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File 1040ez for free 3. File 1040ez for free   Unrelated Trade or Business Table of Contents Selling of products of exempt functions. File 1040ez for free Dual use of assets or facilities. File 1040ez for free Exploitation of exempt functions. File 1040ez for free ExamplesExceptions. File 1040ez for free Excluded Trade or Business ActivitiesQualified sponsorship payment. File 1040ez for free Advertising. File 1040ez for free Exception for contingent payments. File 1040ez for free Exception for periodicals. File 1040ez for free Exception for conventions and trade shows. File 1040ez for free Legal definition. File 1040ez for free Legal where played. File 1040ez for free No for-profit games where played. File 1040ez for free Unrelated business income. File 1040ez for free   Unrelated business income is the income from a trade or business regularly conducted by an exempt organization and not substantially related to the performance by the organization of its exempt purpose or function, except that the organization uses the profits derived from this activity. File 1040ez for free   Certain trade or business activities are not treated as an unrelated trade or business. File 1040ez for free See Excluded Trade or Business Activities, later. File 1040ez for free Trade or business. File 1040ez for free   The term “trade or business” generally includes any activity conducted for the production of income from selling goods or performing services. File 1040ez for free An activity does not lose its identity as a trade or business merely because it is conducted within a larger group of similar activities that may or may not be related to the exempt purposes of the organization. File 1040ez for free   For example, the regular sale of pharmaceutical supplies to the general public by a hospital pharmacy does not lose its identity as a trade or business, even though the pharmacy also furnishes supplies to the hospital and patients of the hospital in accordance with its exempt purpose. File 1040ez for free Similarly, soliciting, selling, and publishing commercial advertising is a trade or business even though the advertising is published in an exempt organization's periodical that contains editorial matter related to the organization's exempt purpose. File 1040ez for free Regularly conducted. File 1040ez for free   Business activities of an exempt organization ordinarily are considered regularly conducted if they show a frequency and continuity, and are pursued in a manner similar to comparable commercial activities of nonexempt organizations. File 1040ez for free   For example, a hospital auxiliary's operation of a sandwich stand for 2 weeks at a state fair would not be the regular conduct of a trade or business. File 1040ez for free The stand would not compete with similar facilities that a nonexempt organization would ordinarily operate year-round. File 1040ez for free However, operating a commercial parking lot every Saturday, year-round, would be the regular conduct of a trade or business. File 1040ez for free Not substantially related. File 1040ez for free    A business activity is not substantially related to an organization's exempt purpose if it does not contribute importantly to accomplishing that purpose (other than through the production of funds). File 1040ez for free Whether an activity contributes importantly depends in each case on the facts involved. File 1040ez for free   In determining whether activities contribute importantly to the accomplishment of an exempt purpose, the size and extent of the activities involved must be considered in relation to the nature and extent of the exempt function that they intend to serve. File 1040ez for free For example, to the extent an activity is conducted on a scale larger than is reasonably necessary to perform an exempt purpose, it does not contribute importantly to the accomplishment of the exempt purpose. File 1040ez for free The part of the activity that is more than needed to accomplish the exempt purpose is an unrelated trade or business. File 1040ez for free   Also in determining whether activities contribute importantly to the accomplishment of an exempt purpose, the following principles apply. File 1040ez for free Selling of products of exempt functions. File 1040ez for free   Ordinarily, selling products that result from the performance of exempt functions is not an unrelated trade or business if the product is sold in substantially the same state it is in when the exempt functions are completed. File 1040ez for free Thus, for an exempt organization engaged in rehabilitating handicapped persons (its exempt function), selling articles made by these persons as part of their rehabilitation training is not an unrelated trade or business. File 1040ez for free   However, if a completed product resulting from an exempt function is used or exploited in further business activity beyond what is reasonably appropriate or necessary to dispose of it as is, the activity is an unrelated trade or business. File 1040ez for free For example, if an exempt organization maintains an experimental dairy herd for scientific purposes, the sale of milk and cream produced in the ordinary course of operation of the project is not an unrelated trade or business. File 1040ez for free But if the organization uses the milk and cream in the further manufacture of food items such as ice cream, pastries, etc. File 1040ez for free , the sale of these products is an unrelated trade or business unless the manufacturing activities themselves contribute importantly to the accomplishment of an exempt purpose of the organization. File 1040ez for free Dual use of assets or facilities. File 1040ez for free   If an asset or facility necessary to the conduct of exempt functions is also used in commercial activities, its use for exempt functions does not, by itself, make the commercial activities a related trade or business. File 1040ez for free The test, as discussed earlier, is whether the activities contribute importantly to the accomplishment of exempt purposes. File 1040ez for free   For example, a museum has a theater auditorium designed for showing educational films in connection with its program of public education in the arts and sciences. File 1040ez for free The theater is a principal feature of the museum and operates continuously while the museum is open to the public. File 1040ez for free If the organization also operates the theater as a motion picture theater for the public when the museum is closed, the activity is an unrelated trade or business. File 1040ez for free   For information on allocating expenses for the dual use of assets or facilities, see Deductions in chapter 4. File 1040ez for free Exploitation of exempt functions. File 1040ez for free   Exempt activities sometimes create goodwill or other intangibles that can be exploited in a commercial way. File 1040ez for free When an organization exploits such an intangible in commercial activities, the fact that the income depends in part upon an exempt function of the organization does not make the commercial activities a related trade or business. File 1040ez for free Unless the commercial exploitation contributes importantly to the accomplishment of the exempt purpose, the commercial activities are an unrelated trade or business. File 1040ez for free   For the treatment of expenses attributable to the exploitation of exempt activities, see Deductions in chapter 4. File 1040ez for free Examples The following are examples of activities that were determined to be (or not to be) unrelated trades or businesses using the definitions and principles just discussed. File 1040ez for free Sales commissions. File 1040ez for free   An agricultural organization, whose exempt purposes are to promote better conditions for cattle breeders and to improve the breed generally, engages in an unrelated trade or business when it regularly sells cattle for its members on a commission basis. File 1040ez for free Artists' facilities. File 1040ez for free   An organization whose exempt purpose is to stimulate and foster public interest in the fine arts by promoting art exhibits, sponsoring cultural events, and furnishing information about fine arts leases studio apartments to artist tenants and operates a dining hall primarily for these tenants. File 1040ez for free These two activities do not contribute importantly to accomplishing the organization's exempt purpose. File 1040ez for free Therefore, they are unrelated trades or businesses. File 1040ez for free Membership list sales. File 1040ez for free   An exempt educational organization regularly sells membership mailing lists to business firms. File 1040ez for free This activity does not contribute importantly to the accomplishment of the organization's exempt purpose and therefore is an unrelated trade or business. File 1040ez for free Also see Exchange or rental of member lists under Excluded Trade or Business Activities, later. File 1040ez for free Hospital facilities. File 1040ez for free   An exempt hospital leases its adjacent office building and furnishes certain office services to a hospital-based medical group for a fee. File 1040ez for free The group provides all diagnostic and therapeutic procedures to the hospital's patients and operates the hospital's emergency room on a 24-hour basis. File 1040ez for free The leasing activity is substantially related to the hospital's exempt purpose and is not an unrelated trade or business. File 1040ez for free   The hospital also operates a gift shop patronized by patients, visitors making purchases for patients, and employees; a cafeteria and coffee shop primarily for employees and medical staff; and a parking lot for patients and visitors only. File 1040ez for free These activities are also substantially related to the hospital's exempt purpose and do not constitute unrelated trades or businesses. File 1040ez for free Book publishing. File 1040ez for free   An exempt organization engages primarily in activities