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Efiling Income Tax

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Efiling Income Tax

Efiling income tax 31. Efiling income tax   Tax on Unearned Income of Certain Children Table of Contents What's New Introduction Useful Items - You may want to see: Which Parent's Return To UseParents Who Do Not File a Joint Return Parent's Election To Report Child's Interest and DividendsEffect of Making the Election Figuring Child's Income Figuring Additional Tax Tax for Certain Children Who Have Unearned IncomeProviding Parental Information (Form 8615, lines A–C) Step 1. Efiling income tax Figuring the Child's Net Unearned Income (Form 8615, Part I) Step 2. Efiling income tax Figuring Tentative Tax at the Parent's Tax Rate (Form 8615, Part II) Step 3. Efiling income tax Figuring the Child's Tax (Form 8615, Part III) What's New Net Investment Income Tax. Efiling income tax . Efiling income tax  For tax years beginning after December 31, 2012, a child whose tax is figured on Form 8615 may be subject to the Net Investment Income Tax (NIIT). Efiling income tax NIIT is a 3. Efiling income tax 8% tax on the lesser of the net investment income or the excess of the child's modified adjusted gross income (MAGI) over the threshold amount. Efiling income tax Use Form 8960, Net Investment Income Tax, to figure this tax. Efiling income tax For more information on NIIT, go to www. Efiling income tax irs. Efiling income tax gov and enter “Net Investment Income Tax” in the search box. Efiling income tax Introduction This chapter discusses the following two rules that may affect the tax on unearned income of certain children. Efiling income tax If the child's interest and dividend income (including capital gain distributions) total less than $10,000, the child's parent may be able to choose to include that income on the parent's return rather than file a return for the child. Efiling income tax (See Parent's Election To Report Child's Interest and Dividends , later. Efiling income tax ) If the child's interest, dividends, and other unearned income total more than $2,000, part of that income may be taxed at the parent's tax rate instead of the child's tax rate. Efiling income tax (See Tax for Certain Children Who Have Unearned Income , later. Efiling income tax ) For these rules, the term “child” includes a legally adopted child and a stepchild. Efiling income tax These rules apply whether or not the child is a dependent. Efiling income tax Useful Items - You may want to see: Publication 929 Tax Rules for Children and Dependents Form (and Instructions) 8615 Tax for Certain Children Who Have Unearned Income 8814 Parents' Election To Report Child's Interest and Dividends Which Parent's Return To Use If a child's parents are married to each other and file a joint return, use the joint return to figure the tax on the child's unearned income. Efiling income tax The tax rate and other return information from that return are used to figure the child's tax as explained later under Tax for Certain Children Who Have Unearned Income . Efiling income tax Parents Who Do Not File a Joint Return For parents who do not file a joint return, the following discussions explain which parent's tax return must be used to figure the tax. Efiling income tax Only the parent whose tax return is used can make the election described under Parent's Election To Report Child's Interest and Dividends . Efiling income tax Parents are married. Efiling income tax   If the child's parents file separate returns, use the return of the parent with the greater taxable income. Efiling income tax Parents not living together. Efiling income tax   If the child's parents are married to each other but not living together, and the parent with whom the child lives (the custodial parent) is considered unmarried, use the return of the custodial parent. Efiling income tax If the custodial parent is not considered unmarried, use the return of the parent with the greater taxable income. Efiling income tax   For an explanation of when a married person living apart from his or her spouse is considered unmarried, see Head of Household in chapter 2. Efiling income tax Parents are divorced. Efiling income tax   If the child's parents are divorced or legally separated, and the parent who had custody of the child for the greater part of the year (the custodial parent) has not remarried, use the return of the custodial parent. Efiling income tax Custodial parent remarried. Efiling income tax   If the custodial parent has remarried, the stepparent (rather than the noncustodial parent) is treated as the child's other parent. Efiling income tax Therefore, if the custodial parent and the stepparent file a joint return, use that joint return. Efiling income tax Do not use the return of the noncustodial parent. Efiling income tax   If the custodial parent and the stepparent are married, but file separate returns, use the return of the one with the greater taxable income. Efiling income tax If the custodial parent and the stepparent are married but not living together, the earlier discussion under Parents not living together applies. Efiling income tax Parents never married. Efiling income tax   If a child's parents have never been married to each other, but lived together all year, use the return of the parent with the greater taxable income. Efiling income tax If the parents did not live together all year, the rules explained earlier under Parents are divorced apply. Efiling income tax Widowed parent remarried. Efiling income tax   If a widow or widower remarries, the new spouse is treated as the child's other parent. Efiling income tax The rules explained earlier under Custodial parent remarried apply. Efiling income tax Parent's Election To Report Child's Interest and Dividends You may be able to elect to include your child's interest and dividend income (including capital gain distributions) on your tax return. Efiling income tax If you do, your child will not have to file a return. Efiling income tax You can make this election only if all the following conditions are met. Efiling income tax Your child was under age 19 (or under age 24 if a full-time student) at the end of the year. Efiling income tax Your child had income only from interest and dividends (including capital gain distributions and Alaska Permanent Fund dividends). Efiling income tax The child's gross income was less than $10,000. Efiling income tax The child is required to file a return unless you make this election. Efiling income tax The child does not file a joint return for the year. Efiling income tax No estimated tax payment was made for the year, and no overpayment from the previous year (or from any amended return) was applied to this year under your child's name and social security number. Efiling income tax No federal income tax was taken out of your child's income under the backup withholding rules. Efiling income tax You are the parent whose return must be used when applying the special tax rules for children. Efiling income tax (See Which Parent's Return To Use , earlier. Efiling income tax ) These conditions are also shown in Figure 31-A. Efiling income tax Certain January 1 birthdays. Efiling income tax   A child born on January 1, 1995, is considered to be age 19 at the end of 2013. Efiling income tax You cannot make this election for such a child unless the child was a full-time student. Efiling income tax   A child born on January 1, 1990, is considered to be age 24 at the end of 2013. Efiling income tax You cannot make this election for such a child. Efiling income tax Full-time student. Efiling income tax   A full-time student is a child who during some part of each of any 5 calendar months of the year was enrolled as a full-time student at a school, or took a full-time on-farm training course given by a school or a state, county, or local government agency. Efiling income tax A school includes a technical, trade, or mechanical school. Efiling income tax It does not include an on-the-job training course, correspondence school, or school offering courses only through the Internet. Efiling income tax How to make the election. Efiling income tax   Make the election by attaching Form 8814 to your Form 1040. Efiling income tax (If you make this election, you cannot file Form 1040A or Form 1040EZ. Efiling income tax ) Attach a separate Form 8814 for each child for whom you make the election. Efiling income tax You can make the election for one or more children and not for others. Efiling income tax Effect of Making the Election The federal income tax on your child's income may be more if you make the Form 8814 election. Efiling income tax Rate may be higher. Efiling income tax   If your child received qualified dividends or capital gain distributions, you may pay up to $100 more tax if you make this election instead of filing a separate tax return for the child. Efiling income tax This is because the tax rate on the child's income between $1,000 and $2,000 is 10% if you make this election. Efiling income tax However, if you file a separate return for the child, the tax rate may be as low as 0% (zero percent) because of the preferential tax rates for qualified dividends and capital gain distributions. Efiling income tax Deductions you cannot take. Efiling income tax   By making the Form 8814 election, you cannot take any of the following deductions that the child would be entitled to on his or her return. Efiling income tax The additional standard deduction if the child is blind. Efiling income tax The deduction for a penalty on an early withdrawal of your child's savings. Efiling income tax Itemized deductions (such as your child's investment expenses or charitable contributions). Efiling income tax Reduced deductions or credits. Efiling income tax   If you use Form 8814, your increased adjusted gross income may reduce certain deductions or credits on your return including the following. Efiling income tax Deduction for contributions to a traditional individual retirement arrangement (IRA). Efiling income tax Deduction for student loan interest. Efiling income tax Itemized deductions for medical expenses, casualty and theft losses, and certain miscellaneous expenses. Efiling income tax Credit for child and dependent care expenses. Efiling income tax Child tax credit. Efiling income tax Education tax credits. Efiling income tax Earned income credit. Efiling income tax Penalty for underpayment of estimated tax. Efiling income tax   If you make this election for 2013 and did not have enough tax withheld or pay enough estimated tax to cover the tax you owe, you may be subject to a penalty. Efiling income tax If you plan to make this election for 2014, you may need to increase your federal income tax withholding or your estimated tax payments to avoid the penalty. Efiling income tax See chapter 4 for more information. Efiling income tax Figuring Child's Income Use Form 8814, Part I, to figure your child's interest and dividend income to report on your return. Efiling income tax Only the amount over $2,000 is added to your income. Efiling income tax The amount over $2,000 is shown on Form 8814, line 6. Efiling income tax Unless the child's income includes qualified dividends or capital gain distributions (discussed next), the same amount is shown on Form 8814, line 12. Efiling income tax Include the amount from Form 8814, line 12, on Form 1040, line 21. Efiling income tax Enter “Form 8814” on the dotted line next to line 21. Efiling income tax If you file more than one Form 8814, include the total amounts from line 12 of all your Forms 8814 on Form 1040, line 21. Efiling income tax Capital gain distributions and qualified dividends. Efiling income tax   If your child's dividend income included any capital gain distributions, see Capital gain distributions under Figuring Child's Income in Publication 929, Part 2. Efiling income tax If your child's dividend income included any qualified dividends, see Qualified dividends under Figuring Child's Income in Publication 929, Part 2. Efiling income tax Figuring Additional Tax Use Form 8814, Part II, to figure the tax on the $2,000 of your child's interest and dividends that you do not include in your income. Efiling income tax This tax is added to the tax figured on your income. Efiling income tax This additional tax is the smaller of: 10% × (your child's gross income − $1,000), or $100. Efiling income tax Include the amount from line 15 of all your Forms 8814 in the total on Form 1040, line 44. Efiling income tax Check box a on Form 1040, line 44. Efiling income tax Figure 31-A. Efiling income tax Can You Include Your Child's Income On Your Tax Return? Please click here for the text description of the image. Efiling income tax Figure 31–A. Efiling income tax Can You Include Your Child's Income On Your Tax Return? Tax for Certain Children Who Have Unearned Income If a child's interest, dividends, and other unearned income total more than $2,000, part of that income may be taxed at the parent's tax rate instead of the child's tax rate. Efiling income tax If the parent does not or cannot choose to include the child's income on the parent's return, use Form 8615 to figure the child's tax. Efiling income tax Attach the completed form to the child's Form 1040 or Form 1040A. Efiling income tax When Form 8615 must