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Federal And State Income Tax Forms

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Federal And State Income Tax Forms

Federal and state income tax forms 9. Federal and state income tax forms   Depletion Table of Contents Introduction Topics - This chapter discusses: Who Can Claim Depletion? Mineral PropertyCost Depletion Percentage Depletion Oil and Gas Wells Mines and Geothermal Deposits Lessor's Gross Income TimberTimber units. Federal and state income tax forms Depletion unit. Federal and state income tax forms Introduction Depletion is the using up of natural resources by mining, drilling, quarrying stone, or cutting timber. Federal and state income tax forms The depletion deduction allows an owner or operator to account for the reduction of a product's reserves. Federal and state income tax forms There are two ways of figuring depletion: cost depletion and percentage depletion. Federal and state income tax forms For mineral property, you generally must use the method that gives you the larger deduction. Federal and state income tax forms For standing timber, you must use cost depletion. Federal and state income tax forms Topics - This chapter discusses: Who can claim depletion Mineral property Timber Who Can Claim Depletion? If you have an economic interest in mineral property or standing timber, you can take a deduction for depletion. Federal and state income tax forms More than one person can have an economic interest in the same mineral deposit or timber. Federal and state income tax forms In the case of leased property, the depletion deduction is divided between the lessor and the lessee. Federal and state income tax forms You have an economic interest if both the following apply. Federal and state income tax forms You have acquired by investment any interest in mineral deposits or standing timber. Federal and state income tax forms You have a legal right to income from the extraction of the mineral or cutting of the timber to which you must look for a return of your capital investment. Federal and state income tax forms A contractual relationship that allows you an economic or monetary advantage from products of the mineral deposit or standing timber is not, in itself, an economic interest. Federal and state income tax forms A production payment carved out of, or retained on the sale of, mineral property is not an economic interest. Federal and state income tax forms Individuals, corporations, estates, and trusts who claim depletion deductions may be liable for alternative minimum tax. Federal and state income tax forms Basis adjustment for depletion. Federal and state income tax forms   You must reduce the basis of your property by the depletion allowed or allowable, whichever is greater. Federal and state income tax forms Mineral Property Mineral property includes oil and gas wells, mines, and other natural deposits (including geothermal deposits). Federal and state income tax forms For this purpose, the term “property” means each separate interest you own in each mineral deposit in each separate tract or parcel of land. Federal and state income tax forms You can treat two or more separate interests as one property or as separate properties. Federal and state income tax forms See section 614 of the Internal Revenue Code and the related regulations for rules on how to treat separate mineral interests. Federal and state income tax forms There are two ways of figuring depletion on mineral property. Federal and state income tax forms Cost depletion. Federal and state income tax forms Percentage depletion. Federal and state income tax forms Generally, you must use the method that gives you the larger deduction. Federal and state income tax forms However, unless you are an independent producer or royalty owner, you generally cannot use percentage depletion for oil and gas wells. Federal and state income tax forms See Oil and Gas Wells , later. Federal and state income tax forms Cost Depletion To figure cost depletion you must first determine the following. Federal and state income tax forms The property's basis for depletion. Federal and state income tax forms The total recoverable units of mineral in the property's natural deposit. Federal and state income tax forms The number of units of mineral sold during the tax year. Federal and state income tax forms Basis for depletion. Federal and state income tax forms   To figure the property's basis for depletion, subtract all the following from the property's adjusted basis. Federal and state income tax forms Amounts recoverable through: Depreciation deductions, Deferred expenses (including deferred exploration and development costs), and Deductions other than depletion. Federal and state income tax forms The residual value of land and improvements at the end of operations. Federal and state income tax forms The cost or value of land acquired for purposes other than mineral production. Federal and state income tax forms Adjusted basis. Federal and state income tax forms   The adjusted basis of your property is your original cost or other basis, plus certain additions and improvements, and minus certain deductions such as depletion allowed or allowable and casualty losses. Federal and state income tax forms Your adjusted basis can never be less than zero. Federal and state income tax forms See Publication 551, Basis of Assets, for more information on adjusted basis. Federal and state income tax forms Total recoverable units. Federal and state income tax forms   The total recoverable units is the sum of the following. Federal and state income tax forms The number of units of mineral remaining at the end of the year (including units recovered but not sold). Federal and state income tax forms The number of units of mineral sold during the tax year (determined under your method of accounting, as explained next). Federal and state income tax forms   You must estimate or determine recoverable units (tons, pounds, ounces, barrels, thousands of cubic feet, or other measure) of mineral products using the current industry method and the most accurate and reliable information you can obtain. Federal and state income tax forms You must include ores and minerals that are developed, in sight, blocked out, or assured. Federal and state income tax forms You must also include probable or prospective ores or minerals that are believed to exist based on good evidence. Federal and state income tax forms But see Elective safe harbor for owners of oil and gas property , later. Federal and state income tax forms Number of units sold. Federal and state income tax forms   You determine the number of units sold during the tax year based on your method of accounting. Federal and state income tax forms Use the following table to make this determination. Federal and state income tax forms    IF you  use . Federal and state income tax forms . Federal and state income tax forms . Federal and state income tax forms THEN the units sold during the year are . Federal and state income tax forms . Federal and state income tax forms . Federal and state income tax forms The cash method of accounting The units sold for which you receive payment during the tax year (regardless of the year of sale). Federal and state income tax forms An accrual method of accounting The units sold based on your inventories and method of accounting for inventory. Federal and state income tax forms   The number of units sold during the tax year does not include any for which depletion deductions were allowed or allowable in earlier years. Federal and state income tax forms Figuring the cost depletion deduction. Federal and state income tax forms   Once you have figured your property's basis for depletion, the total recoverable units, and the number of units sold during the tax year, you can figure your cost depletion deduction by taking the following steps. Federal and state income tax forms Step Action Result 1 Divide your property's basis for depletion by total recoverable units. Federal and state income tax forms Rate per unit. Federal and state income tax forms 2 Multiply the rate per unit by units sold during the tax year. Federal and state income tax forms Cost depletion deduction. Federal and state income tax forms You must keep accounts for the depletion of each property and adjust these accounts each year for units sold and depletion claimed. Federal and state income tax forms Elective safe harbor for owners of oil and gas property. Federal and state income tax forms   Instead of using the method described earlier to determine the total recoverable units, you can use an elective safe harbor. Federal and state income tax forms If you choose the elective safe harbor, the total recoverable units equal 105% of a property's proven reserves (both developed and undeveloped). Federal and state income tax forms For details, see Revenue Procedure 2004-19 on page 563 of Internal Revenue Bulletin 2004-10, available at www. Federal and state income tax forms irs. Federal and state income tax forms gov/pub/irs-irbs/irb04-10. Federal and state income tax forms pdf. Federal and state income tax forms   To make the election, attach a statement to your timely filed (including extensions) original return for the first tax year for which the safe harbor is elected. Federal and state income tax forms The statement must indicate that you are electing the safe harbor provided by Revenue Procedure 2004-19. Federal and state income tax forms The election, if made, is effective for the tax year in which it is made and all later years. Federal and state income tax forms It cannot be revoked for the tax year in which it is elected, but may be revoked in a later year. Federal and state income tax forms Once revoked, it cannot be re-elected for the next 5 years. Federal and state income tax forms Percentage Depletion To figure percentage depletion, you multiply a certain percentage, specified for each mineral, by your gross income from the property during the tax year. Federal and state income tax forms The rates to be used and other rules for oil and gas wells are discussed later under Independent Producers and Royalty Owners and under Natural Gas Wells . Federal and state income tax forms Rates and other rules for percentage depletion of other specific minerals are found later in Mines and Geothermal Deposits . Federal and state income tax forms Gross income. Federal and state income tax forms   When figuring percentage depletion, subtract from your gross income from the property the following amounts. Federal and state income tax forms Any rents or royalties you paid or incurred for the property. Federal and state income tax forms The part of any bonus you paid for a lease on the property allocable to the product sold (or that otherwise gives rise to gross income) for the tax year. Federal and state income tax forms A bonus payment includes amounts you paid as a lessee to satisfy a production payment retained by the lessor. Federal and state income tax forms   Use the following fraction to figure the part of the bonus you must subtract. Federal and state income tax forms No. Federal and state income tax forms of units sold in the tax year Recoverable units from the property × Bonus Payments For oil and gas wells and geothermal deposits, more information about the definition of gross income from the property is under Oil and Gas Wells , later. Federal and state income tax forms For other property, more information about the definition of gross income from the property is under Mines and Geothermal Deposits , later. Federal and state income tax forms Taxable income limit. Federal and state income tax forms   The percentage depletion deduction generally cannot be more than 50% (100% for oil and gas property) of your taxable income from the property figured without the depletion deduction and the domestic production activities deduction. Federal and state income tax forms   Taxable income from the property means gross income from the property minus all allowable deductions (except any deduction for depletion or domestic production activities) attributable to mining processes, including mining transportation. Federal and state income tax forms These deductible items include, but are not limited to, the following. Federal and state income tax forms Operating expenses. Federal and state income tax forms Certain selling expenses. Federal and state income tax forms Administrative and financial overhead. Federal and state income tax forms Depreciation. Federal and state income tax forms Intangible drilling and development costs. Federal and state income tax forms Exploration and development expenditures. Federal and state income tax forms Deductible taxes (see chapter 5), but not taxes that you capitalize or take as a credit. Federal and state income tax forms Losses sustained. Federal and state income tax forms   The following rules apply when figuring your taxable income from the property for purposes of the taxable income limit. Federal and state income tax forms Do not deduct any net operating loss deduction from the gross income from the property. Federal and state income tax forms Corporations do not deduct charitable contributions from the gross income from the property. Federal and state income tax forms If, during the year, you dispose of an item of section 1245 property that was used in connection with mineral property, reduce any allowable deduction for mining expenses by the part of any gain you must report as ordinary income that is allocable to the mineral property. Federal and state income tax forms See section 1. Federal and state income tax forms 613-5(b)(1) of the regulations for information on how to figure the ordinary gain allocable to the property. Federal and state income tax forms Oil and Gas Wells You cannot claim percentage depletion for an oil or gas well unless at least one of the following applies. Federal and state income tax forms You are either an independent producer or a royalty owner. Federal and state income tax forms The well produces natural gas that is either sold under a fixed contract or produced from geopressured brine. Federal and state income tax forms If you are an independent producer or royalty owner, see Independent Producers and Royalty Owners , next. Federal and state income tax forms For information on the depletion deduction for wells that produce natural gas that is either sold under a fixed contract or produced from geopressured brine, see Natural Gas Wells , later. Federal and state income tax forms Independent Producers and Royalty Owners If you are an independent producer or royalty owner, you figure percentage depletion using a rate of 15% of the gross income from the property based on your average daily production of domestic crude oil or domestic natural gas up to your depletable oil or natural gas quantity. Federal and state income tax forms However, certain refiners, as explained next, and certain retailers and transferees of proven oil and gas properties, as explained next, cannot claim percentage depletion. Federal and state income tax forms For information on figuring the deduction, see Figuring percentage depletion , later. Federal and state income tax forms Refiners who cannot claim percentage depletion. Federal and state income tax forms   You cannot claim percentage depletion if you or a related person refine crude oil and you and the related person refined more than 75,000 barrels on any day during the tax year based on average (rather than actual) daily refinery runs for the tax year. Federal and state income tax forms The average daily refinery run is computed by dividing total refinery runs for the tax year by the total number of days in the tax year. Federal and state income tax forms Related person. Federal and state income tax forms   You and another person are related persons if either of you holds a significant ownership interest in the other person or if a third person holds a significant ownership interest in both of you. Federal and state income tax forms For example, a corporation, partnership, estate, or trust and anyone who holds a significant ownership interest in it are related persons. Federal and state income tax forms A partnership and a trust are related persons if one person holds a significant ownership interest in each of them. Federal and state income tax forms For purposes of the related person rules, significant ownership interest means direct or indirect ownership of 5% or more in any one of the following. Federal and state income tax forms The value of the outstanding stock of a corporation. Federal and state income tax forms The interest in the profits or capital of a partnership. Federal and state income tax forms The beneficial interests in an estate or trust. Federal and state income tax forms Any interest owned by or for a corporation, partnership, trust, or estate is considered to be owned directly both by itself and proportionately by its shareholders, partners, or beneficiaries. Federal and state income tax forms Retailers who cannot claim percentage depletion. Federal and state income tax forms   You cannot claim percentage depletion if both the following apply. Federal and state income tax forms You sell oil or natural gas or their by-products directly or through a related person in any of the following situations. Federal and state income tax forms Through a retail outlet operated by you or a related person. Federal and state income tax forms To any person who is required under an agreement with you or a related person to use a trademark, trade name, or service mark or name owned by you or a related person in marketing or distributing oil, natural gas, or their by-products. Federal and state income tax forms To any person given authority under an agreement with you or a related person to occupy any retail outlet owned, leased, or controlled by you or a related person. Federal and state income tax forms The combined gross receipts from sales (not counting resales) of oil, natural gas, or their by-products by all retail outlets taken into account in (1) are more than $5 million for the tax year. Federal and state income tax forms   For the purpose of determining if this rule applies, do not count the following. Federal and state income tax forms Bulk sales (sales in very large quantities) of oil or natural gas to commercial or industrial users. Federal and state income tax forms Bulk sales of aviation fuels to the Department of Defense. Federal and state income tax forms Sales of oil or natural gas or their by-products outside the United States if none of your domestic production or that of a related person is exported during the tax year or the prior tax year. Federal and state income tax forms Related person. Federal and state income tax forms   To determine if you and another person are related persons, see Related person under Refiners who cannot claim percentage depletion, earlier. Federal and state income tax forms Sales through a related person. Federal and state income tax forms   You are considered to be selling through a related person if any sale by the related person produces gross income from which you may benefit because of your direct or indirect ownership interest in the person. Federal and state income tax forms   You are not considered to be selling through a related person who is a retailer if all the following apply. Federal and state income tax forms You do not have a significant ownership interest in the retailer. Federal and state income tax forms You sell your production to persons who are not related to either you or the retailer. Federal and state income tax forms The retailer does not buy oil or natural gas from your customers or persons related to your customers. Federal and state income tax forms There are no arrangements for the retailer to acquire oil or natural gas you produced for resale or made available for purchase by the retailer. Federal and state income tax forms Neither you nor the retailer knows of or controls the final disposition of the oil or natural gas you sold or the original source of the petroleum products the retailer acquired for resale. Federal and state income tax forms Transferees who cannot claim percentage depletion. Federal and state income tax forms   You cannot claim percentage depletion if you received your interest in a proven oil or gas property by transfer after 1974 and before October 12, 1990. Federal and state income tax forms For a definition of the term “transfer,” see section 1. Federal and state income tax forms 613A-7(n) of the regulations. Federal and state income tax forms For a definition of the term “interest in proven oil or gas property,” see section 1. Federal and state income tax forms 613A-7(p) of the regulations. Federal and state income tax forms Figuring percentage depletion. Federal and state income tax forms   Generally, as an independent producer or royalty owner, you figure your percentage depletion by computing your average daily production of domestic oil or gas and comparing it to your depletable oil or gas quantity. Federal and state income tax forms If your average daily production does not exceed your depletable oil or gas quantity, you figure your percentage depletion by multiplying the gross income from the oil or gas property (defined later) by 15%. Federal and state income tax forms If your average daily production of domestic oil or gas exceeds your depletable oil or gas quantity, you must make an allocation as explained later under Average daily production. Federal and state income tax forms   In addition, there is a limit on the percentage depletion deduction. Federal and state income tax forms See Taxable income limit , later. Federal and state income tax forms Average daily production. Federal and state income tax forms   Figure your average daily production by dividing your total domestic production of oil or gas for the tax year by the number of days in your tax year. Federal and state income tax forms Partial interest. Federal and state income tax forms   If you have a partial interest in the production from a property, figure your share of the production by multiplying total production from the property by your percentage of interest in the revenues from the property. Federal and state income tax forms   You have a partial interest in the production from a property if you have a net profits interest in the property. Federal and state income tax forms To figure the share of production for your net profits interest, you must first determine your percentage participation (as measured by the net profits) in the gross revenue from the property. Federal and state income tax forms To figure this percentage, you divide the income you receive for your net profits interest by the gross revenue from the property. Federal and state income tax forms Then multiply the total production from the property by your percentage participation to figure your share of the production. Federal and state income tax forms Example. Federal and state income tax forms Javier Robles owns oil property in which Pablo Olmos owns a 20% net profits interest. Federal and state income tax forms During the year, the property produced 10,000 barrels of oil, which Javier sold for $200,000. Federal and state income tax forms Javier had expenses of $90,000 attributable to the property. Federal and state income tax forms The property generated a net profit of $110,000 ($200,000 − $90,000). Federal and state income tax forms Pablo received income of $22,000 ($110,000 × . Federal and state income tax forms 20) for his net profits interest. Federal and state income tax forms Pablo determined his percentage participation to be 11% by dividing $22,000 (the income he received) by $200,000 (the gross revenue from the property). Federal and state income tax forms Pablo determined his share of the oil production to be 1,100 barrels (10,000 barrels × 11%). Federal and state income tax forms Depletable oil or natural gas quantity. Federal and state income tax forms   Generally, your depletable oil quantity is 1,000 barrels. Federal and state income tax forms Your depletable natural gas quantity is 6,000 cubic feet multiplied by the number of barrels of your depletable oil quantity that you choose to apply. Federal and state income tax forms If you claim depletion on both oil and natural gas, you must reduce your depletable oil quantity (1,000 barrels) by the number of barrels you use to figure your depletable natural gas quantity. Federal and state income tax forms Example. Federal and state income tax forms You have both oil and natural gas production. Federal and state income tax forms To figure your depletable natural gas quantity, you choose to apply 360 barrels of your 1000-barrel depletable oil quantity. Federal and state income tax forms Your depletable natural gas quantity is 2. Federal and state income tax forms 16 million cubic feet of gas (360 × 6000). Federal and state income tax forms You must reduce your depletable oil quantity to 640 barrels (1000 − 360). Federal and state income tax forms If you have production from marginal wells, see section 613A(c)(6) of the Internal Revenue Code to figure your depletable oil or natural gas quantity. Federal and state income tax forms Also, see Notice 2012-50, available at www. Federal and state income tax forms irs. Federal and state income tax forms gov/irb/2012–31_IRB/index. Federal and state income tax forms html. Federal and state income tax forms Business entities and family members. Federal and state income tax forms   You must allocate the depletable oil or gas quantity among the following related persons in proportion to each entity's or family member's production of domestic oil or gas for the year. Federal and state income tax forms Corporations, trusts, and estates if 50% or more of the beneficial interest is owned by the same or related persons (considering only persons that own at least 5% of the beneficial interest). Federal and state income tax forms You and your spouse and minor children. Federal and state income tax forms A related person is anyone mentioned in the related persons discussion under Nondeductible loss in chapter 2 of Publication 544, except that for purposes of this allocation, item (1) in that discussion includes only an individual, his or her spouse, and minor children. Federal and state income tax