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2010 Tax Preparation Software

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2010 Tax Preparation Software

2010 tax preparation software 7. 2010 tax preparation software   Interest Income Table of Contents Reminder Introduction Useful Items - You may want to see: General InformationSSN for joint account. 2010 tax preparation software Custodian account for your child. 2010 tax preparation software Penalty for failure to supply SSN. 2010 tax preparation software Reporting backup withholding. 2010 tax preparation software Savings account with parent as trustee. 2010 tax preparation software Interest not reported on Form 1099-INT. 2010 tax preparation software Nominees. 2010 tax preparation software Incorrect amount. 2010 tax preparation software Information reporting requirement. 2010 tax preparation software Taxable InterestInterest subject to penalty for early withdrawal. 2010 tax preparation software Money borrowed to invest in certificate of deposit. 2010 tax preparation software U. 2010 tax preparation software S. 2010 tax preparation software Savings Bonds Education Savings Bond Program U. 2010 tax preparation software S. 2010 tax preparation software Treasury Bills, Notes, and Bonds Bonds Sold Between Interest Dates Insurance State or Local Government Obligations Original Issue Discount (OID) When To Report Interest IncomeConstructive receipt. 2010 tax preparation software How To Report Interest IncomeSchedule B (Form 1040A or 1040). 2010 tax preparation software Reporting tax-exempt interest. 2010 tax preparation software U. 2010 tax preparation software S. 2010 tax preparation software savings bond interest previously reported. 2010 tax preparation software Reminder Foreign-source income. 2010 tax preparation software  If you are a U. 2010 tax preparation software S. 2010 tax preparation software citizen with interest income from sources outside the United States (foreign income), you must report that income on your tax return unless it is exempt by U. 2010 tax preparation software S. 2010 tax preparation software law. 2010 tax preparation software This is true whether you reside inside or outside the United States and whether or not you receive a Form 1099 from the foreign payer. 2010 tax preparation software Introduction This chapter discusses the following topics. 2010 tax preparation software Different types of interest income. 2010 tax preparation software What interest is taxable and what interest is nontaxable. 2010 tax preparation software When to report interest income. 2010 tax preparation software How to report interest income on your tax return. 2010 tax preparation software In general, any interest you receive or that is credited to your account and can be withdrawn is taxable income. 2010 tax preparation software Exceptions to this rule are discussed later in this chapter. 2010 tax preparation software You may be able to deduct expenses you have in earning this income on Schedule A (Form 1040) if you itemize your deductions. 2010 tax preparation software See Money borrowed to invest in certificate of deposit , later, and chapter 28. 2010 tax preparation software Useful Items - You may want to see: Publication 537 Installment Sales 550 Investment Income and Expenses 1212 Guide to Original Issue Discount (OID) Instruments Form (and Instructions) Schedule B (Form 1040A or 1040) Interest and Ordinary Dividends 8815 Exclusion of Interest From Series EE and I U. 2010 tax preparation software S. 2010 tax preparation software Savings Bonds Issued After 1989 8818 Optional Form To Record Redemption of Series EE and I U. 2010 tax preparation software S. 2010 tax preparation software Savings Bonds Issued After 1989 General Information A few items of general interest are covered here. 2010 tax preparation software Recordkeeping. 2010 tax preparation software You should keep a list showing sources and interest amounts received during the year. 2010 tax preparation software Also, keep the forms you receive showing your interest income (Forms 1099-INT, for example) as an important part of your records. 2010 tax preparation software Tax on unearned income of certain children. 2010 tax preparation software    Part of a child's 2013 unearned income may be taxed at the parent's tax rate. 2010 tax preparation software If so, Form 8615, Tax for Certain Children Who Have Unearned Income, must be completed and attached to the child's tax return. 2010 tax preparation software If not, Form 8615 is not required and the child's income is taxed at his or her own tax rate. 2010 tax preparation software   Some parents can choose to include the child's interest and dividends on the parent's return. 2010 tax preparation software If you can, use Form 8814, Parents' Election To Report Child's Interest and Dividends, for this purpose. 2010 tax preparation software   For more information about the tax on unearned income of children and the parents' election, see chapter 31. 2010 tax preparation software Beneficiary of an estate or trust. 2010 tax preparation software   Interest you receive as a beneficiary of an estate or trust is generally taxable income. 2010 tax preparation software You should receive a Schedule K-1 (Form 1041), Beneficiary's Share of Income, Deductions, Credits, etc. 2010 tax preparation software , from the fiduciary. 2010 tax preparation software Your copy of Schedule K-1 (Form 1041) and its instructions will tell you where to report the income on your Form 1040. 2010 tax preparation software Social security number (SSN). 2010 tax preparation software   You must give your name and SSN or individual tax identification number (ITIN) to any person required by federal tax law to make a return, statement, or other document that relates to you. 2010 tax preparation software This includes payers of interest. 2010 tax preparation software If you do not give your SSN or ITIN to the payer of interest, you may have to pay a penalty. 2010 tax preparation software SSN for joint account. 2010 tax preparation software   If the funds in a joint account belong to one person, list that person's name first on the account and give that person's SSN to the payer. 2010 tax preparation software (For information on who owns the funds in a joint account, see Joint accounts , later. 2010 tax preparation software ) If the joint account contains combined funds, give the SSN of the person whose name is listed first on the account. 2010 tax preparation software This is because only one name and SSN can be shown on Form 1099. 2010 tax preparation software   These rules apply both to joint ownership by a married couple and to joint ownership by other individuals. 2010 tax preparation software For example, if you open a joint savings account with your child using funds belonging to the child, list the child's name first on the account and give the child's SSN. 2010 tax preparation software Custodian account for your child. 2010 tax preparation software   If your child is the actual owner of an account that is recorded in your name as custodian for the child, give the child's SSN to the payer. 2010 tax preparation software For example, you must give your child's SSN to the payer of interest on an account owned by your child, even though the interest is paid to you as custodian. 2010 tax preparation software Penalty for failure to supply SSN. 2010 tax preparation software   If you do not give your SSN to the payer of interest, you may have to pay a penalty. 2010 tax preparation software See Failure to supply SSN under Penalties in chapter 1. 2010 tax preparation software Backup withholding also may apply. 2010 tax preparation software Backup withholding. 2010 tax preparation software   Your interest income is generally not subject to regular withholding. 2010 tax preparation software However, it may be subject to backup withholding to ensure that income tax is collected on the income. 2010 tax preparation software Under backup withholding, the payer of interest must withhold, as income tax, on the amount you are paid, applying the appropriate withholding rate. 2010 tax preparation software   Backup withholding may also be required if the IRS has determined that you underreported your interest or dividend income. 2010 tax preparation software For more information, see Backup Withholding in chapter 4. 2010 tax preparation software Reporting backup withholding. 2010 tax preparation software   If backup withholding is deducted from your interest income, the payer must give you a Form 1099-INT for the year indicating the amount withheld. 2010 tax preparation software The Form 1099-INT will show any backup withholding as “Federal income tax withheld. 2010 tax preparation software ” Joint accounts. 2010 tax preparation software   If two or more persons hold property (such as a savings account or bond) as joint tenants, tenants by the entirety, or tenants in common, each person's share of any interest from the property is determined by local law. 2010 tax preparation software Income from property given to a child. 2010 tax preparation software   Property you give as a parent to your child under the Model Gifts of Securities to Minors Act, the Uniform Gifts to Minors Act, or any similar law becomes the child's property. 2010 tax preparation software   Income from the property is taxable to the child, except that any part used to satisfy a legal obligation to support the child is taxable to the parent or guardian having that legal obligation. 2010 tax preparation software Savings account with parent as trustee. 2010 tax preparation software   Interest income from a savings account opened for a minor child, but placed in the name and subject to the order of the parents as trustees, is taxable to the child if, under the law of the state in which the child resides, both of the following are true. 2010 tax preparation software The savings account legally belongs to the child. 2010 tax preparation software The parents are not legally permitted to use any of the funds to support the child. 2010 tax preparation software Form 1099-INT. 2010 tax preparation software   Interest income is generally reported to you on Form 1099-INT, or a similar statement, by banks, savings and loans, and other payers of interest. 2010 tax preparation software This form shows you the interest you received during the year. 2010 tax preparation software Keep this form for your records. 2010 tax preparation software You do not have to attach it to your tax return. 2010 tax preparation software   Report on your tax return the total interest income you receive for the tax year. 2010 tax preparation software Interest not reported on Form 1099-INT. 2010 tax preparation software   Even if you do not receive Form 1099-INT, you must still report all of your interest income. 2010 tax preparation software For example, you may receive distributive shares of interest from partnerships or S corporations. 2010 tax preparation software This interest is reported to you on Schedule K-1 (Form 1065), Partner's Share of Income, Deduction, Credits, etc. 2010 tax preparation software , or Schedule K-1 (Form 1120S), Shareholder's Share of Income, Deductions, Credits, etc. 2010 tax preparation software Nominees. 2010 tax preparation software   Generally, if someone receives interest as a nominee for you, that person must give you a Form 1099-INT showing the interest received on your behalf. 2010 tax preparation software   If you receive a Form 1099-INT that includes amounts belonging to another person, see the discussion on nominee distributions under How To Report Interest Income in chapter 1 of Publication 550, or Schedule B (Form 1040A or 1040) instructions. 2010 tax preparation software Incorrect amount. 2010 tax preparation software   If you receive a Form 1099-INT that shows an incorrect amount (or other incorrect information), you should ask the issuer for a corrected form. 2010 tax preparation software The new Form 1099-INT you receive will be marked “Corrected. 2010 tax preparation software ” Form 1099-OID. 2010 tax preparation software   Reportable interest income also may be shown on Form 1099-OID, Original Issue Discount. 2010 tax preparation software For more information about amounts shown on this form, see Original Issue Discount (OID) , later in this chapter. 2010 tax preparation software Exempt-interest dividends. 2010 tax preparation software   Exempt-interest dividends you receive from a mutual fund or other regulated investment company, including those received from a qualified fund of funds in any tax year beginning after December 22, 2010, are not included in your taxable income. 2010 tax preparation software (However, see Information reporting requirement , next. 2010 tax preparation software ) Exempt-interest dividends should be shown in box 10 of Form 1099-DIV. 2010 tax preparation software You do not reduce your basis for distributions that are exempt-interest dividends. 2010 tax preparation software Information reporting requirement. 2010 tax preparation software   Although exempt-interest dividends are not taxable, you must show them on your tax return if you have to file. 2010 tax preparation software This is an information reporting requirement and does not change the exempt-interest dividends into taxable income. 