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Income Tax 2012

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Income Tax 2012

Income tax 2012 Publication 596 - Introductory Material Table of Contents Future Developments What is the EIC? Can I Claim the EIC? Do I Need This Publication? Do I Have To Have A Child To Qualify For The EIC? How Do I Figure the Amount of EIC? How Can I Quickly Locate Specific information? Is There Help Online? What's New for 2013 Reminders Future Developments For the latest information about developments related to Publication 596, such as legislation enacted after it was published, go to www. Income tax 2012 irs. Income tax 2012 gov/pub596. Income tax 2012 What is the EIC? The earned income credit (EIC) is a tax credit for certain people who work and have earned income under $51,567. Income tax 2012 A tax credit usually means more money in your pocket. Income tax 2012 It reduces the amount of tax you owe. Income tax 2012 The EIC may also give you a refund. Income tax 2012 Can I Claim the EIC? To claim the EIC, you must meet certain rules. Income tax 2012 These rules are summarized in Table 1. Income tax 2012 Table 1. Income tax 2012 Earned Income Credit in a Nutshell First, you must meet all the rules in this column. Income tax 2012 Second, you must meet all the rules in one of these columns, whichever applies. Income tax 2012 Third, you must meet the rule in this column. Income tax 2012 Chapter 1. Income tax 2012  Rules for Everyone Chapter 2. Income tax 2012  Rules If You Have a Qualifying Child Chapter 3. Income tax 2012  Rules If You Do Not Have a Qualifying Child Chapter 4. Income tax 2012  Figuring and Claiming the EIC 1. Income tax 2012 Your adjusted gross income (AGI) must be less than:  • $46,227 ($51,567 for married filing jointly) if you have three or more qualifying children,  • $43,038 ($48,378 for married filing jointly) if you have two qualifying children,  • $37,870 ($43,210 for married filing jointly) if you have one qualifying child, or   • $14,340 ($19,680 for married filing jointly) if you do not have a qualifying child. Income tax 2012 2. Income tax 2012 You must have a valid social security number. Income tax 2012   3. Income tax 2012 Your filing status cannot be Married filing separately. Income tax 2012   4. Income tax 2012 You must be a U. Income tax 2012 S. Income tax 2012 citizen or resident alien all year. Income tax 2012   5. Income tax 2012 You cannot file Form 2555 or Form 2555-EZ (relating to foreign earned income). Income tax 2012   6. Income tax 2012 Your investment income must be $3,300 or less. Income tax 2012    7. Income tax 2012 You must have earned income. Income tax 2012 8. Income tax 2012 Your child must meet the relationship, age, residency, and joint return tests. Income tax 2012   9. Income tax 2012 Your qualifying child cannot be used by more than one person to claim the EIC. Income tax 2012   10. Income tax 2012 You cannot be a qualifying child of another person. Income tax 2012 11. Income tax 2012 You must be at least age 25 but under age 65. Income tax 2012    12. Income tax 2012 You cannot be the dependent of another person. Income tax 2012   13. Income tax 2012 You cannot be a qualifying child of another person. Income tax 2012   14. Income tax 2012 You must have lived in the United States more than half of the year. Income tax 2012 15. Income tax 2012 Your earned income must be less than:  • $46,227 ($51,567 for married filing jointly) if you have three or more qualifying children,  • $43,038 ($48,378 for married filing jointly) if you have two qualifying children,  • $37,870 ($43,210 for married filing jointly) if you have one qualifying child, or  • $14,340 ($19,680 for married filing jointly) if you do not have a qualifying child. Income tax 2012 Do I Need This Publication? Certain people who file Form 1040 must use Worksheet 1 in this publication, instead of Step 2 in their Form 1040 instructions, when they are checking whether they can take the EIC. Income tax 2012 You are one of those people if any of the following statements are true for 2013. Income tax 2012 You are filing Schedule E (Form 1040). Income tax 2012 You are reporting income from the rental of personal property not used in a trade or business. Income tax 2012 You are reporting income on Form 1040, line 21, from Form 8814 (relating to election to report child's interest and dividends). Income tax 2012 You are reporting an amount on Form 1040, line 13, that includes an amount from Form 4797. Income tax 2012 If none of the statements above apply to you, your tax form instructions have all the information you need to find out if you can claim the EIC and to figure the amount of your EIC. Income tax 2012 You do not need this publication. Income tax 2012 But you can read it to find out whether you can take the EIC and to learn more about the EIC. Income tax 2012 Do I Have To Have A Child To Qualify For The EIC? No, you can qualify for the EIC without a qualifying child if you are at least age 25 but under age 65 and your