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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 Publication 551 - Main Content Table of Contents Cost BasisStocks and Bonds Real Property Business Assets Allocating the Basis Adjusted BasisIncreases to Basis Decreases to Basis Adjustments to Basis Example Basis Other Than CostProperty Received for Services Taxable Exchanges Nontaxable Exchanges Property Transferred From a Spouse Property Received as a Gift Inherited Property Property Changed to Business or Rental Use How To Get Tax HelpLow Income Taxpayer Clinics (LITCs). Federal and state income tax forms Cost Basis The basis of property you buy is usually its cost. Federal and state income tax forms The cost is the amount you pay in cash, debt obligations, other property, or services. Federal and state income tax forms Your cost also includes amounts you pay for the following items. Federal and state income tax forms Sales tax, Freight, Installation and testing, Excise taxes, Legal and accounting fees (when they must be capitalized), Revenue stamps, Recording fees, and Real estate taxes (if assumed for the seller). Federal and state income tax forms  You may also have to capitalize (add to basis) certain other costs related to buying or producing property. Federal and state income tax forms Loans with low or no interest. Federal and state income tax forms   If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price, minus the amount considered to be unstated interest. Federal and state income tax forms You generally have unstated interest if your interest rate is less than the applicable federal rate. Federal and state income tax forms For more information, see Unstated Interest and Original Issue Discount in Publication 537. Federal and state income tax forms Purchase of a business. Federal and state income tax forms   When you purchase a trade or business, you generally purchase all assets used in the business operations, such as land, buildings, and machinery. Federal and state income tax forms Allocate the price among the various assets, including any section 197 intangibles. Federal and state income tax forms See Allocating the Basis, later. Federal and state income tax forms Stocks and Bonds The basis of stocks or bonds you buy is generally the purchase price plus any costs of purchase, such as commissions and recording or transfer fees. Federal and state income tax forms If you get stocks or bonds other than by purchase, your basis is usually determined by the fair market value (FMV) or the previous owner's adjusted basis of the stock. Federal and state income tax forms You must adjust the basis of stocks for certain events that occur after purchase. Federal and state income tax forms See Stocks and Bonds in chapter 4 of Publication 550 for more information on the basis of stock. Federal and state income tax forms Identifying stock or bonds sold. Federal and state income tax forms   If you can adequately identify the shares of stock or the bonds you sold, their basis is the cost or other basis of the particular shares of stock or bonds. Federal and state income tax forms If you buy and sell securities at various times in varying quantities and you cannot adequately identify the shares you sell, the basis of the securities you sell is the basis of the securities you acquired first. Federal and state income tax forms For more information about identifying securities you sell, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. Federal and state income tax forms Mutual fund shares. Federal and state income tax forms   If you sell mutual fund shares acquired at different times and prices, you can choose to use an average basis. Federal and state income tax forms For more information, see Publication 550. Federal and state income tax forms Real Property Real property, also called real estate, is land and generally anything built on or attached to it. Federal and state income tax forms If you buy real property, certain fees and other expenses become part of your cost basis in the property. Federal and state income tax forms Real estate taxes. Federal and state income tax forms   If you pay real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis. Federal and state income tax forms You cannot deduct them as taxes. Federal and state income tax forms   If you reimburse the seller for taxes the seller paid for you, you can usually deduct that amount as an expense in the year of purchase. Federal and state income tax forms Do not include that amount in the basis of the property. Federal and state income tax forms If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. Federal and state income tax forms Settlement costs. Federal and state income tax forms   Your basis includes the settlement fees and closing costs for buying property. Federal and state income tax forms You cannot include in your basis the fees and costs for getting a loan on property. Federal and state income tax forms A fee for buying property is a cost that must be paid even if you bought the property for cash. Federal and state income tax forms   The following items are some of the settlement fees or closing costs you can include in the basis of your property. Federal and state income tax forms Abstract fees (abstract of title fees); Charges for installing utility services; Legal fees (including title search and preparation of the sales contract and deed); Recording fees; Surveys; Transfer taxes; Owner's title insurance; and Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. Federal and state income tax forms   Settlement costs do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Federal and state income tax forms   The following items are some settlement fees and closing costs you cannot include in the basis of the property. Federal and state income tax forms Casualty insurance premiums. Federal and state income tax forms Rent for occupancy of the property before closing. Federal and state income tax forms Charges for utilities or other services related to occupancy of the property before closing. Federal and state income tax forms Charges connected with getting a loan. Federal and state income tax forms The following are examples of these charges. Federal and state income tax forms Points (discount points, loan origination fees). Federal and state income tax forms Mortgage insurance premiums. Federal and state income tax forms Loan assumption fees. Federal and state income tax forms Cost of a credit report. Federal and state income tax forms Fees for an appraisal required by a lender. Federal and state income tax forms Fees for refinancing a mortgage. Federal and state income tax forms If these costs relate to business property, items (1) through (3) are deductible as business expenses. Federal and state income tax forms Items (4) and (5) must be capitalized as costs of getting a loan and can be deducted over the period of the loan. Federal and state income tax forms Points. Federal and state income tax forms   If you pay points to obtain a loan (including a mortgage, second mortgage, line of credit, or a home equity loan), do not add the points to the basis of the related property. Federal and state income tax forms Generally, you deduct the points over the term of the loan. Federal and state income tax forms For more information on how to deduct points, see Points in chapter 4 of Publication 535. Federal and state income tax forms Points on home mortgage. Federal and state income tax forms   Special rules may apply to points you and the seller pay when you obtain a mortgage to purchase your main home. Federal and state income tax forms If certain requirements are met, you can deduct the points in full for the year in which they are paid. Federal and state income tax forms Reduce the basis of your home by any seller-paid points. Federal and state income tax forms For more information, see Points in Publication 936, Home Mortgage Interest Deduction. Federal and state income tax forms Assumption of mortgage. Federal and state income tax forms   If you buy property and assume (or buy subject to) an existing mortgage on the property, your basis includes the amount you pay for the property plus the amount to be paid on the mortgage. Federal and state income tax forms Example. Federal and state income tax forms If you buy a building for $20,000 cash and assume a mortgage of $80,000 on it, your basis is $100,000. Federal and state income tax forms Constructing assets. Federal and state income tax forms   If you build property or have assets built for you, your expenses for this construction are part of your basis. Federal and state income tax forms Some of these expenses include the following costs. Federal and state income tax forms Land, Labor and materials, Architect's fees, Building permit charges, Payments to contractors, Payments for rental equipment, and Inspection fees. Federal and state income tax forms In addition, if you own a business and use your employees, material, and equipment to build an asset, do not deduct the following expenses. Federal and state income tax forms You must include them in the asset's basis. Federal and state income tax forms Employee wages paid for the construction work, reduced by any employment credits allowed; Depreciation on equipment you own while it is used in the construction; Operating and maintenance costs for equipment used in the construction; and The cost of business supplies and materials used in the construction. Federal and state income tax forms    Do not include the value of your own labor, or any other labor you did not pay for, in the basis of any property you construct. Federal and state income tax forms Business Assets If you purchase property to use in your business, your basis is usually its actual cost to you. Federal and state income tax forms If you construct, create, or otherwise produce property, you must capitalize the costs as your basis. Federal and state income tax forms In certain circumstances, you may be subject to the uniform capitalization rules, next. Federal and state income tax forms Uniform Capitalization Rules The uniform capitalization rules specify the costs you add to basis in certain circumstances. Federal and state income tax forms Activities subject to the rules. Federal and state income tax forms   You must use the uniform capitalization rules if you do any of the following in your trade or business or activity carried on for profit. Federal and state income tax forms Produce real or tangible personal property for use in the business or activity, Produce real or tangible personal property for sale to customers, or Acquire property for resale. Federal and state income tax forms However, this rule does not apply to personal property if your average annual gross receipts for the 3 previous tax years are $10 million or less. Federal and state income tax forms   You produce property if you construct, build, install, manufacture, develop, improve, create, raise, or grow the property. Federal and state income tax forms Treat property produced for you under a contract as produced by you up to the amount you pay or costs you otherwise incur for the property. Federal and state income tax forms Tangible personal property includes films, sound recordings, video tapes, books, or similar property. Federal and state income tax forms    Under the uniform capitalization rules, you must capitalize all direct costs and an allocable part of most indirect costs you incur due to your production or resale activities. Federal and state income tax forms To capitalize means to include certain expenses in the basis of property you produce or in your inventory costs rather than deduct them as a current expense. Federal and state income tax forms You recover these costs through deductions for depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. Federal and state income tax forms   Any cost you cannot use to figure your taxable income for any tax year is not subject to the uniform capitalization rules. Federal and state income tax forms Example. Federal and state income tax forms If you incur a business meal expense for which your deduction would be limited to 50% of the cost of the meal, that amount is subject to the uniform capitalization rules. Federal and state income tax forms The nondeductible part of the cost is not subject to the uniform capitalization rules. Federal and state income tax forms More information. Federal and state income tax forms   For more information about these rules, see the regulations under section 263A of the Internal Revenue Code and Publication 538, Accounting Periods and Methods. Federal and state income tax forms Exceptions. Federal and state income tax forms   The following are not subject to the uniform capitalization rules. Federal and state income tax forms Property you produce that you do not use in your trade, business, or activity conducted for profit; Qualified creative expenses you pay or incur as a free-lance (self-employed) writer, photographer, or artist that are otherwise deductible on your tax return; Property you produce under a long-term contract, except for certain home construction contracts; Research and experimental expenses deductible under section 174 of the Internal Revenue Code; and Costs for personal property acquired for resale if your (or your predecessor's) average annual gross receipts for the 3 previous tax years do not exceed $10 million. Federal and state income tax forms For other exceptions to the uniform capitalization rules, see section 1. Federal and state income tax forms 263A-1(b) of the regulations. Federal and state income tax forms   For information on the special rules that apply to costs incurred in the business of farming, see chapter 6 of Publication 225, Farmer's Tax Guide. Federal and state income tax forms Intangible Assets Intangible assets include goodwill, patents, copyrights, trademarks, trade names, and franchises. Federal and state income tax forms The basis of an intangible asset is usually the cost to buy or create it. Federal and state income tax forms If you acquire multiple assets, for example a going business for a lump sum, see Allocating the Basis below to figure the basis of the individual assets. Federal and state income tax forms The basis of certain intangibles can be amortized. Federal and state income tax forms See chapter 8 of Publication 535 for information on the amortization of these costs. Federal and state income tax forms Patents. Federal and state income tax forms   The basis of a patent you get for an invention is the cost of development, such as research and experimental expenditures, drawings, working models, and attorneys' and governmental fees. Federal and state income tax forms If you deduct the research and experimental expenditures as current business expenses, you cannot include them in the basis of the patent. Federal and state income tax forms The value of the inventor's time spent on an invention is not part of the