Personal
interest. Personal interest is not
deductible. Examples of personal
interest include interest on a
loan to purchase an automobile
for personal use and credit card
and installment interest
incurred for personal expenses.
But you may be able to deduct
interest you pay on a qualified
student loan. For details, see
Publication 970, Tax Benefits
for Education.
Limit on
itemized deductions.
If your adjusted gross income is
more than $142,700 ($71,350 if
you are married filing
separately), the overall amount
of your itemized deductions may
be limited. See chapter 31 for
more information about this
limit.
Introduction
This chapter discusses
interest. Interest is the amount
you pay for the use of borrowed
money.
The types of interest you can
deduct as itemized deductions on
Schedule A (Form 1040) are:
Home mortgage
interest, including
certain points, and
Investment interest.
This chapter explains these
deductions. It also explains
where to deduct other types of
interest and lists some types of
interest you cannot deduct.
Use Table 25-1 to find out
where to get more information on
various types of interest,
including investment interest.
Useful Items - You
may want to see:
Publication
936
Home Mortgage Interest
Deduction
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).
The loan may be a mortgage to
buy your home, a second
mortgage, a line of credit, or a
home equity loan.
You can deduct home mortgage
interest only if you meet all
the following conditions.
You must file Form
1040 and itemize
deductions on Schedule A
(Form 1040).
You must be legally
liable for the loan. You
cannot deduct payments
you make for someone
else if you are not
legally liable to make
them. Both you and the
lender must intend that
the loan be repaid. In
addition, there must be
a true debtor-creditor
relationship between you
and the lender.
The mortgage must be
a secured debt on a
qualified home.
(Generally, your
mortgage is a secured
debt if you put your
home up as collateral to
protect the interests of
the lender. The term “qualified
home” means your
main home or second
home. For details, see
Publication 936.)
Amount
Deductible
In most cases, you will
be able to deduct all of
your home mortgage interest.
Whether you can deduct all
of it depends on the date
you took out the mortgage,
the amount of the mortgage,
and your use of its
proceeds.
Fully
deductible interest.
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. (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.)
The three categories
are:
Mortgages
you took out on
or before
October 13, 1987
(called
grandfathered
debt).
Mortgages
you took out
after October
13, 1987, to
buy, build, or
improve your
home (called
home acquisition
debt), but only
if throughout
2004 these
mortgages plus
any
grandfathered
debt totaled $1
million or less
($500,000 or
less if married
filing
separately).
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
2004 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).
The dollar limits for
the second and third
categories apply to the
combined mortgages on
your main home and
second home.
See
Part II
of Publication 936 for
more detailed
definitions of
grandfathered, home
acquisition, and home
equity debt.
You can use Figure
25-A to check whether
your home mortgage
interest is fully
deductible.
Limits
on deduction. You
cannot fully deduct
interest on a mortgage
that does not fit into
any of the three
categories listed above.
If this applies to you,
see
Part II
of Publication 936 to
figure the amount of
interest you can deduct.
Special
Situations
This section
describes certain items
that can be included as
home mortgage interest
and others that cannot.
It also describes
certain special
situations that may
affect your deduction.
Late payment charge
on mortgage payment.
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.
Mortgage prepayment
penalty.
If you pay off
your home mortgage
early, you may have
to pay a penalty.
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.
Sale of home.
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.
Example.
John and
Peggy Harris
sold their home
on May 7.
Through April
30, they made
home mortgage
interest
payments of
$1,220. 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.
Their mortgage
interest
deduction is
$1,270 ($1,220 +
$50).
Prepaid interest.
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. You can
deduct in each year
only the interest
that qualifies as
home mortgage
interest for that
year. However, see
Points, later.
Mortgage interest
credit.
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. Figure
the credit on Form
8396, Mortgage
Interest Credit. If
you take this
credit, you must
reduce your mortgage
interest deduction
by the amount of the
credit.
For more
information on the
credit, see chapter
39.
