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2012 Tax Return Form 1040

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2012 Tax Return Form 1040

2012 tax return form 1040 17. 2012 tax return form 1040   Individual Retirement Arrangements (IRAs) Table of Contents What's New Reminders Introduction Useful Items - You may want to see: Traditional IRAsWho Can Open a Traditional IRA? When and How Can a Traditional IRA Be Opened? How Much Can Be Contributed? When Can Contributions Be Made? How Much Can You Deduct? Nondeductible Contributions Inherited IRAs Can You Move Retirement Plan Assets? When Can You Withdraw or Use IRA Assets? When Must You Withdraw IRA Assets? (Required Minimum Distributions) Are Distributions Taxable? What Acts Result in Penalties or Additional Taxes? Roth IRAsWhat Is a Roth IRA? When Can a Roth IRA Be Opened? Can You Contribute to a Roth IRA? Can You Move Amounts Into a Roth IRA? Are Distributions Taxable? What's New Traditional IRA contribution and deduction limit. 2012 tax return form 1040  The contribution limit to your traditional IRA for 2013 will be increased to the smaller of the following amounts: $5,500, or Your taxable compensation for the year. 2012 tax return form 1040 If you were age 50 or older before 2014, the most that can be contributed to your traditional IRA for 2013 will be the smaller of the following amounts: $6,500, or Your taxable compensation for the year. 2012 tax return form 1040 For more information, see How Much Can Be Contributed? later. 2012 tax return form 1040 Roth IRA contribution limit. 2012 tax return form 1040  If contributions on your behalf are made only to Roth IRAs, your contribution limit for 2013 will generally be the lesser of: $5,500, or Your taxable compensation for the year. 2012 tax return form 1040 If you were age 50 or older before 2014 and contributions on your behalf were made only to Roth IRAs, your contribution limit for 2013 will generally be the lesser of: $6,500, or Your taxable compensation for the year. 2012 tax return form 1040 However, if your modified adjusted gross income (AGI) is above a certain amount, your contribution limit may be reduced. 2012 tax return form 1040 For more information, see How Much Can Be Contributed? under Can You Contribute to a Roth IRA? later. 2012 tax return form 1040 Modified AGI limit for traditional IRA contributions increased. 2012 tax return form 1040  For 2013, if you were covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified AGI is: More than $95,000 but less than $115,000 for a married couple filing a joint return or a qualifying widow(er), More than $59,000 but less than $69,000 for a single individual or head of household, or Less than $10,000 for a married individual filing a separate return. 2012 tax return form 1040 If you either lived with your spouse or file a joint return, and your spouse was covered by a retirement plan at work, but you were not, your deduction is phased out if your modified AGI is more than $178,000 but less than $188,000. 2012 tax return form 1040 If your modified AGI is $188,000 or more, you cannot take a deduction for contributions to a traditional IRA. 2012 tax return form 1040 See How Much Can You Deduct , later. 2012 tax return form 1040 Modified AGI limit for Roth IRA contributions increased. 2012 tax return form 1040  For 2013, your Roth IRA contribution limit is reduced (phased out) in the following situations. 2012 tax return form 1040 Your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $178,000. 2012 tax return form 1040 You cannot make a Roth IRA contribution if your modified AGI is $188,000 or more. 2012 tax return form 1040 Your filing status is single, head of household, or married filing separately and you did not live with your spouse at any time in 2013 and your modified AGI is at least $112,000. 2012 tax return form 1040 You cannot make a Roth IRA contribution if your modified AGI is $127,000 or more. 2012 tax return form 1040 Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than -0-. 2012 tax return form 1040 You cannot make a Roth IRA contribution if your modified AGI is $10,000 or more. 2012 tax return form 1040 See Can You Contribute to a Roth IRA , later. 2012 tax return form 1040 Net Investment Income Tax. 2012 tax return form 1040   For purposes of the Net Investment Income Tax (NIIT), net investment income does not include distributions from a qualified retirement plan including IRAs (for example; 401(a), 403(a), 403(b), 408, 408A, or 457(b) plans). 2012 tax return form 1040 However, these distributions are taken into account when determining the modified adjusted gross income threshold. 2012 tax return form 1040 Distributions from a nonqualified retirement plan are included in net investment income. 2012 tax return form 1040 See Form 8960, Net Investment Income Tax - Individuals, Estates, and Trusts, and its instructions for more information. 2012 tax return form 1040 Name change. 2012 tax return form 1040  All spousal IRAs have been renamed Kay Bailey Hutchison Spousal IRAs. 2012 tax return form 1040 There are no changes to the rules regarding these IRAs. 2012 tax return form 1040 See Kay Bailey Hutchison Spousal IRA Limit , later, for more information. 2012 tax return form 1040 Reminders 2014 limits. 2012 tax return form 1040   You can find information about the 2014 contribution and AGI limits in Publication 590. 2012 tax return form 1040 Contributions to both traditional and Roth IRAs. 2012 tax return form 1040   For information on your combined contribution limit if you contribute to both traditional and Roth IRAs, see Roth IRAs and traditional IRAs under How Much Can Be Contributed? in Roth IRAs, later. 2012 tax return form 1040 Statement of required minimum distribution. 2012 tax return form 1040  If a minimum distribution from your IRA is required, the trustee, custodian, or issuer that held the IRA at the end of the preceding year must either report the amount of the required minimum distribution to you, or offer to calculate it for you. 2012 tax return form 1040 The report or offer must include the date by which the amount must be distributed. 2012 tax return form 1040 The report is due January 31 of the year in which the minimum distribution is required. 2012 tax return form 1040 It can be provided with the year-end fair market value statement that you normally get each year. 2012 tax return form 1040 No report is required for IRAs of owners who have died. 2012 tax return form 1040 IRA interest. 2012 tax return form 1040  Although interest earned from your IRA is generally not taxed in the year earned, it is not tax-exempt interest. 2012 tax return form 1040 Tax on your traditional IRA is generally deferred until you take a distribution. 2012 tax return form 1040 Do not report this interest on your tax return as tax-exempt interest. 2012 tax return form 1040 Form 8606. 2012 tax return form 1040   To designate contributions as nondeductible, you must file Form 8606, Nondeductible IRAs. 2012 tax return form 1040 The term “50 or older” is used several times in this chapter. 2012 tax return form 1040 It refers to an IRA owner who is age 50 or older by the end of the tax year. 2012 tax return form 1040 Introduction An individual retirement arrangement (IRA) is a personal savings plan that gives you tax advantages for setting aside money for your retirement. 2012 tax return form 1040 This chapter discusses the following topics. 2012 tax return form 1040 The rules for a traditional IRA (any IRA that is not a Roth or SIMPLE IRA). 2012 tax return form 1040 The Roth IRA, which features nondeductible contributions and tax-free distributions. 2012 tax return form 1040 Simplified Employee Pensions (SEPs) and Savings Incentive Match Plans for Employees (SIMPLEs) are not discussed in this chapter. 2012 tax return form 1040 For more information on these plans and employees' SEP IRAs and SIMPLE IRAs that are part of these plans, see Publications 560 and 590. 2012 tax return form 1040 For information about contributions, deductions, withdrawals, transfers, rollovers, and other transactions, see Publication 590. 2012 tax return form 1040 Useful Items - You may want to see: Publication 560 Retirement Plans for Small Business 590 Individual Retirement Arrangements (IRAs) Form (and Instructions) 5329 Additional Taxes on Qualified Plans (including IRAs) and Other Tax-Favored Accounts 8606 Nondeductible IRAs Traditional IRAs In this chapter, the original IRA (sometimes called an ordinary or regular IRA) is referred to as a “traditional IRA. 2012 tax return form 1040 ” A traditional IRA is any IRA that is not a Roth IRA or a SIMPLE IRA. 2012 tax return form 1040 Two advantages of a traditional IRA are: You may be able to deduct some or all of your contributions to it, depending on your circumstances, and Generally, amounts in your IRA, including earnings and gains, are not taxed until they are distributed. 2012 tax return form 1040 Who Can Open a Traditional IRA? You can open and make contributions to a traditional IRA if: You (or, if you file a joint return, your spouse) received taxable compensation during the year, and You were not age 70½ by the end of the year. 2012 tax return form 1040 What is compensation?   Generally, compensation is what you earn from working. 2012 tax return form 1040 Compensation includes wages, salaries, tips, professional fees, bonuses, and other amounts you receive for providing personal services. 2012 tax return form 1040 The IRS treats as compensation any amount properly shown in box 1 (Wages, tips, other compensation) of Form W-2, Wage and Tax Statement, provided that amount is reduced by any amount properly shown in box 11 (Nonqualified plans). 2012 tax return form 1040   Scholarship and fellowship payments are compensation for this purpose only if shown in box 1 of Form W-2. 2012 tax return form 1040   Compensation also includes commissions and taxable alimony and separate maintenance payments. 2012 tax return form 1040 Self-employment income. 2012 tax return form 1040   If you are self-employed (a sole proprietor or a partner), compensation is the net earnings from your trade or business (provided your personal services are a material income-producing factor) reduced by the total of: The deduction for contributions made on your behalf to retirement plans, and The deductible part of your self-employment tax. 2012 tax return form 1040   Compensation includes earnings from self-employment even if they are not subject to self-employment tax because of your religious beliefs. 2012 tax return form 1040 Nontaxable combat pay. 2012 tax return form 1040   For IRA purposes, if you were a member of the U. 2012 tax return form 1040 S. 2012 tax return form 1040 Armed Forces, your compensation includes any nontaxable combat pay you receive. 2012 tax return form 1040 What is not compensation?   Compensation does not include any of the following items. 2012 tax return form 1040 Earnings and profits from property, such as rental income, interest income, and dividend income. 2012 tax return form 1040 Pension or annuity income. 2012 tax return form 1040 Deferred compensation received (compensation payments postponed from a past year). 2012 tax return form 1040 Income from a partnership for which you do not provide services that are a material income-producing factor. 2012 tax return form 1040 Conservation Reserve Program (CRP) payments reported on Schedule SE (Form 1040), line 1b. 2012 tax return form 1040 Any amounts (other than combat pay) you exclude from income, such as foreign earned income and housing costs. 2012 tax return form 1040 When and How Can a Traditional IRA Be Opened? You can open a traditional IRA at any time. 2012 tax return form 1040 However, the time for making contributions for any year is limited. 2012 tax return form 1040 See When Can Contributions Be Made , later. 2012 tax return form 1040 You can open different kinds of IRAs with a variety of organizations. 2012 tax return form 1040 You can open an IRA at a bank or other financial institution or with a mutual fund or life insurance company. 2012 tax return form 1040 You can also open an IRA through your stockbroker. 2012 tax return form 1040 Any IRA must meet Internal Revenue Code requirements. 2012 tax return form 1040 Kinds of traditional IRAs. 2012 tax return form 1040   Your traditional IRA can be an individual retirement account or annuity. 2012 tax return form 1040 It can be part of either a simplified employee pension (SEP) or an employer or employee association trust account. 2012 tax return form 1040 How Much Can Be Contributed? There are limits and other rules that affect the amount that can be contributed to a traditional IRA. 2012 tax return form 1040 These limits and other rules are explained below. 2012 tax return form 1040 Community property laws. 2012 tax return form 1040   Except as discussed later under Kay Bailey Hutchison Spousal IRA limit , each spouse figures his or her limit separately, using his or her own compensation. 2012 tax return form 1040 This is the rule even in states with community property laws. 2012 tax return form 1040 Brokers' commissions. 2012 tax return form 1040   Brokers' commissions paid in connection with your traditional IRA are subject to the contribution limit. 2012 tax return form 1040 Trustees' fees. 2012 tax return form 1040   Trustees' administrative fees are not subject to the contribution limit. 2012 tax return form 1040 Qualified reservist repayments. 2012 tax return form 1040   If you are (or were) a member of a reserve component and you were ordered or called to active duty after September 11, 2001, you may be able to contribute (repay) to an IRA amounts equal to any qualified reservist distributions you received. 2012 tax return form 1040 You can make these repayment contributions even if they would cause your total contributions to the IRA to be more than the general limit on contributions. 2012 tax return form 1040 To be eligible to make these repayment contributions, you must have received a qualified reservist distribution from an IRA or from a section 401(k) or 403(b) plan or similar arrangement. 2012 tax return form 1040   For more information, see Qualified reservist repayments under How Much Can Be Contributed? in chapter 1 of Publication 590. 2012 tax return form 1040 Contributions on your behalf to a traditional IRA reduce your limit for contributions to a Roth IRA. 2012 tax return form 1040 (See Roth IRAs, later. 2012 tax return form 1040 ) General limit. 2012 tax return form 1040   For 2013, the most that can be contributed to your traditional IRA generally is the smaller of the following amounts. 2012 tax return form 1040 $5,500 ($6,500 if you are 50 or older). 2012 tax return form 1040 Your taxable compensation (defined earlier) for the year. 2012 tax return form 1040 This is the most that can be contributed regardless of whether the contributions are to one or more traditional IRAs or whether all or part of the contributions are nondeductible. 2012 tax return form 1040 (See Nondeductible Contributions , later. 2012 tax return form 1040 ) Qualified reservist repayments do not affect this limit. 2012 tax return form 1040 Example 1. 2012 tax return form 1040 Betty, who is 34 years old and single, earned $24,000 in 2013. 2012 tax return form 1040 Her IRA contributions for 2013 are limited to $5,500. 2012 tax return form 1040 Example 2. 2012 tax return form 1040 John, an unmarried college student working part time, earned $3,500 in 2013. 2012 tax return form 1040 His IRA contributions for 2013 are limited to $3,500, the amount of his compensation. 2012 tax return form 1040 Kay Bailey Hutchison Spousal IRA limit. 2012 tax return form 1040   For 2013, if you file a joint return and your taxable compensation is less than that of your spouse, the most that can be contributed for the year to your IRA is the smaller of the following amounts. 2012 tax return form 1040 $5,500 ($6,500 if you are 50 or older). 2012 tax return form 1040 The total compensation includible in the gross income of both you and your spouse for the year, reduced by the following two amounts. 2012 tax return form 1040 Your spouse's IRA contribution for the year to a traditional IRA. 2012 tax return form 1040 Any contribution for the year to a Roth IRA on behalf of your spouse. 2012 tax return form 1040 This means that the total combined contributions that can be made for the year to your IRA and your spouse's IRA can be as much as $11,000 ($12,000 if only one of you is 50 or older, or $13,000 if both of you are 50 or older). 2012 tax return form 1040 When Can Contributions Be Made? As soon as you open your traditional IRA, contributions can be made to it through your chosen sponsor (trustee or other administrator). 2012 tax return form 1040 Contributions must be in the form of money (cash, check, or money order). 2012 tax return form 1040 Property cannot be contributed. 2012 tax return form 1040 Contributions must be made by due date. 2012 tax return form 1040   Contributions can be made to your traditional IRA for a year at any time during the year or by the due date for filing your return for that year, not including extensions. 2012 tax return form 1040 Age 70½ rule. 2012 tax return form 1040   Contributions cannot be made to your traditional IRA for the year in which you reach age 70½ or for any later year. 2012 tax return form 1040   You attain age 70½ on the date that is 6 calendar months after the 70th anniversary of your birth. 2012 tax return form 1040 If you were born on or before June 30, 1943, you cannot contribute for 2013 or any later year. 2012 tax return form 1040 Designating year for which contribution is made. 2012 tax return form 1040   If an amount is contributed to your traditional IRA between January 1 and April 15, you should tell the sponsor which year (the current year or the previous year) the contribution is for. 2012 tax return form 1040 If you do not tell the sponsor which year it is for, the sponsor can assume, and report to the IRS, that the contribution is for the current year (the year the sponsor received it). 2012 tax return form 1040 Filing before a contribution is made. 2012 tax return form 1040   You can file your return claiming a traditional IRA contribution before the contribution is actually made. 2012 tax return form 1040 Generally, the contribution must be made by the due date of your return, not including extensions. 2012 tax return form 1040 Contributions not required. 2012 tax return form 1040   You do not have to contribute to your traditional IRA for every tax year, even if you can. 2012 tax return form 1040 How Much Can You Deduct? Generally, you can deduct the lesser of: The contributions to your traditional IRA for the year, or The general limit (or the Kay Bailey Hutchison Spousal IRA limit, if it applies). 2012 tax return form 1040 However, if you or your spouse was covered by an employer retirement plan, you may not be able to deduct this amount. 2012 tax return form 1040 See Limit If Covered by Employer Plan , later. 2012 tax return form 1040 You may be able to claim a credit for contributions to your traditional IRA. 2012 tax return form 1040 For more information, see chapter 37. 2012 tax return form 1040 Trustees' fees. 2012 tax return form 1040   Trustees' administrative fees that are billed separately and paid in connection with your traditional IRA are not deductible as IRA contributions. 2012 tax return form 1040 However, they may be deductible as a miscellaneous itemized deduction on Schedule A (Form 1040). 2012 tax return form 1040 See chapter 28. 2012 tax return form 1040 Brokers' commissions. 2012 tax return form 1040   Brokers' commissions are part of your IRA contribution and, as such, are deductible subject to the limits. 2012 tax return form 1040 Full deduction. 2012 tax return form 1040   If neither you nor your spouse was covered for any part of the year by an employer retirement plan, you can take a deduction for total contributions to one or more traditional IRAs of up to the lesser of: $5,500 ($6,500 if you are age 50 or older in 2013). 2012 tax return form 1040 100% of your compensation. 2012 tax return form 1040 This limit is reduced by any contributions made to a 501(c)(18) plan on your behalf. 