that further its exempt purposes. File 1040ez for free It also owns the publication rights to a book that does not relate to any of its exempt purposes. File 1040ez for free The organization exploits the book in a commercial manner by arranging for printing, distribution, publicity, and advertising in connection with the sale of the book. File 1040ez for free These activities constitute a trade or business regularly conducted. File 1040ez for free Because exploiting the book is unrelated to the organization's exempt purposes (except for the use of the book's profits), the income is unrelated business income. File 1040ez for free   However, if the organization transfers publication rights to a commercial publisher in return for royalties, the royalty income received will not be unrelated business income. File 1040ez for free See Royalties under Exclusions in chapter 4. File 1040ez for free School handicraft shop. File 1040ez for free   An exempt vocational school operates a handicraft shop that sells articles made by students in their regular courses of instruction. File 1040ez for free The students are paid a percentage of the sales price. File 1040ez for free In addition, the shop sells products made by local residents who make articles at home according to the shop's specifications. File 1040ez for free The shop manager periodically inspects the articles during their manufacture to ensure that they meet desired standards of style and quality. File 1040ez for free Although many local participants are former students of the school, any qualified person may participate in the program. File 1040ez for free The sale of articles made by students does not constitute an unrelated trade or business, but the sale of products made by local residents is an unrelated trade or business and is subject to unrelated business income tax. File 1040ez for free School facilities. File 1040ez for free   An exempt school has tennis courts and dressing rooms that it uses during the regular school year in its educational program. File 1040ez for free During the summer, the school operates a tennis club open to the general public. File 1040ez for free Employees of the school run the club, including collecting membership fees and scheduling court time. File 1040ez for free   Another exempt school leases the same type of facilities to an unrelated individual who runs a tennis club for the summer. File 1040ez for free The lease is for a fixed fee that does not depend on the income or profits derived from the leased property. File 1040ez for free   In both situations, the exempt purpose is the advancement of education. File 1040ez for free Furnishing tennis facilities in the manner described does not further that exempt purpose. File 1040ez for free These activities are unrelated trades or businesses. File 1040ez for free However, in the second situation the income derived from the leasing of the property is excluded from unrelated business taxable income as rent from real property. File 1040ez for free See Rents under Exclusions in chapter 4. File 1040ez for free Services provided with lease. File 1040ez for free   An exempt university leases its football stadium during several months of the year to a professional football team for a fixed fee. File 1040ez for free Under the lease agreement, the university furnishes heat, light, and water and is responsible for all ground maintenance. File 1040ez for free It also provides dressing room, linen, and stadium security services for the professional team. File 1040ez for free   Leasing of the stadium is an unrelated trade or business. File 1040ez for free In addition, the substantial services furnished for the convenience of the lessee go beyond those usually provided with the rental of space for occupancy only. File 1040ez for free Therefore, the income from this lease is rent from real property and unrelated business taxable income. File 1040ez for free Broadcasting rights. File 1040ez for free   An exempt collegiate athletic conference conducts an annual competitive athletic game between its conference champion and another collegiate team. File 1040ez for free Income is derived from admission charges and the sale of exclusive broadcasting rights to a national radio and television network. File 1040ez for free An athletic program is considered an integral part of the educational process of a university. File 1040ez for free   The educational purposes served by intercollegiate athletics are identical whether conducted directly by individual universities or by their regional athletic conference. File 1040ez for free Also, the educational purposes served by exhibiting a game before an audience that is physically present and exhibiting the game on television or radio before a much larger audience are substantially similar. File 1040ez for free Therefore, the sale of the broadcasting rights contributes importantly to the accomplishment of the organization's exempt purpose and is not an unrelated trade or business. File 1040ez for free   In a similar situation, an exempt organization was created as a national governing body for amateur athletes to foster interest in amateur sports and to encourage widespread public participation. File 1040ez for free The organization receives income each year from the sale of exclusive broadcasting rights to an independent producer, who contracts with a commercial network to broadcast many of the athletic events sponsored, supervised, and regulated by the organization. File 1040ez for free   The broadcasting of these events promotes the various amateur sports, fosters widespread public interest in the benefits of the organization's nationwide amateur program, and encourages public participation. File 1040ez for free The sale of the rights and the broadcasting of the events contribute importantly to the organization's exempt purpose. File 1040ez for free Therefore, the sale of the exclusive broadcasting rights is not an unrelated trade or business. File 1040ez for free Yearbook advertising. File 1040ez for free   An exempt organization receives income from the sale of advertising in its annual yearbook. File 1040ez for free The organization hires an independent commercial firm, under a contract covering a full calendar year, to conduct an intensive advertising solicitation campaign in the organization's name. File 1040ez for free This firm is paid a percentage of the gross advertising receipts for selling the advertising, collecting from advertisers, and printing the yearbook. File 1040ez for free This advertising activity is an unrelated trade or business. File 1040ez for free Pet boarding and grooming services. File 1040ez for free   An exempt organization, organized and operated for the prevention of cruelty to animals, receives unrelated business income from providing pet boarding and grooming services for the general public. File 1040ez for free These activities do not contribute importantly to its purpose of preventing cruelty to animals. File 1040ez for free Museum eating facilities. File 1040ez for free   An exempt art museum operates a dining room, a cafeteria, and a snack bar for use by the museum staff, employees, and visitors. File 1040ez for free Eating facilities in the museum help to attract visitors and allow them to spend more time viewing the museum's exhibits without having to seek outside restaurants at mealtime. File 1040ez for free The eating facilities also allow the museum staff and employees to remain in the museum throughout the day. File 1040ez for free Thus, the museum's operation of the eating facilities contributes importantly to the accomplishment of its exempt purposes and is not unrelated trade or business. File 1040ez for free Halfway house workshop. File 1040ez for free   A halfway house organized to provide room, board, therapy, and counseling for persons discharged from alcoholic treatment centers also operates a furniture shop to provide full-time employment for its residents. File 1040ez for free The profits are applied to the operating costs of the halfway house. File 1040ez for free The income from this venture is not unrelated trade or business income because the furniture shop contributes importantly to the organization's purpose of aiding its residents' transition from treatment to a normal and productive life. File 1040ez for free Travel tour programs. File 1040ez for free   Travel tour activities that are a trade or business are an unrelated trade or business if the activities are not substantially related to the purpose for which tax exemption was granted to the organization. File 1040ez for free Example 1. File 1040ez for free A tax-exempt university alumni association provides a travel tour program for its members and their families. File 1040ez for free The organization works with various travel agencies and schedules approximately ten tours a year to various places around the world. File 1040ez for free It mails out promotional material and accepts reservations for fees paid by the travel agencies on a per-person basis. File 1040ez for free The organization provides an employee for each tour as a tour leader. File 1040ez for free There is no formal educational program conducted with these tours, and they do not differ from regular commercially operated tours. File 1040ez for free By providing travel tours to its members, the organization is engaging in a regularly conducted trade or business. File 1040ez for free Even if the tours it offers support the university, financially and otherwise, and encourage alumni to do the same, they do not contribute importantly to the organization's exempt purpose of promoting education. File 1040ez for free Therefore, the sale of the travel tours is an unrelated trade or business. File 1040ez for free Example 2. File 1040ez for free A tax-exempt organization formed for the purpose of educating individuals about the geography and the culture of the United States provides study tours to national parks and other locations within the United States. File 1040ez for free These tours are conducted