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Tax act online 9. Tax act online   Education Exception to Additional Tax on Early IRA Distributions Table of Contents Introduction Who Is Eligible Figuring the Amount Not Subject to the 10% Tax Reporting Early Distributions Introduction Generally, if you take a distribution from your IRA before you reach age 59½, you must pay a 10% additional tax on the early distribution. Tax act online This applies to any IRA you own, whether it is a traditional IRA (including a SEP-IRA), a Roth IRA, or a SIMPLE IRA. Tax act online The additional tax on an early distribution from a SIMPLE IRA may be as high as 25%. Tax act online See Publication 560, Retirement Plans for Small Business, for information on SEP-IRAs, and Publication 590, for information about all other IRAs. Tax act online However, you can take distributions from your IRAs for qualified higher education expenses without having to pay the 10% additional tax. Tax act online You may owe income tax on at least part of the amount distributed, but you may not have to pay the 10% additional tax. Tax act online Generally, if the taxable part of the distribution is less than or equal to the adjusted qualified education expenses (AQEE), none of the distribution is subject to the additional tax. Tax act online If the taxable part of the distribution is more than the AQEE, only the excess is subject to the additional tax. Tax act online Who Is Eligible You can take a distribution from your IRA before you reach age 59½ and not have to pay the 10% additional tax if, for the year of the distribution, you pay qualified education expenses for: yourself, your spouse, or your or your spouse's child, foster child, adopted child, or descendant of any of them. Tax act online Qualified education expenses. Tax act online   For purposes of the 10% additional tax, these expenses are tuition, fees, books, supplies, and equipment required for enrollment or attendance at an eligible educational institution. Tax act online They also include expenses for special needs services incurred by or for special needs students in connection with their enrollment or attendance. Tax act online   In addition, if the student is at least a half-time student, room and board are qualified education expenses. Tax act online   The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts. Tax act online The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student. Tax act online The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution. Tax act online You will need to contact the eligible educational institution for qualified room and board costs. Tax act online Eligible educational institution. Tax act online   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Tax act online S. Tax act online Department of Education. Tax act online It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Tax act online The educational institution should be able to tell you if it is an eligible educational institution. Tax act online   Certain educational institutions located outside the United States also participate in the U. Tax act online S. Tax act online Department of Education's Federal Student Aid (FSA) programs. Tax act online Half-time student. Tax act online   A student is enrolled “at least half-time” if he or she is enrolled for at least half the full-time academic work load for the course of study the student is pursuing as determined under the standards of the school where the student is enrolled. Tax act online Figuring the Amount Not Subject to the 10% Tax To determine the amount of your distribution that is not subject to the 10% additional tax, first figure your adjusted qualified education expenses. Tax act online You do this by reducing your total qualified education expenses by any tax-free educational assistance, which includes: Expenses used to figure the tax-free portion of distributions from a Coverdell education savings account (ESA) (see Distributions in chapter 7, Coverdell Education Savings Account), The tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Tax act online Do not reduce the qualified education expenses by amounts paid with funds the student receives as: Payment for services, such as wages, A loan, A gift, An inheritance given to either the student or the individual making the withdrawal, or A withdrawal from personal savings (including savings from a qualified tuition program (QTP)). Tax act online If your IRA distribution is equal to or less than your adjusted qualified education expenses, you are not subject to the 10% additional tax. Tax act online Example 1. Tax act online In 2013, Erin (age 32) took a year off from teaching to attend graduate school full-time. Tax act online She paid $5,800 of qualified education expenses from the following sources. Tax act online   Employer-provided educational assistance  (tax free) $5,000     Early distribution from IRA (includes $500 taxable earnings) 3,200           Before Erin can determine if she must pay the 10% additional tax on her IRA distribution, she must reduce her total qualified education expenses. Tax act online   Total qualified education expenses $5,800     Minus: Tax-free educational assistance −5,000     Equals: Adjusted qualified  education expenses (AQEE) $ 800   Because Erin's AQEE ($800) are more than the taxable portion of her IRA distribution ($500), she does not have to pay the 10% additional tax on any part of this distribution. Tax act online However, she must include the $500 taxable earnings in her gross income subject to income tax. Tax act online Example 2. Tax act online Assume the same facts as in Example 1 , except that Erin deducted some of the contributions to her IRA, so the taxable part of her early distribution is higher by $1,000. Tax act online This must be included in her income subject to income tax. Tax act online The taxable part of Erin's IRA distribution ($1,000) is larger than her $800 AQEE. Tax act online Therefore, she must pay the 10% additional tax on $200, the taxable part of her distribution ($1,000) that is more than her qualified education expenses ($800). Tax act online She does not have to pay the 10% additional tax on the remaining $800 of her taxable distribution. Tax act online Reporting Early Distributions By January 31, 2014, the payer of your IRA distribution should send you Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Tax act online The information on this form will help you determine how much of your distribution is taxable for income tax purposes and how much is subject to the 10% additional tax. Tax act online If you received an early distribution from your IRA, you must report the taxable earnings on Form 1040, line 15b (Form 1040NR, line 16b). Tax act online Then, if you qualify for an exception for qualified higher education expenses, you must file Form 5329 to show how much, if any, of your early distribution is subject to the 10% additional tax. Tax act online See the Instructions for Form 5329, Part I, for help in completing the form and entering the results on Form 1040 or 1040NR. Tax act online There are many other situations in which Form 5329 is required. Tax act online If, during 2013, you had other distributions from IRAs or qualified retirement plans, or have made excess contributions to certain tax-favored accounts, see the instructions for line 58 (Form 1040) or line 56 (Form 1040NR) to determine if you must file Form 5329. Tax act online Prev  Up  Next   Home   More Online Publications
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Section 7216 Information Center

