Is the interest amount that we paid to the IRS deductible?
No, only mortgage or investment interest is deductible on Schedule A. Interest paid to the IRS is considered personal interest and nondeductible. It would be the same as interest on a credit card or automobile loan. Refer to Items You Cannot Deduct in Chapter 25 of Publication 17, Your Federal Income Tax.
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Can you tell me where on the Internet I can find the AFR, Applicable Federal Rate, for the months in 2000?
The Applicable Federal Rates for each month can be found in the first Internal Revenue Bulletin (IRB) published for that month. Internal Revenue Bulletins are located under Tax Information for You.
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A family member has offered a low interest loan to me for purchasing a home. Where can I find information on rates for private loans?
To calculate the lowest rate of interest for federal tax law, you must use the Applicable Federal Rates (AFR) that applies to the terms and time of your loan. The applicable federal rates are published monthly in the Internal Revenue Bulletin.
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I made a personal loan of $3,500 to a friend. She declared bankruptcy after only paying me back $500.00. Does the IRS allow any provision for my loss?
If someone owes you money you cannot collect, you have a bad debt. There are two kinds of bad debts - business and nonbusiness.
Bad debts are deductible only if the amount owed has been lent or previously included in your income. A business bad debt, generally, is one that comes from operating your trade or business.
All other bad debts are nonbusiness. Nonbusiness bad debts must be totally worthless to be deductible. You cannot deduct a partially worthless nonbusiness bad debt. You must establish you have taken reasonable steps to collect the debt and that the debt is worthless. You may take the deduction only in the year the debt becomes worthless. A debt becomes worthless when there is no longer any chance the amount owed will be paid. You do not have to wait until the debt comes due.
For more information on bad debts, refer to Publication 550, Investment Income and Expenses, and Publication 535, Business Expenses.
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Are legal fees incurred for collection of Social Security Benefits deductible? If so, does the actual amount of the legal fee have to be reduced to 85% since Social Security benefits are only 85% taxable?
Yes, any expense incurred in the production of income is a miscellaneous itemized deduction but subject to the 2% limit. You would not need to reduce the legal bill by 15% because just 85% of benefits were taxable.
I went through a divorce last year and paid a lot of legal fees. Are these deductible on my tax return?
Legal fees for the divorce itself and for property settlement are not deductible. However, legal fees to collect taxable income, such as alimony, are deductible as miscellaneous itemized deductions on Form 1040, SCHEDULE A. Most miscellaneous itemized deductions are subject to the 2% limit. This means you can deduct the amount left after you subtract 2% of your adjusted gross income from their total. For additional information, refer to Tax Topic 508, Miscellaneous Expenses, and Publication 529, Miscellaneous Deductions.
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Can I deduct alimony paid to my former spouse?
If you are divorced or separated, you may be able to deduct the alimony or separate maintenance payments that you are required to make to your spouse or former spouse, or on behalf of that spouse. For additional information, refer to Tax Topic 452, Alimony Paid (this topic covers alimony under decrees or agreements after 1984), or Publication 504, Divorced or Separated Individuals.
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Where are fees and commissions for investments deducted?
If they are deductible, investment expenses are deductible as itemized deductions on Form 1040, SCHEDULE A, Itemized Deductions. The taxpayer has to itemize their deductions to deduct these expenses and that may not be as beneficial for the taxpayer as taking the standard deduction. They are deductible only to the extent that the total exceeds 2% of the taxpayer's adjusted gross income.
Commissions and fees for the acquisition or sale of an asset are added to the basis of that asset and are not deductible. For example, acquisition fees, sales commissions, and load charges paid in connection with the purchase or selling of mutual fund shares are not deductible. They can usually be added to the basis of the shares.
Fees for managing investments, such as custodial fees and management fees are deductible. Fees you pay a broker to collect taxable bond interest or stock dividends are deductible. Fees that pass through to you from nonpublicly offered mutual funds, partnerships, or trusts are deductible. All of these fees are subject to the 2% limit.
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Is a real estate investment considered investment property? Is the interest deductible as Investment Interest if you cannot deduct it as mortgage interest?
If you borrow money and use it to buy property you hold for investment, the interest you pay is investment interest. You can deduct investment interest subject to certain limits. However, you cannot deduct interest you incurred to produce tax-exempt income. 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.
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We took a margin loan from our investment money market account. Can the interest we paid be deducted?
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. 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. 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. You cannot deduct any interest on money borrowed for personal reasons.
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If I don't itemize my deductions can I still deduct my investment expenses such as margin interest?
Investment expenses (other than interest expenses) are deducted on Form 1040, SCHEDULE A, Itemized Deductions, as miscellaneous deductions subject to the 2% of your Adjusted Gross Income (AGI) limit.
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How do I deduct and substantiate my gambling losses?
You can deduct gambling losses only if you itemize deductions. Claim your gambling losses as a miscellaneous deduction on Form 1040, SCHEDULE A. However, the amount of losses you deduct cannot total more than the amount of gambling income you have reported on your return. It is important to keep an accurate diary or similar record of your gambling winnings and losses. To deduct your losses, you must be able to provide receipts, tickets, statements or other records that show the amount of both your winnings and losses.
The Service provides the following guidelines for proving gambling winnings and losses:
1. An accurate diary or similar record regularly maintained by the taxpayer, supplemented by verifiable documentation usually is acceptable evidence for substantiation of wagering winnings, and losses. In general, the diary should contain at least the following information
- a) date and type of specific wager or wagering activity;
- b) name of gambling establishment;
- c) address or location of gambling establishment; and
- d) name(s) of other person(s) present with you at gambling establishment.
- e) amount(s) won or lost.
2. Verifiable documentation includes, but is not limited to, wagering tickets, canceled checks, credit records, bank withdrawals, and statements of actual winnings or payment slips provided by the gambling establishment. When possible, the diary and available documentation by the placement and settlement of a wager should be supported by such documentation as hotel bills, airline tickets, gasoline credit cards, or affidavits or testimony from responsible gambling officials regarding the wagering activity.
Refer to Publication 529, Miscellaneous Deductions for information on record keeping. For additional information, refer to Publication 525, Taxable and Nontaxable Income.
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