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2009 Tax

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2009 Tax

2009 tax 10. 2009 tax   Installment Sales Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Installment Sale of a Farm Installment MethodWhen to elect out. 2009 tax Revoking the election. 2009 tax More information. 2009 tax Figuring Installment Sale Income Payments Received or Considered Received ExampleSection 1231 gains. 2009 tax Summary. 2009 tax Introduction An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. 2009 tax If you realize a gain on an installment sale, you may be able to report part of your gain when you receive each payment. 2009 tax This method of reporting gain is called the installment method. 2009 tax You cannot use the installment method to report a loss. 2009 tax You can choose to report all of your gain in the year of sale. 2009 tax Installment obligation. 2009 tax   The buyer's obligation to make future payments to you can be in the form of a deed of trust, note, land contract, mortgage, or other evidence of the buyer's debt to you. 2009 tax Topics - This chapter discusses: The general rules that apply to using the installment method Installment sale of a farm Useful Items - You may want to see: Publication 523 Selling Your Home 535 Business Expenses 537 Installment Sales 538 Accounting Periods and Methods 544 Sales and Other Dispositions of Assets Form (and Instructions) 4797 Sales of Business Property 6252 Installment Sale Income See chapter 16 for information about getting publications and forms. 2009 tax Installment Sale of a Farm The installment sale of a farm for one overall price under a single contract is not the sale of a single asset. 2009 tax It generally includes the sale of real property and personal property reportable on the installment method. 2009 tax It may also include the sale of property for which you must maintain an inventory, which cannot be reported on the installment method. 2009 tax See Inventory , later. 2009 tax The selling price must be allocated to determine the amount received for each class of asset. 2009 tax The tax treatment of the gain or loss on the sale of each class of assets is determined by its classification as a capital asset, as property used in the business, or as property held for sale and by the length of time the asset was held. 2009 tax (See chapter 8 for a discussion of capital assets and chapter 9 for a discussion of property used in the business. 2009 tax ) Separate computations must be made to figure the gain or loss for each class of asset sold. 2009 tax See Sale of a Farm in chapter 8. 2009 tax If you report the sale of property on the installment method, any depreciation recapture under section 1245 or 1250 of the Internal Revenue Code is generally taxable as ordinary income in the year of sale. 2009 tax See Depreciation recapture , later. 2009 tax This applies even if no payments are received in that year. 2009 tax Installment Method An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. 2009 tax A farmer who is not required to maintain an inventory can use the installment method to report gain from the sale of property used or produced in farming. 2009 tax See Inventory , later, for information on the sale of farm property where inventory items are included in the assets sold. 2009 tax If a sale qualifies as an installment sale, the gain must be reported under the installment method unless you elect out of using the installment method. 2009 tax Electing out of the installment method. 2009 tax   If you elect not to use the installment method, you generally report the entire gain in the year of sale, even though you do not receive all the sale proceeds in that year. 2009 tax   To make this election, do not report your sale on Form 6252. 2009 tax Instead, report it on Schedule D (Form 1040), Form 4797, or both. 2009 tax When to elect out. 2009 tax   Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. 2009 tax   However, if you timely file your tax return for the year the sale takes place without making the election, you still can make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). 2009 tax Write “Filed pursuant to section 301. 2009 tax 9100-2” at the top of the amended return and file it where the original return was filed. 2009 tax Revoking the election. 2009 tax   Once made, the election can be revoked only with IRS approval. 2009 tax A revocation is retroactive. 2009 tax More information. 2009 tax   See Electing Out of the Installment Method in Publication 537 for more information. 2009 tax Inventory. 2009 tax   The sale of farm inventory items cannot be reported on the installment method. 2009 tax All gain or loss on their sale must be reported in the year of sale, even if you receive payment in later years. 2009 tax   If inventory items are included in an installment sale, you may have an agreement stating which payments are for inventory and which are for the other assets being sold. 2009 tax If you do not, each payment must be allocated between the inventory and the other assets sold. 2009 tax Sale at a loss. 2009 tax   If your sale results in a loss, you cannot use the installment method. 2009 tax If the loss is on an installment sale of business assets, you can deduct it only in the tax year of sale. 2009 tax Figuring Installment Sale Income Each payment on an installment sale usually consists of the following three parts. 2009 tax Interest income. 2009 tax Return of your adjusted basis in the property. 2009 tax Gain on the sale. 2009 tax In each year you receive a payment, you must include in income both the interest part and the part that is your gain on the sale. 2009 tax You do not include in income the part that is the return of your basis in the property. 2009 tax Basis is the amount of your investment in the property for installment sale purposes. 2009 tax Interest income. 2009 tax   You must report interest as ordinary income. 2009 tax Interest is generally not included in a down payment. 2009 tax However, you may have to treat part of each later payment as interest, even if it is not called interest in your agreement with the buyer. 2009 tax Interest provided in the agreement is called stated interest. 2009 tax If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. 2009 tax See Unstated interest , later. 2009 tax    You must continue to report the interest income on payments you receive in subsequent years as interest income. 2009 tax Adjusted basis and installment sale income (gain on sale). 2009 tax   After you have determined how much of each payment to treat as interest, you treat the rest of each payment as if it were made up of two parts. 2009 tax A tax-free return of your adjusted basis in the property, and Your gain (referred to as “installment sale income” on Form 6252). 2009 tax Figuring adjusted basis for installment sale purposes. 2009 tax   You can use Worksheet 10-1 to figure your adjusted basis in the property for installment sale purposes. 2009 tax When you have completed the worksheet, you will also have determined the gross profit percentage necessary to figure your installment sale income (gain) for this year. 2009 tax    Worksheet 10-1. 2009 tax Figuring Adjusted Basis and Gross Profit Percentage 1. 2009 tax Enter the selling price for the property   2. 2009 tax Enter your adjusted basis for the property     3. 2009 tax Enter your selling expenses     4. 2009 tax Enter any depreciation recapture     5. 2009 tax Add lines 2, 3, and 4. 2009 tax  This is your adjusted basis  for installment sale purposes   6. 2009 tax Subtract line 5 from line 1. 2009 tax If zero or less, enter -0-. 2009 tax  This is your gross profit     If the amount entered on line 6 is zero, Stop here. 2009 tax You cannot use the installment method. 2009 tax   7. 2009 tax Enter the contract price for the property   8. 2009 tax Divide line 6 by line 7. 2009 tax This is your gross profit percentage   Selling price. 2009 tax   The selling price is the total cost of the property to the buyer and includes the following. 2009 tax Any money you are to receive. 2009 tax The fair market value (FMV) of any property you are to receive (FMV is discussed at Property used as a payment under Payments Received or Considered Received ). 2009 tax Any existing mortgage or other debt the buyer pays, assumes, or takes (a note, mortgage, or any other liability, such as a lien, accrued interest, or taxes you owe on the property). 2009 tax Any of your selling expenses the buyer pays. 2009 tax Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue discount. 2009 tax Adjusted basis for installment sale purposes. 2009 tax   Your adjusted basis is the total of the following three items. 2009 tax Adjusted basis. 2009 tax Selling expenses. 2009 tax Depreciation recapture. 2009 tax Adjusted basis. 2009 tax   Basis is your investment in the property for installment sale purposes. 2009 tax The way you figure basis depends on how you acquire the property. 2009 tax The basis of property you buy is generally its cost. 2009 tax The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. 2009 tax   While you own property, various events may change your original basis. 2009 tax Some events, such as adding rooms or making permanent improvements, increase basis. 