be filed. Efiling income tax   Form 8615 must be filed for a child if all of the following statements are true. Efiling income tax The child's investment income was more than $2,000. Efiling income tax The child is required to file a return for 2013. Efiling income tax The child either: Was under age 18 at the end of the year, Was age 18 at the end of the year and did not have earned income that was more than half of his or her support, or Was over age 18 and under age 24 at the end of the year, was a full-time student, and did not have earned income that was more than half of his or her support. Efiling income tax At least one of the child's parents was alive at the end of 2013. Efiling income tax The child does not file a joint return for 2013. Efiling income tax These conditions are also shown in  Figure 31-B. Efiling income tax Earned income. Efiling income tax   Earned income includes salaries, wages, tips, and other payments received for personal services performed. Efiling income tax It does not include unearned income as defined later in this chapter. Efiling income tax Support. Efiling income tax   Your child's support includes all amounts spent to provide the child with food, lodging, clothing, education, medical and dental care, recreation, transportation, and similar necessities. Efiling income tax To figure your child's support, count support provided by you, your child, and others. Efiling income tax However, a scholarship received by your child is not considered support if your child is a full-time student. Efiling income tax See chapter 3 for details about support. Efiling income tax Certain January 1 birthdays. Efiling income tax   Use the following chart to determine whether certain children with January 1 birthdays meet condition 3 under When Form 8615 must be filed. Efiling income tax Figure 31-B. Efiling income tax Do You Have To Use Form 8615 To Figure Your Child's Tax? Please click here for the text description of the image. Efiling income tax Figure 31-B. Efiling income tax Do You Have To Use Form 8615 To Figure Your Child's Tax?    IF a child was born on. Efiling income tax . Efiling income tax . Efiling income tax THEN, at the end of 2013, the child is considered to be. Efiling income tax . Efiling income tax . Efiling income tax January 1, 1996 18* January 1, 1995 19** January 1, 1990 24*** *This child is not under age 18. Efiling income tax The child meets condition 3 only if the child did not have earned income that was more than half of the child's support. Efiling income tax  **This child meets condition 3 only if the child was a full-time student who did not have earned income that was more than half of the child's support. Efiling income tax  ***Do not use Form 8615 for this child. Efiling income tax Providing Parental Information (Form 8615, lines A–C) On Form 8615, lines A and B, enter the parent's name and social security number. Efiling income tax (If the parents filed a joint return, enter the name and social security number listed first on the joint return. Efiling income tax ) On line C, check the box for the parent's filing status. Efiling income tax See Which Parent's Return To Use at the beginning of this chapter for information on which parent's return information must be used on Form 8615. Efiling income tax Parent with different tax year. Efiling income tax   If the parent and the child do not have the same tax year, complete Form 8615 using the information on the parent's return for the tax year that ends in the child's tax year. Efiling income tax Parent's return information not known timely. Efiling income tax   If the information needed from the parent's return is not known by the time the child's return is due (usually April 15), you can file the return using estimates. Efiling income tax   You can use any reasonable estimate. Efiling income tax This includes using information from last year's return. Efiling income tax If you use an estimated amount on Form 8615, enter “Estimated” on the line next to the amount. Efiling income tax    When you get the correct information, file an amended return on Form 1040X, Amended U. Efiling income tax S. Efiling income tax Individual Income Tax Return. Efiling income tax   Instead of using estimates, you can get an automatic 6-month extension of time to file if, by the date your return is due, you file Form 4868, Application for Automatic Extension of Time To File U. Efiling income tax S. Efiling income tax Individual Income Tax Return. Efiling income tax Extensions are discussed in chapter 1. Efiling income tax Step 1. Efiling income tax Figuring the Child's Net Unearned Income (Form 8615, Part I) The first step in figuring a child's tax using Form 8615 is to figure the child's net unearned income. Efiling income tax To do that, use Form 8615, Part I. Efiling income tax Line 1 (unearned income). Efiling income tax   If the child had no earned income, enter on this line the adjusted gross income shown on the child's return. Efiling income tax Adjusted gross income is shown on Form 1040, line 38, or Form 1040A, line 22. Efiling income tax Form 1040EZ cannot be used if Form 8615 must be filed. Efiling income tax   If the child had earned income, figure the amount to enter on Form 8615, line 1, by using the worksheet in the instructions for the form. Efiling income tax   However, if the child has: excluded any foreign earned income, deducted either a loss from self-employment, or deducted a net operating loss from another year, then use the Alternate Worksheet for Form 8615, Line 1, in Publication 929 to figure the amount to enter on Form 8615, line 1. Efiling income tax Unearned income defined. Efiling income tax   Unearned income is generally all income other than salaries, wages, and other amounts received as pay for work actually done. Efiling income tax It includes taxable interest, dividends (including capital gain distributions), capital gains, unemployment compensation, the taxable part of social security and pension payments, and certain distributions from trusts. Efiling income tax Unearned income includes amounts produced by assets the child obtained with earned income (such as interest on a savings account into which the child deposited wages). Efiling income tax Nontaxable income. Efiling income tax   For this purpose, unearned income includes only amounts the child must include in total income. Efiling income tax Nontaxable unearned income, such as tax-exempt interest and the nontaxable part of social security and pension payments, is not included. Efiling income tax Income from property received as a gift. Efiling income tax   A child's unearned income includes all income produced by property belonging to the child. Efiling income tax This is true even if the property was transferred to the child, regardless of when the property was transferred or purchased or who transferred it. Efiling income tax   A child's unearned income includes income produced by property given as a gift to the child. Efiling income tax This includes gifts to the child from grandparents or any other person and gifts made under the Uniform Gift to Minors Act. Efiling income tax Example. Efiling income tax Amanda Black, age 13, received the following income. Efiling income tax Dividends — $800 Wages — $2,100 Taxable interest — $1,200 Tax-exempt interest — $100 Net capital gains — $100 The dividends were qualified dividends on stock given to her by her grandparents. Efiling income tax Amanda's unearned income is $2,100. Efiling income tax This is the total of the dividends ($800), taxable interest ($1,200), and net capital gains ($100). Efiling income tax Her wages are earned (not unearned) income because they are received for work actually done. Efiling income tax Her tax-exempt interest is not included because it is nontaxable. Efiling income tax Trust income. Efiling income tax   If a child is the beneficiary of a trust, distributions of taxable interest, dividends, capital gains, and other unearned income from the trust are unearned income to the child. Efiling income tax   However, for purposes of completing Form 8615, a taxable distribution from a qualified disability trust is considered earned income, not unearned income. Efiling income tax Line 2 (deductions). Efiling income tax   If the child does not itemize deductions on Schedule A (Form 1040), enter $2,000 on line 2. Efiling income tax   If the child does itemize deductions, enter on line 2 the larger of: $1,000 plus the portion of the child's itemized deductions on Schedule A (Form 1040), line 29, that are directly connected with the production of unearned income entered on line 1, or $2,000. Efiling income tax Directly connected. Efiling income tax   Itemized deductions are directly connected with the production of unearned income if they are for expenses paid to produce or collect taxable income or to manage, conserve, or maintain property held for producing income. Efiling income tax These expenses include custodian fees and service charges, service fees to collect taxable interest and dividends, and certain investment counsel fees. Efiling income tax   These expenses are added to certain other miscellaneous itemized deductions on Schedule A (Form 1040). Efiling income tax Only the amount greater than 2% of the child's adjusted gross income can be deducted. Efiling income tax See chapter 28 for more information. Efiling income tax Example 1. Efiling income tax Roger, age 12, has unearned income of $8,000, no other income, no adjustments to income, and itemized deductions of $300 (net of the 2% limit) that are directly connected with his unearned income. Efiling income tax His adjusted gross income is $8,000, which is entered on Form 1040, line 38, and on Form 8615, line 1. Efiling income tax Roger enters $2,000 on line 2 because that is more than the total of $1,000 plus his directly connected itemized deductions of $300. Efiling income tax Example 2. Efiling income tax Eleanor, age 8, has unearned income of $16,000 and an early withdrawal penalty of $100. Efiling income tax She has no other income. Efiling income tax She has itemized deductions of $1,050 (net of the 2% limit) that are directly connected with the production of her unearned income. Efiling income tax Her adjusted gross income, entered on line 1, is $15,900 ($16,000 − $100). Efiling income tax The amount on line 2 is $2,050. Efiling income tax This is the larger of: $1,000 plus the $1,050 of directly connected itemized deductions, or $2,000. Efiling income tax Line 3. Efiling income tax   Subtract line 2 from line 1 and enter the result on this line. Efiling income tax If zero or less, do not complete the rest of the form. Efiling income tax However, you must still attach Form 8615 to the child's tax return. Efiling income tax Figure the tax on the child's taxable income in the normal manner. Efiling income tax Line 4 (child's taxable income). Efiling income tax   Enter on line 4 the child's taxable income from Form 1040, line 43, or Form 1040A, line 27. Efiling income tax   However, if the child files Form 2555 or 2555-EZ to claim the foreign earned income exclusion, housing exclusion, or housing deduction, see the Form 8615 instructions or Pub. Efiling income tax 929. Efiling income tax Line 5 (net unearned income). Efiling income tax   A child's net unearned income cannot be more than his or her taxable income. Efiling income tax Enter on Form 8615, line 5, the smaller of line 3 or line 4. Efiling income tax This is the child's net unearned income. Efiling income tax   If zero or less, do not complete the rest of the form. Efiling income tax However, you must still attach Form 8615 to the child's tax return. Efiling income tax Figure the tax on the child's taxable income in the normal manner. Efiling income tax Step 2. Efiling income tax Figuring Tentative Tax at the Parent's Tax Rate (Form 8615, Part II) The next step in completing Form 8615 is to figure a tentative tax on the child's net unearned income at the parent's tax rate. Efiling income tax The tentative tax at the parent's tax rate is the difference between the tax on the parent's taxable income figured with the child's net unearned income (plus the net unearned income of any other child whose Form 8615 includes the tax return information of that parent) and the tax figured without it. Efiling income tax When figuring the tentative tax at the parent's tax rate on Form 8615, do not refigure any of the exclusions, deductions, or credits on the parent's return because of the child's net unearned income. Efiling income tax For example, do not refigure the medical expense deduction. Efiling income tax Figure the tentative tax on Form 8615, lines 6 through 13. Efiling income tax Note. Efiling income tax If the child or parent has any capital gains or losses, get Publication 929 for help in completing Form 8615, Part II. Efiling income tax Line 6 (parent's taxable income). Efiling income tax   Enter on line 6 the parent's taxable income from Form 1040, line 43, Form 1040A, line 27, or Form 1040EZ, line 6. Efiling income tax   If the Foreign Earned Income Tax Worksheet (in the Form 1040 instructions) was used to figure the parent's tax, enter the amount from line 3 of that worksheet instead of the parent's taxable income. Efiling income tax Line 7 (net unearned income of other children). Efiling income tax   If the tax return