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File 2006 Federal Taxes Free

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File 2006 Federal Taxes Free

File 2006 federal taxes free Publication 15 - Main Content Table of Contents 1. File 2006 federal taxes free Employer Identification Number (EIN) 2. File 2006 federal taxes free Who Are Employees?Relief provisions. File 2006 federal taxes free Business Owned and Operated by Spouses 3. File 2006 federal taxes free Family Employees 4. File 2006 federal taxes free Employee's Social Security Number (SSN)Registering for SSNVS. File 2006 federal taxes free 5. File 2006 federal taxes free Wages and Other CompensationAccountable plan. File 2006 federal taxes free Nonaccountable plan. File 2006 federal taxes free Per diem or other fixed allowance. File 2006 federal taxes free 50% test. File 2006 federal taxes free Health Savings Accounts and medical savings accounts. File 2006 federal taxes free Nontaxable fringe benefits. File 2006 federal taxes free When fringe benefits are treated as paid. File 2006 federal taxes free Valuation of fringe benefits. File 2006 federal taxes free Withholding on fringe benefits. File 2006 federal taxes free Depositing taxes on fringe benefits. File 2006 federal taxes free 6. File 2006 federal taxes free TipsOrdering rule. File 2006 federal taxes free 7. File 2006 federal taxes free Supplemental Wages 8. File 2006 federal taxes free Payroll Period 9. File 2006 federal taxes free Withholding From Employees' WagesIncome Tax Withholding Social Security and Medicare Taxes Part-Time Workers 10. File 2006 federal taxes free Required Notice to Employees About the Earned Income Credit (EIC) 11. File 2006 federal taxes free Depositing TaxesWhen To Deposit How To Deposit Deposit Penalties 12. File 2006 federal taxes free Filing Form 941 or Form 944 13. File 2006 federal taxes free Reporting Adjustments to Form 941 or Form 944Current Period Adjustments Prior Period Adjustments Wage Repayments 14. File 2006 federal taxes free Federal Unemployment (FUTA) TaxSuccessor employer. File 2006 federal taxes free Household employees. File 2006 federal taxes free When to deposit. File 2006 federal taxes free Household employees. File 2006 federal taxes free Electronic filing by reporting agents. File 2006 federal taxes free 16. File 2006 federal taxes free How To Use the Income Tax Withholding TablesWage Bracket Method Percentage Method Alternative Methods of Income Tax Withholding How To Get Tax Help 1. File 2006 federal taxes free Employer Identification Number (EIN) If you are required to report employment taxes or give tax statements to employees or annuitants, you need an EIN. File 2006 federal taxes free The EIN is a nine-digit number the IRS issues. File 2006 federal taxes free The digits are arranged as follows: 00-0000000. File 2006 federal taxes free It is used to identify the tax accounts of employers and certain others who have no employees. File 2006 federal taxes free Use your EIN on all of the items you send to the IRS and SSA. File 2006 federal taxes free For more information, see Publication 1635, Employer Identification Number: Understanding Your EIN. File 2006 federal taxes free If you do not have an EIN, you may apply for one online. File 2006 federal taxes free Go to the IRS. File 2006 federal taxes free gov and click on the Apply for an EIN Online link under Tools. File 2006 federal taxes free You may also apply for an EIN by calling 1-800-829-4933, or you can fax or mail Form SS-4, Application for Employer Identification Number, to the IRS. File 2006 federal taxes free Do not use an SSN in place of an EIN. File 2006 federal taxes free You should have only one EIN. File 2006 federal taxes free If you have more than one and are not sure which one to use, call 1-800-829-4933 or 1-800-829-4059 (TDD/TTY for persons who are deaf, hard of hearing, or have a speech disability). File 2006 federal taxes free Give the numbers you have, the name and address to which each was assigned, and the address of your main place of business. File 2006 federal taxes free The IRS will tell you which number to use. File 2006 federal taxes free If you took over another employer's business (see Successor employer in section 9), do not use that employer's EIN. File 2006 federal taxes free If you have applied for an EIN but do not have your EIN by the time a return is due, file a paper return and write “Applied For” and the date you applied for it in the space shown for the number. File 2006 federal taxes free 2. File 2006 federal taxes free Who Are Employees? Generally, employees are defined either under common law or under statutes for certain situations. File 2006 federal taxes free See Publication 15-A for details on statutory employees and nonemployees. File 2006 federal taxes free Employee status under common law. File 2006 federal taxes free   Generally, a worker who performs services for you is your employee if you have the right to control what will be done and how it will be done. File 2006 federal taxes free This is so even when you give the employee freedom of action. File 2006 federal taxes free What matters is that you have the right to control the details of how the services are performed. File 2006 federal taxes free See Publication 15-A for more information on how to determine whether an individual providing services is an independent contractor or an employee. File 2006 federal taxes free   Generally, people in business for themselves are not employees. File 2006 federal taxes free For example, doctors, lawyers, veterinarians, and others in an independent trade in which they offer their services to the public are usually not employees. File 2006 federal taxes free However, if the business is incorporated, corporate officers who work in the business are employees of the corporation. File 2006 federal taxes free   If an employer-employee relationship exists, it does not matter what it is called. File 2006 federal taxes free The employee may be called an agent or independent contractor. File 2006 federal taxes free It also does not matter how payments are measured or paid, what they are called, or if the employee works full or part time. File 2006 federal taxes free Statutory employees. File 2006 federal taxes free   If someone who works for you is not an employee under the common law rules discussed earlier, do not withhold federal income tax from his or her pay, unless backup withholding applies. File 2006 federal taxes free Although the following persons may not be common law employees, they are considered employees by statute for social security, Medicare, and FUTA tax purposes under certain conditions. File 2006 federal taxes free An agent (or commission) driver who delivers food, beverages (other than milk), laundry, or dry cleaning for someone else. File 2006 federal taxes free A full-time life insurance salesperson who sells primarily for one company. File 2006 federal taxes free A homeworker who works by guidelines of the person for whom the work is done, with materials furnished by and returned to that person or to someone that person designates. File 2006 federal taxes free A traveling or city salesperson (other than an agent-driver or commission-driver) who works full time (except for sideline sales activities) for one firm or person getting orders from customers. File 2006 federal taxes free The orders must be for merchandise for resale or supplies for use in the customer's business. File 2006 federal taxes free The customers must be retailers, wholesalers, contractors, or operators of hotels, restaurants, or other businesses dealing with food or lodging. File 2006 federal taxes free    Statutory nonemployees. File 2006 federal taxes free   Direct sellers, qualified real estate agents, and certain companion sitters are, by law, considered nonemployees. File 2006 federal taxes free They are generally treated as self-employed for all federal tax purposes, including income and employment taxes. File 2006 federal taxes free H-2A agricultural workers. File 2006 federal taxes free   On Form W-2, do not check box 13 (Statutory employee), as H-2A workers are not statutory employees. File 2006 federal taxes free Treating employees as nonemployees. File 2006 federal taxes free   You will generally be liable for social security and Medicare taxes and withheld income tax if you do not deduct and withhold these taxes because you treated an employee as a nonemployee. File 2006 federal taxes free You may be able to calculate your liability using special section 3509 rates for the employee share of social security and Medicare taxes and the federal income tax withholding. File 2006 federal taxes free The applicable rates depend on whether you filed required Forms 1099. File 2006 federal taxes free You cannot recover the employee share of social security, or Medicare tax, or income tax withholding from the employee if the tax is paid under section 3509. File 2006 federal taxes free You are liable for the income tax withholding regardless of whether the employee paid income tax on the wages. File 2006 federal taxes free You continue to owe the full employer share of social security and Medicare taxes. File 2006 federal taxes free The employee remains liable for the employee share of social security and Medicare taxes. File 2006 federal taxes free See Internal Revenue Code section 3509 for details. File 2006 federal taxes free Also see the Instructions for Form 941-X. File 2006 federal taxes free   Section 3509 rates are not available if you intentionally disregard the requirement to withhold taxes from the employee or if you withheld income taxes but not social security or Medicare taxes. File 2006 federal taxes free Section 3509 is not available for reclassifying statutory employees. File 2006 federal taxes free See Statutory employees , earlier in this section. File 2006 federal taxes free   If the employer issued required information returns, the section 3509 rates are: For social security taxes; employer rate of 6. File 2006 federal taxes free 2% plus 20% of the employee rate (see the Instructions for Form 941-X). File 2006 federal taxes free For Medicare taxes; employer rate of 1. File 2006 federal taxes free 45% plus 20% of the employee rate of 1. File 2006 federal taxes free 45%, for a total rate of 1. File 2006 federal taxes free 74% of wages. File 2006 federal taxes free For Additional Medicare Tax; 0. File 2006 federal taxes free 18% (20% of the employee rate of 0. File 2006 federal taxes free 9%) of wages subject to Additional Medicare Tax. File 2006 federal taxes free For income tax withholding, the rate is 1. File 2006 federal taxes free 5% of wages. File 2006 federal taxes free   If the employer did not issue required information returns, the section 3509 rates are: For social security taxes; employer rate of 6. File 2006 federal taxes free 2% plus 40% of the employee rate (see the Instructions for Form 941-X). File 2006 federal taxes free For Medicare taxes; employer rate of 1. File 2006 federal taxes free 45% plus 40% of the employee rate of 1. File 2006 federal taxes free 45%, for a total rate of 2. File 2006 federal taxes free 03% of wages. File 2006 federal taxes free For Additional Medicare Tax; 0. File 2006 federal taxes free 36% (40% of the employee rate of 0. File 2006 federal taxes free 9%) of wages subject to Additional Medicare Tax. File 2006 federal taxes free For income tax withholding, the rate is 3. File 2006 federal taxes free 0% of wages. File 2006 federal taxes free Relief provisions. File 2006 federal taxes free   If you have a reasonable basis for not treating a worker as an employee, you may be relieved from having to pay employment taxes for that worker. File 2006 federal taxes free To get this relief, you must file all required federal tax returns, including information returns, on a basis consistent with your treatment of the worker. File 2006 federal taxes free You (or your predecessor) must not have treated any worker holding a substantially similar position as an employee for any periods beginning after 1977. File 2006 federal taxes free See Publication 1976, Do You Qualify for Relief Under Section 530. File 2006 federal taxes free IRS help. File 2006 federal taxes free   If you want the IRS to determine whether a worker is an employee, file Form SS-8, Determination of Worker Status for Purposes of Federal Employment Taxes and Income Tax Withholding. File 2006 federal taxes free Voluntary Classification Settlement Program (VCSP). File 2006 federal taxes free   Employers who are currently treating their workers (or a class or group of workers) as independent contractors or other nonemployees and want to voluntarily reclassify their workers as employees for future tax periods may be eligible to participate in the VCSP if certain requirements are met. File 2006 federal taxes free To apply, use Form 8952, Application for Voluntary Classification Settlement Program (VCSP). File 2006 federal taxes free For more information visit IRS. File 2006 federal taxes free gov and enter “VCSP” in the search box. File 2006 federal taxes free Business Owned and Operated by Spouses If you and your spouse jointly own and operate a business and share in the profits and losses, you are partners in a partnership, whether or not you have a formal partnership agreement. File 2006 federal taxes free See Publication 541, Partnerships, for more details. File 2006 federal taxes free The partnership is considered the employer of any employees, and is liable for any employment taxes due on wages paid to its employees. File 2006 federal taxes free Exception—Qualified joint venture. File 2006 federal taxes free   For tax years beginning after December 31, 2006, the Small Business and Work Opportunity Tax Act of 2007 (Public Law 110-28) provides that a “qualified joint venture,” whose only members are spouses filing a joint income tax return, can elect not to be treated as a partnership for federal tax purposes. File 2006 federal taxes free A qualified joint venture conducts a trade or business where: The only members of the joint venture are spouses who file a joint income tax return, Both spouses materially participate (see Material participation in the Instructions for Schedule C (Form 1040), line G) in the trade or business (mere joint ownership of property is not enough), Both spouses elect to not be treated as a partnership, and The business is co-owned by both spouses and is not held in the name of a state law entity such as a partnership or limited liability company (LLC). File 2006 federal taxes free   To make the election, all items of income, gain, loss, deduction, and credit must be divided between the spouses, in accordance with each spouse's interest in the venture, and reported on separate Schedules C or F as sole proprietors. File 2006 federal taxes free Each spouse must also file a separate Schedule SE to pay self-employment taxes, as applicable. File 2006 federal taxes free   Spouses using the qualified joint