Ministers' and
military housing
allowance.
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.
Mortgage assistance
payments.
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. You cannot
deduct the interest
that is paid for
you.
No other effect
on taxes.
Do not include
these mortgage
assistance payments
in your income.
Also, do not use
these payments to
reduce other
deductions, such as
real estate taxes.
Divorced or
separated
individuals.
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. See the
discussion of
Payments for
jointly-owned home
in
chapter 20.
Redeemable ground
rent.
If you make annual
or periodic rental
payments on a
redeemable ground
rent, you can deduct
them as mortgage
interest.
Payments made to
end the lease and to
buy the lessor's
entire interest in
the land are not
ground rents. You
cannot deduct them.
For more
information, see
Publication 936.
Nonredeemable
ground rent.
Payments on a
nonredeemable ground
rent are not
mortgage interest.
You can deduct them
as rent if they are
a business expense
or if they are for
rental property.
Rental payments.
If you live in a
house before final
settlement on the
purchase, any
payments you make
for that period are
rent and not
interest. This is
true even if the
settlement papers
call them interest.
You cannot deduct
these payments as
home mortgage
interest.
Mortgage proceeds
invested in
tax-exempt
securities.
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. “Grandfathered
debt” and “home
equity debt”
are defined earlier
under
Amount
Deductible.
Refunds of interest.
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. 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.
However, you need to
include it only up
to the amount of the
deduction that
reduced your tax in
the earlier year.
This is true whether
the interest
overcharge was
refunded to you or
was used to reduce
the outstanding
principal on your
mortgage.
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.
For information
about Form 1098, see
Mortgage
Interest Statement,
later.
For more
information on how
to treat refunds of
interest deducted in
earlier years, see
Recoveries in chapter
13.
Points
The term “points”
is used to describe certain
charges paid, or treated as
paid, by a borrower to
obtain a home mortgage.
Points may also be called
loan origination fees,
maximum loan charges, loan
discount, or discount
points.
A borrower is treated as
paying any points that a
home seller pays for the
borrower's mortgage. See
Points paid by the seller,
later.
General
rule.
You generally cannot
deduct the full amount
of points in the year
paid. Because they are
prepaid interest, you
generally deduct them
ratably over the life
(term) of the mortgage.
However, see
Deduction allowed in
year paid,
and
Home improvement
loan.
Deduction allowed in
year paid.You can fully deduct
points in the year paid
if you meet all the
following tests. (You
can use Figure 25-B as a
quick guide to see
whether your points are
fully deductible in the
year paid.)
Your loan is
secured by your
main home. (Your
main home is the
one you live in
most of the
time.)
Paying
points is an
established
business
practice in the
area where the
loan was made.
The points
paid were not
more than the
points generally
charged in that
area.
You use the
cash method of
accounting. This
means you report
income in the
year you receive
it and deduct
expenses in the
year you pay
them. (If you
want more
information
about this
method, see
Accounting
Methods in
chapter 1.)
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.
The funds
you provided at
or before
closing, plus
any points the
seller paid,
were at least as
much as the
points charged.
The funds you
provided do not
have to have
been applied to
the points. They
can include a
down payment, an
escrow deposit,
earnest money,
and other funds
you paid at or
before closing
for any purpose.
You cannot have
borrowed these
funds from your
lender or
mortgage broker.
You use your
loan to buy or
build your main
home.
The points
were computed as
a percentage of
the principal
amount of the
mortgage.
The amount
is clearly shown
on the
settlement
statement (such
as the Uniform
Settlement
Statement, Form
HUD-1) as points
charged for the
mortgage. The
points may be
shown as paid
from either your
funds or the
seller's.
Figure 25-B.
Are My
Points Fully
Deductible
This Year?
Note.
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.
Home improvement loan.
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.
Second home. You
cannot fully deduct in the
year paid points you pay on
loans secured by your second
home. You can deduct these
points only over the life of
the loan.