information of the parent is also used on any other child's Form 8615, enter on line 7 the total of the amounts from line 5 of all the other children's Forms 8615. Efiling income tax Do not include the amount from line 5 of the Form 8615 being completed. Efiling income tax Example. Efiling income tax Paul and Jane Persimmon have three children, Sharon, Jerry, and Mike, who must attach Form 8615 to their tax returns. Efiling income tax The children's net unearned income amounts on line 5 of their Forms 8615 are: Sharon — $800 Jerry — $600 Mike — $1,000 Line 7 of Sharon's Form 8615 will show $1,600, the total of the amounts on line 5 of Jerry's and Mike's Forms 8615. Efiling income tax Line 7 of Jerry's Form 8615 will show $1,800 ($800 + $1,000). Efiling income tax Line 7 of Mike's Form 8615 will show $1,400 ($800 + $600). Efiling income tax Other children's information not available. Efiling income tax   If the net unearned income of the other children is not available when the return is due, either file the return using estimates or get an extension of time to file. Efiling income tax See Parent's return information not known timely , earlier. Efiling income tax Line 11 (tentative tax). Efiling income tax   Subtract line 10 from line 9 and enter the result on this line. Efiling income tax This is the tentative tax. Efiling income tax   If line 7 is blank, skip lines 12a and 12b and enter the amount from line 11 on line 13. Efiling income tax Also skip the discussion for lines 12a and 12b that follows. Efiling income tax Lines 12a and 12b (dividing the tentative tax). Efiling income tax   If an amount is entered on line 7, divide the tentative tax shown on line 11 among the children according to each child's share of the total net unearned income. Efiling income tax This is done on lines 12a, 12b, and 13. Efiling income tax Add the amount on line 7 to the amount on line 5 and enter the total on line 12a. Efiling income tax Divide the amount on line 5 by the amount on line 12a and enter the result, as a decimal, on line 12b. Efiling income tax Example. Efiling income tax In the earlier example under Line 7 (net unearned income of other children), Sharon's Form 8615 shows $1,600 on line 7. Efiling income tax The amount entered on line 12a is $2,400, the total of the amounts on lines 5 and 7 ($800 + $1,600). Efiling income tax The decimal on line 12b is  . Efiling income tax 333, figured as follows and rounded to three places. Efiling income tax   $800 = . Efiling income tax 333     $2,400   Step 3. Efiling income tax Figuring the Child's Tax (Form 8615, Part III) The final step in figuring a child's tax using Form 8615 is to determine the larger of: The total of: The child's share of the tentative tax based on the parent's tax rate, plus The tax on the child's taxable income in excess of net unearned income, figured at the child's tax rate, or The tax on the child's taxable income, figured at the child's tax rate. Efiling income tax This is the child's tax. Efiling income tax It is figured on Form 8615, lines 14 through 18. Efiling income tax Alternative minimum tax. Efiling income tax   A child may be subject to alternative minimum tax (AMT) if he or she has certain items given preferential treatment under the tax law. Efiling income tax See Alternative Minimum Tax (AMT) in chapter 30. Efiling income tax    For more information on who is liable for AMT and how to figure it, see Form 6251, Alternative Minimum Tax—Individuals. Efiling income tax For information on special limits that apply to a child who files Form 6251, see Certain Children Under Age 24 in the Instructions for Form 6251. Efiling income tax Prev  Up  Next   Home   More Online Publications
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The Efiling Income Tax

Efiling income tax 3. Efiling income tax   Farm Income Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Schedule F (Form 1040) Sales of Farm ProductsSchedule F. Efiling income tax Form 4797. Efiling income tax Sales Caused by Weather-Related Conditions Rents (Including Crop Shares)Crop Shares Agricultural Program PaymentsCommodity Credit Corporation (CCC) Loans Conservation Reserve Program (CRP) Crop Insurance and Crop Disaster Payments Feed Assistance and Payments Cost-Sharing Exclusion (Improvements) Payments Under the Farm Security and Rural Investment Act of 2002 and Under the Food, Conservation, and Energy Act of 2008 Tobacco Quota Buyout Program Payments Other Payments Payment to More Than One Person Income From CooperativesPatronage Dividends Per-Unit Retain Certificates Cancellation of DebtGeneral Rule Exceptions Exclusions Income From Other SourcesSod. Efiling income tax Granting the right to remove deposits. Efiling income tax Income Averaging for FarmersElected Farm Income (EFI) How To Figure the Tax Effect on Other Tax Determinations Tax for Certain Children Who Have Unearned Income Alternative Minimum Tax (AMT) Schedule J Introduction You may receive income from many sources. Efiling income tax You must report the income from all the different sources on your tax return, unless it is excluded by law. Efiling income tax Where you report the income on your tax return depends on its source. Efiling income tax This chapter discusses farm income you report on Schedule F (Form 1040), Profit or Loss From Farming. Efiling income tax For information on where to report other income, see the Instructions for Form 1040, U. Efiling income tax S. Efiling income tax Individual Income Tax Return. Efiling income tax Accounting method. Efiling income tax   The rules discussed in this chapter assume you use the cash method of accounting. Efiling income tax Under the cash method, you generally include an item of income in gross income in the year you receive it. Efiling income tax See Cash Method in chapter 2. Efiling income tax   If you use an accrual method of accounting, different rules may apply to your situation. Efiling income tax See Accrual Method in chapter 2. Efiling income tax Topics - This chapter discusses: Schedule F Sales of farm products Rents (including crop shares) Agricultural program payments Income from cooperatives Cancellation of debt Income from other sources Income averaging for farmers Useful Items - You may want to see: Publication 525 Taxable and Nontaxable Income 550 Investment Income and Expenses 908 Bankruptcy Tax Guide 925 Passive Activity and At-Risk Rules 4681 Canceled Debts, Foreclosures, Repossessions, and Abandonments Form (and Instructions) 982 Reduction of Tax Attributes Due to Discharge of Indebtedness Sch E (Form 1040) Supplemental Income and Loss Sch J (Form 1040) Income Averaging for Farmers and Fishermen 1099-G Certain Government Payments 1099-PATR Taxable Distributions Received From Cooperatives 4797 Sales of Business Property 4835 Farm Rental Income and Expenses See chapter 16 for information about getting publications and forms. Efiling income tax Schedule F (Form 1040) Individuals, trusts, and partnerships report farm income on Schedule F (Form 1040), Profit or Loss From Farming. Efiling income tax Use this schedule to figure the net profit or loss from regular farming operations. Efiling income tax Income from farming reported on Schedule F includes amounts you receive from cultivating, operating, or managing a farm for gain or profit, either as owner or tenant. Efiling income tax This includes income from operating a stock, dairy, poultry, fish, fruit, or truck farm and income from operating a plantation, ranch, range, or orchard. Efiling income tax It also includes income from the sale of crop shares if you materially participate in producing the crop. Efiling income tax See Rents (Including Crop Shares) , later. Efiling income tax Income received from operating a nursery, which specializes in growing ornamental plants, is considered to be income from farming. Efiling income tax Income reported on Schedule F does not include gains or losses from sales or other dispositions of the following farm assets. Efiling income tax Land. Efiling income tax Depreciable farm equipment. Efiling income tax Buildings and structures. Efiling income tax Livestock held for draft, breeding, sport, or dairy purposes. Efiling income tax Gains and losses from most dispositions of farm assets are discussed in chapters 8 and 9. Efiling income tax Gains and losses from casualties, thefts, and condemnations are discussed in chapter 11. Efiling income tax Sales of Farm Products Where to report. Efiling income tax    Table 3-1 shows where to report the sale of farm products on your tax return. Efiling income tax Schedule F. Efiling income tax   Amounts received from the sales of products you raised on your farm for sale (or bought for resale), such as livestock, produce, or grains, are reported on Schedule F. Efiling income tax This includes money and the fair market value of any property or services you receive. Efiling income tax When you sell farm products bought for resale, your profit or loss is the difference between your selling price (money plus the fair market value of any property) and your basis in the item (usually the cost). Efiling income tax See chapter 6 for information on the basis of assets. Efiling income tax You generally report these amounts on Schedule F for the year you receive payment. Efiling income tax Example. Efiling income tax In 2012, you bought 20 feeder calves for $11,000 for resale. Efiling income tax You sold them in 2013 for $21,000. Efiling income tax You report the $21,000 sales price on Schedule F, line 1b, subtract your $11,000 basis on line 1d, and report the resulting $10,000 profit on line 1e. Efiling income tax Form 4797. Efiling income tax   Sales of livestock held for draft, breeding, sport, or dairy purposes may result in ordinary or capital gains or losses, depending on the circumstances. Efiling income tax In either case, you should always report these sales on Form 4797 instead of Schedule F. Efiling income tax See Livestock under Ordinary or Capital Gain or Loss in chapter 8. Efiling income tax Animals you do not hold primarily for sale are considered business assets of your farm. Efiling income tax Table 3-1. Efiling income tax Where To Report Sales of Farm Products Item Sold Schedule F Form 4797 Farm products raised for sale X   Farm products bought for resale X   Farm assets not held primarily for sale, such as livestock held for draft, breeding, sport, or dairy purposes (bought or raised)   X Sale by agent. Efiling income tax   If your agent sells your farm products, you have constructive receipt of the income when your agent receives payment and you must include the net proceeds from the sale in gross income for the year the agent receives payment. Efiling income tax This applies even if your agent pays you in a later year. Efiling income tax For a discussion on constructive receipt of income, see Cash Method under Accounting Methods in chapter 2. Efiling income tax Sales Caused by Weather-Related Conditions If you sell or exchange more livestock, including poultry, than you normally would in a year because of a drought, flood, or other weather-related condition, you may be able to postpone reporting the gain from the additional animals until the next year. Efiling income tax You must meet all the following conditions to qualify. Efiling income tax Your principal trade or business is farming. Efiling income tax You use the cash method of accounting. Efiling income tax You can show that, under your usual business practices, you would not have sold or exchanged the additional animals this year except for the weather-related condition. Efiling income tax The weather-related condition caused an area to be designated as eligible for assistance by the federal government. Efiling income tax Sales or exchanges made before an area became eligible for federal assistance qualify if the weather-related condition that caused the sale or exchange also caused the area to be designated as eligible for federal assistance. Efiling income tax The designation can be made by the President, the Department of Agriculture (or any of its agencies), or by other federal departments or agencies. Efiling income tax A weather-related sale or exchange of livestock (other than poultry) held for draft, breeding, or dairy purposes may be an involuntary conversion. Efiling income tax See Other Involuntary Conversions in chapter 11. Efiling income tax Usual business practice. Efiling income tax   You must determine the number of animals you would have sold had you followed your usual business practice in the absence of the weather-related condition. Efiling income tax Do this by considering all the facts and circumstances, but do not take into account your sales in any earlier year for which you postponed the gain. Efiling income tax If you have not yet established a usual business practice, rely on the usual business practices of similarly situated farmers in your general region. Efiling income tax Connection with affected area. Efiling income tax   The livestock does not have to be raised or sold in an area affected by a weather-related condition for the postponement to apply. Efiling income tax However, the sale must occur solely because of a weather-related condition that affected the water, grazing, or other requirements of the livestock. Efiling income tax This requirement generally will not be met if the costs of feed, water, or