earned income is less than $14,340 ($19,680 if married filing jointly). Income tax 2012 See chapter 3. Income tax 2012 How Do I Figure the Amount of EIC? If you can claim the EIC, you can either have the IRS figure the amount of your credit, or you can figure it yourself. Income tax 2012 To figure it yourself, you can complete a worksheet in the instructions for the form you file. Income tax 2012 To find out how to have the IRS figure it for you, see chapter 4. Income tax 2012 How Can I Quickly Locate Specific information? You can use the index to look up specific information. Income tax 2012 In most cases, index entries will point you to headings, tables, or a worksheet. Income tax 2012 Is There Help Online? Yes. Income tax 2012 You can use the EITC Assistant at www. Income tax 2012 irs. Income tax 2012 gov/eitc to find out if you may be eligible for the credit. Income tax 2012 The EITC Assistant is available in English and Spanish. Income tax 2012 What's New for 2013 Earned income amount is more. Income tax 2012 The maximum amount of income you can earn and still get the credit has increased. Income tax 2012 You may be able to take the credit if: You have three or more qualifying children and you earned less than $46,227 ($51,567 if married filing jointly), You have two qualifying children and you earned less than $43,038 ($48,378 if married filing jointly), You have one qualifying child and you earned less than $37,870 ($43,210 if married filing jointly), or You do not have a qualifying child and you earned less than $14,340 ($19,680 if married filing jointly). Income tax 2012 Your adjusted gross income also must be less than the amount in the above list that applies to you. Income tax 2012 For details, see Rules 1 and 15. Income tax 2012 Investment income amount is more. Income tax 2012 The maximum amount of investment income you can have and still get the credit has increased to $3,300. Income tax 2012 See Rule 6—Your Investment Income Must Be $3,300 or Less . Income tax 2012 Reminders Increased EIC on certain joint returns. Income tax 2012 . Income tax 2012  A married person filing a joint return may get more EIC than someone with the same income but a different filing status. Income tax 2012 As a result, the EIC table has different columns for married persons filing jointly than for everyone else. Income tax 2012 When you look up your EIC in the EIC Table, be sure to use the correct column for your filing status and the number of children you have. Income tax 2012 Earned income credit has no effect on certain welfare benefits. Income tax 2012  Any refund you receive because of the EIC cannot be counted as income when determining whether you or anyone else is eligible for benefits or assistance, or how much you or anyone else can receive, under any federal program or under any state or local program financed in whole or in part with federal funds. Income tax 2012 These programs include the following. Income tax 2012 Temporary Assistance for Needy Families (TANF). Income tax 2012 Medicaid. Income tax 2012 Supplemental security income (SSI). Income tax 2012 Supplemental Nutrition Assistance Program (food stamps). Income tax 2012 Low-income housing. Income tax 2012 In addition, when determining eligibility, the refund cannot be counted as a resource for at least 12 months after you receive it. Income tax 2012 Check with your local benefit coordinator to find out if your refund will affect your benefits. Income tax 2012 Do not overlook your state credit. Income tax 2012  If you can claim the EIC on your federal income tax return, you may be able to take a similar credit on your state or local income tax return. Income tax 2012 For a list of states that offer a state EIC, go to www. Income tax 2012 irs. Income tax 2012 gov/eitc. Income tax 2012 EIC questioned by IRS. Income tax 2012  The IRS may ask you to provide documents to prove you are entitled to claim the EIC. Income tax 2012 We will tell you what documents to send us. Income tax 2012 These may include: birth certificates, school records, etc. Income tax 2012 The process of establishing your eligibility will delay your refund. Income tax 2012 Spanish version of Publication 596. Income tax 2012  You can order Publicación 596SP, Crédito por Ingreso del Trabajo, from the IRS. Income tax 2012 It is a Spanish translation of Publication 596. Income tax 2012 See How To Get Tax Help to find out how to order this and other IRS forms and publications. Income tax 2012 Photographs of missing children. Income tax 2012  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Income tax 2012 Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Income tax 2012 You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Income tax 2012 Comments and suggestions. Income tax 2012  We welcome your comments about this publication and your suggestions for future editions. Income tax 2012 You can write to us at the following address:  Internal Revenue Service Individual Forms and Publications Branch 1111 Constitution Ave. Income tax 2012 NW, IR-6526 