2009 tax Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. 2009 tax The result is adjusted basis. 2009 tax See chapter 6 and Publication 551, Basis of Assets, for more information. 2009 tax Selling expenses. 2009 tax   Selling expenses relate to the sale of the property. 2009 tax They include commissions, attorney fees, and any other expenses paid on the sale. 2009 tax Selling expenses are added to the basis of the sold property. 2009 tax Depreciation recapture. 2009 tax   If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income. 2009 tax See Depreciation Recapture in chapter 9 and Depreciation Recapture Income in Publication 537. 2009 tax Gross profit. 2009 tax   Gross profit is the total gain you report on the installment method. 2009 tax   To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. 2009 tax If the property you sold was your home, subtract from the gross profit any gain you can exclude. 2009 tax Contract price. 2009 tax   Contract price equals: The selling price, minus The mortgages, debts, and other liabilities assumed or taken by the buyer, plus The amount by which the mortgages, debts, and other liabilities assumed or taken by the buyer exceed your adjusted basis for installment sale purposes. 2009 tax Gross profit percentage. 2009 tax   A certain percentage of each payment (after subtracting interest) is reported as installment sale income. 2009 tax This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price. 2009 tax   The gross profit percentage generally remains the same for each payment you receive. 2009 tax However, see the example under Selling price reduced , later, for a situation where the gross profit percentage changes. 2009 tax Amount to report as installment sale income. 2009 tax   Multiply the payments you receive each year (less interest) by the gross profit percentage. 2009 tax The result is your installment sales income for the tax year. 2009 tax In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. 2009 tax A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. 2009 tax For a detailed discussion, see Payments Received or Considered Received , later. 2009 tax Selling price reduced. 2009 tax   If the selling price is reduced at a later date, the gross profit on the sale also will change. 2009 tax You then must refigure the gross profit percentage for the remaining payments. 2009 tax Refigure your gross profit using Worksheet 10-2. 2009 tax New Gross Profit Percentage — Selling Price Reduced. 2009 tax You will spread any remaining gain over future installments. 2009 tax    Worksheet 10-2. 2009 tax New Gross Profit Percentage — Selling Price Reduced 1. 2009 tax Enter the reduced selling  price for the property   2. 2009 tax Enter your adjusted  basis for the  property     3. 2009 tax Enter your selling  expenses     4. 2009 tax Enter any depreciation  recapture     5. 2009 tax Add lines 2, 3, and 4. 2009 tax   6. 2009 tax Subtract line 5 from line 1. 2009 tax  This is your adjusted  gross profit   7. 2009 tax Enter any installment sale  income reported in  prior year(s)   8. 2009 tax Subtract line 7 from line 6   9. 2009 tax Future installments     10. 2009 tax Divide line 8 by line 9. 2009 tax  This is your new  gross profit percentage*. 2009 tax   * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. 2009 tax Example. 2009 tax In 2011, you sold land with a basis of $40,000 for $100,000. 2009 tax Your gross profit was $60,000. 2009 tax You received a $20,000 down payment and the buyer's note for $80,000. 2009 tax The note provides for monthly payments of $1,953 each, figured at 8% interest, amortized over four years, beginning in January 2012. 2009 tax Your gross profit percentage was 60%. 2009 tax You received the down payment of $20,000 in 2011 and total payments of $23,436 in 2012, of which $17,675 was principal and $5,761 was interest according to the amortization schedule. 2009 tax You reported a gain of $12,000 on the down payment received in 2011 and $10,605 ($17,675 X 60% (. 2009 tax 60)) in 2012. 2009 tax In January 2013, you and the buyer agreed to reduce the purchase price to $85,000 and payments during 2013, 2014, and 2015 are reduced to $1,483 a month amortized over the remaining three years. 2009 tax The new gross profit percentage, 47. 2009 tax 32%, is figured in Example — Worksheet 10-2. 2009 tax Example — Worksheet 10-2. 2009 tax New Gross Profit Percentage — Selling Price Reduced 1. 2009 tax Enter the reduced selling  price for the property 85,000 2. 2009 tax Enter your adjusted  basis for the  property 40,000   3. 2009 tax Enter your selling  expenses -0-   4. 2009 tax Enter any depreciation  recapture -0-   5. 2009 tax Add lines 2, 3, and 4. 2009 tax 40,000 6. 2009 tax Subtract line 5 from line 1. 2009 tax  This is your adjusted  gross profit 45,000 7. 2009 tax Enter any installment sale  income reported in  prior year(s) 22,605 8. 2009 tax Subtract line 7 from line 6 22,395 9. 2009 tax Future installments   47,325 10. 2009 tax Divide line 8 by line 9. 2009 tax  This is your new  gross profit percentage*. 2009 tax 47. 2009 tax 32% * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. 2009 tax You will report installment sale income of $6,878 (47. 2009 tax 32% of $14,535) in 2013, $7,449 (47. 2009 tax 32% of $15,742) in 2014, and $8,067 (47. 2009 tax 32% of $17,048) in 2015. 2009 tax Form 6252. 2009 tax   Use Form 6252 to report an installment sale in the year it takes place and to report payments received, or considered received because of related party resales, in later years. 2009 tax Attach it to your tax return for each year. 2009 tax Disposition of Installment Obligation If you are using the installment method and you dispose of the installment obligation, generally you will have a gain or loss to report. 2009 tax It is considered gain or loss on the sale of the property for which you received the installment obligation. 2009 tax Cancellation. 2009 tax   If an installment obligation is canceled or otherwise becomes unenforceable, it is treated as a disposition other than a sale or exchange. 2009 tax Your gain or loss is the difference between your basis in the obligation and its fair market value (FMV) at the time you cancel it. 2009 tax If the parties are related, the FMV of the obligation is considered to be no less than its full face value. 2009 tax Transfer due to death. 2009 tax   The transfer of an installment obligation (other than to a buyer) as a result of the death of the seller is not a disposition. 2009 tax Any unreported gain from the installment obligation is not treated as gross income to the decedent. 2009 tax No income is reported on the decedent's return due to the transfer. 2009 tax Whoever receives the installment obligation as a result of the seller's death is taxed on the installment payments the same as the seller would have been had the seller lived to receive the payments. 2009 tax   However, if the installment obligation is canceled, becomes unenforceable, or is transferred to the buyer because of the death of the holder of the obligation, it is a disposition. 2009 tax The estate must figure its gain or loss on the disposition. 2009 tax If the holder and the buyer were related, the FMV of the installment obligation is considered to be no less than its full face value. 2009 tax More information. 2009 tax   For more information on the disposition of an installment obligation, see Publication 537. 2009 tax Sale of depreciable property. 2009 tax   You generally cannot report gain from the sale of depreciable property to a related person on the installment method. 2009 tax See Sale to a Related Person in Publication 537. 2009 tax   You cannot use the installment method to report any depreciation recapture income up to the gain on the sale. 2009 tax However, report any gain greater than the recapture income on the installment method. 2009 tax   The recapture income reported in the year of sale is included in your installment sale basis to determine your gross profit on the installment sale. 2009 tax   Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. 2009 tax Report the depreciation recapture income in Part II of Form 4797 as ordinary income in the year of sale. 2009 tax    If you sell depreciable business property, prepare Form 4797 first in order to figure the amount to enter on line 12 of Part I, Form 6252. 2009 tax See the Form 6252 instructions for details. 2009 tax   For more information on the section 179 deduction, see Section 179 Expense Deduction in chapter 7. 2009 tax For more information on depreciation recapture, see Depreciation Recapture in  chapter 9. 2009 tax Payments Received or Considered Received You must figure your gain each year on the payments you receive, or are treated as receiving, from an installment sale. 2009 tax In certain situations, you are considered to have received a payment, even though the buyer does not pay you directly. 2009 tax These situations occur when the buyer assumes or pays any of your debts, such as a loan, or pays any of your expenses, such as a sales commission. 2009 tax However, as discussed later, the buyer's assumption of your debt is treated as a recovery of basis, rather than as a payment, in many cases. 2009 tax Buyer pays seller's expenses. 