other requirements of the livestock affected by the weather-related condition are not substantial in relation to the total costs of holding the livestock. Efiling income tax Classes of livestock. Efiling income tax   You must figure the amount to be postponed separately for each generic class of animals—for example, hogs, sheep, and cattle. Efiling income tax Do not separate animals into classes based on age, sex, or breed. Efiling income tax Amount to be postponed. Efiling income tax   Follow these steps to figure the amount of gain to be postponed for each class of animals. Efiling income tax Divide the total income realized from the sale of all livestock in the class during the tax year by the total number of such livestock sold. Efiling income tax For this purpose, do not treat any postponed gain from the previous year as income received from the sale of livestock. Efiling income tax Multiply the result in (1) by the excess number of such livestock sold solely because of weather-related conditions. Efiling income tax Example. Efiling income tax You are a calendar year taxpayer and you normally sell 100 head of beef cattle a year. Efiling income tax As a result of drought, you sold 135 head during 2012. Efiling income tax You realized $70,200 from the sale. Efiling income tax On August 9, 2012, as a result of drought, the affected area was declared a disaster area eligible for federal assistance. Efiling income tax The income you can postpone until 2013 is $18,200 [($70,200 ÷ 135) × 35]. Efiling income tax How to postpone gain. Efiling income tax   To postpone gain, attach a statement to your tax return for the year of the sale. Efiling income tax The statement must include your name and address and give the following information for each class of livestock for which you are postponing gain. Efiling income tax A statement that you are postponing gain under Internal Revenue Code (IRC) section 451(e). Efiling income tax Evidence of the weather-related conditions that forced the early sale or exchange of the livestock and the date, if known, on which an area was designated as eligible for assistance by the federal government because of weather-related conditions. Efiling income tax A statement explaining the relationship of the area affected by the weather-related condition to your early sale or exchange of the livestock. Efiling income tax The number of animals sold in each of the 3 preceding years. Efiling income tax The number of animals you would have sold in the tax year had you followed your normal business practice in the absence of weather-related conditions. Efiling income tax The total number of animals sold and the number sold because of weather-related conditions during the tax year. Efiling income tax A computation, as described above, of the income to be postponed for each class of livestock. Efiling income tax   Generally, you must file the statement and the return by the due date of the return, including extensions. Efiling income tax However, for sales or exchanges treated as an involuntary conversion from weather-related sales of livestock in an area eligible for federal assistance (discussed in chapter 11), you can file this statement at any time during the replacement period. Efiling income tax For other sales or exchanges, if you timely filed your return for the year without postponing gain, you can still postpone gain by filing an amended return within 6 months of the due date of the return (excluding extensions). Efiling income tax Attach the statement to the amended return and write “Filed pursuant to section 301. Efiling income tax 9100-2” at the top of the amended return. Efiling income tax File the amended return at the same address you filed the original return. Efiling income tax Once you have filed the statement, you can cancel your postponement of gain only with the approval of the IRS. Efiling income tax Rents (Including Crop Shares) The rent you receive for the use of your farmland is generally rental income, not farm income. Efiling income tax However, if you materially participate in farming operations on the land, the rent is farm income. Efiling income tax See Landlord Participation in Farming in chapter 12. Efiling income tax Pasture income and rental. Efiling income tax   If you pasture someone else's livestock and take care of them for a fee, the income is from your farming business. Efiling income tax You must enter it as Other income on Schedule F. Efiling income tax If you simply rent your pasture for a flat cash amount without providing services, report the income as rent on Part I of Schedule E (Form 1040), Supplemental Income and Loss. Efiling income tax Crop Shares You must include rent you receive in the form of crop shares in income in the year you convert the shares to money or the equivalent of money. Efiling income tax It does not matter whether you use the cash method of accounting or an accrual method of accounting. Efiling income tax If you materially participate in operating a farm from which you receive rent in the form of crop shares or livestock, the rental income is included in self-employment income. Efiling income tax See Landlord Participation in Farming in chapter 12. Efiling income tax Report the rental income on Schedule F. Efiling income tax If you do not materially participate in operating the farm, report this income on Form 4835 and carry the net income or loss to Schedule E (Form 1040). Efiling income tax The income is not included in self-employment income. Efiling income tax Crop shares you use to feed livestock. Efiling income tax   Crop shares you receive as a landlord and feed to your livestock are considered converted to money when fed to the livestock. Efiling income tax You must include the fair market value of the crop shares in income at that time. Efiling income tax You are entitled to a business expense deduction for the livestock feed in the same amount and at the same time you include the fair market value of the crop share as rental income. Efiling income tax Although these two transactions cancel each other for figuring adjusted gross income on Form 1040, they may be necessary to figure your self-employment tax. Efiling income tax See  chapter 12. Efiling income tax Crop shares you give to others (gift). Efiling income tax   Crop shares you receive as a landlord and give to others are considered converted to money when you make the gift. Efiling income tax You must report the fair market value of the crop share as income, even though someone else receives payment for the crop share. Efiling income tax Example. Efiling income tax A tenant farmed part of your land under a crop-share arrangement. Efiling income tax The tenant harvested and delivered the crop in your name to an elevator company. Efiling income tax Before selling any of the crop, you instructed the elevator company to cancel your warehouse receipt and make out new warehouse receipts in equal amounts of the crop in the names of your children. Efiling income tax They sell their crop shares in the following year and the elevator company makes payments directly to your children. Efiling income tax In this situation, you are considered to have received rental income and then made a gift of that income. Efiling income tax You must include the fair market value of the crop shares in your income for the tax year you gave the crop shares to your children. Efiling income tax Crop share loss. Efiling income tax   If you are involved in a rental or crop-share lease arrangement, any loss from these activities may be subject to the limits under the passive loss rules. Efiling income tax See Publication 925 for information on these rules. Efiling income tax Agricultural Program Payments You must include in income most government payments, such as those for approved conservation practices, direct payments, and counter-cyclical payments, whether you receive them in cash, materials, services, or commodity certificates. Efiling income tax However, you can exclude from income some payments you receive under certain cost-sharing conservation programs. Efiling income tax See Cost-Sharing Exclusion (Improvements) , later. Efiling income tax Report the agricultural program payment on the appropriate line of Schedule F, Part I. Efiling income tax Report the full amount even if you return a government check for cancellation, refund any of the payment you receive, or the government collects all or part of the payment from you by reducing the amount of some other payment or Commodity Credit Corporation (CCC) loan. Efiling income tax However, you can deduct the amount you refund or return or that reduces some other payment or loan to you. Efiling income tax Claim the deduction on Schedule F for the year of repayment or reduction. Efiling income tax Commodity Credit Corporation (CCC) Loans Generally, you do not report loans you receive as income. Efiling income tax However, if you pledge part or all of your production to secure a CCC loan, you can treat the loan as if it were a sale of the crop and report the loan proceeds as income in the year you receive them. Efiling income tax You do not need approval from the IRS to adopt this method of reporting CCC loans. Efiling income tax Once you report a CCC loan as income for the year received, you generally must report all CCC loans in that year and later years in the same way. Efiling income tax However, you can obtain for your tax year an automatic consent to change your method of accounting for loans received from the CCC, from including the loan amount in gross income for the tax year in which the loan is received to treating the loan amount as a loan. Efiling income tax For more information, see Part I of the Instructions for Form 3115 and Revenue Procedure 2008-52. Efiling income tax Revenue Procedure 2008-52, 2008-36 I. Efiling income tax R. Efiling income tax B. Efiling income tax 587, is available at  www. Efiling income tax irs. Efiling income tax gov/irb/2008-36_IRB/ar09. Efiling income tax html. Efiling income tax You can request income tax withholding from CCC loan payments you receive. Efiling income tax Use Form W-4V, Voluntary Withholding Request. Efiling income tax See chapter 16 for information about ordering the form. Efiling income tax To elect to report a CCC loan as income, include the loan proceeds as income on Schedule F, line 7a, for the year you receive it. Efiling income tax Attach a statement to your return showing the details of the loan. Efiling income tax You must file the statement and the return by the due date of the return, including extensions. Efiling income tax If you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Efiling income tax Attach the statement to the amended return and write “Filed pursuant to section 301. Efiling income tax 9100-2” at the top of the return. Efiling income tax File the amended return at the same address you filed the original return. Efiling income tax When you make this election, the amount you report as income becomes your basis in the commodity. Efiling income tax See chapter 6 for information on the basis of assets. Efiling income tax If you later repay the loan, redeem the pledged commodity, and sell it, you report as income at the time of sale the sale proceeds minus your basis in the commodity. Efiling income tax If the sale proceeds are less than your basis in the commodity, you can report the difference as a loss on Schedule F. Efiling income tax If you forfeit the pledged crops to the CCC in full payment of the loan, the forfeiture is treated for tax purposes as a sale of the crops. Efiling income tax If you did not report the loan proceeds as income for the year you received them, you must include them in your income for the year of the forfeiture. Efiling income tax Form 1099-A. Efiling income tax   If you forfeit pledged crops to the CCC in full payment of a loan, you may receive a Form 1099-A, Acquisition or Abandonment of Secured Property. Efiling income tax “CCC” should be shown in box 6. Efiling income tax The amount of any CCC loan outstanding when you forfeited your commodity should also be indicated on the form. Efiling income tax Market Gain Under the CCC nonrecourse marketing assistance loan program, your repayment amount for a loan secured by your pledge of an eligible commodity is generally based on the lower of the loan rate or the prevailing world market price for the commodity on the date of repayment. Efiling income tax If you repay the loan when the world price is lower, the difference between that repayment amount and the original loan amount is market gain. Efiling income tax Whether you use cash or CCC certificates to repay the loan, you will receive a Form 1099-G showing the market gain you realized. Efiling income tax Market gain should be reported as follows. Efiling income tax If you elected to include the CCC loan in income in the year you received it, do not include the market gain in income. Efiling income tax However, adjust the basis of the commodity for the amount of the market gain. Efiling income tax If you did not include the CCC loan in income in the year received, include the market gain in your income. Efiling income tax The following examples show how to report market gain. Efiling income tax Example 1. Efiling income tax Mike Green is a cotton farmer. Efiling income tax He uses the cash method of accounting