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Unemployment Taxes

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Unemployment Taxes

Unemployment taxes 1. Unemployment taxes   Importance of Records Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Benefits of Recordkeeping Kinds of Records To Keep How Long To Keep Records Introduction A farmer, like other taxpayers, must keep records to prepare an accurate income tax return and determine the correct amount of tax. Unemployment taxes This chapter explains the benefits of keeping records, what kinds of records you must keep, and how long you must keep them for federal tax purposes. Unemployment taxes Tax records are not the only type of records you need to keep for your farming business. Unemployment taxes You should also keep records that measure your farm's financial performance. Unemployment taxes This publication only discusses tax records. Unemployment taxes The Farm Financial Standards Council has produced a publication that provides a detailed explanation of the recommendations of the Council for financial reporting and analysis. Unemployment taxes For information on recordkeeping, you can purchase and download Financial Guidelines for Agricultural Producers at www. Unemployment taxes ffsc. Unemployment taxes org. Unemployment taxes For more information, contact Countryside Marketing, Inc. Unemployment taxes in the following manner. Unemployment taxes Call 262-253-6902. Unemployment taxes Send a fax to 262-253-6903. Unemployment taxes Write to: Farm Financial Standards Council N78 W14573 Appleton Ave. Unemployment taxes , #287 Menomonee Falls, WI 53051. Unemployment taxes Topics - This chapter discusses: Benefits of recordkeeping Kinds of records to keep How long to keep records Useful Items - You may want to see: Publication 51 (Circular A), Agricultural Employer's Tax Guide 463 Travel, Entertainment, Gift, and Car Expenses See chapter 16 for information about getting publications. Unemployment taxes Benefits of Recordkeeping Everyone in business, including farmers, must keep appropriate records. Unemployment taxes Recordkeeping will help you do the following. Unemployment taxes Monitor the progress of your farming business. Unemployment taxes   You need records to monitor the progress of your farming business. Unemployment taxes Records can show whether your business is improving, which items are selling, or what changes you need to make. Unemployment taxes Records can help you make better decisions that may increase the likelihood of business success. Unemployment taxes Prepare your financial statements. Unemployment taxes   You need records to prepare accurate financial statements. Unemployment taxes These include income (profit and loss) statements and balance sheets. Unemployment taxes These statements can help you in dealing with your bank or creditors and help you to manage your farm business. Unemployment taxes Identify source of receipts. Unemployment taxes   You will receive money or property from many sources. Unemployment taxes Your records can identify the source of your receipts. Unemployment taxes You need this information to separate farm from nonfarm receipts and taxable from nontaxable income. Unemployment taxes Keep track of deductible expenses. Unemployment taxes   You may forget expenses when you prepare your tax return unless you record them when they occur. Unemployment taxes Prepare your tax returns. Unemployment taxes   You need records to prepare your tax return. Unemployment taxes For example, your records must support the income, expenses, and credits you report. Unemployment taxes Generally, these are the same records you use to monitor your farming business and prepare your financial statements. Unemployment taxes Support items reported on tax returns. Unemployment taxes   You must keep your business records available at all times for inspection by the IRS. Unemployment taxes If the IRS examines any of your tax returns, you may be asked to explain the items reported. Unemployment taxes A complete set of records will speed up the examination. Unemployment taxes Kinds of Records To Keep Except in a few cases, the law does not require any specific kind of records. Unemployment taxes You can choose any recordkeeping system suited to your farming business that clearly shows, for example, your income and expenses. Unemployment taxes You should set up your recordkeeping system using an accounting method that clearly shows your income for your tax year. Unemployment taxes See  chapter 2. Unemployment taxes If you are in more than one business, you should keep a complete and separate set of records for each business. Unemployment taxes A corporation should keep minutes of board of directors' meetings. Unemployment taxes Your recordkeeping system should include a summary of your business transactions. Unemployment taxes This summary is ordinarily made in accounting journals and ledgers. Unemployment taxes For example, they must show your gross income, as well as your deductions and credits. Unemployment taxes In addition, you must keep supporting documents. Unemployment taxes Purchases, sales, payroll, and other transactions you have in your business generate supporting documents such as invoices and receipts. Unemployment taxes These documents contain the information you need to record in your journals and ledgers. Unemployment taxes It is important to keep these documents because they support the entries in your journals and ledgers and on your tax return. Unemployment taxes Keep them in an orderly fashion and in a safe place. Unemployment taxes For instance, organize them by year and type of income or expense. Unemployment taxes Electronic records. Unemployment taxes   All requirements that apply to hard copy books and records also apply to electronic storage systems that maintain tax books and records. Unemployment taxes When you replace hard copy books and records, you must maintain the electronic storage systems for as long as they are material to the administration of tax law. Unemployment taxes An electronic storage system is any system for preparing or keeping your records either by electronic imaging or by transfer to an electronic storage media. Unemployment taxes The electronic storage system must index, store, preserve, retrieve and reproduce the electronically stored books and records in legible format. Unemployment taxes All electronic storage systems must provide a complete and accurate record of your data that is accessible to the IRS. Unemployment taxes Electronic storage systems are also subject to the same controls and retention guidelines as those imposed on your original hard copy books and records. Unemployment taxes The original hard copy books and records may be destroyed provided that the electronic storage system has been tested to establish that the hard copy books and records are being reproduced in compliance with IRS requirements for an electronic storage system and procedures are established to ensure continued compliance with all applicable rules and regulations. Unemployment taxes You still have the responsibility of retaining any other books and records that are required to be retained. Unemployment taxes The IRS may test your electronic storage system, including the equipment used, indexing methodology, software and retrieval capabilities. Unemployment taxes This test is not considered an examination and the results must be shared with you. Unemployment taxes If your electronic storage system meets the requirements mentioned earlier, you will be in compliance. Unemployment taxes If not, you may be subject to penalties for non-compliance, unless you continue to maintain your original hard copybooks and records in a manner that allows you and the IRS to determine your correct tax. Unemployment taxes For details on electronic storage system requirements, see Rev. Unemployment taxes Proc. Unemployment taxes 97-22. Unemployment taxes You can find Rev. Unemployment taxes Proc. Unemployment taxes 97-22 on page 9 of Internal Revenue Bulletin 1997-13 at  www. Unemployment taxes irs. Unemployment taxes gov/pub/irs-irbs/irb97-13. Unemployment taxes pdf. Unemployment taxes Travel, transportation, entertainment, and gift expenses. Unemployment taxes   Specific recordkeeping rules apply to these expenses. Unemployment taxes For more information, see Publication 463. Unemployment taxes Employment taxes. Unemployment taxes   There are specific employment tax records you must keep. Unemployment taxes For a list, see Publication 51 (Circular A). Unemployment taxes Excise taxes. Unemployment taxes   See How To Claim a Credit or Refund in chapter 14 for the specific records you must keep to verify your claim