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Internal Revenue Tax Forms 2012

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Internal Revenue Tax Forms 2012

Internal revenue tax forms 2012 Publication 936 - Main Content Table of Contents Part I. Internal revenue tax forms 2012 Home Mortgage InterestSecured Debt Qualified Home Special Situations Points Mortgage Insurance Premiums Form 1098, Mortgage Interest Statement How To Report Special Rule for Tenant-Stockholders in Cooperative Housing Corporations Part II. Internal revenue tax forms 2012 Limits on Home Mortgage Interest DeductionHome Acquisition Debt Home Equity Debt Grandfathered Debt Table 1 Instructions How To Get Tax HelpLow Income Taxpayer Clinics Part I. Internal revenue tax forms 2012 Home Mortgage Interest This part explains what you can deduct as home mortgage interest. Internal revenue tax forms 2012 It includes discussions on points, mortgage insurance premiums, and how to report deductible interest on your tax return. Internal revenue tax forms 2012 Generally, home mortgage interest is any interest you pay on a loan secured by your home (main home or a second home). Internal revenue tax forms 2012 The loan may be a mortgage to buy your home, a second mortgage, a line of credit, or a home equity loan. Internal revenue tax forms 2012 You can deduct home mortgage interest if all the following conditions are met. Internal revenue tax forms 2012 You file Form 1040 and itemize deductions on Schedule A (Form 1040). Internal revenue tax forms 2012 The mortgage is a secured debt on a qualified home in which you have an ownership interest. Internal revenue tax forms 2012 Secured Debt and Qualified Home are explained later. Internal revenue tax forms 2012  Both you and the lender must intend that the loan be repaid. Internal revenue tax forms 2012 Fully deductible interest. Internal revenue tax forms 2012   In most cases, you can deduct all of your home mortgage interest. Internal revenue tax forms 2012 How much you can deduct depends on the date of the mortgage, the amount of the mortgage, and how you use the mortgage proceeds. Internal revenue tax forms 2012   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. Internal revenue tax forms 2012 (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. Internal revenue tax forms 2012 ) If one or more of your mortgages does not fit into any of these categories, use Part II of this publication to figure the amount of interest you can deduct. Internal revenue tax forms 2012   The three categories are as follows. Internal revenue tax forms 2012 Mortgages you took out on or before October 13, 1987 (called grandfathered debt). Internal revenue tax forms 2012 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). Internal revenue tax forms 2012 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). Internal revenue tax forms 2012 The dollar limits for the second and third categories apply to the combined mortgages on your main home and second home. Internal revenue tax forms 2012   See Part II for more detailed definitions of grandfathered, home acquisition, and home equity debt. Internal revenue tax forms 2012    You can use Figure A to check whether your home mortgage interest is fully deductible. Internal revenue tax forms 2012 This image is too large to be displayed in the current screen. Internal revenue tax forms 2012 Please click the link to view the image. Internal revenue tax forms 2012 Figure A. Internal revenue tax forms 2012 Is My Home Mortgage Interest Fully Deductible? Secured Debt You can deduct your home mortgage interest only if your mortgage is a secured debt. Internal revenue tax forms 2012 A secured debt is one in which you sign an instrument (such as a mortgage, deed of trust, or land contract) that: Makes your ownership in a qualified home security for payment of the debt, Provides, in case of default, that your home could satisfy the debt, and Is recorded or is otherwise perfected under any state or local law that applies. Internal revenue tax forms 2012 In other words, your mortgage is a secured debt if you put your home up as collateral to protect the interests of the lender. Internal revenue tax forms 2012 If you cannot pay the debt, your home can then serve as payment to the lender to satisfy (pay) the debt. Internal revenue tax forms 2012 In this publication, mortgage will refer to secured debt. Internal revenue tax forms 2012 Debt not secured by home. Internal revenue tax forms 2012   A debt is not secured by your home if it is secured solely because of a lien on your general assets or if it is a security interest that attaches to the property without your consent (such as a mechanic's lien or judgment lien). Internal revenue tax forms 2012   A debt is not secured by your home if it once was, but is no longer secured by your home. Internal revenue tax forms 2012 Wraparound mortgage. Internal revenue tax forms 2012   This is not a secured debt unless it is recorded or otherwise perfected under state law. Internal revenue tax forms 2012 Example. Internal revenue tax forms 2012 Beth owns a home subject to a mortgage of $40,000. Internal revenue tax forms 2012 She sells the home for $100,000 to John, who takes it subject to the $40,000 mortgage. Internal revenue tax forms 2012 Beth continues to make the payments on the $40,000 note. Internal revenue tax forms 2012 John pays $10,000 down and gives Beth a $90,000 note secured by a wraparound mortgage on the home. Internal revenue tax forms 2012 Beth does not record or otherwise perfect the $90,000 mortgage under the state law that applies. Internal revenue tax forms 2012 Therefore, the mortgage is not a secured debt and John cannot deduct any of the interest he pays on it as home mortgage interest. Internal revenue tax forms 2012 Choice to treat the debt as not secured by your home. Internal revenue tax forms 2012   You can choose to treat any debt secured by your qualified home as not secured by the home. Internal revenue tax forms 2012 This treatment begins with the tax year for which you make the choice and continues for all later tax years. Internal revenue tax forms 2012 You can revoke your choice only with the consent of the Internal Revenue Service (IRS). Internal revenue tax forms 2012   You may want to treat a debt as not secured by your home if the interest on that debt is fully deductible (for example, as a business expense) whether or not it qualifies as home mortgage interest. Internal revenue tax forms 2012 This may allow you, if the limits in Part II apply, more of a deduction for interest on other debts that are deductible only as home mortgage interest. Internal revenue tax forms 2012 Cooperative apartment owner. Internal revenue tax forms 2012   If you own stock in a cooperative housing corporation, see the Special Rule for Tenant-Stockholders in Cooperative Housing Corporations , near the end of this Part I. Internal revenue tax forms 2012 Qualified Home For you to take a home mortgage interest deduction, your debt must be secured by a qualified home. Internal revenue tax forms 2012 This means your main home or your second home. Internal revenue tax forms 2012 A home includes a house, condominium, cooperative, mobile home, house trailer, boat, or similar property that has sleeping, cooking, and toilet facilities. Internal revenue tax forms 2012 The interest you pay on a mortgage on a home other than your main or second home may be deductible if the proceeds of the loan were used for business, investment, or other deductible purposes. Internal revenue tax forms 2012 Otherwise, it is considered personal interest and is not deductible. Internal revenue tax forms 2012 Main home. Internal revenue tax forms 2012   You can have only one main home at any one time. Internal revenue tax forms 2012 This is the home where you ordinarily live most of the time. Internal revenue tax forms 2012 Second home. Internal revenue tax forms 2012   A second home is a home that you choose to treat as your second home. Internal revenue tax forms 2012 Second home not rented out. Internal revenue tax forms 2012   If you have a second home that you do not hold out for rent or resale to others at any time during the year, you can treat it as a qualified home. Internal revenue tax forms 2012 You do not have to use the home during the year. Internal revenue tax forms 2012 Second home rented out. Internal revenue tax forms 2012   If you have a second home and rent it out part of the year, you also must use it as a home during the year for it to be a qualified home. Internal revenue tax forms 2012 You must use this home more than 14 days or more than 10% of the number of days during the year that the home is rented at a fair rental, whichever is longer. Internal revenue tax forms 2012 If you do not use the home long enough, it is considered rental property and not a second home. Internal revenue tax forms 2012 For information on residential rental property, see Publication 527. Internal revenue tax forms 2012 More than one second home. Internal revenue tax forms 2012   If you have more than one second home, you can treat only one as the qualified second home during any year. Internal revenue tax forms 2012 However, you can change the home you treat as a second home during the year in the following situations. Internal revenue tax forms 2012 If you get a new home during the year, you can choose to treat the new home as your second home as of the day you buy it. Internal revenue tax forms 2012 If your main home no longer qualifies as your main home, you can choose to treat it as your second home as of the day you stop using it as your main home. Internal revenue tax forms 2012 If your second home is sold during the year or becomes your main home, you can choose a new second home as of the day you sell the old one or begin using it as your main home. Internal revenue tax forms 2012 Divided use of your home. Internal revenue tax forms 2012   The only part of your home that is considered a qualified home is the part you use for residential living. Internal revenue tax forms 2012 If you use part of your home for other than residential living, such as a home office, you must allocate the use of your home. Internal revenue tax forms 2012 You must then divide both the cost and fair market value of your home between the part that is a qualified home and the part that is not. Internal revenue tax forms 2012 Dividing the cost may affect the amount of your home acquisition debt, which is limited to the cost of your home plus the cost of any improvements. Internal revenue tax forms 2012 (See Home Acquisition Debt in Part II. Internal revenue tax forms 2012 ) Dividing the fair market value may affect your home equity debt limit, also explained in Part II . Internal revenue tax forms 2012 Renting out part of home. Internal revenue tax forms 2012   If you rent out part of a qualified home to another person (tenant), you can treat the rented part as being used by you for residential living only if all of the following conditions apply. Internal revenue tax forms 2012 The rented part of your home is used by the tenant primarily for residential living. Internal revenue tax forms 2012 The rented part of your home is not a self-contained residential unit having separate sleeping, cooking, and toilet facilities. Internal revenue tax forms 2012 You do not rent (directly or by sublease) the same or different parts of your home to more than two tenants at any time during the tax year. Internal revenue tax forms 2012 If two persons (and dependents of either) share the same sleeping quarters, they are treated as one tenant. Internal revenue tax forms 2012 Office in home. Internal revenue tax forms 2012   If you have an office in your home that you use in your business, see Publication 587, Business Use of Your Home. Internal revenue tax forms 2012 It explains how to figure your deduction for the business use of your home, which includes the business part of your home mortgage interest. Internal revenue tax forms 2012 Home under construction. Internal revenue tax forms 2012   You can treat a home under construction as a qualified home for a period of up to 24 months, but only if it becomes your qualified home at the time it is ready for occupancy. Internal revenue tax forms 2012   The 24-month period can start any time on or after the day construction begins. Internal revenue tax forms 2012 Home destroyed. Internal revenue tax forms 2012   You may be able to continue treating your home as a qualified home even after it is destroyed in a fire, storm, tornado, earthquake, or other casualty. Internal revenue tax forms 2012 This means you can continue to deduct the interest you pay on your home mortgage, subject to the limits described in this publication. Internal revenue tax forms 2012   You can continue treating a destroyed home as a qualified home if, within a reasonable period of time after the home is destroyed, you: Rebuild the destroyed home and move into it, or Sell the land on which the home was located. Internal revenue tax forms 2012   This rule applies to your main home and to a second home that you treat as a qualified home. Internal revenue tax forms 2012 Time-sharing arrangements. Internal revenue tax forms 2012   You can treat a home you own under a time-sharing plan as a qualified home if it meets all the requirements. Internal revenue tax forms 2012 A time-sharing plan is an arrangement between two or more people that limits each person's interest in the home or right to use it to a certain part of the year. Internal revenue tax forms 2012 Rental of time-share. Internal revenue tax forms 2012   If you rent out your time-share, it qualifies as a second home only if you also use it as a home during the year. Internal revenue tax forms 2012 See Second home rented out , earlier, for the use requirement. Internal revenue tax forms 2012 To know whether you meet that requirement, count your days of use and rental of the home only during the time you have a right to use it or to receive any benefits from the rental of it. Internal revenue tax forms 2012 Married taxpayers. Internal revenue tax forms 2012   If you are married and file a joint return, your qualified home(s) can be owned either jointly or by only one spouse. Internal revenue tax forms 2012 Separate returns. Internal revenue tax forms 2012   If you are married filing separately and you and your spouse own more than one home, you can each take into account only one home as a qualified home. Internal revenue tax forms 2012 However, if you both consent in writing, then one spouse can take both the main home and a second home into account. Internal revenue tax forms 2012 Special Situations This section describes certain items that can be included as home mortgage interest and others that cannot. Internal revenue tax forms 2012 It also describes certain special situations that may affect your deduction. Internal revenue tax forms 2012 Late payment charge on mortgage payment. Internal revenue tax forms 2012   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. Internal revenue tax forms 2012 Mortgage prepayment penalty. Internal revenue tax forms 2012   If you pay off your home mortgage early, you may have to pay a penalty. Internal revenue tax forms 2012 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. Internal revenue tax forms 2012 Sale of home. Internal revenue tax forms 2012   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 the sale. Internal revenue tax forms 2012 Example. Internal revenue tax forms 2012 John and Peggy Harris sold their home on May 7. Internal revenue tax forms 2012 Through April 30, they made home mortgage interest payments of $1,220. Internal revenue tax forms 2012 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. Internal revenue tax forms 2012 Their mortgage interest deduction is $1,270 ($1,220 + $50). Internal revenue tax forms 2012 Prepaid interest. Internal revenue tax forms 2012   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. Internal revenue tax forms 2012 You can deduct in each year only the interest that qualifies as home mortgage interest for that year. Internal revenue tax forms 2012 However, there is an exception that applies to points, discussed later. Internal revenue tax forms 2012 Mortgage interest credit. Internal revenue tax forms 2012    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. Internal revenue tax forms 2012 Figure the credit on Form 8396, Mortgage Interest Credit. Internal revenue tax forms 2012 If you take this credit, you must reduce your mortgage interest deduction by the amount of the credit. Internal revenue tax forms 2012   See Form 8396 and Publication 530 for more information on the mortgage interest credit. Internal revenue tax forms 2012 Ministers' and military housing allowance. Internal revenue tax forms 2012   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. Internal revenue tax forms 2012 Hardest Hit Fund and Emergency Homeowners' Loan Programs. Internal revenue tax forms 2012   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. Internal revenue tax forms 2012 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. Internal revenue tax forms 2012 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. Internal revenue tax forms 2012 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 (other information including real property taxes paid). Internal revenue