Refinancing.
Generally, points you
pay to refinance a
mortgage are not
deductible in full in
the year you pay them.
This is true even if the
new mortgage is secured
by your main home.
However, if you use
part of the refinanced
mortgage proceeds to
improve your main home
and you meet the first
six 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. You can
deduct the rest of the
points over the life of
the loan.
Example 1.
In 1992, Bill
Fields got a
mortgage to buy a
home. In 2004, Bill
refinanced that
mortgage with a
15-year $100,000
mortgage loan. The
mortgage is secured
by his home. To get
the new loan, he had
to pay three points
($3,000). 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. Bill paid
the points out of
his private funds,
rather than out of
the proceeds of the
new loan. The
payment of points is
an established
practice in the
area, and the points
charged are not more
than the amount
generally charged
there. Bill's first
payment on the new
loan was due July 1.
He made six payments
on the loan in 2004
and is a cash basis
taxpayer.
Bill used the
funds from the new
mortgage to repay
his existing
mortgage. 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. He cannot
deduct all of the
points in 2004. He
can deduct two
points ($2,000)
ratably over the
life of the loan. He
deducts $67 [($2,000
÷ 180 months) × 6
payments] of the
points in 2004. The
other point ($1,000)
was a fee for
services and is not
deductible.
Example 2.
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.
Bill deducts 25%
($25,000 ÷ $100,000)
of the points
($2,000) in 2004.
His deduction is
$500 ($2,000 × 25%).
Bill also deducts
the ratable part of
the remaining $1,500
($2,000 - $500) that
must be spread over
the life of the
loan. This is $50
[($1,500 ÷ 180
months) × 6
payments] in 2004.
The total amount
Bill deducts in 2004
is $550 ($500 +
$50).
Deduction allowed
ratably. If you do
not meet the tests above
under
Deduction allowed in
year paid,
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.
You use the
cash method of
accounting. This
means you report
income in the
year you receive
it and deduct
expenses in the
year you pay
them. Most
individuals use
this method.
Your loan is
secured by a
home. (The home
does not need to
be your main
home.)
Your loan
period is not
more than 30
years.
If your loan
period is more
than 10 years,
the terms of
your loan are
same as other
loans offered in
your area for
the same or
longer period.
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.
Original issue discount.
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. This
reduction results in
original issue discount,
which is discussed in
chapter 5 of Publication
535.
Amounts
charged for services.
Amounts charged by the
lender for specific
services connected to
the loan are not
interest. Examples of
these charges are:
Appraisal
fees,
Notary fees,
Preparation
costs for the
mortgage note or
deed of trust,
Mortgage
insurance
premiums, and
VA funding
fees.
You cannot deduct these
amounts as points either
in the year paid or over
the life of the
mortgage. For
information about the
tax treatment of these
amounts and other
settlement fees and
closing costs, get
Publication 530, Tax
Information for
First-Time Homeowners.
Points
paid by the seller.
The term “points”
includes loan placement
fees that the seller
pays to the lender to
arrange financing for
the buyer.
Treatment by seller.
The seller cannot
deduct these fees as
interest. But they are a
selling expense that
reduces the amount
realized by the seller.
See chapter 16 for
information on the sale
of your home.
Treatment by buyer.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.
If all the tests under
Deduction allowed in
year paid,
earlier, are met, the
buyer can deduct the
points in the year paid.
If any of those tests is
not met, the buyer
deducts the points over
the life of the loan.
For information about
basis, see chapter 14.
Funds
provided are less than
points. 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. In
addition, you can deduct
any points paid by the
seller.
Example 1.
When you took out
a $100,000 mortgage
loan to buy your
home in December,
you were charged one
point ($1,000). You
meet all the tests
for deducting points
in the year paid,
except the only
funds you provided
were a $750 down
payment. Of the
$1,000 charged for
points, you can
deduct $750 in the
year paid. You
spread the remaining
$250 over the life
of the mortgage.
