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Individual Income Tax Guide

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Introduction

Interest expense can be personal interest, investment interest or business interest. Which type it is depends on how and when you used the proceeds of the loan that generates the interest expense. See Publication 535 for details.

In general, if you paid interest in 2016 that applies to any period after 2016, you can deduct only amounts that apply for 2015.

Home Mortgage Interest Overview

If you are a homeowner who received assistance under a State Housing Finance Agency Hardest Hit Fund program or an Emergency Homeowners' Loan program, see page 2 of Publication 530 for the amount you can deduct on line 10 or 11.

A home mortgage is any loan that is secured by your main home or second home. It includes first and second mortgages, home equity loans, and refinanced mortgages.

For purposes of the home mortgage interest deduction, a home can be a house, condominium, cooperative, mobile home, boat, or similar property. The home must furnish basic living accommodations including sleeping space, toilet, and cooking facilities.

Limit on home mortgage interest: Your home mortgage interest deduction may be limited if you took out any mortgages after October 13, 1987. Amounts borrowed after October 13, 1987, on a line-of-credit mortgage that was outstanding on that date are treated as a mortgage taken out after October 13, 1987. If you refinanced a mortgage that was outstanding on October 13, 1987, you treat the new mortgage as a mortgage taken out on or before October 13, 1987. However, if your new mortgage was greater than the balance of your old mortgage, you must treat the excess of the new mortgage over the old mortgage as a mortgage taken out after October 13, 1987.

See Publication 936 to calculate your deduction if either of the following apply to you. If you owned more than one home at the same time, the dollar amounts apply to the sum of mortgages on the homes.

NOTE: Additional limits apply if the total amount of all mortgages on a home  is more than the home’s fair market value. See “Home Equity Debt Limit” in Publication 936.

Schedule A, Line 10 Home mortgage interest and points reported to you on Form 1098: On this line, enter the total mortgage interest and points reported to you on any Form 1098, Mortgage Interest Statement. If you receive a Form 1098 that reports a refund of overpaid interest, do not reduce your home mortgage interest deduction by the refund amount. Instead, you must generally include this refund amount in income (see the instructions for Form 1040, line 21 for more information). If you and at least one other person (other than your spouse if you are filing married filing jointly) were liable for and paid interest on the mortgage, and the interest was reported on a Form 1098 the other person received, report your share of the interest paid on line 11 (as explained in the line 11 instructions).

If you paid more interest to the mortgage holder than is reported on Form 1098, see Publication 936 to determine whether you can deduct the additional interest you paid. If you are entitled to deduct the additional interest, attach a statement to your paper return explaining the difference between the amount reported on Form 1098 and the amount you are caliming as a deduction on line 10 and enter “See attached” to the right of line 10.

If you are claiming the mortgage interest credit (for holders of qualified mortgage credit certificates issued by state or local governmental units or agencies), subtract the amount shown on Form 8396, Mortgage Interest Credit, line 3, from the total deductible interest you paid on your home mortgage and enter the result on line 10.

Schedule A, Line 11 – Home mortgage interest not reported to you on Form 1098: If you paid home mortgage insurance interest that was not reported to you on Form 1098, Mortgage Interest Statement, report your deductible mortgage interest on line 11.

If you paid home mortgage insurance interest to the person or entity from whom you purchased the home, write that person's name, identifying number, and address on the dotted lines next to line 11. If the person you pay home mortgage interest payment(s) to is an individual, the identifying number is that person’s social security number (SSN). Otherwise, it is the employer identification number of the entity that you make thepayments to. You must also let this person or entity know your SSN. If you do not show the required information about the person or entity to whom you make the payments or let that person or entity know your SSN, you may be subject to a $50 penalty.

If you and one or more other persons (other than your spouse if you filed married filing jointly) were liable for and paid interest on the mortgage, and the home mortgage interest paid was reported on a Form 1098 issued to one of the other persons, attach a statement to your paper return that lists the name and address of that person. To the right of line 11, enter “See attached.”