and files his tax return on a calendar year basis. Efiling income tax He has deducted all expenses incurred in producing the cotton and has a zero basis in the commodity. Efiling income tax In 2012, Mike pledged 1,000 pounds of cotton as collateral for a CCC loan of $2,000 (a loan rate of $2. Efiling income tax 00 per pound). Efiling income tax In 2013, he repaid the loan and redeemed the cotton for $1,500 when the world price was $1. Efiling income tax 50 per pound (lower than the loan amount). Efiling income tax Later in 2013, he sold the cotton for $2,500. Efiling income tax The market gain on the redemption was $. Efiling income tax 50 ($2. Efiling income tax 00 – $1. Efiling income tax 50) per pound. Efiling income tax Mike realized total market gain of $500 ($. Efiling income tax 50 x 1,000 pounds). Efiling income tax How he reports this market gain and figures his gain or loss from the sale of the cotton depends on whether he included CCC loans in income in 2012. Efiling income tax Included CCC loan. Efiling income tax   Mike reported the $2,000 CCC loan as income for 2012 on Schedule F, line 1b, so he is treated as if he sold the cotton for $2,000 when he pledged it and repurchased the cotton for $1,500 when he redeemed it. Efiling income tax The $500 market gain is not recognized on the redemption. Efiling income tax He reports it for 2013 as an agricultural program payment on Schedule F, line 4a, but does not include it as a taxable amount on line 4b. Efiling income tax   Mike's basis in the cotton after he redeemed it was $1,500, which is the redemption (repurchase) price paid for the cotton. Efiling income tax His gain from the sale is $1,000 ($2,500 – $1,500). Efiling income tax He reports the $1,000 gain as income for 2013 on Schedule F, line 1b. Efiling income tax Excluded CCC loan. Efiling income tax   Mike has income of $500 from market gain in 2013. Efiling income tax He reports it on Schedule F, lines 4a and 4b. Efiling income tax His basis in the cotton is zero, so his gain from its sale is $2,500. Efiling income tax He reports the $2,500 gain as income for 2013 on Schedule F, line 1b. Efiling income tax Example 2. Efiling income tax The facts are the same as in Example 1 except that, instead of selling the cotton for $2,500 after redeeming it, Mike entered into an option-to-purchase contract with a cotton buyer before redeeming the cotton. Efiling income tax Under that contract, Mike authorized the cotton buyer to pay the CCC loan on Mike's behalf. Efiling income tax In 2013, the cotton buyer repaid the loan for $1,500 and immediately exercised his option, buying the cotton for $1,500. Efiling income tax How Mike reports the $500 market gain on the redemption of the cotton and figures his gain or loss from its sale depends on whether he included CCC loans in income in 2012. Efiling income tax Included CCC loan. Efiling income tax   As in Example 1, Mike is treated as though he sold the cotton for $2,000 when he pledged it and repurchased the cotton for $1,500 when the cotton buyer redeemed it for him. Efiling income tax The $500 market gain is not recognized on the redemption. Efiling income tax Mike reports it for 2013 as an agricultural program payment on Schedule F, line 4a, but does not include it as a taxable amount on line 4b. Efiling income tax   Also, as in Example 1, Mike's basis in the cotton when the cotton buyer redeemed it for him was $1,500. Efiling income tax Mike has no gain or loss on its sale to the cotton buyer for that amount. Efiling income tax Excluded CCC loan. Efiling income tax   As in Example 1, Mike has income of $500 from market gain in 2013. Efiling income tax He reports it on Schedule F, lines 4a and 4b. Efiling income tax His basis in the cotton is zero, so his gain from its sale is $1,500. Efiling income tax He reports the $1,500 gain as income for 2013 on Schedule F, line 1b. Efiling income tax Conservation Reserve Program (CRP) Under the Conservation Reserve Program (CRP), if you own or operate highly erodible or other specified cropland, you may enter into a long-term contract with the USDA, agreeing to convert to a less intensive use of that cropland. Efiling income tax You must include the annual rental payments and any one-time incentive payment you receive under the program on Schedule F, lines 4a and 4b. Efiling income tax Cost-share payments you receive may qualify for the cost-sharing exclusion. Efiling income tax See Cost-Sharing Exclusion (Improvements) , later. Efiling income tax CRP payments are reported to you on Form 1099-G. Efiling income tax Individuals who are receiving Social Security retirement or disability benefits may exclude CRP payments when calculating self-employment tax. Efiling income tax See the instructions for Schedule SE (Form 1040). Efiling income tax Crop Insurance and Crop Disaster Payments You must include in income any crop insurance proceeds you receive as the result of physical crop damage or reduction of crop revenue, or both. Efiling income tax You generally include them in the year you receive them. Efiling income tax Treat as crop insurance proceeds the crop disaster payments you receive from the federal government as the result of destruction or damage to crops, or the inability to plant crops, because of drought, flood, or any other natural disaster. Efiling income tax You can request income tax withholding from crop disaster payments you receive from the federal government. Efiling income tax Use Form W-4V, Voluntary Withholding Request. Efiling income tax See chapter 16 for information about ordering the form. Efiling income tax Election to postpone reporting until the following year. Efiling income tax   You can postpone reporting some or all crop insurance proceeds as income until the year following the year the physical damage occurred if you meet all the following conditions. Efiling income tax You use the cash method of accounting. Efiling income tax You receive the crop insurance proceeds in the same tax year the crops are damaged. Efiling income tax You can show that under your normal business practice you would have included income from the damaged crops in any tax year following the year the damage occurred. Efiling income tax   Deferral is not permitted for proceeds received from revenue insurance policies. Efiling income tax   To postpone reporting some or all crop insurance proceeds received in 2013, report the amount you received on Schedule F, line 6a, but do not include it as a taxable amount on line 6b. Efiling income tax Check the box on line 8c and attach a statement to your tax return. Efiling income tax The statement must include your name and address and contain the following information. Efiling income tax A statement that you are making an election under IRC section 451(d) and Regulations section 1. Efiling income tax 451-6. Efiling income tax The specific crop or crops physically destroyed or damaged. Efiling income tax A statement that under your normal business practice you would have included income from some or all of the destroyed or damaged crops in gross income for a tax year following the year the crops were destroyed or damaged. Efiling income tax The cause of the physical destruction or damage and the date or dates it occurred. Efiling income tax The total payments you received from insurance carriers, itemized for each specific crop, and the date you received each payment. Efiling income tax The name of each insurance carrier from whom you received payments. Efiling income tax   One election covers all crops representing a single trade or business. Efiling income tax If you have more than one farming business, make a separate election for each one. Efiling income tax For example, if you operate two separate farms on which you grow different crops and you keep separate books for each farm, you should make two separate elections to postpone reporting insurance proceeds you receive for crops grown on each of your farms. Efiling income tax   An election is binding for the year unless the IRS approves your request to change it. Efiling income tax To request IRS approval to change your election, write to the IRS at the following address giving your name, address, identification number, the year you made the election, and your reasons for wanting to change it. Efiling income tax Ogden Submission Processing Center P. Efiling income tax O. Efiling income tax Box 9941 Ogden, UT 84409 Feed Assistance and Payments The Disaster Assistance Act of 1988 authorizes programs to provide feed assistance, reimbursement payments, and other benefits to qualifying livestock producers if the Secretary of Agriculture determines that, because of a natural disaster, a livestock emergency exists. Efiling income tax These programs include partial reimbursement for the cost of purchased feed and for certain transportation expenses. Efiling income tax They also include the donation or sale at a below-market price of feed owned by the Commodity Credit Corporation. Efiling income tax Include in income: The market value of donated feed, The difference between the market value and the price you paid for feed you buy at below-market prices, and Any cost reimbursement you receive. Efiling income tax You must include these benefits in income in the year you receive them. Efiling income tax You cannot postpone reporting them under the rules explained earlier for weather-related sales of livestock or crop insurance proceeds. Efiling income tax Report the benefits on Schedule F, Part I, as agricultural program payments. Efiling income tax You can usually take a current deduction for the same amount as a feed expense. Efiling income tax Cost-Sharing Exclusion (Improvements) You can exclude from your income part or all of a payment you receive under certain federal or state cost-sharing conservation, reclamation, and restoration programs. Efiling income tax A payment is any economic benefit you get as a result of an improvement. Efiling income tax However, this exclusion applies only to that part of a payment that meets all three of the following tests. Efiling income tax It was for a capital expense. Efiling income tax You cannot exclude any part of a payment for an expense you can deduct in the year you pay or incur it. Efiling income tax You must include the payment for a deductible expense in income, and you can take any offsetting deduction. Efiling income tax See chapter 5 for information on deducting soil and water conservation expenses. Efiling income tax It does not substantially increase your annual income from the property for which it is made. Efiling income tax An increase in annual income is substantial if it is more than the greater of the following amounts. Efiling income tax 10% of the average annual income derived from the affected property before receiving the improvement. Efiling income tax $2. Efiling income tax 50 times the number of affected acres. Efiling income tax The Secretary of Agriculture certified that the payment was primarily made for conserving soil and water resources, protecting or restoring the environment, improving forests, or providing a habitat for wildlife. Efiling income tax Qualifying programs. Efiling income tax   If the three tests listed above are met, you can exclude part or all of the payments from the following programs. Efiling income tax The rural clean water program authorized by the Federal Water Pollution Control Act. Efiling income tax The rural abandoned mine program authorized by the Surface Mining Control and Reclamation Act of 1977. Efiling income tax The water bank program authorized by the Water Bank Act. Efiling income tax The emergency conservation measures program authorized by title IV of the Agricultural Credit Act of 1978. Efiling income tax The agricultural conservation program authorized by the Soil Conservation and Domestic Allotment Act. Efiling income tax The great plains conservation program authorized by the Soil Conservation and Domestic Policy Act. Efiling income tax The resource conservation and development program authorized by the Bankhead-Jones Farm Tenant Act and by the Soil Conservation and Domestic Allotment Act. Efiling income tax Certain small watershed programs, listed later. Efiling income tax Any program of a state, possession of the United States, a political subdivision of any of these, or of the District of Columbia under which payments are made to individuals primarily for conserving soil, protecting or restoring the environment, improving forests, or providing a habitat for wildlife. Efiling income tax Several state programs have been approved. Efiling income tax For information about the status of those programs, contact the state offices of the Farm Service Agency (FSA) and the Natural Resources and Conservation Service (NRCS). Efiling income tax Small watershed programs. Efiling income tax   If the three tests listed earlier are met, you can exclude part or all of the payments you receive under the following programs for improvements made in connection with a watershed. Efiling income tax The programs under the Watershed Protection and Flood Prevention Act. Efiling income tax The flood prevention projects under the Flood Control Act of 1944. Efiling income tax The Emergency Watershed Protection Program under the Flood Control Act of 1950. Efiling income tax Certain programs under the Colorado River