tax forms 2012 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. Internal revenue tax forms 2012 Mortgage assistance payments under section 235 of the National Housing Act. Internal revenue tax forms 2012   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. Internal revenue tax forms 2012 You cannot deduct the interest that is paid for you. Internal revenue tax forms 2012 No other effect on taxes. Internal revenue tax forms 2012   Do not include these mortgage assistance payments in your income. Internal revenue tax forms 2012 Also, do not use these payments to reduce other deductions, such as real estate taxes. Internal revenue tax forms 2012 Divorced or separated individuals. Internal revenue tax forms 2012   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. Internal revenue tax forms 2012 See the discussion of Payments for jointly-owned home under Alimony in Publication 504, Divorced or Separated Individuals. Internal revenue tax forms 2012 Redeemable ground rents. Internal revenue tax forms 2012   In some states (such as Maryland), you can buy your home subject to a ground rent. Internal revenue tax forms 2012 A ground rent is an obligation you assume to pay a fixed amount per year on the property. Internal revenue tax forms 2012 Under this arrangement, you are leasing (rather than buying) the land on which your home is located. Internal revenue tax forms 2012   If you make annual or periodic rental payments on a redeemable ground rent, you can deduct them as mortgage interest. Internal revenue tax forms 2012   A ground rent is a redeemable ground rent if all of the following are true. Internal revenue tax forms 2012 Your lease, including renewal periods, is for more than 15 years. Internal revenue tax forms 2012 You can freely assign the lease. Internal revenue tax forms 2012 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 specific amount. Internal revenue tax forms 2012 The lessor's interest in the land is primarily a security interest to protect the rental payments to which he or she is entitled. Internal revenue tax forms 2012   Payments made to end the lease and to buy the lessor's entire interest in the land are not deductible as mortgage interest. Internal revenue tax forms 2012 Nonredeemable ground rents. Internal revenue tax forms 2012   Payments on a nonredeemable ground rent are not mortgage interest. Internal revenue tax forms 2012 You can deduct them as rent if they are a business expense or if they are for rental property. Internal revenue tax forms 2012 Reverse mortgages. Internal revenue tax forms 2012   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. Internal revenue tax forms 2012 With a reverse mortgage, you retain title to your home. Internal revenue tax forms 2012 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. Internal revenue tax forms 2012 Because reverse mortgages are considered loan advances and not income, the amount you receive is not taxable. Internal revenue tax forms 2012 Any interest (including original issue discount) accrued on a reverse mortgage is not deductible until you actually pay it, which is usually when you pay off the loan in full. Internal revenue tax forms 2012 Your deduction may be limited because a reverse mortgage loan generally is subject to the limit on Home Equity Debt discussed in Part II. Internal revenue tax forms 2012 Rental payments. Internal revenue tax forms 2012   If you live in a house before final settlement on the purchase, any payments you make for that period are rent and not interest. Internal revenue tax forms 2012 This is true even if the settlement papers call them interest. Internal revenue tax forms 2012 You cannot deduct these payments as home mortgage interest. Internal revenue tax forms 2012 Mortgage proceeds invested in tax-exempt securities. Internal revenue tax forms 2012   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. Internal revenue tax forms 2012 “Grandfathered debt” and “home equity debt” are defined in Part II of this publication. Internal revenue tax forms 2012 Refunds of interest. Internal revenue tax forms 2012   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. Internal revenue tax forms 2012 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. Internal revenue tax forms 2012 However, you need to include it only up to the amount of the deduction that reduced your tax in the earlier year. Internal revenue tax forms 2012 This is true whether the interest overcharge was refunded to you or was used to reduce the outstanding principal on your mortgage. Internal revenue tax forms 2012 If you need to include the refund in income, report it on Form 1040, line 21. Internal revenue tax forms 2012   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. Internal revenue tax forms 2012 For information about Form 1098, see Form 1098, Mortgage Interest Statement , later. Internal revenue tax forms 2012   For more information on how to treat refunds of interest deducted in earlier years, see Recoveries in Publication 525, Taxable and Nontaxable Income. Internal revenue tax forms 2012 Cooperative apartment owner. Internal revenue tax forms 2012   If you own a cooperative apartment, you must reduce your home mortgage interest deduction by your share of any cash portion of a patronage dividend that the cooperative receives. Internal revenue tax forms 2012 The patronage dividend is a partial refund to the cooperative housing corporation of mortgage interest it paid in a prior year. Internal revenue tax forms 2012   If you receive a Form 1098 from the cooperative housing corporation, the form should show only the amount you can deduct. Internal revenue tax forms 2012 Points The term “points” is used to describe certain charges paid, or treated as paid, by a borrower to obtain a home mortgage. Internal revenue tax forms 2012 Points may also be called loan origination fees, maximum loan charges, loan discount, or discount points. Internal revenue tax forms 2012 This image is too large to be displayed in the current screen. Internal revenue tax forms 2012 Please click the link to view the image. Internal revenue tax forms 2012 Figure B. Internal revenue tax forms 2012 Are My Points Fully Deductible This Year? A borrower is treated as paying any points that a home seller pays for the borrower's mortgage. Internal revenue tax forms 2012 See Points paid by the seller , later. Internal revenue tax forms 2012 General Rule You generally cannot deduct the full amount of points in the year paid. Internal revenue tax forms 2012 Because they are prepaid interest, you generally deduct them ratably over the life (term) of the mortgage. Internal revenue tax forms 2012 See Deduction Allowed Ratably , next. Internal revenue tax forms 2012 For exceptions to the general rule, see Deduction Allowed in Year Paid , later. Internal revenue tax forms 2012 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. Internal revenue tax forms 2012 You use the cash method of accounting. Internal revenue tax forms 2012 This means you report income in the year you receive it and deduct expenses in the year you pay them. Internal revenue tax forms 2012 Most individuals use this method. Internal revenue tax forms 2012 Your loan is secured by a home. Internal revenue tax forms 2012 (The home does not need to be your main home. Internal revenue tax forms 2012 ) Your loan period is not more than 30 years. Internal revenue tax forms 2012 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. Internal revenue tax forms 2012 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. Internal revenue tax forms 2012 Example. Internal revenue tax forms 2012 You use the cash method of accounting. Internal revenue tax forms 2012 In 2013, you took out a $100,000 loan payable over 20 years. Internal revenue tax forms 2012 The terms of the loan are the same as for other 20-year loans offered in your area. Internal revenue tax forms 2012 You paid $4,800 in points. Internal revenue tax forms 2012 You made 3 monthly payments on the loan in 2013. Internal revenue tax forms 2012 You can deduct $60 [($4,800 ÷ 240 months) x 3 payments] in 2013. Internal revenue tax forms 2012 In 2014, if you make all twelve payments, you will be able to deduct $240 ($20 x 12). Internal revenue tax forms 2012 Deduction Allowed in Year Paid You can fully deduct points in the year paid if you meet all the following tests. Internal revenue tax forms 2012 (You can use Figure B as a quick guide to see whether your points are fully deductible in the year paid. Internal revenue tax forms 2012 ) Your loan is secured by your main home. Internal revenue tax forms 2012 (Your main home is the one you ordinarily live in most of the time. Internal revenue tax forms 2012 ) Paying points is an established business practice in the area where the loan was made. Internal revenue tax forms 2012 The points paid were not more than the points generally charged in that area. Internal revenue tax forms 2012 You use the cash method of accounting. Internal revenue tax forms 2012 This means you report income in the year you receive it and deduct expenses in the year you pay them. Internal revenue tax forms 2012 Most individuals use this method. Internal revenue tax forms 2012 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. Internal revenue tax forms 2012 The funds you provided at or before closing, plus any points the seller paid, were at least as much as the points charged. Internal revenue tax forms 2012 The funds you provided are not required to have been applied to the points. Internal revenue tax forms 2012 They can include a down payment, an escrow deposit, earnest money, and other funds you paid at or before closing for any purpose. Internal revenue tax forms 2012 You cannot have borrowed these funds from your lender or mortgage broker. Internal revenue tax forms 2012 You use your loan to buy or build your main home. Internal revenue tax forms 2012 The points were computed as a percentage of the principal amount of the mortgage. Internal revenue tax forms 2012 The amount is clearly shown on the settlement statement (such as the Settlement Statement, Form HUD-1) as points charged for the mortgage. Internal revenue tax forms 2012 The points may be shown as paid from either your funds or the seller's. Internal revenue tax forms 2012 Note. Internal revenue tax forms 2012 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. Internal revenue tax forms 2012 Home improvement loan. Internal revenue tax forms 2012   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. Internal revenue tax forms 2012 Second home. Internal revenue tax forms 2012 You cannot fully deduct in the year paid points you pay on loans secured by your second home. Internal revenue tax forms 2012 You can deduct these points only over the life of the loan. Internal revenue tax forms 2012 Refinancing. Internal revenue tax forms 2012   Generally, points you pay to refinance a mortgage are not deductible in full in the year you pay them. Internal revenue tax forms 2012 This is true even if the new mortgage is secured by your main home. Internal revenue tax forms 2012   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 , you can fully deduct the part of the points related to the improvement in the year you paid them with your own funds. Internal revenue tax forms 2012 You can deduct the rest of the points over the life of the loan. Internal revenue tax forms 2012 Example 1. Internal revenue tax forms 2012 In 1998, Bill Fields got a mortgage to buy a home. Internal revenue tax forms 2012 In 2013, Bill refinanced that mortgage with a 15-year $100,000 mortgage loan. Internal revenue tax forms 2012 The mortgage is secured by his home. Internal revenue tax forms 2012 To get the new loan, he had to pay three points ($3,000). Internal revenue tax forms 2012 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. Internal revenue tax forms 2012 Bill paid the points out of his private funds, rather than out of the proceeds of the new loan. Internal revenue tax forms 2012 The payment of points is an established practice in the area, and the points charged are not more than the amount generally charged there. Internal revenue tax forms 2012 Bill's first payment on the new loan was due July 1. Internal revenue tax forms 2012 He made six payments on the loan in 2013 and is a cash basis taxpayer. Internal revenue tax forms 2012 Bill used the funds from the new mortgage to repay his existing mortgage. Internal revenue tax forms 2012 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. Internal revenue tax forms 2012 He cannot deduct all of the points in 2013. Internal revenue tax forms 2012 He can deduct two points ($2,000) ratably over the life of the loan. Internal revenue tax forms 2012 He deducts $67 [($2,000 ÷ 180 months) × 6 payments] of the points in 2013. Internal revenue tax forms 2012 The other point ($1,000) was a fee for services and is not deductible. Internal revenue tax forms 2012 Example 2. Internal revenue tax forms 2012 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. Internal revenue tax forms 2012 Bill deducts 25% ($25,000 ÷ $100,000) of the points ($2,000) in 2013. Internal revenue tax forms 2012 His deduction is $500 ($2,000 × 25%). Internal revenue tax forms 2012 Bill also deducts the ratable part of the remaining $1,500 ($2,000 − $500) that must be spread over the life of the loan. Internal revenue tax forms 2012 This is $50 [($1,500 ÷ 180 months) × 6 payments] in 2013. Internal revenue tax forms 2012 The total amount Bill deducts in 2013 is $550 ($500 + $50). Internal revenue tax forms 2012 Special Situations This section describes certain special situations that may affect your deduction of points. Internal revenue tax forms 2012 Original issue discount. Internal revenue tax forms 2012   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. Internal revenue tax forms 2012 This reduction results in original issue discount, which is discussed in chapter 4 of Publication 535. Internal revenue tax forms 2012 Amounts charged for services. Internal revenue tax forms 2012    Amounts charged by the lender for specific services connected to the loan are not interest. Internal revenue tax forms 2012 Examples of these charges are: Appraisal fees, Notary fees, and Preparation costs for the mortgage note or deed of trust. Internal revenue tax forms 2012  You cannot deduct these amounts as points either in the year paid or over the life of the mortgage. Internal revenue tax forms 2012 Points paid by the seller. Internal revenue tax forms 2012   The term “points” includes loan placement fees that the seller pays to the lender to arrange financing for the buyer. Internal revenue tax forms 2012 Treatment by seller. Internal revenue tax forms 2012   The seller cannot deduct these fees as interest. Internal revenue tax forms 2012 But they are a selling expense that reduces the amount realized by the seller. Internal revenue tax forms 2012 See Publication 523 for information on selling your home. Internal revenue tax forms 2012 Treatment by buyer. Internal revenue tax forms 2012   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. Internal revenue tax forms 2012 If all the tests under Deduction Allowed in Year Paid , earlier, are met, the buyer can deduct the points in the year paid. Internal revenue tax forms 2012 If any of those tests are not met, the buyer deducts the points over the life of the loan. Internal revenue tax forms 2012   If you need information about the basis of your home, see Publication 523 or Publication 530. Internal revenue tax forms 2012 Funds provided are less than points. Internal revenue tax forms 2012   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. Internal revenue tax forms 2012 In addition, you can deduct any points paid by the seller. Internal revenue tax forms 2012 Example 1. Internal revenue tax forms 2012 When you took out a $100,000 mortgage loan to buy your home in December, you were charged one point ($1,000). Internal revenue tax forms 2012 You meet all the tests for deducting points in the year paid, except the only funds you provided were a $750 down payment. Internal revenue tax forms 2012 Of the $1,000 charged for points, you can deduct $750 in the year paid. Internal revenue tax forms 2012 You spread the remaining $250 over the life of the mortgage. Internal revenue tax forms 2012 Example 2. Internal revenue tax forms 2012 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. Internal revenue tax forms 2012 In the year paid, you can deduct $1,750 ($750 of the amount you were charged plus the $1,000 paid by the seller). Internal revenue tax forms 2012 You spread the remaining $250 over the life of the mortgage. Internal revenue tax forms 2012 You must reduce the basis of your home by the $1,000 paid by the seller. Internal revenue tax forms 2012 Excess points. Internal revenue tax forms 2012   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. Internal revenue tax forms 2012 You must spread any additional points over the life of the mortgage. Internal revenue tax forms 2012 Mortgage ending early. Internal revenue tax forms 2012   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. Internal revenue tax forms 2012 However, if you refinance the mortgage with the same lender, you cannot deduct any remaining balance of spread points. Internal revenue tax forms 2012 Instead, deduct the remaining balance over the term of the