2010 tax preparation software Note. 2010 tax preparation software Exempt-interest dividends paid from specified private activity bonds may be subject to the alternative minimum tax. 2010 tax preparation software See Alternative Minimum Tax (AMT) in chapter 30 for more information. 2010 tax preparation software Chapter 1 of Publication 550 contains a discussion on private activity bonds under State or Local Government Obligations. 2010 tax preparation software Interest on VA dividends. 2010 tax preparation software   Interest on insurance dividends left on deposit with the Department of Veterans Affairs (VA) is not taxable. 2010 tax preparation software This includes interest paid on dividends on converted United States Government Life Insurance and on National Service Life Insurance policies. 2010 tax preparation software Individual retirement arrangements (IRAs). 2010 tax preparation software   Interest on a Roth IRA generally is not taxable. 2010 tax preparation software Interest on a traditional IRA is tax deferred. 2010 tax preparation software You generally do not include it in your income until you make withdrawals from the IRA. 2010 tax preparation software See chapter 17. 2010 tax preparation software Taxable Interest Taxable interest includes interest you receive from bank accounts, loans you make to others, and other sources. 2010 tax preparation software The following are some sources of taxable interest. 2010 tax preparation software Dividends that are actually interest. 2010 tax preparation software   Certain distributions commonly called dividends are actually interest. 2010 tax preparation software You must report as interest so-called “dividends” on deposits or on share accounts in: Cooperative banks, Credit unions, Domestic building and loan associations, Domestic savings and loan associations, Federal savings and loan associations, and Mutual savings banks. 2010 tax preparation software  The “dividends” will be shown as interest income on Form 1099-INT. 2010 tax preparation software Money market funds. 2010 tax preparation software   Money market funds pay dividends and are offered by nonbank financial institutions, such as mutual funds and stock brokerage houses. 2010 tax preparation software Generally, amounts you receive from money market funds should be reported as dividends, not as interest. 2010 tax preparation software Certificates of deposit and other deferred interest accounts. 2010 tax preparation software   If you open any of these accounts, interest may be paid at fixed intervals of 1 year or less during the term of the account. 2010 tax preparation software You generally must include this interest in your income when you actually receive it or are entitled to receive it without paying a substantial penalty. 2010 tax preparation software The same is true for accounts that mature in 1 year or less and pay interest in a single payment at maturity. 2010 tax preparation software If interest is deferred for more than 1 year, see Original Issue Discount (OID) , later. 2010 tax preparation software Interest subject to penalty for early withdrawal. 2010 tax preparation software   If you withdraw funds from a deferred interest account before maturity, you may have to pay a penalty. 2010 tax preparation software You must report the total amount of interest paid or credited to your account during the year, without subtracting the penalty. 2010 tax preparation software See Penalty on early withdrawal of savings in chapter 1 of Publication 550 for more information on how to report the interest and deduct the penalty. 2010 tax preparation software Money borrowed to invest in certificate of deposit. 2010 tax preparation software   The interest you pay on money borrowed from a bank or savings institution to meet the minimum deposit required for a certificate of deposit from the institution and the interest you earn on the certificate are two separate items. 2010 tax preparation software You must report the total interest you earn on the certificate in your income. 2010 tax preparation software If you itemize deductions, you can deduct the interest you pay as investment interest, up to the amount of your net investment income. 2010 tax preparation software See Interest Expenses in chapter 3 of Publication 550. 2010 tax preparation software Example. 2010 tax preparation software You deposited $5,000 with a bank and borrowed $5,000 from the bank to make up the $10,000 minimum deposit required to buy a 6-month certificate of deposit. 2010 tax preparation software The certificate earned $575 at maturity in 2013, but you received only $265, which represented the $575 you earned minus $310 interest charged on your $5,000 loan. 2010 tax preparation software The bank gives you a Form 1099-INT for 2013 showing the $575 interest you earned. 2010 tax preparation software The bank also gives you a statement showing that you paid $310 interest for 2013. 2010 tax preparation software You must include the $575 in your income. 2010 tax preparation software If you itemize your deductions on Schedule A (Form 1040), you can deduct $310, subject to the net investment income limit. 2010 tax preparation software Gift for opening account. 2010 tax preparation software   If you receive noncash gifts or services for making deposits or for opening an account in a savings institution, you may have to report the value as interest. 2010 tax preparation software   For deposits of less than $5,000, gifts or services valued at more than $10 must be reported as interest. 2010 tax preparation software For deposits of $5,000 or more, gifts or services valued at more than $20 must be reported as interest. 2010 tax preparation software The value is determined by the cost to the financial institution. 2010 tax preparation software Example. 2010 tax preparation software You open a savings account at your local bank and deposit $800. 2010 tax preparation software The account earns $20 interest. 2010 tax preparation software You also receive a $15 calculator. 2010 tax preparation software If no other interest is credited to your account during the year, the Form 1099-INT you receive will show $35 interest for the year. 2010 tax preparation software You must report $35 interest income on your tax return. 2010 tax preparation software Interest on insurance dividends. 2010 tax preparation software   Interest on insurance dividends left on deposit with an insurance company that can be withdrawn annually is taxable to you in the year it is credited to your account. 2010 tax preparation software However, if you can withdraw it only on the anniversary date of the policy (or other specified date), the interest is taxable in the year that date occurs. 2010 tax preparation software Prepaid insurance premiums. 2010 tax preparation software   Any increase in the value of prepaid insurance premiums, advance premiums, or premium deposit funds is interest if it is applied to the payment of premiums due on insurance policies or made available for you to withdraw. 2010 tax preparation software U. 2010 tax preparation software S. 2010 tax preparation software obligations. 2010 tax preparation software   Interest on U. 2010 tax preparation software S. 2010 tax preparation software obligations, such as U. 2010 tax preparation software S. 2010 tax preparation software Treasury bills, notes, and bonds, issued by any agency or instrumentality of the United States is taxable for federal income tax purposes. 2010 tax preparation software Interest on tax refunds. 2010 tax preparation software   Interest you receive on tax refunds is taxable income. 2010 tax preparation software Interest on condemnation award. 2010 tax preparation software   If the condemning authority pays you interest to compensate you for a delay in payment of an award, the interest is taxable. 2010 tax preparation software Installment sale payments. 2010 tax preparation software   If a contract for the sale or exchange of property provides for deferred payments, it also usually provides for interest payable with the deferred payments. 2010 tax preparation software That interest is taxable when you receive it. 2010 tax preparation software If little or no interest is provided for in a deferred payment contract, part of each payment may be treated as interest. 2010 tax preparation software See Unstated Interest and Original Issue Discount in Publication 537, Installment Sales. 2010 tax preparation software Interest on annuity contract. 2010 tax preparation software   Accumulated interest on an annuity contract you sell before its maturity date is taxable. 2010 tax preparation software Usurious interest. 2010 tax preparation software   Usurious interest is interest charged at an illegal rate. 2010 tax preparation software This is taxable as interest unless state law automatically changes it to a payment on the principal. 2010 tax preparation software Interest income on frozen deposits. 2010 tax preparation software   Exclude from your gross income interest on frozen deposits. 2010 tax preparation software A deposit is frozen if, at the end of the year, you cannot withdraw any part of the deposit because: The financial institution is bankrupt or insolvent, or The state where the institution is located has placed limits on withdrawals because other financial institutions in the state are bankrupt or insolvent. 2010 tax preparation software   The amount of interest you must exclude is the interest that was credited on the frozen deposits minus the sum of: The net amount you withdrew from these deposits during the year, and The amount you could have withdrawn as of the end of the year (not reduced by any penalty for premature withdrawals of a time deposit). 2010 tax preparation software If you receive a Form 1099-INT for interest income on deposits that were frozen at the end of 2013, see Frozen deposits under How To Report Interest Income in chapter 1 of Publication 550, for information about reporting this interest income exclusion on your tax return. 2010 tax preparation software   The interest you exclude is treated as credited to your account in the following year. 2010 tax preparation software You must include it in income in the year you can withdraw it. 2010 tax preparation software Example. 2010 tax preparation software $100 of interest was credited on your frozen deposit during the year. 2010 tax preparation software You withdrew $80 but could not withdraw any more as of the end of the year. 2010 tax preparation software You must include $80 in your income and exclude $20 from your income for the year. 2010 tax preparation software You must include the $20 in your income for the year you can withdraw it. 2010 tax preparation software Bonds traded flat. 2010 tax preparation software   If you buy a bond at a discount when interest has been defaulted or when the interest has accrued but has not been paid, the transaction is described as trading a bond flat. 2010 tax preparation software The defaulted or unpaid interest is not income and is not taxable as interest if paid later. 2010 tax preparation software When you receive a payment of that interest, it is a return of capital that reduces the remaining cost basis of your bond. 2010 tax preparation software Interest that accrues after the date of purchase, however, is taxable interest income for the year it is received or accrued. 2010 tax preparation software See Bonds Sold Between Interest Dates , later, for more information. 2010 tax preparation software Below-market loans. 2010 tax preparation software   In general, a below-market loan is a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. 2010 tax preparation software See Below-Market Loans in chapter 1 of Publication 550 for more information. 2010 tax preparation software U. 2010 tax preparation software S. 2010 tax preparation software Savings Bonds This section provides tax information on U. 2010 tax preparation software S. 2010 tax preparation software savings bonds. 2010 tax preparation software It explains how to report the interest income on these bonds and how to treat transfers of these bonds. 2010 tax preparation software For other information on U. 2010 tax preparation software S. 2010 tax preparation software savings bonds, write to:  For series EE and I paper savings bonds: Bureau of the Public Debt Division of Customer Assistance P. 2010 tax preparation software O. 2010 tax preparation software Box 7012 Parkersburg, WV 26106-7012  For series EE and I electronic bonds: Bureau of the Public Debt Division of Customer Assistance P. 2010 tax preparation software O. 2010 tax preparation software Box 7015 Parkersburg, WV 26106–7015  For series HH/H: Bureau of the Public Debt Division of Customer Assistance P. 2010 tax preparation software O. 2010 tax preparation software Box 2186 Parkersburg, WV 26106-2186 Or, on the Internet, visit: www. 2010 tax preparation software treasurydirect. 2010 tax preparation software gov/indiv/indiv. 2010 tax preparation software htm. 2010 tax preparation software Accrual method taxpayers. 