basis. Federal and state income tax forms Copyrights. Federal and state income tax forms   If you are an author, the basis of a copyright will usually be the cost of getting the copyright plus copyright fees, attorneys' fees, clerical assistance, and the cost of plates that remain in your possession. Federal and state income tax forms Do not include the value of your time as the author, or any other person's time you did not pay for. Federal and state income tax forms Franchises, trademarks, and trade names. Federal and state income tax forms   If you buy a franchise, trademark, or trade name, the basis is its cost, unless you can deduct your payments as a business expense. Federal and state income tax forms Allocating the Basis If you buy multiple assets for a lump sum, allocate the amount you pay among the assets you receive. Federal and state income tax forms You must make this allocation to figure your basis for depreciation and gain or loss on a later disposition of any of these assets. Federal and state income tax forms See Trade or Business Acquired below. Federal and state income tax forms Group of Assets Acquired If you buy multiple assets for a lump sum, you and the seller may agree to a specific allocation of the purchase price among the assets in the sales contract. Federal and state income tax forms If this allocation is based on the value of each asset and you and the seller have adverse tax interests, the allocation generally will be accepted. Federal and state income tax forms However, see Trade or Business Acquired, next. Federal and state income tax forms Trade or Business Acquired If you acquire a trade or business, allocate the consideration paid to the various assets acquired. Federal and state income tax forms Generally, reduce the consideration paid by any cash and general deposit accounts (including checking and savings accounts) received. Federal and state income tax forms Allocate the remaining consideration to the other business assets received in proportion to (but not more than) their fair market value in the following order. Federal and state income tax forms Certificates of deposit, U. Federal and state income tax forms S. Federal and state income tax forms Government securities, foreign currency, and actively traded personal property, including stock and securities. Federal and state income tax forms Accounts receivable, other debt instruments, and assets you mark to market at least annually for federal income tax purposes. Federal and state income tax forms Property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held primarily for sale to customers in the ordinary course of business. Federal and state income tax forms All other assets except section 197 intangibles, goodwill, and going concern value. Federal and state income tax forms Section 197 intangibles except goodwill and going concern value. Federal and state income tax forms Goodwill and going concern value (whether or not they qualify as section 197 intangibles). Federal and state income tax forms Agreement. Federal and state income tax forms   The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value (FMV) of any of the assets. Federal and state income tax forms This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. Federal and state income tax forms Reporting requirement. Federal and state income tax forms   Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. Federal and state income tax forms Use Form 8594 to provide this information. Federal and state income tax forms The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. Federal and state income tax forms More information. Federal and state income tax forms   See Sale of a Business in chapter 2 of Publication 544 for more information. Federal and state income tax forms Land and Buildings If you buy buildings and the land on which they stand for a lump sum, allocate the basis of the property among the land and the buildings so you can figure the depreciation allowable on the buildings. Federal and state income tax forms Figure the basis of each asset by multiplying the lump sum by a fraction. Federal and state income tax forms The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. Federal and state income tax forms If you are not certain of the FMV of the land and buildings, you can allocate the basis based on their assessed values for real estate tax purposes. Federal and state income tax forms Demolition of building. Federal and state income tax forms   Add demolition costs and other losses incurred for the demolition of any building to the basis of the land on which the demolished building was located. Federal and state income tax forms Do not claim the costs as a current deduction. Federal and state income tax forms Modification of building. Federal and state income tax forms   A modification of a building will not be treated as a demolition if the following conditions are satisfied. Federal and state income tax forms 75 percent or more of the existing external walls of the building are retained in place as internal or external walls, and 75 percent or more of the existing internal structural framework of the building is retained in place. Federal and state income tax forms   If the building is a certified historic structure, the modification must also be part of a certified rehabilitation. Federal and state income tax forms   If these conditions are met, add the costs of the modifications to the basis of the building. Federal and state income tax forms Subdivided lots. Federal and state income tax forms   If you buy a tract of land and subdivide it, you must determine the basis of each lot. Federal and state income tax forms This is necessary because you must figure the gain or loss on the sale of each individual lot. Federal and state income tax forms As a result, you do not recover your entire cost in the tract until you have sold all of the lots. Federal and state income tax forms   To determine the basis of an individual lot, multiply the total cost of the tract by a fraction. Federal and state income tax forms The numerator is the FMV of the lot and the denominator is the FMV of the entire tract. Federal and state income tax forms Future improvement costs. Federal and state income tax forms   If you are a developer and sell subdivided lots before the development work is completed, you can (with IRS consent) include in the basis of the properties sold an allocation of the estimated future cost for common improvements. Federal and state income tax forms See Revenue Procedure 92–29 for more information, including an explanation of the procedures for getting consent from the IRS. Federal and state income tax forms Use of erroneous cost basis. Federal and state income tax forms   If you made a mistake in figuring the cost basis of subdivided lots sold in previous years, you cannot correct the mistake for years for which the statute of limitations (generally 3 tax years) has expired. Federal and state income tax forms Figure the basis of any remaining lots by allocating the correct original cost basis of the entire tract among the original lots. Federal and state income tax forms Example. Federal and state income tax forms You bought a tract of land to which you assigned a cost of $15,000. Federal and state income tax forms You subdivided the land into 15 building lots of equal size and equitably divided your basis so that each lot had a basis of $1,000. Federal and state income tax forms You treated the sale of each lot as a separate transaction and figured gain or loss separately on each sale. Federal and state income tax forms Several years later you determine that your original basis in the tract was $22,500 and not $15,000. Federal and state income tax forms You sold eight lots using $8,000 of basis in years for which the statute of limitations has expired. Federal and state income tax forms You now can take $1,500 of basis into account for figuring gain or loss only on the sale of each of the remaining seven lots ($22,500 basis divided among all 15 lots). Federal and state income tax forms You cannot refigure the basis of the eight lots sold in tax years barred by the statute of limitations. Federal and state income tax forms Adjusted Basis Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments to the basis of the property. Federal and state income tax forms The result of these adjustments to the basis is the adjusted basis. Federal and state income tax forms Increases to Basis Increase the basis of any property by all items properly added to a capital account. Federal and state income tax forms These include the cost of any improvements having a useful life of more than 1 year. Federal and state income tax forms Rehabilitation expenses also increase basis. Federal and state income tax forms However, you must subtract any rehabilitation credit allowed for these expenses before you add them to your basis. Federal and state income tax forms If you have to recapture any of the credit, increase your basis by the recaptured amount. Federal and state income tax forms If you make additions or improvements to business property, keep separate accounts for them. Federal and state income tax forms Also, you must depreciate the basis of each according to the depreciation rules that would apply to the underlying property if you had placed it in service at the same time you placed the addition or improvement in service. Federal and state income tax forms For more information, see Publication 946. Federal and state income tax forms The following items increase the basis of property. Federal and state income tax forms The cost of extending utility service lines to the property; Impact fees; Legal fees, such as the cost of defending and perfecting title; Legal fees for obtaining a decrease in an assessment levied against property to pay for local improvements; Zoning costs; and The capitalized value of a redeemable ground rent. Federal and state income tax forms Assessments for Local Improvements Increase the basis of property by assessments for items such as paving roads and building ditches that increase the value of the property assessed. Federal and state income tax forms Do not deduct them as taxes. Federal and state income tax forms However, you can deduct as taxes charges for maintenance, repairs, or interest charges related to the improvements. Federal and state income tax forms Example. Federal and state income tax forms Your city changes the street in front of your store into an enclosed pedestrian mall and assesses you and other affected landowners for the cost of the conversion. Federal and state income tax forms Add the assessment to your property's basis. Federal and state income tax forms In this example, the assessment is a depreciable asset. Federal and state income tax forms Deducting vs. Federal and state income tax forms Capitalizing Costs Do not add to your basis costs you can deduct as current expenses. Federal and state income tax forms For example, amounts paid for incidental repairs or maintenance that are deductible as business expenses cannot be added to basis. Federal and state income tax forms However, you can choose either to deduct or to capitalize certain other costs. Federal and state income tax forms If you capitalize these costs, include them in your basis. Federal and state income tax forms If you deduct them, do not include them in your basis. Federal and state income tax forms See Uniform Capitalization Rules earlier. Federal and state income tax forms The costs you can choose to deduct or to capitalize include the following. Federal and state income tax forms Carrying charges, such as interest and taxes, that you pay to own property, except carrying charges that must be capitalized under the uniform capitalization rules; Research and experimentation costs; Intangible drilling and development costs for oil, gas, and geothermal wells; Exploration costs for new mineral deposits; Mining development costs for a new mineral deposit; Costs of establishing, maintaining, or increasing the circulation of a newspaper or other periodical; and Costs of removing architectural and transportation barriers to people with disabilities and the elderly. Federal and state income tax forms If you claim the disabled access credit, you must reduce the amount you deduct or capitalize by the amount of the credit. Federal and state income tax forms For more information about deducting or capitalizing costs, see chapter 7 in Publication 535. Federal and state income tax forms Table 1. Federal and state income tax forms Examples of Increases and Decreases to Basis Increases to Basis Decreases to Basis Capital improvements:   Putting an addition on your home   Replacing an entire roof  Paving your driveway  Installing central air conditioning Rewiring your home Exclusion from income of subsidies for energy conservation measures  Casualty or theft loss deductions and insurance reimbursements  Vehicle credits Assessments for local improvements: Water connections Sidewalks Roads Section 179 deduction  Casualty losses: Restoring damaged property Depreciation  Nontaxable corporate distributions Legal fees:  Cost of defending and perfecting a title   Zoning costs   Decreases to Basis The following are some items that reduce the basis of property. Federal and state income tax forms Section 179 deduction; Nontaxable corporate distributions; Deductions previously allowed (or allowable) for amortization, depreciation, and depletion; Exclusion of subsidies for energy conservation measures; Vehicle credits; Residential energy credits; Postponed gain from sale of home; Investment credit (part or all) taken; Casualty and theft losses and insurance reimbursement; Certain canceled debt excluded from income; Rebates from a manufacturer or seller; Easements; Gas-guzzler tax; Adoption tax benefits; and Credit for employer-provided child care. Federal and state income tax forms Some of these items are discussed next. Federal and state income tax forms Casualties and Thefts If you have a casualty or theft loss, decrease the basis in your property by any insurance or other reimbursement and by any deductible loss not covered by insurance. Federal and state income tax forms You must increase your basis in the property by the amount you spend on repairs that substantially prolong the life of the property, increase its value, or adapt it to a different use. Federal and state income tax forms To make this determination, compare the repaired property to the property before the casualty. Federal and state income tax forms For more information on casualty and theft losses, see Publication 547, Casualties, Disasters, and Thefts. Federal and state income tax forms Easements The amount you receive for granting an easement is generally considered to be a sale of an interest in real property. Federal and state income tax forms It reduces the basis of the affected part of the property. Federal and state income tax forms