2012 tax return form 1040 Kay Bailey Hutchison Spousal IRA. 2012 tax return form 1040   In the case of a married couple with unequal compensation who file a joint return, the deduction for contributions to the traditional IRA of the spouse with less compensation is limited to the lesser of the following amounts. 2012 tax return form 1040 $5,500 ($6,500 if the spouse with the lower compensation is age 50 or older in 2013). 2012 tax return form 1040 The total compensation includible in the gross income of both spouses for the year reduced by the following three amounts. 2012 tax return form 1040 The IRA deduction for the year of the spouse with the greater compensation. 2012 tax return form 1040 Any designated nondeductible contribution for the year made on behalf of the spouse with the greater compensation. 2012 tax return form 1040 Any contributions for the year to a Roth IRA on behalf of the spouse with the greater compensation. 2012 tax return form 1040 This limit is reduced by any contributions to a 501(c)(18) plan on behalf of the spouse with the lesser compensation. 2012 tax return form 1040 Note. 2012 tax return form 1040 If you were divorced or legally separated (and did not remarry) before the end of the year, you cannot deduct any contributions to your spouse's IRA. 2012 tax return form 1040 After a divorce or legal separation, you can deduct only contributions to your own IRA. 2012 tax return form 1040 Your deductions are subject to the rules for single individuals. 2012 tax return form 1040 Covered by an employer retirement plan. 2012 tax return form 1040   If you or your spouse was covered by an employer retirement plan at any time during the year for which contributions were made, your deduction may be further limited. 2012 tax return form 1040 This is discussed later under Limit If Covered by Employer Plan . 2012 tax return form 1040 Limits on the amount you can deduct do not affect the amount that can be contributed. 2012 tax return form 1040 See Nondeductible Contributions , later. 2012 tax return form 1040 Are You Covered by an Employer Plan? The Form W-2 you receive from your employer has a box used to indicate whether you were covered for the year. 2012 tax return form 1040 The “Retirement plan” box should be checked if you were covered. 2012 tax return form 1040 Reservists and volunteer firefighters should also see Situations in Which You Are Not Covered by an Employer Plan , later. 2012 tax return form 1040 If you are not certain whether you were covered by your employer's retirement plan, you should ask your employer. 2012 tax return form 1040 Federal judges. 2012 tax return form 1040   For purposes of the IRA deduction, federal judges are covered by an employer retirement plan. 2012 tax return form 1040 For Which Year(s) Are You Covered by an Employer Plan? Special rules apply to determine the tax years for which you are covered by an employer plan. 2012 tax return form 1040 These rules differ depending on whether the plan is a defined contribution plan or a defined benefit plan. 2012 tax return form 1040 Tax year. 2012 tax return form 1040   Your tax year is the annual accounting period you use to keep records and report income and expenses on your income tax return. 2012 tax return form 1040 For almost all people, the tax year is the calendar year. 2012 tax return form 1040 Defined contribution plan. 2012 tax return form 1040   Generally, you are covered by a defined contribution plan for a tax year if amounts are contributed or allocated to your account for the plan year that ends with or within that tax year. 2012 tax return form 1040   A defined contribution plan is a plan that provides for a separate account for each person covered by the plan. 2012 tax return form 1040 Types of defined contribution plans include profit-sharing plans, stock bonus plans, and money purchase pension plans. 2012 tax return form 1040 Defined benefit plan. 2012 tax return form 1040   If you are eligible to participate in your employer's defined benefit plan for the plan year that ends within your tax year, you are covered by the plan. 2012 tax return form 1040 This rule applies even if you: Declined to participate in the plan, Did not make a required contribution, or Did not perform the minimum service required to accrue a benefit for the year. 2012 tax return form 1040   A defined benefit plan is any plan that is not a defined contribution plan. 2012 tax return form 1040 Defined benefit plans include pension plans and annuity plans. 2012 tax return form 1040 No vested interest. 2012 tax return form 1040   If you accrue a benefit for a plan year, you are covered by that plan even if you have no vested interest in (legal right to) the accrual. 2012 tax return form 1040 Situations in Which You Are Not Covered by an Employer Plan Unless you are covered under another employer plan, you are not covered by an employer plan if you are in one of the situations described below. 2012 tax return form 1040 Social security or railroad retirement. 2012 tax return form 1040   Coverage under social security or railroad retirement is not coverage under an employer retirement plan. 2012 tax return form 1040 Benefits from a previous employer's plan. 2012 tax return form 1040   If you receive retirement benefits from a previous employer's plan, you are not covered by that plan. 2012 tax return form 1040 Reservists. 2012 tax return form 1040   If the only reason you participate in a plan is because you are a member of a reserve unit of the armed forces, you may not be covered by the plan. 2012 tax return form 1040 You are not covered by the plan if both of the following conditions are met. 2012 tax return form 1040 The plan you participate in is established for its employees by: The United States, A state or political subdivision of a state, or An instrumentality of either (a) or (b) above. 2012 tax return form 1040 You did not serve more than 90 days on active duty during the year (not counting duty for training). 2012 tax return form 1040 Volunteer firefighters. 2012 tax return form 1040   If the only reason you participate in a plan is because you are a volunteer firefighter, you may not be covered by the plan. 2012 tax return form 1040 You are not covered by the plan if both of the following conditions are met. 2012 tax return form 1040 The plan you participate in is established for its employees by: The United States, A state or political subdivision of a state, or An instrumentality of either (a) or (b) above. 2012 tax return form 1040 Your accrued retirement benefits at the beginning of the year will not provide more than $1,800 per year at retirement. 2012 tax return form 1040 Limit If Covered by Employer Plan If either you or your spouse was covered by an employer retirement plan, you may be entitled to only a partial (reduced) deduction or no deduction at all, depending on your income and your filing status. 2012 tax return form 1040 Your deduction begins to decrease (phase out) when your income rises above a certain amount and is eliminated altogether when it reaches a higher amount. 2012 tax return form 1040 These amounts vary depending on your filing status. 2012 tax return form 1040 To determine if your deduction is subject to phaseout, you must determine your modified adjusted gross income (AGI) and your filing status. 2012 tax return form 1040 See Filing status and Modified adjusted gross income (AGI) , later. 2012 tax return form 1040 Then use Table 17-1 or 17-2 to determine if the phaseout applies. 2012 tax return form 1040 Social security recipients. 2012 tax return form 1040   Instead of using Table 17-1 or Table 17-2, use the worksheets in Appendix B of Publication 590 if, for the year, all of the following apply. 2012 tax return form 1040 You received social security benefits. 2012 tax return form 1040 You received taxable compensation. 2012 tax return form 1040 Contributions were made to your traditional IRA. 2012 tax return form 1040 You or your spouse was covered by an employer retirement plan. 2012 tax return form 1040 Use those worksheets to figure your IRA deduction, your nondeductible contribution, and the taxable portion, if any, of your social security benefits. 2012 tax return form 1040 Deduction phaseout. 2012 tax return form 1040   If you were covered by an employer retirement plan and you did not receive any social security retirement benefits, your IRA deduction may be reduced or eliminated depending on your filing status and modified AGI as shown in Table 17-1. 2012 tax return form 1040 Table 17-1. 2012 tax return form 1040 Effect of Modified AGI1 on Deduction if You Are Covered by Retirement Plan at Work If you are covered by a retirement plan at work, use this table to determine if your modified AGI affects the amount of your deduction. 2012 tax return form 1040 IF your filing status is. 2012 tax return form 1040 . 2012 tax return form 1040 . 2012 tax return form 1040   AND your modified AGI is. 2012 tax return form 1040 . 2012 tax return form 1040 . 2012 tax return form 1040   THEN you can take. 2012 tax return form 1040 . 2012 tax return form 1040 . 2012 tax return form 1040 single   or  head of household   $59,000 or less   a full deduction. 2012 tax return form 1040   more than $59,000 but less than $69,000   a partial deduction. 2012 tax return form 1040   $69,000 or more   no deduction. 2012 tax return form 1040 married filing jointly   or  qualifying widow(er)   $95,000 or less   a full deduction. 2012 tax return form 1040   more than $95,000 but less than $115,000   a partial deduction. 2012 tax return form 1040   $115,000 or more   no deduction. 2012 tax return form 1040 married filing separately2   less than $10,000   a partial deduction. 2012 tax return form 1040   $10,000 or more   no deduction. 2012 tax return form 1040 1Modified AGI (adjusted gross income). 2012 tax return form 1040 See Modified adjusted gross income (AGI) . 2012 tax return form 1040 2If you did not live with your spouse at any time during the year, your filing status is considered Single for this purpose (therefore, your IRA deduction is determined under the “Single” column). 2012 tax return form 1040 If your spouse is covered. 2012 tax return form 1040   If you are not covered by an employer retirement plan, but your spouse is, and you did not receive any social security benefits, your IRA deduction may be reduced or eliminated entirely depending on your filing status and modified AGI as shown in Table 17-2. 2012 tax return form 1040 Filing status. 2012 tax return form 1040   Your filing status depends primarily on your marital status. 2012 tax return form 1040 For this purpose, you need to know if your filing status is single or head of household, married filing jointly or qualifying widow(er), or married filing separately. 2012 tax return form 1040 If you need more information on filing status, see chapter 2. 2012 tax return form 1040 Lived apart from spouse. 2012 tax return form 1040   If you did not live with your spouse at any time during the year and you file a separate return, your filing status, for this purpose, is single. 2012 tax return form 1040 Table 17-2. 2012 tax return form 1040 Effect of Modified AGI1 on Deduction if You Are NOT Covered by Retirement Plan at Work If you are not covered by a retirement plan at work, use this table to determine if your modified AGI affects the amount of your deduction. 2012 tax return form 1040 IF your filing status is. 2012 tax return form 1040 . 2012 tax return form 1040 . 2012 tax return form 1040   AND your modified AGI is. 2012 tax return form 1040 . 2012 tax return form 1040 . 2012 tax return form 1040   THEN you can take. 2012 tax return form 1040 . 2012 tax return form 1040 . 2012 tax return form 1040 single, head of household, or qualifying widow(er)   any amount   a full deduction. 2012 tax return form 1040 married filing jointly or separately with a spouse who is not covered by a plan at work   any amount   a full deduction. 2012 tax return form 1040 married filing jointly with a spouse who is covered by a plan at work   $178,000 or less   a full deduction. 2012 tax return form 1040   more than $178,000 but less than $188,000   a partial deduction. 2012 tax return form 1040   $188,000 or more   no deduction. 2012 tax return form 1040 married filing separately with a spouse who is covered by a plan at work2   less than $10,000   a partial deduction. 2012 tax return form 1040   $10,000 or more   no deduction. 2012 tax return form 1040 1Modified AGI (adjusted gross income). 2012 tax return form 1040 See Modified adjusted gross income (AGI) . 2012 tax return form 1040 2You are entitled to the full deduction if you did not live with your spouse at any time during the year. 2012 tax return form 1040 Modified adjusted gross income (AGI). 2012 tax return form 1040   How you figure your modified AGI depends on whether you are filing Form 1040 or Form 1040A. 2012 tax return form 1040 If you made contributions to your IRA for 2013 and received a distribution from your IRA in 2013, see Publication 590. 2012 tax return form 1040 You may be able to use Worksheet 17-1 to figure your modified AGI. 2012 tax return form 1040    Do not assume that your modified AGI is the same as your compensation. 2012 tax return form 1040 Your modified AGI may include income in addition to your compensation (discussed earlier), such as interest, dividends, and income from IRA distributions. 2012 tax return form 1040 Form 1040. 2012 tax return form 1040   If you file Form 1040, refigure the amount on the page 1 “adjusted gross income” line without taking into account any of the following eight amounts. 2012 tax return form 1040 IRA deduction. 2012 tax return form 1040 Student loan interest deduction. 2012 tax return form 1040 Tuition and fees deduction. 2012 tax return form 1040 Domestic production activities deduction. 2012 tax return form 1040 Foreign earned income exclusion. 2012 tax return form 1040 Foreign housing exclusion or deduction. 2012 tax return form 1040 Exclusion of qualified savings bond interest shown on Form 8815, Exclusion of Interest From Series EE and I U. 2012 tax return form 1040 S. 2012 tax return form 1040 Savings Bonds Issued After 1989. 2012 tax return form 1040 Exclusion of employer-provided adoption benefits shown on Form 8839, Qualified Adoption Expenses. 2012 tax return form 1040 This is your modified AGI. 2012 tax return form 1040 Form 1040A. 2012 tax return form 1040   If you file Form 1040A, refigure the amount on the page 1 “adjusted gross income” line without taking into account any of the following amounts. 2012 tax return form 1040 IRA deduction. 2012 tax return form 1040 Student loan interest deduction. 2012 tax return form 1040 Tuition and fees deduction. 2012 tax return form 1040 Exclusion of qualified savings bond interest shown on Form 8815. 2012 tax return form 1040 This is your modified AGI. 2012 tax return form 1040 Both contributions for 2013 and distributions in 2013. 2012 tax return form 1040   If all three of the following apply, any IRA distributions you received in 2013 may be partly tax free and partly taxable. 2012 tax return form 1040 You received distributions in 2013 from one or more traditional IRAs. 2012 tax return form 1040 You made contributions to a traditional IRA for 2013. 2012 tax return form 1040 Some of those contributions may be nondeductible contributions. 2012 tax return form 1040 If this is your situation, you must figure the taxable part of the traditional IRA distribution before you can figure your modified AGI. 2012 tax return form 1040 To do this, you can use Worksheet 1-5, Figuring the Taxable Part of Your IRA Distribution, in Publication 590. 2012 tax return form 1040   If at least one of the above does not apply, figure your modified AGI using Worksheet 17-1, later. 2012 tax return form 1040    How to figure your reduced IRA deduction. 2012 tax return form 1040   You can figure your reduced IRA deduction for either Form 1040 or Form 1040A by using the worksheets in chapter 1 of Publication 590. 2012 tax return form 1040 Also, the instructions for Form 1040 and Form 1040A include similar worksheets that you may be able to use instead. 2012 tax return form 1040 Worksheet 17-1. 2012 tax return form 1040 Figuring Your Modified AGI Use this worksheet to figure your modified adjusted gross income for traditional IRA purposes. 2012 tax return form 1040 1. 2012 tax return form 1040 Enter your adjusted gross income (AGI) from Form 1040, line 38, or Form 1040A, line 22, figured without taking into account the amount from Form 1040, line 32, or Form 1040A, line 17 1. 2012 tax return form 1040   2. 2012 tax return form 1040 Enter any student loan interest deduction from Form 1040, line 33, or Form 1040A, line 18 2. 2012 tax return form 1040   3. 2012 tax return form 1040 Enter any tuition and fees deduction from Form 1040, line 34, or Form 1040A, line 19 3. 2012 tax return form 1040   4. 2012 tax return form 1040 Enter any domestic production activities deduction from Form 1040, line 35 4. 2012 tax return form 1040   5. 2012 tax return form 1040 Enter any foreign earned income and/or housing exclusion from Form 2555, line 45, or Form 2555-EZ, line 18 5. 2012 tax return form 1040   6. 2012 tax return form 1040 Enter any foreign housing deduction from Form 2555, line 50 6. 2012 tax return form 1040   7. 2012 tax return form 1040 Enter any excludable savings bond interest from Form 8815, line 14 7. 2012 tax return form 1040   8. 2012 tax return form 1040 Enter any excluded employer-provided adoption benefits from Form 8839, line 28 8. 2012 tax return form 1040   9. 2012 tax return form 1040 Add lines 1 through 8. 2012 tax return form 1040 This is your Modified AGI for traditional IRA purposes 9. 2012 tax return form 1040   Reporting Deductible Contributions If you file Form 1040, enter your IRA deduction on line 32 of that form. 2012 tax return form 1040 If you file Form 1040A, enter your IRA deduction on line 17. 2012 tax return form 1040 You cannot deduct IRA contributions on Form 1040EZ. 2012 tax return form 1040 Nondeductible Contributions Although your deduction for IRA contributions may be reduced or eliminated, contributions can be made to your IRA up to the general limit or, if it applies, the Kay Bailey Hutchison Spousal IRA limit. 2012 tax return form 1040 The difference between your total permitted contributions and your IRA deduction, if any, is your nondeductible contribution. 2012 tax return form 1040 Example. 2012 tax return form 1040 Mike is 28 years old and single. 2012 tax return form 1040 In 2013, he was covered by a retirement plan at work. 2012 tax return form 1040 His salary was $57,312. 2012 tax return form 1040 His modified AGI was $70,000. 2012 tax return form 1040 Mike made a $5,500 IRA contribution for 2013. 2012 tax return form 1040 Because he was covered by a retirement plan and his modified AGI was over $69,000, he cannot deduct his $5,500 IRA contribution. 2012 tax return form 1040 He must designate this contribution as a nondeductible contribution by reporting it on Form 8606, as explained next. 2012 tax return form 1040 Form 8606. 2012 tax return form 1040   To designate contributions as nondeductible, you must file Form 8606. 2012 tax return form 1040   You do not have to designate a contribution as nondeductible until you file your tax return. 2012 tax return form 1040 When you file, you can even designate otherwise deductible contributions as nondeductible. 2012 tax return form 1040   You must file Form 8606 to report nondeductible contributions even if you do not have to file a tax return for the year. 2012 tax return form 1040 A Form 8606 is not used for the year that you make a rollover from a qualified retirement plan to a traditional IRA and the rollover includes nontaxable amounts. 2012 tax return form 1040 In those situations, a Form 8606 is completed for the year you take a distribution from that IRA. 2012 tax return form 1040 See Form 8606 under Distributions Fully or Partly Taxable, later. 2012 tax return form 1040 Failure to report nondeductible contributions. 2012 tax return form 1040   If you do not report nondeductible contributions, all of the contributions to your traditional IRA will be treated as deductible contributions when withdrawn. 2012 tax return form 1040 All distributions from your IRA will be taxed unless you can show, with satisfactory evidence, that nondeductible contributions were made. 2012 tax return form 1040 Penalty for overstatement. 