forms Controlled group of corporations. Federal and state income tax forms   Members of the same controlled group of corporations are treated as one taxpayer when figuring the depletable oil or natural gas quantity. Federal and state income tax forms They share the depletable quantity. Federal and state income tax forms A controlled group of corporations is defined in section 1563(a) of the Internal Revenue Code, except that, for this purpose, the stock ownership requirement in that definition is “more than 50%” rather than “at least 80%. Federal and state income tax forms ” Gross income from the property. Federal and state income tax forms   For purposes of percentage depletion, gross income from the property (in the case of oil and gas wells) is the amount you receive from the sale of the oil or gas in the immediate vicinity of the well. Federal and state income tax forms If you do not sell the oil or gas on the property, but manufacture or convert it into a refined product before sale or transport it before sale, the gross income from the property is the representative market or field price (RMFP) of the oil or gas, before conversion or transportation. Federal and state income tax forms   If you sold gas after you removed it from the premises for a price that is lower than the RMFP, determine gross income from the property for percentage depletion purposes without regard to the RMFP. Federal and state income tax forms   Gross income from the property does not include lease bonuses, advance royalties, or other amounts payable without regard to production from the property. Federal and state income tax forms Average daily production exceeds depletable quantities. Federal and state income tax forms   If your average daily production for the year is more than your depletable oil or natural gas quantity, figure your allowance for depletion for each domestic oil or natural gas property as follows. Federal and state income tax forms Figure your average daily production of oil or natural gas for the year. Federal and state income tax forms Figure your depletable oil or natural gas quantity for the year. Federal and state income tax forms Figure depletion for all oil or natural gas produced from the property using a percentage depletion rate of 15%. Federal and state income tax forms Multiply the result figured in (3) by a fraction, the numerator of which is the result figured in (2) and the denominator of which is the result figured in (1). Federal and state income tax forms This is your depletion allowance for that property for the year. Federal and state income tax forms Taxable income limit. Federal and state income tax forms   If you are an independent producer or royalty owner of oil and gas, your deduction for percentage depletion is limited to the smaller of the following. Federal and state income tax forms 100% of your taxable income from the property figured without the deduction for depletion and the deduction for domestic production activities under section 199 of the Internal Revenue Code. Federal and state income tax forms For a definition of taxable income from the property, see Taxable income limit , earlier, under Mineral Property. Federal and state income tax forms 65% of your taxable income from all sources, figured without the depletion allowance, the deduction for domestic production activities, any net operating loss carryback, and any capital loss carryback. Federal and state income tax forms You can carry over to the following year any amount you cannot deduct because of the 65%-of-taxable-income limit. Federal and state income tax forms Add it to your depletion allowance (before applying any limits) for the following year. Federal and state income tax forms Partnerships and S Corporations Generally, each partner or S corporation shareholder, and not the partnership or S corporation, figures the depletion allowance separately. Federal and state income tax forms (However, see Electing large partnerships must figure depletion allowance , later. Federal and state income tax forms ) Each partner or shareholder must decide whether to use cost or percentage depletion. Federal and state income tax forms If a partner or shareholder uses percentage depletion, he or she must apply the 65%-of-taxable-income limit using his or her taxable income from all sources. Federal and state income tax forms Partner's or shareholder's adjusted basis. Federal and state income tax forms   The partnership or S corporation must allocate to each partner or shareholder his or her share of the adjusted basis of each oil or gas property held by the partnership or S corporation. Federal and state income tax forms The partnership or S corporation makes the allocation as of the date it acquires the oil or gas property. Federal and state income tax forms   Each partner's share of the adjusted basis of the oil or gas property generally is figured according to that partner's interest in partnership capital. Federal and state income tax forms However, in some cases, it is figured according to the partner's interest in partnership income. Federal and state income tax forms   The partnership or S corporation adjusts the partner's or shareholder's share of the adjusted basis of the oil and gas property for any capital expenditures made for the property and for any change in partnership or S corporation interests. Federal and state income tax forms Recordkeeping. Federal and state income tax forms Each partner or shareholder must separately keep records of his or her share of the adjusted basis in each oil and gas property of the partnership or S corporation. Federal and state income tax forms The partner or shareholder must reduce his or her adjusted basis by the depletion allowed or allowable on the property each year. Federal and state income tax forms The partner or shareholder must use that reduced adjusted basis to figure cost depletion or his or her gain or loss if the partnership or S corporation disposes of the property. Federal and state income tax forms Reporting the deduction. Federal and state income tax forms   Information that you, as a partner or shareholder, use to figure your depletion deduction on oil and gas properties is reported by the partnership or S corporation on Schedule K-1 (Form 1065) or on Schedule K-1 (Form 1120S). Federal and state income tax forms Deduct oil and gas depletion for your partnership or S corporation interest on Schedule E (Form 1040). Federal and state income tax forms The depletion deducted on Schedule E is included in figuring income or loss from rental real estate or royalty properties. Federal and state income tax forms The instructions for Schedule E explain where to report this income or loss and whether you need to file either of the following forms. Federal and state income tax forms Form 6198, At-Risk Limitations. Federal and state income tax forms Form 8582, Passive Activity Loss Limitations. Federal and state income tax forms Electing large partnerships must figure depletion allowance. Federal and state income tax forms   An electing large partnership, rather than each partner, generally must figure the depletion allowance. Federal and state income tax forms The partnership figures the depletion allowance without taking into account the 65-percent-of-taxable-income limit and the depletable oil or natural gas quantity. Federal and state income tax forms Also, the adjusted basis of a partner's interest in the partnership is not affected by the depletion allowance. Federal and state income tax forms   An electing large partnership is one that meets both the following requirements. Federal and state income tax forms The partnership had 100 or more partners in the preceding year. Federal and state income tax forms The partnership chooses to be an electing large partnership. Federal and state income tax forms Disqualified persons. Federal and state income tax forms   An electing large partnership does not figure the depletion allowance of its partners that are disqualified persons. Federal and state income tax forms Disqualified persons must figure it themselves, as explained earlier. Federal and state income tax forms   All the following are disqualified persons. Federal and state income tax forms Refiners who cannot claim percentage depletion (discussed under Independent Producers and Royalty Owners , earlier). Federal and state income tax forms Retailers who cannot claim percentage depletion (discussed under Independent Producers and Royalty Owners , earlier). Federal and state income tax forms Any partner whose average daily production of domestic crude oil and natural gas is more than 500 barrels during the tax year in which the partnership tax year ends. Federal and state income tax forms Average daily production is discussed earlier. Federal and state income tax forms Natural Gas Wells You can use percentage depletion for a well that produces natural gas that is either Sold under a fixed contract, or Produced from geopressured brine. Federal and state income tax forms Natural gas sold under a fixed contract. Federal and state income tax forms   Natural gas sold under a fixed contract qualifies for a percentage depletion rate of 22%. Federal and state income tax forms This is domestic natural gas sold by the producer under a contract that does not provide for a price increase to reflect any increase in the seller's tax liability because of the repeal of percentage depletion for gas. Federal and state income tax forms The contract must have been in effect from February 1, 1975, until the date of sale of the gas. Federal and state income tax forms Price increases after February 1, 1975, are presumed to take the increase in tax liability into account unless demonstrated otherwise by clear and convincing evidence. Federal and state income tax forms Natural gas from geopressured brine. Federal and state income tax forms   Qualified natural gas from geopressured brine is eligible for a percentage depletion rate of 10%. Federal and state income tax forms This is natural gas that is both the following. Federal and state income tax forms Produced from a well you began to drill after September 1978 and before 1984. Federal and state income tax forms Determined in accordance with section 503 of the Natural Gas Policy Act of 1978 to be produced from geopressured brine. Federal and state income tax forms Mines and Geothermal Deposits Certain mines, wells, and other natural deposits, including geothermal deposits, qualify for percentage depletion. Federal and state income tax forms Mines and other natural deposits. Federal and state income tax forms   For a natural deposit, the percentage of your gross income from the property that you can deduct as depletion depends on the type of deposit. Federal and state income tax forms   The following is a list of the percentage depletion rates for the more common minerals. Federal and state income tax forms DEPOSITS RATE Sulphur, uranium, and, if from deposits in the United States, asbestos, lead ore, zinc ore, nickel ore, and mica 22% Gold, silver, copper, iron ore, and certain oil shale, if from deposits in the United States 15% Borax, granite, limestone, marble, mollusk shells, potash, slate, soapstone, and carbon dioxide produced from a well 14% Coal, lignite, and sodium chloride 10% Clay and shale used or sold for use in making sewer pipe or bricks or used or sold for use as sintered or burned lightweight aggregates 7½% Clay used or sold for use in making drainage and roofing tile, flower pots, and kindred products, and gravel, sand, and stone (other than stone used or sold for use by a mine owner or operator as dimension or ornamental stone) 5%   You can find a complete list of minerals and their percentage depletion rates in section 613(b) of the Internal Revenue Code. Federal and state income tax forms Corporate deduction for iron ore and coal. Federal and state income tax forms   The percentage depletion deduction of a corporation for iron ore and coal (including lignite) is reduced by 20% of: The percentage depletion deduction for the tax year (figured without this reduction), minus The adjusted basis of the property at the close of the tax year (figured without the depletion deduction for the tax year). Federal and state income tax forms Gross income from the property. Federal and state income tax forms   For property other than a geothermal deposit or an oil or gas well, gross income from the property means the gross income from mining. Federal and state income tax forms Mining includes all the following. Federal and state income tax forms Extracting ores or minerals from the ground. Federal and state income tax forms Applying certain treatment processes described later. Federal and state income tax forms Transporting ores or minerals (generally, not more than 50 miles) from the point of extraction to the plants or mills in which the treatment processes are applied. Federal and state income tax forms Excise tax. Federal and state income tax forms   Gross income from mining includes the separately stated excise tax received by a mine operator from the sale of coal to compensate the operator for the excise tax the mine operator must pay to finance black lung benefits. Federal and state income tax forms Extraction. Federal and state income tax forms   Extracting ores or minerals from the ground includes extraction by mine owners or operators of ores or minerals from the waste or residue of prior mining. Federal and state income tax forms This does not apply to extraction from waste or residue of prior mining by the purchaser of the waste or residue or the purchaser of the rights to extract ores or minerals from the waste or residue. Federal and state income tax forms Treatment processes. Federal and state income tax forms   The processes included as mining depend on the ore or mineral mined. Federal and state income tax forms To qualify as mining, the treatment processes must be applied by the mine owner or operator. Federal and state income tax forms For a listing of treatment processes considered as mining, see section 613(c)(4) of the Internal Revenue Code and the related regulations. Federal and state income tax forms Transportation of more than 50 miles. Federal and state income tax forms   If the IRS finds that the ore or mineral must be transported more than 50 miles to plants or mills to be treated because of physical and other requirements, the additional authorized transportation is considered mining and included in the computation of gross income from mining. Federal and state income tax forms    If you wish to include transportation of more than 50 miles in the computation of gross income from mining, request an advance ruling from the IRS. Federal and state income tax forms Include in the request the facts about the physical and other requirements that prevented the construction and operation of the plant within 50 miles of the point of extraction. Federal and state income tax forms For more information about requesting an advance ruling, see Revenue Procedure 2013-1, available at www. Federal and state income tax forms irs. Federal and state income tax forms gov/irb/2013-01_IRB/ar11. Federal and state income tax forms html. Federal and state income tax forms Disposal of coal or iron ore. Federal and state income tax forms   You cannot take a depletion deduction for coal (including lignite) or iron ore mined in the United States if both the following apply. Federal and state income tax forms You disposed of it after holding it for more than 1 year. Federal and state income tax forms You disposed of it under a contract under which you retain an economic interest in the coal or iron ore. Federal and state income tax forms Treat any gain on the disposition as a capital gain. Federal and state income tax forms Disposal to related person. Federal and state income tax forms   This rule does not apply if you dispose of the coal or iron ore to one of the following persons. Federal and state income tax forms A related person (as listed in chapter 2 of Publication 544). Federal and state income tax forms A person owned or controlled by the same interests that own or control you. Federal and state income tax forms Geothermal deposits. Federal and state income tax forms   Geothermal deposits located in the United States or its possessions qualify for a percentage depletion rate of 15%. Federal and state income tax forms A geothermal deposit is a geothermal reservoir of natural heat stored in rocks or in a watery liquid or vapor. Federal and state income tax forms For percentage depletion purposes, a geothermal deposit is not considered a gas well. Federal and state income tax forms   Figure gross income from the property for a geothermal steam well in the same way as for oil and gas wells. Federal and state income tax forms See Gross income from the property , earlier, under Oil and Gas Wells. Federal and state income tax forms Percentage depletion on a geothermal deposit cannot be more than 50% of your taxable income from the property. Federal and state income tax forms Lessor's Gross Income In the case of leased property, the depletion deduction is divided between the lessor and the lessee. Federal and state income tax forms A lessor's gross income from the property that qualifies for percentage depletion usually is the total of the royalties received from the lease. Federal and state income tax forms Bonuses and advanced royalties. Federal and state income tax forms   Bonuses and advanced royalties are payments a lessee makes before production to a lessor for the grant of rights in a lease or for minerals, gas, or oil to be extracted from leased property. Federal and state income tax forms If you are the lessor, your income from bonuses and advanced royalties received is subject to an allowance for depletion, as explained in the next two paragraphs. Federal and state income tax forms Figuring cost depletion. Federal and state income tax forms   To figure cost depletion on a bonus, multiply your adjusted basis in the property by a fraction, the numerator of which is the bonus and the denominator of which is the total bonus and royalties expected to be received. Federal and state income tax forms To figure cost depletion on advanced royalties, use the computation explained earlier under Cost Depletion , treating the number of units for which the advanced royalty is received as the number of units sold. Federal and state income tax forms Figuring percentage depletion. Federal and state income tax forms   In the case of mines, wells, and other natural deposits other than gas, oil, or geothermal property, you may use the percentage rates discussed earlier under Mines and Geothermal Deposits . Federal and state income tax forms Any bonus or advanced royalty payments are generally part of the gross income from the property to which the rates are applied in making the calculation. Federal and state income tax forms However, for oil, gas, or geothermal property, gross income does not include lease bonuses, advanced royalties, or other amounts payable without regard to production from the property. Federal and state income tax forms Ending the lease. Federal and state income tax forms   If you receive a bonus on a lease that ends or is abandoned before you derive any income from mineral extraction, include in income the depletion deduction you took. Federal and state income tax forms Do this for the year the lease ends or is abandoned. Federal and state income tax forms Also increase your adjusted basis in the property to restore the depletion deduction you previously subtracted. Federal and state income tax forms   For advanced royalties, include in income the depletion claimed on minerals for which the advanced royalties were paid if the minerals were not produced before the lease ended. Federal and state income tax forms Include this amount in income for the year the lease ends. Federal and state income tax forms Increase your adjusted basis in the property by the amount you include in income. Federal and state income tax forms Delay rentals. Federal and state income tax forms   These are payments for deferring development of the property. Federal and state income tax forms Since delay rentals are ordinary rent, they are ordinary income that is not subject to depletion. Federal and state income tax forms These rentals can be avoided by either abandoning the lease, beginning development operations, or obtaining production. Federal and state income tax forms Timber You can figure timber depletion only by the cost method. Federal and state income tax forms Percentage depletion does not apply to timber. Federal and state income tax forms Base your depletion on your cost or other basis in the timber. Federal and state income tax forms Your cost does not include the cost of land or any amounts recoverable through depreciation. Federal and state income tax forms Depletion takes place when you cut standing timber. Federal and state income tax forms You can figure your depletion deduction when the quantity of cut timber is first accurately measured in the process of exploitation. Federal and state income tax forms Figuring cost depletion. Federal and state income tax forms   To figure your cost depletion allowance, you multiply the number of timber units cut by your depletion unit. Federal and state income tax forms Timber units. Federal and state income tax forms   When you acquire timber property, you must make an estimate of the quantity of marketable timber that exists on the property. Federal and state income tax forms You measure the timber using board feet, log scale, cords, or other units. Federal and state income tax forms If you later determine that you have more or less units of timber, you must adjust the original estimate. Federal and state income tax forms   The term “timber property” means your economic interest in standing timber in each tract or block representing a separate timber account. Federal and state income tax forms Depletion unit. Federal and state income tax forms   You figure your depletion unit each year by taking the following steps. Federal and state income tax forms Determine your cost or adjusted basis of the timber on hand at the beginning of the year. Federal and state income tax forms Adjusted basis is defined under Cost Depletion in the discussion on Mineral Property. Federal and state income tax forms Add to the amount determined in (1) the cost of any timber units acquired during the year and any additions to capital. Federal and state income tax forms Figure the number of timber units to take into account by adding the number of timber units acquired during the year to the number of timber units on hand in the account at the beginning of the year and then adding (or subtracting) any correction to the estimate of the number of timber units remaining in the account. Federal and state income tax forms Divide the result of (2) by the result of (3). Federal and state income tax forms This is your depletion unit. Federal and state income tax forms Example. Federal and state income tax forms You bought a timber tract for $160,000 and the land was worth as much as the timber. Federal and state income tax forms Your basis for the timber is $80,000. Federal and state income tax forms Based on an estimated one million board feet (1,000 MBF) of standing timber, you figure your depletion unit to be $80 per MBF ($80,000 ÷ 1,000). Federal and state income tax forms If you cut 500 MBF of timber, your depletion allowance would be $40,000 (500 MBF × $80). Federal and state income tax forms When to claim depletion. Federal and state income tax forms   Claim your depletion allowance as a deduction in the year of sale or other disposition of the products cut from the timber, unless you choose to treat the cutting of timber as a sale or exchange (explained below). Federal and state income tax forms Include allowable depletion for timber products not sold during the tax year the timber is cut as a cost item in the closing inventory of timber products for the year. Federal and state income tax forms The inventory is your basis for determining gain or loss in the tax year you sell the timber products. Federal and state income tax forms Example. Federal and state income tax forms The facts are the same as in the previous example except that you sold only half of the timber products in the cutting year. Federal and state income tax forms You would deduct $20,000 of the $40,000 depletion that year. Federal and state income tax forms You would add the remaining $20,000 depletion to your closing inventory of timber products. Federal and state income tax forms Electing to treat the cutting of timber as a sale or exchange. Federal and state income tax forms   You can elect, under certain circumstances, to treat the cutting of timber held for more than 1 year as a sale or exchange. Federal and state income tax forms You must make the election on your income tax return for the tax year to which it applies. Federal and state income tax forms If you make this election, subtract the adjusted basis for depletion from the fair market value of the timber on the first day of the tax year in which you cut it to figure the gain or loss on the cutting. Federal and state income tax forms You generally report the gain as long-term capital gain. Federal and state income tax forms The fair market value then becomes your basis for figuring your ordinary gain or loss on the sale or other disposition of the products cut from the timber. Federal and state income tax forms For more information, see Timber in chapter 2 of Publication 544, Sales and Other Dispositions of Assets. Federal and state income tax forms   You may revoke an election to treat the cutting of timber as a sale or exchange without IRS's consent. Federal and state income tax forms The prior election (and revocation) is disregarded for purposes of making a subsequent election. Federal and state income tax forms See Form T (Timber), Forest Activities Schedule, for more information. Federal and state income tax forms Form T. Federal and state income tax forms   Complete and attach Form T (Timber) to your income tax return if you claim a deduction for timber depletion, choose to treat the cutting of timber as a sale or exchange, or make an outright sale of timber. 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Understanding your CP565 Notice