2009 tax   If the buyer pays any of your expenses related to the sale of your property, it is considered a payment to you in the year of sale. 2009 tax Include these expenses in the selling and contract prices when figuring the gross profit percentage. 2009 tax Buyer assumes mortgage. 2009 tax   If the buyer assumes or pays off your mortgage, or otherwise takes the property subject to the mortgage, the following rules apply. 2009 tax Mortgage less than basis. 2009 tax   If the buyer assumes a mortgage that is not more than your installment sale basis in the property, it is not considered a payment to you. 2009 tax It is considered a recovery of your basis. 2009 tax The contract price is the selling price minus the mortgage. 2009 tax Example. 2009 tax You sell property with an adjusted basis of $19,000. 2009 tax You have selling expenses of $1,000. 2009 tax The buyer assumes your existing mortgage of $15,000 and agrees to pay you $10,000 (a cash down payment of $2,000 and $2,000 (plus 8% interest) in each of the next 4 years). 2009 tax The selling price is $25,000 ($15,000 + $10,000). 2009 tax Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). 2009 tax The contract price is $10,000 ($25,000 − $15,000 mortgage). 2009 tax Your gross profit percentage is 50% ($5,000 ÷ $10,000). 2009 tax You report half of each $2,000 payment received as gain from the sale. 2009 tax You also report all interest you receive as ordinary income. 2009 tax Mortgage more than basis. 2009 tax   If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. 2009 tax The part of the mortgage greater than your basis is treated as a payment received in the year of sale. 2009 tax   To figure the contract price, subtract the mortgage from the selling price. 2009 tax This is the total amount (other than interest) you will receive directly from the buyer. 2009 tax Add to this amount the payment you are considered to have received (the difference between the mortgage and your installment sale basis). 2009 tax The contract price is then the same as your gross profit from the sale. 2009 tax    If the mortgage the buyer assumes is equal to or more than your installment sale basis, the gross profit percentage always will be 100%. 2009 tax Example. 2009 tax The selling price for your property is $9,000. 2009 tax The buyer will pay you $1,000 annually (plus 8% interest) over the next 3 years and assume an existing mortgage of $6,000. 2009 tax Your adjusted basis in the property is $4,400. 2009 tax You have selling expenses of $600, for a total installment sale basis of $5,000. 2009 tax The part of the mortgage that is more than your installment sale basis is $1,000 ($6,000 − $5,000). 2009 tax This amount is included in the contract price and treated as a payment received in the year of sale. 2009 tax The contract price is $4,000: Selling price $9,000 Minus: Mortgage (6,000) Amount actually received $3,000 Add difference:   Mortgage $6,000   Minus: Installment sale basis 5,000 1,000 Contract price $4,000   Your gross profit on the sale is also $4,000: Selling price $9,000 Minus: Installment sale basis (5,000) Gross profit $4,000   Your gross profit percentage is 100%. 2009 tax Report 100% of each payment (less interest) as gain from the sale. 2009 tax Treat the $1,000 difference between the mortgage and your installment sale basis as a payment and report 100% of it as gain in the year of sale. 2009 tax Buyer assumes other debts. 2009 tax   If the buyer assumes any other debts, such as a loan or back taxes, it may be considered a payment to you in the year of sale. 2009 tax   If the buyer assumes the debt instead of paying it off, only part of it may have to be treated as a payment. 2009 tax Compare the debt to your installment sale basis in the property being sold. 2009 tax If the debt is less than your installment sale basis, none of it is treated as a payment. 2009 tax If it is more, only the difference is treated as a payment. 2009 tax If the buyer assumes more than one debt, any part of the total that is more than your installment sale basis is considered a payment. 2009 tax These rules are the same as the rules discussed earlier under Buyer assumes mortgage . 2009 tax However, they apply only to the following types of debt the buyer assumes. 2009 tax Those acquired from ownership of the property you are selling, such as a mortgage, lien, overdue interest, or back taxes. 2009 tax Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased. 2009 tax   If the buyer assumes any other type of debt, such as a personal loan or your legal fees relating to the sale, it is treated as if the buyer had paid off the debt at the time of the sale. 2009 tax The value of the assumed debt is then considered a payment to you in the year of sale. 2009 tax Property used as a payment. 2009 tax   If you receive property rather than money from the buyer, it is still considered a payment in the year received. 2009 tax However, see Trading property for like-kind property , later. 2009 tax Generally, the amount of the payment is the property's FMV on the date you receive it. 2009 tax Exception. 2009 tax   If the property the buyer gives you is payable on demand or readily tradable (see examples later), the amount you should consider as payment in the year received is: The FMV of the property on the date you receive it if you use the cash method of accounting, The face amount of the obligation on the date you receive it if you use an accrual method of accounting, or The stated redemption price at maturity less any original issue discount (OID) or, if there is no OID, the stated redemption price at maturity appropriately discounted to reflect total unstated interest. 2009 tax See Unstated interest , later. 2009 tax Examples. 2009 tax If you receive a note from the buyer as payment, and the note stipulates that you can demand payment from the buyer at any time, the note is payable on demand. 2009 tax If you receive marketable securities from the buyer as payment, and you can sell the securities on an established securities market (such as the New York Stock Exchange) at any time, the securities are readily tradable. 2009 tax In these examples, use the above rules to determine the amount you should consider as payment in the year received. 2009 tax Debt not payable on demand. 2009 tax   Any evidence of debt you receive from the buyer that is not payable on demand is not considered a payment. 2009 tax This is true even if the debt is guaranteed by a third party, including a government agency. 2009 tax Fair market value (FMV). 2009 tax   This is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of all the necessary facts. 2009 tax Third-party note. 2009 tax   If the property the buyer gives you is a third-party note (or other obligation of a third party), you are considered to have received a payment equal to the note's FMV. 2009 tax Because the FMV of the note is itself a payment on your installment sale, any payments you later receive from the third party are not considered payments on the sale. 2009 tax The excess of the note's face value over its FMV is interest. 2009 tax Exclude this interest in determining the selling price of the property. 2009 tax However, see Exception under Property used as a payment , earlier. 2009 tax Example. 2009 tax You sold real estate in an installment sale. 2009 tax As part of the down payment, the buyer assigned to you a $50,000, 8% third-party note. 2009 tax The FMV of the third-party note at the time of the sale was $30,000. 2009 tax This amount, not $50,000, is a payment to you in the year of sale. 2009 tax The third-party note had an FMV equal to 60% of its face value ($30,000 ÷ $50,000), so 60% of each principal payment you receive on this note is a nontaxable return of capital. 2009 tax The remaining 40% is interest taxed as ordinary income. 2009 tax Bond. 2009 tax   A bond or other evidence of debt you receive from the buyer that is payable on demand or readily tradable in an established securities market is treated as a payment in the year you receive it. 2009 tax For more information on the amount you should treat as a payment, see Exception under Property used as a payment , earlier. 2009 tax   If you receive a government or corporate bond for a sale before October 22, 2004, and the bond has interest coupons attached or can be readily traded in an established securities market, you are considered to have received payment equal to the bond's FMV. 2009 tax However, see Exception under Property used as a payment , earlier. 2009 tax Buyer's note. 2009 tax   The buyer's note (unless payable on demand) is not considered payment on the sale. 2009 tax However, its full face value is included when figuring the selling price and the contract price. 2009 tax Payments you receive on the note are used to figure your gain in the year received. 2009 tax Sale to a related person. 2009 tax   If you sell depreciable property to a related person and the sale is an installment sale, you may not be able to report the sale using the installment method. 2009 tax For information on these rules, see the Instructions for Form 6252 and Sale to a Related Person in Publication 537. 2009 tax Trading property for like-kind property. 