for credit or refund of excise taxes on certain fuels. Unemployment taxes Assets. Unemployment taxes   Assets are the property, such as machinery and equipment, you own and use in your business. Unemployment taxes You must keep records to verify certain information about your business assets. Unemployment taxes You need records to figure your annual depreciation deduction and the gain or (loss) when you sell the assets. Unemployment taxes Your records should show all the following. Unemployment taxes When and how you acquired the asset. Unemployment taxes Purchase price. Unemployment taxes Cost of any improvements. Unemployment taxes Section 179 deduction taken. Unemployment taxes Deductions taken for depreciation. Unemployment taxes Deductions taken for casualty losses, such as losses resulting from fires or storms. Unemployment taxes How you used the asset. Unemployment taxes When and how you disposed of the asset. Unemployment taxes Selling price. Unemployment taxes Expenses of sale. Unemployment taxes   The following are examples of records that may show this information. Unemployment taxes Purchase and sales invoices. Unemployment taxes Real estate closing statements. Unemployment taxes Canceled checks. Unemployment taxes Bank statements. Unemployment taxes Financial account statements as proof of payment. Unemployment taxes   If you do not have a canceled check, you may be able to prove payment with certain financial account statements prepared by financial institutions. Unemployment taxes These include account statements prepared for the financial institution by a third party. Unemployment taxes These account statements must be legible. Unemployment taxes The following table lists acceptable account statements. Unemployment taxes IF payment is by. Unemployment taxes . Unemployment taxes . Unemployment taxes THEN the statement must show the. Unemployment taxes . Unemployment taxes . Unemployment taxes Check Check number. Unemployment taxes Amount. Unemployment taxes Payee's name. Unemployment taxes Date the check amount was posted to the account by the financial institution. Unemployment taxes Electronic funds  transfer Amount transferred. Unemployment taxes Payee's name. Unemployment taxes Date the transfer was posted to the account by the financial institution. Unemployment taxes Credit card Amount charged. Unemployment taxes Payee's name. Unemployment taxes Transaction date. Unemployment taxes    Proof of payment of an amount, by itself, does not establish you are entitled to a tax deduction. Unemployment taxes You should also keep other documents, such as credit card sales slips and invoices, to show that you also incurred the cost. Unemployment taxes Tax returns. Unemployment taxes   Keep copies of your filed tax returns. Unemployment taxes They help in preparing future tax returns and making computations if you file an amended return. Unemployment taxes Keep copies of your information returns such as Form 1099, Schedule K-1, and Form W-2. Unemployment taxes How Long To Keep Records You must keep your records as long as they may be needed for the administration of any provision of the Internal Revenue Code. Unemployment taxes Keep records that support an item of income or a deduction appearing on a return until the period of limitations for the return runs out. Unemployment taxes A period of limitations is the period of time after which no legal action can be brought. Unemployment taxes Generally, that means you must keep your records for at least 3 years from when your tax return was due or filed or within 2 years of the date the tax was paid, whichever is later. Unemployment taxes However, certain records must be kept for a longer period of time, as discussed below. Unemployment taxes Employment taxes. Unemployment taxes   If you have employees, you must keep all employment tax records for at least 4 years after the date the tax becomes due or is paid, whichever is later. Unemployment taxes Assets. Unemployment taxes   Keep records relating to property until the period of limitations expires for the year in which you dispose of the property in a taxable disposition. Unemployment taxes You must keep these records to figure any depreciation, amortization, or depletion deduction and to figure your basis for computing gain or (loss) when you sell or otherwise dispose of the property. Unemployment taxes   You may need to keep records relating to the basis of property longer than the period of limitation. Unemployment taxes Keep those records as long as they are important in figuring the basis of the original or replacement property. Unemployment taxes Generally, this means as long as you own the property and, after you dispose of it, for the period of limitations that applies to you. Unemployment taxes For example, if you received property in a nontaxable exchange, you must keep the records for the old property, as well as for the new property, until the period of limitations expires for the year in which you dispose of the new property in a taxable disposition. Unemployment taxes For more information on basis, see chapter 6. Unemployment taxes Records for nontax purposes. Unemployment taxes   When your records are no longer needed for tax purposes, do not discard them until you check to see if you have to keep them longer for other purposes. Unemployment taxes For example, your insurance company or creditors may require you to keep them longer than the IRS does. Unemployment taxes Prev  Up  Next   Home   More Online Publications
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The Unemployment Taxes

Unemployment taxes 3. Unemployment taxes   Investment Expenses Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: Limits on DeductionsPassive activity. Unemployment taxes Other income (nonpassive income). Unemployment taxes Expenses. Unemployment taxes Additional information. Unemployment taxes Interest ExpensesInvestment Interest Limit on Deduction Bond Premium AmortizationSpecial rules to determine amounts payable on a bond. Unemployment taxes Basis. Unemployment taxes How To Figure Amortization Choosing To Amortize How To Report Amortization Expenses of Producing IncomeFees to buy or sell. Unemployment taxes Including mutual fund or REMIC expenses in income. Unemployment taxes Nondeductible ExpensesUsed as collateral. Unemployment taxes Short-sale expenses. Unemployment taxes Expenses for both tax-exempt and taxable income. Unemployment taxes State income taxes. Unemployment taxes Nondeductible amount. Unemployment taxes Basis adjustment. Unemployment taxes How To Report Investment Expenses When To Report Investment Expenses Topics - This chapter discusses: Limits on Deductions , Interest Expenses , Bond Premium Amortization , Expenses of Producing Income , Nondeductible Expenses , How To Report Investment Expenses , and When To Report Investment Expenses . Unemployment taxes Useful Items - You may want to see: Publication 535 Business Expenses 925 Passive Activity and At-Risk Rules 929 Tax Rules for Children and Dependents Form (and Instructions) Schedule A (Form 1040) Itemized Deductions 4952 Investment Interest Expense Deduction See chapter 5, How To Get Tax Help , for information about getting these publications and forms. Unemployment taxes Limits on Deductions Your deductions for investment expenses may be limited by: The at-risk rules, The passive activity loss limits, The limit on investment interest, or The 2% limit on certain miscellaneous itemized deductions. Unemployment taxes The at-risk rules and passive activity rules are explained briefly in this section. Unemployment taxes The limit on investment interest is explained later in this chapter under Interest Expenses . Unemployment taxes The 2% limit is explained later in this chapter under Expenses of Producing Income . Unemployment taxes At-risk rules. Unemployment taxes   Special at-risk rules apply to most income-producing activities. Unemployment taxes These rules limit the amount of loss you can deduct to the amount you risk losing in the activity. Unemployment taxes Generally, this is the cash and the adjusted basis of property you contribute to the activity. Unemployment taxes It also includes money you borrow for use in the activity if you are personally liable for repayment or if you use property not used in the activity as security for the loan. Unemployment taxes For more information, see Publication 925. Unemployment taxes Passive activity losses and credits. Unemployment taxes   The amount of losses and tax credits you can claim from passive activities is limited. Unemployment taxes Generally, you are allowed to deduct passive activity losses only up to the amount of your passive activity income. Unemployment taxes