venture rules are treated as sole proprietors for federal tax purposes and generally do not need an EIN. File 2006 federal taxes free If employment taxes are owed by the qualified joint venture, either spouse may report and pay the employment taxes due on the wages paid to the employees using the EIN of that spouse's sole proprietorship. File 2006 federal taxes free Generally, filing as a qualified joint venture will not increase the spouses' total tax owed on the joint income tax return. File 2006 federal taxes free However, it gives each spouse credit for social security earnings on which retirement benefits are based and for Medicare coverage without filing a partnership return. File 2006 federal taxes free    Note. File 2006 federal taxes free If your spouse is your employee, not your partner, see One spouse employed by another in section 3. File 2006 federal taxes free   For more information on qualified joint ventures, visit IRS. File 2006 federal taxes free gov and enter “qualified joint venture” in the search box. File 2006 federal taxes free Exception—Community income. File 2006 federal taxes free   If you and your spouse wholly own an unincorporated business as community property under the community property laws of a state, foreign country, or U. File 2006 federal taxes free S. File 2006 federal taxes free possession, you can treat the business either as a sole proprietorship (of the spouse who carried on the business) or a partnership. File 2006 federal taxes free You may still make an election to be taxed as a qualified joint venture instead of a partnership. File 2006 federal taxes free See Exception—Qualified joint venture , earlier. File 2006 federal taxes free 3. File 2006 federal taxes free Family Employees Child employed by parents. File 2006 federal taxes free   Payments for the services of a child under age 18 who works for his or her parent in a trade or business are not subject to social security and Medicare taxes if the trade or business is a sole proprietorship or a partnership in which each partner is a parent of the child. File 2006 federal taxes free If these payments are for work other than in a trade or business, such as domestic work in the parent's private home, they are not subject to social security and Medicare taxes until the child reaches age 21. File 2006 federal taxes free However, see Covered services of a child or spouse , later in this section. File 2006 federal taxes free Payments for the services of a child under age 21 who works for his or her parent, whether or not in a trade or business, are not subject to FUTA tax. File 2006 federal taxes free Payments for the services of a child of any age who works for his or her parent are generally subject to income tax withholding unless the payments are for domestic work in the parent's home, or unless the payments are for work other than in a trade or business and are less than $50 in the quarter or the child is not regularly employed to do such work. File 2006 federal taxes free One spouse employed by another. File 2006 federal taxes free   The wages for the services of an individual who works for his or her spouse in a trade or business are subject to income tax withholding and social security and Medicare taxes, but not to FUTA tax. File 2006 federal taxes free However, the payments for services of one spouse employed by another in other than a trade or business, such as domestic service in a private home, are not subject to social security, Medicare, and FUTA taxes. File 2006 federal taxes free Covered services of a child or spouse. File 2006 federal taxes free   The wages for the services of a child or spouse are subject to income tax withholding as well as social security, Medicare, and FUTA taxes if he or she works for: A corporation, even if it is controlled by the child's parent or the individual's spouse; A partnership, even if the child's parent is a partner, unless each partner is a parent of the child; A partnership, even if the individual's spouse is a partner; or An estate, even if it is the estate of a deceased parent. File 2006 federal taxes free Parent employed by son or daughter. File 2006 federal taxes free   When the employer is a son or daughter employing his or her parent the following rules apply. File 2006 federal taxes free Payments for the services of a parent in the son’s or daughter’s (the employer’s) trade or business are subject to income tax withholding and social security and Medicare taxes. File 2006 federal taxes free Payments for the services of a parent not in the son’s or daughter’s (the employer’s) trade or business are generally not subject to social security and Medicare taxes. File 2006 federal taxes free    Social security and Medicare taxes do apply to payments made to a parent for domestic services if all of the following apply: The parent is employed by his or her son or daughter; The son or daughter (the employer) has a child or stepchild living in the home; The son or daughter (the employer) is a widow or widower, divorced, or living with a spouse who, because of a mental or physical condition, cannot care for the child or stepchild for at least 4 continuous weeks in a calendar quarter; and The child or stepchild is either under age 18 or requires the personal care of an adult for at least 4 continuous weeks in a calendar quarter due to a mental or physical condition. File 2006 federal taxes free   Payments made to a parent employed by his or her child are not subject to FUTA tax, regardless of the type of services provided. File 2006 federal taxes free 4. File 2006 federal taxes free Employee's Social Security Number (SSN) You are required to get each employee's name and SSN and to enter them on Form W-2. File 2006 federal taxes free This requirement also applies to resident and nonresident alien employees. File 2006 federal taxes free You should ask your employee to show you his or her social security card. File 2006 federal taxes free The employee may show the card if it is available. File 2006 federal taxes free Do not accept a social security card that says “Not valid for employment. File 2006 federal taxes free ” A social security number issued with this legend does not permit employment. File 2006 federal taxes free You may, but are not required to, photocopy the social security card if the employee provides it. File 2006 federal taxes free If you do not provide the correct employee name and SSN on Form W-2, you may owe a penalty unless you have reasonable cause. File 2006 federal taxes free See Publication 1586, Reasonable Cause Regulations & Requirements for Missing and Incorrect Name/TINs, for information on the requirement to solicit the employee's SSN. File 2006 federal taxes free Applying for a social security card. File 2006 federal taxes free   Any employee who is legally eligible to work in the United States and does not have a social security card can get one by completing Form SS-5, Application for a Social Security Card, and submitting the necessary documentation. File 2006 federal taxes free You can get Form SS-5 at SSA offices, by calling 1-800-772-1213, or from the SSA website at www. File 2006 federal taxes free socialsecurity. File 2006 federal taxes free gov/online/ss-5. File 2006 federal taxes free html. File 2006 federal taxes free The employee must complete and sign Form SS-5; it cannot be filed by the employer. File 2006 federal taxes free You may be asked to supply a letter to accompany Form SS-5 if the employee has exceeded his or her yearly or lifetime limit for the number of replacement cards allowed. File 2006 federal taxes free Applying for a social security number. File 2006 federal taxes free   If you file Form W-2 on paper and your employee applied for an SSN but does not have one when you must file Form W-2, enter “Applied For” on the form. File 2006 federal taxes free If you are filing electronically, enter all zeros (000-00-000) in the social security number field. File 2006 federal taxes free When the employee receives the SSN, file Copy A of Form W-2c, Corrected Wage and Tax Statement, with the SSA to show the employee's SSN. File 2006 federal taxes free Furnish copies B, C, and 2 of Form W-2c to the employee. File 2006 federal taxes free Up to 25 Forms W-2c for each Form W-3c, Transmittal of Corrected Wage and Tax Statements, may now be filed per session over the Internet, with no limit on the number of sessions. File 2006 federal taxes free For more information, visit the SSA's Employer W-2 Filing Instructions & Information webpage at www. File 2006 federal taxes free socialsecurity. File 2006 federal taxes free gov/employer. File 2006 federal taxes free Advise your employee to correct the SSN on his or her original Form W-2. File 2006 federal taxes free Correctly record the employee's name and SSN. File 2006 federal taxes free   Record the name and number of each employee as they are shown on the employee's social security card. File 2006 federal taxes free If the employee's name is not correct as shown on the card (for example, because of marriage or divorce), the employee should request a corrected card from the SSA. File 2006 federal taxes free Continue to report the employee's wages under the old name until the employee shows you an updated social security card with the new name. File 2006 federal taxes free If the SSA issues the employee a replacement card after a name change, or a new card with a different social security number after a change in alien work status, file a Form W-2c to correct the name/SSN reported for the most recently filed Form W-2. File 2006 federal taxes free It is not necessary to correct other years if the previous name and number were used for years before the most recent Form W-2. File 2006 federal taxes free IRS individual taxpayer identification numbers (ITINs) for aliens. File 2006 federal taxes free   Do not accept an ITIN in place of an SSN for employee identification or for work. File 2006 federal taxes free An ITIN is only available to resident and nonresident aliens who are not eligible for U. File 2006 federal taxes free S. File 2006 federal taxes free employment and need identification for other tax purposes. File 2006 federal taxes free You can identify an ITIN because it is a nine-digit number, beginning with the number “9” with either a “7” or “8” as the fourth digit and is formatted like an SSN (for example, 9NN-7N-NNNN). File 2006 federal taxes free    An individual with an ITIN who later becomes eligible to work in the United States must obtain an SSN. File 2006 federal taxes free If the individual is currently eligible to work in the United States, instruct the individual to apply for an SSN and follow the instructions under Applying for a social security number, earlier. File 2006 federal taxes free Do not use an ITIN in place of an SSN on Form W-2. File 2006 federal taxes free Verification of social security numbers. File 2006 federal taxes free   Employers and authorized reporting agents can use the Social Security Number Verification Service (SSNVS) to instantly verify up to 10 names and SSNs (per screen) at a time, or submit an electronic file of up to 250,000 names and SSNs and usually receive the results the next business day. File 2006 federal taxes free Visit www. File 2006 federal taxes free socialsecurity. File 2006 federal taxes free gov/employer/ssnv. File 2006 federal taxes free htm for more information. File 2006 federal taxes free Registering for SSNVS. File 2006 federal taxes free   You must register online and receive authorization from your employer to use SSNVS. File 2006 federal taxes free To register, visit SSA's website at www. File 2006 federal taxes free ssa. File 2006 federal taxes free gov/employer and click on the Business Services Online link. File 2006 federal taxes free Follow the registration instructions to obtain a user identification (ID) and password. File 2006 federal taxes free You will need to provide the following information about yourself and your company. File 2006 federal taxes free Name. File 2006 federal taxes free SSN. File 2006 federal taxes free Date of birth. File 2006 federal taxes free Type of employer. File 2006 federal taxes free EIN. File 2006 federal taxes free Company name, address, and telephone number. File 2006 federal taxes free Email address. File 2006 federal taxes free   When you have completed the online registration process, SSA will mail a one-time activation code to your employer. File 2006 federal taxes free You must enter the activation code online to use SSNVS. File 2006 federal taxes free 5. File 2006 federal taxes free Wages and Other Compensation Wages subject to federal employment taxes generally include all pay you give to an employee for services performed. File 2006 federal taxes free The pay may be in cash or in other forms. File 2006 federal taxes free It includes salaries, vacation allowances, bonuses, commissions, and fringe benefits. File 2006 federal taxes free It does not matter how you measure or make the payments. File 2006 federal taxes free Amounts an employer pays as a bonus for signing or ratifying a contract in connection with the establishment of an employer-employee relationship and an amount paid to an employee for cancellation of an employment contract and relinquishment of contract rights are wages subject to social security, Medicare, and FUTA taxes and income tax withholding. File 2006 federal taxes free Also, compensation paid to a former employee for services performed while still employed is wages subject to employment taxes. File 2006 federal taxes free More information. File 2006 federal taxes free   See section 6 for a discussion of tips and section 7 for a discussion of supplemental wages. File 2006 federal taxes free Also, see section 15 for exceptions to the general rules for wages. File 2006 federal taxes free Publication 15-A provides additional information on wages, including nonqualified deferred compensation, and other compensation. File 2006 federal taxes free Publication 15-B provides information on other forms of compensation, including: Accident and health benefits, Achievement awards, Adoption assistance, Athletic facilities, De minimis (minimal) benefits, Dependent care assistance, Educational assistance, Employee discounts, Employee stock options, Employer-provided cell phones, Group-term life insurance coverage, Health Savings Accounts, Lodging on your business premises, Meals, Moving expense reimbursements, No-additional-cost services, Retirement planning services, Transportation (commuting) benefits, Tuition reduction, and Working condition benefits. File 2006 federal taxes free Employee business expense reimbursements. File 2006 federal taxes free   A reimbursement or allowance arrangement is a system by which you pay the advances, reimbursements, and charges for your employees' business expenses. File 2006 federal taxes free How you report a reimbursement or allowance amount depends on whether you have an accountable or a nonaccountable plan. File 2006 