2012 tax return form 1040   If you overstate the amount of nondeductible contributions on your Form 8606 for any tax year, you must pay a penalty of $100 for each overstatement, unless it was due to reasonable cause. 2012 tax return form 1040 Penalty for failure to file Form 8606. 2012 tax return form 1040   You will have to pay a $50 penalty if you do not file a required Form 8606, unless you can prove that the failure was due to reasonable cause. 2012 tax return form 1040    Tax on earnings on nondeductible contributions. 2012 tax return form 1040   As long as contributions are within the contribution limits, none of the earnings or gains on contributions (deductible or nondeductible) will be taxed until they are distributed. 2012 tax return form 1040 See When Can You Withdraw or Use IRA Assets , later. 2012 tax return form 1040 Cost basis. 2012 tax return form 1040   You will have a cost basis in your traditional IRA if you made any nondeductible contributions. 2012 tax return form 1040 Your cost basis is the sum of the nondeductible contributions to your IRA minus any withdrawals or distributions of nondeductible contributions. 2012 tax return form 1040 Inherited IRAs If you inherit a traditional IRA, you are called a beneficiary. 2012 tax return form 1040 A beneficiary can be any person or entity the owner chooses to receive the benefits of the IRA after he or she dies. 2012 tax return form 1040 Beneficiaries of a traditional IRA must include in their gross income any taxable distributions they receive. 2012 tax return form 1040 Inherited from spouse. 2012 tax return form 1040   If you inherit a traditional IRA from your spouse, you generally have the following three choices. 2012 tax return form 1040 You can: Treat it as your own IRA by designating yourself as the account owner. 2012 tax return form 1040 Treat it as your own by rolling it over into your IRA, or to the extent it is taxable, into a: Qualified employer plan, Qualified employee annuity plan (section 403(a) plan), Tax-sheltered annuity plan (section 403(b) plan), or Deferred compensation plan of a state or local government (section 457 plan). 2012 tax return form 1040 Treat yourself as the beneficiary rather than treating the IRA as your own. 2012 tax return form 1040 Treating it as your own. 2012 tax return form 1040   You will be considered to have chosen to treat the IRA as your own if: Contributions (including rollover contributions) are made to the inherited IRA, or You do not take the required minimum distribution for a year as a beneficiary of the IRA. 2012 tax return form 1040 You will only be considered to have chosen to treat the IRA as your own if: You are the sole beneficiary of the IRA, and You have an unlimited right to withdraw amounts from it. 2012 tax return form 1040   However, if you receive a distribution from your deceased spouse's IRA, you can roll that distribution over into your own IRA within the 60-day time limit, as long as the distribution is not a required distribution, even if you are not the sole beneficiary of your deceased spouse's IRA. 2012 tax return form 1040 Inherited from someone other than spouse. 2012 tax return form 1040   If you inherit a traditional IRA from anyone other than your deceased spouse, you cannot treat the inherited IRA as your own. 2012 tax return form 1040 This means that you cannot make any contributions to the IRA. 2012 tax return form 1040 It also means you cannot roll over any amounts into or out of the inherited IRA. 2012 tax return form 1040 However, you can make a trustee-to-trustee transfer as long as the IRA into which amounts are being moved is set up and maintained in the name of the deceased IRA owner for the benefit of you as beneficiary. 2012 tax return form 1040 For more information, see the discussion of inherited IRAs under Rollover From One IRA Into Another, later. 2012 tax return form 1040 Can You Move Retirement Plan Assets? You can transfer, tax free, assets (money or property) from other retirement plans (including traditional IRAs) to a traditional IRA. 2012 tax return form 1040 You can make the following kinds of transfers. 2012 tax return form 1040 Transfers from one trustee to another. 2012 tax return form 1040 Rollovers. 2012 tax return form 1040 Transfers incident to a divorce. 2012 tax return form 1040 Transfers to Roth IRAs. 2012 tax return form 1040   Under certain conditions, you can move assets from a traditional IRA or from a designated Roth account to a Roth IRA. 2012 tax return form 1040 You can also move assets from a qualified retirement plan to a Roth IRA. 2012 tax return form 1040 See Can You Move Amounts Into a Roth IRA? under Roth IRAs, later. 2012 tax return form 1040 Trustee-to-Trustee Transfer A transfer of funds in your traditional IRA from one trustee directly to another, either at your request or at the trustee's request, is not a rollover. 2012 tax return form 1040 Because there is no distribution to you, the transfer is tax free. 2012 tax return form 1040 Because it is not a rollover, it is not affected by the 1-year waiting period required between rollovers, discussed later under Rollover From One IRA Into Another . 2012 tax return form 1040 For information about direct transfers to IRAs from retirement plans other than IRAs, see Can You Move Retirement Plan Assets? in chapter 1 and Can You Move Amounts Into a Roth IRA? in chapter 2 of Publication 590. 2012 tax return form 1040 Rollovers Generally, a rollover is a tax-free distribution to you of cash or other assets from one retirement plan that you contribute (roll over) to another retirement plan. 2012 tax return form 1040 The contribution to the second retirement plan is called a “rollover contribution. 2012 tax return form 1040 ” Note. 2012 tax return form 1040 An amount rolled over tax free from one retirement plan to another is generally includible in income when it is distributed from the second plan. 2012 tax return form 1040 Kinds of rollovers to a traditional IRA. 2012 tax return form 1040   You can roll over amounts from the following plans into a traditional IRA: A traditional IRA, An employer's qualified retirement plan for its employees, A deferred compensation plan of a state or local government (section 457 plan), or A tax-sheltered annuity plan (section 403(b) plan). 2012 tax return form 1040 Treatment of rollovers. 2012 tax return form 1040   You cannot deduct a rollover contribution, but you must report the rollover distribution on your tax return as discussed later under Reporting rollovers from IRAs and under Reporting rollovers from employer plans . 2012 tax return form 1040 Kinds of rollovers from a traditional IRA. 2012 tax return form 1040   You may be able to roll over, tax free, a distribution from your traditional IRA into a qualified plan. 2012 tax return form 1040 These plans include the federal Thrift Savings Fund (for federal employees), deferred compensation plans of state or local governments (section 457 plans), and tax-sheltered annuity plans (section 403(b) plans). 2012 tax return form 1040 The part of the distribution that you can roll over is the part that would otherwise be taxable (includible in your income). 2012 tax return form 1040 Qualified plans may, but are not required to, accept such rollovers. 2012 tax return form 1040 Time limit for making a rollover contribution. 2012 tax return form 1040   You generally must make the rollover contribution by the 60th day after the day you receive the distribution from your traditional IRA or your employer's plan. 2012 tax return form 1040 The IRS may waive the 60-day requirement where the failure to do so would be against equity or good conscience, such as in the event of a casualty, disaster, or other event beyond your reasonable control. 2012 tax return form 1040 For more information, see Can You Move Retirement Plan Assets? in chapter 1 of Publication 590. 2012 tax return form 1040 Extension of rollover period. 2012 tax return form 1040   If an amount distributed to you from a traditional IRA or a qualified employer retirement plan is a frozen deposit at any time during the 60-day period allowed for a rollover, special rules extend the rollover period. 2012 tax return form 1040 For more information, see Can You Move Retirement Plan Assets? in chapter 1 of Publication 590. 2012 tax return form 1040 More information. 2012 tax return form 1040   For more information on rollovers, see Can You Move Retirement Plan Assets? in chapter 1 of Publication 590. 2012 tax return form 1040 Rollover From One IRA Into Another You can withdraw, tax free, all or part of the assets from one traditional IRA if you reinvest them within 60 days in the same or another traditional IRA. 2012 tax return form 1040 Because this is a rollover, you cannot deduct the amount that you reinvest in an IRA. 2012 tax return form 1040 Waiting period between rollovers. 2012 tax return form 1040   Generally, if you make a tax-free rollover of any part of a distribution from a traditional IRA, you cannot, within a 1-year period, make a tax-free rollover of any later distribution from that same IRA. 2012 tax return form 1040 You also cannot make a tax-free rollover of any amount distributed, within the same 1-year period, from the IRA into which you made the tax-free rollover. 2012 tax return form 1040   The 1-year period begins on the date you receive the IRA distribution, not on the date you roll it over into an IRA. 2012 tax return form 1040 Example. 2012 tax return form 1040 You have two traditional IRAs, IRA-1 and IRA-2. 2012 tax return form 1040 You make a tax-free rollover of a distribution from IRA-1 into a new traditional IRA (IRA-3). 2012 tax return form 1040 You cannot, within 1 year of the distribution from IRA-1, make a tax-free rollover of any distribution from either IRA-1 or IRA-3 into another traditional IRA. 2012 tax return form 1040 However, the rollover from IRA-1 into IRA-3 does not prevent you from making a tax-free rollover from IRA-2 into any other traditional IRA. 2012 tax return form 1040 This is because you have not, within the last year, rolled over, tax free, any distribution from IRA-2 or made a tax-free rollover into IRA-2. 2012 tax return form 1040 Exception. 2012 tax return form 1040   For an exception for distributions from failed financial institutions, see Rollover From One IRA Into Another under Can You Move Retirement Plan Assets? in chapter 1 of Publication 590. 2012 tax return form 1040 Partial rollovers. 2012 tax return form 1040   If you withdraw assets from a traditional IRA, you can roll over part of the withdrawal tax free and keep the rest of it. 2012 tax return form 1040 The amount you keep will generally be taxable (except for the part that is a return of nondeductible contributions). 2012 tax return form 1040 The amount you keep may be subject to the 10% additional tax on early distributions, discussed later under What Acts Result in Penalties or Additional Taxes? . 2012 tax return form 1040 Required distributions. 2012 tax return form 1040   Amounts that must be distributed during a particular year under the required distribution rules (discussed later) are not eligible for rollover treatment. 2012 tax return form 1040 Inherited IRAs. 2012 tax return form 1040   If you inherit a traditional IRA from your spouse, you generally can roll it over, or you can choose to make the inherited IRA your own. 2012 tax return form 1040 See Treating it as your own , earlier. 2012 tax return form 1040 Not inherited from spouse. 2012 tax return form 1040   If you inherit a traditional IRA from someone other than your spouse, you cannot roll it over or allow it to receive a rollover contribution. 2012 tax return form 1040 You must withdraw the IRA assets within a certain period. 2012 tax return form 1040 For more information, see When Must You Withdraw Assets? in chapter 1 of Publication 590. 2012 tax return form 1040 Reporting rollovers from IRAs. 2012 tax return form 1040   Report any rollover from one traditional IRA to the same or another traditional IRA on lines 15a and 15b, Form 1040, or lines 11a and 11b, Form 1040A, as follows. 2012 tax return form 1040   Enter the total amount of the distribution on Form 1040, line 15a, or Form 1040A, line 11a. 2012 tax return form 1040 If the total amount on Form 1040, line 15a, or Form 1040A, line 11a, was rolled over, enter zero on Form 1040, line 15b, or Form 1040A, line 11b. 2012 tax return form 1040 If the total distribution was not rolled over, enter the taxable portion of the part that was not rolled over on Form 1040, line 15b, or Form 1040A, line 11b. 2012 tax return form 1040 Put “Rollover” next to Form 1040, line 15b, or Form 1040A, line 11b. 2012 tax return form 1040 See your tax return instructions. 2012 tax return form 1040   If you rolled over the distribution into a qualified plan (other than an IRA) or you make the rollover in 2014, attach a statement explaining what you did. 2012 tax return form 1040 Rollover From Employer's Plan Into an IRA You can roll over into a traditional IRA all or part of an eligible rollover distribution you receive from your (or your deceased spouse's): Employer's qualified pension, profit-sharing, or stock bonus plan; Annuity plan; Tax-sheltered annuity plan (section 403(b) plan); or Governmental deferred compensation plan (section 457 plan). 2012 tax return form 1040 A qualified plan is one that meets the requirements of the Internal Revenue Code. 2012 tax return form 1040 Eligible rollover distribution. 2012 tax return form 1040   Generally, an eligible rollover distribution is any distribution of all or part of the balance to your credit in a qualified retirement plan except the following. 2012 tax return form 1040 A required minimum distribution (explained later under When Must You Withdraw IRA Assets? (Required Minimum Distributions) ). 2012 tax return form 1040 A hardship distribution. 2012 tax return form 1040 Any of a series of substantially equal periodic distributions paid at least once a year over: Your lifetime or life expectancy, The lifetimes or life expectancies of you and your beneficiary, or A period of 10 years or more. 2012 tax return form 1040 Corrective distributions of excess contributions or excess deferrals, and any income allocable to the excess, or of excess annual additions and any allocable gains. 2012 tax return form 1040 A loan treated as a distribution because it does not satisfy certain requirements either when made or later (such as upon default), unless the participant's accrued benefits are reduced (offset) to repay the loan. 2012 tax return form 1040 Dividends on employer securities. 2012 tax return form 1040 The cost of life insurance coverage. 2012 tax return form 1040 Any nontaxable amounts that you roll over into your traditional IRA become part of your basis (cost) in your IRAs. 2012 tax return form 1040 To recover your basis when you take distributions from your IRA, you must complete Form 8606 for the year of the distribution. 2012 tax return form 1040 See Form 8606 under Distributions Fully or Partly Taxable, later. 2012 tax return form 1040 Rollover by nonspouse beneficiary. 2012 tax return form 1040   A direct transfer from a deceased employee's qualified pension, profit-sharing, or stock bonus plan; annuity plan; tax-sheltered annuity (section 403(b)) plan; or governmental deferred compensation (section 457) plan to an IRA set up to receive the distribution on your behalf can be treated as an eligible rollover distribution if you are the designated beneficiary of the plan and not the employee's spouse. 2012 tax return form 1040 The IRA is treated as an inherited IRA. 2012 tax return form 1040 For more information about inherited IRAs, see Inherited IRAs , earlier. 2012 tax return form 1040 Reporting rollovers from employer plans. 2012 tax return form 1040    Enter the total distribution (before income tax or other deductions were withheld) on Form 1040, line 16a, or Form 1040A, line 12a. 2012 tax return form 1040 This amount should be shown in box 1 of Form 1099-R. 2012 tax return form 1040 From this amount, subtract any contributions (usually shown in box 5 of Form 1099-R) that were taxable to you when made. 2012 tax return form 1040 From that result, subtract the amount that was rolled over either directly or within 60 days of receiving the distribution. 2012 tax return form 1040 Enter the remaining amount, even if zero, on Form 1040, line 16b, or Form 1040A, line 12b. 2012 tax return form 1040 Also, enter "Rollover" next to Form 1040, line 16b, or Form 1040A, line 12b. 2012 tax return form 1040 Transfers Incident to Divorce If an interest in a traditional IRA is transferred from your spouse or former spouse to you by a divorce or separate maintenance decree or a written document related to such a decree, the interest in the IRA, starting from the date of the transfer, is treated as your IRA. 2012 tax return form 1040 The transfer is tax free. 2012 tax return form 1040 For detailed information, see Can You Move Retirement Plan Assets? in chapter 1 of Publication 590. 2012 tax return form 1040 Converting From Any Traditional IRA to a Roth IRA Allowable conversions. 2012 tax return form 1040   You can withdraw all or part of the assets from a traditional IRA and reinvest them (within 60 days) in a Roth IRA. 2012 tax return form 1040 The amount that you withdraw and timely contribute (convert) to the Roth IRA is called a conversion contribution. 2012 tax return form 1040 If properly (and timely) rolled over, the 10% additional tax on early distributions will not apply. 2012 tax return form 1040 However, a part or all of the conversion contribution from your traditional IRA is included in your gross income. 2012 tax return form 1040 Required distributions. 2012 tax return form 1040   You cannot convert amounts that must be distributed from your traditional IRA for a particular year (including the calendar year in which you reach age 70½) under the required distribution rules (discussed later). 2012 tax return form 1040 Income. 2012 tax return form 1040   You must include in your gross income distributions from a traditional IRA that you would have had to include in income if you had not converted them into a Roth IRA. 2012 tax return form 1040 These amounts are normally included in income on your return for the year that you converted them from a traditional IRA to a Roth IRA. 2012 tax return form 1040   You do not include in gross income any part of a distribution from a traditional IRA that is a return of your basis, as discussed later. 2012 tax return form 1040   You must file Form 8606 to report 2013 conversions from traditional, SEP, or SIMPLE IRAs to a Roth IRA in 2013 (unless you recharacterized the entire amount) and to figure the amount to include in income. 2012 tax return form 1040   If you must include any amount in your gross income, you may have to increase your withholding or make estimated tax payments. 2012 tax return form 1040 See chapter 4. 2012 tax return form 1040 Recharacterizations You may be able to treat a contribution made to one type of IRA as having been made to a different type of IRA. 2012 tax return form 1040 This is called recharacterizing the contribution. 2012 tax return form 1040 See Can You Move Retirement Plan Assets? in chapter 1 of Publication 590 for more detailed information. 2012 tax return form 1040 How to recharacterize a contribution. 2012 tax return form 1040   To recharacterize a contribution, you generally must have the contribution transferred from the first IRA (the one to which it was made) to the second IRA in a trustee-to-trustee transfer. 2012 tax return form 1040 If the transfer is made by the due date (including extensions) for your tax return for the year during which the contribution was made, you can elect to treat the contribution as having been originally made to the second IRA instead of to the first IRA. 2012 tax return form 1040 If you recharacterize your contribution, you must do all three of the following. 2012 tax return form 1040 Include in the transfer any net income allocable to the contribution. 2012 tax return form 1040 If there was a loss, the net income you must transfer may be a negative amount. 2012 tax return form 1040 Report the recharacterization on your tax return for the year during which the contribution was made. 2012 tax return form 1040 Treat the contribution as having been made to the second IRA on the date that it was actually made to the first IRA. 2012 tax return form 1040 No deduction allowed. 