by teachers and others certified by the state board of education. File 1040ez for free The tours are primarily designed for students enrolled in degree programs at state educational institutions but are open to all who agree to participate in the required study program associated with the tour taken. File 1040ez for free A tour's study program consists of instruction on subjects related to the location being visited on the tour. File 1040ez for free Each tour group brings along a library of material related to the subjects being studied on the tour. File 1040ez for free During the tour, 5 or 6 hours per day are devoted to organized study, preparation of reports, lectures, instruction, and recitation by the students. File 1040ez for free Examinations are given at the end of each tour. File 1040ez for free The state board of education awards academic credit for tour participation. File 1040ez for free Because these tours are substantially related to the organization's exempt purpose, they are not an unrelated trade or business. File 1040ez for free Insurance programs. File 1040ez for free   An organization that acts as a group insurance policyholder for its members and collects a fee for performing administrative services is normally carrying on an unrelated trade or business. File 1040ez for free Exceptions. File 1040ez for free   Organizations whose exempt activities may include the provision of insurance benefits, such as fraternal beneficiary societies, voluntary employees beneficiary associations, and labor organizations, are generally exceptions to this rule. File 1040ez for free Magazine publishing. File 1040ez for free   An association of credit unions with tax-exempt status as a business league publishes a consumer-oriented magazine four times a year and makes it available to member credit unions for purchase. File 1040ez for free   By selling a magazine to its members as a promotional device, the organization furnishes its members with a regular commercial service they can use in their own operations. File 1040ez for free This service does not promote the improvement of business conditions of one or more lines of business, which is the exempt purpose of a business league. File 1040ez for free   Since the activity does not contribute importantly to the organization's exempt function, it is an unrelated trade or business. File 1040ez for free Directory of members. File 1040ez for free   A business league publishes an annual directory that contains a list of all its members, their addresses, and their area of expertise. File 1040ez for free Each member has the same amount of space in the directory, and its format does not emphasize the relative importance or reputation of any member. File 1040ez for free The directory contains no commercial advertisement and is sold only to the organization's members. File 1040ez for free   The directory facilitates communication among the members and encourages the exchange of ideas and expertise. File 1040ez for free Because the directory lists the members in a similar noncommercial format without advertising and is not distributed to the public, its sale does not confer private commercial benefits on the members. File 1040ez for free The sale of the directory does contribute importantly to the organization's exempt purpose and is not an unrelated trade or business. File 1040ez for free This directory differs from the publication discussed next because of its noncommercial characteristics. File 1040ez for free Sales of advertising space. File 1040ez for free   A national association of law enforcement officials publishes a monthly journal that contains articles and other editorial material of professional interest to its members. File 1040ez for free The journal is distributed without charge, mainly to the organization's members. File 1040ez for free   The organization sells advertising space in the journal either for conventional advertising or to merely identify the purchaser without a commercial message. File 1040ez for free Some of the noncommercial advertising identifies the purchaser in a separate space, and some consists of listings of 60 or more purchasers per page. File 1040ez for free A business firm identified in a separate space is further identified in an Index of Advertisers. File 1040ez for free   The organization solicits advertising by personal contacts. File 1040ez for free Advertising from large firms is solicited by contacting their chief executive officer or community relations officer rather than their advertising manager. File 1040ez for free The organization also solicits advertising in form letters appealing for corporate and personal contributions. File 1040ez for free   An exempt organization's sale of advertising placed for the purchaser's commercial benefit is a commercial activity. File 1040ez for free Goodwill derived by the purchaser from being identified as a patron of the organization is usually considered a form of commercial benefit. File 1040ez for free Therefore, advertising in an exempt organization's publication is generally presumed to be placed for the purchaser's commercial benefit, even if it has no commercial message. File 1040ez for free However, this presumption is not conclusive if the purchaser's patronage would be difficult to justify commercially in view of the facts and circumstances. File 1040ez for free In that case, other factors should also be considered in determining whether a commercial benefit can be expected. File 1040ez for free Those other factors include: The normal manner in which the publication is circulated; The territorial scope of the circulation; The extent to which its readers, promoters, or the like could reasonably be expected to further, either directly or indirectly, the commercial interest of the advertisers; The eligibility of the publishing organization to receive tax-deductible contributions; and The commercial or noncommercial methods used to solicit the advertisers. File 1040ez for free   In this situation, the purchaser of a separate advertising space without a commercial message can nevertheless expect a commercial benefit from the goodwill derived from being identified in that manner as a patron of the organization. File 1040ez for free However, the purchaser of a listing cannot expect more than an inconsequential benefit. File 1040ez for free Therefore, the sale of separate spaces, but not the listings, is an unrelated trade or business. File 1040ez for free Publishing legal notices. File 1040ez for free   A bar association publishes a legal journal containing opinions of the county court, articles of professional interest to lawyers, advertisements for products and services used by the legal profession, and legal notices. File 1040ez for free The legal notices are published to satisfy state laws requiring publication of notices in connection with legal proceedings, such as the administration of estates and actions to quiet title to real property. File 1040ez for free The state designated the bar association's journal as the place to publish the required notices. File 1040ez for free   The publication of ordinary commercial advertising does not advance the exempt purposes of the association even when published in a periodical that contains material related to exempt purposes. File 1040ez for free Although the advertising is directed specifically to members of the legal profession, it is still commercial in nature and does not contribute importantly to the exempt purposes of the association. File 1040ez for free Therefore, the advertising income is unrelated trade or business income. File 1040ez for free   On the other hand, the publication of legal notices is distinguishable from ordinary commercial advertising in that its purpose is to inform the general public of significant legal events rather than to stimulate demand for the products or services of an advertiser. File 1040ez for free This promotes the common interests of the legal profession and contributes importantly to the association's exempt purposes. File 1040ez for free Therefore, the publishing of legal notices does not constitute an unrelated trade or business. File 1040ez for free Museum greeting card sales. File 1040ez for free    An art museum that exhibits modern art sells greeting cards that display printed reproductions of selected works from other art collections. File 1040ez for free Each card is imprinted with the name of the artist, the title or subject matter of the work, the date or period of its creation, if known, and the museum's name. File 1040ez for free The cards contain appropriate greetings and are personalized on request. File 1040ez for free   The organization sells the cards in the shop it operates in the museum and sells them at quantity discounts to retail stores. File 1040ez for free It also sells them by mail order through a catalog that is advertised in magazines and other publications throughout the year. File 1040ez for free As a result, a large number of cards are sold at a significant profit. File 1040ez for free   The museum is exempt as an educational organization on the basis of its ownership, maintenance, and exhibition for public viewing of works of art. File 1040ez for free The sale of greeting cards with printed reproductions of artworks contributes importantly to the achievement of the museum's exempt educational purposes by enhancing public awareness, interest, and appreciation of art. File 1040ez for free The cards may encourage more people to visit the museum itself to share in its educational programs. File 1040ez for free The fact that the cards are promoted and sold in a commercial manner at a profit and in competition with commercial greeting card publishers does not alter the fact that the activity is related to the museum's exempt purpose. File 1040ez for free Therefore, these sales activities are not an unrelated trade or business. File 1040ez for free Museum shop. File 1040ez for free   An art museum maintained and operated for the exhibition of American folk art operates a