2009 tax   If you trade business or investment property solely for the same kind of property to be held as business or investment property, you can postpone reporting the gain. 2009 tax See Like-Kind Exchanges in chapter 8 for a discussion of like-kind property. 2009 tax   If, in addition to like-kind property, you receive an installment obligation in the exchange, the following rules apply to determine installment sale income each year. 2009 tax The contract price is reduced by the FMV of the like-kind property received in the trade. 2009 tax The gross profit is reduced by any gain on the trade that can be postponed. 2009 tax Like-kind property received in the trade is not considered payment on the installment obligation. 2009 tax Unstated interest. 2009 tax   An installment sale contract may provide that each deferred payment on the sale will include interest or that there will be an interest payment in addition to the principal payment. 2009 tax Interest provided in the contract is called stated interest. 2009 tax   If an installment sale contract does not provide for adequate stated interest, part of the stated principal amount of the contract may be recharacterized as interest. 2009 tax If Internal Revenue Code section 483 applies to the contract, this interest is called unstated interest. 2009 tax   If Internal Revenue Code section 1274 applies to the contract, this interest is called original issue discount (OID). 2009 tax   Generally, if a buyer gives a debt in consideration for personal use property, the unstated interest rules do not apply. 2009 tax Therefore, the buyer cannot deduct the unstated interest. 2009 tax The seller must report the unstated interest as income. 2009 tax Personal-use property is any property in which substantially all of its use by the buyer is not in connection with a trade or business or an investment activity. 2009 tax   If the debt is subject to the Internal Revenue Code section 483 rules and is also subject to the below-market loan rules, such as a gift loan, compensation-related loan or corporation-shareholder loan, then both parties are subject to the below-market loan rules rather than the unstated interest rules. 2009 tax   Unstated interest reduces the stated selling price of the property and the buyer's basis in the property. 2009 tax It increases the seller's interest income and the buyer's interest expense. 2009 tax   In general, an installment sale contract provides for adequate stated interest if the stated interest rate (based on an appropriate compounding period) is at least equal to the applicable federal rate (AFR). 2009 tax    The AFRs are published monthly in the Internal Revenue Bulletin (IRB). 2009 tax You can get this information by contacting an IRS office. 2009 tax IRBs are also available at IRS. 2009 tax gov. 2009 tax More information. 2009 tax   For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. 2009 tax Example. 2009 tax You sell property at a contract price of $6,000 and your gross profit is $1,500. 2009 tax Your gross profit percentage is 25% ($1,500 ÷ $6,000). 2009 tax After subtracting interest, you report 25% of each payment, including the down payment, as installment sale income from the sale for the tax year you receive the payment. 2009 tax The remainder (balance) of each payment is the tax-free return of your adjusted basis. 2009 tax Example On January 3, 2013, you sold your farm, including the home, farm land and buildings. 2009 tax You received $50,000 down and the buyer's note for $200,000. 2009 tax In addition, the buyer assumed an outstanding $50,000 mortgage on the farm land. 2009 tax The total selling price was $300,000. 2009 tax The note payments of $25,000 each, plus adequate interest, are due every July 1 and January 1, beginning in July 2013. 2009 tax Your selling expenses were $15,000. 2009 tax Adjusted basis and depreciation. 2009 tax   The adjusted basis and depreciation claimed on each asset sold are as follows:   Depreciation Adjusted Asset Claimed Basis Home* -0- $33,743 Farm land -0- 73,610 Buildings $31,500 35,130 * Owned and used as main home for at least 2 of the 5 years prior to the sale Gain on each asset. 2009 tax   The following schedule shows the assets included in the sale, each asset's selling price based on its respective value, the selling expense allocated to each asset, the adjusted basis of each asset, and the gain on each asset. 2009 tax The selling expense for each asset is 5% of the selling price ($15,000 selling expense ÷ $300,000 selling price). 2009 tax   Selling Selling Adjusted     Price Expense Basis Gain Home* $60,000 $3,000 $33,743 $23,257 Farm land  165,000  8,250  73,610  83,140 Buildings 75,000 3,750 35,130 36,120   $300,000 $15,000 $142,483 $142,517 * Owned and used as main home for at least 2 of the 5 years prior to the sale Depreciation recapture. 2009 tax   The buildings are section 1250 property. 2009 tax There is no depreciation recapture income for them because they were depreciated using the straight line method. 2009 tax See chapter 9 for more information on depreciation recapture. 2009 tax   Special rules may apply when you sell section 1250 assets depreciated under the straight line method. 2009 tax See the Unrecaptured Section 1250 Gain Worksheet in the Instructions for Schedule D (Form 1040). 2009 tax See chapter 3 of Publication 544, Sales and Other Dispositions of Assets, for more information on section 1250 assets. 2009 tax Installment sale basis and gross profit. 2009 tax   The following table shows each asset reported on the installment method, its selling price, installment sale basis, and gross profit. 2009 tax     Installment     Selling Sale Gross   Price Basis Profit Farm land $165,000 $73,610 $83,140 Buildings 75,000 35,130 36,120   $240,000 $108,740 $119,260 Section 1231 gains. 2009 tax   The gain on the farm land and buildings is reported as section 1231 gains. 2009 tax See Section 1231 Gains and Losses in chapter 9. 2009 tax Contract price and gross profit percentage. 2009 tax   The contract price is $250,000 for the part of the sale reported on the installment method. 2009 tax This is the selling price ($300,000) minus the mortgage assumed ($50,000). 2009 tax   Gross profit percentage for the sale is 47. 2009 tax 70% ($119,260 gross profit ÷ $250,000 contract price). 2009 tax The gross profit percentage for each asset is figured as follows:   Percent Farm land ($83,140 ÷ $250,000) 33. 2009 tax 256 Buildings ($36,120 ÷ $250,000) 14. 2009 tax 448 Total 47. 2009 tax 70 Figuring the gain to report on the installment method. 2009 tax   One hundred percent (100%) of each payment is reported on the installment method. 2009 tax The total amount received on the sale in 2013 is $75,000 ($50,000 down payment + $25,000 payment on July 1). 2009 tax The installment sale part of the total payments received in 2013 is also $75,000. 2009 tax Figure the gain to report for each asset by multiplying its gross profit percentage times $75,000. 2009 tax   Income Farm land—33. 2009 tax 256% × $75,000 $24,942 Buildings—14. 2009 tax 448% × $75,000 10,836 Total installment income for 2013 $35,778 Reporting the sale. 2009 tax   Report the installment sale on Form 6252. 2009 tax Then report the amounts from Form 6252 on Form 4797 and Schedule D (Form 1040). 2009 tax Attach a separate page to Form 6252 that shows the computations in the example. 2009 tax If you sell depreciable business property, prepare Form 4797 first in order to figure the amount to enter on line 12 of Part I, Form 6252. 2009 tax Section 1231 gains. 2009 tax   The gains on the farm land and buildings are section 1231 gains. 2009 tax They may be reported as either capital or ordinary gain depending on the net balance when combined with other section 1231 losses. 2009 tax A net 1231 gain is capital gain and a net 1231 loss is an ordinary loss. 2009 tax Installment income for years after 2013. 2009 tax   You figure installment income for the years after 2013 by applying the same gross profit percentages to the payments you receive each year. 2009 tax If you receive $50,000 during the year, the entire $50,000 is considered received on the installment sale (100% × $50,000). 2009 tax You realize income as follows:   Income Farm land—33. 2009 tax 256% × $50,000 $16,628 Buildings—14. 2009 tax 448% × $50,000 7,224 Total installment income $23,852   In this example, no gain ever is recognized from the sale of your home. 2009 tax You will combine your section 1231 gains from this sale with section 1231 gains and losses from other sales in each of the later years to determine whether to report them as ordinary or capital gains. 2009 tax The interest received with each payment will be included in full as ordinary income. 2009 tax Summary. 2009 tax   The installment income (rounded to the nearest dollar) from the sale of the farm is reported as follows: Selling price $190,000 Minus: Installment basis (108,740) Gross profit $81,260     Gain reported in 2012 (year of sale) $35,778 Gain reported in 2013:   $50,000 × 47. 2009 tax 70% 23,850 Gain reported in 2014:   $50,000 × 47. 2009 tax 70% 23,850 Gain reported in 2015:   $50,000 × 47. 2009 tax 70% 23,850 Gain reported in 2016:   $25,000 × 47. 2009 tax 70% 11,925 Total gain reported $119,253 Prev  Up  Next   Home   More Online Publications
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Tax Relief for Victims of Storms and Floods in Missouri