We gave you an Individual Taxpayer Identification Number (ITIN).

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Effective June 22, 2012, the IRS has made interim changes that affect the Individual Taxpayer Identification Number (ITIN) application process. Some of the information below, including the documentation requirements for individuals seeking an ITIN, has been superseded by these changes. Taxpayers and their representatives should review these changes, which are further explained in these Frequently Asked Questions, before requesting an ITIN.


What you need to do

  • Read your notice carefully. Make sure the name and date of birth we have on record for you is right.
  • You don't have to answer the notice.
  • Use your ITIN in place of a Social Security Number to file a federal tax return or a tax reporting document.

You may want to...


Answers to Common Questions

What is an ITIN?
It is a number for you to use on federal tax documents.

Who needs an ITIN?
A non-citizen who has to file a federal tax return or a tax reporting document and does not qualify for an SSN needs an ITIN.

Can I use an ITIN for identification?
No. It is only for tax purposes. It is not for non-tax purposes.

Can I use my ITIN like a Social Security number (SSN)?
You can use an ITIN like an SSN on federal tax documents. It doesn't, however, allow you to collect Social Security benefits. It doesn't change your immigration status.

Can I claim the Earned Income Tax Credit (EITC) when I file my tax return?
No, individuals filing a tax return with an ITIN can't claim the EITC.