Schedule A, Line 12 – Points Not Reported on Form 1098: Points are reported to you on your settlement statement. If you paid the points only to borrow money, they are generally deductible over the life of the loan. See Publication 936 for information on how to calculate the amount of your points paid that you can deduct in the current year. Points that you paid for other purposes, such as for a lender's services, are not deductible.

Refinancing: In general, points that you paid to refinance a mortgage are deductible over the life of the loan, even if the new mortgage is secured by your main home.

If you used part of the proceeds of the loan to improve your main home, you may be able to deduct the part of the points you paid related to the improvement in the year paid. See “Refinancing” in Publication 936 for more information.

If you paid off a mortgage early, you should deduct any remaining points in the year that you paid off the mortgage. However, if you refinanced your mortgage with the same lender, see “Mortgage Ending Early” in Publication 936 for an exception to this rule.

Schedule A, Line 13 – Mortgage Insurance Premiums: You can deduct on this line qualified mortgage insurance premiums you paid under a mortgage insurance contract issued after December 31, 2006, in connection with home acquisition debt that was secured by your first or second home. Box 5 of Form 1098 for your home mortgage may show the amount of premiums you paid in 2016. If you and at least one other person (other than your spouse if you filed married filing jointly) were liable for and paid the premiums in connection with the loan, and the premiums were reported on the other person's Form 1098, report your share of the premiums on line 13. See Prepaid mortgage insurance premiums, below, if you paid any premiums allocable to any period after 2016.

 Qualified mortgage insurance: Qualified mortgage insurance is mortgage insurance provided by the Department of Veterans Affairs, the Federal Housing Administration, or the Rural Housing Service (or their successor organizations), and private mortgage insurance.

Mortgage insurance provided by the Department of Veterans Affairs and the Rural Housing Service is commonly known as a funding fee and guarantee fee respectively. These fees can be deducted fully in 2015 if the mortgage insurance contract was issued in 2015. Contact your mortgage insurance issuer to determine the deductible amount if it is not included in box 5 of Form 1098.

Prepaid mortgage insurance premiums: If you paid qualified mortgage insurance premiums that are allocable to periods after 2016, you must allocate them over the shorter of:

You must treat the premiums as paid in the year to which they are allocated. If you satisfy the mortgage before its term, you are not allowed a deduction for the unamortized balance. See Publication 936 for details.

The allocation rules, explained earlier, do not apply to qualified mortgage insurance provided by the Department of Veterans Affairs or the Rural Housing Service (or their successor organizations).

Limit on mortgage insurance premiums you can deduct: You cannot deduct your mortgage insurance premiums if the amount on your Form 1040, line 38, is more than $109,000 ($54,500 if married filing separately). If the amount on Form 1040, line 38, is more than $100,000 ($50,000 if married filing separately), your deduction is limited and you must use the Mortgage Insurance Premiums Deduction Worksheet to figure your deduction.

Schedule A, Line 14 – Investment Interest: Investment interest is interest is interest paid on money borrowed that you used to purchase investment assets. However, you cannot deduct interest on money borrowed to purchase securities that produce tax-exempt income (e.g., tax-exempt municpal bonds) or interest that is related to passive activities. See the Passive Activty Rules page for more information about passive activities.

To calcualte your investment interest deduction, complete Form 4952, Investment Interest Expense Deduction. You must attach the form to your return.

Exception: You are not required to attach Form 4952 to your return if all of the following apply:

Alaska Permanent Fund dividends, including those reported on Form 8814,

Parents' Election To Report Child's Interest and Dividends, are not considered investment income for these purposes

For more information, see  Investment Interest in Publication 550, Investment Income.

Table of Contents

Chapter 11 - Schedule A: Interest Paid

Home Mortgage Interest Overview

Schedule A, Line 10 Home mortgage interest and points reported to you on Form 1098

Schedule A, Line 11 – Home mortgage interest not reported to you on Form 1098

Schedule A, Line 12 – Points Not Reported on Form 1098

Schedule A, Line 13 – Mortgage Insurance Premiums

Schedule A, Line 14 – Investment Interest