KS-MO-2011-34, Aug. 17, 2011

ST. LOUIS — Victims of flooding beginning on June 1, 2011, in parts of Missouri may qualify for tax relief from the Internal Revenue Service.

The President has declared Andrew, Atchison, Buchanan, Holt, Lafayette and Platte counties a federal disaster area. Individuals who reside or have a business in these localities may qualify for tax relief.

As a result, the IRS has postponed until Aug. 1, 2011, certain deadlines occurring from June 1 to Aug. 1 that affect taxpayers who live or have a business in the disaster area. This includes the June 15 deadline for making estimated tax payments.

In addition, the IRS is abating the failure-to-deposit penalties for employment and excise tax deposits due on or after June 1 and on or before June 16, 2011, as long as the deposits were made by June 16, 2011.

If an affected taxpayer receives a penalty notice from the IRS, the taxpayer should call the telephone number on the notice to have the IRS abate any interest and any late filing or late payment penalties that would otherwise apply. Penalties or interest will be abated only for taxpayers who have an original or extended filing, payment or deposit due date, including an extended filing or payment due date, that falls within the postponement period.

The IRS automatically identifies taxpayers located in the covered disaster area and applies automatic filing and payment relief. But affected taxpayers who reside or have a business located outside the covered disaster area must call the IRS disaster hotline at 1-866-562-5227 to request this tax relief.

Covered Disaster Area

The areas listed above constitute a covered disaster area for purposes of Treas. Reg. § 301.7508A-1(d)(2) and are entitled to the relief detailed below.

Affected Taxpayers

Taxpayers considered to be affected taxpayers eligible for the postponement of time to file returns, pay taxes and perform other time-sensitive acts are those taxpayers listed in Treas. Reg. § 301.7508A-1(d)(1), and include individuals who live, and businesses whose principal place of business is located, in the covered disaster area. Taxpayers not in the covered disaster area, but whose records necessary to meet a deadline listed in Treas. Reg. § 301.7508A-1(c) are in the covered disaster area, are also entitled to relief. In addition, all relief workers affiliated with a recognized government or philanthropic organization assisting in the relief activities in the covered disaster area and any individual visiting the covered disaster area who was killed or injured as a result of the disaster are entitled to relief.

Grant of Relief

Under section 7508A, the IRS has given affected taxpayers until Aug. 1, 2011, to file most tax returns (including individual, corporate, and estate and trust income tax returns; partnership returns, S corporation returns, and trust returns; estate, gift, and generation-skipping transfer tax returns; and employment and certain excise tax returns), or to make tax payments, including estimated tax payments, that have either an original or extended due date occurring on or after June 1 and on or before Aug. 1, 2011.

The IRS also gives affected taxpayers until Aug. 1 to perform other time-sensitive actions described in Treas. Reg. § 301.7508A-1(c)(1) and Rev. Proc. 2007-56, 2007-34 I.R.B. 388 (Aug. 20, 2007), that are due to be performed on or after June 1 and on or before Aug. 1.

This relief also includes the filing of Form 5500 series returns, in the manner described in section 8 of Rev. Proc. 2007-56. The relief described in section 17 of Rev. Proc. 2007-56, pertaining to like-kind exchanges of property, also applies to certain taxpayers who are not otherwise affected taxpayers and may include acts required to be performed before or after the period above.

The postponement of time to file and pay does not apply to information returns in the W-2, 1098, 1099 series, or to Forms 1042-S or 8027. Penalties for failure to timely file information returns can be waived under existing procedures for reasonable cause. Likewise, the postponement does not apply to employment and excise tax deposits. The IRS, however, will abate penalties for failure to make timely employment and excise tax deposits due on or after June 1 and on or before June 16, provided the taxpayer made these deposits by June 16.

Casualty Losses

Affected taxpayers in a federally declared disaster area have the option of claiming disaster-related casualty losses on their federal income tax return for either this year or last year. Claiming the loss on an original or amended return for last year will get the taxpayer an earlier refund, but waiting to claim the loss on this year’s return could result in a greater tax saving, depending on other income factors.

Individuals may deduct personal property losses that are not covered by insurance or other reimbursements. For details, see Form 4684 and its instructions.
Affected taxpayers claiming the disaster loss on last year’s return should put the Disaster Designation, "Missouri/Flooding," at the top of the form so that the IRS can expedite the processing of the refund.

Other Relief

The IRS will waive the usual fees and expedite requests for copies of previously filed tax returns for affected taxpayers. Taxpayers should put the assigned Disaster Designation in red ink at the top of Form 4506, Request for Copy of Tax Return, or Form 4506-T, Request for Transcript of Tax Return, as appropriate, and submit it to the IRS.

Affected taxpayers who are contacted by the IRS on a collection or examination matter should explain how the disaster impacts them so that the IRS can provide appropriate consideration to their case.

Taxpayers may download forms and publications or order them by calling 1-800-TAX-FORM (1-800-829-3676). The IRS toll-free number for general tax questions is 1-800-829-1040.