Basin Salinity Control Act. Efiling income tax The Wetlands Reserve Program authorized by the Food Security Act of 1985, the Federal Agriculture Improvement and Reform Act of 1996 and the Farm Security and Rural Investment Act of 2002. Efiling income tax The Environmental Quality Incentives Program (EQIP) authorized by the Federal Agriculture Improvement and Reform Act of 1996. Efiling income tax The Wildlife Habitat Incentives Program (WHIP) authorized by the Federal Agriculture Improvement and Reform Act of 1996. Efiling income tax The Soil and Water Conservation Assistance Program authorized by the Agricultural Risk Protection Act of 2000. Efiling income tax The Agricultural Management Assistance Program authorized by the Agricultural Risk Protection Act of 2000. Efiling income tax The Conservation Reserve Program authorized by the Food Security Act of 1985 and the Federal Agriculture Improvement and Reform Act of 1996. Efiling income tax The Forest Land Enhancement Program authorized under the Farm Security and Rural Investment Act of 2002. Efiling income tax The Conservation Security Program authorized by the Food Security Act of 1985. Efiling income tax The Forest Health Protection Program (FHPP) authorized by the Cooperative Forestry Assistance Act of 1978. Efiling income tax Income realized. Efiling income tax   The gross income you realize upon getting an improvement under these cost-sharing programs is the value of the improvement reduced by the sum of the excludable portion and your share of the cost of the improvement (if any). Efiling income tax Value of the improvement. Efiling income tax   You determine the value of the improvement by multiplying its fair market value (defined in chapter 6) by a fraction. Efiling income tax The numerator of the fraction is the total cost of the improvement (all amounts paid either by you or by the government for the improvement) reduced by the sum of the following items. Efiling income tax Any government payments under a program not listed earlier. Efiling income tax Any part of a government payment under a program listed earlier that the Secretary of Agriculture has not certified as primarily for conservation. Efiling income tax Any government payment to you for rent or for your services. Efiling income tax The denominator of the fraction is the total cost of the improvement. Efiling income tax Excludable portion. Efiling income tax   The excludable portion is the present fair market value of the right to receive annual income from the affected acreage of the greater of the following amounts. Efiling income tax 10% of the prior average annual income from the affected acreage. Efiling income tax The prior average annual income is the average of the gross receipts from the affected acreage for the last 3 tax years before the tax year in which you started to install the improvement. Efiling income tax $2. Efiling income tax 50 times the number of affected acres. Efiling income tax The calculation of present fair market value of the right to receive annual income is too complex to discuss in this publication. Efiling income tax You may need to consult your tax advisor for assistance. Efiling income tax Example. Efiling income tax One hundred acres of your land was reclaimed under a rural abandoned mine program contract with the Natural Resources Conservation Service of the USDA. Efiling income tax The total cost of the improvement was $500,000. Efiling income tax The USDA paid $490,000. Efiling income tax You paid $10,000. Efiling income tax The value of the cost-sharing improvement is $15,000. Efiling income tax The present fair market value of the right to receive the annual income described in (1) above is $1,380, and the present fair market value of the right to receive the annual income described in (2) is $1,550. Efiling income tax The excludable portion is the greater amount, $1,550. Efiling income tax You figure the amount to include in gross income as follows: Value of cost-sharing improvement $15,000 Minus: Your share $10,000     Excludable portion 1,550 11,550 Amount included in income $ 3,450 Effects of the exclusion. Efiling income tax   When you figure the basis of property you acquire or improve using cost-sharing payments excluded from income, subtract the excluded payments from your capital costs. Efiling income tax Any payment excluded from income is not part of your basis. Efiling income tax In the example above, the increase in basis is $500,000 – $490,000 + $3,450 = $13,450. Efiling income tax   In addition, you cannot take depreciation, amortization, or depletion deductions for the part of the cost of the property for which you receive cost-sharing payments you exclude from income. Efiling income tax How to report the exclusion. Efiling income tax   Attach a statement to your tax return (or amended return) for the tax year you receive the last government payment for the improvement. Efiling income tax The statement must include the following information. Efiling income tax The dollar amount of the cost funded by the government payment. Efiling income tax The value of the improvement. Efiling income tax The amount you are excluding. Efiling income tax   Report the total cost-sharing payments you receive on Schedule F, line 4a, and the taxable amount on line 4b. Efiling income tax Recapture. Efiling income tax   If you dispose of the property within 20 years after you received the excluded payments, you must treat as ordinary income part or all of the cost-sharing payments you excluded. Efiling income tax In the above example, if the 100 acres were sold within 20 years of the exclusion for a gain of $2,000, $1,550 of that amount would be included in ordinary income. Efiling income tax You must report the recapture on Form 4797. Efiling income tax See Section 1255 property under Other Gains in chapter 9. Efiling income tax Electing not to exclude payments. Efiling income tax   You can elect not to exclude all or part of any payments you receive under these programs. Efiling income tax If you make this election for all of these payments, none of the above restrictions and rules apply. Efiling income tax You must make this election by the due date, including extensions, for filing your return. Efiling income tax In the example above, an election not to exclude payments results in $5,000 included in income and a $15,000 increase in basis. Efiling income tax If you timely filed your return for the year without making the election, you can still make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Efiling income tax Write “Filed pursuant to section 301. Efiling income tax 9100-2” at the top of the amended return and file it at the same address you filed the original return. Efiling income tax Payments Under the Farm Security and Rural Investment Act of 2002 and Under the Food, Conservation, and Energy Act of 2008 The Farm Security and Rural Investment Act of 2002 created two new types of payments—direct and counter-cyclical payments. Efiling income tax You must include these payments on Schedule F, lines 4a and 4b. Efiling income tax The Food, Conservation, and Energy Act of 2008 provides for direct and counter-cyclical payments (DCP) as well as Average Crop Revenue Election (ACRE) payments. Efiling income tax You must include these payments on Schedule F, lines 6a and 6b. Efiling income tax The American Taxpayer Relief Act of 2012, enacted on January 2, 2013, amends the Food, Conservation, and Energy Act of 2008 and provided a one-year extension for these payments. Efiling income tax Tobacco Quota Buyout Program Payments The Fair and Equitable Tobacco Reform Act of 2004, title VI of the American Jobs Creation Act of 2004, terminated the tobacco marketing quota program and the tobacco price support program. Efiling income tax As a result, the USDA offered to enter into contracts with eligible tobacco quota holders and growers to provide compensation for the lost value of the quotas and related price support. Efiling income tax If you are an eligible tobacco quota holder, your contract entitles you to receive total payments of $7 per pound of quota in 10 equal annual payments in fiscal years 2005 through 2014. Efiling income tax If you are an eligible tobacco grower, your contract entitles you to receive total payments of up to $3 per pound of quota in 10 equal annual payments in fiscal years 2005 through 2014. Efiling income tax Tobacco Quota Holders Contract payments you receive are considered proceeds from a sale of your tobacco quota as of the date on which you and the USDA enter into the contract. Efiling income tax Your taxable gain or loss is the total amount received for your quota reduced by any amount treated as interest (discussed below), over your adjusted basis. Efiling income tax The gain or loss is capital or ordinary depending on how you used the quota. Efiling income tax See Capital or ordinary gain or loss , later. Efiling income tax Report the entire gain on your income tax return for the tax year that includes the date you entered into the contract if you elect not to use the installment method. Efiling income tax Adjusted basis. Efiling income tax   The adjusted basis of your quota is determined differently depending on how you obtained the quota. Efiling income tax The basis of a quota derived from an original grant by the federal government is zero. Efiling income tax The basis of a purchased quota is the purchase price. Efiling income tax The basis of a quota received as a gift is generally the same as the donor's basis. Efiling income tax However, under certain circumstances, the basis is increased by the amount of gift taxes paid. Efiling income tax If the basis is greater than the fair market value of the quota at the time of the gift, the basis for determining loss is the fair market value. Efiling income tax The basis of an inherited quota is generally the fair market value of the quota at the time of the decedent's death. Efiling income tax Reduction of basis. Efiling income tax   You are required to reduce the basis of your tobacco quota by the following amounts. Efiling income tax Deductions you took for amortization, depletion, or depreciation. Efiling income tax Amounts you previously deducted as a loss because of a reduction in the number of pounds of tobacco allowable under the quota. Efiling income tax The entire cost of a purchased quota you deducted in an earlier year (which reduces your basis to zero). Efiling income tax Amount treated as interest. Efiling income tax   You must reduce your tobacco quota buyout program payment by the amount treated as interest. Efiling income tax The interest is reportable as ordinary income. Efiling income tax If payments total $3,000 or less, your total quota buyout program payment does not include any amount treated as interest and you are not required to reduce the total payment you receive. Efiling income tax   In all other cases, a portion of each payment may be treated as interest for federal tax purposes. Efiling income tax You may be required to reduce your total quota buyout program payment before you calculate your gain or loss. Efiling income tax For more information, see Notice 2005-57, 2005-32 I. Efiling income tax R. Efiling income tax B. Efiling income tax 267, available at www. Efiling income tax irs. Efiling income tax gov/irb/2005-32_IRB/ar13. Efiling income tax html. Efiling income tax Installment method. Efiling income tax   You may use the installment method to report a gain if you receive at least one payment after the close of your tax year. Efiling income tax Under the installment method, a portion of the gain is taken into account in each year in which a payment is received. Efiling income tax See chapter 10 for more information. Efiling income tax Capital or ordinary gain or loss. Efiling income tax   Whether your gain or loss is ordinary or capital depends on how you used the quota. Efiling income tax Quota used in the trade or business of farming. Efiling income tax   If you used the quota in the trade or business of farming and you held it for more than one year, you report the transaction as a section 1231 transaction on Form 4797. Efiling income tax See Section 1231 transactions in the Instructions for Form 4797 for detailed information on reporting section 1231 transactions. Efiling income tax Quota held for investment. Efiling income tax   If you held the quota for investment purposes, any gain or loss is capital gain or loss. Efiling income tax The same result also applies if you held the quota for the production of income, though not connected with a trade or business. Efiling income tax Gain treated as ordinary income. Efiling income tax   If you previously deducted any of the following items, some or all of the capital gain must be recharacterized and reported as ordinary income. Efiling income tax Any resulting capital gain is taxed as ordinary income up to the amount previously deducted. Efiling income tax The cost of acquiring a quota. Efiling income tax Amounts for amortization, depletion, or depreciation. Efiling income tax Amounts to reflect a reduction in the quota pounds. Efiling income tax   You should include the ordinary income on your return for the tax year even if you use the installment method to report the remainder of the gain. Efiling income tax Self-employment income. Efiling income tax   The tobacco