If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain. Federal and state income tax forms Vehicle Credits Unless you elect not to claim the qualified plug-in electric vehicle credit, the alternative motor vehicle credit, or the qualified plug-in electric drive motor vehicle credit, you may have to reduce the basis of each qualified vehicle by certain amounts reported. Federal and state income tax forms For more information, see Form 8834, Qualified Plug-in Electric and Electric Vehicle Credit; Form 8910, Alternative Motor Vehicle Credit; Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit;and the related instructions. Federal and state income tax forms Gas-Guzzler Tax Decrease the basis in your car by the gas-guzzler (fuel economy) tax if you begin using the car within 1 year of the date of its first sale for ultimate use. Federal and state income tax forms This rule also applies to someone who later buys the car and begins using it not more than 1 year after the original sale for ultimate use. Federal and state income tax forms If the car is imported, the one-year period begins on the date of entry or withdrawal of the car from the warehouse if that date is later than the date of the first sale for ultimate use. Federal and state income tax forms Section 179 Deduction If you take the section 179 deduction for all or part of the cost of qualifying business property, decrease the basis of the property by the deduction. Federal and state income tax forms For more information about the section 179 deduction, see Publication 946. Federal and state income tax forms Exclusion of Subsidies for Energy Conservation Measures You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of any energy conservation measure for a dwelling unit. Federal and state income tax forms Reduce the basis of the property for which you received the subsidy by the excluded amount. Federal and state income tax forms For more information on this subsidy, see Publication 525. Federal and state income tax forms Depreciation Decrease the basis of property by the depreciation you deducted, or could have deducted, on your tax returns under the method of depreciation you chose. Federal and state income tax forms If you took less depreciation than you could have under the method chosen, decrease the basis by the amount you could have taken under that method. Federal and state income tax forms If you did not take a depreciation deduction, reduce the basis by the full amount of the depreciation you could have taken. Federal and state income tax forms Unless a timely election is made not to deduct the special depreciation allowance for property placed in service after September 10, 2001, decrease the property's basis by the special depreciation allowance you deducted or could have deducted. Federal and state income tax forms If you deducted more depreciation than you should have, decrease your basis by the amount equal to the depreciation you should have deducted plus the part of the excess depreciation you deducted that actually reduced your tax liability for the year. Federal and state income tax forms In decreasing your basis for depreciation, take into account the amount deducted on your tax returns as depreciation and any depreciation capitalized under the uniform capitalization rules. Federal and state income tax forms For information on figuring depreciation, see Publication 946. Federal and state income tax forms If you are claiming depreciation on a business vehicle, see Publication 463. Federal and state income tax forms If the car is not used more than 50% for business during the tax year, you may have to recapture excess depreciation. Federal and state income tax forms Include the excess depreciation in your gross income and add it to your basis in the property. Federal and state income tax forms For information on the computation of excess depreciation, see chapter 4 in Publication 463. Federal and state income tax forms Canceled Debt Excluded From Income If a debt you owe is canceled or forgiven, other than as a gift or bequest, you generally must include the canceled amount in your gross income for tax purposes. Federal and state income tax forms A debt includes any indebtedness for which you are liable or which attaches to property you hold. Federal and state income tax forms You can exclude canceled debt from income in the following situations. Federal and state income tax forms Debt canceled in a bankruptcy case or when you are insolvent, Qualified farm debt, and Qualified real property business debt (provided you are not a C corporation). Federal and state income tax forms If you exclude from income canceled debt under situation (1) or (2), you may have to reduce the basis of your depreciable and nondepreciable property. Federal and state income tax forms However, in situation (3), you must reduce the basis of your depreciable property by the excluded amount. Federal and state income tax forms For more information about canceled debt in a bankruptcy case or during insolvency, see Publication 908, Bankruptcy Tax Guide. Federal and state income tax forms For more information about canceled debt that is qualified farm debt, see chapter 3 in Publication 225. Federal and state income tax forms For more information about qualified real property business debt, see chapter 5 in Publication 334, Tax Guide for Small Business. Federal and state income tax forms Postponed Gain From Sale of Home If you postponed gain from the sale of your main home before May 7, 1997, you must reduce the basis of your new home by the postponed gain. Federal and state income tax forms For more information on the rules for the sale of a home, see Publication 523. Federal and state income tax forms Adoption Tax Benefits If you claim an adoption credit for the cost of improvements you added to the basis of your home, decrease the basis of your home by the credit allowed. Federal and state income tax forms This also applies to amounts you received under an employer's adoption assistance program and excluded from income. Federal and state income tax forms For more information Form 8839, Qualified Adoption Expenses. Federal and state income tax forms Employer-Provided Child Care If you are an employer, you can claim the employer-provided child care credit on amounts you paid or incurred to acquire, construct, rehabilitate, or expand property used as part of your qualified child care facility. Federal and state income tax forms You must reduce your basis in that property by the credit claimed. Federal and state income tax forms For more information, see Form 8882, Credit for Employer-Provided Child Care Facilities and Services. Federal and state income tax forms Adjustments to Basis Example In January 2005, you paid $80,000 for real property to be used as a factory. Federal and state income tax forms You also paid commissions of $2,000 and title search and legal fees of $600. Federal and state income tax forms You allocated the total cost of $82,600 between the land and the building—$10,325 for the land and $72,275 for the building. Federal and state income tax forms Immediately you spent $20,000 in remodeling the building before you placed it in service. Federal and state income tax forms You were allowed depreciation of $14,526 for the years 2005 through 2009. Federal and state income tax forms In 2008 you had a $5,000 casualty loss from a that was not covered by insurance on the building. Federal and state income tax forms You claimed a deduction for this loss. Federal and state income tax forms You spent $5,500 to repair the damages and extend the useful life of the building. Federal and state income tax forms The adjusted basis of the building on January 1, 2010, is figured as follows: Original cost of building including fees and commissions $72,275 Adjustments to basis:     Add:         Improvements 20,000   Repair of damages 5,500       $97,775 Subtract:       Depreciation $14,526     Deducted casualty loss 5,000 19,526 Adjusted basis on January 1, 2010 $78,249 The basis of the land, $10,325, remains unchanged. Federal and state income tax forms It is not affected by any of the above adjustments. Federal and state income tax forms Basis Other Than Cost There are many times when you cannot use cost as basis. Federal and state income tax forms In these cases, the fair market value or the adjusted basis of property may be used. Federal and state income tax forms Adjusted basis is discussed earlier. Federal and state income tax forms Fair market value (FMV). Federal and state income tax forms   FMV is the price at which property would change hands between a buyer and a seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts. Federal and state income tax forms Sales of similar property on or about the same date may be helpful in figuring the property's FMV. Federal and state income tax forms Property Received for Services If you receive property for services, include the property's FMV in income. Federal and state income tax forms The amount you include in income becomes your basis. Federal and state income tax forms If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary. Federal and state income tax forms Bargain Purchases A bargain purchase is a purchase of an item for less than its FMV. Federal and state income tax forms If, as compensation for services, you purchase goods or other property at less than FMV, include the difference between the purchase price and the property's FMV in your income. Federal and state income tax forms Your basis in the property is its FMV (your purchase price plus the amount you include in income). Federal and state income tax forms If the difference between your purchase price and the FMV represents a qualified employee discount, do not include the difference in income. Federal and state income tax forms However, your basis in the property is still its FMV. Federal and state income tax forms See Employee Discounts in Publication 15-B. Federal and state income tax forms Restricted Property If you receive property for your services and the property is subject to certain restrictions, your basis in the property is its FMV when it becomes substantially vested unless you make the election discussed later. Federal and state income tax forms Property becomes substantially vested when your rights in the property or the rights of any person to whom you transfer the property are not subject to a substantial risk of forfeiture. Federal and state income tax forms There is substantial risk of forfeiture when the rights to full enjoyment of the property depend on the future performance of substantial services by any person. Federal and state income tax forms When the property becomes substantially vested, include the FMV, less any amount you paid for the property, in income. Federal and state income tax forms Example. Federal and state income tax forms Your employer gives you stock for services performed under the condition that you will have to return the stock unless you complete 5 years of service. Federal and state income tax forms The stock is under a substantial risk of forfeiture and is not substantially vested when you receive it. Federal and state income tax forms You do not report any income until you have completed the 5 years of service that satisfy the condition. Federal and state income tax forms Fair market value. Federal and state income tax forms   Figure the FMV of property you received without considering any restriction except one that by its terms will never end. Federal and state income tax forms Example. Federal and state income tax forms You received stock from your employer for services you performed. Federal and state income tax forms If you want to sell the stock while you are still employed, you must sell the stock to your employer at book value. Federal and state income tax forms At your retirement or death, you or your estate must offer to sell the stock to your employer at its book value. Federal and state income tax forms This is a restriction that by its terms will never end and you must consider it when you figure the FMV. Federal and state income tax forms Election. Federal and state income tax forms   You can choose to include in your gross income the FMV of the property at the time of transfer, less any amount you paid for it. Federal and state income tax forms If you make this choice, the substantially vested rules do not apply. Federal and state income tax forms Your basis is the amount you paid plus the amount you included in income. Federal and state income tax forms   See the discussion of Restricted Property in Publication 525 for more information. Federal and state income tax forms Taxable Exchanges A taxable exchange is one in which the gain is taxable or the loss is deductible. Federal and state income tax forms A taxable gain or deductible loss is also known as a recognized gain or loss. Federal and state income tax forms If you receive property in exchange for other property in a taxable exchange, the basis of property you receive is usually its FMV at the time of the exchange. Federal and state income tax forms A taxable exchange occurs when you receive cash or property not similar or related in use to the property exchanged. Federal and state income tax forms Example. Federal and state income tax forms You trade a tract of farm land with an adjusted basis of $3,000 for a tractor that has an FMV of $6,000. Federal and state income tax forms You must report a taxable gain of $3,000 for the land. Federal and state income tax forms The tractor has a basis of $6,000. Federal and state income tax forms Involuntary Conversions If you receive property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, you can figure the basis of the replacement property you receive using the basis of the converted property. Federal and state income tax forms Similar or related property. Federal and state income tax forms   If you receive replacement property similar or related in service or use to the converted property, the replacement property's basis is the old property's basis on the date of the conversion. Federal and state income tax forms However, make the following adjustments. Federal and state income tax forms Decrease the basis by the following. Federal and state income tax forms Any loss you recognize on the conversion, and Any money you receive that you do not spend on similar property. Federal and state income tax forms Increase the basis by the following. Federal and state income tax forms Any gain you recognize on the conversion, and Any cost of acquiring the replacement property. Federal and state income tax forms Money or property not similar or related. Federal and state income tax forms   If you receive money or property not similar or related in service or use to the converted property, and you buy replacement property similar or related in service or use to the converted property, the basis of the new property is its cost decreased by the gain not recognized on the conversion. Federal