What happens to my ITIN if I become a U.S. citizen?
You can get an SSN when you become a U.S. citizen.

What should I do if I get a Social Security number?
Use your SSN. Stop using your ITIN. Let us know you have an SSN so we can change our records. We will give you credit for taxes withheld under your old ITIN.

I sent you documents when I applied for an ITIN. When will you return them?
We will return your documents within 60 days from your notice's date. Call us at the number on your notice if you don't receive your documents by then.


Tips for next year

Use your ITIN and the name shown on your notice when you file your federal taxes next year. Do the same when you contact us by mail.

Consider filing your taxes electronically. Filing online can help you avoid mistakes and find credits and deductions that you may qualify for. In many cases you can file for free. Learn more about e-file.


Understanding your notice

Reading your notice
Your notice may look different from the sample because the information contained in your notice is tailored to your situation.

Notice CP565, Page 1

Notice CP565, Page 2

Printable samples of this notice (PDF)

Tax publications you may find useful

How to get help

Calling the 1-800 number listed on the top right corner of your notice is the fastest way to get your questions answered.

You can also authorize someone (such as an accountant) to contact the IRS on your behalf using this Power of Attorney and Declaration of Representative (Form 2848).

Or you may qualify for help from a Low Income Taxpayer Clinic.
 

Page Last Reviewed or Updated: 14-Mar-2014

The Federal And State Income Tax Forms

Federal and state income tax forms 1. Federal and state income tax forms   Investment Income Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: General InformationSSN for joint account. Federal and state income tax forms Custodian account for your child. Federal and state income tax forms Penalty for failure to supply SSN. Federal and state income tax forms Certification. Federal and state income tax forms Underreported interest and dividends. Federal and state income tax forms How to stop backup withholding due to underreporting. Federal and state income tax forms How to stop backup withholding due to an incorrect identification number. Federal and state income tax forms Reporting backup withholding. Federal and state income tax forms Nonresident aliens. Federal and state income tax forms Penalties. Federal and state income tax forms Savings account with parent as trustee. Federal and state income tax forms Interest IncomeInterest not reported on Form 1099-INT. Federal and state income tax forms Nominees. Federal and state income tax forms Incorrect amount. Federal and state income tax forms Information reporting requirement. Federal and state income tax forms Taxable Interest — General Below-Market Loans U. Federal and state income tax forms S. Federal and state income tax forms Savings Bonds U. Federal and state income tax forms S. Federal and state income tax forms Treasury Bills, Notes, and Bonds Bonds Sold Between Interest Dates Insurance State or Local Government Obligations Discount on Debt InstrumentsOriginal Issue Discount (OID) Market Discount Bonds Discount on Short-Term Obligations Election To Report All Interest as OID When To Report Interest IncomeConstructive receipt. Federal and state income tax forms How To Report Interest IncomeSchedule B (Form 1040A or 1040). Federal and state income tax forms Worksheet for savings bonds distributed from a retirement or profit-sharing plan. Federal and state income tax forms File Form 1099-INT with the IRS. Federal and state income tax forms Dividends and Other DistributionsDividends not reported on Form 1099-DIV. Federal and state income tax forms Nominees. Federal and state income tax forms Ordinary Dividends Capital Gain Distributions Nondividend Distributions Liquidating Distributions Distributions of Stock and Stock Rights Other Distributions How To Report Dividend IncomeElection. Federal and state income tax forms Independent contractor. Federal and state income tax forms Investment interest deducted. Federal and state income tax forms Exception 1. Federal and state income tax forms Exception 2. Federal and state income tax forms Undistributed capital gains. Federal and state income tax forms File Form 1099-DIV with the IRS. Federal and state income tax forms Stripped Preferred Stock REMICs, FASITs, and Other CDOsREMICs Collateralized Debt Obligations (CDOs) FASITs S CorporationsLimit on losses and deductions. Federal and state income tax forms Passive activity losses. Federal and state income tax forms Form 8582. Federal and state income tax forms Investment ClubsInvestments in name of member. Federal and state income tax forms Tax Treatment of the Club Topics - This chapter discusses: Interest Income , Discount on Debt Instruments , When To Report Interest Income , How To Report Interest Income , Dividends and Other Distributions , How To Report Dividend Income , Stripped Preferred Stock , Real estate mortgage investment conduits (REMICs), financial asset securitization investment trusts (FASITs), and other collateralized debt obligations (CDOs) , S Corporations , and Investment Clubs . Federal and state income tax forms Useful Items - You may want to see: Publication 525 Taxable and Nontaxable Income 537 Installment Sales 590 Individual Retirement Arrangements (IRAs) 925 Passive Activity and At-Risk Rules 1212 Guide to Original Issue Discount (OID) Instruments Form (and Instructions) Schedule B (Form 1040A or 1040) Interest and Ordinary Dividends Schedule D (Form 1040) Capital Gains and Losses 1040 U. Federal and state income tax forms S. Federal and state income tax forms Individual Income Tax Return 1040A U. Federal and state income tax forms S. Federal and state income tax forms Individual Income Tax Return 1040EZ Income Tax Return for Single and Joint Filers With No Dependents 1099 General Instructions for Certain Information Returns 2439 Notice to Shareholder of Undistributed Long-Term Capital Gains 3115 Application for Change in Accounting Method 6251 Alternative Minimum Tax — Individuals 8582 Passive Activity Loss Limitations 8615 Tax for Certain Children Who Have Unearned Income 8814 Parents' Election To Report Child's Interest and Dividends 8815 Exclusion of Interest From Series EE and I U. Federal and state income tax forms S. Federal and state income tax forms Savings Bonds Issued After 1989 8818 Optional Form To Record Redemption of Series EE and I U. Federal and state income tax forms S. Federal and state income tax forms Savings Bonds Issued After 1989 8824 Like-Kind Exchanges 8949 Sales and Other Dispositions of Capital Assets 8960 Net Investment Income Tax—Individuals, Estates, and Trusts See chapter 5, How To Get Tax Help , for information about getting these publications and forms. Federal and state income tax forms General Information A few items of general interest are covered here. Federal and state income tax forms Recordkeeping. Federal and state income tax forms You should keep a list showing sources and investment income amounts you receive during the year. Federal and state income tax forms Also keep the forms you receive showing your investment income (Forms 1099-INT, Interest Income, and 1099-DIV, Dividends and Distributions, for example) as an important part of your records. Federal and state income tax forms Net investment income tax (NIIT). Federal and state income tax forms   Beginning in 2013, you may be subject to the NIIT. Federal and state income tax forms The NIIT is a 3. Federal and state income tax forms 8% tax on the lesser of your net investment income or the amount of your modified adjusted gross income (MAGI) that is over a threshold amount based on your filing status. Federal and state income tax forms    Filing Status Threshold Amount Married filing jointly $250,000 Married filing separately $125,000 Single $200,000 Head of household (with qualifying person) $200,000 Qualifying Widow(er) with dependent child $250,000    For more information, see Form 8960 and Instructions for Form 8960. Federal and state income tax forms Tax on unearned income of certain children. Federal and state income tax forms   Part of a child's 2013 unearned income may be taxed at the parent's tax rate. Federal and state income tax forms This may happen if all of the following are true. Federal and state income tax forms The child had more than $2,000 of unearned income. Federal and state income tax forms The child is required to file a tax return. Federal and state income tax forms The child was: Under age 18 at the end of 2013, Age 18 at the end of 2013 and did not have earned income that was more than half of the child's support, or A full-time student over age 18 and under age 24 at the end of 2013 and did not have earned income that was more than half of the child's support. Federal and state income tax forms At least one of the child's parents was alive at the end of 2013. Federal and state income tax forms The child does not file a joint return for 2013. Federal and state income tax forms A child born on January 1, 1996, is considered to be age 18 at the end of 2013; a child born on January 1, 1995, is considered to be age 19 at the end of 2013; a child born on January 1, 1990, is considered to be age 24 at the end of 2013. Federal and state income tax forms   If all of these statements are true, Form 8615 must be completed and attached to the child's tax return. Federal and state income tax forms If any of these statements is not true, Form 8615 is not required and the child's income is taxed at his or her own tax rate. Federal and state income tax forms    However, the parent can choose to include the child's interest and dividends on the parent's return if certain requirements are met. Federal and state income tax forms Use Form 8814 for this purpose. Federal and state income tax forms   For more information about the tax on unearned income of children and the parents' election, see Publication 929, Tax Rules for Children and Dependents. Federal and state income tax forms Beneficiary of an estate or trust. Federal and state income tax forms   Interest, dividends, and other investment income you receive as a beneficiary of an estate or trust is generally taxable income. Federal and state income tax forms You should receive a Schedule K-1 (Form 1041), Beneficiary's Share of Income, Deductions, Credits, etc. Federal and state income tax forms , from the fiduciary. Federal and state income tax forms Your copy of Schedule K-1 (Form 1041) and its instructions will tell you where to report the income on your Form 1040. Federal and state income tax forms Social security number (SSN). Federal and state income tax forms   You must give your name and SSN or individual tax identification number (ITIN) to any person required by federal tax law to make a return, statement, or other document that relates to you. Federal and state income tax forms This includes payers of interest and dividends. Federal and state income tax forms If you do not give your SSN or ITIN to the payer of interest, you may have to pay a penalty. Federal and state income tax forms SSN for joint account. Federal and state income tax forms   If the funds in a joint account belong to one person, list that person's name first on the account and give that person's SSN to the payer. Federal and state income tax forms (For information on who owns the funds in a joint account, see Joint accounts , later. Federal and state income tax forms ) If the joint account contains combined funds, give the SSN of the person whose name is listed first on the account. Federal and state income tax forms This is because only one name and SSN can be shown on Form 1099. Federal and state income tax forms   These rules apply both to joint ownership by a married couple and to joint ownership by other individuals. Federal and state income tax forms For example, if you open a joint savings account with your child using funds belonging to the child, list the child's name first on the account and give the child's SSN. Federal and state income tax forms Custodian account for your child. Federal and state income tax forms   If your child is the actual owner of an account that is recorded in your name as custodian for the child, give the child's SSN to the payer. Federal and state income tax forms For example, you must give your child's SSN to the payer of dividends on stock owned by your child, even though the dividends are paid to you as custodian. Federal and state income tax forms Penalty for failure to supply SSN. Federal and state income tax forms   You will be subject to a penalty if, when required, you fail to: Include your SSN on any return, statement, or other document, Give your SSN to another person who must include it on any return, statement, or other document, or Include the SSN of another person on any return, statement, or other document. Federal and state income tax forms The penalty is $50 for each failure up to a maximum penalty of $100,000 for any calendar year. Federal and state income tax forms   You will not be subject to this penalty if you can show that your failure to provide the SSN was due to reasonable cause and not to willful neglect. Federal and state income tax forms   If you fail to supply an SSN, you may also be subject to backup withholding. Federal and state income tax forms Backup withholding. Federal and state income tax forms   Your investment income is generally not subject to regular withholding. Federal and state income tax forms However, it may be subject to backup withholding to ensure that income tax is collected on the income. Federal and state income tax forms Under backup withholding, the bank, broker, or other payer of interest, original issue discount (OID), dividends, cash patronage dividends, or royalties must withhold, as income tax, on the amount you are paid, applying the appropriate withholding rate. Federal and state income tax forms   Backup withholding applies if: You do not give the payer your identification number (either a social security number or an employer identification number) in the required manner, The IRS notifies the payer that you gave an incorrect identification number, The IRS notifies the payer that you are subject to backup withholding on interest or dividends because you have underreported interest or dividends on your income tax return, or You are required, but fail, to certify that you are not subject to backup withholding for the reason described in (3). Federal and state income tax forms Certification. Federal and state income tax forms   For new accounts paying interest or dividends, you must certify under penalties of perjury that your SSN is correct and that you are not subject to backup withholding. Federal and state income tax forms Your payer will give you a Form W-9, Request for Taxpayer Identification Number and Certification, or similar form, to make this certification. Federal and state income tax forms If you fail to make this certification, backup withholding may begin immediately on your new account or investment. Federal and state income tax forms Underreported interest and dividends. Federal and state income tax forms   You will be considered to have underreported your interest and dividends if the IRS has determined for a tax year that: You failed to include any part of a reportable interest or dividend payment required to be shown on your return, or You were required to file a return and to include a reportable interest or dividend payment on that return, but you failed to file the return. Federal and state income tax forms How to stop backup withholding due to underreporting. Federal and state income tax forms   If you have been notified that you underreported interest or dividends, you can request a determination from the IRS to prevent backup withholding from starting or to stop backup withholding once it has begun. Federal and state income tax forms You must show that at least one of the following situations applies. Federal and state income tax forms No underreporting occurred. Federal and state income tax forms You have a bona fide dispute with the IRS about whether underreporting occurred. Federal and state income tax forms Backup withholding will cause or is causing an undue hardship, and it is unlikely that you will underreport interest and dividends in the future. Federal and state income tax forms You have corrected the underreporting by filing a return if you did not previously file one and by paying all taxes, penalties, and interest due for any underreported interest or dividend payments. Federal and state income tax forms   If the IRS determines that backup withholding should stop, it will provide you with a certification and will notify the payers who were sent notices earlier. Federal and state income tax forms How to stop backup withholding due to an incorrect identification number. Federal and state income tax forms   If you have been notified by a payer that you are subject to backup withholding because you have provided an incorrect SSN or employer identification number, you can stop it by following the instructions the payer gives you. Federal and state income tax forms Reporting backup withholding. Federal and state income tax forms   If backup withholding is deducted from your interest or dividend income or other reportable payment, the bank or other business must give you an information return for the year (for example, a Form 1099-INT) indicating the amount withheld. Federal and state income tax forms The information return will show any backup withholding as “Federal income tax withheld. Federal and state income tax forms ” Nonresident aliens. Federal and state income tax forms    Generally, payments made to nonresident aliens are not