shop in the museum that sells: Reproductions of works in the museum's own collection and reproductions of artistic works from the collections of other art museums (prints suitable for framing, postcards, greeting cards, and slides); Metal, wood, and ceramic copies of American folk art objects from its own collection and similar copies of art objects from other collections of artworks; Instructional literature and scientific books and souvenir items concerning the history and development of art and, in particular, of American folk art; and Scientific books and souvenir items of the city in which the museum is located. File 1040ez for free   The shop also rents originals or reproductions of paintings contained in its collection. File 1040ez for free All of its reproductions are imprinted with the name of the artist, the title or subject matter of the work from which it is reproduced, and the museum's name. File 1040ez for free   Each line of merchandise must be considered separately to determine if sales are related to the exempt purpose. File 1040ez for free   The sale and rental of reproductions and copies of works from the museum's own collection and reproductions of artistic works not owned by the museum contribute importantly to the achievement of the museum's exempt educational purpose by making works of art familiar to a broader segment of the public, thereby enhancing the public's understanding and appreciation of art. File 1040ez for free The same is true for the sale of literature relating to art. File 1040ez for free Therefore, these sales activities are not an unrelated trade or business. File 1040ez for free   On the other hand, the sale of scientific books and souvenir items of the city where the museum is located has no causal relationship to art or to artistic endeavor and, therefore, does not contribute importantly to the accomplishment of the museum's exempt educational purposes. File 1040ez for free The fact that selling some of these items could, under different circumstances, be held related to the exempt educational purpose of some other exempt educational organization does not change this conclusion. File 1040ez for free Additionally, the sale of these items does not lose its identity as a trade or business merely because the museum also sells articles which do contribute importantly to the accomplishment of its exempt function. File 1040ez for free Therefore, these sales are an unrelated trade or business. File 1040ez for free Business league's parking and bus services. File 1040ez for free   A business league, whose purpose is to retain and stimulate trade in a downtown area that has inadequate parking facilities, operates a fringe parking lot and shuttle bus service. File 1040ez for free It also operates, as an insubstantial part of its activities, a park and shop plan. File 1040ez for free   The fringe parking lot and shuttle bus service operate in a manner that does not favor any individual or group of downtown merchants. File 1040ez for free The merchants cannot offer free or discount parking or bus fares to their customers. File 1040ez for free   The park and shop plan allows customers of particular merchants to park free at certain parking lots in the area. File 1040ez for free Merchants participating in this plan buy parking stamps, which they distribute to their customers to use to pay for parking. File 1040ez for free   Operating the fringe parking lot and shuttle bus service provides easy and convenient access to the downtown area and, therefore, stimulates and improves business conditions in the downtown area generally. File 1040ez for free That activity contributes importantly to the organization's accomplishing its exempt purpose and is not an unrelated trade or business. File 1040ez for free   The park and shop plan encourages customers to use a limited number of participating member merchants in order to obtain free parking. File 1040ez for free This provides a particular service to individual members of the organization and does not further its exempt purpose. File 1040ez for free Therefore, operating the park and shop plan is an unrelated trade or business. File 1040ez for free Youth residence. File 1040ez for free   An exempt organization, whose purpose is to provide for the welfare of young people, rents rooms primarily to people under age 25. File 1040ez for free The residence units are operated on, and as a part of, the premises in which the organization carries on the social, recreational, and guidance programs for which it was recognized as exempt. File 1040ez for free The facilities are under the management and supervision of trained career professionals who provide residents with personal counseling, physical education programs, and group recreational activities. File 1040ez for free The rentals are not an unrelated trade or business because renting the rooms is substantially related to the organization's exempt purpose. File 1040ez for free Health club program. File 1040ez for free   An exempt charitable organization's purpose is to provide for the welfare of young people. File 1040ez for free The organization conducts charitable activities and maintains facilities that will contribute to the physical, social, mental, and spiritual health of young people at minimum or no cost to them. File 1040ez for free Nominal annual dues are charged for membership in the organization and use of the facilities. File 1040ez for free   In addition, the organization organized a health club program that its members could join for an annual fee in addition to the annual dues. File 1040ez for free The annual fee is comparable to fees charged by similar local commercial health clubs and is sufficiently high to restrict participation in the program to a limited number of members of the community. File 1040ez for free   The health club program is in addition to the general physical fitness program of the organization. File 1040ez for free Operating this program does not contribute importantly to the organization's accomplishing its exempt purpose and, therefore, is an unrelated trade or business. File 1040ez for free Miniature golf course. File 1040ez for free   An exempt youth welfare organization operates a miniature golf course that is open to the general public. File 1040ez for free The course, which is managed by salaried employees, is substantially similar to commercial courses. File 1040ez for free The admission fees charged are comparable to fees of commercial facilities and are designed to return a profit. File 1040ez for free   The operation of the miniature golf course in a commercial manner does not contribute importantly to the accomplishment of the organization's exempt purpose and, therefore, is an unrelated trade or business. File 1040ez for free Sales of hearing aids. File 1040ez for free   A tax-exempt hospital, whose primary activity is rehabilitation, sells hearing aids to patients. File 1040ez for free This activity is an essential part of the hospital's program to test and evaluate patients with hearing deficiencies and contributes importantly to its exempt purpose. File 1040ez for free It is not an unrelated trade or business. File 1040ez for free Nonpatient laboratory testing. File 1040ez for free   Nonpatient laboratory testing performed by a tax-exempt teaching hospital on specimens needed for the conduct of its teaching activities is not an unrelated trade or business. File 1040ez for free However, laboratory testing performed by a tax-exempt non-teaching hospital on referred specimens from private office patients of staff physicians is an unrelated trade or business if these services are otherwise available in the community. File 1040ez for free Selling endorsements. File 1040ez for free   An exempt scientific organization enjoys an excellent reputation in the field of biological research. File 1040ez for free It exploits this reputation regularly by selling endorsements of laboratory equipment to manufacturers. File 1040ez for free Endorsing laboratory equipment does not contribute importantly to the accomplishment of any purpose for which exemption is granted to the organization. File 1040ez for free Accordingly, the sale of endorsements is an unrelated trade or business. File 1040ez for free Sponsoring entertainment events. File 1040ez for free   An exempt university has a regular faculty and a regularly enrolled student body. File 1040ez for free During the school year, the university sponsors the appearance of professional theater companies and symphony orchestras that present drama and musical performances for the students and faculty members. File 1040ez for free Members of the general public also are admitted. File 1040ez for free The university advertises these performances and supervises advance ticket sales at various places, including such university facilities as the cafeteria and the university bookstore. File 1040ez for free Although the presentation of the performances makes use of an intangible generated by the university's exempt educational functions—the presence of the student body and faculty—such drama and music events contribute importantly to the overall educational and cultural functions of the university. File 1040ez for free Therefore, the activity is not an unrelated trade or business. File 1040ez for free Excluded Trade or Business Activities The following activities are specifically excluded from the definition of unrelated trade or business. File 1040ez for free Volunteer workforce. File 1040ez for free   Any trade or business in which substantially all the work is performed for the organization without compensation is not an unrelated trade or business. File 1040ez for free Example 1. File 1040ez for free A retail store operated by an exempt orphanage where unpaid volunteers perform substantially all the work in carrying on the business is not an unrelated trade or business. File 1040ez for free Example 2. File 1040ez for free A volunteer fire company conducts weekly public dances. File 1040ez for free Holding public dances and