Final Treasury Regulations on rules and consent requirements relating to the disclosure or use of tax return information by tax return preparers became effective Dec. 28, 2012. For additional information about how these apply to services and education related to the Affordable Care Act, please see our questions and answers.

 For further information, see Rev Proc 2013-14 and Rev Proc 2013-19

On December 30, 2009, the IRS issued proposed and temporary regulations (effective January 4, 2010) and related revenue rulings addressing the use or disclosure of tax return information by tax return preparers. The regulations and related revenue rulings under section 7216 enable tax return preparers to more effectively provide a range of services that taxpayers would ordinarily expect from tax return preparers.

Notice of Proposed Rulemaking by Cross-Reference to Temporary Regulations Amendments to the Section 7216 Regulations—Disclosure or Use of Information by Preparers of Returns

Revision to Section 301.7216-2 Guidance

Description of the Guidance:
These final and temporary regulations provide updated guidance regarding the disclosure and use of tax return information by tax return preparers without taxpayer consent. These regulations expand the information tax return preparers may compile, maintain, and use in lists for solicitation of tax return business under section 301.7216-2(n) to include taxpayer entity classification or type and tax return form number. These regulations clarify that the section 301.7216-2(n) lists may not be used to solicit non-tax return preparation services.  These regulations also clarify the phrase “tax information” in section 301.7216-2(n) by replacing that phrase with “tax information and general business or economic analysis for educational purposes.  These regulations further clarify that due diligence performed in contemplation of a sale or other disposition of a tax return preparation business is “in connection with” the sale or other disposition of the section 301.7216-2(n) list compiler’s tax return business” and that tax return information made available for due diligence purposes is a disclosure of that information, not a transfer of that information.  These regulations adopt the guidance provided in Notice 2009-13 related to section 301.7216-2(p) allowing certain expanded disclosures and uses of statistical compilations, subject to specific prohibitions, provided that the statistical compilations are anonymous as to taxpayer identity and contain data from at least 10 tax returns. Finally, these regulations allow the disclosure of tax return information to the extent necessary to accomplish required legal or ethical conflict reviews to avoid client conflicts of interest.  These regulations also include specific restrictions and prohibitions applicable to the expanded uses and disclosures that are designed to appropriately balance taxpayer rights provided by section 7216 and its regulations without compromising those rights.

Revenue Ruling 2010-4

(Provides guidance on whether a tax return preparer is liable for criminal and civil penalties under Internal Revenue Code sections 7216 and 6713 when the tax return preparer uses tax return information to contact taxpayers to inform them of changes in tax law that could affect the taxpayers’ income tax liability reported in tax returns previously prepared or processed by the tax return preparer; uses tax return information to determine which taxpayers’ future income tax return filing obligations may be affected by a prospective change in tax rule or regulation and to contact such taxpayers to notify them of the changed rule or regulation, explain how the change may affect them, and advise them with regard to actions they may take in response to the change; or discloses tax return information contained in the list permitted to be maintained by the tax return preparer under section 301.7216-2(n) to a third-party service provider that creates, publishes, or distributes, by mail or e-mail, tax information and general business and economic information or analysis for educational purposes or for purposes of soliciting additional tax return preparation services for the tax return preparer, for the purpose of obtaining the ‘newsletter’ creation, publication, and or distribution services offered by the third-party service provider.)

Revenue Ruling 2010-5

(Provides guidance on whether a tax return preparer is liable for criminal and civil penalties under Internal Revenue Code sections 7216 and 6713 when the tax return preparer discloses (1) to a professional liability insurance carrier tax return information required by the insurance carrier to obtain or maintain professional liability insurance coverage; (2) to a professional liability insurance carrier tax return information required by the insurance carrier to promptly and accurately report a claim or a potential claim against the tax return preparer, or to aid in the investigation of a claim or potential claim against the tax return preparer; (3) to a professional liability insurance carrier tax return information to the preparer’s professional liability insurance carrier in order to obtain legal representation under the terms of the insurance policy; or (4) tax return information to an unrelated attorney for the purpose of evaluating a claim or potential claim against the tax return preparer.)

News Releases:

IRS Issues Proposed Regulations Adjusting Use of Some Taxpayer Information (Released December 30, 2009)

How Do I?

Section 7216 Frequently Asked Questions

Aids to Preparing Section 7216 Consent Forms

Archived Information:

Section 7216 Updated Rules for Tax Preparers (Updated 12/18/2008)

Page Last Reviewed or Updated: 27-Feb-2014

The Tax Act Online

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