Washington, DC 20224 We respond to many letters by telephone. Income tax 2012 Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Income tax 2012 You can send your comments from www. Income tax 2012 irs. Income tax 2012 gov/formspubs/. Income tax 2012 Click on “More Information” and then on “Comment on Tax Forms and Publications. Income tax 2012 ” Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Income tax 2012 Ordering forms and publications. Income tax 2012  Visit www. Income tax 2012 irs. Income tax 2012 gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. Income tax 2012  Internal Revenue Service 1201 N. Income tax 2012 Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. Income tax 2012  If you have a tax question, check the information available on IRS. Income tax 2012 gov or call 1-800-829-1040. Income tax 2012 We cannot answer tax questions sent to either of the above addresses. Income tax 2012 Prev  Up  Next   Home   More Online Publications
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The Income Tax 2012

Income tax 2012 1. Income tax 2012   Rental Income and Expenses (If No Personal Use of Dwelling) Table of Contents Rental IncomeWhen To Report Types of Income Rental ExpensesWhen To Deduct Types of Expenses This chapter discusses the various types of rental income and expenses for a residential rental activity with no personal use of the dwelling. Income tax 2012 Generally, each year you will report all income and deduct all out-of-pocket expenses in full. Income tax 2012 The deduction to recover the cost of your rental property—depreciation—is taken over a prescribed number of years, and is discussed in chapter 2, Depreciation of Rental Property. Income tax 2012 If your rental income is from property you also use personally or rent to someone at less than a fair rental price, first read the information in chapter 5 , Personal Use of Dwelling Unit (Including Vacation Home). Income tax 2012 Rental Income In most cases, you must include in your gross income all amounts you receive as rent. Income tax 2012 Rental income is any payment you receive for the use or occupation of property. Income tax 2012 In addition to amounts you receive as normal rental payments, there are other amounts that may be rental income. Income tax 2012 When To Report When you report rental income on your tax return generally depends on whether you are a cash basis taxpayer or use an accrual method. Income tax 2012 Most individual taxpayers use the cash method. Income tax 2012 Cash method. Income tax 2012   You are a cash basis taxpayer if you report income on your return in the year you actually or constructively receive it, regardless of when it was earned. Income tax 2012 You constructively receive income when it is made available to you, for example, by being credited to your bank account. Income tax 2012 Accrual method. Income tax 2012    If you are an accrual basis taxpayer, you generally report income when you earn it, rather than when you receive it. Income tax 2012 You generally deduct your expenses when you incur them, rather than when you pay them. Income tax 2012 More information. Income tax 2012   See Publication 538, Accounting Periods and Methods, for more information about when you constructively receive income and accrual methods of accounting. Income tax 2012 Types of Income The following are common types of rental income. Income tax 2012 Advance rent. Income tax 2012   Advance rent is any amount you receive before the period that it covers. Income tax 2012 Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use. Income tax 2012 Example. Income tax 2012 On March 18, 2013, you signed a 10-year lease to rent your property. Income tax 2012 During 2013, you received $9,600 for the first year's rent and $9,600 as rent for the last year of the lease. Income tax 2012 You must include $19,200 in your rental income in the first year. Income tax 2012 Canceling a lease. Income tax 2012   If your tenant pays you to cancel a lease, the amount you receive is rent. Income tax 2012 Include the payment in your income in the year you receive it regardless of your method of accounting. Income tax 2012 Expenses paid by tenant. Income tax 2012   If your tenant pays any of your expenses, those payments are rental income. Income tax 2012 Because you must include this amount in income, you can also deduct the expenses if they are deductible rental expenses. Income tax 2012 For more information, see Rental Expenses , later. Income tax 2012 Example 1. Income tax 2012 Your tenant pays the water and sewage bill for your rental property and deducts the amount from the normal rent payment. Income tax 2012 Under the terms of the lease, your tenant does not have to pay this bill. Income tax 2012 Include the utility bill paid by the tenant and any amount received as a rent payment in your rental income. Income tax 2012 You can deduct the utility payment made by your tenant as a rental expense. Income tax 2012 Example 2. Income tax 2012 While you are out of town, the furnace in your rental