and state income tax forms Example. Federal and state income tax forms The state condemned your property. Federal and state income tax forms The property had an adjusted basis of $26,000 and the state paid you $31,000 for it. Federal and state income tax forms You realized a gain of $5,000 ($31,000 − $26,000). Federal and state income tax forms You bought replacement property similar in use to the converted property for $29,000. Federal and state income tax forms You recognize a gain of $2,000 ($31,000 − $29,000), the unspent part of the payment from the state. Federal and state income tax forms Your gain not recognized is $3,000, the difference between the $5,000 realized gain and the $2,000 recognized gain. Federal and state income tax forms The basis of the new property is figured as follows: Cost of replacement property $29,000 Minus: Gain not recognized 3,000 Basis of the replacement property $26,000 Allocating the basis. Federal and state income tax forms   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. Federal and state income tax forms Example. Federal and state income tax forms The state in the previous example condemned your unimproved real property and the replacement property you bought was improved real property with both land and buildings. Federal and state income tax forms Allocate the replacement property's $26,000 basis between land and buildings based on their respective costs. Federal and state income tax forms More information. Federal and state income tax forms   For more information about condemnations, see Involuntary Conversions in Publication 544. Federal and state income tax forms For more information about casualty and theft losses, see Publication 547. Federal and state income tax forms Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. Federal and state income tax forms If you receive property in a nontaxable exchange, its basis is usually the same as the basis of the property you transferred. Federal and state income tax forms A nontaxable gain or loss is also known as an unrecognized gain or loss. Federal and state income tax forms Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. Federal and state income tax forms To qualify as a like-kind exchange, you must hold for business or investment purposes both the property you transfer and the property you receive. Federal and state income tax forms There must also be an exchange of like-kind property. Federal and state income tax forms For more information, see Like-Kind Exchanges in Publication 544. Federal and state income tax forms The basis of the property you receive is the same as the basis of the property you gave up. Federal and state income tax forms Example. Federal and state income tax forms You exchange real estate (adjusted basis $50,000, FMV $80,000) held for investment for other real estate (FMV $80,000) held for investment. Federal and state income tax forms Your basis in the new property is the same as the basis of the old ($50,000). Federal and state income tax forms Exchange expenses. Federal and state income tax forms   Exchange expenses are generally the closing costs you pay. Federal and state income tax forms They include such items as brokerage commissions, attorney fees, deed preparation fees, etc. Federal and state income tax forms Add them to the basis of the like-kind property received. Federal and state income tax forms Property plus cash. Federal and state income tax forms   If you trade property in a like-kind exchange and also pay money, the basis of the property received is the basis of the property you gave up increased by the money you paid. Federal and state income tax forms Example. Federal and state income tax forms You trade in a truck (adjusted basis $3,000) for another truck (FMV $7,500) and pay $4,000. Federal and state income tax forms Your basis in the new truck is $7,000 (the $3,000 basis of the old truck plus the $4,000 paid). Federal and state income tax forms Special rules for related persons. Federal and state income tax forms   If a like-kind exchange takes place directly or indirectly between related persons and either party disposes of the property within 2 years after the exchange, the exchange no longer qualifies for like-kind exchange treatment. Federal and state income tax forms Each person must report any gain or loss not recognized on the original exchange. Federal and state income tax forms Each person reports it on the tax return filed for the year in which the later disposition occurs. Federal and state income tax forms If this rule applies, the basis of the property received in the original exchange will be its fair market value. Federal and state income tax forms   These rules generally do not apply to the following kinds of property dispositions. Federal and state income tax forms Dispositions due to the death of either related person, Involuntary conversions, and Dispositions in which neither the original exchange nor the subsequent disposition had as a main purpose the avoidance of federal income tax. Federal and state income tax forms Related persons. Federal and state income tax forms   Generally, related persons are ancestors, lineal descendants, brothers and sisters (whole or half), and a spouse. Federal and state income tax forms   For other related persons (for example, two corporations, an individual and a corporation, a grantor and fiduciary, etc. Federal and state income tax forms ), see Nondeductible Loss in chapter 2 of Publication 544. Federal and state income tax forms Exchange of business property. Federal and state income tax forms   Exchanging the assets of one business for the assets of another business is a multiple property exchange. Federal and state income tax forms For information on figuring basis, see Multiple Property Exchanges in chapter 1 of Publication 544. Federal and state income tax forms Partially Nontaxable Exchange A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like property. Federal and state income tax forms The basis of the property you receive is the same as the basis of the property you gave up, with the following adjustments. Federal and state income tax forms Decrease the basis by the following amounts. Federal and state income tax forms Any money you receive, and Any loss you recognize on the exchange. Federal and state income tax forms Increase the basis by the following amounts. Federal and state income tax forms Any additional costs you incur, and Any gain you recognize on the exchange. Federal and state income tax forms If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. Federal and state income tax forms Example. Federal and state income tax forms You traded a truck (adjusted basis $6,000) for a new truck (FMV $5,200) and $1,000 cash. Federal and state income tax forms You realized a gain of $200 ($6,200 − $6,000). Federal and state income tax forms This is the FMV of the truck received plus the cash minus the adjusted basis of the truck you traded ($5,200 + $1,000 – $6,000). Federal and state income tax forms You include all the gain in income (recognized gain) because the gain is less than the cash received. Federal and state income tax forms Your basis in the new truck is: Adjusted basis of old truck $6,000 Minus: Cash received (adjustment 1(a)) 1,000   $5,000 Plus: Gain recognized (adjustment 2(b)) 200 Basis of new truck $5,200 Allocation of basis. Federal and state income tax forms   Allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. Federal and state income tax forms The rest is the basis of the like property. Federal and state income tax forms Example. Federal and state income tax forms You had an adjusted basis of $15,000 in real estate you held for investment. Federal and state income tax forms You exchanged it for other real estate to be held for investment with an FMV of $12,500, a truck with an FMV of $3,000, and $1,000 cash. Federal and state income tax forms The truck is unlike property. Federal and state income tax forms You realized a gain of $1,500 ($16,500 − $15,000). Federal and state income tax forms This is the FMV of the real estate received plus the FMV of the truck received plus the cash minus the adjusted basis of the real estate you traded ($12,500 + $3,000 + $1,000 – $15,000). Federal and state income tax forms You include in income (recognize) all $1,500 of the gain because it is less than the FMV of the unlike property plus the cash received. Federal and state income tax forms Your basis in the properties you received is figured as follows. Federal and state income tax forms Adjusted basis of real estate transferred $15,000 Minus: Cash received (adjustment 1(a)) 1,000   $14,000 Plus: Gain recognized (adjustment 2(b)) 1,500 Total basis of properties received $15,500 Allocate the total basis of $15,500 first to the unlike property — the truck ($3,000). Federal and state income tax forms This is the truck's FMV. Federal and state income tax forms The rest ($12,500) is the basis of the real estate. Federal and state income tax forms Sale and Purchase If you sell property and buy similar property in two mutually dependent transactions, you may have to treat the sale and purchase as a single nontaxable exchange. Federal and state income tax forms Example. Federal and state income tax forms You are a salesperson and you use one of your cars 100% for business. Federal and state income tax forms You have used this car in your sales activities for 2 years and have depreciated it. Federal and state income tax forms Your adjusted basis in the car is $22,600 and its FMV is $23,100. Federal and state income tax forms You are interested in a new car, which sells for $28,000. Federal and state income tax forms If you trade your old car and pay $4,900 for the new one, your basis for depreciation for the new car would be $27,500 ($4,900 plus the $22,600 basis of your old car). Federal and state income tax forms However, you want a higher basis for depreciating the new car, so you agree to pay the dealer $28,000 for the new car if he will pay you $23,100 for your old car. Federal and state income tax forms Because the two transactions are dependent on each other, you are treated as having exchanged your old car for the new one and paid $4,900 ($28,000 − $23,100). Federal and state income tax forms Your basis for depreciating the new car is $27,500, the same as if you traded the old car. Federal and state income tax forms Partial Business Use of Property If you have property used partly for business and partly for personal use, and you exchange it in a nontaxable exchange for property to be used wholly or partly in your business, the basis of the property you receive is figured as if you had exchanged two properties. Federal and state income tax forms The first is an exchange of like-kind property. Federal and state income tax forms The second is personal-use property on which gain is recognized and loss is not recognized. Federal and state income tax forms First, figure your adjusted basis in the property as if you transferred two separate properties. Federal and state income tax forms Figure the adjusted basis of each part of the property by taking into account any adjustments to basis. Federal and state income tax forms Deduct the depreciation you took or could have taken from the adjusted basis of the business part. Federal and state income tax forms Then figure the amount realized for your property and allocate it to the business and nonbusiness parts of the property. Federal and state income tax forms The business part of the property is permitted to be exchanged tax free. Federal and state income tax forms However, you must recognize any gain from the exchange of the nonbusiness part. Federal and state income tax forms You are deemed to have received, in exchange for the nonbusiness part, an amount equal to its FMV on the date of the exchange. Federal and state income tax forms The basis of the property you acquired is the total basis of the property transferred (adjusted to the date of the exchange), increased by any gain recognized on the nonbusiness part. Federal and state income tax forms If the nonbusiness part of the property transferred is your main home, you may qualify to exclude from income all or part of the gain on that part. Federal and state income tax forms For more information, see Publication 523. Federal and state income tax forms Trade of car used partly in business. Federal and state income tax forms   If you trade in a car you used partly in your business for another car you will use in your business, your basis for depreciation of the new car is not the same as your basis for figuring a gain or loss on its sale. Federal and state income tax forms   For information on figuring your basis for depreciation, see Publication 463. Federal and state income tax forms Property Transferred From a Spouse The basis of property transferred to you or transferred in trust for your benefit by your spouse (or former spouse if the transfer is incident to divorce), is the same as your spouse's adjusted basis. Federal and state income tax forms However, adjust your basis for any gain recognized by your spouse or former spouse on property transferred in trust. Federal and state income tax forms This rule applies only to a transfer of property in trust in which the liabilities assumed, plus the liabilities to which the property is subject, are more than the adjusted basis of the property transferred. Federal and state income tax forms If the property transferred to you is a series E, series EE, or series I United States savings bond, the transferor must include in income the interest accrued to the date of transfer. Federal and state income tax forms Your basis in the bond immediately after the transfer is equal to the transferor's basis increased by the interest income includible in the transferor's income. Federal and state income tax forms For more information on these bonds, see Publication 550. Federal and state income tax forms At the time of the transfer, the transferor must give you the records necessary to determine the adjusted basis and holding period of the property as of the date of transfer. Federal and state income tax forms For more information, see Publication 504, Divorced or Separated Individuals. Federal and state income tax forms Property Received as a Gift To figure the basis of property you receive as a gift, you must know its adjusted basis (defined earlier) to the donor just before it was given to you, its FMV at the time it was given to you, and any gift tax paid on it. Federal and state income tax forms FMV Less Than Donor's Adjusted Basis If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. Federal and state income tax forms Your basis for figuring gain is the same as the donor's adjusted basis plus or minus any required adjustment to basis while you held the property. Federal and state income tax forms Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustment to basis while you held the property (see Adjusted