2010 tax preparation software   If you use an accrual method of accounting, you must report interest on U. 2010 tax preparation software S. 2010 tax preparation software savings bonds each year as it accrues. 2010 tax preparation software You cannot postpone reporting interest until you receive it or until the bonds mature. 2010 tax preparation software Accrual methods of accounting are explained in chapter 1 under Accounting Methods . 2010 tax preparation software Cash method taxpayers. 2010 tax preparation software   If you use the cash method of accounting, as most individual taxpayers do, you generally report the interest on U. 2010 tax preparation software S. 2010 tax preparation software savings bonds when you receive it. 2010 tax preparation software The cash method of accounting is explained in chapter 1 under Accounting Methods. 2010 tax preparation software But see Reporting options for cash method taxpayers , later. 2010 tax preparation software Series HH bonds. 2010 tax preparation software    These bonds were issued at face value. 2010 tax preparation software Interest is paid twice a year by direct deposit to your bank account. 2010 tax preparation software If you are a cash method taxpayer, you must report interest on these bonds as income in the year you receive it. 2010 tax preparation software   Series HH bonds were first offered in 1980 and last offered in August 2004. 2010 tax preparation software Before 1980, series H bonds were issued. 2010 tax preparation software Series H bonds are treated the same as series HH bonds. 2010 tax preparation software If you are a cash method taxpayer, you must report the interest when you receive it. 2010 tax preparation software   Series H bonds have a maturity period of 30 years. 2010 tax preparation software Series HH bonds mature in 20 years. 2010 tax preparation software The last series H bonds matured in 2009. 2010 tax preparation software Series EE and series I bonds. 2010 tax preparation software   Interest on these bonds is payable when you redeem the bonds. 2010 tax preparation software The difference between the purchase price and the redemption value is taxable interest. 2010 tax preparation software Series EE bonds. 2010 tax preparation software   Series EE bonds were first offered in January 1980 and have a maturity period of 30 years. 2010 tax preparation software   Before July 1980, series E bonds were issued. 2010 tax preparation software The original 10-year maturity period of series E bonds has been extended to 40 years for bonds issued before December 1965 and 30 years for bonds issued after November 1965. 2010 tax preparation software Paper series EE and series E bonds are issued at a discount. 2010 tax preparation software The face value is payable to you at maturity. 2010 tax preparation software Electronic series EE bonds are issued at their face value. 2010 tax preparation software The face value plus accrued interest is payable to you at maturity. 2010 tax preparation software As of January 1, 2012, paper savings bonds were no longer sold at financial institutions. 2010 tax preparation software   Owners of paper series EE bonds can convert them to electronic bonds. 2010 tax preparation software These converted bonds do not retain the denomination listed on the paper certificate but are posted at their purchase price (with accrued interest). 2010 tax preparation software Series I bonds. 2010 tax preparation software   Series I bonds were first offered in 1998. 2010 tax preparation software These are inflation-indexed bonds issued at their face amount with a maturity period of 30 years. 2010 tax preparation software The face value plus all accrued interest is payable to you at maturity. 2010 tax preparation software Reporting options for cash method taxpayers. 2010 tax preparation software   If you use the cash method of reporting income, you can report the interest on series EE, series E, and series I bonds in either of the following ways. 2010 tax preparation software Method 1. 2010 tax preparation software Postpone reporting the interest until the earlier of the year you cash or dispose of the bonds or the year they mature. 2010 tax preparation software (However, see Savings bonds traded , later. 2010 tax preparation software )  Note. 2010 tax preparation software Series EE bonds issued in 1983 matured in 2013. 2010 tax preparation software If you have used method 1, you generally must report the interest on these bonds on your 2013 return. 2010 tax preparation software The last series E bonds were issued in 1980 and matured in 2010. 2010 tax preparation software If you used method 1, you generally should have reported the interest on these bonds on your 2010 return. 2010 tax preparation software Method 2. 2010 tax preparation software Choose to report the increase in redemption value as interest each year. 2010 tax preparation software You must use the same method for all series EE, series E, and series I bonds you own. 2010 tax preparation software If you do not choose method 2 by reporting the increase in redemption value as interest each year, you must use method 1. 2010 tax preparation software    If you plan to cash your bonds in the same year you will pay for higher education expenses, you may want to use method 1 because you may be able to exclude the interest from your income. 2010 tax preparation software To learn how, see Education Savings Bond Program, later. 2010 tax preparation software Change from method 1. 2010 tax preparation software   If you want to change your method of reporting the interest from method 1 to method 2, you can do so without permission from the IRS. 2010 tax preparation software In the year of change you must report all interest accrued to date and not previously reported for all your bonds. 2010 tax preparation software   Once you choose to report the interest each year, you must continue to do so for all series EE, series E, and series I bonds you own and for any you get later, unless you request permission to change, as explained next. 2010 tax preparation software Change from method 2. 2010 tax preparation software   To change from method 2 to method 1, you must request permission from the IRS. 2010 tax preparation software Permission for the change is automatically granted if you send the IRS a statement that meets all the following requirements. 2010 tax preparation software You have typed or printed the following number at the top: “131. 2010 tax preparation software ” It includes your name and social security number under “131. 2010 tax preparation software ” It includes the year of change (both the beginning and ending dates). 2010 tax preparation software It identifies the savings bonds for which you are requesting this change. 2010 tax preparation software It includes your agreement to: Report all interest on any bonds acquired during or after the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest, and Report all interest on the bonds acquired before the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest, with the exception of the interest reported in prior tax years. 2010 tax preparation software   You must attach this statement to your tax return for the year of change, which you must file by the due date (including extensions). 2010 tax preparation software   You can have an automatic extension of 6 months from the due date of your return for the year of change (excluding extensions) to file the statement with an amended return. 2010 tax preparation software On the statement, type or print “Filed pursuant to section 301. 2010 tax preparation software 9100-2. 2010 tax preparation software ” To get this extension, you must have filed your original return for the year of the change by the due date (including extensions). 2010 tax preparation software    By the date you file the original statement with your return, you must also send a signed copy to the address below. 2010 tax preparation software   Internal Revenue Service Attention: CC:IT&A (Automatic Rulings Branch) P. 2010 tax preparation software O. 2010 tax preparation software Box 7604 Benjamin Franklin Station Washington, DC 20044   If you use a private delivery service, send the signed copy to the address below. 2010 tax preparation software   Internal Revenue Service Attention: CC:IT&A (Automatic Rulings Branch) Room 5336 1111 Constitution Avenue, NW  Washington, DC 20224   Instead of filing this statement, you can request permission to change from method 2 to method 1 by filing Form 3115, Application for Change in Accounting Method. 2010 tax preparation software In that case, follow the form instructions for an automatic change. 2010 tax preparation software No user fee is required. 2010 tax preparation software Co-owners. 2010 tax preparation software   If a U. 2010 tax preparation software S. 2010 tax preparation software savings bond is issued in the names of co-owners, such as you and your child or you and your spouse, interest on the bond is generally taxable to the co-owner who bought the bond. 2010 tax preparation software One co-owner's funds used. 2010 tax preparation software    If you used your funds to buy the bond, you must pay the tax on the interest. 2010 tax preparation software This is true even if you let the other co-owner redeem the bond and keep all the proceeds. 2010 tax preparation software Under these circumstances, the co-owner who redeemed the bond will receive a Form 1099-INT at the time of redemption and must provide you with another Form 1099-INT showing the amount of interest from the bond taxable to you. 2010 tax preparation software The co-owner who redeemed the bond is a “nominee. 2010 tax preparation software ” See Nominee distributions under How To Report Interest Income in chapter 1 of Publication 550 for more information about how a person who is a nominee reports interest income belonging to another person. 2010 tax preparation software Both co-owners' funds used. 2010 tax preparation software   If you and the other co-owner each contribute part of the bond's purchase price, the interest is generally taxable to each of you, in proportion to the amount each of you paid. 2010 tax preparation software Community property. 2010 tax preparation software   If you and your spouse live in a community property state and hold bonds as community property, one-half of the interest is considered received by each of you. 2010 tax preparation software If you file separate returns, each of you generally must report one-half of the bond interest. 2010 tax preparation software For more information about community property, see Publication 555. 2010 tax preparation software Table 7-1. 2010 tax preparation software   These rules are also shown in Table 7-1. 2010 tax preparation software Ownership transferred. 2010 tax preparation software   If you bought series E, series EE, or series I bonds entirely with your own funds and had them reissued in your co-owner's name or beneficiary's name alone, you must include in your gross income for the year of reissue all interest that you earned on these bonds and have not previously reported. 2010 tax preparation software But, if the bonds were reissued in your name alone, you do not have to report the interest accrued at that time. 2010 tax preparation software   This same rule applies when bonds (other than bonds held as community property) are transferred between spouses or incident to divorce. 2010 tax preparation software Purchased jointly. 2010 tax preparation software   If you and a co-owner each contributed funds to buy series E, series EE, or series I bonds jointly and later have the bonds reissued in the co-owner's name alone, you must include in your gross income for the year of reissue your share of all the interest earned on the bonds that you have not previously reported. 2010 tax preparation software The former co-owner does not have to include in gross income at the time of reissue his or her share of the interest earned that was not reported before the transfer. 2010 tax preparation software This interest, however, as well as all interest earned after the reissue, is income to the former co-owner. 2010 tax preparation software   This income-reporting rule also applies when the bonds are reissued in the name of your former co-owner and a new co-owner. 2010 tax preparation software But the new co-owner will report only his or her share of the interest earned after the transfer. 2010 tax preparation software   If bonds that you and a co-owner bought jointly are reissued to each of you separately in the same proportion as your contribution to the purchase price, neither you nor your co-owner has to report at that time the interest earned before the bonds were reissued. 2010 tax preparation software    Table 7-1. 2010 tax preparation software Who Pays the Tax on U. 2010 tax preparation software S. 2010 tax preparation software Savings Bond Interest IF . 2010 tax preparation software . 2010 tax preparation software . 2010 tax preparation software THEN the interest must be reported by . 2010 tax preparation software . 2010 tax preparation software . 