federal taxes free If a single payment includes both wages and an expense reimbursement, you must specify the amount of the reimbursement. File 2006 federal taxes free   These rules apply to all ordinary and necessary employee business expenses that would otherwise qualify for a deduction by the employee. File 2006 federal taxes free Accountable plan. File 2006 federal taxes free   To be an accountable plan, your reimbursement or allowance arrangement must require your employees to meet all three of the following rules. File 2006 federal taxes free They must have paid or incurred deductible expenses while performing services as your employees. File 2006 federal taxes free The reimbursement or advance must be paid for the expense and must not be an amount that would have otherwise been paid by the employee. File 2006 federal taxes free They must substantiate these expenses to you within a reasonable period of time. File 2006 federal taxes free They must return any amounts in excess of substantiated expenses within a reasonable period of time. File 2006 federal taxes free   Amounts paid under an accountable plan are not wages and are not subject to income, social security, Medicare, and FUTA taxes. File 2006 federal taxes free   If the expenses covered by this arrangement are not substantiated (or amounts in excess of substantiated expenses are not returned within a reasonable period of time), the amount paid under the arrangement in excess of the substantiated expenses is treated as paid under a nonaccountable plan. File 2006 federal taxes free This amount is subject to income, social security, Medicare, and FUTA taxes for the first payroll period following the end of the reasonable period of time. File 2006 federal taxes free   A reasonable period of time depends on the facts and circumstances. File 2006 federal taxes free Generally, it is considered reasonable if your employees receive their advance within 30 days of the time they incur the expenses, adequately account for the expenses within 60 days after the expenses were paid or incurred, and return any amounts in excess of expenses within 120 days after the expenses were paid or incurred. File 2006 federal taxes free Also, it is considered reasonable if you give your employees a periodic statement (at least quarterly) that asks them to either return or adequately account for outstanding amounts and they do so within 120 days. File 2006 federal taxes free Nonaccountable plan. File 2006 federal taxes free   Payments to your employee for travel and other necessary expenses of your business under a nonaccountable plan are wages and are treated as supplemental wages and subject to income, social security, Medicare, and FUTA taxes. File 2006 federal taxes free Your payments are treated as paid under a nonaccountable plan if: Your employee is not required to or does not substantiate timely those expenses to you with receipts or other documentation, You advance an amount to your employee for business expenses and your employee is not required to or does not return timely any amount he or she does not use for business expenses, You advance or pay an amount to your employee regardless of whether you reasonably expect the employee to have business expenses related to your business, or You pay an amount as a reimbursement you would have otherwise paid as wages. File 2006 federal taxes free   See section 7 for more information on supplemental wages. File 2006 federal taxes free Per diem or other fixed allowance. File 2006 federal taxes free   You may reimburse your employees by travel days, miles, or some other fixed allowance under the applicable revenue procedure. File 2006 federal taxes free In these cases, your employee is considered to have accounted to you if your reimbursement does not exceed rates established by the Federal Government. File 2006 federal taxes free The 2013 standard mileage rate for auto expenses was 56. File 2006 federal taxes free 5 cents per mile. File 2006 federal taxes free The rate for 2014 is 56 cents per mile. File 2006 federal taxes free   The government per diem rates for meals and lodging in the continental United States are listed in Publication 1542, Per Diem Rates. File 2006 federal taxes free Other than the amount of these expenses, your employees' business expenses must be substantiated (for example, the business purpose of the travel or the number of business miles driven). File 2006 federal taxes free   If the per diem or allowance paid exceeds the amounts substantiated, you must report the excess amount as wages. File 2006 federal taxes free This excess amount is subject to income tax withholding and payment of social security, Medicare, and FUTA taxes. File 2006 federal taxes free Show the amount equal to the substantiated amount (for example, the nontaxable portion) in box 12 of Form W-2 using code “L. File 2006 federal taxes free ” Wages not paid in money. File 2006 federal taxes free   If in the course of your trade or business you pay your employees in a medium that is neither cash nor a readily negotiable instrument, such as a check, you are said to pay them “in kind. File 2006 federal taxes free ” Payments in kind may be in the form of goods, lodging, food, clothing, or services. File 2006 federal taxes free Generally, the fair market value of such payments at the time they are provided is subject to federal income tax withholding and social security, Medicare, and FUTA taxes. File 2006 federal taxes free   However, noncash payments for household work, agricultural labor, and service not in the employer's trade or business are exempt from social security, Medicare, and FUTA taxes. File 2006 federal taxes free Withhold income tax on these payments only if you and the employee agree to do so. File 2006 federal taxes free Nonetheless, noncash payments for agricultural labor, such as commodity wages, are treated as cash payments subject to employment taxes if the substance of the transaction is a cash payment. File 2006 federal taxes free Moving expenses. File 2006 federal taxes free   Reimbursed and employer-paid qualified moving expenses (those that would otherwise be deductible by the employee) paid under an accountable plan are not includible in an employee's income unless you have knowledge the employee deducted the expenses in a prior year. File 2006 federal taxes free Reimbursed and employer-paid nonqualified moving expenses are includible in income and are subject to employment taxes and income tax withholding. File 2006 federal taxes free For more information on moving expenses, see Publication 521, Moving Expenses. File 2006 federal taxes free Meals and lodging. File 2006 federal taxes free   The value of meals is not taxable income and is not subject to income tax withholding and social security, Medicare, and FUTA taxes if the meals are furnished for the employer's convenience and on the employer's premises. File 2006 federal taxes free The value of lodging is not subject to income tax withholding and social security, Medicare, and FUTA taxes if the lodging is furnished for the employer's convenience, on the employer's premises, and as a condition of employment. File 2006 federal taxes free    “For the convenience of the employer” means you have a substantial business reason for providing the meals and lodging other than to provide additional compensation to the employee. File 2006 federal taxes free For example, meals you provide at the place of work so that an employee is available for emergencies during his or her lunch period are generally considered to be for your convenience. File 2006 federal taxes free   However, whether meals or lodging are provided for the convenience of the employer depends on all of the facts and circumstances. File 2006 federal taxes free A written statement that the meals or lodging are for your convenience is not sufficient. File 2006 federal taxes free 50% test. File 2006 federal taxes free   If over 50% of the employees who are provided meals on an employer's business premises receive these meals for the convenience of the employer, all meals provided on the premises are treated as furnished for the convenience of the employer. File 2006 federal taxes free If this 50% test is met, the value of the meals is excludable from income for all employees and is not subject to federal income tax withholding or employment taxes. File 2006 federal taxes free For more information, see Publication 15-B. File 2006 federal taxes free Health insurance plans. File 2006 federal taxes free   If you pay the cost of an accident or health insurance plan for your employees, including an employee's spouse and dependents, your payments are not wages and are not subject to social security, Medicare, and FUTA taxes, or federal income tax withholding. File 2006 federal taxes free Generally, this exclusion also applies to qualified long-term care insurance contracts. File 2006 federal taxes free However, for income tax withholding, the value of health insurance benefits must be included in the wages of S corporation employees who own more than 2% of the S corporation (2% shareholders). File 2006 federal taxes free For social security, Medicare, and FUTA taxes, the health insurance benefits are excluded from the wages only for employees and their dependents or for a class or classes of employees and their dependents. File 2006 federal taxes free See Announcement 92-16 for more information. File 2006 federal taxes free You can find Announcement 92-16 on page 53 of Internal Revenue Bulletin 1992-5. File 2006 federal taxes free Health Savings Accounts and medical savings accounts. File 2006 federal taxes free   Your contributions to an employee's Health Savings Account (HSA) or Archer medical savings account (MSA) are not subject to social security, Medicare, or FUTA taxes, or federal income tax withholding if it is reasonable to believe at the time of payment of the contributions they will be excludable from the income of the employee. File 2006 federal taxes free To the extent it is not reasonable to believe they will be excludable, your contributions are subject to these taxes. File 2006 federal taxes free Employee contributions to their HSAs or MSAs through a payroll deduction plan must be included in wages and are subject to social security, Medicare, and FUTA taxes and income tax withholding. File 2006 federal taxes free However, HSA contributions made under a salary reduction arrangement in a section 125 cafeteria plan are not wages and are not subject to employment taxes or withholding. File 2006 federal taxes free For more information, see the Instructions for Form 8889, Health Savings Accounts (HSAs). File 2006 federal taxes free Medical care reimbursements. File 2006 federal taxes free   Generally, medical care reimbursements paid for an employee under an employer's self-insured medical reimbursement plan are not wages and are not subject to social security, Medicare, and FUTA taxes, or income tax withholding. File 2006 federal taxes free See Publication 15-B for an exception for highly compensated employees. File 2006 federal taxes free Differential wage payments. File 2006 federal taxes free   Differential wage payments are any payments made by an employer to an individual for a period during which the individual is performing service in the uniformed services while on active duty for a period of more than 30 days and represent all or a portion of the wages the individual would have received from the employer if the individual were performing services for the employer. File 2006 federal taxes free   Differential wage payments are wages for income tax withholding, but are not subject to social security, Medicare, or FUTA taxes. File 2006 federal taxes free Employers should report differential wage payments in box 1 of Form W-2. File 2006 federal taxes free For more information about the tax treatment of differential wage payments, visit IRS. File 2006 federal taxes free gov and enter “employees in a combat zone” in the search box. File 2006 federal taxes free Fringe benefits. File 2006 federal taxes free   You generally must include fringe benefits in an employee's gross income (but see Nontaxable fringe benefits next). File 2006 federal taxes free The benefits are subject to income tax withholding and employment taxes. File 2006 federal taxes free Fringe benefits include cars you provide, flights on aircraft you provide, free or discounted commercial flights, vacations, discounts on property or services, memberships in country clubs or other social clubs, and tickets to entertainment or sporting events. File 2006 federal taxes free In general, the amount you must include is the amount by which the fair market value of the benefits is more than the sum of what the employee paid for it plus any amount the law excludes. File 2006 federal taxes free There are other special rules you and your employees may use to value certain fringe benefits. File 2006 federal taxes free See Publication 15-B for more information. File 2006 federal taxes free Nontaxable fringe benefits. File 2006 federal taxes free   Some fringe benefits are not taxable (or are minimally taxable) if certain conditions are met. File 2006 federal taxes free See Publication 15-B for details. File 2006 federal taxes free The following are some examples of nontaxable fringe benefits. File 2006 federal taxes free Services provided to your employees at no additional cost to you. File 2006 federal taxes free Qualified employee discounts. File 2006 federal taxes free Working condition fringes that are property or services the employee could deduct as a business expense if he or she had paid for it. File 2006 federal taxes free Examples include a company car for business use and subscriptions to business magazines. File 2006 federal taxes free Certain minimal value fringes (including an occasional cab ride when an employee must work overtime and meals you provide at eating places you run for your employees if the meals are not furnished at below cost). File 2006 federal taxes free Qualified transportation fringes subject to specified conditions and dollar limitations (including transportation in a commuter highway vehicle, any transit pass, and qualified parking). File 2006 federal taxes free Qualified moving expense reimbursement. File 2006 federal taxes free See Moving expenses , earlier in this section, for details. File 2006 federal taxes free The use of on-premises athletic facilities, if substantially all of the use is by employees, their spouses, and their dependent children. File 2006 federal taxes free Qualified tuition reduction an educational organization provides to its employees for education. File 2006 federal taxes free For more information, see Publication 970, Tax Benefits for Education. File 2006 federal taxes free Employer-provided cell phones provided primarily for a noncompensatory business reason. File 2006 federal taxes free   However, do not exclude the following fringe benefits from the income of highly compensated