2012 tax return form 1040   You cannot deduct the contribution to the first IRA. 2012 tax return form 1040 Any net income you transfer with the recharacterized contribution is treated as earned in the second IRA. 2012 tax return form 1040 Required notifications. 2012 tax return form 1040   To recharacterize a contribution, you must notify both the trustee of the first IRA (the one to which the contribution was actually made) and the trustee of the second IRA (the one to which the contribution is being moved) that you have elected to treat the contribution as having been made to the second IRA rather than the first. 2012 tax return form 1040 You must make the notifications by the date of the transfer. 2012 tax return form 1040 Only one notification is required if both IRAs are maintained by the same trustee. 2012 tax return form 1040 The notification(s) must include all of the following information. 2012 tax return form 1040 The type and amount of the contribution to the first IRA that is to be recharacterized. 2012 tax return form 1040 The date on which the contribution was made to the first IRA and the year for which it was made. 2012 tax return form 1040 A direction to the trustee of the first IRA to transfer in a trustee-to-trustee transfer the amount of the contribution and any net income (or loss) allocable to the contribution to the trustee of the second IRA. 2012 tax return form 1040 The name of the trustee of the first IRA and the name of the trustee of the second IRA. 2012 tax return form 1040 Any additional information needed to make the transfer. 2012 tax return form 1040 Reporting a recharacterization. 2012 tax return form 1040   If you elect to recharacterize a contribution to one IRA as a contribution to another IRA, you must report the recharacterization on your tax return as directed by Form 8606 and its instructions. 2012 tax return form 1040 You must treat the contribution as having been made to the second IRA. 2012 tax return form 1040 When Can You Withdraw or Use IRA Assets? There are rules limiting use of your IRA assets and distributions from it. 2012 tax return form 1040 Violation of the rules generally results in additional taxes in the year of violation. 2012 tax return form 1040 See What Acts Result in Penalties or Additional Taxes , later. 2012 tax return form 1040 Contributions returned before the due date of return. 2012 tax return form 1040   If you made IRA contributions in 2013, you can withdraw them tax free by the due date of your return. 2012 tax return form 1040 If you have an extension of time to file your return, you can withdraw them tax free by the extended due date. 2012 tax return form 1040 You can do this if, for each contribution you withdraw, both of the following conditions apply. 2012 tax return form 1040 You did not take a deduction for the contribution. 2012 tax return form 1040 You withdraw any interest or other income earned on the contribution. 2012 tax return form 1040 You can take into account any loss on the contribution while it was in the IRA when calculating the amount that must be withdrawn. 2012 tax return form 1040 If there was a loss, the net income earned on the contribution may be a negative amount. 2012 tax return form 1040 Note. 2012 tax return form 1040 To calculate the amount you must withdraw, see Worksheet 1-4 under When Can You Withdraw or Use Assets? in chapter 1 of Publication 590. 2012 tax return form 1040 Earnings includible in income. 2012 tax return form 1040   You must include in income any earnings on the contributions you withdraw. 2012 tax return form 1040 Include the earnings in income for the year in which you made the contributions, not in the year in which you withdraw them. 2012 tax return form 1040 Generally, except for any part of a withdrawal that is a return of nondeductible contributions (basis), any withdrawal of your contributions after the due date (or extended due date) of your return will be treated as a taxable distribution. 2012 tax return form 1040 Excess contributions can also be recovered tax free as discussed under What Acts Result in Penalties or Additional Taxes?, later. 2012 tax return form 1040    Early distributions tax. 2012 tax return form 1040   The 10% additional tax on distributions made before you reach age 59½ does not apply to these tax-free withdrawals of your contributions. 2012 tax return form 1040 However, the distribution of interest or other income must be reported on Form 5329 and, unless the distribution qualifies as an exception to the age 59½ rule, it will be subject to this tax. 2012 tax return form 1040 When Must You Withdraw IRA Assets? (Required Minimum Distributions) You cannot keep funds in a traditional IRA indefinitely. 2012 tax return form 1040 Eventually they must be distributed. 2012 tax return form 1040 If there are no distributions, or if the distributions are not large enough, you may have to pay a 50% excise tax on the amount not distributed as required. 2012 tax return form 1040 See Excess Accumulations (Insufficient Distributions) , later. 2012 tax return form 1040 The requirements for distributing IRA funds differ depending on whether you are the IRA owner or the beneficiary of a decedent's IRA. 2012 tax return form 1040 Required minimum distribution. 2012 tax return form 1040   The amount that must be distributed each year is referred to as the required minimum distribution. 2012 tax return form 1040 Required distributions not eligible for rollover. 2012 tax return form 1040   Amounts that must be distributed (required minimum distributions) during a particular year are not eligible for rollover treatment. 2012 tax return form 1040 IRA owners. 2012 tax return form 1040   If you are the owner of a traditional IRA, you must generally start receiving distributions from your IRA by April 1 of the year following the year in which you reach age 70½. 2012 tax return form 1040 April 1 of the year following the year in which you reach age 70½ is referred to as the required beginning date. 2012 tax return form 1040 Distributions by the required beginning date. 2012 tax return form 1040   You must receive at least a minimum amount for each year starting with the year you reach age 70½ (your 70½ year). 2012 tax return form 1040 If you do not (or did not) receive that minimum amount in your 70½ year, then you must receive distributions for your 70½ year by April 1 of the next year. 2012 tax return form 1040   If an IRA owner dies after reaching age 70½, but before April 1 of the next year, no minimum distribution is required because death occurred before the required beginning date. 2012 tax return form 1040 Even if you begin receiving distributions before you attain age 70½, you must begin calculating and receiving required minimum distributions by your required beginning date. 2012 tax return form 1040 Distributions after the required beginning date. 2012 tax return form 1040   The required minimum distribution for any year after the year you turn 70½ must be made by December 31 of that later year. 2012 tax return form 1040    Beneficiaries. 2012 tax return form 1040   If you are the beneficiary of a decedent's traditional IRA, the requirements for distributions from that IRA generally depend on whether the IRA owner died before or after the required beginning date for distributions. 2012 tax return form 1040 More information. 2012 tax return form 1040   For more information, including how to figure your minimum required distribution each year and how to figure your required distribution if you are a beneficiary of a decedent's IRA, see When Must You Withdraw Assets? in chapter 1 of Publication 590. 2012 tax return form 1040 Are Distributions Taxable? In general, distributions from a traditional IRA are taxable in the year you receive them. 2012 tax return form 1040 Exceptions. 2012 tax return form 1040   Exceptions to distributions from traditional IRAs being taxable in the year you receive them are: Rollovers, Qualified charitable distributions (QCD), discussed later, Tax-free withdrawals of contributions, discussed earlier, and The return of nondeductible contributions, discussed later under Distributions Fully or Partly Taxable . 2012 tax return form 1040    Although a conversion of a traditional IRA is considered a rollover for Roth IRA purposes, it is not an exception to the rule that distributions from a traditional IRA are taxable in the year you receive them. 2012 tax return form 1040 Conversion distributions are includible in your gross income subject to this rule and the special rules for conversions explained in Converting From Any Traditional IRA Into a Roth IRA under Can You Move Retirement Plan Assets? in chapter 1 of Publication 590. 2012 tax return form 1040 Qualified charitable distributions (QCD). 2012 tax return form 1040   A QCD is generally a nontaxable distribution made directly by the trustee of your IRA to an organization eligible to receive tax-deductible contributions. 2012 tax return form 1040 Special rules apply if you made a qualified charitable distribution in January 2013 that you elected to treat as made in 2012. 2012 tax return form 1040 See Qualified Charitable Distributions in Publication 590 for more information. 2012 tax return form 1040 Ordinary income. 2012 tax return form 1040   Distributions from traditional IRAs that you include in income are taxed as ordinary income. 2012 tax return form 1040 No special treatment. 2012 tax return form 1040   In figuring your tax, you cannot use the 10-year tax option or capital gain treatment that applies to lump-sum distributions from qualified retirement plans. 2012 tax return form 1040 Distributions Fully or Partly Taxable Distributions from your traditional IRA may be fully or partly taxable, depending on whether your IRA includes any nondeductible contributions. 2012 tax return form 1040 Fully taxable. 2012 tax return form 1040   If only deductible contributions were made to your traditional IRA (or IRAs, if you have more than one), you have no basis in your IRA. 2012 tax return form 1040 Because you have no basis in your IRA, any distributions are fully taxable when received. 2012 tax return form 1040 See Reporting taxable distributions on your return , later. 2012 tax return form 1040 Partly taxable. 2012 tax return form 1040    If you made nondeductible contributions or rolled over any after-tax amounts to any of your traditional IRAs, you have a cost basis (investment in the contract) equal to the amount of those contributions. 2012 tax return form 1040 These nondeductible contributions are not taxed when they are distributed to you. 2012 tax return form 1040 They are a return of your investment in your IRA. 2012 tax return form 1040   Only the part of the distribution that represents nondeductible contributions and rolled over after-tax amounts (your cost basis) is tax free. 2012 tax return form 1040 If nondeductible contributions have been made or after-tax amounts have been rolled over to your IRA, distributions consist partly of nondeductible contributions (basis) and partly of deductible contributions, earnings, and gains (if there are any). 2012 tax return form 1040 Until all of your basis has been distributed, each distribution is partly nontaxable and partly taxable. 2012 tax return form 1040 Form 8606. 2012 tax return form 1040   You must complete Form 8606 and attach it to your return if you receive a distribution from a traditional IRA and have ever made nondeductible contributions or rolled over after-tax amounts to any of your traditional IRAs. 2012 tax return form 1040 Using the form, you will figure the nontaxable distributions for 2013 and your total IRA basis for 2013 and earlier years. 2012 tax return form 1040 Note. 2012 tax return form 1040 If you are required to file Form 8606, but you are not required to file an income tax return, you still must file Form 8606. 2012 tax return form 1040 Send it to the IRS at the time and place you would otherwise file an income tax return. 2012 tax return form 1040 Distributions reported on Form 1099-R. 2012 tax return form 1040   If you receive a distribution from your traditional IRA, you will receive Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. 2012 tax return form 1040 , or a similar statement. 2012 tax return form 1040 IRA distributions are shown in boxes 1 and 2a of Form 1099-R. 2012 tax return form 1040 A number or letter code in box 7 tells you what type of distribution you received from your IRA. 2012 tax return form 1040 Withholding. 2012 tax return form 1040   Federal income tax is withheld from distributions from traditional IRAs unless you choose not to have tax withheld. 2012 tax return form 1040 See chapter 4. 2012 tax return form 1040 IRA distributions delivered outside the United States. 2012 tax return form 1040   In general, if you are a U. 2012 tax return form 1040 S. 2012 tax return form 1040 citizen or resident alien and your home address is outside the United States or its possessions, you cannot choose exemption from withholding on distributions from your traditional IRA. 2012 tax return form 1040 Reporting taxable distributions on your return. 2012 tax return form 1040    Report fully taxable distributions, including early distributions on Form 1040, line 15b, or Form 1040A, line 11b (no entry is required on Form 1040, line 15a, or Form 1040A, line 11a). 2012 tax return form 1040 If only part of the distribution is taxable, enter the total amount on Form 1040, line 15a, or Form 1040A, line 11a, and the taxable part on Form 1040, line 15b, or Form 1040A, line 11b. 2012 tax return form 1040 You cannot report distributions on Form 1040EZ. 2012 tax return form 1040 What Acts Result in Penalties or Additional Taxes? The tax advantages of using traditional IRAs for retirement savings can be offset by additional taxes and penalties if you do not follow the rules. 2012 tax return form 1040 There are additions to the regular tax for using your IRA funds in prohibited transactions. 2012 tax return form 1040 There are also additional taxes for the following activities. 2012 tax return form 1040 Investing in collectibles. 2012 tax return form 1040 Making excess contributions. 2012 tax return form 1040 Taking early distributions. 2012 tax return form 1040 Allowing excess amounts to accumulate (failing to take required distributions). 2012 tax return form 1040 There are penalties for overstating the amount of nondeductible contributions and for failure to file a Form 8606, if required. 2012 tax return form 1040 Prohibited Transactions Generally, a prohibited transaction is any improper use of your traditional IRA by you, your beneficiary, or any disqualified person. 2012 tax return form 1040 Disqualified persons include your fiduciary and members of your family (spouse, ancestor, lineal descendent, and any spouse of a lineal descendent). 2012 tax return form 1040 The following are examples of prohibited transactions with a traditional IRA. 2012 tax return form 1040 Borrowing money from it. 2012 tax return form 1040 Selling property to it. 2012 tax return form 1040 Receiving unreasonable compensation for managing it. 2012 tax return form 1040 Using it as security for a loan. 2012 tax return form 1040 Buying property for personal use (present or future) with IRA funds. 2012 tax return form 1040 Effect on an IRA account. 2012 tax return form 1040   Generally, if you or your beneficiary engages in a prohibited transaction in connection with your traditional IRA account at any time during the year, the account stops being an IRA as of the first day of that year. 2012 tax return form 1040 Effect on you or your beneficiary. 2012 tax return form 1040   If your account stops being an IRA because you or your beneficiary engaged in a prohibited transaction, the account is treated as distributing all its assets to you at their fair market values on the first day of the year. 2012 tax return form 1040 If the total of those values is more than your basis in the IRA, you will have a taxable gain that is includible in your income. 2012 tax return form 1040 For information on figuring your gain and reporting it in income, see Are Distributions Taxable , earlier. 2012 tax return form 1040 The distribution may be subject to additional taxes or penalties. 2012 tax return form 1040 Taxes on prohibited transactions. 2012 tax return form 1040   If someone other than the owner or beneficiary of a traditional IRA engages in a prohibited transaction, that person may be liable for certain taxes. 2012 tax return form 1040 In general, there is a 15% tax on the amount of the prohibited transaction and a 100% additional tax if the transaction is not corrected. 2012 tax return form 1040 More information. 2012 tax return form 1040   For more information on prohibited transactions, see What Acts Result in Penalties or Additional Taxes? in chapter 1 of Publication 590. 2012 tax return form 1040 Investment in Collectibles If your traditional IRA invests in collectibles, the amount invested is considered distributed to you in the year invested. 2012 tax return form 1040 You may have to pay the 10% additional tax on early distributions, discussed later. 2012 tax return form 1040 Collectibles. 2012 tax return form 1040   These include: Artworks, Rugs, Antiques, Metals, Gems, Stamps, Coins, Alcoholic beverages, and Certain other tangible personal property. 2012 tax return form 1040 Exception. 2012 tax return form 1040    Your IRA can invest in one, one-half, one-quarter, or one-tenth ounce U. 2012 tax return form 1040 S. 2012 tax return form 1040 gold coins, or one-ounce silver coins minted by the Treasury Department. 2012 tax return form 1040 It can also invest in certain platinum coins and certain gold, silver, palladium, and platinum bullion. 2012 tax return form 1040 Excess Contributions Generally, an excess contribution is the amount contributed to your traditional IRA(s) for the year that is more than the smaller of: The maximum deductible amount for the year. 2012 tax return form 1040 For 2013, this is $5,500 ($6,500 if you are 50 or older), or Your taxable compensation for the year. 2012 tax return form 1040 Tax on excess contributions. 2012 tax return form 1040   In general, if the excess contributions for a year are not withdrawn by the date your return for the year is due (including extensions), you are subject to a 6% tax. 2012 tax return form 1040 You must pay the 6% tax each year on excess amounts that remain in your traditional IRA at the end of your tax year. 2012 tax return form 1040 The tax cannot be more than 6% of the combined value of all your IRAs as of the end of your tax year. 2012 tax return form 1040 Excess contributions withdrawn by due date of return. 2012 tax return form 1040   You will not have to pay the 6% tax if you withdraw an excess contribution made during a tax year and you also withdraw interest or other income earned on the excess contribution. 2012 tax return form 1040 You must complete your withdrawal by the date your tax return for that year is due, including extensions. 2012 tax return form 1040 How to treat withdrawn contributions. 2012 tax return form 1040   Do not include in your gross income an excess contribution that you withdraw from your traditional IRA before your tax return is due if both the following conditions are met. 2012 tax return form 1040 No deduction was allowed for the excess contribution. 2012 tax return form 1040 You withdraw the interest or other income earned on the excess contribution. 2012 tax return form 1040 You can take into account any loss on the contribution while it was in the IRA when calculating the amount that must be withdrawn. 2012 tax return form 1040 If there was a loss, the net income you must withdraw may be a negative amount. 2012 tax return form 1040 How to treat withdrawn interest or other income. 2012 tax return form 1040   You must include in your gross income the interest or other income that was earned on the excess contribution. 2012 tax return form 1040 Report it on your return for the year in which the excess contribution was made. 2012 tax return form 1040 Your withdrawal of interest or other income may be subject to an additional 10% tax on early distributions, discus
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Tax Scams - How to Report Them