Related Information:

Recent IRS Disaster Relief Announcements
 

 

Page Last Reviewed or Updated: 20-Feb-2014

The 2009 Tax

2009 tax 4. 2009 tax   Deductions Table of Contents Standard DeductionStandard Deduction for Dependents Itemized DeductionsMedical and Dental Expenses Most taxpayers have a choice of taking a standard deduction or itemizing their deductions. 2009 tax You benefit from the standard deduction if your standard deduction is more than the total of your allowable itemized deductions. 2009 tax If you have a choice, you should use the method that gives you the lower tax. 2009 tax Standard Deduction The standard deduction amount depends on your filing status, whether you are 65 or older or blind, and whether an exemption can be claimed for you by another taxpayer. 2009 tax Generally, the standard deduction amounts are adjusted each year for inflation. 2009 tax In most cases, you can use Worksheet 4-1 to figure your standard deduction amount. 2009 tax Persons not eligible for the standard deduction. 2009 tax   Your standard deduction is zero and you should itemize any deductions you have if: You are married and filing a separate return, and your spouse itemizes deductions, You are filing a tax return for a short tax year because of a change in your annual accounting period, or You are a nonresident or dual-status alien during the year. 2009 tax You are considered a dual-status alien if you were both a nonresident alien and a resident alien during the year. 2009 tax   If you are a nonresident alien who is married to a U. 2009 tax S. 2009 tax citizen or resident alien at the end of the year, you can choose to be treated as a U. 2009 tax S. 2009 tax resident. 2009 tax See Publication 519, U. 2009 tax S. 2009 tax Tax Guide for Aliens. 2009 tax If you make this choice, you can take the standard deduction. 2009 tax Decedent's final return. 2009 tax   The amount of the standard deduction for a decedent's final tax return is the same as it would have been had the decedent continued to live. 2009 tax However, if the decedent was not 65 or older at the time of death, the higher standard deduction for age cannot be claimed. 2009 tax Higher standard deduction for age (65 or older). 2009 tax   If you do not itemize deductions, you are entitled to a higher standard deduction if you are age 65 or older at the end of the year. 2009 tax You are considered age 65 on the day before your 65th birthday. 2009 tax Therefore, you can take a higher standard deduction for 2013 if you were born before January 2, 1949. 2009 tax Higher standard deduction for blindness. 2009 tax   If you are blind on the last day of the year and you do not itemize deductions, you are entitled to a higher standard deduction. 2009 tax You qualify for this benefit if you are totally or partly blind. 2009 tax Not totally blind. 2009 tax   If you are not totally blind, you must get a certified statement from an eye doctor (ophthalmologist or optometrist) that: You cannot see better than 20/200 in the better eye with glasses or contact lenses, or Your field of vision is not more than 20 degrees. 2009 tax   If your eye condition will never improve beyond these limits, the statement should include this fact. 2009 tax You must keep the statement in your records. 2009 tax   If your vision can be corrected beyond these limits only by contact lenses that you can wear only briefly because of pain, infection, or ulcers, you can take the higher standard deduction for blindness if you otherwise qualify. 2009 tax Spouse 65 or older or blind. 2009 tax   You can take the higher standard deduction if your spouse is age 65 or older or blind and: You file a joint return, or You file a separate return and can claim an exemption for your spouse because your spouse had no gross income and an exemption for your spouse could not be claimed by another taxpayer. 2009 tax    You cannot claim the higher standard deduction for an individual other than yourself and your spouse. 2009 tax Example. 2009 tax This example illustrates how to determine your standard deduction using Worksheet 4-1. 2009 tax Bill and Lisa are filing a joint return for 2013. 2009 tax Both are over age 65. 2009 tax Neither is blind, and neither can be claimed as a dependent. 2009 tax They do not itemize deductions, so they use Worksheet 4-1. 2009 tax Because they are married filing jointly, they enter $12,200 on line 1. 2009 tax They check the “No” box on line 2, so they also enter $12,200 on line 4. 2009 tax Because they are both over age 65, they enter $2,400 ($1,200 × 2) on line 5. 2009 tax They enter $14,600 ($12,200 + $2,400) on line 6, so their standard deduction is $14,600. 2009 tax Standard Deduction for Dependents The standard deduction for an individual for whom an exemption can be claimed on another person's tax return is generally limited to the greater of: $1,000, or The individual's earned income for the year plus $350 (but not more than the regular standard deduction amount, generally $6,100). 2009 tax However, the standard deduction may be higher if the individual is 65 or older or blind. 2009 tax If an exemption for you (or your spouse if you are filing jointly) can be claimed on someone else's return, use Worksheet 4-1, if applicable, to determine your standard deduction. 2009 tax Worksheet 4-1. 2009 tax 2013 Standard Deduction Worksheet Caution. 2009 tax If you are married filing separately and your spouse itemizes deductions, or if you are a dual-status alien, do not complete this worksheet. 2009 tax If you were born before January 2, 1949, and/or blind, check the correct number of boxes below. 2009 tax Put the total number of boxes checked in box c and go to line 1. 2009 tax a. 2009 tax You   Born before  January 2, 1949     Blind b. 2009 tax Your spouse, if claiming  spouse's exemption   Born before January 2, 1949     Blind c. 2009 tax Total boxes checked             1. 2009 tax Enter the amount shown below for your filing status. 2009 tax               Single or married filing separately — $6,100 Married filing jointly or Qualifying widow(er) — $12,200 Head of household — $8,950   1. 2009 tax           2. 2009 tax Can you (or your spouse if filing jointly) be claimed as a dependent on someone else's return?  No. 2009 tax Skip line 3; enter the amount from line 1 on line 4. 2009 tax   Yes. 2009 tax Go to line 3. 2009 tax         3. 2009 tax Is your earned income* more than $650?               Yes. 2009 tax Add $350 to your earned income. 2009 tax Enter the total   3. 2009 tax         No. 2009 tax Enter $1,000 4. 2009 tax Enter the smaller of line 1 or line 3 4. 2009 tax   5. 2009 tax If born before January 2, 1949, or blind, multiply the number in box c by $1,200 ($1,500 if single or head of household). 2009 tax Enter the result here. 2009 tax Otherwise, enter -0- 5. 2009 tax   6. 2009 tax Add lines 4 and 5. 2009 tax This is your standard deduction for 2013. 2009 tax 6. 2009 tax   * Earned income includes wages, salaries, tips, professional fees, and other compensation received for personal services you performed. 2009 tax It also includes any amount received as a scholarship that you must include in your income. 2009 tax Generally, your earned income is the total of the amount(s) you reported on Form 1040, lines 7, 12, and 18, minus the amount, if any, on line 27 (or the amount you reported on Form 1040A, line 7). 2009 tax Itemized Deductions Some individuals should itemize their deductions because it will save them money. 2009 tax Others should itemize because they do not qualify for the standard deduction. 2009 tax See the discussion under Standard Deduction , earlier, to decide if it would be to your advantage to itemize deductions. 2009 tax You may be subject to a limit on some of your itemized deductions if your adjusted gross income is more than $150,000. 2009 tax For more information, see Overall limitation, later. 2009 tax Medical and dental expenses, some taxes, certain interest expenses, charitable contributions, casualty and theft losses, and certain other miscellaneous expenses may be itemized as deductions on Schedule A (Form 1040). 2009 tax You may benefit from itemizing your deductions on Schedule A (Form 1040) if you: Cannot take the standard deduction, Had uninsured medical or dental expenses that are more than 10% of your adjusted gross income (or more than 7. 2009 tax 5% of your adjusted gross income if either you or your spouse is age 65 or older), Paid interest on your home, Paid real estate or personal property taxes, Paid mortgage insurance premiums, Paid state and local income or general sales taxes, Had large unreimbursed employee business expenses or other miscellaneous deductions, Had large uninsured casualty or theft losses, Made large contributions to qualified charities (see Publication 526, Charitable Contributions), or Have total itemized deductions that are more than the standard deduction that applies to you. 2009 tax See the Schedule A (Form 1040) instructions for more information. 2009 tax Overall limitation. 