Example 2.
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.
In the year paid,
you can deduct
$1,750 ($750 of the
amount you were
charged plus the
$1,000 paid by the
seller). You spread
the remaining $250
over the life of the
mortgage. You must
reduce the basis of
your home by the
$1,000 paid by the
seller.
Excess
points.
If you meet all the
tests in
Deduction allowed in
year paid,
earlier, except that the
points paid were more
than are generally paid
in your area (test 3),
you deduct in the year
paid only the points
that are generally
charged. You must spread
any additional points
over the life of the
mortgage.
Mortgage ending early.
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. However, if you
refinance the mortgage
with the same lender,
you cannot deduct any
remaining balance of
spread points. Instead,
deduct the remaining
balance over the term of
the new loan.
A mortgage may end
early due to a
prepayment, refinancing,
foreclosure, or similar
event.
Example.
Dan paid $3,000
in points in 1994
that he had to
spread out over the
15-year life of the
mortgage. He had
deducted $2,000 of
these points through
2003.
Dan prepaid his
mortgage in full in
2004. He can deduct
the remaining $1,000
of points in 2004.
Limits
on deduction.
You cannot fully
deduct points on a
mortgage unless the
mortgage fits into one
of the categories listed
earlier under
Fully deductible
interest.
See Publication 936 for
details.
Mortgage
Interest
Statement
If you paid $600 or more
of mortgage interest
(including certain points)
during the year on any one
mortgage, you generally will
receive a Form 1098,
Mortgage Interest Statement,
or a similar statement from
the mortgage holder. 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. A governmental
unit is a person for
purposes of furnishing the
statement.
The statement for each
year should be sent to you
by January 31 of the
following year. A copy of
this form will also be sent
to the IRS.
The statement will show
the total interest you paid
during the year. If you
purchased a main home during
the year, it will also show
the deductible points paid
during the year, including
seller-paid points. However,
it should not show any
interest that was paid for
you by a government agency.
As a general rule, Form
1098 will include only
points that you can fully
deduct in the year paid.
However, certain points not
included on Form 1098 also
may be deductible, either in
the year paid or over the
life of the loan. See
Points, earlier,
to determine whether you can
deduct points not shown on
Form 1098.
Prepaid
interest on Form 1098.
If you prepaid
interest in 2004 that
accrued in full by
January 15, 2005, this
prepaid interest may be
included in box 1 of
Form 1098. However, you
cannot deduct the
prepaid amount for
January 2005 in 2004.
(See
Prepaid interest,
earlier.)
You will have to figure
the interest that
accrued for 2005 and
subtract it from the
amount in box 1. You
will include the
interest for January
2005 with the other
interest you pay for
2005. See
How To Report, later.
Refunded interest.
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. See
Refunds of interest,
earlier.
Investment Interest
This section discusses the
interest expenses you may be
able to deduct as an investor.
If you borrow money to buy
property you hold for
investment, the interest you pay
is investment interest. You can
deduct investment interest
subject to the limit discussed
later. However, you cannot
deduct interest you incurred to
produce tax-exempt income. Nor
can you deduct interest expenses
on straddles.
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.
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. 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).
Investment property also
includes an interest in a
trade or business activity
in which you did not
materially participate
(other than a passive
activity).
Partners, shareholders,
and beneficiaries.
To determine your
investment interest,
combine your share of
investment interest from
a partnership, S
corporation, estate, or
trust with your other
investment interest.
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. Only the
interest expense on the part
of the debt used for
investment purposes is
treated as investment
interest. The allocation is
not affected by the use of
property that secures the
debt.
Limit on
Deduction
Generally, your
deduction for investment
interest expense is limited
to the amount of your net
investment income.
You can carry over the
amount of investment
interest that you could not
deduct because of this limit
to the next tax year. The
interest carried over is
treated as investment
interest paid or accrued in
that next year.
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.