Participating in an illegal scheme to avoid paying taxes can result in imprisonment and fines, as well as the repayment of taxes owed with penalties and interest. If you become aware of any abusive tax scams, please report them to the appropriate contact below.

Reporting Tax Scams

Promoters of Abusive Tax Schemes or Preparers of Fraudulent Returns

Common abusive tax scams include anti-tax law, home-based business, trust, and off-shore schemes.

To report promoters of these scheme types or any other types you are aware of that are not listed here, please send a completed referral form, along with any promotional materials to the Lead Development Center:

Mail:
Internal Revenue Service Lead Development Center
Stop MS5040
24000 Avila Road
Laguna Niguel, California 92677-3405

Fax: (877) 477-9135

Abusive Transaction Involving a Retirement Plan

The Abusive Transaction Hotline provides people a way to share information (anonymously, if preferred) about abusive tax shelters and emerging issues that may be abusive in retirement plans.

Find out which listed transactions have been determined by the IRS to be tax avoidance transactions and how to report them.

Abusive Transaction Involving an Exempt Organization

Exempt organizations are, at times, used by for-profit entities as accommodation parties in abusive tax avoidance transactions.

Visit the Exempt Organization Abusive Tax Avoidance Transactions page for information on how to report these schemes using Form 13909, Tax-Exempt Organization Complaint (Referral) Form.

Abusive Tax Shelters and Transactions

The IRS maintains an abusive tax shelter hotline that people can use to provide information (anonymously, if preferred) about abusive tax shelters. Office of Tax Shelter Analysis is primarily interested in potentially abusive transactions that may be employed by many taxpayers and could pose a significant compliance risk to the IRS.

How Do You Report Suspected Tax Fraud Activity?

Quick reference chart outlines how to report suspected tax fraud activity in different situations.