2010 tax preparation software you buy a bond in your name and the name of another person as co-owners, using only your own funds you. 2010 tax preparation software you buy a bond in the name of another person, who is the sole owner of the bond the person for whom you bought the bond. 2010 tax preparation software you and another person buy a bond as co-owners, each contributing part of the purchase price both you and the other co-owner, in proportion to the amount each paid for the bond. 2010 tax preparation software you and your spouse, who live in a community property state, buy a bond that is community property you and your spouse. 2010 tax preparation software If you file separate returns, both you and your spouse generally report one-half of the interest. 2010 tax preparation software Example 1. 2010 tax preparation software You and your spouse each spent an equal amount to buy a $1,000 series EE savings bond. 2010 tax preparation software The bond was issued to you and your spouse as co-owners. 2010 tax preparation software You both postpone reporting interest on the bond. 2010 tax preparation software You later have the bond reissued as two $500 bonds, one in your name and one in your spouse's name. 2010 tax preparation software At that time neither you nor your spouse has to report the interest earned to the date of reissue. 2010 tax preparation software Example 2. 2010 tax preparation software You bought a $1,000 series EE savings bond entirely with your own funds. 2010 tax preparation software The bond was issued to you and your spouse as co-owners. 2010 tax preparation software You both postpone reporting interest on the bond. 2010 tax preparation software You later have the bond reissued as two $500 bonds, one in your name and one in your spouse's name. 2010 tax preparation software You must report half the interest earned to the date of reissue. 2010 tax preparation software Transfer to a trust. 2010 tax preparation software   If you own series E, series EE, or series I bonds and transfer them to a trust, giving up all rights of ownership, you must include in your income for that year the interest earned to the date of transfer if you have not already reported it. 2010 tax preparation software However, if you are considered the owner of the trust and if the increase in value both before and after the transfer continues to be taxable to you, you can continue to defer reporting the interest earned each year. 2010 tax preparation software You must include the total interest in your income in the year you cash or dispose of the bonds or the year the bonds finally mature, whichever is earlier. 2010 tax preparation software   The same rules apply to previously unreported interest on series EE or series E bonds if the transfer to a trust consisted of series HH or series H bonds you acquired in a trade for the series EE or series E bonds. 2010 tax preparation software See Savings bonds traded , later. 2010 tax preparation software Decedents. 2010 tax preparation software   The manner of reporting interest income on series E, series EE, or series I bonds, after the death of the owner (decedent), depends on the accounting and income-reporting methods previously used by the decedent. 2010 tax preparation software This is explained in chapter 1 of Publication 550. 2010 tax preparation software Savings bonds traded. 2010 tax preparation software   If you postponed reporting the interest on your series EE or series E bonds, you did not recognize taxable income when you traded the bonds for series HH or series H bonds, unless you received cash in the trade. 2010 tax preparation software (You cannot trade series I bonds for series HH bonds. 2010 tax preparation software After August 31, 2004, you cannot trade any other series of bonds for series HH bonds. 2010 tax preparation software ) Any cash you received is income up to the amount of the interest earned on the bonds traded. 2010 tax preparation software When your series HH or series H bonds mature, or if you dispose of them before maturity, you report as interest the difference between their redemption value and your cost. 2010 tax preparation software Your cost is the sum of the amount you paid for the traded series EE or series E bonds plus any amount you had to pay at the time of the trade. 2010 tax preparation software Example. 2010 tax preparation software You traded series EE bonds (on which you postponed reporting the interest) for $2,500 in series HH bonds and $223 in cash. 2010 tax preparation software You reported the $223 as taxable income on your tax return. 2010 tax preparation software At the time of the trade, the series EE bonds had accrued interest of $523 and a redemption value of $2,723. 2010 tax preparation software You hold the series HH bonds until maturity, when you receive $2,500. 2010 tax preparation software You must report $300 as interest income in the year of maturity. 2010 tax preparation software This is the difference between their redemption value, $2,500, and your cost, $2,200 (the amount you paid for the series EE bonds). 2010 tax preparation software (It is also the difference between the accrued interest of $523 on the series EE bonds and the $223 cash received on the trade. 2010 tax preparation software ) Choice to report interest in year of trade. 2010 tax preparation software   You could have chosen to treat all of the previously unreported accrued interest on the series EE or series E bonds traded for series HH bonds as income in the year of the trade. 2010 tax preparation software If you made this choice, it is treated as a change from method 1. 2010 tax preparation software See Change from method 1 under Series EE and series I bonds, earlier. 2010 tax preparation software Form 1099-INT for U. 2010 tax preparation software S. 2010 tax preparation software savings bonds interest. 2010 tax preparation software   When you cash a bond, the bank or other payer that redeems it must give you a Form 1099-INT if the interest part of the payment you receive is $10 or more. 2010 tax preparation software Box 3 of your Form 1099-INT should show the interest as the difference between the amount you received and the amount paid for the bond. 2010 tax preparation software However, your Form 1099-INT may show more interest than you have to include on your income tax return. 2010 tax preparation software For example, this may happen if any of the following are true. 2010 tax preparation software You chose to report the increase in the redemption value of the bond each year. 2010 tax preparation software The interest shown on your Form 1099-INT will not be reduced by amounts previously included in income. 2010 tax preparation software You received the bond from a decedent. 2010 tax preparation software The interest shown on your Form 1099-INT will not be reduced by any interest reported by the decedent before death, or on the decedent's final return, or by the estate on the estate's income tax return. 2010 tax preparation software Ownership of the bond was transferred. 2010 tax preparation software The interest shown on your Form 1099-INT will not be reduced by interest that accrued before the transfer. 2010 tax preparation software You were named as a co-owner, and the other co-owner contributed funds to buy the bond. 2010 tax preparation software The interest shown on your Form 1099-INT will not be reduced by the amount you received as nominee for the other co-owner. 2010 tax preparation software (See Co-owners , earlier in this chapter, for more information about the reporting requirements. 2010 tax preparation software ) You received the bond in a taxable distribution from a retirement or profit-sharing plan. 2010 tax preparation software The interest shown on your Form 1099-INT will not be reduced by the interest portion of the amount taxable as a distribution from the plan and not taxable as interest. 2010 tax preparation software (This amount is generally shown on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. 2010 tax preparation software , for the year of distribution. 2010 tax preparation software )   For more information on including the correct amount of interest on your return, see How To Report Interest Income , later. 2010 tax preparation software Publication 550 includes examples showing how to report these amounts. 2010 tax preparation software    Interest on U. 2010 tax preparation software S. 2010 tax preparation software savings bonds is exempt from state and local taxes. 2010 tax preparation software The Form 1099-INT you receive will indicate the amount that is for U. 2010 tax preparation software S. 2010 tax preparation software savings bond interest in box 3. 2010 tax preparation software Education Savings Bond Program You may be able to exclude from income all or part of the interest you receive on the redemption of qualified U. 2010 tax preparation software S. 2010 tax preparation software savings bonds during the year if you pay qualified higher educational expenses during the same year. 2010 tax preparation software This exclusion is known as the Education Savings Bond Program. 2010 tax preparation software You do not qualify for this exclusion if your filing status is married filing separately. 2010 tax preparation software Form 8815. 2010 tax preparation software   Use Form 8815 to figure your exclusion. 2010 tax preparation software Attach the form to your Form 1040 or Form 1040A. 2010 tax preparation software Qualified U. 2010 tax preparation software S. 2010 tax preparation software savings bonds. 2010 tax preparation software   A qualified U. 2010 tax preparation software S. 2010 tax preparation software savings bond is a series EE bond issued after 1989 or a series I bond. 2010 tax preparation software The bond must be issued either in your name (sole owner) or in your and your spouse's names (co-owners). 2010 tax preparation software You must be at least 24 years old before the bond's issue date. 2010 tax preparation software For example, a bond bought by a parent and issued in the name of his or her child under age 24 does not qualify for the exclusion by the parent or child. 2010 tax preparation software    The issue date of a bond may be earlier than the date the bond is purchased because the issue date assigned to a bond is the first day of the month in which it is purchased. 2010 tax preparation software Beneficiary. 2010 tax preparation software   You can designate any individual (including a child) as a beneficiary of the bond. 2010 tax preparation software Verification by IRS. 2010 tax preparation software   If you claim the exclusion, the IRS will check it by using bond redemption information from the Department of the Treasury. 2010 tax preparation software Qualified expenses. 2010 tax preparation software   Qualified higher educational expenses are tuition and fees required for you, your spouse, or your dependent (for whom you claim an exemption) to attend an eligible educational institution. 2010 tax preparation software   Qualified expenses include any contribution you make to a qualified tuition program or to a Coverdell education savings account. 2010 tax preparation software   Qualified expenses do not include expenses for room and board or for courses involving sports, games, or hobbies that are not part of a degree or certificate granting program. 2010 tax preparation software Eligible educational institutions. 2010 tax preparation software   These institutions include most public, private, and nonprofit universities, colleges, and vocational schools that are accredited and eligible to participate in student aid programs run by the U. 2010 tax preparation software S. 2010 tax preparation software Department of Education. 2010 tax preparation software Reduction for certain benefits. 2010 tax preparation software   You must reduce your qualified higher educational expenses by all of the following tax-free benefits. 2010 tax preparation software Tax-free part of scholarships and fellowships (see Scholarships and fellowships in chapter 12). 2010 tax preparation software Expenses used to figure the tax-free portion of distributions from a Coverdell ESA. 2010 tax preparation software Expenses used to figure the tax-free portion of distributions from a qualified tuition program. 2010 tax preparation software Any tax-free payments (other than gifts or inheritances) received for educational expenses, such as Veterans' educational assistance benefits, Qualified tuition reductions, or Employer-provided educational assistance. 2010 tax preparation software Any expense used in figuring the American Opportunity and lifetime learning credits. 2010 tax preparation software Amount excludable. 2010 tax preparation software   If the total proceeds (interest and principal) from the qualified U. 2010 tax preparation software S. 2010 tax preparation software savings bonds you redeem during the year are not more than your adjusted qualified higher educational expenses for the year, you may be able to exclude all of the interest. 2010 tax preparation software If the proceeds are more than the expenses, you may be able to exclude only part of the interest. 2010 tax preparation software   To determine the excludable amount, multiply the interest part of the proceeds by a fraction. 