property stops working. Income tax 2012 Your tenant pays for the necessary repairs and deducts the repair bill from the rent payment. Income tax 2012 Include the repair bill paid by the tenant and any amount received as a rent payment in your rental income. Income tax 2012 You can deduct the repair payment made by your tenant as a rental expense. Income tax 2012 Property or services. Income tax 2012   If you receive property or services as rent, instead of money, include the fair market value of the property or services in your rental income. Income tax 2012   If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary. Income tax 2012 Example. Income tax 2012 Your tenant is a house painter. Income tax 2012 He offers to paint your rental property instead of paying 2 months rent. Income tax 2012 You accept his offer. Income tax 2012 Include in your rental income the amount the tenant would have paid for 2 months rent. Income tax 2012 You can deduct that same amount as a rental expense for painting your property. Income tax 2012 Security deposits. Income tax 2012   Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. Income tax 2012 But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year. Income tax 2012    If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Income tax 2012 Include it in your income when you receive it. Income tax 2012 Other Sources of Rental Income Lease with option to buy. Income tax 2012   If the rental agreement gives your tenant the right to buy your rental property, the payments you receive under the agreement are generally rental income. Income tax 2012 If your tenant exercises the right to buy the property, the payments you receive for the period after the date of sale are considered part of the selling price. Income tax 2012 Part interest. Income tax 2012   If you own a part interest in rental property, you must report your part of the rental income from the property. Income tax 2012 Rental of property also used as your home. Income tax 2012   If you rent property that you also use as your home and you rent it less than 15 days during the tax year, do not include the rent you receive in your income and do not deduct rental expenses. Income tax 2012 However, you can deduct on Schedule A (Form 1040), Itemized Deductions, the interest, taxes, and casualty and theft losses that are allowed for nonrental property. Income tax 2012 See chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). Income tax 2012 Rental Expenses In most cases, the expenses of renting your property, such as maintenance, insurance, taxes, and interest, can be deducted from your rental income. Income tax 2012 Personal use of rental property. Income tax 2012   If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and personal use. Income tax 2012 Also, your rental expense deductions may be limited. Income tax 2012 See chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). Income tax 2012 Part interest. Income tax 2012   If you own a part interest in rental property, you can deduct expenses you paid according to your percentage of ownership. Income tax 2012 Example. Income tax 2012 Roger owns a one-half undivided interest in a rental house. Income tax 2012 Last year he paid $968 for necessary repairs on the property. Income tax 2012 Roger can deduct $484 (50% × $968) as a rental expense. Income tax 2012 He is entitled to reimbursement for the remaining half from the co-owner. Income tax 2012 When To Deduct You generally deduct your rental expenses in the year you pay them. Income tax 2012 If you use the accrual method, see Publication 538 for more information. Income tax 2012 Types of Expenses Listed below are the most common rental expenses. Income tax 2012 Advertising. Income tax 2012 Auto and travel expenses. Income tax 2012 Cleaning and maintenance. Income tax 2012 Commissions. Income tax 2012 Depreciation. Income tax 2012 Insurance. Income tax 2012 Interest (other). Income tax 2012 Legal and other professional fees. Income tax 2012 Local transportation expenses. Income tax 2012 Management fees. Income tax 2012 Mortgage interest paid to banks, etc. Income tax 2012 Points. Income tax 2012 Rental payments. Income tax 2012 Repairs. Income tax 2012 Taxes. Income tax 2012 Utilities. Income tax 2012 Some of these expenses, as well as other less common ones, are discussed below. Income tax 2012 Depreciation. Income tax 2012   Depreciation is a capital expense. Income tax 2012 It is the mechanism for recovering your cost in an income producing property and must be taken over the expected life of the property. Income tax 2012   You can begin to depreciate rental property when it is ready and available for rent. Income tax 2012 See Placed in Service under When Does Depreciation Begin and End in chapter 2. Income tax 2012 Insurance premiums paid in advance. Income tax 2012   If you pay an insurance premium for more than one year in advance, for each year of coverage you can deduct the part of the premium payment that will apply to that year. Income tax 2012 You cannot deduct the total