employees unless the benefit is available to other employees on a nondiscriminatory basis. File 2006 federal taxes free No-additional-cost services. File 2006 federal taxes free Qualified employee discounts. File 2006 federal taxes free Meals provided at an employer operated eating facility. File 2006 federal taxes free Reduced tuition for education. File 2006 federal taxes free  For more information, including the definition of a highly compensated employee, see Publication 15-B. File 2006 federal taxes free When fringe benefits are treated as paid. File 2006 federal taxes free   You may choose to treat certain noncash fringe benefits as paid by the pay period, by the quarter, or on any other basis you choose as long as you treat the benefits as paid at least once a year. File 2006 federal taxes free You do not have to make a formal choice of payment dates or notify the IRS of the dates you choose. File 2006 federal taxes free You do not have to make this choice for all employees. File 2006 federal taxes free You may change methods as often as you like, as long as you treat all benefits provided in a calendar year as paid by December 31 of the calendar year. File 2006 federal taxes free See Publication 15-B for more information, including a discussion of the special accounting rule for fringe benefits provided during November and December. File 2006 federal taxes free Valuation of fringe benefits. File 2006 federal taxes free   Generally, you must determine the value of fringe benefits no later than January 31 of the next year. File 2006 federal taxes free Before January 31, you may reasonably estimate the value of the fringe benefits for purposes of withholding and depositing on time. File 2006 federal taxes free Withholding on fringe benefits. File 2006 federal taxes free   You may add the value of fringe benefits to regular wages for a payroll period and figure withholding taxes on the total, or you may withhold federal income tax on the value of the fringe benefits at the optional flat 25% supplemental wage rate. File 2006 federal taxes free However, see Withholding on supplemental wages when an employee receives more than $1 million of supplemental wages during the calendar year in section 7. File 2006 federal taxes free   You may choose not to withhold income tax on the value of an employee's personal use of a vehicle you provide. File 2006 federal taxes free You must, however, withhold social security and Medicare taxes on the use of the vehicle. File 2006 federal taxes free See Publication 15-B for more information on this election. File 2006 federal taxes free Depositing taxes on fringe benefits. File 2006 federal taxes free   Once you choose when fringe benefits are paid, you must deposit taxes in the same deposit period you treat the fringe benefits as paid. File 2006 federal taxes free To avoid a penalty, deposit the taxes following the general deposit rules for that deposit period. File 2006 federal taxes free   If you determine by January 31 you overestimated the value of a fringe benefit at the time you withheld and deposited for it, you may claim a refund for the overpayment or have it applied to your next employment tax return. File 2006 federal taxes free See Valuation of fringe benefits , earlier. File 2006 federal taxes free If you underestimated the value and deposited too little, you may be subject to a failure-to-deposit penalty. File 2006 federal taxes free See section 11 for information on deposit penalties. File 2006 federal taxes free   If you deposited the required amount of taxes but withheld a lesser amount from the employee, you can recover from the employee the social security, Medicare, or income taxes you deposited on his or her behalf, and included in the employee's Form W-2. File 2006 federal taxes free However, you must recover the income taxes before April 1 of the following year. File 2006 federal taxes free Sick pay. File 2006 federal taxes free   In general, sick pay is any amount you pay under a plan to an employee who is unable to work because of sickness or injury. File 2006 federal taxes free These amounts are sometimes paid by a third party, such as an insurance company or an employees' trust. File 2006 federal taxes free In either case, these payments are subject to social security, Medicare, and FUTA taxes. File 2006 federal taxes free Sick pay becomes exempt from these taxes after the end of 6 calendar months after the calendar month the employee last worked for the employer. File 2006 federal taxes free The payments are always subject to federal income tax. File 2006 federal taxes free See Publication 15-A for more information. File 2006 federal taxes free 6. File 2006 federal taxes free Tips Tips your employee receives from customers are generally subject to withholding. File 2006 federal taxes free Your employee must report cash tips to you by the 10th of the month after the month the tips are received. File 2006 federal taxes free The report should include tips you paid over to the employee for charge customers, tips the employee received directly from customers, and tips received from other employees under any tip-sharing arrangement. File 2006 federal taxes free Both directly and indirectly tipped employees must report tips to you. File 2006 federal taxes free No report is required for months when tips are less than $20. File 2006 federal taxes free Your employee reports the tips on Form 4070, Employee's Report of Tips to Employer, or on a similar statement. File 2006 federal taxes free The statement must be signed by the employee and must include: The employee's name, address, and SSN, Your name and address, The month or period the report covers, and The total of tips received during the month or period. File 2006 federal taxes free Both Forms 4070 and 4070-A, Employee's Daily Record of Tips, are included in Publication 1244, Employee's Daily Record of Tips and Report to Employer. File 2006 federal taxes free You are permitted to establish a system for electronic tip reporting by employees. File 2006 federal taxes free See Regulations section 31. File 2006 federal taxes free 6053-1(d). File 2006 federal taxes free Collecting taxes on tips. File 2006 federal taxes free   You must collect income tax, employee social security tax, and employee Medicare tax on the employee's tips. File 2006 federal taxes free The withholding rules for withholding an employee's share of Medicare tax on tips also apply to withholding the Additional Medicare Tax once wages and tips exceed $200,000 in the calendar year. File 2006 federal taxes free If an employee reports to you in writing $20 or more of tips in a month, the tips are also subject to FUTA tax. File 2006 federal taxes free   You can collect these taxes from the employee's wages or from other funds he or she makes available. File 2006 federal taxes free See Tips treated as supplemental wages in section 7 for more information. File 2006 federal taxes free Stop collecting the employee social security tax when his or her wages and tips for tax year 2014 reach $117,000; collect the income and employee Medicare taxes for the whole year on all wages and tips. File 2006 federal taxes free You are responsible for the employer social security tax on wages and tips until the wages (including tips) reach the limit. File 2006 federal taxes free You are responsible for the employer Medicare tax for the whole year on all wages and tips. File 2006 federal taxes free File Form 941 or Form 944 to report withholding and employment taxes on tips. File 2006 federal taxes free Ordering rule. File 2006 federal taxes free   If, by the 10th of the month after the month for which you received an employee's report on tips, you do not have enough employee funds available to deduct the employee tax, you no longer have to collect it. File 2006 federal taxes free If there are not enough funds available, withhold taxes in the following order. File 2006 federal taxes free Withhold on regular wages and other compensation. File 2006 federal taxes free Withhold social security and Medicare taxes on tips. File 2006 federal taxes free Withhold income tax on tips. File 2006 federal taxes free Reporting tips. File 2006 federal taxes free   Report tips and any collected and uncollected social security and Medicare taxes on Form W-2 and on Form 941, lines 5b, 5c, and 5d (Form 944, lines 4b, 4c, and 4d). File 2006 federal taxes free Report an adjustment on Form 941, line 9 (Form 944, line 6), for the uncollected social security and Medicare taxes. File 2006 federal taxes free Enter the amount of uncollected social security tax and Medicare tax on Form W-2, box 12, with codes “A” and “B. File 2006 federal taxes free ” Do not include any uncollected Additional Medicare Tax in box 12 of Form W-2. File 2006 federal taxes free See section 13 and the General Instructions for Forms W-2 and W-3. File 2006 federal taxes free   Revenue Ruling 2012-18 provides guidance for employers regarding social security and Medicare taxes imposed on tips, including information on the reporting of the employer share of social security and Medicare taxes under section 3121(q), the difference between tips and service charges, and the section 45B credit. File 2006 federal taxes free See Revenue Ruling 2012-18, 2012-26 I. File 2006 federal taxes free R. File 2006 federal taxes free B. File 2006 federal taxes free 1032, available at www. File 2006 federal taxes free irs. File 2006 federal taxes free gov/irb/2012-26_IRB/ar07. File 2006 federal taxes free html. File 2006 federal taxes free Allocated tips. File 2006 federal taxes free   If you operate a large food or beverage establishment, you must report allocated tips under certain circumstances. File 2006 federal taxes free However, do not withhold income, social security, or Medicare taxes on allocated tips. File 2006 federal taxes free   A large food or beverage establishment is one that provides food or beverages for consumption on the premises, where tipping is customary, and where there were normally more than 10 employees on a typical business day during the preceding year. File 2006 federal taxes free   The tips may be allocated by one of three methods—hours worked, gross receipts, or good faith agreement. File 2006 federal taxes free For information about these allocation methods, including the requirement to file Forms 8027 electronically if 250 or more forms are filed, see the Instructions for Form 8027. File 2006 federal taxes free For information on filing Form 8027 electronically with the IRS, see Publication 1239. File 2006 federal taxes free Tip Rate Determination and Education Program. File 2006 federal taxes free   Employers may participate in the Tip Rate Determination and Education Program. File 2006 federal taxes free The program primarily consists of two voluntary agreements developed to improve tip income reporting by helping taxpayers to understand and meet their tip reporting responsibilities. File 2006 federal taxes free The two agreements are the Tip Rate Determination Agreement (TRDA) and the Tip Reporting Alternative Commitment (TRAC). File 2006 federal taxes free A tip agreement, the Gaming Industry Tip Compliance Agreement (GITCA), is available for the gaming (casino) industry. File 2006 federal taxes free To get more information about TRDA and TRAC agreements, see Publication 3144, Tips on Tips. File 2006 federal taxes free Additionally, visit IRS. File 2006 federal taxes free gov and enter “MSU tips” in the search box to get more information about GITCA, TRDA, or TRAC agreements. File 2006 federal taxes free 7. File 2006 federal taxes free Supplemental Wages Supplemental wages are wage payments to an employee that are not regular wages. File 2006 federal taxes free They include, but are not limited to, bonuses, commissions, overtime pay, payments for accumulated sick leave, severance pay, awards, prizes, back pay, retroactive pay increases, and payments for nondeductible moving expenses. File 2006 federal taxes free Other payments subject to the supplemental wage rules include taxable fringe benefits and expense allowances paid under a nonaccountable plan. File 2006 federal taxes free How you withhold on supplemental wages depends on whether the supplemental payment is identified as a separate payment from regular wages. File 2006 federal taxes free See Regulations section 31. File 2006 federal taxes free 3402(g)-1 for additional guidance for wages paid after January 1, 2007. File 2006 federal taxes free Also see Revenue Ruling 2008-29, 2008-24 I. File 2006 federal taxes free R. File 2006 federal taxes free B. File 2006 federal taxes free 1149, available at www. File 2006 federal taxes free irs. File 2006 federal taxes free gov/irb/2008-24_IRB/ar08. File 2006 federal taxes free html. File 2006 federal taxes free Withholding on supplemental wages when an employee receives more than $1 million of supplemental wages from you during the calendar year. File 2006 federal taxes free   Special rules apply to the extent supplemental wages paid to any one employee during the calendar year exceed $1 million. File 2006 federal taxes free If a supplemental wage payment, together with other supplemental wage payments made to the employee during the calendar year, exceeds $1 million, the excess is subject to withholding at 39. File 2006 federal taxes free 6% (or the highest rate of income tax for the year). File 2006 federal taxes free Withhold using the 39. File 2006 federal taxes free 6% rate without regard to the employee's Form W-4. File 2006 federal taxes free In determining supplemental wages paid to the employee during the year, include payments from all businesses under common control. File 2006 federal taxes free For more information, see Treasury Decision 9276, 2006-37 I. File 2006 federal taxes free R. File 2006 federal taxes free B. File 2006 federal taxes free 423, available at www. File 2006 federal taxes free irs. File 2006 federal taxes free gov/irb/2006-37_IRB/ar09. File 2006 federal taxes free html. File 2006 federal taxes free Withholding on supplemental wage payments to an employee who does not receive $1 million of supplemental wages during the calendar year. File 2006 federal taxes free   If the supplemental wages paid to the employee during the calendar year are less than or equal to $1 million, the following rules apply in determining the amount of income tax to be withheld. File 2006 federal taxes free Supplemental wages combined with regular wages. File 2006 federal taxes free   If you pay supplemental wages with regular wages but do not specify the amount of each, withhold federal income tax as if the total were a single payment for a regular payroll period. File 2006 federal taxes free Supplemental wages identified separately from regular wages. File 2006 federal taxes free   If you pay supplemental wages separately (or combine them in a single payment and specify the amount of each), the federal income tax withholding method depends partly on whether you withhold income tax from your