2010 tax preparation software The numerator of the fraction is the qualified higher educational expenses you paid during the year. 2010 tax preparation software The denominator of the fraction is the total proceeds you received during the year. 2010 tax preparation software Example. 2010 tax preparation software In February 2013, Mark and Joan, a married couple, cashed a qualified series EE U. 2010 tax preparation software S. 2010 tax preparation software savings bond they bought in April 1997. 2010 tax preparation software They received proceeds of $8,372 representing principal of $5,000 and interest of $3,372. 2010 tax preparation software In 2013, they paid $4,000 of their daughter's college tuition. 2010 tax preparation software They are not claiming an education credit for that amount, and their daughter does not have any tax-free educational assistance. 2010 tax preparation software They can exclude $1,611 ($3,372 × ($4,000 ÷ $8,372)) of interest in 2013. 2010 tax preparation software They must pay tax on the remaining $1,761 ($3,372 − $1,611) interest. 2010 tax preparation software Modified adjusted gross income limit. 2010 tax preparation software   The interest exclusion is limited if your modified adjusted gross income (modified AGI) is: $74,700 to $89,700 for taxpayers filing single or head of household, and $112,050 to $142,050 for married taxpayers filing jointly or for a qualifying widow(er) with dependent child. 2010 tax preparation software You do not qualify for the interest exclusion if your modified AGI is equal to or more than the upper limit for your filing status. 2010 tax preparation software   Modified AGI, for purposes of this exclusion, is adjusted gross income (Form 1040, line 37, or Form 1040A, line 21) figured before the interest exclusion, and modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion and deduction, Exclusion of income for bona fide residents of American Samoa, Exclusion for income from Puerto Rico, Exclusion for adoption benefits received under an employer's adoption assistance program, Deduction for tuition and fees, Deduction for student loan interest, and Deduction for domestic production activities. 2010 tax preparation software   Use the Line 9 Worksheet in the Form 8815 instructions to figure your modified AGI. 2010 tax preparation software If you claim any of the exclusion or deduction items listed above (except items 6, 7, and 8), add the amount of the exclusion or deduction (except items 6, 7, and 8) to the amount on line 5 of the worksheet, and enter the total on Form 8815, line 9, as your modified AGI. 2010 tax preparation software   If you have investment interest expense incurred to earn royalties and other investment income, see Education Savings Bond Program in chapter 1 of Publication 550. 2010 tax preparation software Recordkeeping. 2010 tax preparation software If you claim the interest exclusion, you must keep a written record of the qualified U. 2010 tax preparation software S. 2010 tax preparation software savings bonds you redeem. 2010 tax preparation software Your record must include the serial number, issue date, face value, and total redemption proceeds (principal and interest) of each bond. 2010 tax preparation software You can use Form 8818 to record this information. 2010 tax preparation software You should also keep bills, receipts, canceled checks, or other documentation that shows you paid qualified higher educational expenses during the year. 2010 tax preparation software U. 2010 tax preparation software S. 2010 tax preparation software Treasury Bills, Notes, and Bonds Treasury bills, notes, and bonds are direct debts (obligations) of the U. 2010 tax preparation software S. 2010 tax preparation software Government. 2010 tax preparation software Taxation of interest. 2010 tax preparation software   Interest income from Treasury bills, notes, and bonds is subject to federal income tax but is exempt from all state and local income taxes. 2010 tax preparation software You should receive Form 1099-INT showing the interest (in box 3) paid to you for the year. 2010 tax preparation software   Payments of principal and interest generally will be credited to your designated checking or savings account by direct deposit through the TreasuryDirect® system. 2010 tax preparation software Treasury bills. 2010 tax preparation software   These bills generally have a 4-week, 13-week, 26-week, or 52-week maturity period. 2010 tax preparation software They are generally issued at a discount in the amount of $100 and multiples of $100. 2010 tax preparation software The difference between the discounted price you pay for the bills and the face value you receive at maturity is interest income. 2010 tax preparation software Generally, you report this interest income when the bill is paid at maturity. 2010 tax preparation software If you paid a premium for a bill (more than the face value), you generally report the premium as a section 171 deduction when the bill is paid at maturity. 2010 tax preparation software Treasury notes and bonds. 2010 tax preparation software   Treasury notes have maturity periods of more than 1 year, ranging up to 10 years. 2010 tax preparation software Maturity periods for Treasury bonds are longer than 10 years. 2010 tax preparation software Both generally are issued in denominations of $100 to $1 million and generally pay interest every 6 months. 2010 tax preparation software Generally, you report this interest for the year paid. 2010 tax preparation software For more information, see U. 2010 tax preparation software S. 2010 tax preparation software Treasury Bills, Notes, and Bonds in chapter 1 of Publication 550. 2010 tax preparation software For other information on Treasury notes or bonds, write to:  Bureau of the Public Debt P. 2010 tax preparation software O. 2010 tax preparation software Box 7015 Parkersburg, WV 26106-7015 Or, on the Internet, visit: www. 2010 tax preparation software treasurydirect. 2010 tax preparation software gov/indiv/indiv. 2010 tax preparation software htm. 2010 tax preparation software For information on series EE, series I, and series HH savings bonds, see U. 2010 tax preparation software S. 2010 tax preparation software Savings Bonds , earlier. 2010 tax preparation software Treasury inflation-protected securities (TIPS). 2010 tax preparation software   These securities pay interest twice a year at a fixed rate, based on a principal amount adjusted to take into account inflation and deflation. 2010 tax preparation software For the tax treatment of these securities, see Inflation-Indexed Debt Instruments under Original Issue Discount (OID), in Publication 550. 2010 tax preparation software Bonds Sold Between Interest Dates If you sell a bond between interest payment dates, part of the sales price represents interest accrued to the date of sale. 2010 tax preparation software You must report that part of the sales price as interest income for the year of sale. 2010 tax preparation software If you buy a bond between interest payment dates, part of the purchase price represents interest accrued before the date of purchase. 2010 tax preparation software When that interest is paid to you, treat it as a return of your capital investment, rather than interest income, by reducing your basis in the bond. 2010 tax preparation software See Accrued interest on bonds under How To Report Interest Income in chapter 1 of Publication 550 for information on reporting the payment. 2010 tax preparation software Insurance Life insurance proceeds paid to you as beneficiary of the insured person are usually not taxable. 2010 tax preparation software But if you receive the proceeds in installments, you must usually report a part of each installment payment as interest income. 2010 tax preparation software For more information about insurance proceeds received in installments, see Publication 525, Taxable and Nontaxable Income. 2010 tax preparation software Annuity. 2010 tax preparation software   If you buy an annuity with life insurance proceeds, the annuity payments you receive are taxed as pension and annuity income from a nonqualified plan, not as interest income. 2010 tax preparation software See chapter 10 for information on pension and annuity income from nonqualified plans. 2010 tax preparation software State or Local Government Obligations Interest on a bond used to finance government operations generally is not taxable if the bond is issued by a state, the District of Columbia, a possession of the United States, or any of their political subdivisions. 2010 tax preparation software Bonds issued after 1982 (including tribal economic development bonds issued after February 17, 2009) by an Indian tribal government are treated as issued by a state. 2010 tax preparation software Interest on these bonds is generally tax exempt if the bonds are part of an issue of which substantially all proceeds are to be used in the exercise of any essential government function. 2010 tax preparation software For information on federally guaranteed bonds, mortgage revenue bonds, arbitrage bonds, private activity bonds, qualified tax credit bonds, and Build America bonds, see State or Local Government Obligations in chapter 1 of Publication 550. 2010 tax preparation software Information reporting requirement. 2010 tax preparation software   If you must file a tax return, you are required to show any tax-exempt interest you received on your return. 2010 tax preparation software This is an information reporting requirement only. 2010 tax preparation software It does not change tax-exempt interest to taxable interest. 2010 tax preparation software Original Issue Discount (OID) Original issue discount (OID) is a form of interest. 2010 tax preparation software You generally include OID in your income as it accrues over the term of the debt instrument, whether or not you receive any payments from the issuer. 2010 tax preparation software A debt instrument generally has OID when the instrument is issued for a price that is less than its stated redemption price at maturity. 2010 tax preparation software OID is the difference between the stated redemption price at maturity and the issue price. 2010 tax preparation software All debt instruments that pay no interest before maturity are presumed to be issued at a discount. 2010 tax preparation software Zero coupon bonds are one example of these instruments. 2010 tax preparation software The OID accrual rules generally do not apply to short-term obligations (those with a fixed maturity date of 1 year or less from date of issue). 2010 tax preparation software See Discount on Short-Term Obligations in chapter 1 of Publication 550. 2010 tax preparation software De minimis OID. 2010 tax preparation software   You can treat the discount as zero if it is less than one-fourth of 1% (. 2010 tax preparation software 0025) of the stated redemption price at maturity multiplied by the number of full years from the date of original issue to maturity. 2010 tax preparation software This small discount is known as “de minimis” OID. 2010 tax preparation software Example 1. 2010 tax preparation software You bought a 10-year bond with a stated redemption price at maturity of $1,000, issued at $980 with OID of $20. 2010 tax preparation software One-fourth of 1% of $1,000 (stated redemption price) times 10 (the number of full years from the date of original issue to maturity) equals $25. 2010 tax preparation software Because the $20 discount is less than $25, the OID is treated as zero. 2010 tax preparation software (If you hold the bond at maturity, you will recognize $20 ($1,000 − $980) of capital gain. 2010 tax preparation software ) Example 2. 2010 tax preparation software The facts are the same as in Example 1, except that the bond was issued at $950. 2010 tax preparation software The OID is $50. 2010 tax preparation software Because the $50 discount is more than the $25 figured in Example 1, you must include the OID in income as it accrues over the term of the bond. 2010 tax preparation software Debt instrument bought after original issue. 2010 tax preparation software   If you buy a debt instrument with de minimis OID at a premium, the discount is not includible in income. 2010 tax preparation software If you buy a debt instrument with de minimis OID at a discount, the discount is reported under the market discount rules. 2010 tax preparation software See Market Discount Bonds in chapter 1 of Publication 550. 2010 tax preparation software Exceptions to reporting OID. 2010 tax preparation software   The OID rules discussed in this chapter do not apply to the following debt instruments. 2010 tax preparation software Tax-exempt obligations. 2010 tax preparation software (However, see Stripped tax-exempt obligations under Stripped Bonds and Coupons in chapter 1 of Publication 550). 2010 tax preparation software U. 2010 tax preparation software S. 2010 tax preparation software savings bonds. 2010 tax preparation software Short-term debt instruments (those with a fixed maturity date of not more than 1 year from the date of issue). 