The Applicable Federal Rates for each month can be found in the first weekly Internal Revenue Bulletin (IRB) published for that month. The Internal Revenue Bulletins are located on the IRS web-site called the "Digital Daily," under Tax Information for You . The Digital Daily may be accessed at http://www.irs.gov.

References:

• Applicable Federal Rates
• Tax Information for You
• http://www.irs.gov

The rules for private or "below market" loans may be found in Publication 550 (PDF), Investment Income and Expenses. To calculate the lowest acceptable rate of interest under federal tax law, you must use the Applicable Federal Rates (AFR) that apply based on the terms and period of your loan. The applicable federal rates are published monthly in the Internal Revenue Bulletin. The Internal Revenue Bulletins may be found on the IRS' web-site, the Digital Daily, under Tax Information for You. You may access the web-site at http://www.irs.gov

References:

• Applicable Federal Rates
• Publication 550 (PDF), Investment Income and Expenses
• http://www.irs.gov

If, in a true debtor-creditor relationship, someone owes you money that 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 to you represents a loan of your cash or has been 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 that 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 totally worthless. A debt becomes totally 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. A nonbusiness bad debt is taken as a short-term capital loss on Form 1040, Schedule D (PDF), Capital Gains and Losses.

For more information on bad debts, refer to Publication 550 (PDF), Investment Income and Expenses, and Publication 535 (PDF), Business Expenses.

Form 1040, Schedule D (PDF), Capital Gains and Losses.

References:

• Publication 550 (PDF), Investment Income and Expenses
• Publication 535 (PDF), Business Expenses

Personal legal fees are not, generally, deductible. However you may deduct legal fees incurred or paid for the production or collection of taxable income. The portion of the legal fees that is deductible would be proportional to the taxable part of your Social Security benefit collected. The deduction is taken on line 22 of Form 1040 Schedule A (PDF), Itemized Deductions, subject to the 2% of Adjusted Gross Income Limitation. For more information, refer to Publication 529 (PDF), Miscellaneous Deductions; and Publication 915 (PDF), Social Security and Equivalent Railroad Retirement Benefits.

References:

• Publication 529 (PDF), Miscellaneous Deductions
• Publication 915 (PDF), Social Security and Equivalent Railroad Retirement Benefits

Legal fees incurred or paid for a divorce are personal in nature, and are not generally deductible. However, legal fees incurred or paid for the production or collection of taxable income may be deductible. You may deduct legal fees for collecting alimony because alimony is taxable income. These deductions are taken on line 22 of Form 1040, Schedule A (PDF), Itemized Deductions. For additional information, refer to Tax Topic 508, Miscellaneous Expenses, and Publication 529 (PDF), Miscellaneous Deductions.

References:

• Publication 529 (PDF), Miscellaneous Deductions
• Form 1040, Schedule A (PDF), Itemized Deductions
• Tax Topic 508, Miscellaneous Expenses

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; and Publication 504 (PDF), Divorced or Separated Individuals.

References:

• Publication 504 (PDF), Divorced or Separated Individuals
• Tax Topic 452, Alimony Paid

If they are deductible, investment expenses other than investment interest are taken as miscellaneous deductions on Form 1040, Schedule A (PDF), Itemized Deductions. These deductions must be reduced by 2% of your 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 non-publicly offered mutual funds, partnerships, or trusts are deductible. All of these fees are subject to the 2% limit. For more information, refer to Publication 529 (PDF), Miscellaneous Deductions; Publication 550 (PDF), Investment Income and Expenses; and Publication 564 (PDF), Mutual Fund Distributions.

References:

• Publication 17 (PDF), Your Federal Income Tax for Individuals
• Publication 529 (PDF), Miscellaneous Deductions
• Publication 550 (PDF), Investment Income and Expenses
• Publication 564 (PDF), Mutual Fund Distributions

If you borrow money and use it to buy property you hold for investment, the interest you pay is deductible as 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. For more information, refer to Publication 564 (PDF), Investment Income and Expenses; Tax Topic 505, Interest Expense; and Publication 925 (PDF), Passive Activity and At-Risk Rules.

References:

• Publication 550 (PDF), Investment Income and Expenses
• Tax Topic 505, Interest expenses
• Publication 925 (PDF), Passive Activity and At-Risk Rules

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 pay 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. Investment interest deductions are limited to the extent of investment income. The deductions amount is reported on Form 4952 (PDF), Investment Interest Deduction. The deduction is then taken as an itemized deduction on line 13 of Form 1040, Schedule A (PDF), Itemized Deductions. For more information, refer to Publication 550 (PDF), Investment Income and Expenses.

References:

• Publication 17 (PDF), Your Federal Income Tax
• Tax Topic 505, Interest Expenses
• Publication 550 (PDF), Investment Income and Expenses
• Form 4952 (PDF), Investment Interest Deduction

Investment expenses for individuals must be taken as itemized deductions. Investment expenses (other than interest expenses) are deducted on Form 1040, Schedule A (PDF), Itemized Deductions, as miscellaneous deductions subject to the 2% of your Adjusted Gross Income (AGI) limit. Investment Interest, such as margin interest, is reported on Form 4952 (PDF) , Investment Interest Deduction, and on Form 1040, Schedule A Itemized Deductions, but is not subject to the 2% of your Adjusted Gross Income (AGI) limit. For more information, refer to Publication 550 (PDF), Investment Income and Expenses; Publication 529 (PDF), Miscellaneous Deductions; and Tax Topic 508, Miscellaneous Expenses.

References:

• Publication 550 (PDF), Investment Income and Expenses
• Form 4952 (PDF), Investment Interest Deduction
• Tax Topic 508, Miscellaneous Expenses
• Publication 529 (PDF), Miscellaneous Deductions

You can deduct gambling losses only if you itemize deductions. Claim your gambling losses as a miscellaneous deduction on line 27 of Form 1040, Schedule A (PDF), Itemized Deductions. They are not subject to the 2% limit of your Adjusted Gross Income. 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:

• 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:
  • date and type of specific wager or wagering activity;
  • name of gambling establishment;
  • address or location of gambling establishment;
  • name(s) of other person(s) present with you at gambling establishment; and
  • amount(s) won or lost.
• 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 generated with 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.

For more information refer to Publication 529 (PDF), Miscellaneous Deductions; and Publication 525 (PDF), Taxable and Nontaxable Income.

References:

• Publication 525 (PDF), Taxable and Nontaxable Income
• Publication 529 (PDF), Miscellaneous Deductions
• Form 1040, Schedule A (PDF), Itemized Deductions

Tax Topics & FAQs | 2002 Tax Year Archives | Tax Help Archives | Home