new loan. Internal revenue tax forms 2012   A mortgage may end early due to a prepayment, refinancing, foreclosure, or similar event. Internal revenue tax forms 2012 Example. Internal revenue tax forms 2012 Dan paid $3,000 in points in 2002 that he had to spread out over the 15-year life of the mortgage. Internal revenue tax forms 2012 He deducts $200 points per year. Internal revenue tax forms 2012 Through 2012, Dan has deducted $2,200 of the points. Internal revenue tax forms 2012 Dan prepaid his mortgage in full in 2013. Internal revenue tax forms 2012 He can deduct the remaining $800 of points in 2013. Internal revenue tax forms 2012 Limits on deduction. Internal revenue tax forms 2012   You cannot fully deduct points paid on a mortgage that exceeds the limits discussed in Part II . Internal revenue tax forms 2012 See the Table 1 Instructions for line 10. Internal revenue tax forms 2012 Form 1098. Internal revenue tax forms 2012    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. Internal revenue tax forms 2012 See Form 1098, Mortgage Interest Statement , later. Internal revenue tax forms 2012 Mortgage Insurance Premiums You can treat amounts you paid during 2013 for qualified mortgage insurance as home mortgage interest. Internal revenue tax forms 2012 The insurance must be in connection with home acquisition debt, and the insurance contract must have been issued after 2006. Internal revenue tax forms 2012 Qualified mortgage insurance. Internal revenue tax forms 2012   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). Internal revenue tax forms 2012   Mortgage insurance provided by the Department of Veterans Affairs is commonly known as a funding fee. Internal revenue tax forms 2012 If provided by the Rural Housing Service, it is commonly known as a guarantee fee. Internal revenue tax forms 2012 The funding fee and guarantee fee can either be included in the amount of the loan or paid in full at the time of closing. Internal revenue tax forms 2012 These fees can be deducted fully in 2013 if the mortgage insurance contract was issued in 2013. Internal revenue tax forms 2012 Contact the mortgage insurance issuer to determine the deductible amount if it is not reported in box 4 of Form 1098. Internal revenue tax forms 2012 Special rules for prepaid mortgage insurance. Internal revenue tax forms 2012   Generally, if you paid premiums for qualified mortgage insurance that are properly allocable to periods after the close of the tax year, such premiums are treated as paid in the period to which they are allocated. Internal revenue tax forms 2012 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. Internal revenue tax forms 2012 No deduction is allowed for the unamortized balance if the mortgage is satisfied before its term. Internal revenue tax forms 2012 This paragraph does not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service. Internal revenue tax forms 2012 Example. Internal revenue tax forms 2012 Ryan purchased a home in May of 2012 and financed the home with a 15-year mortgage. Internal revenue tax forms 2012 Ryan also prepaid all of the $9,240 in private mortgage insurance required at the time of closing in May. Internal revenue tax forms 2012 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. Internal revenue tax forms 2012 Ryan's adjusted gross income (AGI) for 2012 is $76,000. Internal revenue tax forms 2012 Ryan can deduct $880 ($9,240 ÷ 84 x 8 months) for qualified mortgage insurance premiums in 2012. Internal revenue tax forms 2012 For 2013, Ryan can deduct $1,320 ($9,240 ÷ 84 x 12 months) if his AGI is $100,000 or less. Internal revenue tax forms 2012 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). Internal revenue tax forms 2012 Limit on deduction. Internal revenue tax forms 2012   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. Internal revenue tax forms 2012 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. Internal revenue tax forms 2012 If your adjusted gross income is more than $109,000 ($54,500 if married filing separately), you cannot deduct your mortgage insurance premiums. Internal revenue tax forms 2012 Form 1098. Internal revenue tax forms 2012   The mortgage interest statement you receive should show not only the total interest paid during the year, but also your mortgage insurance premiums paid during the year, which may qualify to be treated as deductible mortgage interest. Internal revenue tax forms 2012 See Form 1098, Mortgage Interest Statement, next. Internal revenue tax forms 2012 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. Internal revenue tax forms 2012 You will receive the statement if you pay interest to a person (including a financial institution or cooperative housing corporation) in the course of that person's trade or business. Internal revenue tax forms 2012 A governmental unit is a person for purposes of furnishing the statement. Internal revenue tax forms 2012 The statement for each year should be sent to you by January 31 of the following year. Internal revenue tax forms 2012 A copy of this form will also be sent to the IRS. Internal revenue tax forms 2012 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. Internal revenue tax forms 2012 However, it should not show any interest that was paid for you by a government agency. Internal revenue tax forms 2012 As a general rule, Form 1098 will include only points that you can fully deduct in the year paid. Internal revenue tax forms 2012 However, certain points not included on Form 1098 also may be deductible, either in the year paid or over the life of the loan. Internal revenue tax forms 2012 See the earlier discussion of Points to determine whether you can deduct points not shown on Form 1098. Internal revenue tax forms 2012 Prepaid interest on Form 1098. Internal revenue tax forms 2012   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. Internal revenue tax forms 2012 However, you cannot deduct the prepaid amount for January 2014 in 2013. Internal revenue tax forms 2012 (See Prepaid interest , earlier. Internal revenue tax forms 2012 ) You will have to figure the interest that accrued for 2014 and subtract it from the amount in box 1. Internal revenue tax forms 2012 You will include the interest for January 2014 with other interest you pay for 2014. Internal revenue tax forms 2012 Refunded interest. Internal revenue tax forms 2012   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. Internal revenue tax forms 2012 See Refunds of interest , earlier. Internal revenue tax forms 2012 Mortgage insurance premiums. Internal revenue tax forms 2012   The amount of mortgage insurance premiums you paid during 2013 may be shown in Box 4 of Form 1098. Internal revenue tax forms 2012 See Mortgage Insurance Premiums , earlier. Internal revenue tax forms 2012 How To Report Deduct the home mortgage interest and points reported to you on Form 1098 on Schedule A (Form 1040), line 10. Internal revenue tax forms 2012 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. Internal revenue tax forms 2012 Attach a statement explaining the difference and print “See attached” next to line 10. Internal revenue tax forms 2012 Deduct home mortgage interest that was not reported to you on Form 1098 on Schedule A (Form 1040), line 11. Internal revenue tax forms 2012 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. Internal revenue tax forms 2012 The seller must give you this number and you must give the seller your TIN. Internal revenue tax forms 2012 A Form W-9, Request for Taxpayer Identification Number and Certification, can be used for this purpose. Internal revenue tax forms 2012 Failure to meet any of these requirements may result in a $50 penalty for each failure. Internal revenue tax forms 2012 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. Internal revenue tax forms 2012 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. Internal revenue tax forms 2012 Deduct mortgage insurance premiums on Schedule A (Form 1040), line 13. Internal revenue tax forms 2012 More than one borrower. Internal revenue tax forms 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 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. Internal revenue tax forms 2012 Show how much of the interest each of you paid, and give the name and address of the person who received the form. Internal revenue tax forms 2012 Deduct your share of the interest on Schedule A (Form 1040), line 11, and print “See attached” next to the line. Internal revenue tax forms 2012 Also, deduct your share of any qualified mortgage insurance premiums on Schedule A (Form 1040), line 13. Internal revenue tax forms 2012   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. Internal revenue tax forms 2012 Let each of the other borrowers know what his or her share is. Internal revenue tax forms 2012 Mortgage proceeds used for business or investment. Internal revenue tax forms 2012   If your home mortgage interest deduction is limited under the rules explained in Part II , but all or part of the mortgage proceeds were used for business, investment, or other deductible activities, see Table 2 near the end of this publication. Internal revenue tax forms 2012 It shows where to deduct the part of your excess interest that is for those activities. Internal revenue tax forms 2012 The Table 1 Instructions for line 13 in Part II explain how to divide the excess interest among the activities for which the mortgage proceeds were used. Internal revenue tax forms 2012 Special Rule for Tenant-Stockholders in Cooperative Housing Corporations A qualified home includes stock in a cooperative housing corporation owned by a tenant-stockholder. Internal revenue tax forms 2012 This applies only if the tenant-stockholder is entitled to live in the house or apartment because of owning stock in the cooperative. Internal revenue tax forms 2012 Cooperative housing corporation. Internal revenue tax forms 2012   This is a corporation that meets all of the following conditions. Internal revenue tax forms 2012 Has only one class of stock outstanding, Has no stockholders other than those who own the stock that can live in a house, apartment, or house trailer owned or leased by the corporation, Has no stockholders who can receive any distribution out of capital other than on a liquidation of the corporation, and Meets at least one of the following requirements. Internal revenue tax forms 2012 Receives at least 80% of its gross income for the year in which the mortgage interest is paid or incurred from tenant-stockholders. Internal revenue tax forms 2012 For this purpose, gross income is all income received during the entire year, including amounts received before the corporation changed to cooperative ownership. Internal revenue tax forms 2012 At all times during the year, at least 80% of the total square footage of the corporation's property is used or available for use by the tenant-stockholders for residential or residential-related use. Internal revenue tax forms 2012 At least 90% of the corporation's expenditures paid or incurred during the year are for the acquisition, construction, management, maintenance, or care of corporate property for the benefit of the tenant-stockholders. Internal revenue tax forms 2012 Stock used to secure debt. Internal revenue tax forms 2012   In some cases, you cannot use your cooperative housing stock to secure a debt because of either: Restrictions under local or state law, or Restrictions in the cooperative agreement (other than restrictions in which the main purpose is to permit the tenant- stockholder to treat unsecured debt as secured debt). Internal revenue tax forms 2012 However, you can treat a debt as secured by the stock to the extent that the proceeds are used to buy the stock under the allocation of interest rules. Internal revenue tax forms 2012 See chapter 4 of Publication 535 for details on these rules. Internal revenue tax forms 2012 Figuring deductible home mortgage interest. Internal revenue tax forms 2012   Generally, if you are a tenant-stockholder, you can deduct payments you make for your share of the interest paid or incurred by the cooperative. Internal revenue tax forms 2012 The interest must be on a debt to buy, build, change, improve, or maintain the cooperative's housing, or on a debt to buy the land. Internal revenue tax forms 2012   Figure your share of this interest by multiplying the total by the following fraction. Internal revenue tax forms 2012      Your shares of stock in the cooperative   The total shares of stock in the cooperative Limits on deduction. Internal revenue tax forms 2012   To figure how the limits discussed in Part II apply to you, treat your share of the cooperative's debt as debt incurred by you. Internal revenue tax forms 2012 The cooperative should determine your share of its grandfathered debt, its home acquisition debt, and its home equity debt. Internal revenue tax forms 2012 (Your share of each of these types of debt is equal to the average balance of each debt multiplied by the fraction just given. Internal revenue tax forms 2012 ) After your share of the average balance of each type of debt is determined, you include it with the average balance of that type of debt secured by your stock. Internal revenue tax forms 2012 Form 1098. Internal revenue tax forms 2012    The cooperative should give you a Form 1098 showing your share of the interest. Internal revenue tax forms 2012 Use the rules in this publication to determine your deductible mortgage interest. Internal revenue tax forms 2012 Part II. Internal revenue tax forms 2012 Limits on Home Mortgage Interest Deduction This part of the publication discusses the limits on deductible home mortgage interest. Internal revenue tax forms 2012 These limits apply to your home mortgage interest expense if you have a home mortgage that does not fit into any of the three categories listed at the beginning of Part I under Fully deductible interest . Internal revenue tax forms 2012 Your home mortgage interest deduction is limited to the interest on the part of your home mortgage debt that is not more than your qualified loan limit. Internal revenue tax forms 2012 This is the part of your home mortgage debt that is grandfathered debt or that is not more than the limits for home acquisition debt and home equity debt. Internal revenue tax forms 2012 Table 1 can help you figure your qualified loan limit and your deductible home mortgage interest. Internal revenue tax forms 2012 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 (your main or second home). Internal revenue tax forms 2012 It also must be secured by that home. Internal revenue tax forms 2012 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. Internal revenue tax forms 2012 The additional debt may qualify as home equity debt (discussed later). Internal revenue tax forms 2012 Home acquisition debt limit. Internal revenue tax forms 2012   The total amount you can treat as home acquisition debt at any time on your main home and second home cannot be more than $1 million ($500,000 if married filing separately). Internal revenue tax forms 2012 This limit is reduced (but not below zero) by the amount of your grandfathered debt (discussed later). Internal revenue tax forms 2012 Debt over this limit may qualify as home equity debt (also discussed later). Internal revenue tax forms 2012 Refinanced home acquisition debt. Internal revenue tax forms 2012   Any secured debt you use to refinance home acquisition debt is treated as home acquisition debt. Internal revenue tax forms 2012 However, the new debt will qualify as home acquisition debt only up to the amount of the balance of the old mortgage principal just before the refinancing. Internal revenue tax forms 2012 Any additional debt not used to buy, build, or substantially improve a qualified home is not home acquisition debt, but may qualify as home equity debt (discussed later). Internal revenue tax forms 2012 Mortgage that qualifies later. Internal revenue tax forms 2012   A mortgage that does not qualify as home acquisition debt because it does not meet all the requirements may qualify at a later time. Internal revenue tax forms 2012 For example, a debt that you use to buy your home may not qualify as home acquisition debt because it is not secured by the home. Internal revenue tax forms 2012 However, if the debt is later secured by the home, it may qualify as home acquisition debt after that time. Internal revenue tax forms 2012 Similarly, a debt that you use to buy property may not qualify because the property is not a qualified home. Internal revenue tax forms 2012 However, if the property later becomes a qualified home, the debt may qualify after that time. Internal revenue tax forms 2012 Mortgage treated as used to buy, build, or improve home. Internal revenue tax forms 2012   A mortgage secured by a qualified home may be treated as home acquisition debt, even if you do not actually use the proceeds to buy, build, or substantially improve the home. Internal revenue tax forms 2012 This applies in the following situations. Internal revenue tax forms 2012 You buy your home within 90 days before or after the date you take out the mortgage. Internal revenue tax forms 2012 The home acquisition debt is limited to the home's cost, plus the cost of any substantial improvements within the limit described below in (2) or (3). Internal revenue tax forms 2012 (See