Also, you can use credits from passive activities only against tax on the income from passive activities. Unemployment taxes There are exceptions for certain activities, such as rental real estate activities. Unemployment taxes Passive activity. Unemployment taxes   A passive activity generally is any activity involving the conduct of any trade or business in which you do not materially participate and any rental activity. Unemployment taxes However, if you are involved in renting real estate, the activity is not a passive activity if both of the following are true. Unemployment taxes More than one-half of the personal services you perform during the year in all trades or businesses are performed in real property trades or businesses in which you materially participate. Unemployment taxes You perform more than 750 hours of services during the year in real property trades or businesses in which you materially participate. Unemployment taxes  The term “trade or business” generally means any activity that involves the conduct of a trade or business, is conducted in anticipation of starting a trade or business, or involves certain research or experimental expenditures. Unemployment taxes However, it does not include rental activities or certain activities treated as incidental to holding property for investment. Unemployment taxes   You are considered to materially participate in an activity if you are involved on a regular, continuous, and substantial basis in the operations of the activity. Unemployment taxes Other income (nonpassive income). Unemployment taxes    Generally, you can use losses from passive activities only to offset income from passive activities. Unemployment taxes You cannot use passive activity losses to offset your other income, such as your wages or your portfolio income. Unemployment taxes Portfolio income includes gross income from interest, dividends, annuities, or royalties that is not derived in the ordinary course of a trade or business. Unemployment taxes It also includes gains or losses (not derived in the ordinary course of a trade or business) from the sale or trade of property (other than an interest in a passive activity) producing portfolio income or held for investment. Unemployment taxes This includes capital gain distributions from mutual funds (and other regulated investment companies) and real estate investment trusts. Unemployment taxes   You cannot use passive activity losses to offset Alaska Permanent Fund dividends. Unemployment taxes Expenses. Unemployment taxes   Do not include in the computation of your passive activity income or loss: Expenses (other than interest) that are clearly and directly allocable to your portfolio income, or Interest expense properly allocable to portfolio income. Unemployment taxes However, this interest and other expenses may be subject to other limits. Unemployment taxes These limits are explained in the rest of this chapter. Unemployment taxes Additional information. Unemployment taxes   For more information about determining and reporting income and losses from passive activities, see Publication 925. Unemployment taxes Interest Expenses This section discusses interest expenses you may be able to deduct as an investor. Unemployment taxes For information on business interest, see chapter 4 of Publication 535. Unemployment taxes You cannot deduct personal interest expenses other than qualified home mortgage interest, as explained in Publication 936, Home Mortgage Interest Deduction, and interest on certain student loans, as explained in Publication 970. Unemployment taxes Investment Interest If you borrow money to buy property you hold for investment, the interest you pay is investment interest. Unemployment taxes You can deduct investment interest subject to the limit discussed later. Unemployment taxes However, you cannot deduct interest you incurred to produce tax-exempt income. Unemployment taxes See Tax-exempt income under Nondeductible Expenses, later. Unemployment taxes You also cannot deduct interest expenses on straddles discussed under Interest expense and carrying charges on straddles , later. Unemployment taxes 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. Unemployment taxes Investment property. Unemployment taxes   Property held for investment includes property that produces interest, dividends, annuities, or royalties not derived in the ordinary course of a trade or business. Unemployment taxes 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). Unemployment taxes Investment property also includes an interest in a trade or business activity in which you did not materially participate (other than a passive activity). Unemployment taxes Partners, shareholders, and beneficiaries. Unemployment taxes   To determine your investment interest, combine your share of investment interest from a partnership, S corporation, estate, or trust with your other investment interest. Unemployment taxes 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. Unemployment taxes Only the interest expense on the part of the debt used for investment purposes is treated as investment interest. Unemployment taxes The allocation is not affected by the use of property that secures the debt. Unemployment taxes Example 1. Unemployment taxes You borrow $10,000 and use $8,000 to buy stock. Unemployment taxes You use the other $2,000 to buy items for your home. Unemployment taxes Since 80% of the debt is used for, and allocated to, investment purposes, 80% of the interest on that debt is investment interest. Unemployment taxes The other 20% is nondeductible personal interest. Unemployment taxes Debt proceeds received in cash. Unemployment taxes   If you receive debt proceeds in cash, the proceeds are generally not treated as investment property. Unemployment taxes Debt proceeds deposited in account. Unemployment taxes   If you deposit debt proceeds in an account, that deposit is treated as investment property, regardless of whether the account bears interest. Unemployment taxes But, if you withdraw the funds and use them for another purpose, you must reallocate the debt to determine the amount considered to be for investment purposes. Unemployment taxes Example 2. Unemployment taxes Assume in Example 1 that you borrowed the money on March 1 and immediately bought the stock for $8,000. Unemployment taxes You did not buy the household items until June 1. Unemployment taxes You had deposited the $2,000 in the bank. Unemployment taxes You had no other transactions on the bank account until June. Unemployment taxes You did not sell the stock, and you made no principal payments on the debt. Unemployment taxes You paid interest from another account. Unemployment taxes The $8,000 is treated as being used for an investment purpose. Unemployment taxes The $2,000 is treated as being used for an investment purpose for the 3-month period. Unemployment taxes Your total interest expense for 3 months on this debt is investment interest. Unemployment taxes In June, when you spend the $2,000 for household items, you must begin to allocate 80% of the debt and the interest expense to investment purposes and 20% to personal purposes. Unemployment taxes Amounts paid within 30 days. Unemployment taxes   If you receive loan proceeds in cash or if the loan proceeds are deposited in an account, you can treat any payment (up to the amount of the proceeds) made from any account you own, or from cash, as made from those proceeds. Unemployment taxes This applies to any payment made within 30 days before or after the proceeds are received in cash or deposited in your account. Unemployment taxes   If you received the loan proceeds in cash, you can treat the payment as made on the date you received the cash instead of the date you actually made the payment. Unemployment taxes Payments on debt may require new allocation. Unemployment taxes   As you repay a debt used for more than one purpose, you must reallocate the balance. Unemployment taxes You must first reduce the amount allocated to personal purposes by the repayment. Unemployment taxes You then reallocate the rest of the debt to find what part is for investment purposes. Unemployment taxes Example 3. Unemployment taxes If, in Example 2 , you repay $500 on November 1, the entire repayment is applied against the amount allocated to personal purposes. Unemployment taxes The debt balance is now allocated as $8,000 for investment purposes and $1,500 for personal purposes. Unemployment taxes Until the next reallocation is necessary, 84% ($8,000 ÷ $9,500) of the debt and the interest expense is allocated to investment. Unemployment taxes Pass-through entities. Unemployment taxes   If you use borrowed funds to buy an interest in a