quota buyout payments are not self-employment income. Efiling income tax Income averaging for farmers. Efiling income tax   The gain or loss resulting from the quota payments does not qualify for income averaging. Efiling income tax A tobacco quota is considered an interest in land. Efiling income tax Income averaging is not available for gain or loss arising from the sale or other disposition of land. Efiling income tax Involuntary conversion. Efiling income tax   The buyout of the tobacco quota is not an involuntary conversion. Efiling income tax Form 1099-S. Efiling income tax   A tobacco quota is considered an interest in land, so the USDA will generally report the total amount you receive under a contract on Form 1099-S, Proceeds From Real Estate Transactions, if the amount is $600 or more. Efiling income tax The USDA will generally report any portion of a payment treated as interest of $600 or more to you on Form 1099-INT, Interest Income, for the year in which the payment is made. Efiling income tax Like-kind exchange of quota. Efiling income tax   You may postpone reporting the gain or loss from tobacco quota buyout payments by entering into a like-kind exchange if you comply with the requirements of section 1031 and the regulations thereunder. Efiling income tax See Notice 2005-57 for more information. Efiling income tax Tobacco Growers Contract payments you receive are determined by reference to the amount of quota under which you produced (or planted) quota tobacco during the 2002, 2003, and 2004 tobacco marketing years and are prorated based on the number of years that you produced (or planted) quota tobacco during those years. Efiling income tax Taxation of payments to tobacco growers. Efiling income tax   Payments to growers replace ordinary income that would have been earned had the tobacco marketing quota and price support programs continued. Efiling income tax Individuals will generally report the payments as an Agricultural program payment on Schedule F. Efiling income tax If you are a landowner who does not materially participate in the operation or management of the farm and are receiving the grower payment because your farm rental income is based on the tobacco grown by a tenant, the grower payment should be reported on Form 4835. Efiling income tax Self-employment income. Efiling income tax   Payments to growers generally represent self-employment income. Efiling income tax If the grower is an individual carrying on a trade or business and deriving income (other than farm rental income properly reported on Form 4835) from that trade or business, the payments are net earnings from self-employment. Efiling income tax Income averaging for farmers. Efiling income tax   Payments to growers who are individuals qualify for farm income averaging. Efiling income tax Form 1099-G. Efiling income tax   If the amount received in a taxable year is $600 or more, the amount will generally be reported by the USDA on a Form 1099-G. Efiling income tax Other Payments You must include most other government program payments in income. Efiling income tax Fertilizer and Lime Include in income the value of fertilizer or lime you receive under a government program. Efiling income tax How to claim the offsetting deduction is explained under Fertilizer and Lime in chapter 4. Efiling income tax Improvements If government payments are based on improvements, such as a pollution control facility, you must include them in income. Efiling income tax You must also capitalize the full cost of the improvement. Efiling income tax Since you have included the payments in income, they do not reduce your basis. Efiling income tax However, see Cost-Sharing Exclusion (Improvements) , earlier, for additional information. Efiling income tax National Tobacco Growers' Settlement Trust Fund Payments If you are a producer, landowner, or tobacco quota owner who receives money from the National Tobacco Growers' Settlement Trust Fund, you must report those payments as income. Efiling income tax You should receive a Form 1099-MISC, Miscellaneous Income, that shows the payment amount. Efiling income tax If you produce a tobacco crop, report the payments as income from farming on your Schedule F. Efiling income tax If you are a landowner or tobacco quota owner who leases tobacco-related property but you do not produce the crop, report the payments as farm rental income on Form 4835. Efiling income tax Payment to More Than One Person The USDA reports program payments to the IRS. Efiling income tax It reports a program payment intended for more than one person as having been paid to the person whose identification number is on record for that payment (payee of record). Efiling income tax If you, as the payee of record, receive a program payment belonging to someone else, such as your landlord, the amount belonging to the other person is a nominee distribution. Efiling income tax You should file Form 1099-G to report the identity of the actual recipient to the IRS. Efiling income tax You should also give this information to the recipient. Efiling income tax You can avoid the inconvenience of unnecessary inquiries about the identity of the recipient if you file this form. Efiling income tax Report the total amount reported to you as the payee of record on Schedule F, line 4a or 6a. Efiling income tax However, do not report as a taxable amount on line 4b or 6b any amount belonging to someone else. Efiling income tax See chapter 16 for information about ordering Form 1099-G. Efiling income tax Income From Cooperatives If you buy farm supplies through a cooperative, you may receive income from the cooperative in the form of patronage dividends (refunds). Efiling income tax If you sell your farm products through a cooperative, you may receive either patronage dividends or a per-unit retain certificate, explained later, from the cooperative. Efiling income tax Form 1099-PATR. Efiling income tax   The cooperative will report the income to you on Form 1099-PATR or a similar form and send a copy to the IRS. Efiling income tax Form 1099-PATR may also show an alternative minimum tax adjustment that you must include on Form 6251, Alternative Minimum Tax—Individuals, if you are required to file the form. Efiling income tax For information on the alternative minimum tax, see the Instructions for Form 6251. Efiling income tax Patronage Dividends You generally report patronage dividends as income on Schedule F, lines 3a and 3b, for the tax year you receive them. Efiling income tax They include the following items. Efiling income tax Money paid as a patronage dividend, including cash advances received (for example, from a marketing cooperative). Efiling income tax The stated dollar value of qualified written notices of allocation. Efiling income tax The fair market value of other property. Efiling income tax Do not report as income on line 3b any patronage dividends you receive from expenditures that were not deductible, such as buying personal or family items, capital assets, or depreciable property. Efiling income tax You must reduce the cost or other basis of these items by the amount of such patronage dividends received. Efiling income tax Personal items include fuel purchased for personal use, basic local telephone service, and personal long distance calls. Efiling income tax If you cannot determine what the dividend is for, report it as income on lines 3a and 3b. Efiling income tax Qualified written notice of allocation. Efiling income tax   If you receive a qualified written notice of allocation as part of a patronage dividend, you must generally include its stated dollar value in your income on Schedule F, lines 3a and 3b, in the year you receive it. Efiling income tax A written notice of allocation is qualified if at least 20% of the patronage dividend is paid in money or by qualified check and either of the following conditions is met. Efiling income tax The notice must be redeemable in cash for at least 90 days after it is issued, and you must have received a written notice of your right of redemption at the same time as the written notice of allocation. Efiling income tax You must have agreed to include the stated dollar value in income in the year you receive the notice by doing one of the following. Efiling income tax Signing and giving a written agreement to the cooperative. Efiling income tax Getting or keeping membership in the cooperative after it adopted a bylaw providing that membership constitutes agreement. Efiling income tax The cooperative must notify you in writing of this bylaw and give you a copy. Efiling income tax Endorsing and cashing a qualified check paid as part of the same patronage dividend. Efiling income tax You must cash the check by the 90th day after the close of the payment period for the cooperative's tax year for which the patronage dividend was paid. Efiling income tax Qualified check. Efiling income tax   A qualified check is any instrument that is redeemable in money and meets both of the following requirements. Efiling income tax It is part of a patronage dividend that also includes a qualified written notice of allocation for which you met condition 2(c), above. Efiling income tax It is imprinted with a statement that endorsing and cashing it constitutes the payee's consent to include in income the stated dollar value of any written notices of allocation paid as part of the same patronage dividend. Efiling income tax Loss on redemption. Efiling income tax   You can deduct on Schedule F, Part II, any loss incurred on the redemption of a qualified written notice of allocation you received in the ordinary course of your farming business. Efiling income tax The loss is the difference between the stated dollar amount of the qualified written notice you included in income and the amount you received when you redeemed it. Efiling income tax Nonqualified notice of allocation. Efiling income tax   Do not include the stated dollar value of any nonqualified notice of allocation in income when you receive it. Efiling income tax Your basis in the notice is zero. Efiling income tax You must include in income for the tax year of disposition any amount you receive from its sale, redemption, or other disposition. Efiling income tax Report that amount, up to the stated dollar value of the notice, on Schedule F, lines 3a and 3b. Efiling income tax However, do not include that amount in your income if the notice resulted from buying or selling capital assets or depreciable property or from buying personal items, as explained in the following discussions. Efiling income tax   If the amount you receive is more than the stated dollar value of the notice, report the excess as the type of income it represents. Efiling income tax For example, if it represents interest income, report it on your return as interest. Efiling income tax Buying or selling capital assets or depreciable property. Efiling income tax   Do not include in income patronage dividends from buying capital assets or depreciable property used in your business. Efiling income tax You must, however, reduce the basis of these assets by the dividends. Efiling income tax This reduction is taken into account as of the first day of the tax year in which the dividends are received. Efiling income tax If the dividends are more than your unrecovered basis, reduce the unrecovered basis to zero and include the difference on Schedule F, line 3a, for the tax year you receive them. Efiling income tax   This rule and the exceptions explained below also apply to amounts you receive from the sale, redemption, or other disposition of a nonqualified notice of allocation that resulted from buying or selling capital assets or depreciable property. Efiling income tax Example. Efiling income tax On July 1, 2012, Mr. Efiling income tax Brown, a patron of a cooperative association, bought a machine for his dairy farm business from the association for $2,900. Efiling income tax The machine has a life of 7 years under MACRS (as provided in the Table of Class Lives and Recovery Periods in Appendix B of Publication 946, Depreciation and Amortization). Efiling income tax Mr. Efiling income tax Brown files his return on a calendar year basis. Efiling income tax For 2012, he claimed a depreciation deduction of $311, using the 10. Efiling income tax 71% depreciation rate from the 150% declining balance, half-year convention table (shown in Table A-14 in Appendix A of Publication 946). Efiling income tax On July 2, 2013, the cooperative association paid Mr. Efiling income tax Brown a $300 cash patronage dividend for buying the machine. Efiling income tax Mr. Efiling income tax Brown adjusts the basis of the machine and figures his depreciation deduction for 2013 (and later years) as follows. Efiling income tax Cost of machine on July 1, 2012 $2,900 Minus: 2012 depreciation $311     2013 cash dividend 300 611 Adjusted basis for  depreciation for 2013: $2,289 Depreciation rate: 1 ÷ 6½ (remaining recovery period as of 1/1/2012) = 15. Efiling income tax 38% × 1. Efiling income tax 5 = 23. Efiling income tax 07% Depreciation deduction for 2013 ($2,289 × 23. Efiling income tax 07%) $528 Exceptions. Efiling income tax   If the dividends are for buying or selling capital assets or depreciable property you did not own at any time during the year you received the dividends, you must include them