Information for Tax Professionals on the Common Types of Schemes

Page Last Reviewed or Updated: 15-Nov-2013

The 2012 Tax Return Form 1040

2012 tax return form 1040 8. 2012 tax return form 1040   Gains and Losses Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Sales and ExchangesDetermining Gain or Loss Like-Kind Exchanges Transfer to Spouse Ordinary or Capital Gain or LossCapital Assets Noncapital Assets Hedging (Commodity Futures) Livestock Converted Wetland and Highly Erodible Cropland Timber Sale of a Farm Foreclosure or Repossession Abandonment Introduction This chapter explains how to figure, and report on your tax return, your gain or loss on the disposition of your property or debt and whether such gain or loss is ordinary or capital. 2012 tax return form 1040 Ordinary gain is taxed at the same rates as wages and interest income while capital gain is generally taxed at lower rates. 2012 tax return form 1040 Dispositions discussed in this chapter include sales, exchanges, foreclosures, repossessions, canceled debts, hedging transactions, and elections to treat cutting of timber as a sale or exchange. 2012 tax return form 1040 Topics - This chapter discusses: Sales and exchanges Ordinary or capital gain or loss Useful Items - You may want to see: Publication 334 Tax Guide for Small Business 523 Selling Your Home 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 908 Bankruptcy Tax Guide Form (and Instructions) 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) Sch D (Form 1040) Capital Gains and Losses Sch F (Form 1040) Profit or Loss From Farming 1099-A Acquisition or Abandonment of Secured Property 1099-C Cancellation of Debt 4797 Sales of Business Property 8949 Sales and Other Dispositions of Capital Assets See chapter 16 for information about getting publications and forms. 2012 tax return form 1040 Sales and Exchanges If you sell, exchange, or otherwise dispose of your property, you usually have a gain or a loss. 2012 tax return form 1040 This section explains certain rules for determining whether any gain you have is taxable, and whether any loss you have is deductible. 2012 tax return form 1040 A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. 2012 tax return form 1040 An exchange is a transfer of property for other property or services. 2012 tax return form 1040 Determining Gain or Loss You usually realize a gain or loss when you sell or exchange property. 2012 tax return form 1040 If the amount you realize from a sale or exchange of property is more than its adjusted basis, you will have a gain. 2012 tax return form 1040 If the adjusted basis of the property is more than the amount you realize, you will have a loss. 2012 tax return form 1040 Basis and adjusted basis. 2012 tax return form 1040   The basis of property you buy is usually its cost. 2012 tax return form 1040 The adjusted basis of property is basis plus certain additions and minus certain deductions. 2012 tax return form 1040 See chapter 6 for more information about basis and adjusted basis. 2012 tax return form 1040 Amount realized. 2012 tax return form 1040   The amount you realize from a sale or exchange is the total of all money you receive plus the fair market value (FMV) (defined in chapter 6) of all property or services you receive. 2012 tax return form 1040 The amount you realize also includes any of your liabilities assumed by the buyer and any liabilities to which the property you transferred is subject, such as real estate taxes or a mortgage. 2012 tax return form 1040   If the liabilities relate to an exchange of multiple properties, see Multiple Property Exchanges in chapter 1 of Publication 544. 2012 tax return form 1040 Amount recognized. 2012 tax return form 1040   Your gain or loss realized from a sale or exchange of certain property is usually a recognized gain or loss for tax purposes. 2012 tax return form 1040 A recognized gain is a gain you must include in gross income and report on your income tax return. 2012 tax return form 1040 A recognized loss is a loss you deduct from gross income. 2012 tax return form 1040 However, your gain or loss realized from the exchange of certain property may not be recognized for tax purposes. 2012 tax return form 1040 See Like-Kind Exchanges next. 2012 tax return form 1040 Also, a loss from the disposition of property held for personal use is not deductible. 2012 tax return form 1040 Like-Kind Exchanges Certain exchanges of property are not taxable. 2012 tax return form 1040 This means any gain from the exchange is not recognized, and any loss cannot be deducted. 2012 tax return form 1040 Your gain or loss will not be recognized until you sell or otherwise dispose of the property you receive. 2012 tax return form 1040 The exchange of property for the same kind of property is the most common type of nontaxable exchange. 2012 tax return form 1040 To qualify for treatment as a like-kind exchange, the property traded and the property received must be both of the following. 2012 tax return form 1040 Qualifying property. 2012 tax return form 1040 Like-kind property. 2012 tax return form 1040 These two requirements are discussed later. 2012 tax return form 1040 Multiple-party transactions. 2012 tax return form 1040   The like-kind exchange rules also apply to property exchanges that involve three and four-party transactions. 2012 tax return form 1040 Any part of these multiple-party transactions can qualify as a like-kind exchange if it meets all the requirements described in this section. 2012 tax return form 1040 Receipt of title from third party. 2012 tax return form 1040   If you receive property in a like-kind exchange and the other party who transfers the property to you does not give you the title, but a third party does, you can still treat this transaction as a like-kind exchange if it meets all the requirements. 2012 tax return form 1040 Basis of property received. 2012 tax return form 1040   If you receive property in a like-kind exchange, the basis of the property will be the same as the basis of the property you gave up. 2012 tax return form 1040 See chapter 6 for more information. 2012 tax return form 1040 Money paid. 2012 tax return form 1040   If, in addition to giving up like-kind property, you pay money in a like-kind exchange, you still have no recognized gain or loss. 2012 tax return form 1040 The basis of the property received is the basis of the property given up, increased by the money paid. 2012 tax return form 1040 Example. 2012 tax return form 1040 You traded an old tractor with an adjusted basis of $15,000 for a new one. 2012 tax return form 1040 The new tractor costs $300,000. 2012 tax return form 1040 You were allowed $80,000 for the old tractor and paid $220,000 cash. 2012 tax return form 1040 You have no recognized gain or loss on the transaction regardless of the adjusted basis of your old tractor and the basis of the new tractor is $235,000, the adjusted basis of the old tractor plus the cash paid ($15,000 + $220,000). 2012 tax return form 1040 If you had sold the old tractor to a third party for $80,000 and bought a new one, you would have a recognized gain or loss on the sale of your old tractor equal to the difference between the amount realized and the adjusted basis of the old tractor. 2012 tax return form 1040 In this case, the taxable gain would be $65,000 ($80,000 − $15,000) and the basis of the new tractor would be $300,000. 2012 tax return form 1040 Reporting the exchange. 2012 tax return form 1040   Report the exchange of like-kind property, even though no gain or loss is recognized, on Form 8824, Like-Kind Exchanges. 2012 tax return form 1040 The Instructions for Form 8824 explain how to report the details of the exchange. 2012 tax return form 1040   If you have any recognized gain because you received money or unlike property, report it on Schedule D (Form 1040) or Form 4797, whichever applies. 2012 tax return form 1040 You may also have to report the recognized gain as ordinary income because of depreciation recapture on Form 4797. 2012 tax return form 1040 See chapter 9 for more information. 2012 tax return form 1040 Qualifying property. 2012 tax return form 1040   In a like-kind exchange, both the property you give up and the property you receive must be held by you for investment or for productive use in your trade or business. 2012 tax return form 1040 Machinery, buildings, land, trucks, breeding livestock, rental houses, and certain mutual ditch, reservoir, or irrigation company stock are examples of property that may qualify. 2012 tax return form 1040 Nonqualifying property. 2012 tax return form 1040   The rules for like-kind exchanges do not apply to exchanges of the following property. 2012 tax return form 1040 Property you use for personal purposes, such as your home and family car. 2012 tax return form 1040 Stock in trade or other property held primarily for sale, such as crops and produce. 2012 tax return form 1040 Stocks, bonds, or notes. 2012 tax return form 1040 However, see Qualifying property above. 2012 tax return form 1040 Other securities or evidences of indebtedness, such as accounts receivable. 2012 tax return form 1040 Partnership interests. 2012 tax return form 1040 However, you may have a nontaxable exchange under other rules. 2012 tax return form 1040 See Other Nontaxable Exchanges in chapter 1 of Publication 544. 2012 tax return form 1040 Like-kind property. 2012 tax return form 1040   To qualify as a nontaxable exchange, the properties exchanged must be of like kind. 2012 tax return form 1040 Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. 2012 tax return form 1040 Generally, real property exchanged for real property qualifies as an exchange of like-kind property. 2012 tax return form 1040 For example, an exchange of city property for farm property or improved property for unimproved property is a like-kind exchange. 2012 tax return form 1040   An exchange of a tractor for a new tractor is an exchange of like-kind property, and so is an exchange of timber land for crop acreage. 2012 tax return form 1040 An exchange of a tractor for acreage, however, is not an exchange of like-kind property. 2012 tax return form 1040 The exchange of livestock of one sex for livestock of the other sex is not a like-kind exchange. 2012 tax return form 1040 For example, the exchange of a bull for a cow is not a like-kind exchange. 2012 tax return form 1040 An exchange of the assets of a business for the assets of a similar business cannot be treated as an exchange of one property for another property. 2012 tax return form 1040    Note. 2012 tax return form 1040 Whether you engaged in a like-kind exchange depends on an analysis of each asset involved in the exchange. 2012 tax return form 1040 Personal property. 2012 tax return form 1040   Depreciable tangible personal property can be either like kind or like class to qualify for nontaxable exchange treatment. 2012 tax return form 1040 Like-class properties are depreciable tangible personal properties within the same General Asset Class or Product Class. 2012 tax return form 1040 Property classified in any General Asset Class may not be classified within a Product Class. 2012 tax return form 1040 Assets that are not in the same class will qualify as like-kind property if they are of the same nature or character. 2012 tax return form 1040 General Asset Classes. 2012 tax return form 1040   General Asset Classes describe the types of property frequently used in many businesses. 2012 tax return form 1040 They include, but are not limited to, the following property. 2012 tax return form 1040 Office furniture, fixtures, and equipment (asset class 00. 2012 tax return form 1040 11). 2012 tax return form 1040 Information systems, such as computers and peripheral equipment (asset class 00. 2012 tax return form 1040 12). 2012 tax return form 1040 Data handling equipment except computers (asset class 00. 2012 tax return form 1040 13). 2012 tax return form 1040 Automobiles and taxis (asset class 00. 2012 tax return form 1040 22). 2012 tax return form 1040 Light general purpose trucks (asset class 00. 2012 tax return form 1040 241). 2012 tax return form 1040 Heavy general purpose trucks (asset class 00. 2012 tax return form 1040 242). 2012 tax return form 1040 Tractor units for use over-the-road (asset class 00. 2012 tax return form 1040 26). 2012 tax return form 1040 Trailers and trailer-mounted containers (asset class 00. 2012 tax return form 1040 27). 2012 tax return form 1040 Industrial steam and electric generation and/or distribution systems (asset class 00. 2012 tax return form 1040 4). 2012 tax return form 1040 Product Classes. 2012 tax return form 1040   Product Classes include property listed in a 6-digit product class in sectors 31 through 33 of the North American Industry Classification System (NAICS) of the Executive Office of the President, Office of Management and Budget, United States, (NAICS Manual). 2012 tax return form 1040 The latest version of the manual can be accessed at www. 2012 tax return form 1040 census. 2012 tax return form 1040 gov/eos/www/naics/. 2012 tax return form 1040 Copies of the printed manual may be purchased from the National Technical Information Service (NTIS) at  www. 2012 tax return form 1040 ntis. 2012 tax return form 1040 gov/products/naics. 2012 tax return form 1040 aspx or by calling 1-800-553-NTIS (1-800-553-6847) or (703) 605-6000. 2012 tax return form 1040 A CD-ROM version with search and retrieval software is also available from NTIS. 2012 tax return form 1040    NAICS class 333111, Farm Machinery and Equipment Manufacturing, includes most machinery and equipment used in a farming business. 2012 tax return form 1040 Partially nontaxable exchange. 2012 tax return form 1040   If, in addition to like-kind property, you receive money or unlike property in an exchange on which you realize gain, you have a partially nontaxable exchange. 2012 tax return form 1040 You are taxed on the gain you realize, but only to the extent of the money and the FMV of the unlike property you receive. 2012 tax return form 1040 A loss is not deductible. 2012 tax return form 1040 Example 1. 2012 tax return form 1040 You trade farmland that cost $30,000 for $10,000 cash and other land to be used in farming with a FMV of $50,000. 2012 tax return form 1040 You have a realized gain of $30,000 ($50,000 FMV of new land + $10,000 cash − $30,000 basis of old farmland = $30,000 realized gain). 2012 tax return form 1040 However, only $10,000, the cash received, is recognized (included in income). 2012 tax return form 1040 Example 2. 2012 tax return form 1040 Assume the same facts as in Example 1, except that, instead of money, you received a tractor with a FMV of $10,000. 2012 tax return form 1040 Your recognized gain is still limited to $10,000, the value of the tractor (the unlike property). 2012 tax return form 1040 Example 3. 2012 tax return form 1040 Assume in Example 1 that the FMV of the land you received was only $15,000. 2012 tax return form 1040 Your $5,000 loss is not recognized. 2012 tax return form 1040 Unlike property given up. 2012 tax return form 1040   If, in addition to like-kind property, you give up unlike property, you must recognize gain or loss on the unlike property you give up. 2012 tax return form 1040 The gain or loss is the difference between the FMV of the unlike property and the adjusted basis of the unlike property. 2012 tax return form 1040 Like-kind exchanges between related persons. 2012 tax return form 1040   Special rules apply to like-kind exchanges between related persons. 2012 tax return form 1040 These rules affect both direct and indirect exchanges. 2012 tax return form 1040 Under these rules, if either person disposes of the property within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. 2012 tax return form 1040 The gain or loss on the original exchange must be recognized as of the date of the later disposition. 2012 tax return form 1040 The 2-year holding period begins on the date of the last transfer of property that was part of the like-kind exchange. 2012 tax return form 1040 Related persons. 2012 tax return form 1040   Under these rules, related persons include, for example, you and a member of your family (spouse, brother, sister, parent, child, etc. 2012 tax return form 1040 ), you and a corporation in which you have more than 50% ownership, you and a partnership in which you directly or indirectly own more than a 50% interest of the capital or profits, and two partnerships in which you directly or indirectly own more than 50% of the capital interests or profits. 2012 tax return form 1040   For the complete list of related persons, see Related persons in chapter 2 of Publication 544. 2012 tax return form 1040 Example. 2012 tax return form 1040 You used a grey pickup truck in your farming business. 2012 tax return form 1040 Your sister used a red pickup truck in her landscaping business. 2012 tax return form 1040 In December 2012, you exchanged your grey pickup truck, plus $200, for your sister's red pickup truck. 2012 tax return form 1040 At that time, the FMV of the grey pickup truck was $7,000 and its adjusted basis was $6,000. 2012 tax return form 1040 The FMV of the red pickup truck was $7,200 and its adjusted basis was $1,000. 2012 tax return form 1040 You realized a gain of $1,000 (the $7,200 FMV of the red pickup truck, minus the grey pickup truck's $6,000 adjusted basis, minus the $200 you paid). 2012 tax return form 1040 Your sister realized a gain of $6,200 (the $7,000 FMV of the grey pickup truck plus the $200 you paid, minus the $1,000 adjusted basis of the red pickup truck). 2012 tax return form 1040 However, because this was a like-kind exchange, you recognized no gain. 2012 tax return form 1040 Your basis in the red pickup truck was $6,200 (the $6,000 adjusted basis of the grey pickup truck plus the $200 you paid). 2012 tax return form 1040 She recognized gain only to the extent of the money she received, $200. 2012 tax return form 1040 Her basis in the grey pickup truck was $1,000 (the $1,000 adjusted basis of the red pickup truck minus the $200 received, plus the $200 gain recognized). 2012 tax return form 1040 In 2013, you sold the red pickup truck to a third party for $7,000. 2012 tax return form 1040 Because you sold it within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. 2012 tax return form 1040 On your tax return for 2013, you must report your $1,000 gain on the 2012 exchange. 2012 tax return form 1040 You also report a loss on the sale as $200 (the adjusted basis of the red pickup truck, $7,200 (its $6,200 basis plus the $1,000 gain recognized), minus the $7,000 realized from the sale). 2012 tax return form 1040 In addition, your sister must report on her tax return for 2013 the $6,000 balance of her gain on the 2012 exchange. 2012 tax return form 1040 Her adjusted basis in the grey pickup truck is increased to $7,000 (its $1,000 basis plus the $6,000 gain recognized). 2012 tax return form 1040 Exceptions to the rules for related persons. 2012 tax return form 1040   The following property dispositions are excluded from these rules. 2012 tax return form 1040 Dispositions due to the death of either related person. 2012 tax return form 1040 Involuntary conversions. 2012 tax return form 1040 Dispositions where it is established to the satisfaction of the IRS that neither the exchange nor the disposition has, as a main purpose, the avoidance of federal income tax. 2012 tax return form 1040 Multiple property exchanges. 2012 tax return form 1040   Under the like-kind exchange rules, you must generally make a property-by-property comparison to figure your recognized gain and the basis of the property you receive in the exchange. 2012 tax return form 1040 However, for exchanges of multiple properties, you do not make a property-by-property comparison if you do either of the following. 2012 tax return form 1040 Transfer and receive properties in two or more exchange groups. 2012 tax return form 1040 Transfer or receive more than one property within a single exchange group. 2012 tax return form 1040   For more information, see Multiple Property Exchanges in chapter 1 of Publication 544. 2012 tax return form 1040 Deferred exchange. 2012 tax return form 1040   A deferred exchange for like-kind property may qualify for nonrecognition of gain or loss. 2012 tax return form 1040 A deferred exchange is an exchange in which you transfer property you use in business or hold for investment and later receive like-kind property you will use in business or hold for investment. 2012 tax return form 1040 The property you receive is replacement property. 2012 tax return form 1040 The transaction must be an exchange of property for property rather than a transfer of property for money used to buy replacement property. 2012 tax return form 1040 In addition, the replacement property will not be treated as like-kind property unless certain identification and receipt requirements are met. 2012 tax return form 1040   For more information see Deferred Exchanges in chapter 1 of Publication 544. 2012 tax return form 1040 Transfer to Spouse No gain or loss is recognized on a transfer of property from an individual to (or in trust for the benefit of) a spouse, or a former spouse if incident to divorce. 2012 tax return form 1040 This rule does not apply if the recipient is a nonresident alien. 2012 tax return form 1040 Nor does this rule apply to a transfer in trust to the extent the liabilities assumed and the liabilities on the property are more than the property's adjusted basis. 2012 tax return form 1040 Any transfer of property to a spouse or former spouse on which gain or loss is not recognized is not considered a sale or exchange. 2012 tax return form 1040 The recipient's basis in the property will be the same as the adjusted basis of the giver immediately before the transfer. 2012 tax return form 1040 This carryover basis rule applies whether the adjusted basis of the transferred property is less than, equal to, or greater than either its FMV at the time of transfer or any consideration paid by the recipient. 2012 tax return form 1040 This rule applies for determining loss as well as gain. 2012 tax return form 1040 Any gain recognized on a transfer in trust increases the basis. 2012 tax return form 1040 For more information on transfers of property incident to divorce, see Property Settlements in Publication 504, Divorced or Separated Individuals. 2012 tax return form 1040 Ordinary or Capital Gain or Loss Generally, you will have a capital gain or loss if you sell or exchange a capital asset (defined below). 2012 tax return form 1040 You may also have a capital gain if your section 1231 transactions result in a net gain. 2012 tax return form 1040 See Section 1231 Gains and Losses in  chapter 9. 2012 tax return form 1040 To figure your net capital gain or loss, you must classify your gains and losses as either ordinary or capital (and your capital gains or losses as either short-term or long-term). 2012 tax return form 1040 Your net capital gains may be taxed at a lower tax rate than ordinary income. 2012 tax return form 1040 See Capital Gains Tax Rates , later. 2012 tax return form 1040 Your deduction for a net capital loss may be limited. 2012 tax return form 1040 See Treatment of Capital Losses , later. 2012 tax return form 1040 Capital Assets Almost everything you own and use for personal purposes or investment is a capital asset. 2012 tax return form 1040 The following items are examples of capital assets. 2012 tax return form 1040 A home owned and occupied by you and your family. 2012 tax return form 1040 Household furnishings. 2012 tax return form 1040 A car used for pleasure. 2012 tax return form 1040 If your car is used both for pleasure and for farm business, it is partly a capital asset and partly a noncapital asset, defined later. 2012 tax return form 1040 Stocks and bonds. 2012 tax return form 1040 However, there are special rules for gains on qualified small business stock. 2012 tax return form 1040 For more information on this subject, see Gains on Qualified Small Business Stock and Losses on Section 1244 (Small Business) Stock in chapter 4 of Publication 550. 2012 tax return form 1040 Personal-use property. 2012 tax return form 1040   Gain from a sale or exchange of personal-use property is a capital gain and is taxable. 2012 tax return form 1040 Loss from the sale or exchange of personal-use property is not deductible. 2012 tax return form 1040 You can deduct a loss relating to personal-use property only if it results from a casualty or theft. 2012 tax return form 1040 For information on casualties and thefts, see chapter 11. 2012 tax return form 1040 Long and Short Term Where you report a capital gain or loss depends on how long you own the asset before you sell or exchange it. 2012 tax return form 1040 The time you own an asset before disposing of it is the holding period. 2012 tax return form 1040 If you hold a capital asset 1 year or less, the gain or loss resulting from its disposition is short term. 2012 tax return form 1040 Report it in Part I of Schedule D (Form 1040). 2012 tax return form 1040 If you hold a capital asset longer than 1 year, the gain or loss resulting from its disposition is long term. 2012 tax return form 1040 Report it in Part II of Schedule D (Form 1040). 2012 tax return form 1040 Holding period. 2012 tax return form 1040   To figure if you held property longer than 1 year, start counting on the day after the day you acquired the property. 2012 tax return form 1040 The day you disposed of the property is part of your holding period. 2012 tax return form 1040 Example. 2012 tax return form 1040 If you bought an asset on June 19, 2012, you should start counting on June 20, 2012. 2012 tax return form 1040 If you sold the asset on June 19, 2013, your holding period is not longer than 1 year, but if you sold it on June 20, 2013, your holding period is longer than 1 year. 2012 tax return form 1040 Inherited property. 2012 tax return form 1040   If you inherit property, you are considered to have held the property longer than 1 year, regardless of how long you actually held it. 2012 tax return form 1040 This rule does not apply to livestock used in a farm business. 2012 tax return form 1040 See Holding period under Livestock , later. 2012 tax return form 1040 Nonbusiness bad debt. 2012 tax return form 1040   A nonbusiness bad debt is a short-term capital loss, deductible in the year the debt becomes worthless. 2012 tax return form 1040 See chapter 4 of Publication 550. 2012 tax return form 1040 Nontaxable exchange. 2012 tax return form 1040   If you acquire an asset in exchange for another asset and your basis for the new asset is figured, in whole or in part, by using your basis in the old property, the holding period of the new property includes the holding period of the old property. 