Net
Investment
Income
Determine the amount
of your net investment
income by subtracting
your investment expenses
(other than interest
expense) from your
investment income.
Investment income.This generally
includes your gross
income from property
held for investment
(such as interest,
dividends,
annuities, and
royalties).
Investment income
does not include
Alaska Permanent
Fund dividends. It
also does not
include qualified
dividends or capital
gain distributions
unless you choose to
include them.
Choosing to
include qualified
dividends.
Investment income
generally does not
include qualified
dividends (discussed
in chapter 9).
However, you can
choose to include
all or part of your
qualified dividends
in investment
income.
You make this
choice by completing
Form 4952, line 4g,
according to its
instructions.
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.
Choosing to
include net capital
gain.
Investment income
generally does not
include net capital
gain from disposing
of investment
property (including
capital gain
distributions from
mutual funds).
However, you can
choose to include
all or part of your
net capital gain in
investment income.
You make this
choice by completing
Form 4952, line 4g,
according to its
instructions.
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.
Before making
either choice,
consider the overall
effect on your tax
liability. Compare
your tax if you make
one or both of these
choices with your
tax if you do not.
Investment income of
child reported on
parent's return.Investment
income includes the
part of your child's
interest and
dividend income that
you choose to report
on your return. 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.
Child's
qualified dividends.
If part of the
amount you report is
your child's
qualified dividends,
that part (which is
reported on line 9b
of Form 1040 or Form
1040A) generally
does not count as
investment income.
However, you can
choose to include
all or part of it in
investment income,
as explained under
Choosing to
include qualified
dividends,
earlier.
Your investment
income also includes
the amount on Form
8814, line 6, (or,
if applicable, the
amount figured next
under
Child's Alaska
Permanent Fund
dividends).
Child's Alaska
Permanent Fund
dividends.
If part of the
amount you report is
your child's Alaska
Permanent Fund
dividends, that part
does not count as
investment income.
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. Multiply
that amount by a
percentage that is
equal to the Alaska
Permanent Fund
dividends divided by
the total amount of
interest and
dividend income on
Form 8814, lines 1a
and 2. Subtract the
result from the
amount on Form 8814,
line 6.
Child's capital
gain distributions.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. However, you
can choose to
include all or part
of it in investment
income, as explained
in
Choosing to
include net capital
gain,
earlier.
Your investment
income also includes
the amount on Form
8814, line 6, (or,
if applicable, the
amount figured under
Child's Alaska
Permanent Fund
dividends,
earlier).
Investment expenses.
Investment
expenses include all
income-producing
expenses (other than
interest expense)
relating to
investment property
that are allowable
deductions after
applying the 2%
limit that applies
to miscellaneous
itemized deductions.
Use the smaller of:
The
investment
expenses
included on
Schedule A
(Form 1040),
line 22, or
The
amount on
Schedule A,
line 26.
Losses from passive
activities.
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). See
Publication 925,
Passive Activity and
At-Risk Rules, for
information about
passive activities.
Form 4952
Use Form 4952,
Investment Interest
Expense Deduction, to
figure your deduction
for investment interest.
Exception to use of
Form 4952. You
do not have to
complete Form 4952
or attach it to your
return if you meet
all of the following
tests.
Your
investment
interest
expense is
not more
than your
investment
income from
interest and
ordinary
dividends
minus any
qualified
dividends.
You have
no other
deductible
investment
expenses.
You have
no
disallowed
investment
interest
expense from
2003.
If you meet all of
these tests, you can
deduct all of your
investment interest.
More
Information
For more information
on investment interest,
see
Investment Expenses
in chapter 3 of
Publication 550.
Items You Cannot
Deduct
Some interest payments are
not deductible. Certain expenses
similar to interest also are not
deductible. Nondeductible
expenses include the following
items.
Personal interest
(discussed later).
Service charges
(however, see
Other Expenses in chapter 30).
Annual fees for
credit cards.
Loan fees.
Credit investigation
fees.