partnership or S corporation, then the interest on those funds must be allocated based on the assets of the entity. Unemployment taxes If you contribute to the capital of the entity, you can make the allocation using any reasonable method. Unemployment taxes Additional allocation rules. Unemployment taxes   For more information about allocating interest expense, see chapter 4 of Publication 535. Unemployment taxes When To Deduct Investment Interest If you use the cash method of accounting, you must pay the interest before you can deduct it. Unemployment taxes If you use an accrual method of accounting, you can deduct interest over the period it accrues, regardless of when you pay it. Unemployment taxes For an exception, see Unpaid expenses owed to related party under When To Report Investment Expenses, later in this chapter. Unemployment taxes Example. Unemployment taxes You borrowed $1,000 on August 26, 2013, payable in 90 days at 12% interest. Unemployment taxes On November 26, 2013, you paid this with a new note for $1,030, due on February 26, 2014. Unemployment taxes If you use the cash method of accounting, you cannot deduct any part of the $30 interest on your return for 2013 because you did not actually pay it. Unemployment taxes If you use an accrual method, you may be able to deduct a portion of the interest on the loans through December 31, 2013, on your return for 2013. Unemployment taxes Interest paid in advance. Unemployment taxes   Generally, if you pay interest in advance for a period that goes beyond the end of the tax year, you must spread the interest over the tax years to which it belongs under the OID rules discussed in chapter 1. Unemployment taxes You can deduct in each year only the interest for that year. Unemployment taxes Interest on margin accounts. Unemployment taxes   If you are a cash method taxpayer, you can deduct interest on margin accounts to buy taxable securities as investment interest in the year you paid it. Unemployment taxes You are considered to have paid interest on these accounts only when you actually pay the broker or when payment becomes available to the broker through your account. Unemployment taxes Payment may become available to the broker through your account when the broker collects dividends or interest for your account, or sells securities held for you or received from you. Unemployment taxes   You cannot deduct any interest on money borrowed for personal reasons. Unemployment taxes Limit on interest deduction for market discount bonds. Unemployment taxes   The amount you can deduct for interest expense you paid or accrued during the year to buy or carry a market discount bond may be limited. Unemployment taxes This limit does not apply if you accrue the market discount and include it in your income currently. Unemployment taxes   Under this limit, the interest is deductible only to the extent it is more than: The total interest and OID includible in gross income for the bond for the year, plus The market discount for the number of days you held the bond during the year. Unemployment taxes Figure the amount in (2) above using the rules for figuring accrued market discount in chapter 1 under Market Discount Bonds . Unemployment taxes Interest not deducted due to limit. Unemployment taxes   In the year you dispose of the bond, you can deduct any interest expense you were not allowed to deduct in earlier years because of the limit. Unemployment taxes Choosing to deduct disallowed interest expense before the year of disposition. Unemployment taxes   You can choose to deduct disallowed interest expense in any year before the year you dispose of the bond, up to your net interest income from the bond during the year. Unemployment taxes The rest of the disallowed interest expense remains deductible in the year you dispose of the bond. Unemployment taxes Net interest income. Unemployment taxes   This is the interest income (including OID) from the bond that you include in income for the year, minus the interest expense paid or accrued during the year to purchase or carry the bond. Unemployment taxes Limit on interest deduction for short-term obligations. Unemployment taxes   If the current income inclusion rules discussed in chapter 1 under Discount on Short-Term Obligations do not apply to you, the amount you can deduct for interest expense you paid or accrued during the year to buy or carry a short-term obligation is limited. Unemployment taxes   The interest is deductible only to the extent it is more than: The amount of acquisition discount or OID on the obligation for the tax year, plus The amount of any interest payable on the obligation for the year that is not included in income because of your accounting method (other than interest taken into account in determining the amount of acquisition discount or OID). Unemployment taxes The method of determining acquisition discount and OID for short-term obligations is discussed in chapter 1 under Discount on Short-Term Obligations . Unemployment taxes Interest not deducted due to limit. Unemployment taxes   In the year you dispose of the obligation, or, if you choose, in another year in which you have net interest income from the obligation, you can deduct any interest expense you were not allowed to deduct for an earlier year because of the limit. Unemployment taxes Follow the same rules provided in the earlier discussion under Limit on interest deduction for market discount bonds , earlier. Unemployment taxes Limit on Deduction Generally, your deduction for investment interest expense is limited to your net investment income. Unemployment taxes You can carry over the amount of investment interest you could not deduct because of this limit to the next tax year. Unemployment taxes The interest carried over is treated as investment interest paid or accrued in that next year. Unemployment taxes 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. Unemployment taxes Net Investment Income Determine the amount of your net investment income by subtracting your investment expenses (other than interest expense) from your investment income. Unemployment taxes Investment income. Unemployment taxes   This generally includes your gross income from property held for investment (such as interest, dividends, annuities, and royalties). Unemployment taxes Investment income does not include Alaska Permanent Fund dividends. Unemployment taxes It also does not include qualified dividends or net capital gain unless you choose to include them. Unemployment taxes Choosing to include qualified dividends. Unemployment taxes   Investment income generally does not include qualified dividends, discussed in chapter 1. Unemployment taxes However, you can choose to include all or part of your qualified dividends in investment income. Unemployment taxes   You make this choice by completing Form 4952, line 4g, according to its instructions. Unemployment taxes   If you choose to include any 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. Unemployment taxes Choosing to include net capital gain. Unemployment taxes    Investment income generally does not include net capital gain from disposing of investment property (including capital gain distributions from mutual funds). Unemployment taxes However, you can choose to include all or part of your net capital gain in investment income. Unemployment taxes   You make this choice by completing Form 4952, line 4g, according to its instructions. Unemployment taxes   If you choose to include any 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. Unemployment taxes   For more information about the capital gains rates, see Capital Gain Tax Rates in chapter 4. Unemployment taxes    Before making either choice, consider the overall effect on your tax liability. Unemployment taxes Compare your tax if you make one or both of these choices with your tax if you do not. Unemployment taxes Investment income of child reported on parent's return. Unemployment taxes   Investment income includes the part of your child's interest and dividend income you choose to report on your return. Unemployment taxes 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. Unemployment taxes Include it on line 4a of Form 4952. Unemployment taxes Example. Unemployment taxes Your 8-year-old son has interest income of $2,200, which you choose to report on your own return. Unemployment taxes You enter $2,200 on Form 8814, lines 1a and 4, and $200 on lines 6 and 12 and complete Part II. Unemployment taxes Also enter $200 on Form 1040, line 21. Unemployment taxes Your investment income includes this $200. Unemployment taxes Child's qualified dividends. Unemployment taxes   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. Unemployment