subject to backup withholding. Federal and state income tax forms You can use Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, to certify exempt status. Federal and state income tax forms However, this does not exempt you from the 30% (or lower treaty) withholding rate that may apply to your investment income. Federal and state income tax forms For information on the 30% rate, see Publication 519, U. Federal and state income tax forms S. Federal and state income tax forms Tax Guide for Aliens. Federal and state income tax forms Penalties. Federal and state income tax forms   There are civil and criminal penalties for giving false information to avoid backup withholding. Federal and state income tax forms The civil penalty is $500. Federal and state income tax forms The criminal penalty, upon conviction, is a fine of up to $1,000, or imprisonment of up to 1 year, or both. Federal and state income tax forms Where to report investment income. Federal and state income tax forms   Table 1-1 gives an overview of the forms and schedules to use to report some common types of investment income. Federal and state income tax forms But see the rest of this publication for detailed information about reporting investment income. Federal and state income tax forms Joint accounts. Federal and state income tax forms   If two or more persons hold property (such as a savings account, bond, or stock) as joint tenants, tenants by the entirety, or tenants in common, each person's share of any interest or dividends from the property is determined by local law. Federal and state income tax forms Community property states. Federal and state income tax forms   If you are married and receive a distribution that is community income, one-half of the distribution is generally considered to be received by each spouse. Federal and state income tax forms If you file separate returns, you must each report one-half of any taxable distribution. Federal and state income tax forms See Publication 555, Community Property, for more information on community income. Federal and state income tax forms   If the distribution is not considered community property and you and your spouse file separate returns, each of you must report your separate taxable distributions. Federal and state income tax forms Example. Federal and state income tax forms You and your spouse have a joint money market account. Federal and state income tax forms Under state law, half the income from the account belongs to you, and half belongs to your spouse. Federal and state income tax forms If you file separate returns, you each report half the income. Federal and state income tax forms Income from property given to a child. Federal and state income tax forms   Property you give as a parent to your child under the Model Gifts of Securities to Minors Act, the Uniform Gifts to Minors Act, or any similar law becomes the child's property. Federal and state income tax forms   Income from the property is taxable to the child, except that any part used to satisfy a legal obligation to support the child is taxable to the parent or guardian having that legal obligation. Federal and state income tax forms Savings account with parent as trustee. Federal and state income tax forms   Interest income from a savings account opened for a minor child, but placed in the name and subject to the order of the parents as trustees, is taxable to the child if, under the law of the state in which the child resides, both of the following are true. Federal and state income tax forms The savings account legally belongs to the child. Federal and state income tax forms The parents are not legally permitted to use any of the funds to support the child. Federal and state income tax forms Table 1-1. Federal and state income tax forms Where To Report Common Types of Investment Income (For detailed information about reporting investment income, see the rest of this publication, especially How To Report Interest Income and How To Report Dividend Income in chapter 1. Federal and state income tax forms ) Type of Income If you file Form 1040, report on . Federal and state income tax forms . Federal and state income tax forms . Federal and state income tax forms If you can file Form 1040A, report on . Federal and state income tax forms . Federal and state income tax forms . Federal and state income tax forms If you can file Form 1040EZ, report on . Federal and state income tax forms . Federal and state income tax forms . Federal and state income tax forms Tax-exempt interest (Form 1099-INT, box 8) Line 8b Line 8b Space to the left of line 2 (enter “TEI” and the amount) Taxable interest that totals $1,500 or less Line 8a (You may need to file Schedule B as well. Federal and state income tax forms ) Line 8a (You may need to file Schedule B as well. Federal and state income tax forms ) Line 2 Taxable interest that totals more than $1,500 Line 8a; also use Schedule B, line 1 Line 8a; also use Schedule B, line 1   Savings bond interest you will exclude because of higher education expenses Schedule B; also use Form 8815 Schedule B; also use Form 8815   Ordinary dividends that total $1,500 or less Line 9a (You may need to file Schedule B as well. Federal and state income tax forms ) Line 9a (You may need to file Schedule B as well. Federal and state income tax forms )   Ordinary dividends that total more than $1,500 Line 9a; also use Schedule B, line 5 Line 9a; also use Schedule B, line 5   Qualified dividends (if you do not have to file Schedule D) Line 9b; also use the Qualified Dividends and Capital Gain Tax Worksheet, line 2 Line 9b; also use the Qualified Dividends and Capital Gain Tax Worksheet, line 2   Qualified dividends (if you have to file Schedule D) Line 9b; also use the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet, line 2 You cannot use Form 1040A    You cannot use Form 1040EZ Capital gain distributions (if you do not have to file Schedule D) Line 13; also use the Qualified Dividends and Capital Gain Tax Worksheet, line 3 Line 10; also use the Qualified Dividends and Capital Gain Tax Worksheet, line 3   Capital gain distributions (if you have to file Schedule D) Schedule D, line 13; also use the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet     Section 1250, 1202, or collectibles gain (Form 1099-DIV, box 2b, 2c, or 2d) Form 8949 and Schedule D     Nondividend distributions (Form 1099-DIV, box 3) Generally not reported*     Undistributed capital gains (Form 2439, boxes 1a - 1d) Schedule D     Gain or loss from sales of stocks or bonds Line 13; also use Form 8949, Schedule D, and the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet You cannot use Form 1040A   Gain or loss from exchanges of like-kind investment property Line 13; also use Schedule D, Form 8824, and the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet     *Report any amounts in excess of your basis in your mutual fund shares on Form 8949. Federal and state income tax forms Use Part II if you held the shares more than 1 year. Federal and state income tax forms Use Part I if you held your mutual fund shares 1 year or less. Federal and state income tax forms For details on Form 8949, see Reporting Capital Gains and Losses in chapter 4, and the Instructions for Form 8949. Federal and state income tax forms Accuracy-related penalty. Federal and state income tax forms   An accuracy-related penalty of 20% can be charged for underpayments of tax due to negligence or disregard of rules or regulations or substantial understatement of tax. Federal and state income tax forms For information on the penalty and any interest that applies, see Penalties in chapter 2. Federal and state income tax forms Interest Income This section discusses the tax treatment of different types of interest income. Federal and state income tax forms In general, any interest that you receive or that is credited to your account and can be withdrawn is taxable income. Federal and state income tax forms (It does not have to be entered in your passbook. Federal and state income tax forms ) Exceptions to this rule are discussed later. Federal and state income tax forms Form 1099-INT. Federal and state income tax forms   Interest income is generally reported to you on Form 1099-INT, or a similar statement, by banks, savings and loans, and other payers of interest. Federal and state income tax forms This form shows you the interest you received during the year. Federal and state income tax forms Keep this form for your records. Federal and state income tax forms You do not have to attach it to your tax return. Federal and state income tax forms   Report on your tax return the total interest income you receive for the tax year. Federal and state income tax forms Interest not reported on Form 1099-INT. Federal and state income tax forms   Even if you do not receive Form 1099-INT, you must still report all of your interest income. Federal and state income tax forms For example, you may receive distributive shares of interest from partnerships or S corporations. Federal and state income tax forms This interest is reported to you on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. Federal and state income tax forms , and Schedule K-1 (Form 1120S), Shareholder's Share of Income, Deductions, Credits, etc. Federal and state income tax forms Nominees. Federal and state income tax forms   Generally, if someone receives interest as a nominee for you, that person must give you a Form 1099-INT showing the interest received on your behalf. Federal and state income tax forms   If you receive a Form 1099-INT that includes amounts belonging to another person, see the discussion on Nominee distributions , later, under How To Report Interest Income. Federal and state income tax forms Incorrect amount. Federal and state income tax forms   If you receive a Form 1099-INT that shows an incorrect amount (or other incorrect information), you should ask the issuer for a corrected form. Federal and state income tax forms The new Form 1099-INT you receive will be marked “Corrected. Federal and state income tax forms ” Form 1099-OID. Federal and state income tax forms   Reportable interest income also may be shown on Form 1099-OID, Original Issue Discount. Federal and state income tax forms For more information about amounts shown on this form, see Original Issue Discount (OID) , later in this chapter. Federal and state income tax forms Exempt-interest dividends. Federal and state income tax forms   Exempt-interest dividends you receive from a mutual fund or other regulated investment company, including those received from a qualified fund of funds in any tax year beginning after December 22, 2010, are not included in your taxable income. Federal and state income tax forms (However, see Information reporting requirement , next. Federal and state income tax forms ) Exempt-interest dividends should be shown in box 10 of Form 1099-DIV. Federal and state income tax forms You do not reduce your basis for distributions that are exempt-interest dividends. Federal and state income tax forms Information reporting requirement. Federal and state income tax forms   Although exempt-interest dividends are not taxable, you must show them on your tax return if you have to file. Federal and state income tax forms This is an information reporting requirement and does not change the exempt-interest dividends into taxable income. Federal and state income tax forms See How To Report Interest Income , later. Federal and state income tax forms Note. Federal and state income tax forms Exempt-interest dividends paid from specified private activity bonds may be subject to the alternative minimum tax. Federal and state income tax forms The exempt-interest dividends subject to the alternative minimum tax are shown in box 11 of Form 1099-DIV. Federal and state income tax forms See Form 6251 and its instructions for more information about this tax. Federal and state income tax forms Private activity bonds are discussed later under State or Local Government Obligations. Federal and state income tax forms Interest on VA dividends. Federal and state income tax forms   Interest on insurance dividends left on deposit with the Department of Veterans Affairs (VA) is not taxable. Federal and state income tax forms This includes interest paid on dividends on converted United States Government Life Insurance policies and on National Service Life Insurance policies. Federal and state income tax forms Individual retirement arrangements (IRAs). Federal and state income tax forms   Interest on a Roth IRA generally is not taxable. Federal and state income tax forms Interest on a traditional IRA is tax deferred. Federal and state income tax forms You generally do not include it in your income until you make withdrawals from the IRA. Federal and state income tax forms See Publication 590 for more information. Federal and state income tax forms Taxable Interest — General Taxable interest includes interest you receive from bank accounts, loans you make to others, and other sources. Federal and state income tax forms The following are some sources of taxable interest. Federal and state income tax forms Dividends that are actually interest. Federal and state income tax forms   Certain distributions commonly called dividends are actually interest. Federal and state income tax forms You must report as interest so-called “dividends” on deposits or on share accounts in: Cooperative banks, Credit unions, Domestic building and loan associations, Domestic savings and loan associations, Federal savings and loan associations, and Mutual savings banks. Federal and state income tax forms  The “dividends” will be shown as interest income on Form 1099-INT. Federal and state income tax forms Money market funds. Federal and state income tax forms   Money market funds are offered by nonbank financial institutions such as mutual funds and stock brokerage houses, and pay dividends. Federal and state income tax forms Generally, amounts you receive from money market funds should be reported as dividends, not as interest. Federal and state income tax forms Certificates of deposit and other deferred interest accounts. Federal and state income tax forms   If you open any of these accounts, interest may be paid at fixed intervals of 1 year or less during the term of the account. Federal and state income tax forms You generally must include this interest in your income when you actually receive it or are entitled to receive it without paying a substantial penalty. Federal and state income tax forms The same is true for accounts that mature in 1 year or less and pay interest in a single payment at maturity. Federal and state income tax forms If interest is deferred for more than 1 year, see Original Issue Discount (OID) , later. Federal and state income tax forms Interest subject to penalty for early withdrawal. Federal and state income tax forms   If you withdraw funds from a deferred interest account before maturity, you may have to pay a penalty. Federal and state income tax forms You must report the total amount of interest paid or credited to your account during the year, without subtracting the penalty. Federal and state income tax forms See Penalty on early withdrawal of savings under How To Report Interest Income, later, for more information on how to report the interest and deduct the penalty. Federal and state income tax forms Money borrowed to invest in certificate of deposit. Federal and state income tax forms   The interest you pay on money borrowed from a bank or savings institution to meet the minimum deposit required for a certificate of deposit from the institution and the interest you earn on the certificate are two separate items. Federal and state income tax forms You must report the total interest you earn on the certificate in your income. Federal and state income tax forms If you itemize deductions, you can deduct the interest you pay as investment interest, up to the amount of your net investment income. Federal and state income tax forms See Interest Expenses in chapter 3. Federal and state income tax forms Example. Federal and state income tax forms You deposited $5,000 with a bank and borrowed $5,000 from the bank to make up the $10,000 minimum deposit required to buy a 6-month certificate of deposit. Federal and state income tax forms The certificate earned $575 at maturity in 2013, but you received only $265, which represented the $575 you earned minus $310 interest charged on your $5,000 loan. Federal and state income tax forms The bank gives you a Form 1099-INT for 2013 showing the $575 interest you earned. Federal and state income tax forms The bank also gives you a statement showing that you paid $310 interest for 2013. Federal and state income tax forms You must include the $575 in your income. Federal and state income tax forms If you itemize your deductions on Schedule A (Form 1040), Itemized Deductions, you can deduct $310, subject to the net investment income limit. Federal and state income tax forms Gift for opening account. Federal and state income tax forms   If you receive noncash gifts or services for making deposits or for opening an account in a savings institution, you may have to report the value as interest. Federal and state income tax forms   For deposits of less than $5,000, gifts or services valued at more than $10 must be reported as interest. Federal and state income tax forms For deposits of $5,000 or more, gifts or services valued at more than $20 must be reported as interest. Federal and state income tax forms The value is determined by the cost to the financial institution. Federal and state income tax forms Example. Federal and state income tax forms You open a savings account at your local bank and deposit $800. Federal and state income tax forms The account earns $20 interest. Federal and state