Basis earlier). Federal and state income tax forms If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and have a gain, you have neither gain nor loss on the sale or disposition of the property. Federal and state income tax forms Example. Federal and state income tax forms You received an acre of land as a gift. Federal and state income tax forms At the time of the gift, the land had an FMV of $8,000. Federal and state income tax forms The donor's adjusted basis was $10,000. Federal and state income tax forms After you received the land, no events occurred to increase or decrease your basis. Federal and state income tax forms If you sell the land for $12,000, you will have a $2,000 gain because you must use the donor's adjusted basis ($10,000) at the time of the gift as your basis to figure gain. Federal and state income tax forms If you sell the land for $7,000, you will have a $1,000 loss because you must use the FMV ($8,000) at the time of the gift as your basis to figure a loss. Federal and state income tax forms If the sales price is between $8,000 and $10,000, you have neither gain nor loss. Federal and state income tax forms For instance, if the sales price was $9,000 and you tried to figure a gain using the donor's adjusted basis ($10,000), you would get a $1,000 loss. Federal and state income tax forms If you then tried to figure a loss using the FMV ($8,000), you would get a $1,000 gain. Federal and state income tax forms Business property. Federal and state income tax forms   If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deduction is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property. Federal and state income tax forms FMV Equal to or More Than Donor's Adjusted Basis If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis at the time you received the gift. Federal and state income tax forms Increase your basis by all or part of any gift tax paid, depending on the date of the gift. Federal and state income tax forms Also, for figuring gain or loss from a sale or other disposition of the property, or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis by any required adjustments to basis while you held the property. Federal and state income tax forms See Adjusted Basis earlier. Federal and state income tax forms Gift received before 1977. Federal and state income tax forms   If you received a gift before 1977, increase your basis in the gift (the donor's adjusted basis) by any gift tax paid on it. Federal and state income tax forms However, do not increase your basis above the FMV of the gift at the time it was given to you. Federal and state income tax forms Example 1. Federal and state income tax forms You were given a house in 1976 with an FMV of $21,000. Federal and state income tax forms The donor's adjusted basis was $20,000. Federal and state income tax forms The donor paid a gift tax of $500. Federal and state income tax forms Your basis is $20,500, the donor's adjusted basis plus the gift tax paid. Federal and state income tax forms Example 2. Federal and state income tax forms If, in Example 1, the gift tax paid had been $1,500, your basis would be $21,000. Federal and state income tax forms This is the donor's adjusted basis plus the gift tax paid, limited to the FMV of the house at the time you received the gift. Federal and state income tax forms Gift received after 1976. Federal and state income tax forms   If you received a gift after 1976, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it that is due to the net increase in value of the gift. Federal and state income tax forms Figure the increase by multiplying the gift tax paid by a fraction. Federal and state income tax forms The numerator of the fraction is the net increase in value of the gift and the denominator is the amount of the gift. Federal and state income tax forms   The net increase in value of the gift is the FMV of the gift less the donor's adjusted basis. Federal and state income tax forms The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. Federal and state income tax forms For information on the gift tax, see Publication 950, Introduction to Estate and Gift Taxes. Federal and state income tax forms Example. Federal and state income tax forms In 2010, you received a gift of property from your mother that had an FMV of $50,000. Federal and state income tax forms Her adjusted basis was $20,000. Federal and state income tax forms The amount of the gift for gift tax purposes was $37,000 ($50,000 minus the $13,000 annual exclusion). Federal and state income tax forms She paid a gift tax of $9,000. Federal and state income tax forms Your basis, $27,290, is figured as follows: Fair market value $50,000 Minus: Adjusted basis 20,000 Net increase in value $30,000 Gift tax paid $9,000 Multiplied by ($30,000 ÷ $37,000) . Federal and state income tax forms 81 Gift tax due to net increase in value $7,290 Adjusted basis of property to your mother 20,000 Your basis in the property $27,290 Inherited Property Special rules apply to property acquired from a decedent who died in 2010. Federal and state income tax forms See Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, for details. Federal and state income tax forms If you inherited property from a decedent who died before 2010, your basis in property you inherit from a decedent is generally one of the following. Federal and state income tax forms The FMV of the property at the date of the individual's death. Federal and state income tax forms The FMV on the alternate valuation date if the personal representative for the estate chooses to use alternate valuation. Federal and state income tax forms For information on the alternate valuation date, see the Instructions for Form 706. Federal and state income tax forms The value under the special-use valuation method for real property used in farming or a closely held business if chosen for estate tax purposes. Federal and state income tax forms This method is discussed later. Federal and state income tax forms The decedent's adjusted basis in land to the extent of the value excluded from the decedent's taxable estate as a qualified conservation easement. Federal and state income tax forms For information on a qualified conservation easement, see the Instructions for Form 706. Federal and state income tax forms If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. Federal and state income tax forms For more information, see the Instructions for Form 706. Federal and state income tax forms Appreciated property. Federal and state income tax forms   The above rule does not apply to appreciated property you receive from a decedent if you or your spouse originally gave the property to the decedent within 1 year before the decedent's death. Federal and state income tax forms Your basis in this property is the same as the decedent's adjusted basis in the property immediately before his or her death, rather than its FMV. Federal and state income tax forms Appreciated property is any property whose FMV on the day it was given to the decedent is more than its adjusted basis. Federal and state income tax forms Community Property In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), husband and wife are each usually considered to own half the community property. Federal and state income tax forms When either spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property. Federal and state income tax forms For this rule to apply, at least half the value of the community property interest must be includable in the decedent's gross estate, whether or not the estate must file a return. Federal and state income tax forms For example, you and your spouse owned community property that had a basis of $80,000. Federal and state income tax forms When your spouse died, half the FMV of the community interest was includible in your spouse's estate. Federal and state income tax forms The FMV of the community interest was $100,000. Federal and state income tax forms The basis of your half of the property after the death of your spouse is $50,000 (half of the $100,000 FMV). Federal and state income tax forms The basis of the other half to your spouse's heirs is also $50,000. Federal and state income tax forms For more information on community property, see Publication 555, Community Property. Federal and state income tax forms Property Held by Surviving Tenant The following example explains the rule for the basis of property held by a surviving tenant in joint tenancy or tenancy by the entirety. Federal and state income tax forms Example. Federal and state income tax forms John and Jim owned, as joint tenants with right of survivorship, business property they purchased for $30,000. Federal and state income tax forms John furnished two-thirds of the purchase price and Jim furnished one-third. Federal and state income tax forms Depreciation deductions allowed before John's death were $12,000. Federal and state income tax forms Under local law, each had a half interest in the income from the property. Federal and state income tax forms At the date of John's death, the property had an FMV of $60,000, two-thirds of which is includable in John's estate. Federal and state income tax forms Jim figures his basis in the property at the date of John's death as follows: Interest Jim bought with his own funds—1/3 of $30,000 cost $10,000   Interest Jim received on John's death—2/3 of $60,000 FMV 40,000 $50,000 Minus: ½ of $12,000 depreciation before John's death 6,000 Jim's basis at the date of John's death $44,000 If Jim had not contributed any part of the purchase price, his basis at the date of John's death would be $54,000. Federal and state income tax forms This is figured by subtracting from the $60,000 FMV, the $6,000 depreciation allocated to Jim's half interest before the date of death. Federal and state income tax forms If under local law Jim had no interest in the income from the property and he contributed no part of the purchase price, his basis at John's death would be $60,000, the FMV of the property. Federal and state income tax forms Qualified Joint Interest Include one-half of the value of a qualified joint interest in the decedent's gross estate. Federal and state income tax forms It does not matter how much each spouse contributed to the purchase price. Federal and state income tax forms Also, it does not matter which spouse dies first. Federal and state income tax forms A qualified joint interest is any interest in property held by husband and wife as either of the following. Federal and state income tax forms Tenants by the entirety, or Joint tenants with right of survivorship if husband and wife are the only joint tenants. Federal and state income tax forms Basis. Federal and state income tax forms   As the surviving spouse, your basis in property you owned with your spouse as a qualified joint interest is the cost of your half of the property with certain adjustments. Federal and state income tax forms Decrease the cost by any deductions allowed to you for depreciation and depletion. Federal and state income tax forms Increase the reduced cost by your basis in the half you inherited. Federal and state income tax forms Farm or Closely Held Business Under certain conditions, when a person dies the executor or personal representative of that person's estate can choose to value the qualified real property on other than its FMV. Federal and state income tax forms If so, the executor or personal representative values the qualified real property based on its use as a farm or its use in a closely held business. Federal and state income tax forms If the executor or personal representative chooses this method of valuation for estate tax purposes, that value is the basis of the property for the heirs. Federal and state income tax forms Qualified heirs should be able to get the necessary value from the executor or personal representative of the estate. Federal and state income tax forms Special-use valuation. Federal and state income tax forms   If you are a qualified heir who received special-use valuation property, your basis in the property is the estate's or trust's basis in that property immediately before the distribution. Federal and state income tax forms Increase your basis by any gain recognized by the estate or trust because of post-death appreciation. Federal and state income tax forms Post-death appreciation is the property's FMV on the date of distribution minus the property's FMV either on the date of the individual's death or the alternate valuation date. Federal and state income tax forms Figure all FMVs without regard to the special-use valuation. Federal and state income tax forms   You can elect to increase your basis in special-use valuation property if it becomes subject to the additional estate tax. Federal and state income tax forms This tax is assessed if, within 10 years after the death of the decedent, you transfer the property to a person who is not a member of your family or the property stops being used as a farm or in a closely held business. Federal and state income tax forms   To increase your basis in the property, you must make an irrevocable election and pay interest on the additional estate tax figured from the date 9 months after the decedent's death until the date of the payment of the additional estate tax. Federal and state income tax forms If you meet these requirements, increase your basis in the property to its FMV on the date of the decedent's death or the alternate valuation date. Federal and state income tax forms The increase in your basis is considered to have occurred immediately before the event that results in the additional estate tax. Federal and state income tax forms   You make the election by filing with Form 706-A a statement that does all of the following. Federal and state income tax forms Contains your name, address, and taxpayer identification number and those of the estate; Identifies the election as an election under section 1016(c) of the Internal Revenue Code; Specifies the property for which the election is made; and Provides any additional information required by the Instructions for Form 706-A. Federal and state income tax forms   For more information, see the Instructions for Form 706 and the Instructions for Form 706-A. Federal and state income tax forms Property Changed to Business or Rental Use If you hold property for personal use and then change it to business use or use it to produce rent, you must figure its basis for depreciation. Federal and state income tax forms An example of changing property held for personal use to business use would be renting out your former main home. Federal and state income tax forms Basis for depreciation. Federal and state income tax forms   The basis for depreciation is the lesser of the following amounts. Federal and state income tax forms The FMV of the property on the date of the change, or Your adjusted basis on the date of the change. Federal and state income tax forms Example. Federal