premium in the year you pay it. Income tax 2012 See chapter 6 of Publication 535 for information on deductible premiums. Income tax 2012 Interest expense. Income tax 2012   You can deduct mortgage interest you pay on your rental property. Income tax 2012 When you refinance a rental property for more than the previous outstanding balance, the portion of the interest allocable to loan proceeds not related to rental use generally cannot be deducted as a rental expense. Income tax 2012 Chapter 4 of Publication 535 explains mortgage interest in detail. Income tax 2012 Expenses paid to obtain a mortgage. Income tax 2012   Certain expenses you pay to obtain a mortgage on your rental property cannot be deducted as interest. Income tax 2012 These expenses, which include mortgage commissions, abstract fees, and recording fees, are capital expenses that are part of your basis in the property. Income tax 2012 Form 1098, Mortgage Interest Statement. Income tax 2012   If you paid $600 or more of mortgage interest on your rental property to any one person, you should receive a Form 1098 or similar statement showing the interest you paid for the year. Income tax 2012 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, the mortgage, and the other person received the Form 1098, report your share of the interest on Schedule E (Form 1040), line 13. Income tax 2012 Attach a statement to your return showing the name and address of the other person. Income tax 2012 On the dotted line next to line 13, enter “See attached. Income tax 2012 ” Legal and other professional fees. Income tax 2012   You can deduct, as a rental expense, legal and other professional expenses such as tax return preparation fees you paid to prepare Schedule E, Part I. Income tax 2012 For example, on your 2013 Schedule E you can deduct fees paid in 2013 to prepare Part I of your 2012 Schedule E. Income tax 2012 You can also deduct, as a rental expense, any expense (other than federal taxes and penalties) you paid to resolve a tax underpayment related to your rental activities. Income tax 2012 Local benefit taxes. Income tax 2012   In most cases, you cannot deduct charges for local benefits that increase the value of your property, such as charges for putting in streets, sidewalks, or water and sewer systems. Income tax 2012 These charges are nondepreciable capital expenditures and must be added to the basis of your property. Income tax 2012 However, you can deduct local benefit taxes that are for maintaining, repairing, or paying interest charges for the benefits. Income tax 2012 Local transportation expenses. Income tax 2012   You may be able to deduct your ordinary and necessary local transportation expenses if you incur them to collect rental income or to manage, conserve, or maintain your rental property. Income tax 2012 However, transportation expenses incurred to travel between your home and a rental property generally constitute nondeductible commuting costs unless you use your home as your principal place of business. Income tax 2012 See Publication 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business. Income tax 2012   Generally, if you use your personal car, pickup truck, or light van for rental activities, you can deduct the expenses using one of two methods: actual expenses or the standard mileage rate. Income tax 2012 For 2013, the standard mileage rate for business use is 56. Income tax 2012 5 cents per mile. Income tax 2012 For more information, see chapter 4 of Publication 463. Income tax 2012    To deduct car expenses under either method, you must keep records that follow the rules in chapter 5 of Publication 463. Income tax 2012 In addition, you must complete Form 4562, Part V, and attach it to your tax return. Income tax 2012 Pre-rental expenses. Income tax 2012   You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent. Income tax 2012 Rental of equipment. Income tax 2012   You can deduct the rent you pay for equipment that you use for rental purposes. Income tax 2012 However, in some cases, lease contracts are actually purchase contracts. Income tax 2012 If so, you cannot deduct these payments. Income tax 2012 You can recover the cost of purchased equipment through depreciation. Income tax 2012 Rental of property. Income tax 2012   You can deduct the rent you pay for property that you use for rental purposes. Income tax 2012 If you buy a leasehold for rental purposes, you can deduct an equal part of the cost each year over the term of the lease. Income tax 2012 Travel expenses. Income tax 2012   You can deduct the ordinary and necessary expenses of traveling away from home if the primary purpose of the trip is to collect rental income or to manage, conserve, or maintain your rental property. Income tax 2012 You must properly allocate your expenses between rental and nonrental activities. Income tax 2012 You cannot deduct the cost of traveling away from home if the primary purpose of the trip is to improve the property. Income tax 2012 The cost of improvements is recovered by taking depreciation. Income