income tax forms You also receive a $15 calculator. Federal and state income tax forms If no other interest is credited to your account during the year, the Form 1099-INT you receive will show $35 interest for the year. Federal and state income tax forms You must report $35 interest income on your tax return. Federal and state income tax forms Interest on insurance dividends. Federal and state income tax forms   Interest on insurance dividends left on deposit with an insurance company that can be withdrawn annually is taxable to you in the year it is credited to your account. Federal and state income tax forms However, if you can withdraw it only on the anniversary date of the policy (or other specified date), the interest is taxable in the year that date occurs. Federal and state income tax forms Prepaid insurance premiums. Federal and state income tax forms   Any increase in the value of prepaid insurance premiums, advance premiums, or premium deposit funds is interest if it is applied to the payment of premiums due on insurance policies or made available for you to withdraw. Federal and state income tax forms U. Federal and state income tax forms S. Federal and state income tax forms obligations. Federal and state income tax forms   Interest on U. Federal and state income tax forms S. Federal and state income tax forms obligations, such as U. Federal and state income tax forms S. Federal and state income tax forms Treasury bills, notes, and bonds, issued by any agency or instrumentality of the United States is taxable for federal income tax purposes. Federal and state income tax forms Interest on tax refunds. Federal and state income tax forms   Interest you receive on tax refunds is taxable income. Federal and state income tax forms Interest on condemnation award. Federal and state income tax forms   If the condemning authority pays you interest to compensate you for a delay in payment of an award, the interest is taxable. Federal and state income tax forms Installment sale payments. Federal and state income tax forms   If a contract for the sale or exchange of property provides for deferred payments, it also usually provides for interest payable with the deferred payments. Federal and state income tax forms That interest is taxable when you receive it. Federal and state income tax forms If little or no interest is provided for in a deferred payment contract, part of each payment may be treated as interest. Federal and state income tax forms See Unstated Interest and Original Issue Discount (OID) in Publication 537. Federal and state income tax forms Interest on annuity contract. Federal and state income tax forms   Accumulated interest on an annuity contract you sell before its maturity date is taxable. Federal and state income tax forms Usurious interest. Federal and state income tax forms   Usurious interest is interest charged at an illegal rate. Federal and state income tax forms This is taxable as interest unless state law automatically changes it to a payment on the principal. Federal and state income tax forms Interest income on frozen deposits. Federal and state income tax forms   Exclude from your gross income interest on frozen deposits. Federal and state income tax forms A deposit is frozen if, at the end of the year, you cannot withdraw any part of the deposit because: The financial institution is bankrupt or insolvent, or The state in which the institution is located has placed limits on withdrawals because other financial institutions in the state are bankrupt or insolvent. Federal and state income tax forms   The amount of interest you must exclude is the interest that was credited on the frozen deposits minus the sum of: The net amount you withdrew from these deposits during the year, and The amount you could have withdrawn as of the end of the year (not reduced by any penalty for premature withdrawals of a time deposit). Federal and state income tax forms If you receive a Form 1099-INT for interest income on deposits that were frozen at the end of 2013, see Frozen deposits under How To Report Interest Income for information about reporting this interest income exclusion on your tax return. Federal and state income tax forms   The interest you exclude is treated as credited to your account in the following year. Federal and state income tax forms You must include it in income in the year you can withdraw it. Federal and state income tax forms Example. Federal and state income tax forms $100 of interest was credited on your frozen deposit during the year. Federal and state income tax forms You withdrew $80 but could not withdraw any more as of the end of the year. Federal and state income tax forms You must include $80 in your income and exclude $20 from your income for the year. Federal and state income tax forms You must include the $20 in your income for the year you can withdraw it. Federal and state income tax forms Bonds traded flat. Federal and state income tax forms    If you buy a bond at a discount when interest has been defaulted or when the interest has accrued but has not been paid, the transaction is described as trading a bond flat. Federal and state income tax forms The defaulted or unpaid interest is not income and is not taxable as interest if paid later. Federal and state income tax forms When you receive a payment of that interest, it is a return of capital that reduces the remaining cost basis of your bond. Federal and state income tax forms Interest that accrues after the date of purchase, however, is taxable interest income for the year received or accrued. Federal and state income tax forms See Bonds Sold Between Interest Dates , later in this chapter. Federal and state income tax forms Below-Market Loans If you make a below-market gift or demand loan, you must report as interest income any forgone interest (defined later) from that loan. Federal and state income tax forms The below-market loan rules and exceptions are described in this section. Federal and state income tax forms For more information, see section 7872 of the Internal Revenue Code and its regulations. Federal and state income tax forms If you receive a below-market loan, you may be able to deduct the forgone interest as well as any interest you actually paid, but not if it is personal interest. Federal and state income tax forms Loans subject to the rules. Federal and state income tax forms   The rules for below-market loans apply to: Gift loans, Pay-related loans, Corporation-shareholder loans, Tax avoidance loans, and Certain loans made to qualified continuing care facilities under a continuing care contract. Federal and state income tax forms A pay-related loan is any below-market loan between an employer and an employee or between an independent contractor and a person for whom the contractor provides services. Federal and state income tax forms A tax avoidance loan is any below-market loan where the avoidance of federal tax is one of the main purposes of the interest arrangement. Federal and state income tax forms Forgone interest. Federal and state income tax forms   For any period, forgone interest is: The amount of interest that would be payable for that period if interest accrued on the loan at the applicable federal rate and was payable annually on December 31, minus Any interest actually payable on the loan for the period. Federal and state income tax forms Applicable federal rate. Federal and state income tax forms   Applicable federal rates are published by the IRS each month in the Internal Revenue Bulletin. Federal and state income tax forms Some IRS offices have these bulletins available for research. Federal and state income tax forms See chapter 5, How To Get Tax Help , for other ways to get this information. Federal and state income tax forms Rules for below-market loans. Federal and state income tax forms   The rules that apply to a below-market loan depend on whether the loan is a gift loan, demand loan, or term loan. Federal and state income tax forms Gift and demand loans. Federal and state income tax forms   A gift loan is any below-market loan where the forgone interest is in the nature of a gift. Federal and state income tax forms   A demand loan is a loan payable in full at any time upon demand by the lender. Federal and state income tax forms A demand loan is a below-market loan if no interest is charged or if interest is charged at a rate below the applicable federal rate. Federal and state income tax forms   A demand loan or gift loan that is a below-market loan is generally treated as an arm's-length transaction in which the lender is treated as having made: A loan to the borrower in exchange for a note that requires the payment of interest at the applicable federal rate, and An additional payment to the borrower in an amount equal to the forgone interest. Federal and state income tax forms The borrower is generally treated as transferring the additional payment back to the lender as interest. Federal and state income tax forms The lender must report that amount as interest income. Federal and state income tax forms   The lender's additional payment to the borrower is treated as a gift, dividend, contribution to capital, pay for services, or other payment, depending on the substance of the transaction. Federal and state income tax forms The borrower may have to report this payment as taxable income, depending on its classification. Federal and state income tax forms These transfers are considered to occur annually, generally on December 31. Federal and state income tax forms Term loans. Federal and state income tax forms   A term loan is any loan that is not a demand loan. Federal and state income tax forms A term loan is a below-market loan if the amount of the loan is more than the present value of all payments due under the loan. Federal and state income tax forms   A lender who makes a below-market term loan other than a gift loan is treated as transferring an additional lump-sum cash payment to the borrower (as a dividend, contribution to capital, etc. Federal and state income tax forms ) on the date the loan is made. Federal and state income tax forms The amount of this payment is the amount of the loan minus the present value, at the applicable federal rate, of all payments due under the loan. Federal and state income tax forms An equal amount is treated as original issue discount (OID). Federal and state income tax forms The lender must report the annual part of the OID as interest income. Federal and state income tax forms The borrower may be able to deduct the OID as interest expense. Federal and state income tax forms See Original Issue Discount (OID) , later. Federal and state income tax forms Exceptions to the below-market loan rules. Federal and state income tax forms   Exceptions to the below-market loan rules are discussed here. Federal and state income tax forms Exception for loans of $10,000 or less. Federal and state income tax forms   The rules for below-market loans do not apply to any day on which the total outstanding amount of loans between the borrower and lender is $10,000 or less. Federal and state income tax forms This exception applies only to: Gift loans between individuals if the gift loan is not directly used to buy or carry income-producing assets, and Pay-related loans or corporation-shareholder loans if the avoidance of federal tax is not a principal purpose of the interest arrangement. Federal and state income tax forms This exception does not apply to a term loan described in (2) earlier that previously has been subject to the below-market loan rules. Federal and state income tax forms Those rules will continue to apply even if the outstanding balance is reduced to $10,000 or less. Federal and state income tax forms Exception for loans to continuing care facilities. Federal and state income tax forms   Loans to qualified continuing care facilities under continuing care contracts are not subject to the rules for below-market loans for the calendar year if the lender or the lender's spouse is age 62 or older at the end of the year. Federal and state income tax forms For the definitions of qualified continuing care facility and continuing care contract, see Internal Revenue Code section 7872(h). Federal and state income tax forms Exception for loans without significant tax effect. Federal and state income tax forms   Loans are excluded from the below-market loan rules if their interest arrangements do not have a significant effect on the federal tax liability of the borrower or the lender. Federal and state income tax forms These loans include: Loans made available by the lender to the general public on the same terms and conditions that are consistent with the lender's customary business practice; Loans subsidized by a federal, state, or municipal government that are made available under a program of general application to the public; Certain employee-relocation loans; Certain loans from a foreign person, unless the interest income would be effectively connected with the conduct of a U. Federal and state income tax forms S. Federal and state income tax forms trade or business and would not be exempt from U. Federal and state income tax forms S. Federal and state income tax forms tax under an income tax treaty; Gift loans to a charitable organization, contributions to which are deductible, if the total outstanding amount of loans between the organization and lender is $250,000 or less at all times during the tax year; and Other loans on which the interest arrangement can be shown to have no significant effect on the federal tax liability of the lender or the borrower. Federal and state income tax forms For a loan described in (6) above, all the facts and circumstances are used to determine if the interest arrangement has a significant effect on the federal tax liability of the lender or borrower. Federal and state income tax forms Some factors to be considered are: Whether items of income and deduction generated by the loan offset each other; The amount of these items; The cost to you of complying with the below-market loan rules, if they were to apply; and Any reasons other than taxes for structuring the transaction as a below-market loan. Federal and state income tax forms If you structure a transaction to meet this exception and one of the principal purposes of that structure is the avoidance of federal tax, the loan will be considered a tax-avoidance loan, and this exception will not apply. Federal and state income tax forms Limit on forgone interest for gift loans of $100,000 or less. Federal and state income tax forms   For gift loans between individuals, if the outstanding loans between the lender and borrower total $100,000 or less, the forgone interest to be included in income by the lender and deducted by the borrower is limited to the amount of the borrower's net investment income for the year. Federal and state income tax forms If the borrower's net investment income is $1,000 or less, it is treated as zero. Federal and state income tax forms This limit does not apply to a loan if the avoidance of federal tax is one of the main purposes of the interest arrangement. Federal and state income tax forms Effective dates. Federal and state income tax forms    These rules apply to term loans made after June 6, 1984, and to demand loans outstanding after that date. Federal and state income tax forms U. Federal and state income tax forms S. Federal and state income tax forms Savings Bonds This section provides tax information on U. Federal and state income tax forms S. Federal and state income tax forms savings bonds. Federal and state income tax forms It explains how to report the interest income on these bonds and how to treat transfers of these bonds. Federal and state income tax forms U. Federal and state income tax forms S. Federal and state income tax forms savings bonds currently offered to individuals include Series EE bonds and Series I bonds. Federal and state income tax forms For other information on U. Federal and state income tax forms S. Federal and state income tax forms savings bonds, write to:  For Series HH/H: Bureau of the Fiscal Service Division of Customer Assistance P. Federal and state income tax forms O. Federal and state income tax forms Box 2186 Parkersburg, WV 26106-2186  For Series EE and I paper savings bonds: Bureau of the Fiscal Service Division of Customer Assistance P. Federal and state income tax forms O. Federal and state income tax forms Box 7012 Parkersburg, WV 26106-7012  For Series EE and I electronic bonds: Bureau of the Fiscal Service  Division of Customer Assistance P. Federal and state income tax forms O. Federal and state income tax forms Box 7015 Parkersburg, WV 26106-7015 Or, on the Internet, visit: www. Federal and state income tax forms treasurydirect. Federal and state income tax forms gov/indiv/indiv. Federal and state income tax forms htm. Federal and state income tax forms Accrual method taxpayers. Federal and state income tax forms   If you use an accrual method of accounting, you must report interest on U. Federal and state income tax forms S. Federal and state income tax forms savings bonds each year as it accrues. Federal and state income tax forms You cannot postpone reporting interest until you receive it or until the bonds mature. Federal and state income tax forms Cash method taxpayers. Federal and state income tax forms   If you use the cash method of accounting, as most individual taxpayers do, you generally report the interest on U. Federal and state income tax forms S. Federal and state income tax forms savings bonds when you receive it. Federal and state income tax forms But see Reporting options for cash method taxpayers , later. Federal and state income tax forms Series HH bonds. Federal and state income tax forms   These bonds were issued at face value. Federal