taxes However, you can choose to include all or part of it in investment income, as explained under Choosing to include qualified dividends , earlier. Unemployment taxes   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). Unemployment taxes Child's Alaska Permanent Fund dividends. Unemployment taxes   If part of the amount you report is your child's Alaska Permanent Fund dividends, that part does not count as investment income. Unemployment taxes 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. Unemployment taxes 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. Unemployment taxes Subtract the result from the amount on Form 8814, line 12. Unemployment taxes Example. Unemployment taxes Your 10-year-old child has taxable interest income of $4,000 and Alaska Permanent Fund dividends of $2,000. Unemployment taxes You choose to report this on your return. Unemployment taxes You enter $4,000 on Form 8814, line 1a, $2,000 on line 2a, and $6,000 on line 4. Unemployment taxes You then enter $4,000 on Form 8814, lines 6 and 12, and Form 1040, line 21. Unemployment taxes You figure the amount of your child's income that you can consider your investment income as follows: $4,000 − ($4,000 × ($2,000 ÷ $6,000)) = $2,667 You include the result, $2,667, on Form 4952, line 4a. Unemployment taxes Child's capital gain distributions. Unemployment taxes   If part of the amount you report is your child's capital gain distributions, that part (which is reported on Schedule D (Form 1040), line 13, or Form 1040, line 13) generally does not count as investment income. Unemployment taxes However, you can choose to include all or part of it in investment income, as explained in Choosing to include net capital gain , earlier. Unemployment taxes   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). Unemployment taxes Investment expenses. Unemployment taxes   Investment expenses are your allowed deductions (other than interest expense) directly connected with the production of investment income. Unemployment taxes 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. Unemployment taxes Use the smaller of: The investment expenses included on Schedule A (Form 1040), line 23, or The amount on Schedule A (Form 1040), line 27. Unemployment taxes See Expenses of Producing Income , later, for a discussion of the 2% limit. Unemployment taxes Losses from passive activities. Unemployment taxes   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). Unemployment taxes See Publication 925 for information about passive activities. Unemployment taxes Example. Unemployment taxes Ted is a partner in a partnership that operates a business. Unemployment taxes However, he does not materially participate in the partnership's business. Unemployment taxes Ted's interest in the partnership is considered a passive activity. Unemployment taxes Ted's investment income from interest and dividends (other than qualified dividends) is $10,000. Unemployment taxes His investment expenses (other than interest) are $3,200 after taking into account the 2% limit on miscellaneous itemized deductions. Unemployment taxes His investment interest expense is $8,000. Unemployment taxes Ted also has income from the partnership of $2,000. Unemployment taxes Ted figures his net investment income and the limit on his investment interest expense deduction in the following way: Total investment income $10,000 Minus: Investment expenses (other than interest) 3,200 Net investment income $6,800 Deductible investment interest expense for the year $6,800 The $2,000 of income from the passive activity is not used in determining Ted's net investment income. Unemployment taxes His investment interest deduction for the year is limited to $6,800, the amount of his net investment income. Unemployment taxes Form 4952 Use Form 4952 to figure your deduction for investment interest. Unemployment taxes See Form 4952 for more information. Unemployment taxes Exception to use of Form 4952. Unemployment taxes   You do not have to complete Form 4952 or attach it to your return if you meet all of the following tests. Unemployment taxes Your investment interest expense is not more than your investment income from interest and ordinary dividends minus any qualified dividends. Unemployment taxes You do not have any other deductible investment expenses. Unemployment taxes You have no carryover of investment interest expense from 2012. Unemployment taxes   If you meet all of these tests, you can deduct all of your investment interest. Unemployment taxes    Bond Premium Amortization If you pay a premium to buy a bond, the premium is part of your basis in the bond. Unemployment taxes If the bond yields taxable interest, you can choose to amortize the premium. Unemployment taxes This generally means that each year, over the life of the bond, you use a part of the premium to reduce the amount of interest includible in your income. Unemployment taxes If you make this choice, you must reduce your basis in the bond by the amortization for the year. Unemployment taxes If the bond yields tax-exempt interest, you must amortize the premium. Unemployment taxes This amortized amount is not deductible in determining taxable income. Unemployment taxes However, each year you must reduce your basis in the bond (and tax-exempt interest otherwise reportable on Form 1040, line 8b) by the amortization for the year. Unemployment taxes Bond premium. Unemployment taxes   Bond premium is the amount by which your basis in the bond right after you get it is more than the total of all amounts payable on the bond after you get it (other than payments of qualified stated interest). Unemployment taxes For example, a bond with a maturity value of $1,000 generally would have a $50 premium if you buy it for $1,050. Unemployment taxes Special rules to determine amounts payable on a bond. Unemployment taxes   For special rules that apply to determine the amounts payable on a variable rate bond, an inflation-indexed debt instrument, a bond that provides for certain alternative payment schedules (for example, a bond callable prior to the stated maturity date of the bond), or a bond that provides for remote or incidental contingencies, see Regulations section 1. Unemployment taxes 171-3. Unemployment taxes Basis. Unemployment taxes   In general, your basis for figuring bond premium amortization is the same as your basis for figuring any loss on the sale of the bond. Unemployment taxes However, you may need to use a different basis for: Convertible bonds, Bonds you got in a trade, and Bonds whose basis has to be determined using the basis of the person who transferred the bond to you. Unemployment taxes See Regulations section 1. Unemployment taxes 171-1(e). Unemployment taxes Dealers. Unemployment taxes   A dealer in taxable bonds (or anyone who holds them mainly for sale to customers in the ordinary course of a trade or business or who would properly include bonds in inventory at the close of the tax year) cannot claim a deduction for amortizable bond premium. Unemployment taxes   See section 75 of the Internal Revenue Code for the treatment of bond premium by a dealer in tax-exempt bonds. Unemployment taxes How To Figure Amortization For bonds issued after September 27, 1985, you must amortize bond premium using a constant yield method on the basis of the bond's yield to maturity, determined by using the bond's basis and compounding at the close of each accrual period. Unemployment taxes Constant yield method. Unemployment taxes   Figure the bond premium amortization for each accrual period as follows. Unemployment taxes Step 1: Determine your yield. Unemployment taxes   Your yield is the discount rate that, when used in figuring the present value of all remaining payments to be made on the bond (including payments of qualified stated interest), produces an amount equal to your basis in the bond. Unemployment taxes Figure the yield as of the date you got the bond. Unemployment taxes It must be constant over the term of the bond and must be figured to at least two decimal places when expressed as a percentage. Unemployment taxes   If you do not know the yield, consult your broker or tax advisor. Unemployment taxes Databases available to them are likely to show the yield at the date of purchase. Unemployment taxes Step 2: Determine the accrual periods. Unemployment taxes   You can choose the accrual periods to use. Unemployment taxes They may be of any length and may vary in length over the term of the bond, but each accrual period can be no longer than 1 year and each scheduled payment of principal or interest must occur either on the first or the final day of an accrual period. Unemployment taxes The computation is simplest if