employee's regular wages. File 2006 federal taxes free If you withheld income tax from an employee's regular wages in the current or immediately preceding calendar year, you can use one of the following methods for the supplemental wages. File 2006 federal taxes free Withhold a flat 25% (no other percentage allowed). File 2006 federal taxes free If the supplemental wages are paid concurrently with regular wages, add the supplemental wages to the concurrently paid regular wages. File 2006 federal taxes free If there are no concurrently paid regular wages, add the supplemental wages to alternatively, either the regular wages paid or to be paid for the current payroll period or the regular wages paid for the preceding payroll period. File 2006 federal taxes free Figure the income tax withholding as if the total of the regular wages and supplemental wages is a single payment. File 2006 federal taxes free Subtract the tax withheld from the regular wages. File 2006 federal taxes free Withhold the remaining tax from the supplemental wages. File 2006 federal taxes free If there were other payments of supplemental wages paid during the payroll period made before the current payment of supplemental wages, aggregate all the payments of supplemental wages paid during the payroll period with the regular wages paid during the payroll period, calculate the tax on the total, subtract the tax already withheld from the regular wages and the previous supplemental wage payments, and withhold the remaining tax. File 2006 federal taxes free If you did not withhold income tax from the employee's regular wages in the current or immediately preceding calendar year, use method 1-b. File 2006 federal taxes free This would occur, for example, when the value of the employee's withholding allowances claimed on Form W-4 is more than the wages. File 2006 federal taxes free Regardless of the method you use to withhold income tax on supplemental wages, they are subject to social security, Medicare, and FUTA taxes. File 2006 federal taxes free Example 1. File 2006 federal taxes free You pay John Peters a base salary on the 1st of each month. File 2006 federal taxes free He is single and claims one withholding allowance. File 2006 federal taxes free In January he is paid $1,000. File 2006 federal taxes free Using the wage bracket tables, you withhold $50 from this amount. File 2006 federal taxes free In February, he receives salary of $1,000 plus a commission of $2,000, which you combine with regular wages and do not separately identify. File 2006 federal taxes free You figure the withholding based on the total of $3,000. File 2006 federal taxes free The correct withholding from the tables is $338. File 2006 federal taxes free Example 2. File 2006 federal taxes free You pay Sharon Warren a base salary on the 1st of each month. File 2006 federal taxes free She is single and claims one allowance. File 2006 federal taxes free Her May 1 pay is $2,000. File 2006 federal taxes free Using the wage bracket tables, you withhold $188. File 2006 federal taxes free On May 14 she receives a bonus of $1,000. File 2006 federal taxes free Electing to use supplemental wage withholding method 1-b, you: Add the bonus amount to the amount of wages from the most recent base salary pay date (May 1) ($2,000 + $1,000 = $3,000). File 2006 federal taxes free Determine the amount of withholding on the combined $3,000 amount to be $338 using the wage bracket tables. File 2006 federal taxes free Subtract the amount withheld from wages on the most recent base salary pay date (May 1) from the combined withholding amount ($338 – $188 = $150). File 2006 federal taxes free Withhold $150 from the bonus payment. File 2006 federal taxes free Example 3. File 2006 federal taxes free The facts are the same as in Example 2, except you elect to use the flat rate method of withholding on the bonus. File 2006 federal taxes free You withhold 25% of $1,000, or $250, from Sharon's bonus payment. File 2006 federal taxes free Example 4. File 2006 federal taxes free The facts are the same as in Example 2, except you elect to pay Sharon a second bonus of $2,000 on May 28. File 2006 federal taxes free Using supplemental wage withholding method 1-b, you: Add the first and second bonus amounts to the amount of wages from the most recent base salary pay date (May 1) ($2,000 + $1,000 + $2,000 = $5,000). File 2006 federal taxes free Determine the amount of withholding on the combined $5,000 amount to be $781 using the wage bracket tables. File 2006 federal taxes free Subtract the amounts withheld from wages on the most recent base salary pay date (May 1) and the amounts withheld from the first bonus payment from the combined withholding amount ($781 – $188 – $150 = $443). File 2006 federal taxes free Withhold $443 from the second bonus payment. File 2006 federal taxes free Tips treated as supplemental wages. File 2006 federal taxes free   Withhold income tax on tips from wages earned by the employee or from other funds the employee makes available. File 2006 federal taxes free If an employee receives regular wages and reports tips, figure income tax withholding as if the tips were supplemental wages. File 2006 federal taxes free If you have not withheld income tax from the regular wages, add the tips to the regular wages. File 2006 federal taxes free Then withhold income tax on the total. File 2006 federal taxes free If you withheld income tax from the regular wages, you can withhold on the tips by method 1-a or 1-b discussed earlier in this section under Supplemental wages identified separately from regular wages. File 2006 federal taxes free Vacation pay. File 2006 federal taxes free   Vacation pay is subject to withholding as if it were a regular wage payment. File 2006 federal taxes free When vacation pay is in addition to regular wages for the vacation period, treat it as a supplemental wage payment. File 2006 federal taxes free If the vacation pay is for a time longer than your usual payroll period, spread it over the pay periods for which you pay it. File 2006 federal taxes free 8. File 2006 federal taxes free Payroll Period Your payroll period is a period of service for which you usually pay wages. File 2006 federal taxes free When you have a regular payroll period, withhold income tax for that time period even if your employee does not work the full period. File 2006 federal taxes free No regular payroll period. File 2006 federal taxes free   When you do not have a regular payroll period, withhold the tax as if you paid wages for a daily or miscellaneous payroll period. File 2006 federal taxes free Figure the number of days (including Sundays and holidays) in the period covered by the wage payment. File 2006 federal taxes free If the wages are unrelated to a specific length of time (for example, commissions paid on completion of a sale), count back the number of days from the payment period to the latest of: The last wage payment made during the same calendar year, The date employment began, if during the same calendar year, or January 1 of the same year. File 2006 federal taxes free Employee paid for period less than 1 week. File 2006 federal taxes free   When you pay an employee for a period of less than one week, and the employee signs a statement under penalties of perjury indicating he or she is not working for any other employer during the same week for wages subject to withholding, figure withholding based on a weekly payroll period. File 2006 federal taxes free If the employee later begins to work for another employer for wages subject to withholding, the employee must notify you within 10 days. File 2006 federal taxes free You then figure withholding based on the daily or miscellaneous period. File 2006 federal taxes free 9. File 2006 federal taxes free Withholding From Employees' Wages Income Tax Withholding Using Form W-4 to figure withholding. File 2006 federal taxes free   To know how much federal income tax to withhold from employees' wages, you should have a Form W-4 on file for each employee. File 2006 federal taxes free Encourage your employees to file an updated Form W-4 for 2014, especially if they owed taxes or received a large refund when filing their 2013 tax return. File 2006 federal taxes free Advise your employees to use the IRS Withholding Calculator on the IRS website at www. File 2006 federal taxes free irs. File 2006 federal taxes free gov/individuals for help in determining how many withholding allowances to claim on their Forms W-4. File 2006 federal taxes free   Ask all new employees to give you a signed Form W-4 when they start work. File 2006 federal taxes free Make the form effective with the first wage payment. File 2006 federal taxes free If a new employee does not give you a completed Form W-4, withhold income tax as if he or she is single, with no withholding allowances. File 2006 federal taxes free Form in Spanish. File 2006 federal taxes free   You can provide Formulario W-4(SP), Certificado de Exención de Retenciones del Empleado, in place of Form W-4, to your Spanish-speaking employees. File 2006 federal taxes free For more information, see Publicación 17(SP), El Impuesto Federal sobre los Ingresos (Para Personas Físicas). File 2006 federal taxes free The rules discussed in this section that apply to Form W-4 also apply to Formulario W-4(SP). File 2006 federal taxes free Electronic system to receive Form W-4. File 2006 federal taxes free   You may establish a system to electronically receive Forms W-4 from your employees. File 2006 federal taxes free See Regulations section 31. File 2006 federal taxes free 3402(f)(5)-1(c) for more information. File 2006 federal taxes free Effective date of Form W-4. File 2006 federal taxes free   A Form W-4 remains in effect until the employee gives you a new one. File 2006 federal taxes free When you receive a new Form W-4 from an employee, do not adjust withholding for pay periods before the effective date of the new form. File 2006 federal taxes free If an employee gives you a Form W-4 that replaces an existing Form W-4, begin withholding no later than the start of the first payroll period ending on or after the 30th day from the date when you received the replacement Form W-4. File 2006 federal taxes free For exceptions, see Exemption from federal income tax withholding , IRS review of requested Forms W-4 , and Invalid Forms W-4 , later in this section. File 2006 federal taxes free A Form W-4 that makes a change for the next calendar year will not take effect in the current calendar year. File 2006 federal taxes free Successor employer. File 2006 federal taxes free   If you are a successor employer (see Successor employer , later in this section), secure new Forms W-4 from the transferred employees unless the “Alternative Procedure” in section 5 of Revenue Procedure 2004-53 applies. File 2006 federal taxes free See Revenue Procedure 2004-53, 2004-34 I. File 2006 federal taxes free R. File 2006 federal taxes free B. File 2006 federal taxes free 320, available at www. File 2006 federal taxes free irs. File 2006 federal taxes free gov/irb/2004-34_IRB/ar13. File 2006 federal taxes free html. File 2006 federal taxes free Completing Form W-4. File 2006 federal taxes free   The amount of any federal income tax withholding must be based on marital status and withholding allowances. File 2006 federal taxes free Your employees may not base their withholding amounts on a fixed dollar amount or percentage. File 2006 federal taxes free However, an employee may specify a dollar amount to be withheld in addition to the amount of withholding based on filing status and withholding allowances claimed on Form W-4. File 2006 federal taxes free Employees may claim fewer withholding allowances than they are entitled to claim. File 2006 federal taxes free They may wish to claim fewer allowances to ensure they have enough withholding or to offset the tax on other sources of taxable income not subject to withholding. File 2006 federal taxes free See Publication 505, Tax Withholding and Estimated Tax, for more information about completing Form W-4. File 2006 federal taxes free Along with Form W-4, you may wish to order Publication 505 for use by your employees. File 2006 federal taxes free Do not accept any withholding or estimated tax payments from your employees in addition to withholding based on their Form W-4. File 2006 federal taxes free If they require additional withholding, they should submit a new Form W-4 and, if necessary, pay estimated tax by filing Form 1040-ES, Estimated Tax for Individuals, or by using the Electronic Federal Tax Payment System (EFTPS) to make estimated tax payments. File 2006 federal taxes free Exemption from federal income tax withholding. File 2006 federal taxes free   Generally, an employee may claim exemption from federal income tax withholding because he or she had no income tax liability last year and expects none this year. File 2006 federal taxes free See the Form W-4 instructions for more information. File 2006 federal taxes free However, the wages are still subject to social security and Medicare taxes. File 2006 federal taxes free See also Invalid Forms W-4 , later in this section. File 2006 federal taxes free   A Form W-4 claiming exemption from withholding is effective when it is filed with the employer and only for that calendar year. File 2006 federal taxes free To continue to be exempt from withholding in the next calendar year, an employee must give you a new Form W-4 by February 15. File 2006 federal taxes free If the employee does not give you a new Form W-4 by February 15, begin withholding based on the last Form W-4 for the employee that did not claim an exemption from withholding or, if one was not filed, then withhold tax as if he or she is single with zero withholding allowances. File 2006 federal taxes free If the employee provides a new Form W-4 claiming exemption from withholding on February 16 or later, you may apply it to future wages but do not refund any taxes already withheld. File 2006 federal taxes free Withholding income taxes on the wages of nonresident alien employees. File 2006 federal taxes free   In general, you must withhold federal income taxes on the wages of nonresident alien employees. File 2006 federal taxes free However, see Publication 515, Withholding of Tax on Nonresident Aliens and Foreign Entities, for exceptions to this general rule. File 2006 federal taxes free Also see section 3 of Publication 51 (Circular A), Agricultural Employer's Tax Guide, for guidance on H-2A visa workers. File 2006 federal taxes free Withholding adjustment for nonresident alien employees. File 2006 federal taxes free   For 2014, apply the procedure discussed next to figure the amount of income tax to withhold from the wages of nonresident alien employees performing services within the United States. File 2006 federal taxes free Nonresident alien students from India and business apprentices from India are not subject to this procedure. File 2006 federal taxes free