and state income tax forms Interest is paid twice a year by direct deposit to your bank account. Federal and state income tax forms If you are a cash method taxpayer, you must report interest on these bonds as income in the year you receive it. Federal and state income tax forms   Series HH bonds were first offered in 1980 and last offered in August 2004. Federal and state income tax forms Before 1980, series H bonds were issued. Federal and state income tax forms Series H bonds are treated the same as series HH bonds. Federal and state income tax forms If you are a cash method taxpayer, you must report the interest when you receive it. Federal and state income tax forms   Series H bonds have a maturity period of 30 years. Federal and state income tax forms Series HH bonds mature in 20 years. Federal and state income tax forms The last series H bonds matured in 2009. Federal and state income tax forms The last series HH bonds will mature in 2024. Federal and state income tax forms Series EE and series I bonds. Federal and state income tax forms   Interest on these bonds is payable when you redeem the bonds. Federal and state income tax forms The difference between the purchase price and the redemption value is taxable interest. Federal and state income tax forms Series EE bonds. Federal and state income tax forms   Series EE bonds were first offered in January 1980 and have a maturity period of 30 years. Federal and state income tax forms Before July 1980, series E bonds were issued. Federal and state income tax forms The original 10-year maturity period of series E bonds has been extended to 40 years for bonds issued before December 1965 and 30 years for bonds issued after November 1965. Federal and state income tax forms Paper series EE and series E bonds are issued at a discount. Federal and state income tax forms The face value is payable to you at maturity. Federal and state income tax forms Electronic series EE bonds are issued at their face value. Federal and state income tax forms The face value plus accrued interest is payable to you at maturity. Federal and state income tax forms As of January 1, 2012, paper savings bonds were no longer sold at financial institutions. Federal and state income tax forms    Owners of paper series EE bonds can convert them to electronic bonds. Federal and state income tax forms These converted bonds do not retain the denomination listed on the paper certificate but are posted at their purchase price (with accrued interest). Federal and state income tax forms Series I bonds. Federal and state income tax forms   Series I bonds were first offered in 1998. Federal and state income tax forms These are inflation-indexed bonds issued at their face amount with a maturity period of 30 years. Federal and state income tax forms The face value plus all accrued interest is payable to you at maturity. Federal and state income tax forms Reporting options for cash method taxpayers. Federal and state income tax forms   If you use the cash method of reporting income, you can report the interest on series EE, series E, and series I bonds in either of the following ways. Federal and state income tax forms Method 1. Federal and state income tax forms Postpone reporting the interest until the earlier of the year you cash or dispose of the bonds or the year in which they mature. Federal and state income tax forms (However, see Savings bonds traded , later. Federal and state income tax forms )  Note. Federal and state income tax forms Series EE bonds issued in 1983 matured in 2013. Federal and state income tax forms If you have used method 1, you generally must report the interest on these bonds on your 2013 return. Federal and state income tax forms The last series E bonds were issued in 1980 and matured in 2010. Federal and state income tax forms If you used method 1, you generally should have reported the interest on these bonds on your 2010 return. Federal and state income tax forms Method 2. Federal and state income tax forms Choose to report the increase in redemption value as interest each year. Federal and state income tax forms  You must use the same method for all series EE, series E, and series I bonds you own. Federal and state income tax forms If you do not choose method 2 by reporting the increase in redemption value as interest each year, you must use method 1. Federal and state income tax forms If you plan to cash your bonds in the same year you will pay for higher educational expenses, you may want to use method 1 because you may be able to exclude the interest from your income. Federal and state income tax forms To learn how, see Education Savings Bond Program, later. Federal and state income tax forms Change from method 1. Federal and state income tax forms   If you want to change your method of reporting the interest from method 1 to method 2, you can do so without permission from the IRS. Federal and state income tax forms In the year of change, you must report all interest accrued to date and not previously reported for all your bonds. Federal and state income tax forms   Once you choose to report the interest each year, you must continue to do so for all series EE, series E, and series I bonds you own and for any you get later, unless you request permission to change, as explained next. Federal and state income tax forms Change from method 2. Federal and state income tax forms   To change from method 2 to method 1, you must request permission from the IRS. Federal and state income tax forms Permission for the change is automatically granted if you send the IRS a statement that meets all the following requirements. Federal and state income tax forms You have typed or printed the following number at the top: “131. Federal and state income tax forms ” It includes your name and social security number under “131. Federal and state income tax forms ” It includes the year of change (both the beginning and ending dates). Federal and state income tax forms It identifies the savings bonds for which you are requesting this change. Federal and state income tax forms It includes your agreement to: Report all interest on any bonds acquired during or after the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest; and Report all interest on the bonds acquired before the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest, with the exception of the interest reported in prior tax years. Federal and state income tax forms   You must attach this statement to your tax return for the year of change, which you must file by the due date (including extensions). Federal and state income tax forms   You can have an automatic extension of 6 months from the due date of your return for the year of change (excluding extensions) to file the statement with an amended return. Federal and state income tax forms On the statement, type or print “Filed pursuant to section 301. Federal and state income tax forms 9100-2. Federal and state income tax forms ” To get this extension, you must have filed your original return for the year of the change by the due date (including extensions). Federal and state income tax forms    By the date you file the original statement with your return, you must also send a signed copy to the address below. Federal and state income tax forms    Internal Revenue Service Attention: CC:IT&A (Automatic Rulings Branch) P. Federal and state income tax forms O. Federal and state income tax forms Box 7604 Benjamin Franklin Station Washington, DC 20044   If you use a private delivery service, send the signed copy to the address below. Federal and state income tax forms Internal Revenue Service Attention: CC:IT&A  (Automatic Rulings Branch) Room 5336 1111 Constitution Avenue, NW Washington, DC 20224    Instead of filing this statement, you can request permission to change from method 2 to method 1 by filing Form 3115. Federal and state income tax forms In that case, follow the form instructions for an automatic change. Federal and state income tax forms No user fee is required. Federal and state income tax forms Co-owners. Federal and state income tax forms   If a U. Federal and state income tax forms S. Federal and state income tax forms savings bond is issued in the names of co-owners, such as you and your child or you and your spouse, interest on the bond is generally taxable to the co-owner who bought the bond. Federal and state income tax forms One co-owner's funds used. Federal and state income tax forms   If you used your funds to buy the bond, you must pay the tax on the interest. Federal and state income tax forms This is true even if you let the other co-owner redeem the bond and keep all the proceeds. Federal and state income tax forms Under these circumstances, the co-owner who redeemed the bond will receive a Form 1099-INT at the time of redemption and must provide you with another Form 1099-INT showing the amount of interest from the bond taxable to you. Federal and state income tax forms The co-owner who redeemed the bond is a “nominee. Federal and state income tax forms ” See Nominee distributions under How To Report Interest Income, later, for more information about how a person who is a nominee reports interest income belonging to another person. Federal and state income tax forms Both co-owners' funds used. Federal and state income tax forms   If you and the other co-owner each contribute part of the bond's purchase price, the interest is generally taxable to each of you, in proportion to the amount each of you paid. Federal and state income tax forms Community property. Federal and state income tax forms   If you and your spouse live in a community property state and hold bonds as community property, one-half of the interest is considered received by each of you. Federal and state income tax forms If you file separate returns, each of you generally must report one-half of the bond interest. Federal and state income tax forms For more information about community property, see Publication 555. Federal and state income tax forms Table 1-2. Federal and state income tax forms   These rules are also shown in Table 1-2. Federal and state income tax forms Child as only owner. Federal and state income tax forms   Interest on U. Federal and state income tax forms S. Federal and state income tax forms savings bonds bought for and registered only in the name of your child is income to your child, even if you paid for the bonds and are named as beneficiary. Federal and state income tax forms If the bonds are series EE, series E, or series I bonds, the interest on the bonds is income to your child in the earlier of the year the bonds are cashed or disposed of or the year the bonds mature, unless your child chooses to report the interest income each year. Federal and state income tax forms Choice to report interest each year. Federal and state income tax forms   The choice to report the accrued interest each year can be made either by your child or by you for your child. Federal and state income tax forms This choice is made by filing an income tax return that shows all the interest earned to date, and by stating on the return that your child chooses to report the interest each year. Federal and state income tax forms Either you or your child should keep a copy of this return. Federal and state income tax forms   Unless your child is otherwise required to file a tax return for any year after making this choice, your child does not have to file a return only to report the annual accrual of U. Federal and state income tax forms S. Federal and state income tax forms savings bond interest under this choice. Federal and state income tax forms However, see Tax on unearned income of certain children , earlier, under General Information. Federal and state income tax forms Neither you nor your child can change the way you report the interest unless you request permission from the IRS, as discussed earlier under Change from method 2 . Federal and state income tax forms Ownership transferred. Federal and state income tax forms   If you bought series E, series EE, or series I bonds entirely with your own funds and had them reissued in your co-owner's name or beneficiary's name alone, you must include in your gross income for the year of reissue all interest that you earned on these bonds and have not previously reported. Federal and state income tax forms But, if the bonds were reissued in your name alone, you do not have to report the interest accrued at that time. Federal and state income tax forms   This same rule applies when bonds (other than bonds held as community property) are transferred between spouses or incident to divorce. Federal and state income tax forms Example. Federal and state income tax forms You bought series EE bonds entirely with your own funds. Federal and state income tax forms You did not choose to report the accrued interest each year. Federal and state income tax forms Later, you transfer the bonds to your former spouse under a divorce agreement. Federal and state income tax forms You must include the deferred accrued interest, from the date of the original issue of the bonds to the date of transfer, in your income in the year of transfer. Federal and state income tax forms Your former spouse includes in income the interest on the bonds from the date of transfer to the date of redemption. Federal and state income tax forms Table 1-2. Federal and state income tax forms Who Pays the Tax on U. Federal and state income tax forms S. Federal and state income tax forms Savings Bond Interest IF . Federal and state income tax forms . Federal and state income tax forms . Federal and state income tax forms THEN the interest must be reported by . Federal and state income tax forms . Federal and state income tax forms . Federal and state income tax forms you buy a bond in your name and the name of another person as co-owners, using only your own funds you. Federal and state income tax forms you buy a bond in the name of another person, who is the sole owner of the bond the person for whom you bought the bond. Federal and state income tax forms you and another person buy a bond as co-owners, each contributing part of the purchase price both you and the other co-owner, in proportion to the amount each paid for the bond. Federal and state income tax forms you and your spouse, who live in a community property state, buy a bond that is community property you and your spouse. Federal and state income tax forms If you file separate returns, both you and your spouse generally report one-half of the interest. Federal and state income tax forms Purchased jointly. Federal and state income tax forms   If you and a co-owner each contributed funds to buy series E, series EE, or series I bonds jointly and later have the bonds reissued in the co-owner's name alone, you must include in your gross income for the year of reissue your share of all the interest earned on the bonds that you have not previously reported. Federal and state income tax forms The former co-owner does not have to include in gross income at the time of reissue his or her share of the interest earned that was not reported before the transfer. Federal and state income tax forms This interest, however, as well as all interest earned after the reissue, is income to the former co-owner. Federal and state income tax forms   This income-reporting rule also applies when the bonds are reissued in the name of your former co-owner and a new co-owner. Federal and state income tax forms But the new co-owner will report only his or her share of the interest earned after the transfer. Federal and state income tax forms   If bonds that you and a co-owner bought jointly are reissued to each of you separately in the same proportion as your contribution to the purchase price, neither you nor your co-owner has to report at that time the interest earned before the bonds were reissued. Federal and state income tax forms Example 1. Federal and state income tax forms You and your spouse each spent an equal amount to buy a $1,000 series EE savings bond. Federal and state income tax forms The bond was issued to you and your spouse as co-owners. Federal and state income tax forms You both postpone reporting interest on the bond. Federal and state income tax forms You later have the bond reissued as two $500 bonds, one in your name and one in your spouse's name. Federal and state income tax forms At that time neither you nor your spouse has to report the interest earned to the date of reissue. Federal and state income tax forms Example 2. Federal and state income tax forms You bought a $1,000 series EE savings bond entirely with your own funds. Federal and state income tax forms The bond was issued to you and your spouse as co-owners. Federal and state income tax forms You both postponed reporting interest on the bond. Federal and state income tax forms You later have the bond reissued as two $500 bonds, one in your name and one in your spouse's name. Federal and state income tax forms You must report half the interest earned to the date of reissue. Federal and state income tax forms Transfer to a trust. Federal and state income tax forms   If you own series E, series EE, or series I bonds and transfer them to a trust, giving up all rights of ownership, you must include in your income for that year the interest earned to the date of transfer if you have not already reported it. Federal and state income tax forms However, if you are considered the owner of the trust and if the increase in value both before and after the transfer continues to be taxable to you, you can continue to defer reporting the interest earned each year. Federal and state income tax forms You must include the total interest in your income in the year you cash or dispose of the bonds or the year the bonds finally mature, whichever is earlier. Federal and state income tax