accrual periods are the same as the intervals between interest payment dates. Unemployment taxes Step 3: Determine the bond premium for the accrual period. Unemployment taxes   To do this, multiply your adjusted acquisition price at the beginning of the accrual period by your yield. Unemployment taxes Then subtract the result from the qualified stated interest for the period. Unemployment taxes   Your adjusted acquisition price at the beginning of the first accrual period is the same as your basis. Unemployment taxes After that, it is your basis decreased by the amount of bond premium amortized for earlier periods and the amount of any payment previously made on the bond other than a payment of qualified stated interest. Unemployment taxes Example. Unemployment taxes On February 1, 2012, you bought a taxable bond for $110,000. Unemployment taxes The bond has a stated principal amount of $100,000, payable at maturity on February 1, 2019, making your premium $10,000 ($110,000 − $100,000). Unemployment taxes The bond pays qualified stated interest of $10,000 on February 1 of each year. Unemployment taxes Your yield is 8. Unemployment taxes 07439% compounded annually. Unemployment taxes You choose to use annual accrual periods ending on February 1 of each year. Unemployment taxes To find your bond premium amortization for the accrual period ending on February 1, 2013, you multiply the adjusted acquisition price at the beginning of the period ($110,000) by your yield. Unemployment taxes When you subtract the result ($8,881. Unemployment taxes 83) from the qualified stated interest for the period ($10,000), you find that your bond premium amortization for the period is $1,118. Unemployment taxes 17. Unemployment taxes Special rules to figure amortization. Unemployment taxes   For special rules to figure the bond premium amortization on a variable rate bond, an inflation-indexed debt instrument, a bond that provides for certain alternative payment schedules (for example, a bond callable prior to the stated maturity date of the bond), or a bond that provides for remote or incidental contingencies, see Regulations section 1. Unemployment taxes 171-3. Unemployment taxes Bonds Issued Before September 28, 1985 For these bonds, you can amortize bond premium using any reasonable method. Unemployment taxes Reasonable methods include: The straight-line method, and The Revenue Ruling 82-10 method. Unemployment taxes Straight-line method. Unemployment taxes   Under this method, the amount of your bond premium amortization is the same each month. Unemployment taxes Divide the number of months you held the bond during the year by the number of months from the beginning of the tax year (or, if later, the date of acquisition) to the date of maturity or earlier call date. Unemployment taxes Then multiply the result by the bond premium (reduced by any bond premium amortization claimed in earlier years). Unemployment taxes This gives you your bond premium amortization for the year. Unemployment taxes Revenue Ruling 82-10 method. Unemployment taxes   Under this method, the amount of your bond premium amortization increases each month over the life of the bond. Unemployment taxes This method is explained in Revenue Ruling 82-10, 1982-1 C. Unemployment taxes B. Unemployment taxes 46. Unemployment taxes Choosing To Amortize You choose to amortize the premium on taxable bonds by reporting the amortization for the year on your income tax return for the first tax year you want the choice to apply. Unemployment taxes You should attach a statement to your return that you are making this choice under section 171. Unemployment taxes See How To Report Amortization, next. Unemployment taxes This choice is binding for the year you make it and for later tax years. Unemployment taxes It applies to all taxable bonds you own in the year you make the choice and also to those you acquire in later years. Unemployment taxes You can change your decision to amortize bond premium only with the written approval of the IRS. Unemployment taxes To request approval, use Form 3115. Unemployment taxes For more information on requesting approval, see section 5 of the Appendix to Revenue Procedure 2011-14 in Internal Revenue Bulletin 2011-4. Unemployment taxes You can find Revenue Procedure 2011-14 at www. Unemployment taxes irs. Unemployment taxes gov/irb/2011-04_IRB/ar08. Unemployment taxes html. Unemployment taxes How To Report Amortization Subtract the bond premium amortization from your interest income from these bonds. Unemployment taxes Report the bond's interest on Schedule B (Form 1040A or 1040), line 1. Unemployment taxes Under your last entry on line 1, put a subtotal of all interest listed on line 1. Unemployment taxes Below this subtotal, print “ABP Adjustment,” and the total interest you received. Unemployment taxes Subtract this amount from the subtotal, and enter the result on line 2. Unemployment taxes Bond premium amortization more than interest. Unemployment taxes   If the amount of your bond premium amortization for an accrual period is more than the qualified stated interest for the period, you can deduct the difference as a miscellaneous itemized deduction on Schedule A (Form 1040), line 28. Unemployment taxes    But your deduction is limited to the amount by which your total interest inclusions on the bond in prior accrual periods is more than your total bond premium deductions on the bond in prior periods. Unemployment taxes Any amount you cannot deduct because of this limit can be carried forward to the next accrual period. Unemployment taxes Pre-1998 election to amortize bond premium. Unemployment taxes   Generally, if you first elected to amortize bond premium before 1998, the above treatment of the premium does not apply to bonds you acquired before 1988. Unemployment taxes Bonds acquired before October 23, 1986. Unemployment taxes   The amortization of the premium on these bonds is a miscellaneous itemized deduction not subject to the 2%-of-adjusted-gross-income limit. Unemployment taxes Bonds acquired after October 22, 1986, but before 1988. Unemployment taxes    The amortization of the premium on these bonds is investment interest expense subject to the investment interest limit, unless you choose to treat it as an offset to interest income on the bond. Unemployment taxes Expenses of Producing Income You deduct investment expenses (other than interest expenses) as miscellaneous itemized deductions on Schedule A (Form 1040). Unemployment taxes To be deductible, these expenses must be ordinary and necessary expenses paid or incurred: To produce or collect income, or To manage property held for producing income. Unemployment taxes The expenses must be directly related to the income or income-producing property, and the income must be taxable to you. Unemployment taxes The deduction for most income-producing expenses is subject to a 2% limit that also applies to certain other miscellaneous itemized deductions. Unemployment taxes The amount deductible is limited to the total of these miscellaneous deductions that is more than 2% of your adjusted gross income. Unemployment taxes For information on how to report expenses of producing income, see How To Report Investment Expenses , later. Unemployment taxes Attorney or accounting fees. Unemployment taxes   You can deduct attorney or accounting fees that are necessary to produce or collect taxable income. Unemployment taxes However, in some cases, attorney or accounting fees are part of the basis of property. Unemployment taxes See Basis of Investment Property in chapter 4. Unemployment taxes Automatic investment service and dividend reinvestment plans. Unemployment taxes   A bank may offer its checking account customers an automatic investment service so that, for a charge, each customer can choose to invest a part of the checking account each month in common stock. Unemployment taxes Or a bank that is a dividend disbursing agent for a number of publicly-owned corporations may set up an automatic dividend reinvestment service. Unemployment taxes Through that service, cash dividends are reinvested in more shares of stock after the bank deducts a service charge. Unemployment taxes   A corporation in which you own stock also may have a dividend reinvestment plan. Unemployment taxes This plan lets you choose to use your dividends to buy more shares of stock in the corporation instead of receiving the dividends in cash. Unemployment taxes   You can deduct the monthly service charge you pay to a bank to participate in an automatic investment service. Unemployment taxes If you participate in a dividend reinvestment plan, you can deduct any service charge subtracted from your cash dividends before the