Example 1 later. Internal revenue tax forms 2012 ) You build or improve your home and take out the mortgage before the work is completed. Internal revenue tax forms 2012 The home acquisition debt is limited to the amount of the expenses incurred within 24 months before the date of the mortgage. Internal revenue tax forms 2012 You build or improve your home and take out the mortgage within 90 days after the work is completed. Internal revenue tax forms 2012 The home acquisition debt is limited to the amount of the expenses incurred within the period beginning 24 months before the work is completed and ending on the date of the mortgage. Internal revenue tax forms 2012 (See Example 2 later. Internal revenue tax forms 2012 ) Example 1. Internal revenue tax forms 2012 You bought your main home on June 3 for $175,000. Internal revenue tax forms 2012 You paid for the home with cash you got from the sale of your old home. Internal revenue tax forms 2012 On July 15, you took out a mortgage of $150,000 secured by your main home. Internal revenue tax forms 2012 You used the $150,000 to invest in stocks. Internal revenue tax forms 2012 You can treat the mortgage as taken out to buy your home because you bought the home within 90 days before you took out the mortgage. Internal revenue tax forms 2012 The entire mortgage qualifies as home acquisition debt because it was not more than the home's cost. Internal revenue tax forms 2012 Example 2. Internal revenue tax forms 2012 On January 31, John began building a home on the lot that he owned. Internal revenue tax forms 2012 He used $45,000 of his personal funds to build the home. Internal revenue tax forms 2012 The home was completed on October 31. Internal revenue tax forms 2012 On November 21, John took out a $36,000 mortgage that was secured by the home. Internal revenue tax forms 2012 The mortgage can be treated as used to build the home because it was taken out within 90 days after the home was completed. Internal revenue tax forms 2012 The entire mortgage qualifies as home acquisition debt because it was not more than the expenses incurred within the period beginning 24 months before the home was completed. Internal revenue tax forms 2012 This is illustrated by Figure C. Internal revenue tax forms 2012   Please click here for the text description of the image. Internal revenue tax forms 2012 Figure C. Internal revenue tax forms 2012 John's example Date of the mortgage. Internal revenue tax forms 2012   The date you take out your mortgage is the day the loan proceeds are disbursed. Internal revenue tax forms 2012 This is generally the closing date. Internal revenue tax forms 2012 You can treat the day you apply in writing for your mortgage as the date you take it out. Internal revenue tax forms 2012 However, this applies only if you receive the loan proceeds within a reasonable time (such as within 30 days) after your application is approved. Internal revenue tax forms 2012 If a timely application you make is rejected, a reasonable additional time will be allowed to make a new application. Internal revenue tax forms 2012 Cost of home or improvements. Internal revenue tax forms 2012   To determine your cost, include amounts paid to acquire any interest in a qualified home or to substantially improve the home. Internal revenue tax forms 2012   The cost of building or substantially improving a qualified home includes the costs to acquire real property and building materials, fees for architects and design plans, and required building permits. Internal revenue tax forms 2012 Substantial improvement. Internal revenue tax forms 2012   An improvement is substantial if it: Adds to the value of your home, Prolongs your home's useful life, or Adapts your home to new uses. Internal revenue tax forms 2012    Repairs that maintain your home in good condition, such as repainting your home, are not substantial improvements. Internal revenue tax forms 2012 However, if you paint your home as part of a renovation that substantially improves your qualified home, you can include the painting costs in the cost of the improvements. Internal revenue tax forms 2012 Acquiring an interest in a home because of a divorce. Internal revenue tax forms 2012   If you incur debt to acquire the interest of a spouse or former spouse in a home, because of a divorce or legal separation, you can treat that debt as home acquisition debt. Internal revenue tax forms 2012 Part of home not a qualified home. Internal revenue tax forms 2012    To figure your home acquisition debt, you must divide the cost of your home and improvements between the part of your home that is a qualified home and any part that is not a qualified home. Internal revenue tax forms 2012 See Divided use of your home under Qualified Home in Part I. Internal revenue tax forms 2012 Home Equity Debt If you took out a loan for reasons other than to buy, build, or substantially improve your home, it may qualify as home equity debt. Internal revenue tax forms 2012 In addition, debt you incurred to buy, build, or substantially improve your home, to the extent it is more than the home acquisition debt limit (discussed earlier), may qualify as home equity debt. Internal revenue tax forms 2012 Home equity debt is a mortgage you took out after October 13, 1987, that: Does not qualify as home acquisition debt or as grandfathered debt, and Is secured by your qualified home. Internal revenue tax forms 2012 Example. Internal revenue tax forms 2012 You bought your home for cash 10 years ago. Internal revenue tax forms 2012 You did not have a mortgage on your home until last year, when you took out a $50,000 loan, secured by your home, to pay for your daughter's college tuition and your father's medical bills. Internal revenue tax forms 2012 This loan is home equity debt. Internal revenue tax forms 2012 Home equity debt limit. Internal revenue tax forms 2012   There is a limit on the amount of debt that can be treated as home equity debt. Internal revenue tax forms 2012 The total home equity debt on your main home and second home is limited to the smaller of: $100,000 ($50,000 if married filing separately), or The total of each home's fair market value (FMV) reduced (but not below zero) by the amount of its home acquisition debt and grandfathered debt. Internal revenue tax forms 2012 Determine the FMV and the outstanding home acquisition and grandfathered debt for each home on the date that the last debt was secured by the home. Internal revenue tax forms 2012 Example. Internal revenue tax forms 2012 You own one home that you bought in 2000. Internal revenue tax forms 2012 Its FMV now is $110,000, and the current balance on your original mortgage (home acquisition debt) is $95,000. Internal revenue tax forms 2012 Bank M offers you a home mortgage loan of 125% of the FMV of the home less any outstanding mortgages or other liens. Internal revenue tax forms 2012 To consolidate some of your other debts, you take out a $42,500 home mortgage loan [(125% × $110,000) − $95,000] with Bank M. Internal revenue tax forms 2012 Your home equity debt is limited to $15,000. Internal revenue tax forms 2012 This is the smaller of: $100,000, the maximum limit, or $15,000, the amount that the FMV of $110,000 exceeds the amount of home acquisition debt of $95,000. Internal revenue tax forms 2012 Debt higher than limit. Internal revenue tax forms 2012   Interest on amounts over the home equity debt limit (such as the interest on $27,500 [$42,500 − $15,000] in the preceding example) generally is treated as personal interest and is not deductible. Internal revenue tax forms 2012 But if the proceeds of the loan were used for investment, business, or other deductible purposes, the interest may be deductible. Internal revenue tax forms 2012 If it is, see the Table 1 Instructions for line 13 for an explanation of how to allocate the excess interest. Internal revenue tax forms 2012 Part of home not a qualified home. Internal revenue tax forms 2012   To figure the limit on your home equity debt, you must divide the FMV of your home between the part that is a qualified home and any part that is not a qualified home. Internal revenue tax forms 2012 See Divided use of your home under Qualified Home in Part I. Internal revenue tax forms 2012 Fair market value (FMV). Internal revenue tax forms 2012    This is the price at which the home would change hands between you and a buyer, neither having to sell or buy, and both having reasonable knowledge of all relevant facts. Internal revenue tax forms 2012 Sales of similar homes in your area, on about the same date your last debt was secured by the home, may be helpful in figuring the FMV. Internal revenue tax forms 2012 Grandfathered Debt If you took out a mortgage on your home before October 14, 1987, or you refinanced such a mortgage, it may qualify as grandfathered debt. Internal revenue tax forms 2012 To qualify, it must have been secured by your qualified home on October 13, 1987, and at all times after that date. Internal revenue tax forms 2012 How you used the proceeds does not matter. Internal revenue tax forms 2012 Grandfathered debt is not limited. Internal revenue tax forms 2012 All of the interest you paid on grandfathered debt is fully deductible home mortgage interest. Internal revenue tax forms 2012 However, the amount of your grandfathered debt reduces the $1 million limit for home acquisition debt and the limit based on your home's fair market value for home equity debt. Internal revenue tax forms 2012 Refinanced grandfathered debt. Internal revenue tax forms 2012   If you refinanced grandfathered debt after October 13, 1987, for an amount that was not more than the mortgage principal left on the debt, then you still treat it as grandfathered debt. Internal revenue tax forms 2012 To the extent the new debt is more than that mortgage principal, it is treated as home acquisition or home equity debt, and the mortgage is a mixed-use mortgage (discussed later under Average Mortgage Balance in the Table 1 instructions). Internal revenue tax forms 2012 The debt must be secured by the qualified home. Internal revenue tax forms 2012   You treat grandfathered debt that was refinanced after October 13, 1987, as grandfathered debt only for the term left on the debt that was refinanced. Internal revenue tax forms 2012 After that, you treat it as home acquisition debt or home equity debt, depending on how you used the proceeds. Internal revenue tax forms 2012 Exception. Internal revenue tax forms 2012   If the debt before refinancing was like a balloon note (the principal on the debt was not amortized over the term of the debt), then you treat the refinanced debt as grandfathered debt for the term of the first refinancing. Internal revenue tax forms 2012 This term cannot be more than 30 years. Internal revenue tax forms 2012 Example. Internal revenue tax forms 2012 Chester took out a $200,000 first mortgage on his home in 1986. Internal revenue tax forms 2012 The mortgage was a five-year balloon note and the entire balance on the note was due in 1991. Internal revenue tax forms 2012 Chester refinanced the debt in 1991 with a new 20-year mortgage. Internal revenue tax forms 2012 The refinanced debt is treated as grandfathered debt for its entire term (20 years). Internal revenue tax forms 2012 Line-of-credit mortgage. Internal revenue tax forms 2012    If you had a line-of-credit mortgage on October 13, 1987, and borrowed additional amounts against it after that date, then the additional amounts are either home acquisition debt or home equity debt depending on how you used the proceeds. Internal revenue tax forms 2012 The balance on the mortgage before you borrowed the additional amounts is grandfathered debt. Internal revenue tax forms 2012 The newly borrowed amounts are not grandfathered debt because the funds were borrowed after October 13, 1987. Internal revenue tax forms 2012 See Average Mortgage Balance in the Table 1 Instructions that follow. Internal revenue tax forms 2012 Table 1 Instructions Unless you are subject to the overall limit on itemized deductions, you can deduct all of the interest you paid during the year on mortgages secured by your main home or second home in either of the following two situations. Internal revenue tax forms 2012 All the mortgages are grandfathered debt. Internal revenue tax forms 2012 The total of the mortgage balances for the entire year is within the limits discussed earlier under Home Acquisition Debt and Home Equity Debt . Internal revenue tax forms 2012 In either of those cases, you do not need Table 1. Internal revenue tax forms 2012 Otherwise, you can use Table 1 to determine your qualified loan limit and deductible home mortgage interest. Internal revenue tax forms 2012 Fill out only one Table 1 for both your main and second home regardless of how many mortgages you have. Internal revenue tax forms 2012 Table 1. Internal revenue tax forms 2012 Worksheet To Figure Your Qualified Loan Limit and Deductible Home Mortgage Interest For the Current Year See the Table 1 Instructions. Internal revenue tax forms 2012 Part I Qualified Loan Limit 1. Internal revenue tax forms 2012 Enter the average balance of all your grandfathered debt. Internal revenue tax forms 2012 See line 1 instructions 1. Internal revenue tax forms 2012   2. Internal revenue tax forms 2012 Enter the average balance of all your home acquisition debt. Internal revenue tax forms 2012 See line 2 instructions 2. Internal revenue tax forms 2012   3. Internal revenue tax forms 2012 Enter $1,000,000 ($500,000 if married filing separately) 3. Internal revenue tax forms 2012   4. Internal revenue tax forms 2012 Enter the larger of the amount on line 1 or the amount on line 3 4. Internal revenue tax forms 2012   5. Internal revenue tax forms 2012 Add the amounts on lines 1 and 2. Internal revenue tax forms 2012 Enter the total here 5. Internal revenue tax forms 2012   6. Internal revenue tax forms 2012 Enter the smaller of the amount on line 4 or the amount on line 5 6. Internal revenue tax forms 2012   7. Internal revenue tax forms 2012 If you have home equity debt, enter the smaller of $100,000 ($50,000 if married filing separately) or your limited amount. Internal revenue tax forms 2012 See the line 7 instructions for the limit which may apply to you. Internal revenue tax forms 2012 7. Internal revenue tax forms 2012   8. Internal revenue tax forms 2012 Add the amounts on lines 6 and 7. Internal revenue tax forms 2012 Enter the total. Internal revenue tax forms 2012 This is your qualified loan limit. Internal revenue tax forms 2012 8. Internal revenue tax forms 2012   Part II Deductible Home Mortgage Interest 9. Internal revenue tax forms 2012 Enter the total of the average balances of all mortgages on all qualified homes. Internal revenue tax forms 2012  See line 9 instructions 9. Internal revenue tax forms 2012     If line 8 is less than line 9, go on to line 10. Internal revenue tax forms 2012 If line 8 is equal to or more than line 9, stop here. Internal revenue tax forms 2012 All of your interest on all the mortgages included on line 9 is deductible as home mortgage interest on Schedule A (Form 1040). Internal revenue tax forms 2012     10. Internal revenue tax forms 2012 Enter the total amount of interest that you paid. Internal revenue tax forms 2012 See line 10 instructions 10. Internal revenue tax forms 2012   11. Internal revenue tax forms 2012 Divide the amount on line 8 by the amount on line 9. Internal revenue tax forms 2012 Enter the result as a decimal amount (rounded to three places) 11. Internal revenue tax forms 2012 × . Internal revenue tax forms 2012 12. Internal revenue tax forms 2012 Multiply the amount on line 10 by the decimal amount on line 11. Internal revenue tax forms 2012 Enter the result. Internal revenue tax forms 2012 This is your deductible home mortgage interest. Internal revenue tax forms 2012 Enter this amount on Schedule A (Form 1040) 12. Internal revenue tax forms 2012   13. Internal revenue tax forms 2012 Subtract the amount on line 12 from the amount on line 10. Internal revenue tax forms 2012 Enter the result. Internal revenue tax forms 2012 This is not home mortgage interest. Internal revenue tax forms 2012 See line 13 instructions 13. Internal revenue tax forms 2012   Home equity debt only. Internal revenue tax forms 2012   If all of your mortgages are home equity debt, do not fill in lines 1 through 5. Internal revenue tax forms 2012 Enter zero on line 6 and complete the rest of Table 1. Internal revenue tax forms 2012 Average Mortgage Balance You have to figure the average balance of each mortgage to determine your qualified loan limit. Internal revenue tax forms 2012 You need these amounts to complete lines 1, 2, and 9 of Table 1. Internal revenue tax forms 2012 You can use the highest mortgage balances during the year, but you may benefit most by using the average balances. Internal revenue tax forms 2012 The following are methods you can use to figure your average mortgage balances. Internal revenue tax forms 2012 However, if a mortgage has more than one category of debt, see Mixed-use mortgages , later, in this section. Internal revenue tax forms 2012 Average of first and last balance method. Internal revenue tax forms 2012   You can use this method if all the following apply. Internal revenue tax forms 2012 You did not borrow any new amounts on the mortgage