2010 tax preparation software Obligations issued by an individual before March 2, 1984. 2010 tax preparation software Loans between individuals if all the following are true. 2010 tax preparation software The lender is not in the business of lending money. 2010 tax preparation software The amount of the loan, plus the amount of any outstanding prior loans between the same individuals, is $10,000 or less. 2010 tax preparation software Avoiding any federal tax is not one of the principal purposes of the loan. 2010 tax preparation software Form 1099-OID. 2010 tax preparation software   The issuer of the debt instrument (or your broker if you held the instrument through a broker) should give you Form 1099-OID, or a similar statement, if the total OID for the calendar year is $10 or more. 2010 tax preparation software Form 1099-OID will show, in box 1, the amount of OID for the part of the year that you held the bond. 2010 tax preparation software It also will show, in box 2, the stated interest you must include in your income. 2010 tax preparation software A copy of Form 1099-OID will be sent to the IRS. 2010 tax preparation software Do not file your copy with your return. 2010 tax preparation software Keep it for your records. 2010 tax preparation software   In most cases, you must report the entire amount in boxes 1 and 2 of Form 1099-OID as interest income. 2010 tax preparation software But see Refiguring OID shown on Form 1099-OID, later in this discussion, for more information. 2010 tax preparation software Form 1099-OID not received. 2010 tax preparation software   If you had OID for the year but did not receive a Form 1099-OID, you can find tables on IRS. 2010 tax preparation software gov that list total OID on certain debt instruments and have information that will help you figure OID. 2010 tax preparation software For the latest OID tables, go to www. 2010 tax preparation software irs. 2010 tax preparation software gov and enter “OID tables” in the Search box. 2010 tax preparation software If your debt instrument is not listed, consult the issuer for further information about the accrued OID for the year. 2010 tax preparation software Nominee. 2010 tax preparation software   If someone else is the holder of record (the registered owner) of an OID instrument belonging to you and receives a Form 1099-OID on your behalf, that person must give you a Form 1099-OID. 2010 tax preparation software Refiguring OID shown on Form 1099-OID. 2010 tax preparation software   You must refigure the OID shown in box 1 or box 8 of Form 1099-OID if either of the following apply. 2010 tax preparation software You bought the debt instrument after its original issue and paid a premium or an acquisition premium. 2010 tax preparation software The debt instrument is a stripped bond or a stripped coupon (including certain zero coupon instruments). 2010 tax preparation software For information about figuring the correct amount of OID to include in your income, see Figuring OID on Long-Term Debt Instruments in Publication 1212. 2010 tax preparation software Refiguring periodic interest shown on Form 1099-OID. 2010 tax preparation software   If you disposed of a debt instrument or acquired it from another holder during the year, see Bonds Sold Between Interest Dates , earlier, for information about the treatment of periodic interest that may be shown in box 2 of Form 1099-OID for that instrument. 2010 tax preparation software Certificates of deposit (CDs). 2010 tax preparation software   If you buy a CD with a maturity of more than 1 year, you must include in income each year a part of the total interest due and report it in the same manner as other OID. 2010 tax preparation software   This also applies to similar deposit arrangements with banks, building and loan associations, etc. 2010 tax preparation software , including: Time deposits, Bonus plans, Savings certificates, Deferred income certificates, Bonus savings certificates, and Growth savings certificates. 2010 tax preparation software Bearer CDs. 2010 tax preparation software   CDs issued after 1982 generally must be in registered form. 2010 tax preparation software Bearer CDs are CDs not in registered form. 2010 tax preparation software They are not issued in the depositor's name and are transferable from one individual to another. 2010 tax preparation software   Banks must provide the IRS and the person redeeming a bearer CD with a Form 1099-INT. 2010 tax preparation software More information. 2010 tax preparation software   See chapter 1 of Publication 550 for more information about OID and related topics, such as market discount bonds. 2010 tax preparation software When To Report Interest Income When to report your interest income depends on whether you use the cash method or an accrual method to report income. 2010 tax preparation software Cash method. 2010 tax preparation software   Most individual taxpayers use the cash method. 2010 tax preparation software If you use this method, you generally report your interest income in the year in which you actually or constructively receive it. 2010 tax preparation software However, there are special rules for reporting the discount on certain debt instruments. 2010 tax preparation software See U. 2010 tax preparation software S. 2010 tax preparation software Savings Bonds and Original Issue Discount (OID) , earlier. 2010 tax preparation software Example. 2010 tax preparation software On September 1, 2011, you loaned another individual $2,000 at 12%, compounded annually. 2010 tax preparation software You are not in the business of lending money. 2010 tax preparation software The note stated that principal and interest would be due on August 31, 2013. 2010 tax preparation software In 2013, you received $2,508. 2010 tax preparation software 80 ($2,000 principal and $508. 2010 tax preparation software 80 interest). 2010 tax preparation software If you use the cash method, you must include in income on your 2013 return the $508. 2010 tax preparation software 80 interest you received in that year. 2010 tax preparation software Constructive receipt. 2010 tax preparation software   You constructively receive income when it is credited to your account or made available to you. 2010 tax preparation software You do not need to have physical possession of it. 2010 tax preparation software For example, you are considered to receive interest, dividends, or other earnings on any deposit or account in a bank, savings and loan, or similar financial institution, or interest on life insurance policy dividends left to accumulate, when they are credited to your account and subject to your withdrawal. 2010 tax preparation software This is true even if they are not yet entered in your passbook. 2010 tax preparation software   You constructively receive income on the deposit or account even if you must: Make withdrawals in multiples of even amounts, Give a notice to withdraw before making the withdrawal, Withdraw all or part of the account to withdraw the earnings, or Pay a penalty on early withdrawals, unless the interest you are to receive on an early withdrawal or redemption is substantially less than the interest payable at maturity. 2010 tax preparation software Accrual method. 2010 tax preparation software   If you use an accrual method, you report your interest income when you earn it, whether or not you have received it. 2010 tax preparation software Interest is earned over the term of the debt instrument. 2010 tax preparation software Example. 2010 tax preparation software If, in the previous example, you use an accrual method, you must include the interest in your income as you earn it. 2010 tax preparation software You would report the interest as follows: 2011, $80; 2012, $249. 2010 tax preparation software 60; and 2013, $179. 2010 tax preparation software 20. 2010 tax preparation software Coupon bonds. 2010 tax preparation software   Interest on coupon bonds is taxable in the year the coupon becomes due and payable. 2010 tax preparation software It does not matter when you mail the coupon for payment. 2010 tax preparation software How To Report Interest Income Generally, you report all your taxable interest income on Form 1040, line 8a; Form 1040A, line 8a; or Form 1040EZ, line 2. 2010 tax preparation software You cannot use Form 1040EZ if your taxable interest income is more than $1,500. 2010 tax preparation software Instead, you must use Form 1040A or Form 1040. 2010 tax preparation software Form 1040A. 2010 tax preparation software   You must complete Schedule B (Form 1040A or 1040), Part I, if you file Form 1040A and any of the following are true. 2010 tax preparation software Your taxable interest income is more than $1,500. 2010 tax preparation software You are claiming the interest exclusion under the Education Savings Bond Program (discussed earlier). 2010 tax preparation software You received interest from a seller-financed mortgage, and the buyer used the property as a home. 2010 tax preparation software You received a Form 1099-INT for U. 2010 tax preparation software S. 2010 tax preparation software savings bond interest that includes amounts you reported before 2013. 2010 tax preparation software You received, as a nominee, interest that actually belongs to someone else. 2010 tax preparation software You received a Form 1099-INT for interest on frozen deposits. 2010 tax preparation software You are reporting OID in an amount less than the amount shown on Form 1099-OID. 2010 tax preparation software You received a Form 1099-INT for interest on a bond you bought between interest payment dates. 2010 tax preparation software You acquired taxable bonds after 1987 and choose to reduce interest income from the bonds by any amortizable bond premium (see Bond Premium Amortization in chapter 3 of Publication 550). 2010 tax preparation software List each payer's name and the amount of interest income received from each payer on line 1. 2010 tax preparation software If you received a Form 1099-INT or Form 1099-OID from a brokerage firm, list the brokerage firm as the payer. 2010 tax preparation software   You cannot use Form 1040A if you must use Form 1040, as described next. 2010 tax preparation software Form 1040. 2010 tax preparation software   You must use Form 1040 instead of Form 1040A or Form 1040EZ if: You forfeited interest income because of the early withdrawal of a time deposit; You acquired taxable bonds after 1987, you choose to reduce interest income from the bonds by any amortizable bond premium, and you are deducting the excess of bond premium amortization for the accrual period over the qualified stated interest for the period (see Bond Premium Amortization in chapter 3 of Publication 550); or You received tax-exempt interest from private activity bonds issued after August 7, 1986. 2010 tax preparation software Schedule B (Form 1040A or 1040). 2010 tax preparation software   You must complete Schedule B (Form 1040A or 1040), Part I, if you file Form 1040 and any of the following apply. 2010 tax preparation software Your taxable interest income is more than $1,500. 2010 tax preparation software You are claiming the interest exclusion under the Education Savings Bond Program (discussed earlier). 2010 tax preparation software You received interest from a seller-financed mortgage, and the buyer used the property as a home. 2010 tax preparation software You received a Form 1099-INT for U. 2010 tax preparation software S. 2010 tax preparation software savings bond interest that includes amounts you reported before 2013. 2010 tax preparation software You received, as a nominee, interest that actually belongs to someone else. 2010 tax preparation software You received a Form 1099-INT for interest on frozen deposits. 2010 tax preparation software You received a Form 1099-INT for interest on a bond you bought between interest payment dates. 2010 tax preparation software You are reporting OID in an amount less than the amount shown on Form 1099-OID. 2010 tax preparation software Statement (2) in the preceding list under Form 1040 is true. 2010 tax preparation software In Part I, line 1, list each payer's name and the amount received from each. 2010 tax preparation software If you received a Form 1099-INT or Form 1099-OID from a brokerage firm, list the brokerage firm as the payer. 2010 tax preparation software Reporting tax-exempt interest. 2010 tax preparation software   Total your tax-exempt interest (such as interest or accrued OID on certain state and municipal bonds, including tax-exempt interest on zero coupon municipal bonds) and exempt-interest dividends from a mutual fund as shown on Form 1099-INT, box 8, and on Form 1099-DIV, box 10. 2010 tax preparation software Add these amounts to any other tax-exempt interest you received. 2010 tax preparation software Report the total on line 8b of Form 1040A or 1040. 2010 tax preparation software   If you file Form 1040EZ, enter “TEI” and the amount in the space to the left of line 2. 2010 tax preparation software Do not add tax-exempt interest in the total on Form 1040EZ, line 2. 2010 tax preparation software   Form 1099-INT, box 9, and Form 1099-DIV, box 11, show the tax-exempt interest subject to the alternative minimum tax on Form 6251. 