dividends are used to buy more shares of stock. Unemployment taxes Deduct the charges in the year you pay them. Unemployment taxes Clerical help and office rent. Unemployment taxes   You can deduct office expenses, such as rent and clerical help, you incurred in connection with your investments and collecting the taxable income on your investments. Unemployment taxes Cost of replacing missing securities. Unemployment taxes   To replace your taxable securities that are mislaid, lost, stolen, or destroyed, you may have to post an indemnity bond. Unemployment taxes You can deduct the premium you pay to buy the indemnity bond and the related incidental expenses. Unemployment taxes   You may, however, get a refund of part of the bond premium if the missing securities are recovered within a specified time. Unemployment taxes Under certain types of insurance policies, you can recover some of the expenses. Unemployment taxes   If you receive the refund in the tax year you pay the amounts, you can deduct only the difference between the expenses paid and the amount refunded. Unemployment taxes If the refund is made in a later tax year, you must include the refund in income in the year you received it, but only to the extent that the expenses decreased your tax in the year you deducted them. Unemployment taxes Fees to collect income. Unemployment taxes   You can deduct fees you pay to a broker, bank, trustee, or similar agent to collect investment income, such as your taxable bond or mortgage interest, or your dividends on shares of stock. Unemployment taxes Fees to buy or sell. Unemployment taxes   You cannot deduct a fee you pay to a broker to acquire investment property, such as stocks or bonds. Unemployment taxes You must add the fee to the cost of the property. Unemployment taxes See Basis of Investment Property in chapter 4. Unemployment taxes    You cannot deduct any broker's fees, commissions, or option premiums you pay (or that were netted out) in connection with the sale of investment property. Unemployment taxes They can be used only to figure gain or loss from the sale. Unemployment taxes See Reporting Capital Gains and Losses , in chapter 4, for more information about the treatment of these sale expenses. Unemployment taxes Investment counsel and advice. Unemployment taxes   You can deduct fees you pay for counsel and advice about investments that produce taxable income. Unemployment taxes This includes amounts you pay for investment advisory services. Unemployment taxes Safe deposit box rent. Unemployment taxes   You can deduct rent you pay for a safe deposit box if you use the box to store taxable income-producing stocks, bonds, or other investment-related papers and documents. Unemployment taxes If you also use the box to store tax-exempt securities or personal items, you can deduct only part of the rent. Unemployment taxes See Tax-exempt income under Nondeductible Expenses, later, to figure what part you can deduct. Unemployment taxes State and local transfer taxes. Unemployment taxes   You cannot deduct the state and local transfer taxes you pay when you buy or sell securities. Unemployment taxes If you pay these transfer taxes when you buy securities, you must treat them as part of the cost of the property. Unemployment taxes If you pay these transfer taxes when you sell securities, you must treat them as a reduction in the amount realized. Unemployment taxes Trustee's commissions for revocable trust. Unemployment taxes   If you set up a revocable trust and have its income distributed to you, you can deduct the commission you pay the trustee for managing the trust to the extent it is to produce or collect taxable income or to manage property. Unemployment taxes However, you cannot deduct any part of the commission used for producing or collecting tax-exempt income or for managing property that produces tax-exempt income. Unemployment taxes   If you are a cash-basis taxpayer and pay the commissions for several years in advance, you must deduct a part of the commission each year. Unemployment taxes You cannot deduct the entire amount in the year you pay it. Unemployment taxes Investment expenses from pass-through entities. Unemployment taxes   If you hold an interest in a partnership, S corporation, real estate mortgage investment conduit (REMIC), or a nonpublicly offered mutual fund, you can deduct your share of that entity's investment expenses. Unemployment taxes A partnership or S corporation will show your share of these expenses on your Schedule K-1 (Form 1065) or Schedule K-1 (Form 1120S). Unemployment taxes A nonpublicly offered mutual fund will indicate your share of these expenses in box 5 of Form 1099-DIV (or substitute statement). Unemployment taxes Publicly-offered mutual funds are discussed later. Unemployment taxes   If you hold an interest in a REMIC, any expenses relating to your residual interest investment will be shown on Schedule Q (Form 1066), line 3b. Unemployment taxes Any expenses relating to your regular interest investment will appear in box 5 of Form 1099-INT (or substitute statement) or box 9 of Form 1099-OID (or substitute statement). Unemployment taxes   Report your share of these investment expenses on Schedule A (Form 1040), subject to the 2% limit, in the same manner as your other investment expenses. Unemployment taxes Including mutual fund or REMIC expenses in income. Unemployment taxes   Your share of the investment expenses of a REMIC or a nonpublicly offered mutual fund, as described above, are considered to be indirect deductions through that pass-through entity. Unemployment taxes You must include in your gross income an amount equal to the expenses allocated to you, whether or not you are able to claim a deduction for those expenses. Unemployment taxes If you are a shareholder in a nonpublicly offered mutual fund, you must include on your return the full amount of ordinary dividends or other distributions of stock, as shown in box 1a of Form 1099-DIV (or substitute statement). Unemployment taxes If you are a residual interest holder in a REMIC, you must report as ordinary income on Schedule E (Form 1040) the total amounts shown on Schedule Q (Form 1066), lines 1b and 3b. Unemployment taxes If you are a REMIC regular interest holder, you must include the amount of any expense allocation you received on Form 1040, line 8a. Unemployment taxes Publicly-offered mutual funds. Unemployment taxes   Most mutual funds are publicly offered. Unemployment taxes These mutual funds, generally, are traded on an established securities exchange. Unemployment taxes These funds do not pass investment expenses through to you. Unemployment taxes Instead, the dividend income they report to you in box 1a of Form 1099-DIV (or substitute statement) is already reduced by your share of investment expenses. Unemployment taxes As a result, you cannot deduct the expenses on your return. Unemployment taxes   Include the amount from box 1a of Form 1099-DIV (or substitute statement) in your income. Unemployment taxes    A publicly offered mutual fund is one that: Is continuously offered pursuant to a public offering, Is regularly traded on an established securities market, and Is held by or for no fewer than 500 persons at any time during the year. Unemployment taxes Contact your mutual fund if you are not sure whether it is publicly offered. Unemployment taxes Nondeductible Expenses Some expenses that you incur as an investor are not deductible. Unemployment taxes Stockholders' meetings. Unemployment taxes   You cannot deduct transportation and other expenses you pay to attend stockholders' meetings of companies in which you have no interest other than owning stock. Unemployment taxes This is true even if your purpose in attending is to get information that would be useful in making further investments. Unemployment taxes Investment-related seminar. Unemployment taxes   You cannot deduct expenses for attending a convention, seminar, or similar meeting for investment purposes. Unemployment taxes Single-premium life insurance, endowment, and annuity contracts. Unemployment taxes   You cannot deduct interest on money you borrow to buy or carry a single-premium life insurance, endowment, or annuity contract. Unemployment taxes Used as collateral. Unemployment taxes   If you use a single premium annuity contract as collateral to obtain or continue a mortgage loan, you cannot deduct any interest on the loan that is collateralized by the annuity contract. Unemployment taxes Figure the amount of interest expense disallowed by multiplying the current interest rate on the mortgage loan by the lesser of the amount of the annuity contract used as collateral or the amount of the loan. Unemployment taxes Borrowing