry tax-exempt securities. H&r block free tax prep Penalties. H&r block free tax prep   You cannot deduct fines and penalties paid to a government for violations of law, regardless of their nature. H&r block free tax prep Personal Interest Personal interest is not deductible. H&r block free tax prep Personal interest is any interest that is not home mortgage interest, investment interest, business interest, or other deductible interest. H&r block free tax prep It includes the following items. H&r block free tax prep Interest on car loans (unless you use the car for business). H&r block free tax prep Interest on federal, state, or local income tax. H&r block free tax prep Finance charges on credit cards, retail installment contracts, and revolving charge accounts incurred for personal expenses. H&r block free tax prep Late payment charges by a public utility. H&r block free tax prep You may be able to deduct interest you pay on a qualified student loan. H&r block free tax prep For details, see Publication 970, Tax Benefits for Education. H&r block free tax prep Allocation of Interest If you use the proceeds of a loan for more than one purpose (for example, personal and business), you must allocate the interest on the loan to each use. H&r block free tax prep However, you do not have to allocate home mortgage interest if it is fully deductible, regardless of how the funds are used. H&r block free tax prep You allocate interest (other than fully deductible home mortgage interest) on a loan in the same way as the loan itself is allocated. H&r block free tax prep You do this by tracing disbursements of the debt proceeds to specific uses. H&r block free tax prep For details on how to do this, see chapter 4 of Publication 535. H&r block free tax prep How To Report You must file Form 1040 to deduct any home mortgage interest expense on your tax return. H&r block free tax prep Where you deduct your interest expense generally depends on how you use the loan proceeds. H&r block free tax prep See Table 23-1 for a summary of where to deduct your interest expense. H&r block free tax prep Home mortgage interest and points. H&r block free tax prep   Deduct the home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 10. H&r block free tax prep If you paid more deductible interest to the financial institution than the amount shown on Form 1098, show the larger deductible amount on line 10. H&r block free tax prep Attach a statement explaining the difference and print “See attached” next to line 10. H&r block free tax prep    Deduct home mortgage interest that was not reported to you on Form 1098 on Schedule A (Form 1040), line 11. H&r block free tax prep If you paid home mortgage interest to the person from whom you bought your home, show that person's name, address, and taxpayer identification number (TIN) on the dotted lines next to line 11. H&r block free tax prep The seller must give you this number and you must give the seller your TIN. H&r block free tax prep A Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. H&r block free tax prep Failure to meet any of these requirements may result in a $50 penalty for each failure. H&r block free tax prep The TIN can be either a social security number, an individual taxpayer identification number (issued by the Internal Revenue Service), or an employer identification number. H&r block free tax prep See Social Security Number (SSN) in chapter 1 for more information about TINs. H&r block free tax prep    If you can take a deduction for points that were not reported to you on Form 1098, deduct those points on Schedule A (Form 1040), line 12. H&r block free tax prep   Deduct mortgage insurance premiums on Schedule A (Form 1040), line 13. H&r block free tax prep More than one borrower. H&r block free tax prep   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. H&r block free tax prep Show how much of the interest each of you paid, and give the name and address of the person who received the form. H&r block free tax prep Deduct your share of the interest on Schedule A (Form 1040), line 11, and print “See attached” next to the line. H&r block free tax prep Also, deduct your share of any qualified mortgage insurance premiums on Schedule A (Form 1040), line 13. H&r block free tax prep   Similarly, if you are the payer of record on a mortgage on which there are other borrowers entitled to a deduction for the interest shown on the Form 1098 you received, deduct only your share of the interest on Schedule A (Form 1040), line 10. H&r block free tax prep You should let each of the other borrowers know what his or her share is. H&r block free tax prep Mortgage proceeds used for business or investment. H&r block free tax prep    If your home mortgage interest deduction is limited, but all or part of the mortgage proceeds were used for business, investment, or other deductible activities, see Table 23-1. H&r block free tax prep It shows where to deduct the part of your excess interest that is for those activities. H&r block free tax prep Investment interest. H&r block free tax prep    Deduct investment interest, subject to certain limits discussed in Publication 550, on Schedule A (Form 1040), line 14. H&r block free tax prep Amortization of bond premium. H&r block free tax prep   There are various ways to treat the premium you pay to buy taxable bonds. H&r block free tax prep See Bond Premium Amortization in Publication 550. H&r block free tax prep Income-producing rental or royalty interest. H&r block free tax prep   Deduct interest on a loan for income-producing rental or royalty property that is not used in your business in Part I of Schedule E (Form 1040). H&r block free tax prep Example. H&r block free tax prep You rent out part of your home and borrow money to make repairs. H&r block free tax prep You can deduct only the interest payment for the rented part in Part I of Schedule E (Form 1040). H&r block free tax prep Deduct the rest of the interest payment on Schedule A (Form 1040) if it is deductible home mortgage interest. H&r block free tax prep Table 23-1. H&r block free tax prep Where To Deduct Your Interest Expense IF you have . H&r block free tax prep . H&r block free tax prep . H&r block free tax prep THEN deduct it on . H&r block free tax prep . H&r block free tax prep . H&r block free tax prep AND for more information go to . H&r block free tax prep . H&r block free tax prep . H&r block free tax prep deductible student loan interest Form 1040, line 33, or Form 1040A, line 18 Publication 970. H&r block free tax prep deductible home mortgage interest and points reported on Form 1098 Schedule A (Form 1040), line 10 Publication 936. H&r block free tax prep deductible home mortgage interest not reported on Form 1098 Schedule A (Form 1040), line 11 Publication 936. H&r block free tax prep deductible points not reported on Form 1098 Schedule A (Form 1040), line 12 Publication 936. H&r block free tax prep deductible mortgage insurance premiums Schedule A (Form 1040), line 13 Publication 936. H&r block free tax prep deductible investment interest (other than incurred to produce rents or royalties) Schedule A (Form 1040), line 14 Publication 550. H&r block free tax prep deductible business interest (non-farm) Schedule C or C-EZ (Form 1040) Publication 535. H&r block free tax prep deductible farm business interest Schedule F (Form 1040) Publications 225 and 535. H&r block free tax prep deductible interest incurred to produce rents or royalties Schedule E (Form 1040) Publications 527 and 535. H&r block free tax prep personal interest not deductible. H&r block free tax prep Prev  Up  Next   Home   More Online Publications