during the year. Internal revenue tax forms 2012 (This does not include borrowing the original mortgage amount. Internal revenue tax forms 2012 ) You did not prepay more than one month's principal during the year. Internal revenue tax forms 2012 (This includes prepayment by refinancing your home or by applying proceeds from its sale. Internal revenue tax forms 2012 ) You had to make level payments at fixed equal intervals on at least a semi-annual basis. Internal revenue tax forms 2012 You treat your payments as level even if they were adjusted from time to time because of changes in the interest rate. Internal revenue tax forms 2012    To figure your average balance, complete the following worksheet. Internal revenue tax forms 2012    1. Internal revenue tax forms 2012 Enter the balance as of the first day of the year that the mortgage was secured by your qualified home during the year (generally January 1)   2. Internal revenue tax forms 2012 Enter the balance as of the last day of the year that the mortgage was secured by your qualified home during the year (generally December 31)   3. Internal revenue tax forms 2012 Add amounts on lines 1 and 2   4. Internal revenue tax forms 2012 Divide the amount on line 3 by 2. Internal revenue tax forms 2012 Enter the result   Interest paid divided by interest rate method. Internal revenue tax forms 2012   You can use this method if at all times in 2013 the mortgage was secured by your qualified home and the interest was paid at least monthly. Internal revenue tax forms 2012    Complete the following worksheet to figure your average balance. Internal revenue tax forms 2012    1. Internal revenue tax forms 2012 Enter the interest paid in 2013. Internal revenue tax forms 2012 Do not include points, mortgage insurance premiums, or any interest paid in 2013 that is for a year after 2013. Internal revenue tax forms 2012 However, do include interest that is for 2013 but was paid in an earlier year   2. Internal revenue tax forms 2012 Enter the annual interest rate on the mortgage. Internal revenue tax forms 2012 If the interest rate varied in 2013, use the lowest rate for the year   3. Internal revenue tax forms 2012 Divide the amount on line 1 by the amount on line 2. Internal revenue tax forms 2012 Enter the result   Example. Internal revenue tax forms 2012 Mr. Internal revenue tax forms 2012 Blue had a line of credit secured by his main home all year. Internal revenue tax forms 2012 He paid interest of $2,500 on this loan. Internal revenue tax forms 2012 The interest rate on the loan was 9% (. Internal revenue tax forms 2012 09) all year. Internal revenue tax forms 2012 His average balance using this method is $27,778, figured as follows. Internal revenue tax forms 2012 1. Internal revenue tax forms 2012 Enter the interest paid in 2013. Internal revenue tax forms 2012 Do not include points, mortgage insurance premiums, or any interest paid in 2013 that is for a year after 2013. Internal revenue tax forms 2012 However, do include interest that is for 2013 but was paid in an earlier year $2,500 2. Internal revenue tax forms 2012 Enter the annual interest rate on the mortgage. Internal revenue tax forms 2012 If the interest rate varied in 2013, use the lowest rate for the year . Internal revenue tax forms 2012 09 3. Internal revenue tax forms 2012 Divide the amount on line 1 by the amount on line 2. Internal revenue tax forms 2012 Enter the result $27,778 Statements provided by your lender. Internal revenue tax forms 2012   If you receive monthly statements showing the closing balance or the average balance for the month, you can use either to figure your average balance for the year. Internal revenue tax forms 2012 You can treat the balance as zero for any month the mortgage was not secured by your qualified home. Internal revenue tax forms 2012   For each mortgage, figure your average balance by adding your monthly closing or average balances and dividing that total by the number of months the home secured by that mortgage was a qualified home during the year. Internal revenue tax forms 2012   If your lender can give you your average balance for the year, you can use that amount. Internal revenue tax forms 2012 Example. Internal revenue tax forms 2012 Ms. Internal revenue tax forms 2012 Brown had a home equity loan secured by her main home all year. Internal revenue tax forms 2012 She received monthly statements showing her average balance for each month. Internal revenue tax forms 2012 She can figure her average balance for the year by adding her monthly average balances and dividing the total by 12. Internal revenue tax forms 2012 Mixed-use mortgages. Internal revenue tax forms 2012   A mixed-use mortgage is a loan that consists of more than one of the three categories of debt (grandfathered debt, home acquisition debt, and home equity debt). Internal revenue tax forms 2012 For example, a mortgage you took out during the year is a mixed-use mortgage if you used its proceeds partly to refinance a mortgage that you took out in an earlier year to buy your home (home acquisition debt) and partly to buy a car (home equity debt). Internal revenue tax forms 2012   Complete lines 1 and 2 of Table 1 by including the separate average balances of any grandfathered debt and home acquisition debt in your mixed-use mortgage. Internal revenue tax forms 2012 Do not use the methods described earlier in this section to figure the average balance of either category. Internal revenue tax forms 2012 Instead, for each category, use the following method. Internal revenue tax forms 2012 Figure the balance of that category of debt for each month. Internal revenue tax forms 2012 This is the amount of the loan proceeds allocated to that category, reduced by your principal payments on the mortgage previously applied to that category. Internal revenue tax forms 2012 Principal payments on a mixed-use mortgage are applied in full to each category of debt, until its balance is zero, in the following order: First, any home equity debt, Next, any grandfathered debt, and Finally, any home acquisition debt. Internal revenue tax forms 2012 Add together the monthly balances figured in (1). Internal revenue tax forms 2012 Divide the result in (2) by 12. Internal revenue tax forms 2012   Complete line 9 of Table 1 by including the average balance of the entire mixed-use mortgage, figured under one of the methods described earlier in this section. Internal revenue tax forms 2012 Example 1. Internal revenue tax forms 2012 In 1986, Sharon took out a $1,400,000 mortgage to buy her main home (grandfathered debt). Internal revenue tax forms 2012 On March 2, 2013, when the home had a fair market value of $1,700,000 and she owed $1,100,000 on the mortgage, Sharon took out a second mortgage for $200,000. Internal revenue tax forms 2012 She used $180,000 of the proceeds to make substantial improvements to her home (home acquisition debt) and the remaining $20,000 to buy a car (home equity debt). Internal revenue tax forms 2012 Under the loan agreement, Sharon must make principal payments of $1,000 at the end of each month. Internal revenue tax forms 2012 During 2013, her principal payments on the second mortgage totaled $10,000. Internal revenue tax forms 2012 To complete Table 1, line 2, Sharon must figure a separate average balance for the part of her second mortgage that is home acquisition debt. Internal revenue tax forms 2012 The January and February balances were zero. Internal revenue tax forms 2012 The March through December balances were all $180,000, because none of her principal payments are applied to the home acquisition debt. Internal revenue tax forms 2012 (They are all applied to the home equity debt, reducing it to $10,000 [$20,000 − $10,000]. Internal revenue tax forms 2012 ) The monthly balances of the home acquisition debt total $1,800,000 ($180,000 × 10). Internal revenue tax forms 2012 Therefore, the average balance of the home acquisition debt for 2013 was $150,000 ($1,800,000 ÷ 12). Internal revenue tax forms 2012 Example 2. Internal revenue tax forms 2012 The facts are the same as in Example 1. Internal revenue tax forms 2012 In 2014, Sharon's January through October principal payments on her second mortgage are applied to the home equity debt, reducing it to zero. Internal revenue tax forms 2012 The balance of the home acquisition debt remains $180,000 for each of those months. Internal revenue tax forms 2012 Because her November and December principal payments are applied to the home acquisition debt, the November balance is $179,000 ($180,000 − $1,000) and the December balance is $178,000 ($180,000 − $2,000). Internal revenue tax forms 2012 The monthly balances total $2,157,000 [($180,000 × 10) + $179,000 + $178,000]. Internal revenue tax forms 2012 Therefore, the average balance of the home acquisition debt for 2014 is $179,750 ($2,157,000 ÷ 12). Internal revenue tax forms 2012 L
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IRS Extends Tax Relief to Some New Jersey and New York Victims of Hurricane Sandy; Return Filing and Tax Payment Deadline Extended to April 1, 2013

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IR-2013-16, Feb. 1, 2013

WASHINGTON –– In the aftermath of Hurricane Sandy, the Internal Revenue Service announced additional tax relief to affected individuals and businesses. The IRS today is further extending tax deadlines of that relief until April 1 for the following localities:

  • In New Jersey (starting Oct. 26): Monmouth and Ocean counties.
  • In New York (starting Oct. 27): Nassau, Queens, Richmond and Suffolk counties.

Beyond the relief provided by law to taxpayers in the FEMA-designated counties, the IRS will work with any taxpayer who resides outside the disaster area but whose books, records or tax professional are located in the areas affected by Hurricane Sandy. All workers assisting the relief activities in the covered disaster areas who are affiliated with a recognized government or philanthropic organization are eligible for relief. Taxpayers who live outside of the impacted area and think they may qualify for this relief need to contact the IRS at 866-562-5227.

The IRS also announced today that Taxpayer Assistance Centers in several New York and New Jersey locations will be open additional hours to provide help to taxpayers impacted by Hurricane Sandy. There will also be special assistance available at several New Jersey and New York locations on Saturday, February 23 from 9 a.m. until 2 p.m. More information will be available on irs.gov.

The tax relief postpones various tax filing and payment deadlines that occurred starting in late October. As a result, affected individuals and businesses will have until April 1, 2013, to file these returns and pay any taxes due. This includes the fourth quarter individual estimated tax payment, normally due Jan. 15, 2013. It also includes payroll and excise tax returns and accompanying payments for the third and fourth quarters, normally due on Oct. 31, 2012 and Jan. 31, 2013 respectively, and calendar year corporate income tax returns due March 15. It also applies to tax-exempt organizations required to file Form 990 series returns with an original or extended deadline falling during this period.  

The IRS will abate any interest, late-payment or late-filing penalty that would otherwise apply. The IRS automatically provides this relief to any taxpayer located in the disaster area. Taxpayers need not contact the IRS to get this relief.

The tax relief is part of a coordinated federal response to the damage caused by the hurricane and is based on local damage assessments by FEMA. For information on disaster recovery, individuals should visit disasterassistance.gov

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Page Last Reviewed or Updated: 05-Nov-2013

The Internal Revenue Tax Forms 2012

Internal revenue tax forms 2012 8. Internal revenue tax forms 2012   Business Expenses Table of Contents Introduction Useful Items - You may want to see: Bad DebtsAccrual method. Internal revenue tax forms 2012 Cash method. Internal revenue tax forms 2012 Car and Truck ExpensesOffice in the home. Internal revenue tax forms 2012 Methods for Deducting Car and Truck Expenses Reimbursing Your Employees for Expenses Depreciation Employees' PayFringe benefits. Internal revenue tax forms 2012 InsuranceHow to figure the deduction. Internal revenue tax forms 2012 Interest Legal and Professional FeesTax preparation fees. Internal revenue tax forms 2012 Pension Plans Rent Expense Taxes Travel, Meals, and EntertainmentTransportation. Internal revenue tax forms 2012 Taxi, commuter bus, and limousine. Internal revenue tax forms 2012 Baggage and shipping. Internal revenue tax forms 2012 Car or truck. Internal revenue tax forms 2012 Meals and lodging. Internal revenue tax forms 2012 Cleaning. Internal revenue tax forms 2012 Telephone. Internal revenue tax forms 2012 Tips. Internal revenue tax forms 2012 More information. Internal revenue tax forms 2012 Business Use of Your HomeExceptions to exclusive use. Internal revenue tax forms 2012 Other Expenses You Can Deduct Expenses You Cannot Deduct Introduction You can deduct the costs of operating your business. Internal revenue tax forms 2012 These costs are known as business expenses. Internal revenue tax forms 2012 These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year. Internal revenue tax forms 2012 To be deductible, a business expense must be both ordinary and necessary. Internal revenue tax forms 2012 An ordinary expense is one that is common and accepted in your field of business. Internal revenue tax forms 2012 A necessary expense is one that is helpful and appropriate for your business. Internal revenue tax forms 2012 An expense does not have to be indispensable to be considered necessary. Internal revenue tax forms 2012 For more information about the general rules for deducting business expenses, see chapter 1 in Publication 535, Business Expenses. Internal revenue tax forms 2012 If you have an expense that is partly for business and partly personal, separate the personal part from the business part. Internal revenue tax forms 2012 The personal part is not deductible. Internal revenue tax forms 2012 Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 535 Business Expenses 946 How To Depreciate Property See chapter 12 for information about getting publications and forms. Internal revenue tax forms 2012 Bad Debts If someone owes you money you cannot collect, you have a bad debt. Internal revenue tax forms 2012 There are two kinds of bad debts, business bad debts and nonbusiness bad debts. Internal revenue tax forms 2012 A business bad debt is generally one that comes from operating your trade or business. Internal revenue tax forms 2012 You may be able to deduct business bad debts as an expense on your business tax return. Internal revenue tax forms 2012 Business bad debt. Internal revenue tax forms 2012   A business bad debt is a loss from the worthlessness of a debt that was either of the following. Internal revenue tax forms 2012 Created or acquired in your business. Internal revenue tax forms 2012 Closely related to your business when it became partly or totally worthless. Internal revenue tax forms 2012 A debt is closely related to your business if your primary motive for incurring the debt is a business reason. Internal revenue tax forms 2012   Business bad debts are mainly the result of credit sales to customers. Internal revenue tax forms 2012 They can also be the result of loans to suppliers, clients, employees, or distributors. Internal revenue tax forms 2012 Goods and services customers have not paid for are shown in your books as either accounts receivable or notes receivable. Internal revenue tax forms 2012 If you are unable to collect any part of these accounts or notes receivable, the uncollectible part is a business bad debt. Internal revenue tax forms 2012    You can take a bad debt deduction for these accounts and notes receivable only if the amount you were owed was included in your gross income either for the year the deduction is claimed or for a prior year. Internal revenue tax forms 2012 Accrual method. Internal revenue tax forms 2012   If you use an accrual method of accounting, you normally report income as you earn it. Internal revenue tax forms 2012 You can take a bad debt deduction for an uncollectible receivable if you have included the uncollectible amount in income. Internal revenue tax forms 2012 Cash method. Internal revenue tax forms 2012   If you use the cash method of accounting, you normally report income when you receive payment. Internal revenue tax forms 2012 You cannot take a bad debt deduction for amounts owed to you that you have not received and cannot collect if you never included those amounts in income. Internal revenue tax forms 2012 More information. Internal revenue tax forms 2012   For more information about business bad debts, see chapter 10 in Publication 535. Internal revenue tax forms 2012 Nonbusiness bad debts. Internal revenue tax forms 2012   All other bad debts are nonbusiness bad debts and are deductible as short-term capital losses on Form 8949 and Schedule D (Form 1040). Internal revenue tax forms 2012 For more information on nonbusiness bad debts, see Publication 550, Investment Income and Expenses. Internal revenue tax forms 2012 Car and Truck Expenses If you