Instructions. File 2006 federal taxes free   To figure how much income tax to withhold from the wages paid to a nonresident alien employee performing services in the United States, use the following steps. File 2006 federal taxes free Step 1. File 2006 federal taxes free   Add to the wages paid to the nonresident alien employee for the payroll period the amount shown in the chart below for the applicable payroll period. File 2006 federal taxes free    Amount to Add to Nonresident Alien Employee's Wages for Calculating Income Tax Withholding Only   Payroll Period Add Additional     Weekly $ 43. File 2006 federal taxes free 30     Biweekly 86. File 2006 federal taxes free 50     Semimonthly 93. File 2006 federal taxes free 80     Monthly 187. File 2006 federal taxes free 50     Quarterly 562. File 2006 federal taxes free 50     Semiannually 1,125. File 2006 federal taxes free 00     Annually 2,250. File 2006 federal taxes free 00     Daily or Miscellaneous (each day of the payroll period) 8. File 2006 federal taxes free 70   Step 2. File 2006 federal taxes free   Use the amount figured in Step 1 and the number of withholding allowances claimed (generally limited to one allowance) to figure income tax withholding. File 2006 federal taxes free Determine the value of withholding allowances by multiplying the number of withholding allowances claimed by the appropriate amount from Table 5. File 2006 federal taxes free Percentage Method—2014 Amount for One Withholding Allowance shown on page 41. File 2006 federal taxes free If you are using the Percentage Method Tables for Income Tax Withholding, provided on pages 43–44, reduce the amount figured in Step 1 by the value of withholding allowances and use that reduced amount to figure the income tax withholding. File 2006 federal taxes free If you are using the Wage Bracket Method for Income Tax Withholding, provided on pages 45–64, use the amount figured in Step 1 and the number of withholding allowances to figure income tax withholding. File 2006 federal taxes free The amounts from the chart above are added to wages solely for calculating income tax withholding on the wages of the nonresident alien employee. File 2006 federal taxes free The amounts from the chart should not be included in any box on the employee's Form W-2 and do not increase the income tax liability of the employee. File 2006 federal taxes free Also, the amounts from the chart do not increase the social security tax or Medicare tax liability of the employer or the employee, or the FUTA tax liability of the employer. File 2006 federal taxes free This procedure only applies to nonresident alien employees who have wages subject to income tax withholding. File 2006 federal taxes free Example. File 2006 federal taxes free An employer using the percentage method of withholding pays wages of $500 for a biweekly payroll period to a married nonresident alien employee. File 2006 federal taxes free The nonresident alien has properly completed Form W-4, entering marital status as “single” with one withholding allowance and indicating status as a nonresident alien on Form W-4, line 6 (see Nonresident alien employee's Form W-4 , later in this section). File 2006 federal taxes free The employer determines the wages to be used in the withholding tables by adding to the $500 amount of wages paid the amount of $86. File 2006 federal taxes free 50 from the chart under Step 1 ($586. File 2006 federal taxes free 50 total). File 2006 federal taxes free The employer then applies the applicable tables to determine the income tax withholding for nonresident aliens (see Step 2 ). File 2006 federal taxes free Reminder: If you use the Percentage Method Tables for Income Tax Withholding, reduce the amount figured in Step 1 by the value of withholding allowances and use that reduced amount to figure income tax withholding. File 2006 federal taxes free The $86. File 2006 federal taxes free 50 added to wages for calculating income tax withholding is not reported on Form W-2, and does not increase the income tax liability of the employee. File 2006 federal taxes free Also, the $86. File 2006 federal taxes free 50 added to wages does not affect the social security tax or Medicare tax liability of the employer or the employee, or the FUTA tax liability of the employer. File 2006 federal taxes free Supplemental wage payment. File 2006 federal taxes free   This procedure for determining the amount of income tax withholding does not apply to a supplemental wage payment (see section 7) if the 39. File 2006 federal taxes free 6% mandatory flat rate withholding applies or if the 25% optional flat rate withholding is being used to calculate income tax withholding on the supplemental wage payment. File 2006 federal taxes free Nonresident alien employee's Form W-4. File 2006 federal taxes free   When completing Forms W-4, nonresident aliens are required to: Not claim exemption from income tax withholding, Request withholding as if they are single, regardless of their actual marital status, Claim only one allowance (if the nonresident alien is a resident of Canada, Mexico, or South Korea, or a student or business apprentice from India, he or she may claim more than one allowance), and Write “Nonresident Alien” or “NRA” above the dotted line on line 6 of Form W-4. File 2006 federal taxes free   If you maintain an electronic Form W-4 system, you should provide a field for nonresident aliens to enter nonresident alien status in lieu of writing “Nonresident Alien” or “NRA” above the dotted line on line 6. File 2006 federal taxes free A nonresident alien employee may request additional withholding at his or her option for other purposes, although such additions should not be necessary for withholding to cover federal income tax liability related to employment. File 2006 federal taxes free Form 8233. File 2006 federal taxes free   If a nonresident alien employee claims a tax treaty exemption from withholding, the employee must submit Form 8233, Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Nonresident Alien Individual, with respect to the income exempt under the treaty, instead of Form W-4. File 2006 federal taxes free See Publication 515 for details. File 2006 federal taxes free IRS review of requested Forms W-4. File 2006 federal taxes free   When requested by the IRS, you must make original Forms W-4 available for inspection by an IRS employee. File 2006 federal taxes free You may also be directed to send certain Forms W-4 to the IRS. File 2006 federal taxes free You may receive a notice from the IRS requiring you to submit a copy of Form W-4 for one or more of your named employees. File 2006 federal taxes free Send the requested copy or copies of Form W-4 to the IRS at the address provided and in the manner directed by the notice. File 2006 federal taxes free The IRS may also require you to submit copies of Form W-4 to the IRS as directed by Treasury Decision 9337, 2007-35 I. File 2006 federal taxes free R. File 2006 federal taxes free B. File 2006 federal taxes free 455, which is available at www. File 2006 federal taxes free irs. File 2006 federal taxes free gov/irb/2007-35_IRB/ar10. File 2006 federal taxes free html. File 2006 federal taxes free When we refer to Form W-4, the same rules apply to Formulario W-4(SP), its Spanish translation. File 2006 federal taxes free After submitting a copy of a requested Form W-4 to the IRS, continue to withhold federal income tax based on that Form W-4 if it is valid (see Invalid Forms W-4 , later in this section). File 2006 federal taxes free However, if the IRS later notifies you in writing the employee is not entitled to claim exemption from withholding or a claimed number of withholding allowances, withhold federal income tax based on the effective date, marital status, and maximum number of withholding allowances specified in the IRS notice (commonly referred to as a "lock-in letter
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File 2006 federal taxes free 9. File 2006 federal taxes free   Rental Income and Expenses Table of Contents Introduction Useful Items - You may want to see: Rental Income Rental ExpensesVacant while listed for sale. File 2006 federal taxes free Repairs and Improvements Other Expenses Property Changed to Rental Use Renting Part of Property Not Rented for Profit Personal Use of Dwelling Unit (Including Vacation Home)Example. File 2006 federal taxes free Dividing Expenses Dwelling Unit Used as a Home Reporting Income and Deductions DepreciationChanging your accounting method to deduct unclaimed depreciation. File 2006 federal taxes free Limits on Rental LossesAt-Risk Rules Passive Activity Limits How To Report Rental Income and ExpensesSchedule E (Form 1040) Introduction This chapter discusses rental income and expenses. File 2006 federal taxes free It also covers the following topics. File 2006 federal taxes free Personal use of dwelling unit (including vacation home). File 2006 federal taxes free Depreciation. File 2006 federal taxes free Limits on rental losses. File 2006 federal taxes free How to report your rental income and expenses. File 2006 federal taxes free If you sell or otherwise dispose of your rental property, see Publication 544, Sales and Other Dispositions of Assets. File 2006 federal taxes free If you have a loss from damage to, or theft of, rental property, see Publication 547, Casualties, Disasters, and Thefts. File 2006 federal taxes free If you rent a condominium or a cooperative apartment, some special rules apply to you even though you receive the same tax treatment as other owners of rental property. File 2006 federal taxes free See Publication 527, Residential Rental Property, for more information. File 2006 federal taxes free Useful Items - You may want to see: Publication 527 Residential Rental Property 534 Depreciating Property Placed in Service Before 1987 535 Business Expenses 925 Passive Activity and At-Risk Rules 946 How To Depreciate Property Form (and Instructions) 4562 Depreciation and Amortization 6251 Alternative Minimum Tax—Individuals 8582 Passive Activity Loss Limitations Schedule E (Form 1040) Supplemental Income and Loss Rental Income In most cases, you must include in your gross income all amounts you receive as rent. File 2006 federal taxes free Rental income is any payment you receive for the use or occupation of property. File 2006 federal taxes free In addition to amounts you receive as normal rent payments, there are other amounts that may be rental income. File 2006 federal taxes free When to report. File 2006 federal taxes free   If you are a cash-basis taxpayer, you report rental income on your return for the year you actually or constructively receive it. File 2006 federal taxes free You are a cash-basis taxpayer if you report income in the year you receive it, regardless of when it was earned. File 2006 federal taxes free You constructively receive income when it is made available to you, for example, by being credited to your bank account. File 2006 federal taxes free   For more information about when you constructively receive income, see Accounting Methods in chapter 1. File 2006 federal taxes free Advance rent. File 2006 federal taxes free   Advance rent is any amount you receive before the period that it covers. File 2006 federal taxes free Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use. File 2006 federal taxes free Example. File 2006 federal taxes free You sign a 10-year lease to rent your property. File 2006 federal taxes free In the first year, you receive $5,000 for the first year's rent and $5,000 as rent for the last year of the lease. File 2006 federal taxes free You must include $10,000 in your income in the first year. File 2006 federal taxes free Canceling a lease. File 2006 federal taxes free   If your tenant pays you to cancel a lease, the amount you receive is rent. File 2006 federal taxes free Include the payment in your income in the year you receive it regardless of your method of accounting. File 2006 federal taxes free Expenses paid by tenant. File 2006 federal taxes free   If your tenant pays any of your expenses, the payments are rental income. File 2006 federal taxes free Because you must include this amount in income, you can deduct the expenses if they are deductible rental expenses. File 2006 federal taxes free See Rental Expenses , later, for more information. File 2006 federal taxes free Property or services. File 2006 federal taxes free   If you receive property or services, instead of money, as rent, include the fair market value of the property or services in your rental income. File 2006 federal taxes free   If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary. File 2006 federal taxes free Security deposits. File 2006 federal taxes free   Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. File 2006 federal taxes free But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year. File 2006 federal taxes free   If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. File 2006 federal taxes free Include it in your income when you receive it. File 2006 federal taxes free Part interest. File 2006 federal taxes free   If you own a part interest in rental property, you must report your part of the rental income from the property. File 2006 federal taxes free Rental of property also used as your home. File 2006 federal taxes free   If you rent property that you also use as your home and you rent it less than 15 days during the tax year, do not include the rent you receive in your income and do not deduct rental expenses. File 2006 federal taxes free However, you can deduct on Schedule A (Form 1040) the interest, taxes, and casualty and theft losses that are allowed for nonrental property. File 2006 federal taxes free See Personal Use of Dwelling Unit (Including Vacation Home) , later. File 2006 federal taxes free Rental Expenses This part discusses expenses of renting property that you ordinarily can deduct from your rental income. File 2006 federal taxes free It includes information on the expenses you can deduct if you rent part of your property, or if you change your property to rental use. File 2006 federal taxes free Depreciation , which you can also deduct from your rental income, is discussed later. File 2006 federal taxes free Personal use of rental property. File 2006 federal taxes free   If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and personal use. File 2006 federal taxes free Also, your rental expense deductions may be limited. File 2006 federal taxes free See Personal Use of Dwelling Unit (Including Vacation Home) , later. File 2006 federal taxes free Part interest. File 2006 federal taxes free   If you own a part interest in rental property, you can deduct expenses that you paid according to your percentage of ownership. File 2006 federal taxes free When to deduct. File 2006 federal taxes free   If you are a cash-basis taxpayer, you generally deduct your rental expenses in the year you pay them. File 2006 federal taxes free Depreciation. File 2006 