2012 tax return form 1040 That is, it begins on the same day as your holding period for the old property. 2012 tax return form 1040 Gift. 2012 tax return form 1040   If you receive a gift of property and your basis in it is figured using the donor's basis, your holding period includes the donor's holding period. 2012 tax return form 1040 Real property. 2012 tax return form 1040   To figure how long you held real property, start counting on the day after you received title to it or, if earlier, on the day after you took possession of it and assumed the burdens and privileges of ownership. 2012 tax return form 1040   However, taking possession of real property under an option agreement is not enough to start the holding period. 2012 tax return form 1040 The holding period cannot start until there is an actual contract of sale. 2012 tax return form 1040 The holding period of the seller cannot end before that time. 2012 tax return form 1040 Figuring Net Gain or Loss The totals for short-term capital gains and losses and the totals for long-term capital gains and losses must be figured separately. 2012 tax return form 1040 Net short-term capital gain or loss. 2012 tax return form 1040   Combine your short-term capital gains and losses. 2012 tax return form 1040 Do this by adding all of your short-term capital gains. 2012 tax return form 1040 Then add all of your short-term capital losses. 2012 tax return form 1040 Subtract the lesser total from the greater. 2012 tax return form 1040 The difference is your net short-term capital gain or loss. 2012 tax return form 1040 Net long-term capital gain or loss. 2012 tax return form 1040   Follow the same steps to combine your long-term capital gains and losses. 2012 tax return form 1040 The result is your net long-term capital gain or loss. 2012 tax return form 1040 Net gain. 2012 tax return form 1040   If the total of your capital gains is more than the total of your capital losses, the difference is taxable. 2012 tax return form 1040 However, part of your gain (but not more than your net capital gain) may be taxed at a lower rate than the rate of tax on your ordinary income. 2012 tax return form 1040 See Capital Gains Tax Rates , later. 2012 tax return form 1040 Net loss. 2012 tax return form 1040   If the total of your capital losses is more than the total of your capital gains, the difference is deductible. 2012 tax return form 1040 But there are limits on how much loss you can deduct and when you can deduct it. 2012 tax return form 1040 See Treatment of Capital Losses next. 2012 tax return form 1040 Treatment of Capital Losses If your capital losses are more than your capital gains, you must claim the difference even if you do not have ordinary income to offset it. 2012 tax return form 1040 For taxpayers other than corporations, the yearly limit on the capital loss you can deduct is $3,000 ($1,500 if you are married and file a separate return). 2012 tax return form 1040 If your other income is low, you may not be able to use the full $3,000. 2012 tax return form 1040 The part of the $3,000 you cannot use becomes part of your capital loss carryover (discussed next). 2012 tax return form 1040 Capital loss carryover. 2012 tax return form 1040   Generally, you have a capital loss carryover if either of the following situations applies to you. 2012 tax return form 1040 Your net loss on Schedule D (Form 1040), is more than the yearly limit. 2012 tax return form 1040 Your taxable income without your deduction for exemptions is less than zero. 2012 tax return form 1040 If either of these situations applies to you for 2013, see Capital Losses under Reporting Capital Gains and Losses in chapter 4 of Publication 550 to figure the amount you can carry over to 2014. 2012 tax return form 1040    To figure your capital loss carryover from 2013 to 2014, you will need a copy of your 2013 Form 1040 and Schedule D (Form 1040). 2012 tax return form 1040 Capital Gains Tax Rates The tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income. 2012 tax return form 1040 These lower rates are called the maximum capital gains rates. 2012 tax return form 1040 The term “net capital gain” means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss. 2012 tax return form 1040 See Schedule D (Form 1040) and the Instructions for Schedule D (Form 1040). 2012 tax return form 1040 Also see Publication 550. 2012 tax return form 1040 Noncapital Assets Noncapital assets include property such as inventory and depreciable property used in a trade or business. 2012 tax return form 1040 A list of properties that are not capital assets is provided in the Instructions for Schedule D (Form 1040). 2012 tax return form 1040 Property held for sale in the ordinary course of your farm business. 2012 tax return form 1040   Property you hold mainly for sale to customers, such as livestock, poultry, livestock products, and crops, is a noncapital asset. 2012 tax return form 1040 Gain or loss from sales or other dispositions of this property is reported on Schedule F (Form 1040) (not on Schedule D (Form 1040) or Form 4797). 2012 tax return form 1040 The treatment of this property is discussed in chapter 3. 2012 tax return form 1040 Land and depreciable properties. 2012 tax return form 1040   Land and depreciable property you use in farming are not capital assets. 2012 tax return form 1040 Noncapital assets also include livestock held for draft, breeding, dairy, or sporting purposes. 2012 tax return form 1040 However, your gains and losses from sales and exchanges of your farmland and depreciable properties must be considered together with certain other transactions to determine whether the gains and losses are treated as capital or ordinary gains and losses. 2012 tax return form 1040 The sales of these business assets are reported on Form 4797. 2012 tax return form 1040 See chapter 9 for more information. 2012 tax return form 1040 Hedging (Commodity Futures) Hedging transactions are transactions that you enter into in the normal course of business primarily to manage the risk of interest rate or price changes, or currency fluctuations, with respect to borrowings, ordinary property, or ordinary obligations. 2012 tax return form 1040 Ordinary property or obligations are those that cannot produce capital gain or loss if sold or exchanged. 2012 tax return form 1040 A commodity futures contract is a standardized, exchange-traded contract for the sale or purchase of a fixed amount of a commodity at a future date for a fixed price. 2012 tax return form 1040 The holder of an option on a futures contract has the right (but not the obligation) for a specified period of time to enter into a futures contract to buy or sell at a particular price. 2012 tax return form 1040 A forward contract is generally similar to a futures contract except that the terms are not standardized and the contract is not exchange traded. 2012 tax return form 1040 Businesses may enter into commodity futures contracts or forward contracts and may acquire options on commodity futures contracts as either of the following. 2012 tax return form 1040 Hedging transactions. 2012 tax return form 1040 Transactions that are not hedging transactions. 2012 tax return form 1040 Futures transactions with exchange-traded commodity futures contracts that are not hedging transactions, generally, result in capital gain or loss and are subject to the mark-to-market rules discussed in Publication 550. 2012 tax return form 1040 There is a limit on the amount of capital losses you can deduct each year. 2012 tax return form 1040 Hedging transactions are not subject to the mark-to-market rules. 2012 tax return form 1040 If, as a farmer-producer, to protect yourself from the risk of unfavorable price fluctuations, you enter into commodity forward contracts, futures contracts, or options on futures contracts and the contracts cover an amount of the commodity within your range of production, the transactions are generally considered hedging transactions. 2012 tax return form 1040 They can take place at any time you have the commodity under production, have it on hand for sale, or reasonably expect to have it on hand. 2012 tax return form 1040 The gain or loss on the termination of these hedges is generally ordinary gain or loss. 2012 tax return form 1040 Farmers who file their income tax returns on the cash method report any profit or loss on the hedging transaction on Schedule F, line 8. 2012 tax return form 1040 Gains or losses from hedging transactions that hedge supplies of a type regularly used or consumed in the ordinary course of your trade or business may be ordinary gains or losses. 2012 tax return form 1040 Examples include fuel and feed. 2012 tax return form 1040 If you have numerous transactions in the commodity futures market during the year, you must be able to show which transactions are hedging transactions. 2012 tax return form 1040 Clearly identify a hedging transaction on your books and records before the end of the day you entered into the transaction. 2012 tax return form 1040 It may be helpful to have separate brokerage accounts for your hedging and speculation transactions. 2012 tax return form 1040 Retain the identification of each hedging transaction with your books and records. 2012 tax return form 1040 Also, identify the item(s) or aggregate risk that is being hedged in your records. 2012 tax return form 1040 Although the identification of the hedging transaction must be made before the end of the day it was entered into, you have 35 days after entering into the transaction to identify the hedged item(s) or risk. 2012 tax return form 1040 For more information on the tax treatment of futures and options contracts, see Commodity Futures and Section 1256 Contracts Marked to Market in Publication 550. 2012 tax return form 1040 Accounting methods for hedging transactions. 2012 tax return form 1040   The accounting method you use for a hedging transaction must clearly reflect income. 2012 tax return form 1040 This means that your accounting method must reasonably match the timing of income, deduction, gain, or loss from a hedging transaction with the timing of income, deduction, gain, or loss from the item or items being hedged. 2012 tax return form 1040 There are requirements and limits on the method you can use for certain hedging transactions. 2012 tax return form 1040 See Regulations section 1. 2012 tax return form 1040 446-4(e) for those requirements and limits. 2012 tax return form 1040   Hedging transactions must be accounted for under the rules stated above unless the transaction is subject to mark-to-market accounting under section 475 or you use an accounting method other than the following methods. 2012 tax return form 1040 Cash method. 2012 tax return form 1040 Farm-price method. 2012 tax return form 1040 Unit-livestock-price method. 2012 tax return form 1040   Once you adopt a method, you must apply it consistently and must have IRS approval before changing it. 2012 tax return form 1040   Your books and records must describe the accounting method used for each type of hedging transaction. 2012 tax return form 1040 They must also contain any additional identification necessary to verify the application of the accounting method you used for the transaction. 2012 tax return form 1040 You must make the additional identification no more than 35 days after entering into the hedging transaction. 2012 tax return form 1040 Example of a hedging transaction. 2012 tax return form 1040   You file your income tax returns on the cash method. 2012 tax return form 1040 On July 2 you anticipate a yield of 50,000 bushels of corn this year. 2012 tax return form 1040 The December futures price is $5. 2012 tax return form 1040 75 a bushel, but there are indications that by harvest time the price will drop. 2012 tax return form 1040 To protect yourself against a drop in the price, you enter into the following hedging transaction. 2012 tax return form 1040 You sell ten December futures contracts of 5,000 bushels each for a total of 50,000 bushels of corn at $5. 2012 tax return form 1040 75 a bushel. 2012 tax return form 1040   The price did not drop as anticipated but rose to $6 a bushel. 2012 tax return form 1040 In November, you sell your crop at a local elevator for $6 a bushel. 2012 tax return form 1040 You also close out your futures position by buying ten December contracts for $6 a bushel. 2012 tax return form 1040 You paid a broker's commission of $1,400 ($70 per contract) for the complete in and out position in the futures market. 2012 tax return form 1040   The result is that the price of corn rose 25 cents a bushel and the actual selling price is $6 a bushel. 2012 tax return form 1040 Your loss on the hedge is 25 cents a bushel. 2012 tax return form 1040 In effect, the net selling price of your corn is $5. 2012 tax return form 1040 75 a bushel. 2012 tax return form 1040   Report the results of your futures transactions and your sale of corn separately on Schedule F. 2012 tax return form 1040 See the instructions for the 2013 Schedule F (Form 1040). 2012 tax return form 1040   The loss on your futures transactions is $13,900, figured as follows. 2012 tax return form 1040 July 2 - Sold December corn futures (50,000 bu. 2012 tax return form 1040 @$5. 2012 tax return form 1040 75) $287,500 November 6 - Bought December corn futures (50,000 bu. 2012 tax return form 1040 @$6 plus $1,400 broker's commission) 301,400 Futures loss ($13,900) This loss is reported as a negative figure on Schedule F, Part I, line 8, as other income. 2012 tax return form 1040   The proceeds from your corn sale at the local elevator are $300,000 (50,000 bu. 2012 tax return form 1040 × $6). 2012 tax return form 1040 Report it on Schedule F, Part I, line 2, as income from sales of products you raised. 2012 tax return form 1040   Assume you were right and the price went down 25 cents a bushel. 2012 tax return form 1040 In effect, you would still net $5. 2012 tax return form 1040 75 a bushel, figured as follows. 2012 tax return form 1040 Sold cash corn, per bushel $5. 2012 tax return form 1040 50 Gain on hedge, per bushel . 2012 tax return form 1040 25 Net price, per bushel $5. 2012 tax return form 1040 75       The gain on your futures transactions would have been $11,100, figured as follows. 2012 tax return form 1040 July 2 - Sold December corn futures (50,000 bu. 2012 tax return form 1040 @$5. 2012 tax return form 1040 75) $287,500 November 6 - Bought December corn futures (50,000 bu. 2012 tax return form 1040 @$5. 2012 tax return form 1040 50 plus $1,400 broker's commission) 276,400 Futures gain $11,100 The $11,100 is reported on Schedule F, Part I, line 8, as other income. 2012 tax return form 1040   The proceeds from the sale of your corn at the local elevator, $275,000, are reported on Schedule F, Part I, line 2, as income from sales of products you raised. 2012 tax return form 1040 Livestock This part discusses the sale or exchange of livestock used in your farm business. 2012 tax return form 1040 Gain or loss from the sale or exchange of this livestock may qualify as a section 1231 gain or loss. 2012 tax return form 1040 However, any part of the gain that is ordinary income from the recapture of depreciation is not included as section 1231 gain. 2012 tax return form 1040 See chapter 9 for more information on section 1231 gains and losses and the recapture of depreciation under section 1245. 2012 tax return form 1040 The rules discussed here do not apply to the sale of livestock held primarily for sale to customers. 2012 tax return form 1040 The sale of this livestock is reported on Schedule F. 2012 tax return form 1040 See chapter 3. 2012 tax return form 1040 Also, special rules apply to sales or exchanges caused by weather-related conditions. 2012 tax return form 1040 See chapter 3. 2012 tax return form 1040 Holding period. 2012 tax return form 1040   The sale or exchange of livestock used in your farm business (defined below) qualifies as a section 1231 transaction if you held the livestock for 12 months or more (24 months or more for horses and cattle). 2012 tax return form 1040 Livestock. 2012 tax return form 1040   For section 1231 transactions, livestock includes cattle, hogs, horses, mules, donkeys, sheep, goats, fur-bearing animals, and other mammals. 2012 tax return form 1040 Also, for section 1231 transactions, livestock does not include chickens, turkeys, pigeons, geese, emus, ostriches, rheas, or other birds, fish, frogs, reptiles, etc. 2012 tax return form 1040 Livestock used in farm business. 2012 tax return form 1040   If livestock is held primarily for draft, breeding, dairy, or sporting purposes, it is used in your farm business. 2012 tax return form 1040 The purpose for which an animal is held ordinarily is determined by a farmer's actual use of the animal. 2012 tax return form 1040 An animal is not held for draft, breeding, dairy, or sporting purposes merely because it is suitable for that purpose, or because it is held for sale to other persons for use by them for that purpose. 2012 tax return form 1040 However, a draft, breeding, or sporting purpose may be present if an animal is disposed of within a reasonable time after it is prevented from its intended use or made undesirable as a result of an accident, disease, drought, or unfitness of the animal. 2012 tax return form 1040 Example 1. 2012 tax return form 1040 You discover an animal that you intend to use for breeding purposes is sterile. 2012 tax return form 1040 You dispose of it within a reasonable time. 2012 tax return form 1040 This animal was held for breeding purposes. 2012 tax return form 1040 Example 2. 2012 tax return form 1040 You retire and sell your entire herd, including young animals that you would have used for breeding or dairy purposes had you remained in business. 2012 tax return form 1040 These young animals were held for breeding or dairy purposes. 2012 tax return form 1040 Also, if you sell young animals to reduce your breeding or dairy herd because of drought, these animals are treated as having been held for breeding or dairy purposes. 2012 tax return form 1040 See Sales Caused by Weather-Related Conditions in chapter 3. 2012 tax return form 1040 Example 3. 2012 tax return form 1040 You are in the business of raising hogs for slaughter. 2012 tax return form 1040 Customarily, before selling your sows, you obtain a single litter of pigs that you will raise for sale. 2012 tax return form 1040 You sell the brood sows after obtaining the litter. 2012 tax return form 1040 Even though you hold these brood sows for ultimate sale to customers in the ordinary course of your business, they are considered to be held for breeding purposes. 2012 tax return form 1040 Example 4. 2012 tax return form 1040 You are in the business of raising registered cattle for sale to others for use as breeding cattle. 2012 tax return form 1040 The business practice is to breed the cattle before sale to establish their fitness as registered breeding cattle. 2012 tax return form 1040 Your use of the young cattle for breeding purposes is ordinary and necessary for selling them as registered breeding cattle. 2012 tax return form 1040 Such use does not demonstrate that you are holding the cattle for breeding purposes. 2012 tax return form 1040 However, those cattle you held as additions or replacements to your own breeding herd to produce calves are considered to be held for breeding purposes, even though they may not actually have produced calves. 2012 tax return form 1040 The same applies to hog and sheep breeders. 2012 tax return form 1040 Example 5. 2012 tax return form 1040 You breed, raise, and train horses for racing purposes. 2012 tax return form 1040 Every year you cull horses from your racing stable. 2012 tax return form 1040 In 2013, you decided that to prevent your racing stable from getting too large to be effectively operated, you must cull six horses that had been raced at public tracks in 2012. 2012 tax return form 1040 These horses are all considered held for sporting purposes. 2012 tax return form 1040 Figuring gain or loss on the cash method. 2012 tax return form 1040   Farmers or ranchers who use the cash method of accounting figure their gain or loss on the sale of livestock used in their farming business as follows. 2012 tax return form 1040 Raised livestock. 2012 tax return form 1040   Gain on the sale of raised livestock is generally the gross sales price reduced by any expenses of the sale. 2012 tax return form 1040 Expenses of sale include sales commissions, freight or hauling from farm to commission company, and other similar expenses. 2012 tax return form 1040 The basis of the animal sold is zero if the costs of raising it were deducted during the years the animal was being raised. 2012 tax return form 1040 However, see Uniform Capitalization Rules in chapter 6. 2012 tax return form 1040 Purchased livestock. 2012 tax return form 1040   The gross sales price minus your adjusted basis and any expenses of sale is the gain or loss. 2012 tax return form 1040 Example. 2012 tax return form 1040 A farmer sold a breeding cow on January 8, 2013, for $1,250. 2012 tax return form 1040 Expenses of the sale were $125. 2012 tax return form 1040 The cow was bought July 2, 2009, for $1,300. 2012 tax return form 1040 Depreciation (not less than the amount allowable) was $867. 2012 tax return form 1040 Gross sales price $1,250 Cost (basis) $1,300   Minus: Depreciation deduction 867   Unrecovered cost (adjusted basis) $ 433   Expense of sale 125 558 Gain realized $ 692 Converted Wetland and Highly Erodible Cropland Special rules apply to dispositions of land converted to farming use after March 1, 1986. 2012 tax return form 1040 Any gain realized on the disposition of converted wetland or highly erodible cropland is treated as ordinary income. 2012 tax return form 1040 Any loss on the disposition of such property is treated as a long-term capital loss. 2012 tax return form 1040 Converted wetland. 2012 tax return form 1040   This is generally land that was drained or filled to make the production of agricultural commodities possible. 2012 tax return form 1040 It includes converted wetland held by the person who originally converted it or held by any other person who used the converted wetland at any time after conversion for farming. 2012 tax return form 1040   A wetland (before conversion) is land that meets all the following conditions. 2012 tax return form 1040 It is mostly soil that, in its undrained condition, is saturated, flooded, or ponded long enough during a growing season to develop an oxygen-deficient state that supports the growth and regeneration of plants growing in water. 2012 tax return form 1040 It is saturated by surface or groundwater at a frequency and duration sufficient to support mostly plants that are adapted for life in saturated soil. 2012 tax return form 1040 It supports, under normal circumstances, mostly plants that grow in saturated soil. 2012 tax return form 1040 Highly erodible cropland. 2012 tax return form 1040   This is cropland subject to erosion that you used at any time for farming purposes other than grazing animals. 2012 tax return form 1040 Generally, highly erodible cropland is land currently classified by the Department of Agriculture as Class IV, VI, VII, or VIII under its classification system. 2012 tax return form 1040 Highly erodible cropland also includes land that would have an excessive average annual erosion rate in relation to the soil loss tolerance level, as determined by the Department of Agriculture. 2012 tax return form 1040 Successor. 2012 tax return form 1040   Converted wetland or highly erodible cropland is also land held by any person whose basis in the land is figured by reference to the adjusted basis of a person in whose hands the property was converted wetland or highly erodible cropland. 2012 tax return form 1040 Timber Standing timber you held as investment property is a capital asset. 2012 tax return form 1040 Gain or loss from its sale is capital gain or loss reported on Form 8949 and Schedule D (Form 1040), as applicable. 2012 tax return form 1040 If you held the timber primarily for sale to customers, it is not a capital asset. 2012 tax return form 1040 Gain or loss on its sale is ordinary business income or loss. 2012 tax return form 1040 It is reported on Schedule F, line 1 (purchased timber) or line 2 (raised timber). 2012 tax return form 1040 See the Instructions for Schedule F (Form 1040). 2012 tax return form 1040 Farmers who cut timber on their land and sell it as logs, firewood, or pulpwood usually have no cost or other basis for that timber. 2012 tax return form 1040 Amounts realized from these sales, and the expenses incurred in cutting, hauling, etc. 2012 tax return form 1040 , are ordinary farm income and expenses reported on Schedule F. 2012 tax return form 1040 Different rules apply if you owned the timber longer than 1 year and elect to treat timber cutting as a sale or exchange or you enter into a cutting contract, discussed below. 2012 tax return form 1040 Timber considered cut. 2012 tax return form 1040   Timber is considered cut on the date when, in the ordinary course of business, the quantity of felled timber is first definitely determined. 2012 tax return form 1040 This is true whether the timber is cut under contract or whether you cut it yourself. 2012 tax return form 1040 Christmas trees. 2012 tax return form 1040   Evergreen trees, such as Christmas trees, that are more than 6 years old when severed from their roots and sold for ornamental purposes are included in the term timber. 2012 tax return form 1040 They qualify for both rules discussed below. 2012 tax return form 1040 Election to treat cutting as a sale or exchange. 2012 tax return form 1040   Under the general rule, the cutting of timber results in no gain or loss. 2012 tax return form 1040 It is not until a sale or exchange occurs that gain or loss is realized. 2012 tax return form 1040 But if you owned or had a contractual right to cut timber, you can elect to treat the cutting of timber as a section 1231 transaction in the year it is cut. 2012 tax return form 1040 Even though the cut timber is not actually sold or exchanged, you report your gain or loss on the cutting for the year the timber is cut. 2012 tax return form 1040 Any later sale results in ordinary business income or loss. 2012 tax return form 1040 See the example below. 2012 tax return form 1040   To elect this treatment, you must: Own or hold a contractual right to cut the timber for a period of more than 1 year before it is cut, and Cut the timber for sale or use in your trade or business. 2012 tax return form 1040 Making the election. 