forms   The same rules apply to previously unreported interest on series EE or series E bonds if the transfer to a trust consisted of series HH or series H bonds you acquired in a trade for the series EE or series E bonds. Federal and state income tax forms See Savings bonds traded , later. Federal and state income tax forms Decedents. Federal and state income tax forms   The manner of reporting interest income on series E, series EE, or series I bonds, after the death of the owner (decedent), depends on the accounting and income-reporting methods previously used by the decedent. Federal and state income tax forms Decedent who reported interest each year. Federal and state income tax forms   If the bonds transferred because of death were owned by a person who used an accrual method, or who used the cash method and had chosen to report the interest each year, the interest earned in the year of death up to the date of death must be reported on that person's final return. Federal and state income tax forms The person who acquires the bonds includes in income only interest earned after the date of death. Federal and state income tax forms Decedent who postponed reporting interest. Federal and state income tax forms   If the transferred bonds were owned by a decedent who had used the cash method and had not chosen to report the interest each year, and who had bought the bonds entirely with his or her own funds, all interest earned before death must be reported in one of the following ways. Federal and state income tax forms The surviving spouse or personal representative (executor, administrator, etc. Federal and state income tax forms ) who files the final income tax return of the decedent can choose to include on that return all interest earned on the bonds before the decedent's death. Federal and state income tax forms The person who acquires the bonds then includes in income only interest earned after the date of death. Federal and state income tax forms If the choice in (1) is not made, the interest earned up to the date of death is income in respect of the decedent and should not be included in the decedent's final return. Federal and state income tax forms All interest earned both before and after the decedent's death (except any part reported by the estate on its income tax return) is income to the person who acquires the bonds. Federal and state income tax forms If that person uses the cash method and does not choose to report the interest each year, he or she can postpone reporting it until the year the bonds are cashed or disposed of or the year they mature, whichever is earlier. Federal and state income tax forms In the year that person reports the interest, he or she can claim a deduction for any federal estate tax paid on the part of the interest included in the decedent's estate. Federal and state income tax forms For more information on income in respect of a decedent, see Publication 559, Survivors, Executors, and Administrators. Federal and state income tax forms Example 1. Federal and state income tax forms Your uncle, a cash method taxpayer, died and left you a $1,000 series EE bond. Federal and state income tax forms He had bought the bond for $500 and had not chosen to report the interest each year. Federal and state income tax forms At the date of death, interest of $200 had accrued on the bond, and its value of $700 was included in your uncle's estate. Federal and state income tax forms Your uncle's executor chose not to include the $200 accrued interest in your uncle's final income tax return. Federal and state income tax forms The $200 is income in respect of the decedent. Federal and state income tax forms You are a cash method taxpayer and do not choose to report the interest each year as it is earned. Federal and state income tax forms If you cash the bond when it reaches maturity value of $1,000, you report $500 interest income—the difference between maturity value of $1,000 and the original cost of $500. Federal and state income tax forms For that year, you can deduct (as a miscellaneous itemized deduction not subject to the 2%-of-adjusted-gross-income limit) any federal estate tax paid because the $200 interest was included in your uncle's estate. Federal and state income tax forms Example 2. Federal and state income tax forms If, in Example 1 , the executor had chosen to include the $200 accrued interest in your uncle's final return, you would report only $300 as interest when you cashed the bond at maturity. Federal and state income tax forms $300 is the interest earned after your uncle's death. Federal and state income tax forms Example 3. Federal and state income tax forms If, in Example 1 , you make or have made the choice to report the increase in redemption value as interest each year, you include in gross income for the year you acquire the bond all of the unreported increase in value of all series E, series EE, and series I bonds you hold, including the $200 on the bond you inherited from your uncle. Federal and state income tax forms Example 4. Federal and state income tax forms When your aunt died, she owned series HH bonds that she had acquired in a trade for series EE bonds. Federal and state income tax forms You were the beneficiary of these bonds. Federal and state income tax forms Your aunt used the cash method and did not choose to report the interest on the series EE bonds each year as it accrued. Federal and state income tax forms Your aunt's executor chose not to include any interest earned before your aunt's death on her final return. Federal and state income tax forms The income in respect of the decedent is the sum of the unreported interest on the series EE bonds and the interest, if any, payable on the series HH bonds but not received as of the date of your aunt's death. Federal and state income tax forms You must report any interest received during the year as income on your return. Federal and state income tax forms The part of the interest payable but not received before your aunt's death is income in respect of the decedent and may qualify for the estate tax deduction. Federal and state income tax forms For information on when to report the interest on the series EE bonds traded, see Savings bonds traded , later. Federal and state income tax forms Savings bonds distributed from a retirement or profit-sharing plan. Federal and state income tax forms   If you acquire a U. Federal and state income tax forms S. Federal and state income tax forms savings bond in a taxable distribution from a retirement or profit-sharing plan, your income for the year of distribution includes the bond's redemption value (its cost plus the interest accrued before the distribution). Federal and state income tax forms When you redeem the bond (whether in the year of distribution or later), your interest income includes only the interest accrued after the bond was distributed. Federal and state income tax forms To figure the interest reported as a taxable distribution and your interest income when you redeem the bond, see Worksheet for savings bonds distributed from a retirement or profit-sharing plan under How To Report Interest Income, later. Federal and state income tax forms Savings bonds traded. Federal and state income tax forms   If you postponed reporting the interest on your series EE or series E bonds, you did not recognize taxable income when you traded the bonds for series HH or series H bonds, unless you received cash in the trade. Federal and state income tax forms (You cannot trade series I bonds for series HH bonds. Federal and state income tax forms After August 31, 2004, you cannot trade any other series of bonds for series HH bonds. Federal and state income tax forms ) Any cash you received is income up to the amount of the interest earned on the bonds traded. Federal and state income tax forms When your series HH or series H bonds mature, or if you dispose of them before maturity, you report as interest the difference between their redemption value and your cost. Federal and state income tax forms Your cost is the sum of the amount you paid for the traded series EE or series E bonds plus any amount you had to pay at the time of the trade. Federal and state income tax forms Example. Federal and state income tax forms You traded series EE bonds (on which you postponed reporting the interest) for $2,500 in series HH bonds and $223 in cash. Federal and state income tax forms You reported the $223 as taxable income on your tax return. Federal and state income tax forms At the time of the trade, the series EE bonds had accrued interest of $523 and a redemption value of $2,723. Federal and state income tax forms You hold the series HH bonds until maturity, when you receive $2,500. Federal and state income tax forms You must report $300 as interest income in the year of maturity. Federal and state income tax forms This is the difference between their redemption value, $2,500, and your cost, $2,200 (the amount you paid for the series EE bonds). Federal and state income tax forms (It is also the difference between the accrued interest of $523 on the series EE bonds and the $223 cash received on the trade. Federal and state income tax forms ) Choice to report interest in year of trade. Federal and state income tax forms   You could have chosen to treat all of the previously unreported accrued interest on series EE or series E bonds traded for series HH bonds as income in the year of the trade. Federal and state income tax forms If you made this choice, it is treated as a change from method 1. Federal and state income tax forms See Change from method 1 under Series EE and series I bonds, earlier. Federal and state income tax forms Form 1099-INT for U. Federal and state income tax forms S. Federal and state income tax forms savings bond interest. Federal and state income tax forms   When you cash a bond, the bank or other payer that redeems it must give you a Form 1099-INT if the interest part of the payment you receive is $10 or more. Federal and state income tax forms Box 3 of your Form 1099-INT should show the interest as the difference between the amount you received and the amount paid for the bond. Federal and state income tax forms However, your Form 1099-INT may show more interest than you have to include on your income tax return. Federal and state income tax forms For example, this may happen if any of the following are true. Federal and state income tax forms You chose to report the increase in the redemption value of the bond each year. Federal and state income tax forms The interest shown on your Form 1099-INT will not be reduced by amounts previously included in income. Federal and state income tax forms You received the bond from a decedent. Federal and state income tax forms The interest shown on your Form 1099-INT will not be reduced by any interest reported by the decedent before death, or on the decedent's final return, or by the estate on the estate's income tax return. Federal and state income tax forms Ownership of the bond was transferred. Federal and state income tax forms The interest shown on your Form 1099-INT will not be reduced by interest that accrued before the transfer. Federal and state income tax forms You were named as a co-owner, and the other co-owner contributed funds to buy the bond. Federal and state income tax forms The interest shown on your Form 1099-INT will not be reduced by the amount you received as nominee for the other co-owner. Federal and state income tax forms (See Co-owners , earlier in this section, for more information about the reporting requirements. Federal and state income tax forms ) You received the bond in a taxable distribution from a retirement or profit-sharing plan. Federal and state income tax forms The interest shown on your Form 1099-INT will not be reduced by the interest portion of the amount taxable as a distribution from the plan and not taxable as interest. Federal and state income tax forms (This amount is generally shown on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Federal and state income tax forms , for the year of distribution. Federal and state income tax forms )   For more information on including the correct amount of interest on your return, see U. Federal and state income tax forms S. Federal and state income tax forms savings bond interest previously reported or Nominee distributions under How To Report Interest Income, later. Federal and state income tax forms    Interest on U. Federal and state income tax forms S. Federal and state income tax forms savings bonds is exempt from state and local taxes. Federal and state income tax forms The Form 1099-INT you receive will indicate the amount that is for U. Federal and state income tax forms S. Federal and state income tax forms savings bonds interest in box 3. Federal and state income tax forms Do not include this income on your state or local income tax return. Federal and state income tax forms Education Savings Bond Program You may be able to exclude from income all or part of the interest you receive on the redemption of qualified U. Federal and state income tax forms S. Federal and state income tax forms savings bonds during the year if you pay qualified higher educational expenses during the same year. Federal and state income tax forms This exclusion is known as the Education Savings Bond Program. Federal and state income tax forms You do not qualify for this exclusion if your filing status is married filing separately. Federal and state income tax forms Form 8815. Federal and state income tax forms   Use Form 8815 to figure your exclusion. Federal and state income tax forms Attach the form to your Form 1040 or Form 1040A. Federal and state income tax forms Qualified U. Federal and state income tax forms S. Federal and state income tax forms savings bonds. Federal and state income tax forms   A qualified U. Federal and state income tax forms S. Federal and state income tax forms savings bond is a series EE bond issued after 1989 or a series I bond. Federal and state income tax forms The bond must be issued either in your name (sole owner) or in your and your spouse's names (co-owners). Federal and state income tax forms You must be at least 24 years old before the bond's issue date. Federal and state income tax forms For example, a bond bought by a parent and issued in the name of his or her child under age 24 does not qualify for the exclusion by the parent or child. Federal and state income tax forms    The issue date of a bond may be earlier than the date the bond is purchased because the issue date assigned to a bond is the first day of the month in which it is purchased. Federal and state income tax forms Beneficiary. Federal and state income tax forms   You can designate any individual (including a child) as a beneficiary of the bond. Federal and state income tax forms Verification by IRS. Federal and state income tax forms   If you claim the exclusion, the IRS will check it by using bond redemption information from the Department of Treasury. Federal and state income tax forms Qualified expenses. Federal and state income tax forms   Qualified higher educational expenses are tuition and fees required for you, your spouse, or your dependent (for whom you claim an exemption) to attend an eligible educational institution. Federal and state income tax forms   Qualified expenses include any contribution you make to a qualified tuition program or to a Coverdell education savings account. Federal and state income tax forms For information about these programs, see Publication 970, Tax Benefits for Education. Federal and state income tax forms   Qualified expenses do not include expenses for room and board or for courses involving sports, games, or hobbies that are not part of a degree or certificate granting program. Federal and state income tax forms Eligible educational institutions. Federal and state income tax forms   These institutions include most public, private, and nonprofit universities, colleges, and vocational schools that are accredited and eligible to participate in student aid programs run by the Department of Education. Federal and state income tax forms Reduction for certain benefits. Federal and state income tax forms   You must reduce your qualified higher educational expenses by all of the following tax-free benefits. Federal and state income tax forms Tax-free part of scholarships and fellowships. Federal and state income tax forms Expenses used to figure the tax-free portion of distributions from a Coverdell ESA. Federal and state income tax forms Expenses used to figure the tax-free portion of distributions from a qualified tuition program. Federal and state income tax forms Any tax-free payments (other than gifts or inheritances) received as educational assistance, such as: Veterans' educational assistance benefits, Qualified tuition reductions, or Employer-provided educational assistance. Federal and state income tax forms Any expense used in figuring the American Opportunity and lifetime learning credits. Federal and state income tax forms For information about these benefits, see Publication 970. Federal and state income tax forms Amount excludable. Federal and state income tax forms   If the total proceeds (interest and principal) from the qualified U. Federal and state income tax forms S. Federal and state income tax forms savings bonds you redeem during the year are not more than your adjusted qualified higher educational expenses for the year, you may be able to exclude all of the interest. Federal and state income tax forms If the proceeds are more than the expenses, you may be able to exclude only part of the interest. Federal and state income tax forms   To determine the excludable amount, multiply the interest part of the proceeds by a fraction. Federal and state income tax forms The numer