charging admission on a regular basis may, given the facts and circumstances of a particular case, be considered an unrelated trade or business. File 1040ez for free However, because the work at the dances is performed by unpaid volunteers, the activity is not an unrelated trade or business. File 1040ez for free Convenience of members. File 1040ez for free   A trade or business conducted by a 501(c)(3) organization or by a governmental college or university primarily for the convenience of its members, students, patients, officers, or employees is not an unrelated trade or business. File 1040ez for free For example, a laundry operated by a college for the purpose of laundering dormitory linens and students' clothing is not an unrelated trade or business. File 1040ez for free Qualified sponsorship activities. File 1040ez for free   Soliciting and receiving qualified sponsorship payments is not an unrelated trade or business, and the payments are not subject to unrelated business income tax. File 1040ez for free Qualified sponsorship payment. File 1040ez for free   This is any payment made by a person engaged in a trade or business for which the person will receive no substantial benefit other than the use or acknowledgment of the business name, logo, or product lines in connection with the organization's activities. File 1040ez for free “Use or acknowledgment” does not include advertising the sponsor's products or services. File 1040ez for free The organization's activities include all its activities, whether or not related to its exempt purposes. File 1040ez for free   For example, if, in return for receiving a sponsorship payment, an organization promises to use the sponsor's name or logo in acknowledging the sponsor's support for an educational or fundraising event, the payment is a qualified sponsorship payment and is not subject to the unrelated business income tax. File 1040ez for free   Providing facilities, services, or other privileges (for example, complimentary tickets, pro-am playing spots in golf tournaments, or receptions for major donors) to a sponsor or the sponsor's designees in connection with a sponsorship payment does not affect whether the payment is a qualified sponsorship payment. File 1040ez for free Instead, providing these goods or services is treated as a separate transaction in determining whether the organization has unrelated business income from the event. File 1040ez for free Generally, if the services or facilities are not a substantial benefit or if providing them is a related business activity, the payments will not be subject to the unrelated business income tax. File 1040ez for free   Similarly, the sponsor's receipt of a license to use an intangible asset (for example, a trademark, logo, or designation) of the organization is treated as separate from the qualified sponsorship transaction in determining whether the organization has unrelated business taxable income. File 1040ez for free   If part of a payment would be a qualified sponsorship payment if paid separately, that part is treated as a separate payment. File 1040ez for free For example, if a sponsorship payment entitles the sponsor to both product advertising and the use or acknowledgment of the sponsor's name or logo by the organization, then the unrelated business income tax does not apply to the part of the payment that is more than the fair market value of the product advertising. File 1040ez for free Advertising. File 1040ez for free   A payment is not a qualified sponsorship payment if, in return, the organization advertises the sponsor's products or services. File 1040ez for free For information on the treatment of payments for advertising, see Exploitation of Exempt Activity—Advertising Sales in chapter 4. File 1040ez for free   Advertising includes: Messages containing qualitative or comparative language, price information, or other indications of savings or value; Endorsements; and Inducements to purchase, sell, or use the products or services. File 1040ez for free   The use of promotional logos or slogans that are an established part of the sponsor's identity is not, by itself, advertising. File 1040ez for free In addition, mere distribution or display of a sponsor's product by the organization to the public at a sponsored event, whether for free or for remuneration, is considered use or acknowledgment of the product rather than advertising. File 1040ez for free Exception for contingent payments. File 1040ez for free   A payment is not a qualified sponsorship payment if its amount is contingent, by contract or otherwise, upon the level of attendance at one or more events, broadcast ratings, or other factors indicating the degree of public exposure to one or more events. File 1040ez for free However, the fact that a sponsorship payment is contingent upon an event actually taking place or being broadcast does not, by itself, affect whether a payment qualifies. File 1040ez for free Exception for periodicals. File 1040ez for free   A payment is not a qualified sponsorship payment if it entitles the payer to the use or acknowledgment of the business name, logo, or product lines in the organization's periodical. File 1040ez for free For this purpose, a periodical is any regularly scheduled and printed material (for example, a monthly journal) published by or on behalf of the organization. File 1040ez for free It does not include material that is related to and primarily distributed in connection with a specific event conducted by the organization (for example, a program or brochure distributed at a sponsored event). File 1040ez for free   The treatment of payments that entitle the payer to the depiction of the payer's name, logo, or products lines in an organization's periodical is determined under the rules that apply to advertising activities. File 1040ez for free See Sales of advertising space under Examples, earlier in this chapter. File 1040ez for free Also see Exploitation of Exempt Activity—Advertising Sales in chapter 4. File 1040ez for free Exception for conventions and trade shows. File 1040ez for free   A payment is not a qualified sponsorship payment if it is made in connection with any qualified convention or trade show activity. File 1040ez for free The exclusion of qualified convention or trade show activities from the definition of unrelated trade or business is explained later under Convention or trade show activity. File 1040ez for free Selling donated merchandise. File 1040ez for free   A trade or business that consists of selling merchandise, substantially all of which the organization received as gifts or contributions, is not an unrelated trade or business. File 1040ez for free For example, a thrift shop operated by a tax-exempt organization that sells donated clothes and books to the general public, with the proceeds going to the exempt organization, is not an unrelated trade or business. File 1040ez for free Employee association sales. File 1040ez for free   The sale of certain items by a local association of employees described in section 501(c)(4), organized before May 17, 1969, is not an unrelated trade or business if the items are sold for the convenience of the association's members at their usual place of employment. File 1040ez for free This exclusion applies only to the sale of work-related clothes and equipment and items normally sold through vending machines, food dispensing facilities, or by snack bars. File 1040ez for free Bingo games. File 1040ez for free   Certain bingo games are not included in the term “unrelated trade or business. File 1040ez for free ” To qualify for this exclusion, the bingo game must meet the following requirements. File 1040ez for free It meets the legal definition of bingo. File 1040ez for free It is legal where it is played. File 1040ez for free It is played in a jurisdiction where bingo games are not regularly conducted by for-profit organizations. File 1040ez for free Legal definition. File 1040ez for free   For a game to meet the legal definition of bingo, wagers must be placed, winners must be determined, and prizes or other property must be distributed in the presence of all persons placing wagers in that game. File 1040ez for free   A wagering game that does not meet the legal definition of bingo does not qualify for the exclusion, regardless of its name. File 1040ez for free For example, “instant bingo,” in which a player buys a pre-packaged bingo card with pull-tabs that the player removes to determine if he or she is a winner, does not qualify. File 1040ez for free Legal where played. File 1040ez for free   This exclusion applies only if bingo is legal under the laws of the jurisdiction where it is conducted. File 1040ez for free The fact that a jurisdiction's law that prohibits bingo is rarely enforced or is widely disregarded does not make the conduct of bingo legal for this purpose. File 1040ez for free No for-profit games where played. File 1040ez for free   This exclusion applies only if for-profit organizations cannot regularly conduct bingo games in any part of the same jurisdiction. File 1040ez for free Jurisdiction is normally the entire state; however, in certain situations, local jurisdiction will control. File 1040ez for free Example. File 1040ez for free Tax-exempt organizations X and Y are organized under the laws of state N, which has a law that permits exempt organizations to conduct bingo games. File 1040ez for free In addition, for-profit organizations are permitted to conduct bingo games in city S, a resort community located in county R. File 1040ez for free Several for-profit organizations conduct nightly games. File 1040ez for free Y conducts weekly bingo games in city S, while X conducts weekly games in county R. File 1040ez for free Since state law confines the for-profit organizations to city S, local jurisdiction controls. File 1040ez for free Y's bingo games conducted in city S are an unrelated trade or business. File 1040ez for free However, X's bingo games conducted in county R outside of city S are not an unrelated trade