federal taxes free   You can begin to depreciate rental property when it is ready and available for rent. File 2006 federal taxes free See Placed-in-Service under When Does Depreciation Begin and End in chapter 2 of Publication 527. File 2006 federal taxes free Pre-rental expenses. File 2006 federal taxes free   You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent. File 2006 federal taxes free Uncollected rent. File 2006 federal taxes free   If you are a cash-basis taxpayer, do not deduct uncollected rent. File 2006 federal taxes free Because you have not included it in your income, it is not deductible. File 2006 federal taxes free Vacant rental property. File 2006 federal taxes free   If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. File 2006 federal taxes free However, you cannot deduct any loss of rental income for the period the property is vacant. File 2006 federal taxes free Vacant while listed for sale. File 2006 federal taxes free   If you sell property you held for rental purposes, you can deduct the ordinary and necessary expenses for managing, conserving, or maintaining the property until it is sold. File 2006 federal taxes free If the property is not held out and available for rent while listed for sale, the expenses are not deductible rental expenses. File 2006 federal taxes free Repairs and Improvements Generally, an expense for repairing or maintaining your rental property may be deducted if you are not required to capitalize the expense. File 2006 federal taxes free Improvements. File 2006 federal taxes free   You must capitalize any expense you pay to improve your rental property. File 2006 federal taxes free An expense is for an improvement if it results in a betterment to your property, restores your property, or adapts your property to a new or different use. File 2006 federal taxes free Betterments. File 2006 federal taxes free   Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property. File 2006 federal taxes free Restoration. File 2006 federal taxes free   Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition. File 2006 federal taxes free Adaptation. File 2006 federal taxes free   Expenses that may be for adaptation include expenses for altering your property to a use that is not consistent with the intended ordinary use of your property when you began renting the property. File 2006 federal taxes free Separate the costs of repairs and improvements, and keep accurate records. File 2006 federal taxes free You will need to know the cost of improvements when you sell or depreciate your property. File 2006 federal taxes free The expenses you capitalize for improving your property can generally be depreciated as if the improvement were separate property. File 2006 federal taxes free Other Expenses Other expenses you can deduct from your rental income include advertising, cleaning and maintenance, utilities, fire and liability insurance, taxes, interest, commissions for the collection of rent, ordinary and necessary travel and transportation, and other expenses, discussed next. File 2006 federal taxes free Insurance premiums paid in advance. File 2006 federal taxes free   If you pay an insurance premium for more than one year in advance, for each year of coverage you can deduct the part of the premium payment that will apply to that year. File 2006 federal taxes free You cannot deduct the total premium in the year you pay it. File 2006 federal taxes free Legal and other professional fees. File 2006 federal taxes free   You can deduct, as a rental expense, legal and other professional expenses, such as tax return preparation fees you paid to prepare Schedule E (Form 1040), Part I. File 2006 federal taxes free For example, on your 2013 Schedule E, you can deduct fees paid in 2013 to prepare your 2012 Schedule E, Part I. File 2006 federal taxes free You can also deduct, as a rental expense, any expense (other than federal taxes and penalties) you paid to resolve a tax underpayment related to your rental activities. File 2006 federal taxes free Local benefit taxes. File 2006 federal taxes free   In most cases, you cannot deduct charges for local benefits that increase the value of your property, such as charges for putting in streets, sidewalks, or water and sewer systems. File 2006 federal taxes free These charges are nondepreciable capital expenditures, and must be added to the basis of your property. File 2006 federal taxes free However, you can deduct local benefit taxes that are for maintaining, repairing, or paying interest charges for the benefits. File 2006 federal taxes free Local transportation expenses. File 2006 federal taxes free    You may be able to deduct your ordinary and necessary local transportation expenses if you incur them to collect rental income or to manage, conserve, or maintain your rental property. File 2006 federal taxes free However, transportation expenses incurred to travel between your home and a rental property generally constitute nondeductible commuting costs unless you use your home as your principal place of business. File 2006 federal taxes free See Publication 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business. File 2006 federal taxes free   Generally, if you use your personal car, pickup truck, or light van for rental activities, you can deduct the expenses using one of two methods: actual expenses or the standard mileage rate. File 2006 federal taxes free For 2013, the standard mileage rate for business use is 56. File 2006 federal taxes free 5 cents per mile. File 2006 federal taxes free For more information, see chapter 26. File 2006 federal taxes free    To deduct car expenses under either method, you must keep records that follow the rules in chapter 26. File 2006 federal taxes free In addition, you must complete Form 4562, Part V, and attach it to your tax return. File 2006 federal taxes free Rental of equipment. File 2006 federal taxes free   You can deduct the rent you pay for equipment that you use for rental purposes. File 2006 federal taxes free However, in some cases, lease contracts are actually purchase contracts. File 2006 federal taxes free If so, you cannot deduct these payments. File 2006 federal taxes free You can recover the cost of purchased equipment through depreciation. File 2006 federal taxes free Rental of property. File 2006 federal taxes free   You can deduct the rent you pay for property that you use for rental purposes. File 2006 federal taxes free If you buy a leasehold for rental purposes, you can deduct an equal part of the cost each year over the term of the lease. File 2006 federal taxes free Travel expenses. File 2006 federal taxes free   You can deduct the ordinary and necessary expenses of traveling away from home if the primary purpose of the trip is to collect rental income or to manage, conserve, or maintain your rental property. File 2006 federal taxes free You must properly allocate your expenses between rental and nonrental activities. File 2006 federal taxes free You cannot deduct the cost of traveling away from home if the primary purpose of the trip was to improve your property. File 2006 federal taxes free You recover the cost of improvements by taking depreciation. File 2006 federal taxes free For information on travel expenses, see chapter 26. File 2006 federal taxes free    To deduct travel expenses, you must keep records that follow the rules in chapter 26. File 2006 federal taxes free   See Rental Expenses in Publication 527 for more information. File 2006 federal taxes free Property Changed to Rental Use If you change your home or other property (or a part of it) to rental use at any time other than the beginning of your tax year, you must divide yearly expenses, such as taxes and insurance, between rental use and personal use. File 2006 federal taxes free You can deduct as rental expenses only the part of the expense that is for the part of the year the property was used or held for rental purposes. File 2006 federal taxes free You cannot deduct depreciation or insurance for the part of the year the property was held for personal use. File 2006 federal taxes free However, you can include the home mortgage interest, qualified mortgage insurance premiums, and real estate tax expenses for the part of the year the property was held for personal use as an itemized deduction on Schedule A (Form 1040). File 2006 federal taxes free Example. File 2006 federal taxes free Your tax year is the calendar year. File 2006 federal taxes free You moved from your home in May and started renting it out on June 1. File 2006 federal taxes free You can deduct as rental expenses seven-twelfths of your yearly expenses, such as taxes and insurance. File 2006 federal taxes free Starting with June, you can deduct as rental expenses the amounts you pay for items generally billed monthly, such as utilities. File 2006 federal taxes free Renting Part of Property If you rent part of your property, you must divide certain expenses between the part of the property used for rental purposes and the part of the property used for personal purposes, as though you actually had two separate pieces of property. File 2006 federal taxes free You can deduct the expenses related to the part of the property used for rental purposes, such as home mortgage interest, qualified mortgage insurance premiums, and real estate taxes, as rental expenses on Schedule E (Form 1040). File 2006 federal taxes free You can also deduct as rental expenses a portion of other expenses that normally are nondeductible personal expenses, such as expenses for electricity or painting the outside of your house. File 2006 federal taxes free There is no change in the types of expenses deductible for the personal-use part of your property. File 2006 federal taxes free Generally, these expenses may be deducted only if you itemize your deductions on Schedule A (Form 1040). File 2006 federal taxes free You cannot deduct any part of the cost of the first phone line even if your tenants have unlimited use of it. File 2006 federal taxes free You do not have to divide the expenses that belong only to the rental part of your property. File 2006 federal taxes free For example, if you paint a room that you rent, or if you pay premiums for liability insurance in connection with renting a room in your home, your entire cost is a rental expense. File 2006 federal taxes free If you install a second phone line strictly for your tenants' use, all of the cost of the second line is deductible as a rental expense. File 2006 federal taxes free You can deduct depreciation, discussed later, on the part of the house used for rental purposes as well as on the furniture and equipment you use for rental purposes. File 2006 federal taxes free How to divide expenses. File 2006 federal taxes free   If an expense is for both rental use and personal use, such as mortgage interest or heat for the entire house, you must divide the expense between the rental use and the personal use. File 2006 federal taxes free You can use any reasonable method for dividing the expense. File 2006 federal taxes free It may be reasonable to divide the cost of some items (for example, water) based on the number of people using them. File 2006 federal taxes free The two most common methods for dividing an expense are based on (1) the number of rooms in your home, and (2) the square footage of your home. File 2006 federal taxes free Not Rented for Profit If you do not rent your property to make a profit, you can deduct your rental expenses only up to the amount of your rental income. File 2006 federal taxes free You cannot deduct a loss or carry forward to the next year any rental expenses that are more than your rental income for the year. File 2006 federal taxes free For more information about the rules for an activity not engaged in for profit, see Not-for-Profit Activities in chapter 1 of Publication 535. File 2006 federal taxes free Where to report. File 2006 federal taxes free   Report your not-for-profit rental income on Form 1040, line 21. File 2006 federal taxes free For example, you can include your mortgage interest and any qualified mortgage insurance premiums (if you use the property as your main home or second home), real estate taxes, and casualty losses on the appropriate lines of Schedule A (Form 1040) if you itemize your deductions. File 2006 federal taxes free   If you itemize your deductions, claim your other rental expenses, subject to the rules explained in chapter 1 of Publication 535, as miscellaneous itemized deductions on Form 1040, Schedule A, line 23. File 2006 federal taxes free You can deduct these expenses only if they, together with certain other miscellaneous itemized deductions, total more than 2% of your adjusted gross income. File 2006 federal taxes free Personal Use of Dwelling Unit (Including Vacation Home) If you have any personal use of a dwelling unit (including a vacation home) that you rent, you must divide your expenses between rental use and personal use. File 2006 federal taxes free In general, your rental expenses will be no more than your total expenses multiplied by a fraction; the denominator of which is the total number of days the dwelling unit is used and the numerator of which is the total number of days actually rented at a fair rental price. File 2006 federal taxes free Only your rental expenses may be deducted on Schedule E (Form 1040). File 2006 federal taxes free Some of your personal expenses may be deductible if you itemize your deductions on Schedule A (Form 1040). File 2006 federal taxes free You must also determine if the dwelling unit is considered a home. File 2006 federal taxes free The amount of rental expenses that you can deduct may be limited if the dwelling unit is considered a home. File 2006 federal taxes free Whether a dwelling unit is considered a home depends on how many days during the year are considered to be days of personal use. File 2006 federal taxes free There is a special rule if you used the dwelling unit as a home and you rented it for less than 15 days during the year. File 2006 federal taxes free Dwelling unit. File 2006 federal taxes free   A dwelling unit includes a house, apartment, condominium, mobile home, boat, vacation home, or similar property. File 2006 federal taxes free It also includes all structures or other property belonging to the dwelling unit. File 2006 federal taxes free A dwelling unit has basic living accommodations, such as sleeping space, a toilet, and cooking facilities. File 2006 federal taxes free   A dwelling unit does not include property used solely as a hotel, motel, inn, or similar establishment. File 2006 federal taxes free Property is used solely as a hotel, motel, inn, or similar establishment if it is regularly available for occupancy by paying customers and is not used by an owner as a home during the year. File 2006 federal taxes free Example. File 2006 federal taxes free   You rent a room in your home that is always available for short-term occupancy by paying