on Schedule F, lines 3a and 3b, unless one of the following rules applies. Efiling income tax If the dividends relate to a capital asset you held for more than 1 year for which a loss was or would have been deductible, treat them as gain from the sale or exchange of a capital asset held for more than 1 year. Efiling income tax If the dividends relate to a capital asset for which a loss was not or would not have been deductible, do not report them as income (ordinary or capital gain). Efiling income tax   If the dividends are for selling capital assets or depreciable property during the year you received the dividends, treat them as an additional amount received on the sale. Efiling income tax Personal purchases. Efiling income tax   Because you cannot deduct the cost of personal, living, or family items, such as supplies, equipment, or services not related to the production of farm income, you can omit from the taxable amount of patronage dividends on Schedule F, line 3b, any dividends from buying those items (and you must reduce the cost or other basis of those items by the amount of the dividends). Efiling income tax This rule also applies to amounts you receive from the sale, redemption, or other disposition of a nonqualified written notice of allocation resulting from these purchases. Efiling income tax Per-Unit Retain Certificates A per-unit retain certificate is any written notice that shows the stated dollar amount of a per-unit retain allocation made to you by the cooperative. Efiling income tax A per-unit retain allocation is an amount paid to patrons for products sold for them that is fixed without regard to the net earnings of the cooperative. Efiling income tax These allocations can be paid in money, other property, or qualified certificates. Efiling income tax Per-unit retain certificates issued by a cooperative generally receive the same tax treatment as patronage dividends, discussed earlier. Efiling income tax Qualified certificates. Efiling income tax   Qualified per-unit retain certificates are those issued to patrons who have agreed to include the stated dollar amount of these certificates in income in the year of receipt. Efiling income tax The agreement may be made in writing or by getting or keeping membership in a cooperative whose bylaws or charter states that membership constitutes agreement. Efiling income tax If you receive qualified per-unit retain certificates, include the stated dollar amount of the certificates in income on Schedule F, lines 3a and 3b, for the tax year you receive them. Efiling income tax Nonqualified certificates. Efiling income tax   Do not include the stated dollar value of a nonqualified per-unit retain certificate in income when you receive it. Efiling income tax Your basis in the certificate is zero. Efiling income tax You must include in income any amount you receive from its sale, redemption, or other disposition. Efiling income tax Report the amount you receive from the disposition as ordinary income on Schedule F, lines 3a and 3b, for the tax year of disposition. Efiling income tax Cancellation of Debt This section explains the general rule for including canceled debt in income and the exceptions to the general rule. Efiling income tax For more information on canceled debt, see Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments. Efiling income tax General Rule Generally, if your debt is canceled or forgiven, other than as a gift or bequest to you, you must include the canceled amount in gross income for tax purposes. Efiling income tax Discharge of qualified farm indebtedness (defined below) is one of the exceptions to the general rule. Efiling income tax It is excluded from taxable income (see Exclusions , later). Efiling income tax Report the canceled amount on Schedule F, line 8, if you incurred the debt in your farming business. Efiling income tax If the debt is a nonbusiness debt, report the canceled amount as other income on Form 1040, line 21. Efiling income tax Election to defer income from discharge of indebtedness. Efiling income tax   You can elect to defer income from a discharge of business indebtedness that occurred after 2008 and before 2011. Efiling income tax Generally, if the election is made, the deferred income is included in gross income ratably over a 5-year period beginning in 2014 (for calendar year taxpayers) and the exclusions listed below do not apply. Efiling income tax See IRC section 108(i) and Publication 4681 for details. Efiling income tax Form 1099-C. Efiling income tax   If a federal agency, financial institution, credit union, finance company, or credit card company cancels or forgives your debt of $600 or more, you will receive a Form 1099-C, Cancellation of Debt. Efiling income tax The amount of debt canceled is shown in box 2. Efiling income tax Exceptions The following discussion covers some exceptions to the general rule for canceled debt. Efiling income tax These exceptions apply before the exclusions discussed below. Efiling income tax Price reduced after purchase. Efiling income tax   If your purchase of property was financed by the seller and the seller reduces the amount of the debt at a time when you are not insolvent and the reduction does not occur in a chapter 11 bankruptcy case, the amount of the debt reduction will be treated as a reduction in the purchase price of the property. Efiling income tax Reduce your basis in the property by the amount of the reduction in the debt. Efiling income tax The rules that apply to bankruptcy and insolvency are explained below under Exclusions . Efiling income tax Deductible debt. Efiling income tax   You do not realize income from a canceled debt to the extent the payment of the debt would have been a deductible expense. Efiling income tax This exception applies before the price reduction exception discussed above and the bankruptcy and insolvency exclusions discussed next. Efiling income tax Example. Efiling income tax You get accounting services for your farm on credit. Efiling income tax Later, you have trouble paying your farm debts, but you are not bankrupt or insolvent. Efiling income tax Your accountant forgives part of the amount you owe for the accounting services. Efiling income tax How you treat the canceled debt depends on your method of accounting. Efiling income tax Cash method — You do not include the canceled debt in income because payment of the debt would have been deductible as a business expense. Efiling income tax Accrual method — You include the canceled debt in income because the expense was deductible when you incurred the debt. Efiling income tax Exclusions Do not include canceled debt in income in the following situations. Efiling income tax The cancellation takes place in a bankruptcy case under title 11 of the U. Efiling income tax S. Efiling income tax Code. Efiling income tax The cancellation takes place when you are insolvent. Efiling income tax The canceled debt is a qualified farm debt. Efiling income tax The canceled debt is a qualified real property business debt (in the case of a taxpayer other than a C corporation). Efiling income tax See Publication 334, Tax Guide for Small Business, chapter 5. Efiling income tax The canceled debt is qualified principal residence indebtedness which is discharged after 2006 and before 2014. Efiling income tax The exclusions do not apply in the following situations: If a canceled debt is excluded from income because it takes place in a bankruptcy case, the exclusions in situations (2), (3), (4), and (5) do not apply. Efiling income tax If a canceled debt is excluded from income because it takes place when you are insolvent, the exclusions in situations (3) and (4) do not apply to the extent you are insolvent. Efiling income tax If a canceled debt is excluded from income because it is qualified principal residence indebtedness, the exclusion in situation (2) does not apply unless you elect to apply situation (2) instead of the exclusion for qualified principal residence indebtedness. Efiling income tax See Form 982 , later, for information on how to claim an exclusion for a canceled debt. Efiling income tax Debt. Efiling income tax   For this discussion, debt includes any debt for which you are liable or that attaches to property you hold. Efiling income tax Bankruptcy and Insolvency You can exclude a canceled debt from income if you are bankrupt or to the extent you are insolvent. Efiling income tax Bankruptcy. Efiling income tax   A bankruptcy case is a case under title 11 of the U. Efiling income tax S. Efiling income tax Code if you are under the jurisdiction of the court and the cancellation of the debt is granted by the court or is the result of a plan approved by the court. Efiling income tax   Do not include debt canceled in a bankruptcy case in your income in the year it is canceled. Efiling income tax Instead, you must use the amount canceled to reduce your tax attributes, explained below under Reduction of tax attributes . Efiling income tax Insolvency. Efiling income tax   You are insolvent to the extent your liabilities are more than the fair market value of your assets immediately before the cancellation of debt. Efiling income tax   You can exclude canceled debt from gross income up to the amount by which you are insolvent. Efiling income tax If the canceled debt is more than this amount and the debt qualifies, you can apply the rules for qualified farm debt or qualified real property business debt to the difference. Efiling income tax Otherwise, you include the difference in gross income. Efiling income tax Use the amount excluded because of insolvency to reduce any tax attributes, as explained below under Reduction of tax attributes . Efiling income tax You must reduce the tax attributes under the insolvency rules before applying the rules for qualified farm debt or for qualified real property business debt. Efiling income tax Example. Efiling income tax You had a $15,000 debt that was not qualified principal residence debt canceled outside of bankruptcy. Efiling income tax Immediately before the cancellation, your liabilities totaled $80,000 and your assets totaled $75,000. Efiling income tax Since your liabilities were more than your assets, you were insolvent to the extent of $5,000 ($80,000 − $75,000). Efiling income tax You can exclude this amount from income. Efiling income tax The remaining canceled debt ($10,000) may be subject to the qualified farm debt or qualified real property business debt rules. Efiling income tax If not, you must include it in income. Efiling income tax Reduction of tax attributes. Efiling income tax   If you exclude canceled debt from income in a bankruptcy case or during insolvency, you must use the excluded debt to reduce certain tax attributes. Efiling income tax Order of reduction. Efiling income tax   You must use the excluded canceled debt to reduce the following tax attributes in the order listed unless you elect to reduce the basis of depreciable property first, as explained later. Efiling income tax Net operating loss (NOL). Efiling income tax Reduce any NOL for the tax year of the debt cancellation, and then any NOL carryover to that year. Efiling income tax Reduce the NOL or NOL carryover one dollar for each dollar of excluded canceled debt. Efiling income tax General business credit carryover. Efiling income tax Reduce the credit carryover to or from the tax year of the debt cancellation. Efiling income tax Reduce the carryover 331/3 cents for each dollar of excluded canceled debt. Efiling income tax Minimum tax credit. Efiling income tax Reduce the minimum tax credit available at the beginning of the tax year following the tax year of the debt cancellation. Efiling income tax Reduce the credit 331/3 cents for each dollar of excluded canceled debt. Efiling income tax Capital loss. Efiling income tax Reduce any net capital loss for the tax year of the debt cancellation, and then any capital loss carryover to that year. Efiling income tax Reduce the capital loss or loss carryover one dollar for each dollar of excluded canceled debt. Efiling income tax Basis. Efiling income tax Reduce the basis of the property you hold at the beginning of the tax year following the tax year of the debt cancellation in the following order. Efiling income tax Real property (except inventory) used in your trade or business or held for investment that secured the canceled debt. Efiling income tax Personal property (except inventory and accounts and notes receivable) used in your trade or business or held for investment that secured the canceled debt. Efiling income tax Other property (except inventory and accounts and notes receivable) used in your trade or business or held for investment. Efiling income tax Inventory and accounts and notes receivable. Efiling income tax Other property. Efiling income tax Reduce the basis one dollar for each dollar of excluded canceled debt. Efiling income tax However, the reduction cannot be more than the total basis of property and the amount of money you hold immediately after the debt cancellation minus your total liabilities immediately after the cancellation. Efiling income tax For allocation rules that apply to basis reductions for multiple canceled debts, see Regulations section 1. Efiling income tax 1017-1(b)(2). Efiling income tax Also see Electing to reduce the basis of depreciable property