tax 2012 For information on travel expenses, see chapter 1 of Publication 463. Income tax 2012    To deduct travel expenses, you must keep records that follow the rules in chapter 5 of Publication 463. Income tax 2012 Uncollected rent. Income tax 2012   If you are a cash basis taxpayer, do not deduct uncollected rent. Income tax 2012 Because you have not included it in your income, it is not deductible. Income tax 2012   If you use an accrual method, report income when you earn it. Income tax 2012 If you are unable to collect the rent, you may be able to deduct it as a business bad debt. Income tax 2012 See chapter 10 of Publication 535 for more information about business bad debts. Income tax 2012 Vacant rental property. Income tax 2012   If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. Income tax 2012 However, you cannot deduct any loss of rental income for the period the property is vacant. Income tax 2012 Vacant while listed for sale. Income tax 2012   If you sell property you held for rental purposes, you can deduct the ordinary and necessary expenses for managing, conserving, or maintaining the property until it is sold. Income tax 2012 If the property is not held out and available for rent while listed for sale, the expenses are not deductible rental expenses. Income tax 2012 Points The term “points” is often used to describe some of the charges paid, or treated as paid, by a borrower to take out a loan or a mortgage. Income tax 2012 These charges are also called loan origination fees, maximum loan charges, or premium charges. Income tax 2012 Any of these charges (points) that are solely for the use of money are interest. Income tax 2012 Because points are prepaid interest, you generally cannot deduct the full amount in the year paid, but must deduct the interest over the term of the loan. Income tax 2012 The method used to figure the amount of points you can deduct each year follows the original issue discount (OID) rules. Income tax 2012 In this case, points are equivalent to OID, which is the difference between: The amount borrowed (redemption price at maturity, or principal) and The proceeds (issue price). Income tax 2012 The first step is to determine whether your total OID (which you may have on bonds or other investments in addition to the mortgage loan), including the OID resulting from the points, is insignificant or de minimis. Income tax 2012 If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct. Income tax 2012 De minimis OID. Income tax 2012   The OID is de minimis if it is less than one-fourth of 1% (. Income tax 2012 0025) of the stated redemption price at maturity (principal amount of the loan) multiplied by the number of full years from the date of original issue to maturity (term of the loan). Income tax 2012   If the OID is de minimis, you can choose one of the following ways to figure the amount of points you can deduct each year. Income tax 2012 On a constant-yield basis over the term of the loan. Income tax 2012 On a straight line basis over the term of the loan. Income tax 2012 In proportion to stated interest payments. Income tax 2012 In its entirety at maturity of the loan. Income tax 2012 You make this choice by deducting the OID (points) in a manner consistent with the method chosen on your timely filed tax return for the tax year in which the loan is issued. Income tax 2012 Example. Income tax 2012 Carol Madison took out a $100,000 mortgage loan on January 1, 2013, to buy a house she will use as a rental during 2013. Income tax 2012 The loan is to be repaid over 30 years. Income tax 2012 During 2013, Carol paid $10,000 of mortgage interest (stated interest) to the lender. Income tax 2012 When the loan was made, she paid $1,500 in points to the lender. Income tax 2012 The points reduced the principal amount of the loan from $100,000 to $98,500, resulting in $1,500 of OID. Income tax 2012 Carol determines that the points (OID) she paid are de minimis based on the following computation. Income tax 2012 Redemption price at maturity (principal amount of the loan) $100,000 Multiplied by: The term of the  loan in complete years ×30 Multiplied by ×. Income tax 2012 0025 De minimis amount $7,500 The points (OID) she paid ($1,500) are less than the de minimis amount ($7,500). Income tax 2012 Therefore, Carol has de minimis OID and she can choose one of the four ways discussed earlier to figure the amount she can deduct each year. Income tax 2012 Under the straight line method, she can deduct $50 each year for 30 years. Income tax 2012 Constant-yield method. Income tax 2012   If the OID is not de minimis, you must use the constant-yield method to figure how much you can deduct each year. Income tax 2012   You figure your deduction for the first year in the following manner. Income tax 2012 Determine the issue price of the loan. Income tax 2012 If you paid points on the loan, the issue price generally is the difference between the principal and the points. Income tax 2012 Multiply the result in (1) by the yield to maturity (defined