on insurance. Unemployment taxes   Generally, you cannot deduct interest on money you borrow to buy or carry a life insurance, endowment, or annuity contract if you plan to systematically borrow part or all of the increases in the cash value of the contract. Unemployment taxes This rule applies to the interest on the total amount borrowed to buy or carry the contract, not just the interest on the borrowed increases in the cash value. Unemployment taxes Tax-exempt income. Unemployment taxes   You cannot deduct expenses you incur to produce tax-exempt income. Unemployment taxes Nor can you deduct interest on money you borrow to buy tax-exempt securities or shares in a mutual fund or other regulated investment company that distributes only exempt-interest dividends. Unemployment taxes Short-sale expenses. Unemployment taxes   The rule disallowing a deduction for interest expenses on tax-exempt securities applies to amounts you pay in connection with personal property used in a short sale or amounts paid by others for the use of any collateral in connection with the short sale. Unemployment taxes However, it does not apply to the expenses you incur if you deposit cash as collateral for the property used in the short sale and the cash does not earn a material return during the period of the sale. Unemployment taxes Short sales are discussed in Short Sales in chapter 4. Unemployment taxes Expenses for both tax-exempt and taxable income. Unemployment taxes   You may have expenses that are for both tax-exempt and taxable income. Unemployment taxes If you cannot specifically identify what part of the expenses is for each type of income, you can divide the expenses, using reasonable proportions based on facts and circumstances. Unemployment taxes You must attach a statement to your return showing how you divided the expenses and stating that each deduction claimed is not based on tax-exempt income. Unemployment taxes   One accepted method for dividing expenses is to do it in the same proportion that each type of income is to the total income. Unemployment taxes If the expenses relate in part to capital gains and losses, include the gains, but not the losses, in figuring this proportion. Unemployment taxes To find the part of the expenses that is for the tax-exempt income, divide your tax-exempt income by the total income and multiply your expenses by the result. Unemployment taxes Example. Unemployment taxes You received $6,000 interest; $4,800 was tax-exempt and $1,200 was taxable. Unemployment taxes In earning this income, you had $500 of expenses. Unemployment taxes You cannot specifically identify the amount of each expense item that is for each income item, so you must divide your expenses. Unemployment taxes 80% ($4,800 tax-exempt interest divided by $6,000 total interest) of your expenses is for the tax-exempt income. Unemployment taxes You cannot deduct $400 (80% of $500) of the expenses. Unemployment taxes You can deduct $100 (the rest of the expenses) because they are for the taxable interest. Unemployment taxes State income taxes. Unemployment taxes   If you itemize your deductions, you can deduct, as taxes, state income taxes on interest income that is exempt from federal income tax. Unemployment taxes But you cannot deduct, as either taxes or investment expenses, state income taxes on other exempt income. Unemployment taxes Interest expense and carrying charges on straddles. Unemployment taxes   You cannot deduct interest and carrying charges allocable to personal property that is part of a straddle. Unemployment taxes The nondeductible interest and carrying charges are added to the basis of the straddle property. Unemployment taxes However, this treatment does not apply if: All the offsetting positions making up the straddle either consist of one or more qualified covered call options and the optioned stock, or consist of section 1256 contracts (and the straddle is not part of a larger straddle); or The straddle is a hedging transaction. Unemployment taxes  For information about straddles, including definitions of the terms used in this discussion, see Straddles in chapter 4. Unemployment taxes   Interest includes any amount you pay or incur in connection with personal property used in a short sale. Unemployment taxes However, you must first apply the rules discussed in Payments in lieu of dividends under Short Sales in chapter 4. Unemployment taxes   To determine the interest on market discount bonds and short-term obligations that are part of a straddle, you must first apply the rules discussed under Limit on interest deduction for market discount bonds and Limit on interest deduction for short-term obligations (both under Interest Expenses, earlier). Unemployment taxes Nondeductible amount. Unemployment taxes   Figure the nondeductible interest and carrying charges on straddle property as follows. Unemployment taxes Add: Interest on indebtedness incurred or continued to buy or carry the personal property, and All other amounts (including charges to insure, store, or transport the personal property) paid or incurred to carry the personal property. Unemployment taxes Subtract from the amount in (1): Interest (including OID) includible in gross income for the year on the personal property, Any income from the personal property treated as ordinary income on the disposition of short-term government obligations or as ordinary income under the market discount and short-term bond provisions — see Discount on Debt Instruments in chapter 1, The dividends includible in gross income for the year from the personal property, and Any payment on a loan of the personal property for use in a short sale that is includible in gross income. Unemployment taxes Basis adjustment. Unemployment taxes   Add the nondeductible amount to the basis of your straddle property. Unemployment taxes How To Report Investment Expenses To deduct your investment expenses, you must itemize deductions on Schedule A (Form 1040). Unemployment taxes Enter your deductible investment interest expense on Schedule A (Form1040), line 14. Unemployment taxes Include any deductible short sale expenses. Unemployment taxes (See Short Sales in chapter 4 for information on these expenses. Unemployment taxes ) Also attach a completed Form 4952 if you used that form to figure your investment interest expense. Unemployment taxes Enter the total amount of your other investment expenses (other than interest expenses) on Schedule A (Form 1040), line 23. Unemployment taxes List the type and amount of each expense on the dotted lines next to line 23. Unemployment taxes (If necessary, you can show the required information on an attached statement. Unemployment taxes ) For information on how to report amortizable bond premium, see Bond Premium Amortization , earlier in this chapter. Unemployment taxes When To Report Investment Expenses If you use the cash method to report income and expenses, you generally deduct your expenses, except for certain prepaid interest, in the year you pay them. Unemployment taxes If you use an accrual method, you generally deduct your expenses when you incur a liability for them, rather than when you pay them. Unemployment taxes Also see When To Deduct Investment Interest , earlier in this chapter. Unemployment taxes Unpaid expenses owed to related party. Unemployment taxes   If you use an accrual method, you cannot deduct interest and other expenses owed to a related cash-basis person until payment is made and the amount is includible in the gross income of that person. Unemployment taxes The relationship, for purposes of this rule, is determined as of the end of the tax year for which the interest or expense would otherwise be deductible. Unemployment taxes If a deduction is denied under this rule, this rule will continue to apply even if your relationship with the person ceases to exist before the amount is includible in the gross income of that person. Unemployment taxes   This rule generally applies to those relationships listed in chapter 4 under Related Party Transactions . Unemployment taxes It also applies to accruals by partnerships to partners, partners to partnerships, shareholders to S corporations, and S corporations to shareholders. Unemployment taxes   The postponement of deductions for unpaid expenses and interest under the related party rule does not apply to OID, regardless of when payment is made. Unemployment taxes This rule also does not apply to loans with below-market interest rates or to certain payments for the use of property and services when the lender or recipient has to include payments periodically in income, even if a payment has not been made. Unemployment taxes Prev  Up  Next   Home   More Online Publications