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THE BALTIMORE SUN's tax advice column features three experts from the Hunt Valley accounting firm SC&H; Group answering questions about preparing your return. Here is an edited excerpt of this week's column:

Can I deduct losses on my house destroyed by a fire during 2005, although I have not yet settled with the insurance company as of Dec. 31, 2005?

- Bernie, Brooklyn, N.Y.

Generally, you can deduct a casualty loss only in the tax year in which the casualty occurred. To determine your deduction for a casualty or theft loss, you must first figure your loss.

When calculating your loss, you must subtract the actual or expected insurance reimbursement. You must reduce your loss even if you do not receive payment until a later tax year. Furthermore, if you later receive more or less reimbursement than you expected, you may have to include that difference on your return for the year in which you can reasonably expect no more reimbursement.

Finally, after you have figured your casualty loss, your deduction will be subject to two limitation rules: the $100 rule and the 10 percent rule. The $100 rule says you must reduce each casualty loss by $100 when figuring your deduction. The 10 percent rule applies after you apply the $100 rule and states that you must reduce your total casualty loss by 10 percent of your adjusted gross income. If you determine you have a loss, use both of the following forms to report the loss: Form 4684 and Schedule A (Form 1040).

I have a reverse mortgage. I paid over $7,000 in interest on my reverse mortgage last year. Is it deductible?

- Charles, Manchester

Because a reverse mortgage adds the interest to the loan balance over the term of the loan, there are no interest payments at all until the note comes due. Generally, you can only deduct interest you actually pay. In the case of a reverse mortgage, the interest is not deductible until the loan is repaid.

I am doing my elderly father's taxes this year. The [Form] 1099 from his investment company has a paragraph saying to list tax-exempt interest on the 1040, and that it isn't included in your taxable income. But it is included on the Social Security worksheet. It does not seem fair that an elderly person who has put money into tax-free investments for that very reason gets penalized for it. Since tax-exempt interest isn't listed on the 1099, do I have to show it?

- Lois, Cockeysville

Tax-exempt interest should be reported on Line 8b of your father's 1040. While the actual interest income is not considered part of his federal taxable income, it is included in the calculation of taxable Social Security benefits. Additionally, interest that is exempt from federal income tax is not always exempt from state taxes. If the information provided with the 1099 does not indicate the amount of interest that is exempt from state taxes, you may want to call the investment firm.

In 2005, I added a friend to my townhome title through a Quit Claim Deed for a few months until he gets his own mortgage and gets everything under his name. I moved to another house. To prove to the mortgage company in the future that he can handle the payment, he's been making the mortgage payment by sending it directly to the bank. I never see the money. Now, I got a Form 1098 from the bank for that mortgage and I'm confused. The IRS says I can't use the interest paid as [a] deduction. Others say I have to count the money that my friend paid as income and then use the deduction. What do I need to do?

- Herman, Denver

You cannot take a deduction for mortgage interest that you did not pay, even though you were issued a 1098. The legal owner of real estate subject to a mortgage may deduct interest paid on the mortgage, even though the owner is not personally liable on the indebtedness. By adding your friend to the title, you transferred to him an interest in the property.

Since your friend is making the actual mortgage payments, he is entitled to the deduction. However, you are entitled to deduct any mortgage interest that you paid during the year prior to this arrangement with your friend. These same rules would apply to the real estate taxes on the property.

To submit a question or read the columns online, go to

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