2009 tax   You may not be able to deduct all of your itemized deductions if your adjusted gross income is more than: $150,000, if married filing separately, $250,000, if single, $275,000, if head of household, or $300,000, if married filing jointly or qualifying widow(er). 2009 tax  If your adjusted gross income exceeds the applicable amount, you will use the Itemized Deductions Worksheet in the Instructions for Schedule A (Form 1040) to figure your total itemized deductions. 2009 tax Medical and Dental Expenses You can deduct certain medical and dental expenses you paid for yourself, your spouse, and your dependent(s) if you itemize your deductions on Schedule A (Form 1040). 2009 tax Table 4-1 shows some common items that you can or cannot include in figuring your medical expense deduction. 2009 tax For more information, see the following discussions of selected items, which are presented in alphabetical order. 2009 tax A more extensive list of items and further details can be found in Publication 502, Medical and Dental Expenses. 2009 tax Table 4-1. 2009 tax Medical and Dental Expenses Checklist You can include: You cannot include: Bandages Capital expenses for equipment or improvements to your home needed for medical care (see Publication 502) Certain weight-loss expenses for obesity Diagnostic devices Expenses of an organ donor Eye surgery—to promote the correct function of the eye Guide dogs or other animals aiding the blind, deaf, and disabled Hospital services fees (lab work, therapy, nursing services, surgery, etc. 2009 tax ) Lead-based paint removal (see Publication 502) Long-term care contracts, qualified (see Publication 502) Meals and lodging provided by a hospital during medical treatment Medical and hospital insurance premiums Medical services fees (from doctors, dentists, surgeons, specialists, and other medical practitioners) Medicare Part D premiums Oxygen equipment and oxygen Part of life-care fee paid to retirement home designated for medical care Prescription medicines (prescribed by a doctor) and insulin Psychiatric and psychological treatment Social security tax, Medicare tax, FUTA, and state employment tax for worker providing medical care (see Publication 502) Special items (artificial limbs, false teeth, eyeglasses, contact lenses, hearing aids, crutches, wheelchair, etc. 2009 tax ) Special education for mentally or physically disabled persons (see Publication 502) Stop-smoking programs Transportation for needed medical care Treatment at a drug or alcohol center (includes meals and lodging provided by the center) Wages for nursing services (see Publication 502) Contributions to Archer MSAs (see Publication 969) Bottled water Diaper service Expenses for your general health (even if following your doctor's advice) such as: —Health club dues —Household help (even if recommended by a doctor) —Social activities, such as dancing or swimming lessons —Trip for general health improvement Flexible spending account reimbursements for medical expenses (if contributions were on a pretax basis) (see Publication 502) Funeral, burial, or cremation expenses Health savings account payments for medical expenses (see Publication 502) Illegal operation or treatment Life insurance or income protection policies, or policies providing payment for loss of life, limb, sight, etc. 2009 tax Medical insurance included in a car insurance policy covering all persons injured in or by your car Medicine you buy without a prescription Nursing care for a healthy baby Prescription drugs you brought in (or ordered shipped) from another country, in most cases (see Publication 502) Surgery for purely cosmetic reasons (see Publication 502) Toothpaste, toiletries, cosmetics, etc. 2009 tax Teeth whitening Weight-loss expenses not for the treatment of obesity or other disease You can deduct only the amount of your medical and dental expenses that is more than 10% of your adjusted gross income (or that is more than 7. 2009 tax 5% of your adjusted gross income if you or your spouse is age 65 or older). 2009 tax What to include. 2009 tax   Generally, you can include only the medical and dental expenses you paid this year, regardless of when the services were provided. 2009 tax If you pay medical expenses by check, the day you mail or deliver the check generally is the date of payment. 2009 tax If you use a pay-by-phone or online account to pay your medical expenses, the date reported on the statement of the financial institution showing when payment was made is the date of payment. 2009 tax You can include medical expenses you charge to your credit card in the year the charge is made. 2009 tax It does not matter when you actually pay the amount charged. 2009 tax Home Improvements You can include in medical expenses amounts you pay for home improvements if their main purpose is medical care for you, your spouse, or your dependent. 2009 tax Only reasonable costs to accommodate a home to your disabled condition (or that of your spouse or your dependent(s) who live with you) are considered medical care. 2009 tax Additional costs for personal motives, such as for architectural or aesthetic reasons, are not medical expenses. 2009 tax Publication 502 contains additional information and examples, including a capital expense worksheet, to assist you in figuring the amount of the capital expense that you can include in your medical expenses. 2009 tax Also, see Publication 502 for information about deductible operating and upkeep expenses related to such capital expense items, and for information about improvements, for medical reasons, to property rented by a person with disabilities. 2009 tax Household Help You cannot include in medical expenses the cost of household help, even if such help is recommended by a doctor. 2009 tax This is a personal expense that is not deductible. 2009 tax However, you may be able to include certain expenses paid to a person providing nursing-type services. 2009 tax For more information, see Nursing Services , later. 2009 tax Also, certain maintenance or personal care services provided for qualified long-term care can be included in medical expenses. 2009 tax For more information, see Qualified long-term care services under Long-Term Care, later. 2009 tax Hospital Services You can include in medical expenses amounts you pay for the cost of inpatient care at a hospital or similar institution if a principal reason for being there is to receive medical care. 2009 tax This includes amounts paid for meals and lodging. 2009 tax Also, see Meals and Lodging , later. 2009 tax Long-Term Care You can include in medical expenses amounts paid for qualified long-term care services and premiums paid for qualified long-term care insurance contracts. 2009 tax Qualified long-term care services. 2009 tax   Qualified long-term care services are necessary diagnostic, preventive, therapeutic, curing, treating, mitigating, rehabilitative services, and maintenance and personal care services (defined later) that are: Required by a chronically ill individual, and Provided under a plan of care prescribed by a licensed health care practitioner. 2009 tax Chronically ill individual. 2009 tax    An individual is chronically ill if, within the previous 12 months, a licensed health care practitioner has certified that the individual meets either of the following descriptions. 2009 tax He or she is unable to perform at least two activities of daily living without substantial assistance from another individual for at least 90 days, due to a loss of functional capacity. 2009 tax Activities of daily living are eating, toileting, transferring, bathing, dressing, and continence. 2009 tax He or she requires substantial supervision to be protected from threats to health and safety due to severe cognitive impairment. 2009 tax Maintenance and personal care services. 2009 tax    Maintenance or personal care services is care which has as its primary purpose the providing of a chronically ill individual with needed assistance with his or her disabilities (including protection from threats to health and safety due to severe cognitive impairment). 2009 tax Qualified long-term care insurance contracts. 2009 tax   A qualified long-term care insurance contract is an insurance contract that provides only coverage of qualified long-term care services. 2009 tax The contract must: Be guaranteed renewable, Not provide for a cash surrender value or other money that can be paid, assigned, pledged, or borrowed, Provide that refunds, other than refunds on the death of the insured or complete surrender or cancellation of the contract, and dividends under the contract must be used only to reduce future premiums or increase future benefits, and Generally not pay or reimburse expenses incurred for services or items that would be reimbursed under Medicare, except where Medicare is a secondary payer, or the contract makes per diem or other periodic payments without regard to expenses. 2009 tax   The amount of qualified long-term care premiums you can include is limited. 