2012 tax return form 1040   You make the election on your return for the year the cutting takes place by including in income the gain or loss on the cutting and including a computation of your gain or loss. 2012 tax return form 1040 You do not have to make the election in the first year you cut the timber. 2012 tax return form 1040 You can make it in any year to which the election would apply. 2012 tax return form 1040 If the timber is partnership property, the election is made on the partnership return. 2012 tax return form 1040 This election cannot be made on an amended return. 2012 tax return form 1040   Once you have made the election, it remains in effect for all later years unless you revoke it. 2012 tax return form 1040 Election under section 631(a) may be revoked. 2012 tax return form 1040   If you previously elected for any tax year ending before October 23, 2004, to treat the cutting of timber as a sale or exchange under section 631(a), you may revoke this election without the consent of the IRS for any tax year ending after October 22, 2004. 2012 tax return form 1040 The prior election (and revocation) is disregarded for purposes of making a subsequent election. 2012 tax return form 1040 See Form T (Timber), Forest Activities Schedule, for more information. 2012 tax return form 1040 Gain or loss. 2012 tax return form 1040   Your gain or loss on the cutting of standing timber is the difference between its adjusted basis for depletion and its FMV on the first day of your tax year in which it is cut. 2012 tax return form 1040   Your adjusted basis for depletion of cut timber is based on the number of units (board feet, log scale, or other units) of timber cut during the tax year and considered to be sold or exchanged. 2012 tax return form 1040 Your adjusted basis for depletion is also based on the depletion unit of timber in the account used for the cut timber, and should be figured in the same manner as shown in section 611 and Regulations section 1. 2012 tax return form 1040 611-3. 2012 tax return form 1040   Depletion of timber is discussed in chapter 7. 2012 tax return form 1040 Example. 2012 tax return form 1040   In April 2013, you owned 4,000 MBF (1,000 board feet) of standing timber longer than 1 year. 2012 tax return form 1040 It had an adjusted basis for depletion of $40 per MBF. 2012 tax return form 1040 You are a calendar year taxpayer. 2012 tax return form 1040 On January 1, 2013, the timber had a FMV of $350 per MBF. 2012 tax return form 1040 It was cut in April for sale. 2012 tax return form 1040 On your 2013 tax return, you elect to treat the cutting of the timber as a sale or exchange. 2012 tax return form 1040 You report the difference between the FMV and your adjusted basis for depletion as a gain. 2012 tax return form 1040 This amount is reported on Form 4797 along with your other section 1231 gains and losses to figure whether it is treated as a capital gain or as ordinary gain. 2012 tax return form 1040 You figure your gain as follows. 2012 tax return form 1040 FMV of timber January 1, 2013 $1,400,000 Minus: Adjusted basis for depletion 160,000 Section 1231 gain $1,240,000   The FMV becomes your basis in the cut timber, and a later sale of the cut timber, including any by-product or tree tops, will result in ordinary business income or loss. 2012 tax return form 1040 Outright sales of timber. 2012 tax return form 1040   Outright sales of timber by landowners qualify for capital gains treatment using rules similar to the rules for certain disposal of timber under a contract with retained economic interest (defined later). 2012 tax return form 1040 However, for outright sales, the date of disposal is not deemed to be the date the timber is cut because the landowner can elect to treat the payment date as the date of disposal (see Date of disposal below). 2012 tax return form 1040 Cutting contract. 2012 tax return form 1040   You must treat the disposal of standing timber under a cutting contract as a section 1231 transaction if all the following apply to you. 2012 tax return form 1040 You are the owner of the timber. 2012 tax return form 1040 You held the timber longer than 1 year before its disposal. 2012 tax return form 1040 You kept an economic interest in the timber. 2012 tax return form 1040   You have kept an economic interest in standing timber if, under the cutting contract, the expected return on your investment is conditioned on the cutting of the timber. 2012 tax return form 1040   The difference between the amount realized from the disposal of the timber and its adjusted basis for depletion is treated as gain or loss on its sale. 2012 tax return form 1040 Include this amount on Form 4797 along with your other section 1231 gains or losses. 2012 tax return form 1040 Date of disposal. 2012 tax return form 1040   The date of disposal is the date the timber is cut. 2012 tax return form 1040 However, for outright sales by landowners or if you receive payment under the contract before the timber is cut, you can elect to treat the date of payment as the date of disposal. 2012 tax return form 1040   This election applies only to figure the holding period of the timber. 2012 tax return form 1040 It has no effect on the time for reporting gain or loss (generally when the timber is sold or exchanged). 2012 tax return form 1040   To make this election, attach a statement to the tax return filed by the due date (including extensions) for the year payment is received. 2012 tax return form 1040 The statement must identify the advance payments subject to the election and the contract under which they were made. 2012 tax return form 1040   If you timely filed your return for the year you received payment without making the election, you can still make the election by filing an amended return within 6 months after the due date for that year's return (excluding extensions). 2012 tax return form 1040 Attach the statement to the amended return and write “Filed pursuant to section 301. 2012 tax return form 1040 9100-2” at the top of the statement. 2012 tax return form 1040 File the amended return at the same address the original return was filed. 2012 tax return form 1040 Owner. 2012 tax return form 1040   An owner is any person who owns an interest in the timber, including a sublessor and the holder of a contract to cut the timber. 2012 tax return form 1040 You own an interest in timber if you have the right to cut it for sale on your own account or for use in your business. 2012 tax return form 1040 Tree stumps. 2012 tax return form 1040   Tree stumps are a capital asset if they are on land held by an investor who is not in the timber or stump business as a buyer, seller, or processor. 2012 tax return form 1040 Gain from the sale of stumps sold in one lot by such a holder is taxed as a capital gain. 2012 tax return form 1040 However, tree stumps held by timber operators after the saleable standing timber was cut and removed from the land are considered by-products. 2012 tax return form 1040 Gain from the sale of stumps in lots or tonnage by such operators is taxed as ordinary income. 2012 tax return form 1040   See Form T (Timber) and its separate instructions for more information about dispositions of timber. 2012 tax return form 1040 Sale of a Farm The sale of your farm will usually involve the sale of both nonbusiness property (your home) and business property (the land and buildings used in the farm operation and perhaps machinery and livestock). 2012 tax return form 1040 If you have a gain from the sale, you may be allowed to exclude the gain on your home. 2012 tax return form 1040 For more information, see Publication 523, Selling Your Home. 2012 tax return form 1040 The gain on the sale of your business property is taxable. 2012 tax return form 1040 A loss on the sale of your business property to an unrelated person is deducted as an ordinary loss. 2012 tax return form 1040 Your taxable gain or loss on the sale of property used in your farm business is taxed under the rules for section 1231 transactions. 2012 tax return form 1040 See chapter 9. 2012 tax return form 1040 Losses from personal-use property, other than casualty or theft losses, are not deductible. 2012 tax return form 1040 If you receive payments for your farm in installments, your gain is taxed over the period of years the payments are received, unless you elect not to use the installment method of reporting the gain. 2012 tax return form 1040 See chapter 10 for information about installment sales. 2012 tax return form 1040 When you sell your farm, the gain or loss on each asset is figured separately. 2012 tax return form 1040 The tax treatment of gain or loss on the sale of each asset is determined by the classification of the asset. 2012 tax return form 1040 Each of the assets sold must be classified as one of the following. 2012 tax return form 1040 Capital asset held 1 year or less. 2012 tax return form 1040 Capital asset held longer than 1 year. 2012 tax return form 1040 Property (including real estate) used in your business and held 1 year or less (including draft, breeding, dairy, and sporting animals held less than the holding periods discussed earlier under Livestock ). 2012 tax return form 1040 Property (including real estate) used in your business and held longer than 1 year (including only draft, breeding, dairy, and sporting animals held for the holding periods discussed earlier). 2012 tax return form 1040 Property held primarily for sale or which is of the kind that would be included in inventory if on hand at the end of your tax year. 2012 tax return form 1040 Allocation of consideration paid for a farm. 2012 tax return form 1040   The sale of a farm for a lump sum is considered a sale of each individual asset rather than a single asset. 2012 tax return form 1040 The residual method is required only if the group of assets sold constitutes a trade or business. 2012 tax return form 1040 This method determines gain or loss from the transfer of each asset. 2012 tax return form 1040 It also determines the buyer's basis in the business assets. 2012 tax return form 1040 For more information, see Sale of a Business in chapter 2 of Publication 544. 2012 tax return form 1040 Property used in farm operation. 2012 tax return form 1040   The rules for excluding the gain on the sale of your home, described later under Sale of your home , do not apply to the property used for your farming business. 2012 tax return form 1040 Recognized gains and losses on business property must be reported on your return for the year of the sale. 2012 tax return form 1040 If the property was held longer than 1 year, it may qualify for section 1231 treatment (see chapter 9). 2012 tax return form 1040 Example. 2012 tax return form 1040 You sell your farm, including your main home, which you have owned since December 2001. 2012 tax return form 1040 You realize gain on the sale as follows. 2012 tax return form 1040   Farm   Farm   With Home Without   Home Only Home Selling price $382,000 $158,000 $224,000 Cost (or other basis) 240,000 110,000 130,000 Gain $142,000 $48,000 $94,000 You must report the $94,000 gain from the sale of the property used in your farm business. 2012 tax return form 1040 All or a part of that gain may have to be reported as ordinary income from the recapture of depreciation or soil and water conservation expenses. 2012 tax return form 1040 Treat the balance as section 1231 gain. 2012 tax return form 1040 The $48,000 gain from the sale of your home is not taxable as long as you meet the requirements explained later under Sale of your home . 2012 tax return form 1040 Partial sale. 2012 tax return form 1040   If you sell only part of your farm, you must report any recognized gain or loss on the sale of that part on your tax return for the year of the sale. 2012 tax return form 1040 You cannot wait until you have sold enough of the farm to recover its entire cost before reporting gain or loss. 2012 tax return form 1040 For a detailed discussion on installment sales, see Publication 544. 2012 tax return form 1040 Adjusted basis of the part sold. 2012 tax return form 1040   This is the properly allocated part of your original cost or other basis of the entire farm plus or minus necessary adjustments for improvements, depreciation, etc. 2012 tax return form 1040 , on the part sold. 2012 tax return form 1040 If your home is on the farm, you must properly adjust the basis to exclude those costs from your farm asset costs, as discussed below under Sale of your home . 2012 tax return form 1040 Example. 2012 tax return form 1040 You bought a 600-acre farm for $700,000. 2012 tax return form 1040 The farm included land and buildings. 2012 tax return form 1040 The purchase contract designated $600,000 of the purchase price to the land. 2012 tax return form 1040 You later sold 60 acres of land on which you had installed a fence. 2012 tax return form 1040 Your adjusted basis for the part of your farm sold is $60,000 (1/10 of $600,000), plus any unrecovered cost (cost not depreciated) of the fence on the 60 acres at the time of sale. 2012 tax return form 1040 Use this amount to determine your gain or loss on the sale of the 60 acres. 2012 tax return form 1040 Assessed values for local property taxes. 2012 tax return form 1040   If you paid a flat sum for the entire farm and no other facts are available for properly allocating your original cost or other basis between the land and the buildings, you can use the assessed values for local property taxes for the year of purchase to allocate the costs. 2012 tax return form 1040 Example. 2012 tax return form 1040 Assume that in the preceding example there was no breakdown of the $700,000 purchase price between land and buildings. 2012 tax return form 1040 However, in the year of purchase, local taxes on the entire property were based on assessed valuations of $420,000 for land and $140,000 for improvements, or a total of $560,000. 2012 tax return form 1040 The assessed valuation of the land is 3/4 (75%) of the total assessed valuation. 2012 tax return form 1040 Multiply the $700,000 total purchase price by 75% to figure basis of $525,000 for the 600 acres of land. 2012 tax return form 1040 The unadjusted basis of the 60 acres you sold would then be $52,500 (1/10 of $525,000). 2012 tax return form 1040 Sale of your home. 2012 tax return form 1040   Your home is a capital asset and not property used in the trade or business of farming. 2012 tax return form 1040 If you sell a farm that includes a house you and your family occupy, you must determine the part of the selling price and the part of the cost or other basis allocable to your home. 2012 tax return form 1040 Your home includes the immediate surroundings and outbuildings relating to it that are not used for business purposes. 2012 tax return form 1040   If you use part of your home for business, you must make an appropriate adjustment to the basis for depreciation allowed or allowable. 2012 tax return form 1040 For more information on basis, see chapter 6. 2012 tax return form 1040 More information. 2012 tax return form 1040   For more information on selling your home, see Publication 523. 2012 tax return form 1040 Gain from condemnation. 2012 tax return form 1040   If you have a gain from a condemnation or sale under threat of condemnation, you may use the preceding rules for excluding the gain, rather than the rules discussed under Postponing Gain in chapter 11. 2012 tax return form 1040 However, any gain that cannot be excluded (because it is more than the limit) may be postponed under the rules discussed under Postponing Gain in chapter 11. 2012 tax return form 1040 Foreclosure or Repossession If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. 2012 tax return form 1040 The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. 2012 tax return form 1040 This is true even if you voluntarily return the property to the lender. 2012 tax return form 1040 You may also realize ordinary income from cancellation of debt if the loan balance is more than the FMV of the property. 2012 tax return form 1040 Buyer's (borrower's) gain or loss. 2012 tax return form 1040   You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale or exchange. 2012 tax return form 1040 The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized. 2012 tax return form 1040 See Determining Gain or Loss , earlier. 2012 tax return form 1040 Worksheet 8-1. 2012 tax return form 1040 Worksheet for Foreclosures andRepossessions Part 1. 2012 tax return form 1040 Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. 2012 tax return form 1040 Complete this part only if you were personally liable for the debt. 2012 tax return form 1040 Otherwise, go to Part 2. 2012 tax return form 1040   1. 2012 tax return form 1040 Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable after the transfer of property   2. 2012 tax return form 1040 Enter the Fair Market Value of the transferred property   3. 2012 tax return form 1040 Ordinary income from cancellation of debt upon foreclosure or repossession. 2012 tax return form 1040 * Subtract line 2 from line 1. 2012 tax return form 1040 If zero or less, enter -0-   Part 2. 2012 tax return form 1040 Figure your gain or loss from foreclosure or repossession. 2012 tax return form 1040   4. 2012 tax return form 1040 If you completed Part 1, enter the smaller of line 1 or line 2. 2012 tax return form 1040 If you did not complete Part 1, enter the outstanding debt immediately before the transfer of property   5. 2012 tax return form 1040 Enter any proceeds you received from the foreclosure sale   6. 2012 tax return form 1040 Add lines 4 and 5   7. 2012 tax return form 1040 Enter the adjusted basis of the transferred property   8. 2012 tax return form 1040 Gain or loss from foreclosure or repossession. 2012 tax return form 1040 Subtract line 7  from line 6   * The income may not be taxable. 2012 tax return form 1040 See Cancellation of debt . 2012 tax return form 1040    You can use Worksheet 8-1 to figure your gain or loss from a foreclosure or repossession. 2012 tax return form 1040 Amount realized on a nonrecourse debt. 2012 tax return form 1040   If you are not personally liable for repaying the debt (nonrecourse debt) secured by the transferred property, the amount you realize includes the full amount of the debt canceled by the transfer. 2012 tax return form 1040 The full canceled debt is included in the amount realized even if the fair market value of the property is less than the canceled debt. 2012 tax return form 1040 Example 1. 2012 tax return form 1040 Ann paid $200,000 for land used in her farming business. 2012 tax return form 1040 She paid $15,000 down and borrowed the remaining $185,000 from a bank. 2012 tax return form 1040 Ann is not personally liable for the loan (nonrecourse debt), but pledges the land as security. 2012 tax return form 1040 The bank foreclosed on the loan 2 years after Ann stopped making payments. 2012 tax return form 1040 When the bank foreclosed, the balance due on the loan was $180,000 and the FMV of the land was $170,000. 2012 tax return form 1040 The amount Ann realized on the foreclosure was $180,000, the debt canceled by the foreclosure. 2012 tax return form 1040 She figures her gain or loss on Form 4797, Part I, by comparing the amount realized ($180,000) with her adjusted basis ($200,000). 2012 tax return form 1040 She has a $20,000 deductible loss. 2012 tax return form 1040 Example 2. 2012 tax return form 1040 Assume the same facts as in Example 1 except the FMV of the land was $210,000. 2012 tax return form 1040 The result is the same. 2012 tax return form 1040 The amount Ann realized on the foreclosure is $180,000, the debt canceled by the foreclosure. 2012 tax return form 1040 Because her adjusted basis is $200,000, she has a deductible loss of $20,000, which she reports on Form 4797, Part I. 2012 tax return form 1040 Amount realized on a recourse debt. 2012 tax return form 1040   If you are personally liable for the debt (recourse debt), the amount realized on the foreclosure or repossession includes the lesser of: The outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, or The fair market value of the transferred property. 2012 tax return form 1040   You are treated as receiving ordinary income from the canceled debt for the part of the debt that is more than the fair market value. 2012 tax return form 1040 The amount realized does not include the canceled debt that is your income from cancellation of debt. 2012 tax return form 1040 See Cancellation of debt , later. 2012 tax return form 1040 Example 3. 2012 tax return form 1040 Assume the same facts as in Example 1 above except Ann is personally liable for the loan (recourse debt). 2012 tax return form 1040 In this case, the amount she realizes is $170,000. 2012 tax return form 1040 This is the canceled debt ($180,000) up to the FMV of the land ($170,000). 2012 tax return form 1040 Ann figures her gain or loss on the foreclosure by comparing the amount realized ($170,000) with her adjusted basis ($200,000). 2012 tax return form 1040 She has a $30,000 deductible loss, which she figures on Form 4797, Part I. 2012 tax return form 1040 She is also treated as receiving ordinary income from cancellation of debt. 2012 tax return form 1040 That income is $10,000 ($180,000 − $170,000). 2012 tax return form 1040 This is the part of the canceled debt not included in the amount realized. 2012 tax return form 1040 She reports this as other income on Schedule F, line 8. 2012 tax return form 1040 Seller's (lender's) gain or loss on repossession. 2012 tax return form 1040   If you finance a buyer's purchase of property and later acquire an interest in it through foreclosure or repossession, you may have a gain or loss on the acquisition. 2012 tax return form 1040 For more information, see Repossession in Publication 537, Installment Sales. 2012 tax return form 1040 Cancellation of debt. 2012 tax return form 1040   If property that is repossessed or foreclosed upon secures a debt for which you are personally liable (recourse debt), you generally must report as ordinary income the amount by which the canceled debt is more than the FMV of the property. 2012 tax return form 1040 This income is separate from any gain or loss realized from the foreclosure or repossession. 2012 tax return form 1040 Report the income from cancellation of a business debt on Schedule F, line 8. 2012 tax return form 1040 Report the income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. 2012 tax return form 1040    You can use Worksheet 8-1 to figure your income from cancellation of debt. 2012 tax return form 1040   However, income from cancellation of debt is not taxed if any of the following apply. 2012 tax return form 1040 The cancellation is intended as a gift. 2012 tax return form 1040 The debt is qualified farm debt (see chapter 3). 2012 tax return form 1040 The debt is qualified real property business debt (see chapter 5 of Publication 334). 2012 tax return form 1040 You are insolvent or bankrupt (see  chapter 3). 2012 tax return form 1040 The debt is qualified principal residence indebtedness (see chapter 3). 2012 tax return form 1040   Use Form 982 to report the income exclusion. 2012 tax return form 1040 Abandonment The abandonment of property is a disposition of property. 2012 tax return form 1040 You abandon property when you voluntarily and permanently give up possession and use of the property with the intention of ending your ownership, but without passing it on to anyone else. 2012 tax return form 1040 Business or investment property. 2012 tax return form 1040   Loss from abandonment of business or investment property is deductible as a loss. 2012 tax return form 1040 Loss from abandonment of business or investment property that is not treated as a sale or exchange generally is an ordinary loss. 2012 tax return form 1040 If your adjusted basis is more than the amount you realize (if any), then you have a loss. 2012 tax return form 1040 If the amount you realize (if any) is more than your adjusted basis, then you have a gain. 2012 tax return form 1040 This rule also applies to leasehold improvements the lessor made for the lessee. 2012 tax return form 1040 However, if the property is foreclosed on or repossessed in lieu of abandonment, gain or loss is figured as discussed earlier under Foreclosure or Repossession . 2012 tax return form 1040   If the abandoned property is secured by debt, special rules apply. 2012 tax return form 1040 The tax consequences of abandonment of property that secures a debt depend on whether you are personally liable for the debt (recourse debt) or were not personally liable for the debt (nonrecourse debt). 2012 tax return form 1040 For more information, see chapter 3 of Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals). 2012 tax return form 1040 The abandonment loss is deducted in the tax year in which the loss is sustained. 2012 tax return form 1040 Report the loss on Form 4797, Part II, line 10. 2012 tax return form 1040 Personal-use property. 2012 tax return form 1040   You cannot deduct any loss from abandonment of your home or other property held for personal use. 2012 tax return form 1040 Canceled debt. 2012 tax return form 1040   If the abandoned property secures a debt for which you are personally liable and the debt is canceled, you will realize ordinary income equal to the canceled debt. 2012 tax return form 1040 This income is separate from any loss realized from abandonment of the property. 2012 tax return form 1040 Report income from cancellation of a debt related to a business or rental activity as business or rental income. 2012 tax return form 1040 Report income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. 2012 tax return form 1040   However, income from cancellation of debt is not taxed in certain circumstances. 2012 tax return form 1040 See Cancellation of debt earlier under Foreclosure or Repossession . 2012 tax return form 1040 Forms 1099-A and 1099-C. 2012 tax return form 1040   A lender who acquires an interest in your property in a foreclosure, repossession, or abandonment should send you Form 1099-A showing the information you need to figure your loss from the foreclosure, repossession, or abandonment. 2012 tax return form 1040 However, if the lender cancels part of your debt and the lender must file Form 1099-C, the lender may include the information about the foreclosure, repossession, or abandonment on that form instead of Form 1099-A. 2012 tax return form 1040 The lender must file Form 1099-C and send you a copy if the canceled debt is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. 2012 tax return form 1040 For foreclosures, repossessions, abandonments of property, and debt cancellations occurring in 2013, these forms should be sent to you by January 31, 2014. 2012 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