or business. File 1040ez for free Gambling activities other than bingo. File 1040ez for free   Any game of chance conducted by an exempt organization in North Dakota is not an unrelated trade or business if conducting the game does not violate any state or local law. File 1040ez for free Pole rentals. File 1040ez for free   The term unrelated trade or business does not include qualified pole rentals by a mutual or cooperative telephone or electric company described in section 501(c)(12). File 1040ez for free A qualified pole rental is the rental of a pole (or other structure used to support wires) if the pole (or other structure) is used: By the telephone or electric company to support one or more wires that the company uses in providing telephone or electric services to its members, and According to the rental, to support one or more wires (in addition to the wires described in 1 ) for use in connection with the transmission by wire of electricity or of telephone or other communications. File 1040ez for free For this purpose, the term rental includes any sale of the right to use the pole (or other structure). File 1040ez for free Distribution of low cost articles. File 1040ez for free   The term unrelated trade or business does not include activities relating to the distribution of low cost articles incidental to soliciting charitable contributions. File 1040ez for free This applies to organizations described in section 501 that are eligible to receive charitable contributions. File 1040ez for free   A distribution is considered incidental to the solicitation of a charitable contribution if: The recipient did not request the distribution, The distribution is made without the express consent of the recipient, and The article is accompanied by a request for a charitable contribution to the organization and a statement that the recipient may keep the low cost article regardless of whether a contribution is made. File 1040ez for free   An article is considered low cost if the cost of an item (or the aggregate costs if more than one item) distributed to a single recipient in a tax year is not more than $5, indexed annually for inflation. File 1040ez for free The maximum cost of a low cost article is $9. File 1040ez for free 70 for 2011. File 1040ez for free The cost of an article is the cost to the organization that distributes the item or on whose behalf it is distributed. File 1040ez for free Exchange or rental of member lists. File 1040ez for free   The exchange or rental of member or donor lists between organizations described in section 501 that are eligible to receive charitable contributions is not included in the term unrelated trade or business. File 1040ez for free Hospital services. File 1040ez for free   The providing of certain services at or below cost by an exempt hospital to other exempt hospitals that have facilities for 100 or fewer inpatients is not an unrelated trade or business. File 1040ez for free This exclusion applies only to services described in section 501(e)(1)(A). File 1040ez for free Public entertainment activity. File 1040ez for free   An unrelated trade or business does not include a qualified public entertainment activity. File 1040ez for free A public entertainment activity is one traditionally conducted at a fair or exposition promoting agriculture and education, including any activity whose purpose is designed to attract the public to fairs or expositions or to promote the breeding of animals or the development of products or equipment. File 1040ez for free   A qualified public entertainment activity is one conducted by a qualifying organization: In conjunction with an international, national, state, regional, or local fair or exposition; In accordance with state law that permits the activity to be operated or conducted solely by such an organization or by an agency, instrumentality, or political subdivision of the state; or In accordance with state law that permits an organization to be granted a license to conduct an activity for not more than 20 days on paying the state a lower percentage of the revenue from the activity than the state charges nonqualifying organizations that hold similar activities. File 1040ez for free   For these purposes, a qualifying organization is an organization described in section 501(c)(3), 501(c)(4), or 501(c)(5) that regularly conducts an agricultural and educational fair or exposition as one of its substantial exempt purposes. File 1040ez for free Its conducting qualified public entertainment activities will not affect determination of its exempt status. File 1040ez for free Convention or trade show activity. File 1040ez for free   An unrelated trade or business does not include qualified convention or trade show activities conducted at a convention, annual meeting, or trade show. File 1040ez for free   A qualified convention or trade show activity is any activity of a kind traditionally conducted by a qualifying organization in conjunction with an international, national, state, regional, or local convention, annual meeting, or show if: One of the purposes of the organization in sponsoring the activity is promoting and stimulating interest in, and demand for, the products and services of that industry or educating the persons in attendance regarding new products and services or new rules and regulations affecting the industry; and The show is designed to achieve its purpose through the character of the exhibits and the extent of the industry products that are displayed. File 1040ez for free   For these purposes, a qualifying organization is one described in section 501(c)(3), 501(c)(4), 501(c)(5), or 501(c)(6). File 1040ez for free The organization must regularly conduct, as one of its substantial exempt purposes, a qualified convention or trade show activity. File 1040ez for free   The rental of display space to exhibitors (including exhibitors who are suppliers) at a qualified convention or trade show is not an unrelated trade or business even if the exhibitors who rent the space are permitted to sell or solicit orders. File 1040ez for free For this purpose, a supplier's exhibit is one in which the exhibitor displays goods or services that are supplied to, rather than by, members of the qualifying organization in the conduct of these members' own trades or businesses. File 1040ez for free    Certain Internet activities conducted by a trade association described in section 501(c)(6) will be considered qualified convention and trade show activity if conducted on a special supplementary section of the association's website in conjunction with a trade show conducted by the association. File 1040ez for free The trade show itself must be a qualified convention and trade show activity. File 1040ez for free The supplementary section of the website must be ancillary to, and serve to augment and enhance, the trade show, as when it makes available the same information available at the trade show and is available only during a time period that coincides with the time period that the trade show is in operation. File 1040ez for free Conversely, Internet activities that are not conducted in conjunction with a qualified convention and trade show activity and that do not augment and enhance the trade show cannot themselves be qualified convention and trade show activity. File 1040ez for free Prev  Up  Next   Home   More Online Publications
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The File 1040ez For Free

File 1040ez for free 35. File 1040ez for free   Education Credits Table of Contents Introduction Useful Items - You may want to see: Who Can Claim an Education Credit Qualified Education ExpensesNo Double Benefit Allowed Adjustments to Qualified Education Expenses Introduction For 2013, there are two tax credits available to persons who pay expenses for higher (postsecondary) education. File 1040ez for free They are: The American opportunity credit, and The lifetime learning credit. File 1040ez for free The chapter will present an overview of these education credits. File 1040ez for free To get the detailed information you will need to claim either of the credits, and for examples illustrating that information, see chapters 2 and 3 of Publication 970. File 1040ez for free Can you claim more than one education credit this year?   For each student, you can choose for any year only one of the credits. File 1040ez for free For example, if you choose to take the American opportunity credit for a child on your 2013 tax return, you cannot, for that same child, also claim the lifetime learning credit for 2013. File 1040ez for free   If you are eligible to claim the American opportunity credit and you are also eligible to claim the lifetime learning credit for the same student in the same year, you can choose to claim either credit, but not both. File 1040ez for free   If you pay qualified education expenses for more than one student in the same year, you can choose to take the American opportunity and the lifetime learning credits on a per-student, per-year basis. File 1040ez for free This means that, for example, you can claim the American opportunity credit for one student and the lifetime learning credit for another student in the same year. File 1040ez for free Table 35-1. File 1040ez for free Comparison of Education Credits Caution. File 1040ez for free You can claim both the American opportunity credit and the lifetime learning credit on the same return—but not for the same student. File 1040ez for free   American Opportunity Credit Lifetime Learning Credit Maximum credit Up to $2,500 credit per eligible student Up to $2,000 credit per return Limit on modified adjusted gross income (MAGI) $180,000 if married filing jointly;  $90,000 if single, head of household, or qualifying widow(er) $127,000 if married filing jointly;  $63,000 if single, head of household, or qualifying widow(er) Refundable or nonrefundable 40% of credit may be refundable Credit limited to the amount of tax you must pay on your taxable income Number of years of postsecondary education