2009 tax You can include the following as medical expenses on Schedule A (Form 1040). 2009 tax Qualified long-term care premiums up to the following amounts. 2009 tax Age 40 or under – $360. 2009 tax Age 41 to 50 – $680. 2009 tax Age 51 to 60 – $1,360. 2009 tax Age 61 to 70 – $3,640. 2009 tax Age 71 or over – $4,550. 2009 tax Unreimbursed expenses for qualified long-term care services. 2009 tax Note. 2009 tax The limit on premiums is for each person. 2009 tax Meals and Lodging You can include in medical expenses the cost of meals and lodging at a hospital or similar institution if your main reason for being there is to receive medical care. 2009 tax You may be able to include in medical expenses the cost of lodging (but not meals) not provided in a hospital or similar institution. 2009 tax You can include the cost of such lodging while away from home if all of the following requirements are met. 2009 tax The lodging is primarily for, and essential to, medical care. 2009 tax The medical care is provided by a doctor in a licensed hospital or in a medical care facility related to, or the equivalent of, a licensed hospital. 2009 tax The lodging is not lavish or extravagant under the circumstances. 2009 tax There is no significant element of personal pleasure, recreation, or vacation in the travel away from home. 2009 tax The amount you include in medical expenses for lodging cannot be more than $50 per night for each person. 2009 tax You can include lodging for a person traveling with the person receiving the medical care. 2009 tax For example, if a parent is traveling with a sick child, up to $100 per night can be included as a medical expense for lodging. 2009 tax (Meals are not included. 2009 tax ) Nursing home. 2009 tax   You can include in medical expenses the cost of medical care in a nursing home or a home for the aged for yourself, your spouse, or your dependent(s). 2009 tax This includes the cost of meals and lodging in the home if a main reason for being there is to get medical care. 2009 tax   Do not include the cost of meals and lodging if the reason for being in the home is personal. 2009 tax However, you can include in medical expenses the part of the cost that is for medical or nursing care. 2009 tax Medical Insurance Premiums You can include in medical expenses insurance premiums you pay for policies that cover medical care. 2009 tax Policies can provide payment for: Hospitalization, surgical fees, X-rays, Prescription drugs and insulin, Dental care, Replacement of lost or damaged contact lenses, and Qualified long-term care insurance contracts (subject to the additional limits included in the discussion on qualified long-term care insurance contracts under Long-Term Care , earlier). 2009 tax If you have a policy that provides payments for other than medical care, you can include the premiums for the medical care part of the policy if the charge for the medical part is reasonable. 2009 tax The cost of the medical portion must be separately stated in the insurance contract or given to you in a separate statement. 2009 tax Medicare Part A. 2009 tax   If you are covered under social security (or if you are a government employee who paid Medicare tax), you are enrolled in Medicare Part A. 2009 tax The payroll tax paid for Medicare Part A is not a medical expense. 2009 tax If you are not covered under social security (or were not a government employee who paid Medicare tax), you can enroll voluntarily in Medicare Part A. 2009 tax In this situation you can include the premiums you paid for Medicare Part A as a medical expense. 2009 tax Medicare Part B. 2009 tax   Medicare Part B is a supplemental medical insurance. 2009 tax Premiums you pay for Medicare Part B are a medical expense. 2009 tax If you applied for it at age 65 or after you became disabled, you can include in medical expenses the monthly premiums you paid. 2009 tax If you were over age 65 or disabled when you first enrolled, check with your local Social Security Administration office, or go to their website at www. 2009 tax SSA. 2009 tax gov, to find out your premium. 2009 tax Medicare Part D. 2009 tax   Medicare Part D is a voluntary prescription drug insurance program for persons with Medicare Part A or Part B. 2009 tax You can include as a medical expense premiums you pay for Medicare Part D. 2009 tax Prepaid insurance premiums. 2009 tax   Insurance premiums you pay before you are age 65 for medical care for yourself, your spouse, or your dependents after you reach age 65 are medical care expenses in the year paid if they are: Payable in equal yearly installments, or more often, and Payable for at least 10 years, or until you reach age 65 (but not for less than 5 years). 2009 tax Medicines You can include in medical expenses amounts you pay for prescribed medicines and drugs. 2009 tax A prescribed drug is one that requires a prescription by a doctor for its use by an individual. 2009 tax You can also include amounts you pay for insulin. 2009 tax Except for insulin, you cannot include in medical expenses amounts you pay for a drug that is not prescribed. 2009 tax Imported medicines and drugs. 2009 tax   If you import medicines or drugs from other countries, see Medicines and Drugs From Other Countries, under What Expenses Are Not Includible, in Publication 502. 2009 tax Nursing Services You can include in medical expenses wages and other amounts you pay for nursing services. 2009 tax The services need not be performed by a nurse as long as the services are of a kind generally performed by a nurse. 2009 tax This includes services connected with caring for the patient's condition, such as giving medication or changing dressings, as well as bathing and grooming the patient. 2009 tax These services can be provided in your home or another care facility. 2009 tax Generally, only the amount spent for nursing services is a medical expense. 2009 tax If the attendant also provides personal and household services, amounts paid to the attendant must be divided between the time spent performing household and personal services and the time spent for nursing services. 2009 tax However, certain maintenance or personal care services provided for qualified long-term care can be included in medical expenses. 2009 tax See Maintenance and personal care services under Qualified long-term care services, earlier. 2009 tax Additionally, certain expenses for household services or for the care of a qualifying individual incurred to allow you to work may qualify for the child and dependent care credit. 2009 tax See Child and Dependent Care Credit , later, and Publication 503, Child and Dependent Care Expenses. 2009 tax You can also include in medical expenses part of the amount you pay for that attendant's meals. 2009 tax Divide the food expense among the household members to find the cost of the attendant's food. 2009 tax Then divide that cost in the same manner as in the preceding paragraph. 2009 tax If you had to pay additional amounts for household upkeep because of the attendant, you can include the extra amounts with your medical expenses. 2009 tax This includes extra rent or utilities you pay because you moved to a larger apartment to provide space for the attendant. 2009 tax Employment taxes. 2009 tax   You can include as a medical expense social security tax, FUTA, Medicare tax, and state employment taxes you pay for a nurse, attendant, or other person who provides medical care. 2009 tax If the attendant also provides personal and household services, you can include as a medical expense only the amount of employment taxes paid for medical services as explained earlier under Nursing Services. 2009 tax For information on employment tax responsibilities of household employers, see Publication 926, Household Employer's Tax Guide. 2009 tax Transportation You can include in medical expenses amounts paid for transportation primarily for, and essential to, medical care. 2009 tax Car expenses. 2009 tax    You can include out-of-pocket expenses, such as the cost of gas and oil, when you use a car for medical reasons. 2009 tax You cannot include depreciation, insurance, general repair, or maintenance expenses. 2009 tax   If you do not want to use your actual expenses for 2013, you can use the standard medical mileage rate of 24 cents a mile. 2009 tax   You can also include parking fees and tolls. 2009 tax You can add these fees and tolls to your medical expenses whether you use actual expenses or use the standard mileage rate. 2009 tax You can also include:    Bus, taxi, train, or plane fares or ambulance service, and Transportation expenses of a nurse or other person who can give injections, medications, or other treatment required by a patient who is traveling to get medical care and is unable to travel alone. 2009 tax Do not include transportation expenses if, for purely personal reasons, you choose to travel to another city for an operation or other medical care prescribed by your doctor. 2009 tax Prev  Up  Next   Home   More Online Publications