use your car or truck in your business, you may be able to deduct the costs of operating and maintaining your vehicle. Internal revenue tax forms 2012 You also may be able to deduct other costs of local transportation and traveling away from home overnight on business. Internal revenue tax forms 2012 You may qualify for a tax credit for qualified plug-in electric vehicles, qualified plug-in electric drive motor vehicles, and alternative motor vehicles you place in service during the year. Internal revenue tax forms 2012 See Form 8936 and Form 8910 for more information. Internal revenue tax forms 2012 Local transportation expenses. Internal revenue tax forms 2012   Local transportation expenses include the ordinary and necessary costs of all the following. Internal revenue tax forms 2012 Getting from one workplace to another in the course of your business or profession when you are traveling within the city or general area that is your tax home. Internal revenue tax forms 2012 Tax home is defined later. Internal revenue tax forms 2012 Visiting clients or customers. Internal revenue tax forms 2012 Going to a business meeting away from your regular workplace. Internal revenue tax forms 2012 Getting from your home to a temporary workplace when you have one or more regular places of work. Internal revenue tax forms 2012 These temporary workplaces can be either within the area of your tax home or outside that area. Internal revenue tax forms 2012 Local business transportation does not include expenses you have while traveling away from home overnight. Internal revenue tax forms 2012 Those expenses are deductible as travel expenses and are discussed later under Travel, Meals, and Entertainment. Internal revenue tax forms 2012 However, if you use your car while traveling away from home overnight, use the rules in this section to figure your car expense deduction. Internal revenue tax forms 2012   Generally, your tax home is your regular place of business, regardless of where you maintain your family home. Internal revenue tax forms 2012 It includes the entire city or general area in which your business or work is located. Internal revenue tax forms 2012 Example. Internal revenue tax forms 2012 You operate a printing business out of rented office space. Internal revenue tax forms 2012 You use your van to deliver completed jobs to your customers. Internal revenue tax forms 2012 You can deduct the cost of round-trip transportation between your customers and your print shop. Internal revenue tax forms 2012    You cannot deduct the costs of driving your car or truck between your home and your main or regular workplace. Internal revenue tax forms 2012 These costs are personal commuting expenses. Internal revenue tax forms 2012 Office in the home. Internal revenue tax forms 2012   Your workplace can be your home if you have an office in your home that qualifies as your principal place of business. Internal revenue tax forms 2012 For more information, see Business Use of Your Home, later. Internal revenue tax forms 2012 Example. Internal revenue tax forms 2012 You are a graphics designer. Internal revenue tax forms 2012 You operate your business out of your home. Internal revenue tax forms 2012 Your home qualifies as your principal place of business. Internal revenue tax forms 2012 You occasionally have to drive to your clients to deliver your completed work. Internal revenue tax forms 2012 You can deduct the cost of the round-trip transportation between your home and your clients. Internal revenue tax forms 2012 Methods for Deducting Car and Truck Expenses For local transportation or overnight travel by car or truck, you generally can use one of the following methods to figure your expenses. Internal revenue tax forms 2012 Standard mileage rate. Internal revenue tax forms 2012 Actual expenses. Internal revenue tax forms 2012 Standard mileage rate. Internal revenue tax forms 2012   You may be able to use the standard mileage rate to figure the deductible costs of operating your car, van, pickup, or panel truck for business purposes. Internal revenue tax forms 2012 For 2013, the standard mileage rate is 56. Internal revenue tax forms 2012 5 cents per mile. Internal revenue tax forms 2012    If you choose to use the standard mileage rate for a year, you cannot deduct your actual expenses for that year except for business-related parking fees and tolls. Internal revenue tax forms 2012 Choosing the standard mileage rate. Internal revenue tax forms 2012   If you want to use the standard mileage rate for a car or truck you own, you must choose to use it in the first year the car is available for use in your business. Internal revenue tax forms 2012 In later years, you can choose to use either the standard mileage rate or actual expenses. Internal revenue tax forms 2012   If you use the standard mileage rate for a car you lease, you must choose to use it for the entire lease period (including renewals). Internal revenue tax forms 2012 Standard mileage rate not allowed. Internal revenue tax forms 2012   You cannot use the standard mileage rate if you: Operate five or more cars at the same time, Claimed a depreciation deduction using any method other than straight line, for example, ACRS or MACRS, Claimed a section 179 deduction on the car, Claimed the special depreciation allowance on the car, Claimed actual car expenses for a car you leased, or Are a rural mail carrier who received a qualified reimbursement. Internal revenue tax forms 2012 Parking fees and tolls. Internal revenue tax forms 2012   In addition to using the standard mileage rate, you can deduct any business-related parking fees and tolls. Internal revenue tax forms 2012 (Parking fees you pay to park your car at your place of work are nondeductible commuting expenses. Internal revenue tax forms 2012 ) Actual expenses. Internal revenue tax forms 2012   If you do not choose to use the standard mileage rate, you may be able to deduct your actual car or truck expenses. Internal revenue tax forms 2012    If you qualify to use both methods, figure your deduction both ways to see which gives you a larger deduction. Internal revenue tax forms 2012   Actual car expenses include the costs of the following items. Internal revenue tax forms 2012 Depreciation Lease payments Registration Garage rent Licenses Repairs Gas Oil Tires Insurance Parking fees Tolls   If you use your vehicle for both business and personal purposes, you must divide your expenses between business and personal use. Internal revenue tax forms 2012 You can divide your expenses based on the miles driven for each purpose. Internal revenue tax forms 2012 Example. Internal revenue tax forms 2012 You are the sole proprietor of a flower shop. Internal revenue tax forms 2012 You drove your van 20,000 miles during the year. Internal revenue tax forms 2012 16,000 miles were for delivering flowers to customers and 4,000 miles were for personal use (including commuting miles). Internal revenue tax forms 2012 You can claim only 80% (16,000 ÷ 20,000) of the cost of operating your van as a business expense. Internal revenue tax forms 2012 More information. Internal revenue tax forms 2012   For more information about the rules for claiming car and truck expenses, see Publication 463. Internal revenue tax forms 2012 Reimbursing Your Employees for Expenses You generally can deduct the amount you reimburse your employees for car and truck expenses. Internal revenue tax forms 2012 The reimbursement you deduct and the manner in which you deduct it depend in part on whether you reimburse the expenses under an accountable plan or a nonaccountable plan. Internal revenue tax forms 2012 For details, see chapter 11 in Publication 535. Internal revenue tax forms 2012 That chapter explains accountable and nonaccountable plans and tells you whether to report the reimbursement on your employee's Form W-2, Wage and Tax Statement. Internal revenue tax forms 2012 Depreciation If property you acquire to use in your business is expected to last more than 1 year, you generally cannot deduct the entire cost as a business expense in the year you acquire it. Internal revenue tax forms 2012 You must spread the cost over more than 1 tax year and deduct part of it each year on Schedule C. Internal revenue tax forms 2012 This method of deducting the cost of business property is called depreciation. Internal revenue tax forms 2012 The discussion here is brief. Internal revenue tax forms 2012 You will find more information about depreciation in Publication 946. Internal revenue tax forms 2012 What property can be depreciated?   You can depreciate property if it meets all the following requirements. Internal revenue tax forms 2012 It must be property you own. Internal revenue tax forms 2012 It must be used in business or held to produce income. Internal revenue tax forms 2012 You never can depreciate inventory (explained in chapter 2) because it is not held for use in your business. Internal revenue tax forms 2012 It must have a useful life that extends substantially beyond the year it is placed in service. Internal revenue tax forms 2012 It must have a determinable useful life, which means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. Internal revenue tax forms 2012 You never can depreciate the cost of land because land does not wear out, become obsolete, or get used up. Internal revenue tax forms 2012 It must not be excepted property. Internal revenue tax forms 2012 This includes property placed in service and disposed of in the same year. Internal revenue tax forms 2012 Repairs. Internal revenue tax forms 2012    You cannot depreciate repairs and replacements that do not increase the value of your property, make it more useful, or lengthen its useful life. Internal revenue tax forms 2012 You can deduct these amounts on line 21 of Schedule C or line 2 of Schedule C-EZ. Internal revenue tax forms 2012 Depreciation method. Internal revenue tax forms 2012   The method for depreciating most business and investment property placed in service after 1986 is called the Modified Accelerated Cost Recovery System (MACRS). Internal revenue tax forms 2012 MACRS is discussed in detail in Publication 946. Internal revenue tax forms 2012 Section 179 deduction. Internal revenue tax forms 2012   You can elect to deduct a limited amount of the cost of certain depreciable property in the year you place the property in service. Internal revenue tax forms 2012 This deduction is known as the “section 179 deduction. Internal revenue tax forms 2012 ” The maximum amount you can elect to deduct during 2013 is generally $500,000 (higher limits apply to certain property). Internal revenue tax forms 2012 See IRC 179(e). Internal revenue tax forms 2012   This limit is generally reduced by the amount by which the cost of the property placed in service during the tax year exceeds $2 million. Internal revenue tax forms 2012 The total amount of depreciation (including the section 179 deduction) you can take for a passenger automobile you use in your business and first place in service in 2013 is $3,160 ($11,160 if you take the special depreciation allowance for qualified passenger automobiles placed in service in 2013). Internal revenue tax forms 2012 Special rules apply to trucks and vans. Internal revenue tax forms 2012 For more information, see Publication 946. Internal revenue tax forms 2012 It explains what property qualifies for the deduction, what limits apply to the deduction, and when and how to recapture the deduction. Internal revenue tax forms 2012    Your section 179 election for the cost of any sport utility vehicle (SUV) and certain other vehicles is limited to $25,000. Internal revenue tax forms 2012 For more information, see the Instructions for Form 4562 or Publication 946. Internal revenue tax forms 2012 Listed property. Internal revenue tax forms 2012   You must follow special rules and recordkeeping requirements when depreciating listed property. Internal revenue tax forms 2012 Listed property is any of the following. Internal revenue tax forms 2012 Most passenger automobiles. Internal revenue tax forms 2012 Most other property used for transportation. Internal revenue tax forms 2012 Any property of a type generally used for entertainment, recreation, or amusement. Internal revenue tax forms 2012 Certain computers and related peripheral equipment. Internal revenue tax forms 2012   For more information about listed property, see Publication 946. Internal revenue tax forms 2012 Form 4562. Internal revenue tax forms 2012   Use Form 4562, Depreciation and Amortization, if you are claiming any of the following. Internal revenue tax forms 2012 Depreciation on property placed in service during the current tax year. Internal revenue tax forms 2012 A section 179 deduction. Internal revenue tax forms 2012 Depreciation on any listed property (regardless of when it was placed in service). Internal revenue tax forms 2012    If you have to use Form 4562, you must file Schedule C. Internal revenue tax forms 2012 You cannot use Schedule C-EZ. Internal revenue tax forms 2012   Employees' Pay You can generally deduct on Schedule C the pay you give your employees for the services they perform for your business. Internal revenue tax forms 2012 The pay may be in cash, property, or services. Internal revenue tax forms 2012 To be deductible, your employees' pay must be an ordinary and necessary expense and you must pay or incur it in the tax year. Internal revenue tax forms 2012 In addition, the pay must meet both the following tests. Internal revenue tax forms 2012 The pay must be reasonable. Internal revenue tax forms 2012 The pay must be for services performed. Internal revenue tax forms 2012 Chapter 2 in Publication 535 explains and defines these requirements. Internal revenue tax forms 2012 You cannot deduct your own salary or any personal withdrawals you make from your business. Internal revenue tax forms 2012 As a sole proprietor, you are not an employee of the business. Internal revenue tax forms 2012 If you had employees during the year, you must use Schedule C. Internal revenue tax forms 2012 You cannot use Schedule C-EZ. Internal revenue tax forms 2012 Kinds of pay. Internal revenue tax forms 2012   Some of the ways you may provide pay to your employees are listed below. Internal revenue tax forms 2012 For an explanation of each of these items, see chapter 2 in Publication 535. Internal revenue tax forms 2012 Awards. Internal revenue tax forms 2012 Bonuses. Internal revenue tax forms 2012 Education expenses. Internal revenue tax forms 2012 Fringe benefits (discussed later). Internal revenue tax forms 2012 Loans or advances you do not expect the employee to repay if they are for personal services actually performed. Internal revenue tax forms 2012 Property you transfer to an employee as payment for services. Internal revenue tax forms 2012 Reimbursements for employee business expenses. Internal revenue tax forms 2012 Sick pay. Internal revenue tax forms 2012 Vacation pay. Internal revenue tax forms 2012 Fringe benefits. Internal revenue tax forms 2012   A fringe benefit is a form of pay for the performance of services. Internal revenue tax forms 2012 The following are examples of fringe benefits. Internal revenue tax forms 2012 Benefits under qualified employee benefit programs. Internal revenue tax forms 2012 Meals and lodging. Internal revenue tax forms 2012 The use of a car. Internal revenue tax forms 2012 Flights on airplanes. Internal revenue tax forms 2012 Discounts on property or services. Internal revenue tax forms 2012 Memberships in country clubs or other social clubs. Internal revenue tax forms 2012 Tickets to entertainment or sporting events. Internal revenue tax forms 2012   Employee benefit programs include the following. Internal revenue tax forms 2012 Accident and health plans. Internal revenue tax forms 2012 Adoption assistance. Internal revenue tax forms 2012 Cafeteria plans. Internal revenue tax forms 2012 Dependent care assistance. Internal revenue tax forms 2012 Educational assistance. Internal revenue tax forms 2012 Group-term life insurance coverage. Internal revenue tax forms 2012 Welfare benefit funds. Internal revenue tax forms 2012   You can generally deduct the cost of fringe benefits you provide on your Schedule C in whatever category the cost falls. Internal revenue tax forms 2012 For example, if you allow an employee to use a car or other property you lease, deduct the cost of the lease as a rent or lease expense. Internal revenue tax forms 2012 If you own the property, include your deduction for its cost or other basis as a section 179 deduction or a depreciation deduction. Internal revenue tax forms 2012    You may be able to exclude all or part of the fringe benefits you provide from your employees' wages. Internal revenue tax forms 2012 For more information about fringe benefits and the exclusion of benefits, see Publication 15-B, Employer's Tax Guide to Fringe Benefits. Internal revenue tax forms 2012 Insurance You can generally deduct premiums you pay for the following kinds of insurance related to your business. Internal revenue tax forms 2012 Fire, theft, flood, or similar insurance. Internal revenue tax forms 2012 Credit insurance that covers losses from business bad debts. Internal revenue tax forms 2012 Group hospitalization and medical insurance for employees, including long-term care insurance. Internal