Available ONLY if the student had not completed the first 4 years of postsecondary education before 2013 Available for all years of postsecondary education and for courses to acquire or improve job skills Number of tax years credit available Available ONLY for 4 tax years per eligible student (including any year(s) the Hope credit was claimed) Available for an unlimited number of years Type of program required Student must be pursuing a program leading to a degree or other recognized education credential Student does not need to be pursuing a program leading to a degree or other recognized education credential Number of courses Student must be enrolled at least half time for at least one academic period beginning during the tax year Available for one or more courses Felony drug conviction At the end of 2013, the student had not been convicted of a felony for possessing or distributing a controlled substance Felony drug convictions do not make the student ineligible Qualified expenses Tuition, required enrollment fees, and course materials that the student needs for a course of study whether or not the materials are bought at the educational institution as a condition of enrollment or attendance Tuition and fees required for enrollment or attendance (including amounts required to be paid to the institution for course-related books, supplies, and equipment) Payments for academic periods Payments made in 2013 for academic periods beginning in 2013 or beginning in the first 3 months of 2014 Differences between the American opportunity and lifetime learning credits. File 1040ez for free   There are several differences between these two credits. File 1040ez for free These differences are summarized in Table 35-1, later. File 1040ez for free Useful Items - You may want to see: Publication 970 Tax Benefits for Education Form (and Instructions) 8863 Education Credits (American Opportunity and Lifetime Learning Credits) Who Can Claim an Education Credit You may be able to claim an education credit if you, your spouse, or a dependent you claim on your tax return was a student enrolled at or attending an eligible educational institution. File 1040ez for free The credits are based on the amount of qualified education expenses paid for the student in 2013 for academic periods beginning in 2013 and in the first 3 months of 2014. File 1040ez for free For example, if you paid $1,500 in December 2013 for qualified tuition for the spring 2014 semester beginning in January 2014, you may be able to use that $1,500 in figuring your 2013 education credit(s). File 1040ez for free Academic period. File 1040ez for free   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. File 1040ez for free 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. File 1040ez for free Eligible educational institution. File 1040ez for free   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. File 1040ez for free S. File 1040ez for free Department of Education. File 1040ez for free It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. File 1040ez for free The educational institution should be able to tell you if it is an eligible educational institution. File 1040ez for free   Certain educational institutions located outside the United States also participate in the U. File 1040ez for free S. File 1040ez for free Department of Education's Federal Student Aid (FSA) programs. File 1040ez for free Who can claim a dependent's expenses. File 1040ez for free   If an exemption is allowed as a deduction for any person who claims the student as a dependent, all qualified education expenses of the student are treated as having been paid by that person. File 1040ez for free Therefore, only that person can claim an education credit for the student. File 1040ez for free If a student is not claimed as a dependent on another person's tax return, only the student can claim a credit. File 1040ez for free Expenses paid by a third party. File 1040ez for free   Qualified education expenses paid on behalf of the student by someone other than the student (such as a relative) are treated as paid by the student. File 1040ez for free However, qualified education expenses paid (or treated as paid) by a student who is claimed as a dependent on your tax return are treated as paid by you. File 1040ez for free Therefore, you are treated as having paid expenses that were paid by the third party. File 1040ez for free For more information and an example see Who Can Claim a Dependent's Expenses in Pub. File 1040ez for free 970, chapter 2 or 3. File 1040ez for free Who cannot claim a credit. File 1040ez for free   You cannot take an education credit if any of the following apply. File 1040ez for free You are claimed as a dependent on another person's tax return, such as your parent's return. File 1040ez for free Your filing status is married filing separately. File 1040ez for free You (or your spouse) were a nonresident alien for any part of 2013 and did not elect to be treated as a resident alien for tax purposes. File 1040ez for free Your MAGI is one of the following. File 1040ez for free American opportunity credit: $180,000 or more if married filing jointly, or $90,000 or more if single, head of household, or qualifying widow(er). File 1040ez for free Lifetime learning credit: $127,000 or more if married filing jointly, or $63,000 or more if single, head of household, or qualifying widow(er) . File 1040ez for free   Generally, your MAGI is the amount on your Form 1040, line 38, or Form 1040A, line 22. File 1040ez for free However, if you are filing Form 2555, Form 2555–EZ, or Form 4563, or are excluding income from Puerto RIco, add to the amount on your Form 1040, line 38, or Form 1040A, line 22, the amount of income you excluded. File 1040ez for free For details, see Pub. File 1040ez for free 970. File 1040ez for free    Figure 35-A may be helpful in determining if you can claim an education credit on your tax return. File 1040ez for free The American opportunity credit will always be greater than or equal to the lifetime learning credit for any student who is eligible for both credits. File 1040ez for free However, if any of the conditions for the American opportunity credit, listed in Table 35-1 earlier, are not met for any student, you cannot take the American opportunity credit for that student. File 1040ez for free You may be able to take the lifetime learning credit for part or all of that student's qualified education expenses instead. File 1040ez for free See Pub. File 1040ez for free 970 for information on other education benefits. File 1040ez for free Qualified Education Expenses Generally, qualified education expenses are amounts paid in 2013 for tuition and fees required for the student's enrollment or attendance at an eligible educational institution. File 1040ez for free It does not matter whether the expenses were paid in cash, by check, by credit or debit card, or with borrowed funds. File 1040ez for free For course-related books, supplies, and equipment, only certain expenses qualify. File 1040ez for free American opportunity credit: Qualified education expenses include amounts spent on books, supplies, and equipment needed for a course of study, whether or not the materials are purchased from the educational institution as a condition of enrollment or attendance. File 1040ez for free Lifetime learning credit: Qualified education expenses include amounts for books, supplies, and equipment only if required to be paid to the institution as a condition of enrollment or attendance. File 1040ez for free Qualified education expenses include nonacademic fees, such as student activity fees, athletic fees, or other expenses unrelated to the academic course of instruction, only if the fee must be paid to the institution as a condition of enrollment or attendance. File 1040ez for free However, fees for personal expenses (described below) are never qualified education expenses. File 1040ez for free Qualified education expenses for either credit do not include amounts paid for: Personal expenses. File 1040ez for free This means room and board, insurance, medical expenses (including student health fees), transportation, and other similar personal, living, or family expenses. File 1040ez for free Any course or other education involving sports, games, or hobbies, or any noncredit course, unless such course or other education is part of the student's degree program or (for the lifetime learning credit only) helps the student acquire or improve job skills. File 1040ez for free You should receive Form 1098–T, Tuition Statement, from the institution reporting either payments received in 2013 (box 1) or amounts billed in 2013 (box 2). File 1040ez for free However, the amount in box 1 or 2 of Form 1098–T may be different from the amount you paid (or are treated as having paid). File 1040ez for free In completing Form 8863, use only the amounts you actually paid (plus any amounts you are treated as having paid) in 2013, reduced as necessary, as described in Adjustments to Qualified Education Expenses , later. File 1040ez for free Qualified education expenses paid on behalf of the student by someone other than the student (such as a relative) are treated as paid by the student. File 1040ez for free Qualified education expenses paid (or treated as paid) by a student who is claimed as a dependent on your tax return are treated as paid by you. File 1040ez for free If you or the student takes a deduction for higher education expenses, such as on Schedule A or C (Form 1040), you cannot use those expenses in your qualified education expenses when figuring your education credits. File 1040ez for free Qualified education expenses for any academic period must be reduced by any tax-free educational assistance allocable to that academic period. File 1040ez for free See Adjustments to Qualified Education Expenses, later. File 1040ez for free Prepaid Expenses. File 1040ez for free   Qualified education expenses paid in 2013 for an academic period that begins in the first 3 months of 2014 can be used