FHA mortgage
insurance premiums and
VA funding fees.
Interest to purchase
or carry tax-exempt
securities.
Penalties.
You cannot deduct fines
and penalties paid to a
government for violations of
law, regardless of their
nature.
Personal
Interest
Personal interest is not
deductible. Personal
interest is any interest
that is not home mortgage
interest, investment
interest, business interest,
or other deductible
interest. It includes the
following items.
Interest on car
loans (unless you
use the car for
business).
Interest on
federal, state, or
local income tax.
Finance charges
on credit cards,
retail installment
contracts, and
revolving charge
accounts incurred
for personal
expenses.
Late payment
charges by a public
utility.
You may be able to
deduct interest you pay on a
qualified student loan. For
details, see Publication
970.
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. However, you do not have to
allocate home mortgage interest
if it is fully deductible,
regardless of how the funds are
used.
You allocate interest (other
than fully deductible home
mortgage interest) on a loan in
the same way as the loan itself
is allocated. You do this by
tracing disbursements of the
debt proceeds to specific uses.
For details on how to do this,
see chapter 5 of Publication
535.
How To Report
You must file Form 1040 to
deduct any home mortgage
interest expense on your tax
return. Where you deduct your
interest expense generally
depends on how you use the loan
proceeds. See Table 25-1 for a
summary of where to deduct your
interest expense.
Home
mortgage interest and
points.
Deduct the home mortgage
interest and points reported
to you on Form 1098 on
Schedule A (Form 1040), line
10. 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. Attach a statement
explaining the difference
and print “See
attached” next to
line 10.
Deduct home mortgage
interest that was not
reported to you on Form 1098
on Schedule A (Form 1040),
line 11. 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. The
seller must give you this
number and you must give the
seller your TIN. A Form W-9
can be used for this
purpose. Failure to meet any
of these requirements may
result in a $50 penalty for
each failure. 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. See
Social Security Number in chapter 1 for more
information about TINs.
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.
More than
one borrower.
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. Show how
much of the interest each of
you paid, and give the name
and address of the person
who received the form.
Deduct your share of the
interest on Schedule A (Form
1040), line 11, and print “See
attached” next to the
line.
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. You should let each of
the other borrowers know
what his or her share is.
Mortgage
proceeds used for business
or investment.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 25-1. It shows where
to deduct the part of your
excess interest that is for
those activities.
Investment
interest.Deduct investment
interest, subject to certain
limits discussed in
Publication 550, on Schedule
A (Form 1040), line 13.
Amortization of bond
premium.
There are various ways to
treat the premium you pay to
buy taxable bonds. See
Bond Premium Amortization
in Publication
550.
Income-producing rental or
royalty interest.
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).
Example.
You rent out part of
your home and borrow
money to make repairs.
You can deduct only the
interest payment for the
rented part in Part I of
Schedule E (Form 1040).
Deduct the rest of the
interest payment on
Schedule A (Form 1040)
if it is deductible home
mortgage interest.
Table 25-1. Where To
Deduct Your Interest
Expense
IF you have
...
THEN deduct
it on ...
AND for more
information
go to ...
Deductible
student loan
interest
Form 1040, line
26 or Form
1040A, line 18
Publication 970
Deductible home
mortgage
interest and
points reported
on Form 1098
Schedule A (Form
1040), line 10
Publication 936
Deductible home
mortgage
interest
not
reported on Form
1098
Schedule A (Form
1040), line 11
Publication 936
Deductible
points
not
reported on Form
1098
Schedule A (Form
1040), line 12
Publication 936
Deductible
investment
interest (other
than interest
incurred to
produce rents or
royalties)
Schedule A (Form
1040), line 13
Publication 550
Deductible
business
interest
(non-farm)
Schedule C or
C-EZ (Form 1040)
Publication 535
Deductible farm
business
interest
Schedule F (Form
1040)
Publications 225
and 535
Deductible
interest
incurred to
produce rents or
royalties