and state income tax forms Several years ago you paid $160,000 to have your home built on a lot that cost $25,000. Federal and state income tax forms You paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for damage to the house before changing the property to rental use last year. Federal and state income tax forms Because land is not depreciable, you include only the cost of the house when figuring the basis for depreciation. Federal and state income tax forms Your adjusted basis in the house when you changed its use was $178,000 ($160,000 + $20,000 − $2,000). Federal and state income tax forms On the same date, your property had an FMV of $180,000, of which $15,000 was for the land and $165,000 was for the house. Federal and state income tax forms The basis for figuring depreciation on the house is its FMV on the date of change ($165,000) because it is less than your adjusted basis ($178,000). Federal and state income tax forms Sale of property. Federal and state income tax forms   If you later sell or dispose of property changed to business or rental use, the basis of the property you use will depend on whether you are figuring gain or loss. Federal and state income tax forms Gain. Federal and state income tax forms   The basis for figuring a gain is your adjusted basis when you sell the property. Federal and state income tax forms Example. Federal and state income tax forms Assume the same facts as in the previous example except that you sell the property at a gain after being allowed depreciation deductions of $37,500. Federal and state income tax forms Your adjusted basis for figuring gain is $165,500 ($178,000 + $25,000 (land) − $37,500). Federal and state income tax forms Loss. Federal and state income tax forms   Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. Federal and state income tax forms Then adjust this amount for the period after the change in the property's use, as discussed earlier under Adjusted Basis, to arrive at a basis for loss. Federal and state income tax forms Example. Federal and state income tax forms Assume the same facts as in the previous example, except that you sell the property at a loss after being allowed depreciation deductions of $37,500. Federal and state income tax forms In this case, you would start with the FMV on the date of the change to rental use ($180,000) because it is less than the adjusted basis of $203,000 ($178,000 + $25,000) on that date. Federal and state income tax forms Reduce that amount ($180,000) by the depreciation deductions to arrive at a basis for loss of $142,500 ($180,000 − $37,500). Federal and state income tax forms How To Get Tax Help You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get more information from the IRS in several ways. Federal and state income tax forms By selecting the method that is best for you, you will have quick and easy access to tax help. Federal and state income tax forms Contacting your Taxpayer Advocate. Federal and state income tax forms   The Taxpayer Advocate Service (TAS) is an independent organization within the IRS. Federal and state income tax forms We help taxpayers who are experiencing economic harm, such as not being able to provide necessities like housing, transportation, or food; taxpayers who are seeking help in resolving tax problems with the IRS; and those who believe that an IRS system or procedure is not working as it should. Federal and state income tax forms Here are seven things every taxpayer should know about TAS. Federal and state income tax forms TAS is your voice at the IRS. Federal and state income tax forms Our service is free, confidential, and tailored to meet your needs. Federal and state income tax forms You may be eligible for our help if you have tried to resolve your tax problem through normal IRS channels and have gotten nowhere, or you believe an IRS procedure just isn't working as it should. Federal and state income tax forms We help taxpayers whose problems are causing financial difficulty or significant cost, including the cost of professional representation. Federal and state income tax forms This includes businesses as well as individuals. Federal and state income tax forms Our employees know the IRS and how to navigate it. Federal and state income tax forms If you qualify for our help, we'll assign your case to an advocate who will listen to your problem, help you understand what needs to be done to resolve it, and stay with you every step of the way until your problem is resolved. Federal and state income tax forms We have at least one local taxpayer advocate in every state, the District of Columbia, and Puerto Rico. Federal and state income tax forms You can call your local advocate, whose number is in your phone book, in Publication 1546, Taxpayer Advocate Service—Your Voice at the IRS, and on our website at www. Federal and state income tax forms irs. Federal and state income tax forms gov/advocate. Federal and state income tax forms You can also call our toll-free line at 1-877-777-4778 or TTY/TDD 1-800-829-4059. Federal and state income tax forms You can learn about your rights and responsibilities as a taxpayer by visiting our online tax toolkit at www. Federal and state income tax forms taxtoolkit. Federal and state income tax forms irs. Federal and state income tax forms gov. Federal and state income tax forms You can get updates on hot tax topics by visiting our YouTube channel at www. Federal and state income tax forms youtube. Federal and state income tax forms com/tasnta and our Facebook page at www. Federal and state income tax forms facebook. Federal and state income tax forms com/YourVoiceAtIRS, or by following our tweets at www. Federal and state income tax forms twitter. Federal and state income tax forms com/YourVoiceAtIRS. Federal and state income tax forms Low Income Taxpayer Clinics (LITCs). Federal and state income tax forms   The Low Income Taxpayer Clinic program serves individuals who have a problem with the IRS and whose income is below a certain level. Federal and state income tax forms LITCs are independent from the IRS. Federal and state income tax forms Most LITCs can provide representation before the IRS or in court on audits, tax collection disputes, and other issues for free or a small fee. Federal and state income tax forms If an individual's native language is not English, some clinics can provide multilingual information about taxpayer rights and responsibilities. Federal and state income tax forms For more information, see Publication 4134, Low Income Taxpayer Clinic List. Federal and state income tax forms This publication is available at IRS. Federal and state income tax forms gov, by calling 1-800-TAX-FORM (1-800-829-3676), or at your local IRS office. Federal and state income tax forms Free tax services. Federal and state income tax forms   Publication 910, IRS Guide to Free Tax Services, is your guide to IRS services and resources. Federal and state income tax forms Learn about free tax information from the IRS, including publications, services, and education and assistance programs. Federal and state income tax forms The publication also has an index of over 100 TeleTax topics (recorded tax information) you can listen to on the telephone. Federal and state income tax forms The majority of the information and services listed in this publication are available to you free of charge. Federal and state income tax forms If there is a fee associated with a resource or service, it is listed in the publication. Federal and state income tax forms   Accessible versions of IRS published products are available on request in a variety of alternative formats for people with d
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The Federal And State Income Tax Forms

Federal and state income tax forms 4. Federal and state income tax forms   Student Loan Interest Deduction Table of Contents Introduction Student Loan Interest DefinedQualified Student Loan Qualified Education Expenses Include As Interest Do Not Include As Interest When Must Interest Be Paid Can You Claim the DeductionNo Double Benefit Allowed Figuring the DeductionEffect of the Amount of Your Income on the Amount of Your Deduction Which Worksheet To Use Claiming the Deduction Introduction Generally, personal interest you pay, other than certain mortgage interest, is not deductible on your tax return. Federal and state income tax forms However, if your modified adjusted gross income (MAGI) is less than $75,000 ($155,000 if filing a joint return) there is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. Federal and state income tax forms For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return before subtracting any deduction for student loan interest. Federal and state income tax forms This deduction can reduce the amount of your income subject to tax by up to $2,500 in 2013. Federal and state income tax forms The student loan interest deduction is taken as an adjustment to income. Federal and state income tax forms This means you can claim this deduction even if you do not itemize deductions on Schedule A (Form 1040). Federal and state income tax forms This chapter explains: What type of loan interest you can deduct, Whether you can claim the deduction, What expenses you must have paid with the student loan, Who is an eligible student, How to figure the deduction, and How to claim the deduction. Federal and state income tax forms Table 4-1. Federal and state income tax forms Student Loan Interest Deduction at a Glance This table summarizes the features of the student loan interest deduction. Federal and state income tax forms Do not rely on this table alone. Federal and state income tax forms Refer to the text for complete details. Federal and state income tax forms Feature   Description Maximum benefit   You can reduce your income subject to tax by up to $2,500. Federal and state income tax forms Loan qualifications   Your student loan: •must have been taken out solely to pay qualified education expenses, and •cannot be from a related person or made under a qualified employer plan. Federal and state income tax forms Student qualifications   The student must be: •you, your spouse, or your dependent, and  •enrolled at least half-time in a degree program. Federal and state income tax forms Time limit on deduction   You can deduct interest paid during the remaining period of your student loan. Federal and state income tax forms Limit on modified adjusted gross income (MAGI)   $155,000 if married filing a joint return; $75,000 if single, head of household, or qualifying widow(er). Federal and state income tax forms Student Loan Interest Defined Student loan interest is interest you paid during the year on a qualified student loan. Federal and state income tax forms It includes both required and voluntary interest payments. Federal and state income tax forms Qualified Student Loan This is a loan you took out solely to pay qualified education expenses (defined later) that were: For you, your spouse, or a person who was your dependent when you took out the loan, Paid or incurred within a reasonable period of time before or after you took out the loan, and For education provided during an academic period for an eligible student. Federal and state income tax forms Loans from the following sources are not qualified student loans. Federal and state income tax forms A related person. Federal and state income tax forms A qualified employer plan. Federal and state income tax forms Your dependent. Federal and state income tax forms   Generally, your dependent is someone who is either a: Qualifying child, or Qualifying relative. Federal and state income tax forms You can find more information about dependents in Publication 501. Federal and state income tax forms Exceptions. Federal and state income tax forms   For purposes of the student loan interest deduction, there are the following exceptions to the general rules for dependents. Federal and state income tax forms An individual can be your dependent even if you are the dependent of another taxpayer. Federal and state income tax forms An individual can be your dependent even if the individual files a joint return with a spouse. Federal and state income tax forms An individual can be your dependent even if the individual had gross income for the year that was equal to or more than the exemption amount for the year ($3,900 for 2013). Federal and state income tax forms Reasonable period of time. Federal and state income tax forms   Qualified education expenses are treated as paid or incurred within a reasonable period of time before or after you take out the loan if they are paid with the proceeds of student loans that are part of a federal postsecondary education loan program. Federal and state income tax forms   Even if not paid with the proceeds of that type of loan, the expenses are treated as paid or incurred within a reasonable period of time if both of the following requirements are met. Federal and state income tax forms The expenses relate to a specific academic period, and The loan proceeds are disbursed within a period that begins 90 days before the start of that academic period and ends 90 days after the end of that academic period. Federal and state income tax forms   If neither of the above situations applies, the reasonable period of time usually is determined based on all the relevant facts and circumstances. Federal and state income tax forms Academic period. Federal and state income tax forms   An academic period includes a semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. Federal and state income tax forms In the case of an educational institution that uses credit hours or clock hours and does not have academic terms, each payment period can be treated as an academic period. Federal and state income tax forms Eligible student. Federal and state income tax forms   This is a student who was enrolled at least half-time in a program leading to a degree, certificate, or other recognized educational credential. Federal and state income tax forms Enrolled at least half-time. Federal and state income tax forms   A student was enrolled at least half-time if the student was taking at least half the normal full-time work load for his or her course of study. Federal and state income tax forms   The standard for what is half of the normal full-time work load is determined by each eligible educational institution. Federal and state income tax forms However, the standard may not be lower than any of those established by the U. Federal and state income tax forms S. Federal and state income tax forms Department of Education under the Higher Education Act of 1965. Federal and state income tax forms Related person. Federal and state income tax forms   You cannot deduct interest on a loan you get from a related person. Federal and state income tax forms Related persons include: Your spouse, Your brothers and sisters, Your half brothers and half sisters, Your ancestors (parents, grandparents, etc. Federal and state income tax forms ), Your lineal descendants (children, grandchildren, etc. Federal and state income tax forms ), and Certain corporations, partnerships, trusts, and exempt organizations. Federal and state income tax forms Qualified employer plan. Federal and state income tax forms   You cannot deduct interest on a loan made under a qualified employer plan or under a contract purchased under such a plan. Federal and state income tax forms Qualified Education Expenses For purposes of the student loan interest deduction, these expenses are the total costs of attending an eligible educational institution, including graduate school. Federal and state income tax forms They include amounts paid for the following items. Federal and state income tax forms Tuition and fees. Federal and state income tax forms Room and board. Federal and state income tax forms Books, supplies, and equipment. Federal and state income tax forms Other necessary expenses (such as transportation). Federal and state income tax forms The cost of room and board qualifies only to the extent that it is not more than the greater of: The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student, or The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution. Federal and state income tax forms Eligible educational institution. Federal and state income tax forms   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Federal and state income tax forms S. Federal and state income tax forms Department of Education. Federal and state income tax forms It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Federal and state income tax forms   Certain educational institutions located outside the United States also participate in the U. Federal and state income tax forms S. Federal and state income tax forms Department of Education's Federal Student Aid (FSA) programs. Federal and state income tax forms   For purposes of the student loan interest deduction, an eligible educational institution also includes an institution conducting an internship or residency program leading to a degree or certificate from an institution of higher education, a hospital, or a health care facility that offers postgraduate training. Federal and state income tax forms   An educational institution must meet the above criteria only during the academic period(s) for which the student loan was incurred. Federal and state income tax forms The deductibility of interest on the loan is not affected by the institution's subsequent loss of eligibility. Federal and state income tax forms    The educational institution should be able to tell you if it is an eligible educational institution. Federal and state income tax forms Adjustments to Qualified Education Expenses You must reduce your qualified education expenses by the total amount paid for them with the following tax-free items. Federal and state income tax forms Employer-provided educational assistance. Federal and state income tax forms See chapter 11, Employer-Provided Educational Assistance . Federal and state income tax forms Tax-free distribution of earnings from a Coverdell education savings account (ESA). Federal and state income tax forms See Tax-Free Distributions in chapter 7, Coverdell Education Savings Account. Federal and state income tax forms Tax-free distribution of earnings from a qualified tuition program (QTP). Federal and state income tax forms See Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program. Federal and state income tax forms U. Federal and state income tax forms S. Federal and state income tax forms savings bond interest that you exclude from income because it is used to pay qualified education expenses. Federal and state income tax forms See chapter 10, Education Savings Bond Program . Federal and state income tax forms The tax-free part of scholarships and fellowships. Federal and state income tax forms See Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Federal and state income tax forms Veterans' educational assistance. Federal and state income tax forms See Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Federal and state income tax forms Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Federal and state income tax forms Include As Interest In addition to simple interest on the loan, if all other requirements are met, the items discussed below can be student loan interest. Federal and state income tax forms Loan origination fee. Federal and state income tax forms   In general, this is a one-time fee charged by the lender when a loan is made. Federal and state income tax forms To be deductible as interest, a loan origination fee must be for the use of money rather than for property or services (such as commitment fees or processing costs) provided by the lender. Federal and state income tax forms A loan origination fee treated as interest accrues over the term of the loan. Federal and state income tax forms   Loan origination fees were not required to be reported on Form 1098-E, Student Loan Interest Statement, for loans made before September 1, 2004. Federal and state income tax forms If loan origination fees are not included in the amount reported on your Form 1098-E, you can use any reasonable method to allocate the loan origination fees over the term of the loan. Federal and state income tax forms The method shown in the example below allocates equal portions of the loan origination fee to each payment required under the terms of the loan. Federal and state income tax forms A method that results in the double deduction of the same portion of a loan origination fee would not be reasonable. Federal and state income tax forms Example. Federal and state income tax forms In August 2004, Bill took out a student loan for $16,000 to pay the tuition for his senior year of college. Federal and state income tax forms The lender charged a 3% loan origination fee ($480) that was withheld from the funds Bill received. Federal and state income tax forms Bill began making payments on his student loan in 2013. Federal and state income tax forms Because the loan origination fee was not included in his 2013 Form 1098-E, Bill can use any reasonable method to allocate that fee over the term of the loan. Federal and state income tax forms Bill's loan is payable in 120 equal monthly payments. Federal and state income tax forms He allocates the $480 fee equally over the total number of payments ($480 ÷ 120 months = $4 per month). Federal and state income tax forms Bill made 7 payments in 2013, so he paid $28 ($4 × 7) of interest attributable to the loan origination fee. Federal and state income tax forms To determine his student loan interest deduction, he will add the $28 to the amount of other interest reported to him on Form 1098-E. Federal and state income tax forms Capitalized interest. Federal and state income tax forms   This is unpaid interest on a student loan that is added by the lender to the outstanding principal balance of the loan. Federal and state income tax forms Capitalized interest is treated as interest for tax purposes and is deductible as payments of principal are made on the loan. Federal and state income tax forms No deduction for capitalized interest is allowed in a year in which no loan payments were made. Federal and state income tax forms Interest on revolving lines of credit. Federal and state income tax forms   This interest, which includes interest on credit card debt, is student loan interest if the borrower uses the line of credit (credit card) only to pay qualified education expenses. Federal and state income tax forms See Qualified Education Expenses , earlier. Federal and state income tax forms Interest on refinanced student loans. Federal and state income tax forms   This includes interest on both: Consolidated loans—loans used to refinance more than one student loan of the same borrower, and Collapsed loans—two or more loans of the same borrower that are treated by both the lender and the borrower as one loan. Federal and state income tax forms    If you refinance a qualified student loan for more than your original loan and you use the additional amount for any purpose other than qualified education expenses, you cannot deduct any interest paid on the refinanced loan. Federal and state income tax forms Voluntary interest payments. Federal and state income tax forms   These are payments made on a qualified student loan during a period when interest payments are not required, such as when the borrower has been granted a deferment or the loan has not yet entered repayment status. Federal and state income tax forms Example. Federal and state income tax forms The payments on Roger's student loan were scheduled to begin in June 2012, 6 months after he graduated from college. Federal and state income tax forms He began making payments as required. Federal and state income tax forms In September 2013, Roger enrolled in graduate school on a full-time basis. Federal and state income tax forms He applied for and was granted deferment of his loan payments while in graduate school. Federal and state income tax forms Wanting to pay down his student loan as much as possible, he made loan payments in October and November 2013. Federal and state income tax forms Even though these were voluntary (not required) payments, Roger can deduct the interest paid in October and November. Federal and state income tax forms Allocating Payments Between Interest and Principal The allocation of payments between interest and principal for tax purposes might not be the same as the allocation shown on the Form 1098-E or other statement you receive from the lender or loan servicer. Federal and state income tax forms To make the allocation for tax purposes, a payment generally applies first to stated interest that remains unpaid as of the date the payment is due, second to any loan origination fees allocable to the payment, third to any capitalized interest that remains unpaid as of the date the payment is due, and fourth to the outstanding principal. Federal and state income tax forms Example. Federal and state income tax forms In August 2012, Peg took out a $10,000 student loan to pay the tuition for her senior year of college. Federal and state income tax forms The lender charged a 3% loan origination fee ($300) that was withheld from the funds Peg received. Federal and state income tax forms The interest (5% simple) on this loan accrued while she completed her senior year and for 6 months after she graduated. Federal and state income tax forms At the end of that period, the lender determined the amount to be repaid by capitalizing all accrued but unpaid interest ($625 interest accrued from August 2012 through October 2013) and adding it to the outstanding principal balance of the loan. Federal and state income tax forms The loan is payable over 60 months, with a payment of $200. Federal and state income tax forms 51 due on the first of each month, beginning November 2013. Federal and state income tax forms Peg did not receive a Form 1098-E for 2013 from her lender because the amount of interest she paid did not require the lender to issue an information return. Federal and state income tax forms However, she did receive an account statement from the lender that showed the following 2013 payments on her outstanding loan of $10,625 ($10,000 principal + $625 accrued but unpaid interest). Federal and state income tax forms Payment Date   Payment   Stated Interest   Principal November 2013   $200. Federal and state income tax forms 51   $44. Federal and state income tax forms 27   $156. Federal and state income tax forms 24 December 2013   $200. Federal and state income tax forms 51   $43. Federal and state income tax forms 62   $156. Federal and state income tax forms 89 Totals   $401. Federal and state income tax forms 02   $87. Federal and state income tax forms 89   $313. Federal and state income tax forms 13 To determine the amount of interest that could be deducted on the loan for 2013, Peg starts with the total amount of stated interest she paid, $87. Federal and state income tax forms 89. Federal and state income tax forms Next, she allocates the loan origination fee over the term of the loan ($300 ÷ 60 months = $5 per month). Federal and state income tax forms A total of $10 ($5 of each of the two principal payments) should be treated as interest for tax purposes. Federal and state income tax forms Peg then applies the unpaid capitalized interest ($625) to the two principal payments in the order in which they were made, and determines that the remaining amount of principal of both payments is treated as interest for tax purposes. Federal and state income tax forms Assuming that Peg qualifies to take the student loan interest deduction, she can deduct $401. Federal and state income tax forms 02 ($87. Federal and state income tax forms 89 + $10 + $303. Federal and state income tax forms 13). Federal and state income tax forms For 2014, Peg will continue to allocate $5 of the loan origination fee to the principal portion of each monthly payment she makes and treat that amount as interest for tax purposes. Federal and state income tax forms She also will apply the remaining amount of capitalized interest ($625 − $303. Federal and state income tax forms 13 = $321. Federal and state income tax forms 87) to the principal payments in the order in which they are made until the balance is zero, and treat those amounts as interest for tax purposes. Federal and state income tax forms Do Not Include As Interest You cannot claim a student loan interest deduction for any of the following items. Federal and state income tax forms Interest you paid on a loan if, under the terms of the loan, you are not legally obligated to make interest payments. Federal and state income tax forms Loan origination fees that are payments for property or services provided by the lender, such as commitment fees or processing costs. Federal and state income tax forms Interest you paid on a loan to the extent payments were made through your participation in the National Health Service Corps Loan Repayment Program (the “NHSC Loan Repayment Program”) or certain other loan repayment assistance programs. Federal and state income tax forms For more information, see Student Loan Repayment Assistance in chapter 5, Student Loan Cancellations and Repayment Assistance. Federal and state income tax forms When Must Interest Be Paid You can deduct all interest you paid during the year on your student loan, including voluntary payments, until the loan is paid off. Federal and state income tax forms Can You Claim the Deduction Generally, you can claim the deduction if all of the following requirements are met. Federal and state income tax forms Your filing status is any filing status except married filing separately. Federal and state income tax forms No one else is claiming an exemption for you on his or her tax return. Federal and state income tax forms You are legally obligated