revenue tax forms 2012 Liability insurance. Internal revenue tax forms 2012 Malpractice insurance that covers your personal liability for professional negligence resulting in injury or damage to patients or clients. Internal revenue tax forms 2012 Workers' compensation insurance set by state law that covers any claims for bodily injuries or job-related diseases suffered by employees in your business, regardless of fault. Internal revenue tax forms 2012 Contributions to a state unemployment insurance fund are deductible as taxes if they are considered taxes under state law. Internal revenue tax forms 2012 Overhead insurance that pays for business overhead expenses you have during long periods of disability caused by your injury or sickness. Internal revenue tax forms 2012 Car and other vehicle insurance that covers vehicles used in your business for liability, damages, and other losses. Internal revenue tax forms 2012 If you operate a vehicle partly for personal use, deduct only the part of the insurance premium that applies to the business use of the vehicle. Internal revenue tax forms 2012 If you use the standard mileage rate to figure your car expenses, you cannot deduct any car insurance premiums. Internal revenue tax forms 2012 Life insurance covering your employees if you are not directly or indirectly the beneficiary under the contract. Internal revenue tax forms 2012 Business interruption insurance that pays for lost profits if your business is shut down due to a fire or other cause. Internal revenue tax forms 2012 Nondeductible premiums. Internal revenue tax forms 2012   You cannot deduct premiums on the following kinds of insurance. Internal revenue tax forms 2012 Self-insurance reserve funds. Internal revenue tax forms 2012 You cannot deduct amounts credited to a reserve set up for self-insurance. Internal revenue tax forms 2012 This applies even if you cannot get business insurance coverage for certain business risks. Internal revenue tax forms 2012 However, your actual losses may be deductible. Internal revenue tax forms 2012 For more information, see Publication 547, Casualties, Disasters, and Thefts. Internal revenue tax forms 2012 Loss of earnings. Internal revenue tax forms 2012 You cannot deduct premiums for a policy that pays for your lost earnings due to sickness or disability. Internal revenue tax forms 2012 However, see item (8) in the previous list. Internal revenue tax forms 2012 Certain life insurance and annuities. Internal revenue tax forms 2012 For contracts issued before June 9, 1997, you cannot deduct the premiums on a life insurance policy covering you, an employee, or any person with a financial interest in your business if you are directly or indirectly a beneficiary of the policy. Internal revenue tax forms 2012 You are included among possible beneficiaries of the policy if the policy owner is obligated to repay a loan from you using the proceeds of the policy. Internal revenue tax forms 2012 A person has a financial interest in your business if the person is an owner or part owner of the business or has lent money to the business. Internal revenue tax forms 2012 For contracts issued after June 8, 1997, you generally cannot deduct the premiums on any life insurance policy, endowment contract, or annuity contract if you are directly or indirectly a beneficiary. Internal revenue tax forms 2012 The disallowance applies without regard to whom the policy covers. Internal revenue tax forms 2012 Insurance to secure a loan. Internal revenue tax forms 2012 If you take out a policy on your life or on the life of another person with a financial interest in your business to get or protect a business loan, you cannot deduct the premiums as a business expense. Internal revenue tax forms 2012 Nor can you deduct the premiums as interest on business loans or as an expense of financing loans. Internal revenue tax forms 2012 In the event of death, the proceeds of the policy are not taxed as income even if they are used to liquidate the debt. Internal revenue tax forms 2012 Self-employed health insurance deduction. Internal revenue tax forms 2012   You may be able to deduct the amount you paid for medical and dental insurance and qualified long-term care insurance for you and your family. Internal revenue tax forms 2012 How to figure the deduction. Internal revenue tax forms 2012   Generally, you can use the worksheet in the Form 1040 instructions to figure your deduction. Internal revenue tax forms 2012 However, if any of the following apply, you must use the worksheet in chapter 6 of Publication 535. Internal revenue tax forms 2012 You have more than one source of income subject to self-employment tax. Internal revenue tax forms 2012 You file Form 2555 or Form 2555-EZ (relating to foreign earned income). Internal revenue tax forms 2012 You are using amounts paid for qualified long-term care insurance to figure the deduction. Internal revenue tax forms 2012 Prepayment. Internal revenue tax forms 2012   You cannot deduct expenses in advance, even if you pay them in advance. Internal revenue tax forms 2012 This rule applies to any 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. Internal revenue tax forms 2012 Example. Internal revenue tax forms 2012 In 2013, you signed a 3-year insurance contract. Internal revenue tax forms 2012 Even though you paid the premiums for 2013, 2014, and 2015 when you signed the contract, you can only deduct the premium for 2013 on your 2013 tax return. Internal revenue tax forms 2012 You can deduct in 2014 and 2015 the premium allocable to those years. Internal revenue tax forms 2012 More information. Internal revenue tax forms 2012   For more information about deducting insurance, see chapter 6 in Publication 535. Internal revenue tax forms 2012 Interest You can generally deduct as a business expense all interest you pay or accrue during the tax year on debts related to your business. Internal revenue tax forms 2012 Interest relates to your business if you use the proceeds of the loan for a business expense. Internal revenue tax forms 2012 It does not matter what type of property secures the loan. Internal revenue tax forms 2012 You can deduct interest on a debt only if you meet all of the following requirements. Internal revenue tax forms 2012 You are legally liable for that debt. Internal revenue tax forms 2012 Both you and the lender intend that the debt be repaid. Internal revenue tax forms 2012 You and the lender have a true debtor-creditor relationship. Internal revenue tax forms 2012 You cannot deduct on Schedule C or C-EZ the interest you paid on personal loans. Internal revenue tax forms 2012 If a loan is part business and part personal, you must divide the interest between the personal part and the business part. Internal revenue tax forms 2012 Example. Internal revenue tax forms 2012 In 2013, you paid $600 interest on a car loan. Internal revenue tax forms 2012 During 2013, you used the car 60% for business and 40% for personal purposes. Internal revenue tax forms 2012 You are claiming actual expenses on the car. Internal revenue tax forms 2012 You can only deduct $360 (60% × $600) for 2013 on Schedule C or C-EZ. Internal revenue tax forms 2012 The remaining interest of $240 is a nondeductible personal expense. Internal revenue tax forms 2012 More information. Internal revenue tax forms 2012   For more information about deducting interest, see chapter 4 in Publication 535. Internal revenue tax forms 2012 That chapter explains the following items. Internal revenue tax forms 2012 Interest you can deduct. Internal revenue tax forms 2012 Interest you cannot deduct. Internal revenue tax forms 2012 How to allocate interest between personal and business use. Internal revenue tax forms 2012 When to deduct interest. Internal revenue tax forms 2012 The rules for a below-market interest rate loan. Internal revenue tax forms 2012 (This is generally a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. Internal revenue tax forms 2012 ) Legal and Professional Fees Legal and professional fees, such as fees charged by accountants, that are ordinary and necessary expenses directly related to operating your business are deductible on Schedule C or C-EZ. Internal revenue tax forms 2012 However, you usually cannot deduct legal fees you pay to acquire business assets. Internal revenue tax forms 2012 Add them to the basis of the property. Internal revenue tax forms 2012 If the fees include payments for work of a personal nature (such as making a will), you can take a business deduction only for the part of the fee related to your business. Internal revenue tax forms 2012 The personal part of legal fees for producing or collecting taxable income, doing or keeping your job, or for tax advice may be deductible on Schedule A (Form 1040) if you itemize deductions. Internal revenue tax forms 2012 For more information, see Publication 529, Miscellaneous Deductions. Internal revenue tax forms 2012 Tax preparation fees. Internal revenue tax forms 2012   You can deduct on Schedule C or C-EZ the cost of preparing that part of your tax return relating to your business as a sole proprietor or statutory employee. Internal revenue tax forms 2012 You can deduct the remaining cost on Schedule A (Form 1040) if you itemize your deductions. Internal revenue tax forms 2012   You can also deduct on Schedule C or C-EZ the amount you pay or incur in resolving asserted tax deficiencies for your business as a sole proprietor or statutory employee. Internal revenue tax forms 2012 Pension Plans You can set up and maintain the following small business retirement plans for yourself and your employees. Internal revenue tax forms 2012 SEP (Simplified Employee Pension) plans. Internal revenue tax forms 2012 SIMPLE (Savings Incentive Match Plan for Employees) plans. Internal revenue tax forms 2012 Qualified plans (including Keogh or H. Internal revenue tax forms 2012 R. Internal revenue tax forms 2012 10 plans). Internal revenue tax forms 2012 SEP, SIMPLE, and qualified plans offer you and your employees a tax favored way to save for retirement. Internal revenue tax forms 2012 You can deduct contributions you make to the plan for your employees on line 19 of Schedule C. Internal revenue tax forms 2012 If you are a sole proprietor, you can deduct contributions you make to the plan for yourself on line 28 of Form 1040. Internal revenue tax forms 2012 You can also deduct trustees' fees if contributions to the plan do not cover them. Internal revenue tax forms 2012 Earnings on the contributions are generally tax free until you or your employees receive distributions from the plan. Internal revenue tax forms 2012 You may also be able to claim a tax credit of 50% of the first $1,000 of qualified startup costs if you begin a new qualified defined benefit or defined contribution plan (including a 401(k) plan), SIMPLE plan, or simplified employee pension. Internal revenue tax forms 2012 Under certain plans, employees can have you contribute limited amounts of their before-tax pay to a plan. Internal revenue tax forms 2012 These amounts (and earnings on them) are generally tax free until your employees receive distributions from the plan. Internal revenue tax forms 2012 For more information on retirement plans for small business, see Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans). Internal revenue tax forms 2012 Publication 590, Individual Retirement Arrangements (IRAs), discusses other tax favored ways to save for retirement. Internal revenue tax forms 2012 Rent Expense Rent is any amount you pay for the use of property you do not own. Internal revenue tax forms 2012 In general, you can deduct rent as a business expense only if the rent is for property you use in your business. Internal revenue tax forms 2012 If you have or will receive equity in or title to the property, you cannot deduct the rent. Internal revenue tax forms 2012 Unreasonable rent. Internal revenue tax forms 2012   You cannot take a rental deduction for unreasonable rents. Internal revenue tax forms 2012 Ordinarily, the issue of reasonableness arises only if you and the lessor are related. Internal revenue tax forms 2012 Rent paid to a related person is reasonable if it is the same amount you would pay to a stranger for use of the same property. Internal revenue tax forms 2012 Rent is not unreasonable just because it is figured as a percentage of gross receipts. Internal revenue tax forms 2012   Related persons include members of your immediate family, including only brothers and sisters (either whole or half), your spouse, ancestors, and lineal descendants. Internal revenue tax forms 2012 For a list of the other related persons, see section 267 of the Internal Revenue Code. Internal revenue tax forms 2012 Rent on your home. Internal revenue tax forms 2012   If you rent your home and use part of it as your place of business, you may be able to deduct the rent you pay for that part. Internal revenue tax forms 2012 You must meet the requirements for business use of your home. Internal revenue tax forms 2012 For more information, see Business Use of Your Home , later. Internal revenue tax forms 2012 Rent paid in advance. Internal revenue tax forms 2012   Generally, rent paid in your business is deductible in the year paid or accrued. Internal revenue tax forms 2012 If you pay rent in advance, you can deduct only the amount that applies to your use of the rented property during the tax year. Internal revenue tax forms 2012 You can deduct the rest of your payment only over the period to which it applies. Internal revenue tax forms 2012 More information. Internal revenue tax forms 2012   For more information about rent, see chapter 3 in Publication 535. Internal revenue tax forms 2012 Taxes You can deduct on Schedule C or C-EZ various federal, state, local, and foreign taxes directly attributable to your business. Internal revenue tax forms 2012 Income taxes. Internal revenue tax forms 2012   You can deduct on Schedule C or C-EZ a state tax on gross income (as distinguished from net income) directly attributable to your business. Internal revenue tax forms 2012 You can deduct other state and local income taxes on Schedule A (Form 1040) if you itemize your deductions. Internal revenue tax forms 2012 Do not deduct federal income tax. Internal revenue tax forms 2012 Employment taxes. Internal revenue tax forms 2012   You can deduct the social security, Medicare, and federal unemployment (FUTA) taxes you paid out of your own funds as an employer. Internal revenue tax forms 2012 Employment taxes are discussed briefly in chapter 1. Internal revenue tax forms 2012 You can also deduct payments you made as an employer to a state unemployment compensation fund or to a state disability benefit fund. Internal revenue tax forms 2012 Deduct these payments as taxes. Internal revenue tax forms 2012 Self-employment tax. Internal revenue tax forms 2012   You can deduct one-half of your self-employment tax on line 27 of Form 1040. Internal revenue tax forms 2012 Self-employment tax is discussed in chapters 1 and 10. Internal revenue tax forms 2012 Personal property tax. Internal revenue tax forms 2012   You can deduct on Schedule C or C-EZ any tax imposed by a state or local government on personal property used in your business. Internal revenue tax forms 2012   You can also deduct registration fees for the right to use property within a state or local area. Internal revenue tax forms 2012 Example. Internal revenue tax forms 2012 May and Julius Winter drove their car 7,000 business miles out of a total of 10,000 miles. Internal revenue tax forms 2012 They had to pay $25 for their annual state license tags and $20 for their city registration sticker. Internal revenue tax forms 2012 They also paid $235 in city personal property tax on the car, for a total of $280. Internal revenue tax forms 2012 They are claiming their actual car expenses. Internal revenue tax forms 2012 Because they used the car 70% for business, they can deduct 70% of the $280, or $196, as a business expense. Internal revenue tax forms 2012 Real estate taxes. Internal revenue tax forms 2012   You can deduct on Schedule C or C-EZ the real estate taxes you pay on your business property. Internal revenue tax forms 2012 Deductible real estate taxes are any state, local, or foreign taxes on real estate levied for the general public welfare. Internal revenue tax forms 2012 The taxing authority must base the taxes on the assessed value of the real estate and charge them uniformly against all property under its jurisdiction. Internal revenue tax forms 2012   For more information about real estate taxes, see chapter 5 in Publication 535. Internal revenue tax forms 2012 That chapter explains special rules for deducting the following items. Internal revenue tax forms 2012 Taxes for local benefits, such as those for sidewalks, streets, water mains, and sewer lines. Internal revenue tax forms 2012 Real estate taxes when you buy or sell property during the year. Internal revenue tax forms 2012 Real estate taxes if you use an accrual method of accounting and choose to accrue real estate tax related to a definite period ratably over that period. Internal revenue tax forms 2012 Sales tax. Internal revenue tax forms 2012   Treat any sales tax you pay on a service or on the purchase or use of property as part of the cost of the service or property. Internal revenue