in figuring an education credit for 2013 only. File 1040ez for free See Academic period , earlier. File 1040ez for free For example, if you pay $2,000 in December 2013 for qualified tuition for the 2014 winter quarter that begins in January 2014, you can use that $2,000 in figuring an education credit for 2013 only (if you meet all the other requirements). File 1040ez for free    You cannot use any amount you paid in 2012 or 2014 to figure the qualified education expenses you use to figure your 2013 education credit(s). File 1040ez for free Paid with borrowed funds. File 1040ez for free   You can claim an education credit for qualified education expenses paid with the proceeds of a loan. File 1040ez for free Use the expenses to figure the credit for the year in which the expenses are paid, not the year in which the loan is repaid. File 1040ez for free Treat loan payments sent directly to the educational institution as paid on the date the institution credits the student's account. File 1040ez for free Student withdraws from class(es). File 1040ez for free   You can claim an education credit for qualified education expenses not refunded when a student withdraws. File 1040ez for free No Double Benefit Allowed You cannot do any of the following. File 1040ez for free Deduct higher education expenses on your income tax return (as, for example, a business expense) and also claim an education credit based on those same expenses. File 1040ez for free Claim more than one education credit based on the same qualified education expenses. File 1040ez for free Claim an education credit based on the same expenses used to figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or qualified tuition program (QTP). File 1040ez for free Claim an education credit based on qualified education expenses paid with educational assistance, such as a tax-free scholarship, grant, or employer-provided educational assistance. File 1040ez for free See Adjustments to Qualified Education Expenses, next. File 1040ez for free Adjustments to Qualified Education Expenses For each student, reduce the qualified education expenses paid in 2013 by or on behalf of that student under the following rules. File 1040ez for free The result is the amount of adjusted qualified education expenses for each student. File 1040ez for free Tax-free educational assistance. File 1040ez for free   For tax-free educational assistance received in 2013, reduce the qualified educational expenses for each academic period by the amount of tax-free educational assistance allocable to that academic period. File 1040ez for free See Academic period , earlier. File 1040ez for free      Tax-free educational assistance includes:    Tax-free parts of scholarships and fellowships (see chapter 12 of this publication and chapter 1 of Pub. File 1040ez for free 970), The tax-free part of Pell grants (see chapter 1 of Pub. File 1040ez for free 970), The tax-free part of employer-provided educational assistance (see Pub. File 1040ez for free 970), Veterans' educational assistance (see chapter 1 of Pub. File 1040ez for free 970), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. File 1040ez for free Generally, any scholarship or fellowship is treated as tax-free educational assistance. File 1040ez for free However, a scholarship or fellowship is not treated as tax-free educational assistance to the extent the student includes it in gross income (if the student is required to file a tax return) for the year the scholarship or fellowship is received and either: The scholarship or fellowship (or any part of it) must be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in Pub. File 1040ez for free 970, chapter 1; or The scholarship or fellowship (or any part of it) may be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in Pub. File 1040ez for free 970, chapter 1. File 1040ez for free You may be able to increase the combined value of an education credit and certain educational assistance if the student includes some or all of the educational assistance in income in the year received. File 1040ez for free For details, see Adjustments of Qualified Education Expenses, in chapters 2 and 3 of Pub. File 1040ez for free 970. File 1040ez for free Some tax-free educational assistance received after 2013 may be treated as a refund of qualified education expenses paid in 2013. File 1040ez for free This tax-free educational assistance is any tax-free educational assistance received by you or anyone else after 2013 for qualified education expenses paid on behalf of a student in 2013 (or attributable to enrollment at an eligible educational institution during 2013). File 1040ez for free If this tax-free educational assistance is received after 2013 but before you file your 2013 income tax return, see Refunds received after 2013 but before your income tax return is filed, later. File 1040ez for free If this tax-free educational assistance is received after 2013 and after you file your 2013 income tax return, see Refunds received after 2013 and after your income tax return is filed, later. File 1040ez for free Refunds. File 1040ez for free   A refund of qualified education expenses may reduce qualified education expenses for the tax year or may require you to repay (recapture) the credit that you claimed in an earlier year. File 1040ez for free Some tax-free educational assistance received after 2013 may be treated as a refund. File 1040ez for free See Tax-free educational assistance, earlier. File 1040ez for free Refunds received in 2013. File 1040ez for free   For each student, figure the adjusted qualified education expenses for 2013 by adding all the qualified education expenses paid in 2013 and subtracting any refunds of those expenses received from the eligible educational institution during 2013. File 1040ez for free Refunds received after 2013 but before your income tax return is filed. File 1040ez for free   If anyone receives a refund after 2013 of qualified education expenses paid on behalf of a student in 2013 and the refund is received before you file your 2013 income tax return, reduce the amount of qualified education expenses for 2013 by the amount of the refund. File 1040ez for free Refunds received after 2013 and after your income tax return is filed. File 1040ez for free   If anyone receives a refund after 2013 of qualified education expenses paid on behalf of a student in 2013 and the refund is received after you file your 2013 income tax return, you may need to repay some or all of the credit that you claimed. File 1040ez for free See Credit recapture, next. File 1040ez for free Credit recapture. File 1040ez for free    If any tax-free educational assistance for the qualified education expenses paid in 2013, or any refund of your qualified education expenses paid in 2013, is received after you file your 2013 income tax return, you must recapture (repay) any excess credit. File 1040ez for free You do this by refiguring the amount of your adjusted qualified education expenses for 2013 by reducing the expenses by the amount of the refund or tax-free educational assistance. File 1040ez for free You then refigure your education credit(s) for 2013 and figure the amount by which your 2013 tax liability would have increased if you had claimed the refigured credit(s). File 1040ez for free Include that amount as an additional tax for the year the refund or tax-free assistance was received. File 1040ez for free Example. File 1040ez for free    You paid $8,000 tuition and fees in December 2013 for your child's Spring semester beginning in January 2014. File 1040ez for free You filed your 2013 tax return on February 3, 2014, and claimed a lifetime learning credit of $1,600 ($8,000 qualified education expense paid x . File 1040ez for free 20). File 1040ez for free You claimed no other tax credits. File 1040ez for free After you filed your return, your child withdrew from two courses and you received a refund of $1,400. File 1040ez for free You must refigure your 2013 lifetime learning credit using $6,600 ($8,000 qualified education expenses − $1,400 refund). File 1040ez for free The refigured credit is $1,320 and your tax liability increased by $280. File 1040ez for free You must include the difference of $280 ($1,600 credit originally claimed − $1,320 refigured credit) as additional tax on your 2014 income tax return. File 1040ez for free See the instructions for your 2014 income tax return to determine where to include this tax. File 1040ez for free If you also pay qualified education expenses in 2014 for an academic period that begins in the first 3 months of 2014 and you receive tax-free educational assistance, or a refund, as described above, you may choose to reduce your qualified education expenses for 2014 instead of reducing your expenses for 2013. File 1040ez for free Amounts that do not reduce qualified education expenses. File 1040ez for free   Do not reduce qualified education expenses by amounts paid with funds the student receives as: Payment for services, such as wages, A loan, A gift, An inheritance, or A withdrawal from the student's personal savings. File 1040ez for free   Do not reduce the qualified education expenses by any scholarship or fellowship reported as income on the student's tax return in the following situations. File 1040ez for free The use of the money is restricted, by the terms of the scholarship or fellowship, to costs of attendance (such as room and board) other than qualified education expenses, as defined in Chapter 1 of Pub. File 1040ez for free 970. File 1040ez for free The use of the money is not restricted. File 1040ez for free   For examples, see chapter 2 in Pub. File 1040ez for free 970. File 1040ez for free Figure 35-A. File 1040ez for free Can You Claim an Education Credit for 2013? This image is too large to be displayed in the current screen. File 1040ez for free Please click the link to view the image. File 1040ez for free Figure 35-A. File 1040ez for free Can You Claim an Education Credit for 2013? Prev  Up  Next   Home   More Online Publications