2010 tax preparation software These amounts are already included in the amounts on Form 1099-INT, box 8, and Form 1099-DIV, box 10. 2010 tax preparation software Do not add the amounts in Form 1099-INT, box 9 and Form 1099-DIV, box 11 to, or subtract them from, the amounts on Form 1099-INT, box 8, and Form 1099-DIV, box 10. 2010 tax preparation software    Do not report interest from an individual retirement account (IRA) as tax-exempt interest. 2010 tax preparation software Form 1099-INT. 2010 tax preparation software   Your taxable interest income, except for interest from U. 2010 tax preparation software S. 2010 tax preparation software savings bonds and Treasury obligations, is shown in box 1 of Form 1099-INT. 2010 tax preparation software Add this amount to any other taxable interest income you received. 2010 tax preparation software You must report all of your taxable interest income even if you do not receive a Form 1099-INT. 2010 tax preparation software Generally, contact your financial institution if you do not receive a Form 1099-INT by February 15. 2010 tax preparation software Your identifying number may be truncated on any paper Form 1099-INT you receive. 2010 tax preparation software   If you forfeited interest income because of the early withdrawal of a time deposit, the deductible amount will be shown on Form 1099-INT in box 2. 2010 tax preparation software See Penalty on early withdrawal of savings in chapter 1 of Publication 550. 2010 tax preparation software   Box 3 of Form 1099-INT shows the interest income you received from U. 2010 tax preparation software S. 2010 tax preparation software savings bonds, Treasury bills, Treasury notes, and Treasury bonds. 2010 tax preparation software Add the amount shown in box 3 to any other taxable interest income you received, unless part of the amount in box 3 was previously included in your interest income. 2010 tax preparation software If part of the amount shown in box 3 was previously included in your interest income, see U. 2010 tax preparation software S. 2010 tax preparation software savings bond interest previously reported , later. 2010 tax preparation software   Box 4 of Form 1099-INT will contain an amount if you were subject to backup withholding. 2010 tax preparation software Report the amount from box 4 on Form 1040EZ, line 7; on Form 1040A, line 36; or Form 1040, line 62 (federal income tax withheld). 2010 tax preparation software   Box 5 of Form 1099-INT shows investment expenses you may be able to deduct as an itemized deduction. 2010 tax preparation software See chapter 28 for more information about investment expenses. 2010 tax preparation software   If there are entries in boxes 6 and 7 of Form 1099-INT, you must file Form 1040. 2010 tax preparation software You may be able to take a credit for the amount shown in box 6 unless you deduct this amount on line 8 of Schedule A (Form 1040). 2010 tax preparation software To take the credit, you may have to file Form 1116, Foreign Tax Credit. 2010 tax preparation software For more information, see Publication 514, Foreign Tax Credit for Individuals. 2010 tax preparation software U. 2010 tax preparation software S. 2010 tax preparation software savings bond interest previously reported. 2010 tax preparation software   If you received a Form 1099-INT for U. 2010 tax preparation software S. 2010 tax preparation software savings bond interest, the form may show interest you do not have to report. 2010 tax preparation software See Form 1099-INT for U. 2010 tax preparation software S. 2010 tax preparation software savings bonds interest , earlier, under U. 2010 tax preparation software S. 2010 tax preparation software Savings Bonds. 2010 tax preparation software   On Schedule B (Form 1040A or 1040), Part I, line 1, report all the interest shown on your Form 1099-INT. 2010 tax preparation software Then follow these steps. 2010 tax preparation software Several lines above line 2, enter a subtotal of all interest listed on line 1. 2010 tax preparation software Below the subtotal enter “U. 2010 tax preparation software S. 2010 tax preparation software Savings Bond Interest Previously Reported” and enter amounts previously reported or interest accrued before you received the bond. 2010 tax preparation software Subtract these amounts from the subtotal and enter the result on line 2. 2010 tax preparation software More information. 2010 tax preparation software   For more information about how to report interest income, see chapter 1 of Publication 550 or the instructions for the form you must file. 2010 tax preparation software Prev  Up  Next   Home   More Online Publications
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The 2010 Tax Preparation Software

2010 tax preparation software 10. 2010 tax preparation software   Business Bad Debts Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Definition of Business Bad DebtAccrual method. 2010 tax preparation software Cash method. 2010 tax preparation software Debt acquired from a decedent. 2010 tax preparation software Liquidation. 2010 tax preparation software Types of Business Bad Debts When a Debt Becomes Worthless How To Claim a Business Bad DebtSpecific Charge-Off Method Nonaccrual-Experience Method Recovery of a Bad DebtNet operating loss (NOL) carryover. 2010 tax preparation software Introduction You have a bad debt if you cannot collect money owed to you. 2010 tax preparation software A bad debt is either a business bad debt or a nonbusiness bad debt. 2010 tax preparation software This chapter discusses only business bad debts. 2010 tax preparation software Generally, a business bad debt is one that comes from operating your trade or business. 2010 tax preparation software You can deduct business bad debts on Schedule C (Form 1040) or your applicable business income tax return. 2010 tax preparation software All other bad debts are nonbusiness bad debts and are deductible only as short-term capital losses. 2010 tax preparation software For more information on nonbusiness bad debts, see Publication 550. 2010 tax preparation software Topics - This chapter discusses: Definition of business bad debt When a debt becomes worthless How to claim a business bad debt Recovery of a bad debt Useful Items - You may want to see: Publication 525 Taxable and Nontaxable Income 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 556 Examination of Returns, Appeal Rights, and Claims for Refund Form (and Instructions) Schedule C (Form 1040) Profit or Loss From Business 1040X Amended U. 2010 tax preparation software S. 2010 tax preparation software Individual Income Tax Return 1045 Application for Tentative Refund 1139 Corporation Application for Tentative Refund 3115 Application for Change in Accounting Method See chapter 12 for information about getting publications and forms. 2010 tax preparation software Definition of Business Bad Debt A business bad debt is a loss from the worthlessness of a debt that was either: Created or acquired in your trade or business, or Closely related to your trade or business when it became partly or totally worthless. 2010 tax preparation software A debt is closely related to your trade or business if your primary motive for incurring the debt is business related. 2010 tax preparation software Bad debts of a corporation (other than an S corporation) are always business bad debts. 2010 tax preparation software Credit sales. 2010 tax preparation software   Business bad debts are mainly the result of credit sales to customers. 2010 tax preparation software Goods that have been sold, but not yet paid for, and services that have been performed, but not yet paid for, are recorded in your books as either accounts receivable or notes receivable. 2010 tax preparation software After a reasonable period of time, if you have tried to collect the amount due, but are unable to do so, the uncollectible part becomes a business bad debt. 2010 tax preparation software   Accounts or notes receivable valued at fair market value (FMV) when received are deductible only at that value, even though the FMV may be less than the face value. 2010 tax preparation software If you purchased an account receivable for less than its face value, and the receivable subsequently becomes worthless, the most you are allowed to deduct is the amount you paid to acquire it. 2010 tax preparation software    You can claim a business bad debt deduction only if the amount owed to you was previously included in gross income. 2010 tax preparation software This applies to amounts owed to you from all sources of taxable income, including sales, services, rents, and interest. 2010 tax preparation software Accrual method. 2010 tax preparation software   If you use the accrual method of accounting, you generally report income as you earn it. 2010 tax preparation software You can only claim a bad debt deduction for an uncollectible receivable if you have previously included the uncollectible amount in income. 2010 tax preparation software   If you qualify, you can use the nonaccrual-experience method of accounting discussed later. 2010 tax preparation software Under this method, you do not have to accrue income that, based on your experience, you do not expect to collect. 2010 tax preparation software Cash method. 2010 tax preparation software   If you use the cash method of accounting, you generally report income when you receive payment. 2010 tax preparation software You cannot claim a bad debt deduction for amounts owed to you because you never included those amounts in income. 2010 tax preparation software For example, a cash basis architect cannot claim a bad debt deduction if a client fails to pay the bill because the architect's fee was never included in income. 2010 tax preparation software Debts from a former business. 2010 tax preparation software   If you sell your business but retain its receivables, these debts are business debts because they arose out of your trade or business. 2010 tax preparation software If any of these receivables subsequently become worthless, the loss is still a business bad debt. 2010 tax preparation software Debt acquired from a decedent. 2010 tax preparation software   The character of a loss from debts of a business acquired from a decedent is determined in the same way as debts acquired on the purchase of a business. 2010 tax preparation software The executor of the decedent's estate treats any loss from the debts as a business bad debt if the debts were closely related to the decedent's trade or business when they became worthless. 2010 tax preparation software Otherwise, a loss from these debts becomes a nonbusiness bad debt for the decedent's estate. 2010 tax preparation software Liquidation. 2010 tax preparation software   If you liquidate your business and some of the accounts receivable that you retain become worthless, they become business bad debts. 2010 tax preparation software Types of Business Bad Debts Business bad debts may result from the following. 2010 tax preparation software Loans to clients and suppliers. 2010 tax preparation software   If you loan money to a client, supplier, employee, or distributor for a business reason and you are unable to collect the loan after attempting to do so, you have a business bad debt. 2010 tax preparation software Debts owed by political parties. 2010 tax preparation software   If a political party (or other organization that accepts contributions or spends money to influence elections) owes you money and the debt becomes worthless, you can claim a bad debt deduction only if all of the following requirements are met. 2010 tax preparation software You use the accrual method of accounting. 2010 tax preparation software The debt arose from the sale of goods or services in the ordinary course of your trade or business. 2010 tax preparation software More than 30% of your receivables accrued in the year of the sale were from sales to political parties. 2010 tax preparation software You made substantial and continuing efforts to collect on the debt. 2010 tax preparation software Loan or capital contribution. 2010 tax preparation software   You cannot claim a bad debt deduction for a loan you made to a corporation if, based on the facts and circumstances, the loan is actually a contribution to capital. 2010 tax preparation software Debts of an insolvent partner. 2010 tax preparation software   If your business partnership breaks up and one of your former partners becomes insolvent, you may have to pay more than your pro rata share of the partnership's debts. 2010 tax preparation software If you pay any part of the insolvent partner's share of the debts, you can claim a bad debt deduction for the amount you paid that is attributable to the insolvent partner's share. 2010 tax preparation software Business loan guarantee. 2010 tax preparation software   If you guarantee a debt that subsequently becomes worthless, the debt can qualify as a business bad debt if all the following requirements are met. 2010 tax preparation software You made the guarantee in the course of your trade or business. 