tax forms 2012 If the service or the cost or use of the property is a deductible business expense, you can deduct the tax as part of that service or cost. Internal revenue tax forms 2012 If the property is merchandise bought for resale, the sales tax is part of the cost of the merchandise. Internal revenue tax forms 2012 If the property is depreciable, add the sales tax to the basis for depreciation. Internal revenue tax forms 2012 For information on the basis of property, see Publication 551, Basis of Assets. Internal revenue tax forms 2012    Do not deduct state and local sales taxes imposed on the buyer that you must collect and pay over to the state or local government. Internal revenue tax forms 2012 Do not include these taxes in gross receipts or sales. Internal revenue tax forms 2012 Excise taxes. Internal revenue tax forms 2012   You can deduct on Schedule C or C-EZ all excise taxes that are ordinary and necessary expenses of carrying on your business. Internal revenue tax forms 2012 Excise taxes are discussed briefly in chapter 1. Internal revenue tax forms 2012 Fuel taxes. Internal revenue tax forms 2012   Taxes on gasoline, diesel fuel, and other motor fuels you use in your business are usually included as part of the cost of the fuel. Internal revenue tax forms 2012 Do not deduct these taxes as a separate item. Internal revenue tax forms 2012   You may be entitled to a credit or refund for federal excise tax you paid on fuels used for certain purposes. Internal revenue tax forms 2012 For more information, see Publication 510, Excise Taxes. Internal revenue tax forms 2012 Travel, Meals, and Entertainment This section briefly explains the kinds of travel and entertainment expenses you can deduct on Schedule C or C-EZ. Internal revenue tax forms 2012 Table 8-1. Internal revenue tax forms 2012 When Are Entertainment Expenses Deductible? (Note. Internal revenue tax forms 2012 The following is a summary of the rules for deducting entertainment expenses. Internal revenue tax forms 2012 For more details about these rules, see Publication 463. Internal revenue tax forms 2012 ) General rule You can deduct ordinary and necessary expenses to entertain a client, customer, or employee if the expenses meet the directly-related test or the associated test. Internal revenue tax forms 2012 Definitions Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation, and includes meals provided to a customer or client. Internal revenue tax forms 2012 An ordinary expense is one that is common and accepted in your field of business, trade, or profession. Internal revenue tax forms 2012 A necessary expense is one that is helpful and appropriate, although not necessarily required, for your business. Internal revenue tax forms 2012 Tests to be met Directly-related test Entertainment took place in a clear business setting, or Main purpose of entertainment was the active conduct of business, and You did engage in business with the person during the entertainment period, and You had more than a general expectation of getting income or some other specific business benefit. Internal revenue tax forms 2012   Associated test Entertainment is associated with your trade or business, and Entertainment directly precedes or follows a substantial business discussion. Internal revenue tax forms 2012 Other rules You cannot deduct the cost of your meal as an entertainment expense if you are claiming the meal as a travel expense. Internal revenue tax forms 2012 You cannot deduct expenses that are lavish or extravagant under the circumstances. Internal revenue tax forms 2012 You generally can deduct only 50% of your unreimbursed entertainment expenses. Internal revenue tax forms 2012 Travel expenses. Internal revenue tax forms 2012   These are the ordinary and necessary expenses of traveling away from home for your business. Internal revenue tax forms 2012 You are traveling away from home if both the following conditions are met. Internal revenue tax forms 2012 Your duties require you to be away from the general area of your tax home (defined later) substantially longer than an ordinary day's work. Internal revenue tax forms 2012 You need to get sleep or rest to meet the demands of your work while away from home. Internal revenue tax forms 2012 Generally, your tax home is your regular place of business, regardless of where you maintain your family home. Internal revenue tax forms 2012 It includes the entire city or general area in which your business is located. Internal revenue tax forms 2012 See Publication 463 for more information. Internal revenue tax forms 2012   The following is a brief discussion of the expenses you can deduct. Internal revenue tax forms 2012 Transportation. Internal revenue tax forms 2012   You can deduct the cost of travel by airplane, train, bus, or car between your home and your business destination. Internal revenue tax forms 2012 Taxi, commuter bus, and limousine. Internal revenue tax forms 2012   You can deduct fares for these and other types of transportation between the airport or station and your hotel, or between the hotel and your work location away from home. Internal revenue tax forms 2012 Baggage and shipping. Internal revenue tax forms 2012   You can deduct the cost of sending baggage and sample or display material between your regular and temporary work locations. Internal revenue tax forms 2012 Car or truck. Internal revenue tax forms 2012   You can deduct the costs of operating and maintaining your vehicle when traveling away from home on business. Internal revenue tax forms 2012 You can deduct actual expenses or the standard mileage rate (discussed earlier under Car and Truck Expenses), as well as business-related tolls and parking. Internal revenue tax forms 2012 If you rent a car while away from home on business, you can deduct only the business-use portion of the expenses. Internal revenue tax forms 2012 Meals and lodging. Internal revenue tax forms 2012   You can deduct the cost of meals and lodging if your business trip is overnight or long enough that you need to stop for sleep or rest to properly perform your duties. Internal revenue tax forms 2012 In most cases, you can deduct only 50% of your meal expenses. Internal revenue tax forms 2012 Cleaning. Internal revenue tax forms 2012   You can deduct the costs of dry cleaning and laundry while on your business trip. Internal revenue tax forms 2012 Telephone. Internal revenue tax forms 2012   You can deduct the cost of business calls while on your business trip, including business communication by fax machine or other communication devices. Internal revenue tax forms 2012 Tips. Internal revenue tax forms 2012   You can deduct the tips you pay for any expense in this list. Internal revenue tax forms 2012 More information. Internal revenue tax forms 2012   For more information about travel expenses, see Publication 463. Internal revenue tax forms 2012 Entertainment expenses. Internal revenue tax forms 2012   You may be able to deduct business-related entertainment expenses for entertaining a client, customer, or employee. Internal revenue tax forms 2012 In most cases, you can deduct only 50% of these expenses. Internal revenue tax forms 2012   The following are examples of entertainment expenses. Internal revenue tax forms 2012 Entertaining guests at nightclubs, athletic clubs, theaters, or sporting events. Internal revenue tax forms 2012 Providing meals, a hotel suite, or a car to business customers or their families. Internal revenue tax forms 2012 To be deductible, the expenses must meet the rules listed in Table 8-1. Internal revenue tax forms 2012 For details about these rules, see Publication 463. Internal revenue tax forms 2012 Reimbursing your employees for expenses. Internal revenue tax forms 2012   You generally can deduct the amount you reimburse your employees for travel and entertainment expenses. Internal revenue tax forms 2012 The reimbursement you deduct and the manner in which you deduct it depend in part on whether you reimburse the expenses under an accountable plan or a nonaccountable plan. Internal revenue tax forms 2012 For details, see chapter 11 in Publication 535. Internal revenue tax forms 2012 That chapter explains accountable and nonaccountable plans and tells you whether to report the reimbursement on your employee's Form W-2, Wage and Tax Statement. Internal revenue tax forms 2012 Business Use of Your Home To deduct expenses related to the part of your home used for business, you must meet specific requirements. Internal revenue tax forms 2012 Even then, your deduction may be limited. Internal revenue tax forms 2012 To qualify to claim expenses for business use of your home, you must meet the following tests. Internal revenue tax forms 2012 Your use of the business part of your home must be: Exclusive (however, see Exceptions to exclusive use , later), Regular, For your business, and The business part of your home must be one of the following: Your principal place of business (defined later), A place where you meet or deal with patients, clients, or customers in the normal course of your business, or A separate structure (not attached to your home) you use in connection with your business. Internal revenue tax forms 2012 Exclusive use. Internal revenue tax forms 2012   To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. Internal revenue tax forms 2012 The area used for business can be a room or other separately identifiable space. Internal revenue tax forms 2012 The space does not need to be marked off by a permanent partition. Internal revenue tax forms 2012   You do not meet the requirements of the exclusive use test if you use the area in question both for business and for personal purposes. Internal revenue tax forms 2012 Example. Internal revenue tax forms 2012 You are an attorney and use a den in your home to write legal briefs and prepare clients' tax returns. Internal revenue tax forms 2012 Your family also uses the den for recreation. Internal revenue tax forms 2012 The den is not used exclusively in your profession, so you cannot claim a business deduction for its use. Internal revenue tax forms 2012 Exceptions to exclusive use. Internal revenue tax forms 2012   You do not have to meet the exclusive use test if you use part of your home in either of the following ways. Internal revenue tax forms 2012 For the storage of inventory or product samples. Internal revenue tax forms 2012 As a daycare facility. Internal revenue tax forms 2012 For an explanation of these exceptions, see Publication 587, Business Use of Your Home (Including Use by Daycare Providers). Internal revenue tax forms 2012 Regular use. Internal revenue tax forms 2012   To qualify under the regular use test, you must use a specific area of your home for business on a continuing basis. Internal revenue tax forms 2012 You do not meet the test if your business use of the area is only occasional or incidental, even if you do not use that area for any other purpose. Internal revenue tax forms 2012 Principal place of business. Internal revenue tax forms 2012   You can have more than one business location, including your home, for a single trade or business. Internal revenue tax forms 2012 To qualify to deduct the expenses for the business use of your home under the principal place of business test, your home must be your principal place of business for that business. Internal revenue tax forms 2012 To determine your principal place of business, you must consider all the facts and circumstances. Internal revenue tax forms 2012   Your home office will qualify as your principal place of business for deducting expenses for its use if you meet the following requirements. Internal revenue tax forms 2012 You use it exclusively and regularly for administrative or management activities of your business. Internal revenue tax forms 2012 You have no other fixed location where you conduct substantial administrative or management activities of your business. Internal revenue tax forms 2012   Alternatively, if you use your home exclusively and regularly for your business, but your home office does not qualify as your principal place of business based on the previous rules, you determine your principal place of business based on the following factors. Internal revenue tax forms 2012 The relative importance of the activities performed at each location. Internal revenue tax forms 2012 If the relative importance factor does not determine your principal place of business, you can also consider the time spent at each location. Internal revenue tax forms 2012   If, after considering your business locations, your home cannot be identified as your principal place of business, you cannot deduct home office expenses. Internal revenue tax forms 2012 However, for other ways to qualify to deduct home office expenses, see Publication 587. Internal revenue tax forms 2012 Deduction limit. Internal revenue tax forms 2012   If your gross income from the business use of your home equals or exceeds your total business expenses (including depreciation), you can deduct all your business expenses related to the use of your home. Internal revenue tax forms 2012 If your gross income from the business use is less than your total business expenses, your deduction for certain expenses for the business use of your home is limited. Internal revenue tax forms 2012   Your deduction of otherwise nondeductible expenses, such as insurance, utilities, and depreciation (with depreciation taken last), allocable to the business is limited to the gross income from the business use of your home minus the sum of the following. Internal revenue tax forms 2012 The business part of expenses you could deduct even if you did not use your home for business (such as mortgage interest, real estate taxes, and casualty and theft losses that are allowable as itemized deductions on Schedule A (Form 1040)). Internal revenue tax forms 2012 The business expenses that relate to the business activity in the home (for example, business phone, supplies, and depreciation on equipment), but not to the use of the home itself. Internal revenue tax forms 2012 Do not include in (2) above your deduction for one-half of your self-employment tax. Internal revenue tax forms 2012   Use Form 8829, Expenses for Business Use of Your Home, to figure your deduction. Internal revenue tax forms 2012 New simplified method. Internal revenue tax forms 2012    The IRS now provides a simplified method to determine your expenses for business use of your home. Internal revenue tax forms 2012 The simplified method is an alternative to calculating and substantiating actual expenses. Internal revenue tax forms 2012 In most cases, you will figure your deduction by multiplying $5 by the area of your home used for a qualified business use. Internal revenue tax forms 2012 The area you use to figure your deduction is limited to 300 square feet. Internal revenue tax forms 2012 For more information, see the Instructions for Schedule C. Internal revenue tax forms 2012 More information. Internal revenue tax forms 2012   For more information on deducting expenses for the business use of your home, see Publication 587. Internal revenue tax forms 2012 Other Expenses You Can Deduct You may also be able to deduct the following expenses. Internal revenue tax forms 2012 See Publication 535 to find out whether you can deduct them. Internal revenue tax forms 2012 Advertising. Internal revenue tax forms 2012 Bank fees. Internal revenue tax forms 2012 Donations to business organizations. Internal revenue tax forms 2012 Education expenses. Internal revenue tax forms 2012 Energy efficient commercial buildings deduction expenses. Internal revenue tax forms 2012 Impairment-related expenses. Internal revenue tax forms 2012 Interview expense allowances. Internal revenue tax forms 2012 Licenses and regulatory fees. Internal revenue tax forms 2012 Moving machinery. Internal revenue tax forms 2012 Outplacement services. Internal revenue tax forms 2012 Penalties and fines you pay for late performance or nonperformance of a contract. Internal revenue tax forms 2012 Repairs that keep your property in a normal efficient operating condition. Internal revenue tax forms 2012 Repayments of income. Internal revenue tax forms 2012 Subscriptions to trade or professional publications. Internal revenue tax forms 2012 Supplies and materials. Internal revenue tax forms 2012 Utilities. Internal revenue tax forms 2012 Expenses You Cannot Deduct You usually cannot deduct the following as business expenses. Internal revenue tax forms 2012 For more information, see Publication 535. Internal revenue tax forms 2012 Bribes and kickbacks. Internal revenue tax forms 2012 Charitable contributions. Internal revenue tax forms 2012 Demolition expenses or losses. Internal revenue tax forms 2012 Dues to business, social, athletic, luncheon, sporting, airline, and hotel clubs. Internal revenue tax forms 2012 Lobbying expenses. Internal revenue tax forms 2012 Penalties and fines you pay to a governmental agency or instrumentality because you broke the law. Internal revenue tax forms 2012 Personal, living, and family expenses. Internal revenue tax forms 2012 Political contributions. Internal revenue tax forms 2012 Repairs that add to the value of your property or significantly increase its life. Internal revenue tax forms 2012 Prev  Up  Next   Home   More Online Publications