later). Income tax 2012 Subtract any qualified stated interest payments (defined later) from the result in (2). Income tax 2012 This is the OID you can deduct in the first year. Income tax 2012 Yield to maturity (YTM). Income tax 2012   This rate is generally shown in the literature you receive from your lender. Income tax 2012 If you do not have this information, consult your lender or tax advisor. Income tax 2012 In general, the YTM is the discount rate that, when used in computing the present value of all principal and interest payments, produces an amount equal to the principal amount of the loan. Income tax 2012 Qualified stated interest (QSI). Income tax 2012   In general, this is the stated interest that is unconditionally payable in cash or property (other than another loan of the issuer) at least annually over the term of the loan at a fixed rate. Income tax 2012 Example—Year 1. Income tax 2012 The facts are the same as in the previous example. Income tax 2012 The yield to maturity on Carol's loan is 10. Income tax 2012 2467%, compounded annually. Income tax 2012 She figured the amount of points (OID) she could deduct in 2013 as follows. Income tax 2012 Principal amount of the loan $100,000 Minus: Points (OID) –1,500 Issue price of the loan $98,500 Multiplied by: YTM × . Income tax 2012 102467 Total 10,093 Minus: QSI –10,000 Points (OID) deductible in 2013 $93 To figure your deduction in any subsequent year, you start with the adjusted issue price. Income tax 2012 To get the adjusted issue price, add to the issue price figured in Year 1 any OID previously deducted. Income tax 2012 Then follow steps (2) and (3), earlier. Income tax 2012 Example—Year 2. Income tax 2012 Carol figured the deduction for 2014 as follows. Income tax 2012 Issue price $98,500 Plus: Points (OID) deducted  in 2013 +93 Adjusted issue price $98,593 Multiplied by: YTM × . Income tax 2012 102467 Total 10,103 Minus: QSI –10,000 Points (OID) deductible in 2014 $103 Loan or mortgage ends. Income tax 2012    If your loan or mortgage ends, you may be able to deduct any remaining points (OID) in the tax year in which the loan or mortgage ends. Income tax 2012 A loan or mortgage may end due to a refinancing, prepayment, foreclosure, or similar event. Income tax 2012 However, if the refinancing is with the same lender, the remaining points (OID) generally are not deductible in the year in which the refinancing occurs, but may be deductible over the term of the new mortgage or loan. Income tax 2012 Points when loan refinance is more than the previous outstanding balance. Income tax 2012   When you refinance a rental property for more than the previous outstanding balance, the portion of the points allocable to loan proceeds not related to rental use generally cannot be deducted as a rental expense. Income tax 2012 For example, if an individual refinanced a loan with a balance of $100,000, the amount of the new loan was $120,000, and the taxpayer used $20,000 to purchase a car, points allocable to the $20,000 would be treated as nondeductible personal interest. Income tax 2012 Repairs and Improvements Generally, an expense for repairing or maintaining your rental property may be deducted if you are not required to capitalize the expense. Income tax 2012 Improvements. Income tax 2012   You must capitalize any expense you pay to improve your rental property. Income tax 2012 An expense is for an improvement if it results in a betterment to your property, restores your property, or adapts your property to a new or different use. Income tax 2012 Betterments. Income tax 2012   Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property. Income tax 2012 Restoration. Income tax 2012   Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition. Income tax 2012 Adaptation. Income tax 2012   Expenses that may be for adaptation include expenses for altering your property to a use that is not consistent with the intended ordinary use of your property when you began renting the property. Income tax 2012 Separate the costs of repairs and improvements, and keep accurate records. Income tax 2012 You will need to know the cost of improvements when you sell or depreciate your property. Income tax 2012 The expenses you capitalize for improving your property can generally be depreciated as if the improvement were separate property. Income tax 2012 Table 1-1. Income tax 2012 Examples of Improvements Additions Bedroom Bathroom Deck Garage Porch Patio  Lawn & Grounds Landscaping Driveway Walkway Fence Retaining wall Sprinkler system Swimming pool Miscellaneous Storm windows, doors New roof Central vacuum Wiring upgrades Satellite dish Security system   Heating & Air Conditioning Heating system Central air conditioning Furnace Duct work Central humidifier Filtration system Plumbing Septic system Water heater Soft water system Filtration system  Interior Improvements Built-in appliances Kitchen modernization Flooring Wall-to-wall carpeting  Insulation Attic Walls, floor Pipes, duct work Prev  Up  Next   Home   More Online Publications