2010 tax preparation software You have a legal duty to pay the debt. 2010 tax preparation software You made the guarantee before the debt became worthless. 2010 tax preparation software You meet this requirement if you reasonably expected you would not have to pay the debt without full reimbursement from the borrower. 2010 tax preparation software You received reasonable consideration for making the guarantee. 2010 tax preparation software You meet this requirement if you made the guarantee in accord with normal business practice or for a good faith business purpose. 2010 tax preparation software Example. 2010 tax preparation software Jane Zayne owns the Zayne Dress Company. 2010 tax preparation software She guaranteed payment of a $20,000 note for Elegant Fashions, a dress outlet. 2010 tax preparation software Elegant Fashions is one of Zayne's largest clients. 2010 tax preparation software Elegant Fashions later defaulted on the loan. 2010 tax preparation software As a result, Ms. 2010 tax preparation software Zayne paid the remaining balance of the loan in full to the bank. 2010 tax preparation software She can claim a business bad debt deduction only for the amount she paid, since her guarantee was made in the course of her trade or business for a good faith business purpose. 2010 tax preparation software She was motivated by the desire to retain one of her better clients and keep a sales outlet. 2010 tax preparation software Deductible in the year paid. 2010 tax preparation software   If you make a payment on a loan you guaranteed, you can deduct it in the year paid, unless you have rights against the borrower. 2010 tax preparation software Rights against a borrower. 2010 tax preparation software   When you make payment on a loan you guaranteed, you may have the right to take the place of the lender. 2010 tax preparation software The debt is then owed to you. 2010 tax preparation software If you have this right, or some other right to demand payment from the borrower, you cannot claim a bad debt deduction until these rights become partly or totally worthless. 2010 tax preparation software Joint debtor. 2010 tax preparation software   If two or more debtors jointly owe you money, your inability to collect from one does not enable you to deduct a proportionate amount as a bad debt. 2010 tax preparation software Sale of mortgaged property. 2010 tax preparation software   If mortgaged or pledged property is sold for less than the debt, the unpaid, uncollectible balance of the debt is a bad debt. 2010 tax preparation software When a Debt Becomes Worthless A debt becomes worthless when there is no longer any chance the amount owed will be paid. 2010 tax preparation software This may occur when the debt is due or prior to that date. 2010 tax preparation software To demonstrate worthlessness, you must only show that you have taken reasonable steps to collect the debt but were unable to do so. 2010 tax preparation software It is not necessary to go to court if you can show that a judgment from the court would be uncollectible. 2010 tax preparation software Bankruptcy of your debtor is generally good evidence of the worthlessness of at least a part of an unsecured and unpreferred debt. 2010 tax preparation software Property received for debt. 2010 tax preparation software   If you receive property in partial settlement of a debt, reduce the debt by the property's FMV, which becomes the property's basis. 2010 tax preparation software You can deduct the remaining debt as a bad debt if and when it becomes worthless. 2010 tax preparation software   If you later sell the property for more than its basis, any gain on the sale is due to the appreciation of the property. 2010 tax preparation software It is not a recovery of a bad debt. 2010 tax preparation software For information on the sale of an asset, see Publication 544. 2010 tax preparation software How To Claim a Business Bad Debt There are two methods to claim a business bad debt. 2010 tax preparation software The specific charge-off method. 2010 tax preparation software The nonaccrual-experience method. 2010 tax preparation software Generally, you must use the specific charge-off method. 2010 tax preparation software However, you may use the nonaccrual-experience method if you meet the requirements discussed later under Nonaccrual-Experience Method . 2010 tax preparation software Specific Charge-Off Method If you use the specific charge-off method, you can deduct specific business bad debts that become either partly or totally worthless during the tax year. 2010 tax preparation software However, with respect to partly worthless bad debts, your deduction is limited to the amount you charged off on your books during the year. 2010 tax preparation software Partly worthless debts. 2010 tax preparation software   You can deduct specific bad debts that become partly uncollectible during the tax year. 2010 tax preparation software Your tax deduction is limited to the amount you charge off on your books during the year. 2010 tax preparation software You do not have to charge off and deduct your partly worthless debts annually. 2010 tax preparation software You can delay the charge off until a later year. 2010 tax preparation software However, you cannot deduct any part of a debt after the year it becomes totally worthless. 2010 tax preparation software Significantly modified debt. 2010 tax preparation software   An exception to the charge-off rule exists for debt which has been significantly modified and on which the holder recognized gain. 2010 tax preparation software For more information, see Regulations section 1. 2010 tax preparation software 166-3(a)(3). 2010 tax preparation software Deduction disallowed. 2010 tax preparation software   Generally, you can claim a partial bad debt deduction only in the year you make the charge-off on your books. 2010 tax preparation software If, under audit, the IRS does not allow your deduction and the debt becomes partly worthless in a later tax year, you can deduct the amount you charged off in that year plus the disallowed amount charged off in the earlier year. 2010 tax preparation software The charge-off in the earlier year, unless reversed on your books, fulfills the charge-off requirement for the later year. 2010 tax preparation software Totally worthless debts. 2010 tax preparation software   If a debt becomes totally worthless in the current tax year, you can deduct the entire amount, less any amount deducted in an earlier tax year when the debt was only partly worthless. 2010 tax preparation software   You do not have to make an actual charge-off on your books to claim a bad debt deduction for a totally worthless debt. 2010 tax preparation software However, you may want to do so. 2010 tax preparation software If you do not and the IRS later rules the debt is only partly worthless, you will not be allowed a deduction for the debt in that tax year because a deduction of a partly worthless bad debt is limited to the amount actually charged off. 2010 tax preparation software See Partly worthless debts, earlier. 2010 tax preparation software Filing a claim for refund. 2010 tax preparation software   If you did not deduct a bad debt on your original return for the year it became worthless, you can file a claim for a credit or refund. 2010 tax preparation software If the bad debt was totally worthless, you must file the claim by the later of the following dates. 2010 tax preparation software 7 years from the date your original return was due (not including extensions). 2010 tax preparation software 2 years from the date you paid the tax. 2010 tax preparation software   If the claim is for a partly worthless bad debt, you must file the claim by the later of the following dates. 2010 tax preparation software 3 years from the date you filed your original return. 2010 tax preparation software 2 years from the date you paid the tax. 2010 tax preparation software You may have longer to file the claim if you were unable to manage your financial affairs due to a physical or mental impairment. 2010 tax preparation software Such an impairment requires proof of existence. 2010 tax preparation software   For details and more information about filing a claim, see Publication 556. 2010 tax preparation software Use one of the following forms to file a claim. 2010 tax preparation software For more information, see the instructions for the applicable form. 2010 tax preparation software Table 10-1. 2010 tax preparation software Forms Used To File a Claim IF you filed as a. 2010 tax preparation software . 2010 tax preparation software . 2010 tax preparation software THEN file. 2010 tax preparation software . 2010 tax preparation software . 2010 tax preparation software Sole proprietor or farmer Form 1040X Corporation Form 1120X S corporation Form 1120S and check box H(4) Partnership Form 1065X if filing on paper or  Form 1065 and check box G(5) if filing electronically Nonaccrual-Experience Method If you use an accrual method of accounting and qualify under the rules explained in this section, you can use the nonaccrual-experience method for bad debts. 2010 tax preparation software Under this method, you do not accrue service related income you expect to be uncollectible. 2010 tax preparation software Because the expected uncollectible amounts are not included in income, these amounts are not later deducted from income. 2010 tax preparation software Generally, you can use the nonaccrual-experience method for accounts receivable for services you performed only if: The services are provided in the fields of accounting, actuarial science, architecture, consulting, engineering, health, law, or the performing arts, or You meet the $5 million gross receipts test for all prior years. 2010 tax preparation software Service related income. 2010 tax preparation software   You can use the nonaccrual-experience method only for amounts earned by performing services. 2010 tax preparation software You cannot use this method for amounts owed to you from activities such as lending money, selling goods, or acquiring receivables or other rights to receive payment. 2010 tax preparation software Gross receipts test. 2010 tax preparation software   To find out if you meet the $5 million gross receipts test for all prior years, you must figure the average annual gross receipts for each prior year. 2010 tax preparation software If your average annual gross receipts for any year exceeds $5 million, you cannot use the non-accural experience method. 2010 tax preparation software   The average annual gross receipts for any year is the average of gross receipts from the year in question and the 2 previous years. 2010 tax preparation software For example, if you were figuring the average annual gross receipts for 2013, you would average your gross receipts for 2011, 2012, and 2013. 2010 tax preparation software Interest or penalty charged. 2010 tax preparation software   Generally, you cannot use the nonaccrual-experience method for amounts due on which you charge interest or a late payment penalty. 2010 tax preparation software However, do not treat a discount offered for early payment as the charging of interest or a penalty if both the following apply. 2010 tax preparation software You otherwise accrue the full amount due as gross income at the time you provide the services. 2010 tax preparation software You treat the discount allowed for early payment as an adjustment to gross income in the year of payment. 2010 tax preparation software Change in accounting method. 2010 tax preparation software   Generally, you must obtain consent to change to a nonaccrual-experience method (other than one of the safe harbor methods) or to change from one method to another. 2010 tax preparation software See Form 3115 and the Instructions for Form 3115 for more information. 2010 tax preparation software Recovery of a Bad Debt If you claim a deduction for a bad debt on your income tax return and later recover (collect) all or part of it, you may have to include all or part of the recovery in gross income. 2010 tax preparation software The amount you include is limited to the amount you actually deducted. 2010 tax preparation software However, you can exclude the amount deducted that did not reduce your tax. 2010 tax preparation software Report the recovery as “Other income” on the appropriate business form or schedule. 2010 tax preparation software See Recoveries in Publication 525 for more information. 2010 tax preparation software Net operating loss (NOL) carryover. 2010 tax preparation software   If a bad debt deduction increases an NOL carryover that has not expired before the beginning of the tax year in which the recovery takes place, you treat the deduction as having reduced your tax. 2010 tax preparation software A bad debt deduction that contributes to a NOL helps lower taxes in the year to which you carry the NOL. 2010 tax preparation software For more information about NOLs, see Publication 536. 2010 tax preparation software Also, see the Instructions for Form 1045, and the Instructions for Form 1139. 2010 tax preparation software Prev  Up  Next   Home   More Online Publications