to pay interest on a qualified student loan. Federal and state income tax forms You paid interest on a qualified student loan. Federal and state income tax forms Claiming an exemption for you. Federal and state income tax forms   Another taxpayer is claiming an exemption for you if he or she lists your name and other required information on his or her Form 1040 (or Form 1040A), line 6c, or Form 1040NR, line 7c. Federal and state income tax forms Example 1. Federal and state income tax forms During 2013, Josh paid $600 interest on his qualified student loan. Federal and state income tax forms Only he is legally obligated to make the payments. Federal and state income tax forms No one claimed an exemption for Josh for 2013. Federal and state income tax forms Assuming all other requirements are met, Josh can deduct the $600 of interest he paid on his 2013 Form 1040 or 1040A. Federal and state income tax forms Example 2. Federal and state income tax forms During 2013, Jo paid $1,100 interest on her qualified student loan. Federal and state income tax forms Only she is legally obligated to make the payments. Federal and state income tax forms Jo's parents claimed an exemption for her on their 2013 tax return. Federal and state income tax forms In this case, neither Jo nor her parents may deduct the student loan interest Jo paid in 2013. Federal and state income tax forms Interest paid by others. Federal and state income tax forms   If you are the person legally obligated to make interest payments and someone else makes a payment of interest on your behalf, you are treated as receiving the payments from the other person and, in turn, paying the interest. Federal and state income tax forms Example 1. Federal and state income tax forms Darla obtained a qualified student loan to attend college. Federal and state income tax forms After Darla's graduation from college, she worked as an intern for a nonprofit organization. Federal and state income tax forms As part of the internship program, the nonprofit organization made an interest payment on behalf of Darla. Federal and state income tax forms This payment was treated as additional compensation and reported in box 1 of her Form W-2. Federal and state income tax forms Assuming all other qualifications are met, Darla can deduct this payment of interest on her tax return. Federal and state income tax forms Example 2. Federal and state income tax forms Ethan obtained a qualified student loan to attend college. Federal and state income tax forms After graduating from college, the first monthly payment on his loan was due in December. Federal and state income tax forms As a gift, Ethan's mother made this payment for him. Federal and state income tax forms No one is claiming a dependency exemption for Ethan on his or her tax return. Federal and state income tax forms Assuming all other qualifications are met, Ethan can deduct this payment of interest on his tax return. Federal and state income tax forms No Double Benefit Allowed You cannot deduct as interest on a student loan any amount that is an allowable deduction under any other provision of the tax law (for example, as home mortgage interest). Federal and state income tax forms Figuring the Deduction Your student loan interest deduction for 2013 is generally the smaller of: $2,500, or The interest you paid in 2013. Federal and state income tax forms However, the amount determined above may be gradually reduced (phased out) or eliminated based on your filing status and MAGI as explained below. Federal and state income tax forms You can use Worksheet 4-1. Federal and state income tax forms Student Loan Interest Deduction Worksheet (at the end of this chapter) to figure both your MAGI and your deduction. Federal and state income tax forms Form 1098-E. Federal and state income tax forms   To help you figure your student loan interest deduction, you should receive Form 1098-E. Federal and state income tax forms Generally, an institution (such as a bank or governmental agency) that received interest payments of $600 or more during 2013 on one or more qualified student loans must send Form 1098-E (or acceptable substitute) to each borrower by January 31, 2014. Federal and state income tax forms   For qualified student loans taken out before September 1, 2004, the institution is required to include on Form 1098-E only payments of stated interest. Federal and state income tax forms Other interest payments, such as certain loan origination fees and capitalized interest, may not appear on the form you receive. Federal and state income tax forms However, if you pay qualifying interest that is not included on Form 1098-E, you can also deduct those amounts. Federal and state income tax forms See Allocating Payments Between Interest and Principal , earlier. Federal and state income tax forms    The lender may ask for a completed Form W-9S, or similar statement to obtain the borrower's name, address, and taxpayer identification number. Federal and state income tax forms The form may also be used by the borrower to certify that the student loan was incurred solely to pay for qualified education expenses. Federal and state income tax forms Effect of the Amount of Your Income on the Amount of Your Deduction The amount of your student loan interest deduction is phased out (gradually reduced) if your MAGI is between $60,000 and $75,000 ($125,000 and $155,000 if you file a joint return). Federal and state income tax forms You cannot take a student loan interest deduction if your MAGI is $75,000 or more ($155,000 or more if you file a joint return). Federal and state income tax forms Modified adjusted gross income (MAGI). Federal and state income tax forms   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return before subtracting any deduction for student loan interest. Federal and state income tax forms However, as discussed below, there may be other modifications. Federal and state income tax forms Table 4-2 shows how the amount of your MAGI can affect your student loan interest deduction. Federal and state income tax forms Table 4-2. Federal and state income tax forms Effect of MAGI on Student Loan Interest Deduction IF your filing status is. Federal and state income tax forms . Federal and state income tax forms . Federal and state income tax forms AND your MAGI is. Federal and state income tax forms . Federal and state income tax forms . Federal and state income tax forms THEN your student loan interest deduction is. Federal and state income tax forms . Federal and state income tax forms . Federal and state income tax forms single,  head of household, or qualifying widow(er) not more than $60,000 not affected by the phaseout. Federal and state income tax forms more than $60,000  but less than $75,000 reduced because of the phaseout. Federal and state income tax forms $75,000 or more eliminated by the phaseout. Federal and state income tax forms married filing joint return not more than $125,000 not affected by the phaseout. Federal and state income tax forms more than $125,000 but less than $155,000 reduced because of the phaseout. Federal and state income tax forms $155,000 or more eliminated by the phaseout. Federal and state income tax forms MAGI when using Form 1040A. Federal and state income tax forms   If you file Form 1040A, your MAGI is the AGI on line 22 of that form figured without taking into account any amount on line 18 (student loan interest deduction) and line 19 (tuition and fees deduction). Federal and state income tax forms MAGI when using Form 1040. Federal and state income tax forms   If you file Form 1040, your MAGI is the AGI on line 38 of that form figured without taking into account any amount on line 33 (student loan interest deduction), line 34 (tuition and fees deduction), or line 35 (domestic production activities deduction), and modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, and Exclusion of income by bona fide residents of Puerto Rico. Federal and state income tax forms MAGI when using Form 1040NR. Federal and state income tax forms   If you file Form 1040NR, your MAGI is the AGI on line 36 of that form figured without taking into account any amount on line 33 (student loan interest deduction) and line 34 (domestic production activities deduction). Federal and state income tax forms MAGI when using Form 1040NR-EZ. Federal and state income tax forms   If you file Form 1040NR-EZ, your MAGI is the AGI on line 10 of that form figured without taking into account any amount on line 9 (student loan interest deduction). Federal and state income tax forms Phaseout. Federal and state income tax forms   If your MAGI is within the range of incomes where the credit must be reduced, you must figure your reduced deduction. Federal and state income tax forms To figure the phaseout, multiply your interest deduction (before the phaseout) by a fraction. Federal and state income tax forms The numerator is your MAGI minus $60,000 ($125,000 in the case of a joint return). Federal and state income tax forms The denominator is $15,000 ($30,000 in the case of a joint return). Federal and state income tax forms Subtract the result from your deduction (before the phaseout) to give you the amount you can deduct. Federal and state income tax forms Example 1. Federal and state income tax forms During 2013 you paid $800 interest on a qualified student loan. Federal and state income tax forms Your 2013 MAGI is $145,000 and you are filing a joint return. Federal and state income tax forms You must reduce your deduction by $533, figured as follows. Federal and state income tax forms   $800 × $145,000 − $125,000  $30,000 = $533   Your reduced student loan interest deduction is $267 ($800 − $533). Federal and state income tax forms Example 2. Federal and state income tax forms The facts are the same as in Example 1 except that you paid $2,750 interest. Federal and state income tax forms Your maximum deduction for 2013 is $2,500. Federal and state income tax forms You must reduce your maximum deduction by $1,667, figured as follows. Federal and state income tax forms   $2,500 × $145,000 − $125,000  $30,000 = $1,667   In this example, your reduced student loan interest deduction is $833 ($2,500 − $1,667). Federal and state income tax forms Which Worksheet To Use Generally, you figure the deduction using the Student Loan Interest Deduction Worksheet in the instructions for Form 1040, Form 1040A, or Form 1040NR. Federal and state income tax forms However, if you are filing Form 2555, Foreign Earned Income, Form 2555-EZ, Foreign Earned Income Exclusion, or Form 4563, Exclusion of Income for Bona Fide Residents of American Samoa, or you are excluding income from sources within Puerto Rico, you must complete Worksheet 4-1. Federal and state income tax forms Student Loan Interest Deduction Worksheet at the end of this chapter. Federal and state income tax forms Claiming the Deduction The student loan interest deduction is an adjustment to income. Federal and state income tax forms To claim the deduction, enter the allowable amount on line 33 (Form 1040), line 18 (Form 1040A), line 33 (Form 1040NR), or line 9 (Form 1040NR-EZ). Federal and state income tax forms Worksheet 4-1. Federal and state income tax forms Student Loan Interest Deduction Worksheet Use this worksheet instead of the worksheet in the Form 1040 instructions if you are filing Form 2555, 2555-EZ, or 4563, or you are excluding income from sources within Puerto Rico. Federal and state income tax forms Before using this worksheet, you must complete Form 1040, lines 7 through 32, plus any amount to be entered on the dotted line next to line 36. Federal and state income tax forms 1. Federal and state income tax forms Enter the total interest you paid in 2013 on qualified student loans. Federal and state income tax forms Do not enter  more than $2,500 1. Federal and state income tax forms   2. Federal and state income tax forms Enter the amount from Form 1040, line 22 2. Federal and state income tax forms       3. Federal and state income tax forms Enter the total of the amounts from Form 1040,  lines 23 through 32 3. Federal and state income tax forms           4. Federal and state income tax forms Enter the total of any amounts entered on the dotted line next to Form 1040, line 36 4. Federal and state income tax forms           5. Federal and state income tax forms Add lines 3 and 4 5. Federal and state income tax forms       6. Federal and state income tax forms Subtract line 5 from line 2 6. Federal and state income tax forms       7. Federal and state income tax forms Enter any foreign earned income exclusion and/or housing  exclusion (Form 2555, line 45, or Form 2555-EZ, line 18) 7. Federal and state income tax forms       8. Federal and state income tax forms Enter any foreign housing deduction (Form 2555, line 50) 8. Federal and state income tax forms       9. Federal and state income tax forms Enter the amount of income from Puerto Rico you are excluding 9. Federal and state income tax forms       10. Federal and state income tax forms Enter the amount of income from American Samoa  you are excluding (Form 4563, line 15) 10. Federal and state income tax forms       11. Federal and state income tax forms Add lines 6 through 10. Federal and state income tax forms This is your modified adjusted gross income 11. Federal and state income tax forms   12. Federal and state income tax forms Enter the amount shown below for your filing status 12. Federal and state income tax forms     •Single, head of household, or qualifying widow(er)—$60,000       •Married filing jointly—$125,000     13. Federal and state income tax forms Is the amount on line 11 more than the amount on line 12?       □ No. Federal and state income tax forms Skip lines 13 and 14, enter -0- on line 15, and go to line 16. Federal and state income tax forms       □ Yes. Federal and state income tax forms Subtract line 12 from line 11 13. Federal and state income tax forms   14. Federal and state income tax forms Divide line 13 by $15,000 ($30,000 if married filing jointly). Federal and state income tax forms Enter the result as a decimal  (rounded to at least three places). Federal and state income tax forms If the result is 1. Federal and state income tax forms 000 or more, enter 1. Federal and state income tax forms 000 14. Federal and state income tax forms . Federal and state income tax forms 15. Federal and state income tax forms Multiply line 1 by line 14 15. Federal and state income tax forms   16. Federal and state income tax forms Student loan interest deduction. Federal and state income tax forms Subtract line 15 from line 1. Federal and state income tax forms Enter the result here  and on Form 1040, line 33. Federal and state income tax forms Do not include this amount in figuring any other  deduction on your return (such as on Schedule A, C, E, etc. Federal and state income tax forms ) 16. Federal and state income tax forms   Prev  Up  Next   Home   More Online Publications