customers. File 2006 federal taxes free You do not use the room yourself, and you allow only paying customers to use the room. File 2006 federal taxes free The room is used solely as a hotel, motel, inn, or similar establishment and is not a dwelling unit. File 2006 federal taxes free Dividing Expenses If you use a dwelling unit for both rental and personal purposes, divide your expenses between the rental use and the personal use based on the number of days used for each purpose. File 2006 federal taxes free When dividing your expenses, follow these rules. File 2006 federal taxes free Any day that the unit is rented at a fair rental price is a day of rental use even if you used the unit for personal purposes that day. File 2006 federal taxes free This rule does not apply when determining whether you used the unit as a home. File 2006 federal taxes free Any day that the unit is available for rent but not actually rented is not a day of rental use. File 2006 federal taxes free Example. File 2006 federal taxes free Your beach cottage was available for rent from June 1 through August 31 (92 days). File 2006 federal taxes free During that time, except for the first week in August (7 days) when you were unable to find a renter, you rented the cottage at a fair rental price. File 2006 federal taxes free The person who rented the cottage for July allowed you to use it over the weekend (2 days) without any reduction in or refund of rent. File 2006 federal taxes free Your family also used the cottage during the last 2 weeks of May (14 days). File 2006 federal taxes free The cottage was not used at all before May 17 or after August 31. File 2006 federal taxes free You figure the part of the cottage expenses to treat as rental expenses as follows. File 2006 federal taxes free The cottage was used for rental a total of 85 days (92 − 7). File 2006 federal taxes free The days it was available for rent but not rented (7 days) are not days of rental use. File 2006 federal taxes free The July weekend (2 days) you used it is rental use because you received a fair rental price for the weekend. File 2006 federal taxes free You used the cottage for personal purposes for 14 days (the last 2 weeks in May). File 2006 federal taxes free The total use of the cottage was 99 days (14 days personal use + 85 days rental use). File 2006 federal taxes free Your rental expenses are 85/99 (86%) of the cottage expenses. File 2006 federal taxes free Note. File 2006 federal taxes free When determining whether you used the cottage as a home, the July weekend (2 days) you used it is considered personal use even though you received a fair rental price for the weekend. File 2006 federal taxes free Therefore, you had 16 days of personal use and 83 days of rental use for this purpose. File 2006 federal taxes free Because you used the cottage for personal purposes more than 14 days and more than 10% of the days of rental use (8 days), you used it as a home. File 2006 federal taxes free If you have a net loss, you may not be able to deduct all of the rental expenses. File 2006 federal taxes free See Dwelling Unit Used as a Home, next. File 2006 federal taxes free Dwelling Unit Used as a Home If you use a dwelling unit for both rental and personal purposes, the tax treatment of the rental expenses you figured earlier under Dividing Expenses and rental income depends on whether you are considered to be using the dwelling unit as a home. File 2006 federal taxes free You use a dwelling unit as a home during the tax year if you use it for personal purposes more than the greater of: 14 days, or 10% of the total days it is rented to others at a fair rental price. File 2006 federal taxes free See What is a day of personal use , later. File 2006 federal taxes free Fair rental price. File 2006 federal taxes free   A fair rental price for your property generally is the amount of rent that a person who is not related to you would be willing to pay. File 2006 federal taxes free The rent you charge is not a fair rental price if it is substantially less than the rents charged for other properties that are similar to your property in your area. File 2006 federal taxes free   If a dwelling unit is used for personal purposes on a day it is rented at a fair rental price, do not count that day as a day of rental use in applying (2) above. File 2006 federal taxes free Instead, count it as a day of personal use in applying both (1) and (2) above. File 2006 federal taxes free What is a day of personal use?   A day of personal use of a dwelling unit is any day that the unit is used by any of the following persons. File 2006 federal taxes free You or any other person who has an interest in the unit, unless you rent it to another owner as his or her main home under a shared equity financing agreement (defined later). File 2006 federal taxes free However, see Days used as a main home before or after renting , later. File 2006 federal taxes free A member of your family or a member of the family of any other person who owns an interest in the unit, unless the family member uses the dwelling unit as his or her main home and pays a fair rental price. File 2006 federal taxes free Family includes only your spouse, brothers and sisters, half-brothers and half-sisters, ancestors (parents, grandparents, etc. File 2006 federal taxes free ), and lineal descendants (children, grandchildren, etc. File 2006 federal taxes free ). File 2006 federal taxes free Anyone under an arrangement that lets you use some other dwelling unit. File 2006 federal taxes free Anyone at less than a fair rental price. File 2006 federal taxes free Main home. File 2006 federal taxes free   If the other person or member of the family in (1) or (2) above has more than one home, his or her main home is ordinarily the one he or she lived in most of the time. File 2006 federal taxes free Shared equity financing agreement. File 2006 federal taxes free   This is an agreement under which two or more persons acquire undivided interests for more than 50 years in an entire dwelling unit, including the land, and one or more of the co-owners is entitled to occupy the unit as his or her main home upon payment of rent to the other co-owner or owners. File 2006 federal taxes free Donation of use of property. File 2006 federal taxes free   You use a dwelling unit for personal purposes if: You donate the use of the unit to a charitable organization, The organization sells the use of the unit at a fund-raising event, and The “purchaser” uses the unit. File 2006 federal taxes free Examples. File 2006 federal taxes free   The following examples show how to determine days of personal use. File 2006 federal taxes free Example 1. File 2006 federal taxes free You and your neighbor are co-owners of a condominium at the beach. File 2006 federal taxes free Last year, you rented the unit to vacationers whenever possible. File 2006 federal taxes free The unit was not used as a main home by anyone. File 2006 federal taxes free Your neighbor used the unit for 2 weeks last year; you did not use it at all. File 2006 federal taxes free Because your neighbor has an interest in the unit, both of you are considered to have used the unit for personal purposes during those 2 weeks. File 2006 federal taxes free Example 2. File 2006 federal taxes free You and your neighbors are co-owners of a house under a shared equity financing agreement. File 2006 federal taxes free Your neighbors live in the house and pay you a fair rental price. File 2006 federal taxes free Even though your neighbors have an interest in the house, the days your neighbors live there are not counted as days of personal use by you. File 2006 federal taxes free This is because your neighbors rent the house as their main home under a shared equity financing agreement. File 2006 federal taxes free Example 3. File 2006 federal taxes free You own a rental property that you rent to your son. File 2006 federal taxes free Your son does not own any interest in this property. File 2006 federal taxes free He uses it as his main home and pays you a fair rental price. File 2006 federal taxes free Your son's use of the property is not personal use by you because your son is using it as his main home, he owns no interest in the property, and he is paying you a fair rental price. File 2006 federal taxes free Example 4. File 2006 federal taxes free You rent your beach house to Joshua. File 2006 federal taxes free Joshua rents his cabin in the mountains to you. File 2006 federal taxes free You each pay a fair rental price. File 2006 federal taxes free You are using your house for personal purposes on the days that Joshua uses it because your house is used by Joshua under an arrangement that allows you to use his house. File 2006 federal taxes free Days used for repairs and maintenance. File 2006 federal taxes free   Any day that you spend working substantially full time repairing and maintaining (not improving) your property is not counted as a day of personal use. File 2006 federal taxes free Do not count such a day as a day of personal use even if family members use the property for recreational purposes on the same day. File 2006 federal taxes free Days used as a main home before or after renting. File 2006 federal taxes free   For purposes of determining whether a dwelling unit was used as a home, you may not have to count days you used the property as your main home before or after renting it or offering it for rent as days of personal use. File 2006 federal taxes free Do not count them as days of personal use if: You rented or tried to rent the property for 12 or more consecutive months. File 2006 federal taxes free You rented or tried to rent the property for a period of less than 12 consecutive months and the period ended because you sold or exchanged the property. File 2006 federal taxes free However, this special rule does not apply when dividing expenses between rental and personal use. File 2006 federal taxes free Examples. File 2006 federal taxes free   The following examples show how to determine whether you used your rental property as a home. File 2006 federal taxes free Example 1. File 2006 federal taxes free You converted the basement of your home into an apartment with a bedroom, a bathroom, and a small kitchen. File 2006 federal taxes free You rented the basement apartment at a fair rental price to college students during the regular school year. File 2006 federal taxes free You rented to them on a 9-month lease (273 days). File 2006 federal taxes free You figured 10% of the total days rented to others at a fair rental price is 27 days. File 2006 federal taxes free During June (30 days), your brothers stayed with you and lived in the basement apartment rent free. File 2006 federal taxes free Your basement apartment was used as a home because you used it for personal purposes for 30 days. File 2006 federal taxes free Rent-free use by your brothers is considered personal use. File 2006 federal taxes free Your personal use (30 days) is more than the greater of 14 days or 10% of the total days it was rented (27 days). File 2006 federal taxes free Example 2. File 2006 federal taxes free You rented the guest bedroom in your home at a fair rental price during the local college's homecoming, commencement, and football weekends (a total of 27 days). File 2006 federal taxes free Your sister-in-law stayed in the room, rent free, for the last 3 weeks (21 days) in July. File 2006 federal taxes free You figured 10% of the total days rented to others at a fair rental price is 3 days. File 2006 federal taxes free The room was used as a home because you used it for personal purposes for 21 days. File 2006 federal taxes free That is more than the greater of 14 days or 10% of the 27 days it was rented (3 days). File 2006 federal taxes free Example 3. File 2006 federal taxes free You own a condominium apartment in a resort area. File 2006 federal taxes free You rented it at a fair rental price for a total of 170 days during the year. File 2006 federal taxes free For 12 of those days, the tenant was not able to use the apartment and allowed you to use it even though you did not refund any of the rent. File 2006 federal taxes free Your family actually used the apartment for 10 of those days. File 2006 federal taxes free Therefore, the apartment is treated as having been rented for 160 (170 − 10) days. File 2006 federal taxes free You figured 10% of the total days rented to others at a fair rental price is 16 days. File 2006 federal taxes free Your family also used the apartment for 7 other days during the year. File 2006 federal taxes free You used the apartment as a home because you used it for personal purposes for 17 days. File 2006 federal taxes free That is more than the greater of 14 days or 10% of the 160 days it was rented (16 days). File 2006 federal taxes free Minimal rental use. File 2006 federal taxes free   If you use the dwelling unit as a home and you rent it less than 15 days during the year, that period is not treated as rental activity. File 2006 federal taxes free See Used as a home but rented less than 15 days , later, for more information. File 2006 federal taxes free Limit on deductions. File 2006 federal taxes free   Renting a dwelling unit that is considered a home is not a passive activity. File 2006 federal taxes free Instead, if your rental expenses are more than your rental income, some or all of the excess expenses cannot be used to offset income from other sources. File 2006 federal taxes free The excess expenses that cannot be used to offset income from other sources are carried forward to the next year and treated as rental expenses for the same property. File 2006 federal taxes free Any expenses carried forward to the next year will be subject to any limits that apply for that year. File 2006 federal taxes free This limitation will apply to expenses carried forward to another year even if you do not use the property as your home for that subsequent year. File 2006 federal taxes free   To figure your deductible rental expenses for this year and any carryover to next year, use Worksheet 9-1. File 2006 federal taxes free Reporting Income and Deductions Property not used for personal purposes. File 2006 federal taxes free   If you do not use a dwelling unit for personal purposes, see How To Report Rental Income and Expenses , later, for how to report your rental income and expenses. File 2006 federal taxes free Property used for personal purposes. File 2006 federal taxes free   If you do use a dwelling unit for personal purposes, then how you report your rental income and expenses depends on whether you used the dwelling unit as a home. File 2006 federal taxes free Not used as a home. File 2006 federal taxes free   If you use a dwelling unit for personal purposes, but not as a home, report all the rental income in your income. File 2006 federal taxes free Since you used the dwelling unit for personal purposes, you must divide your expenses between the rental use and the personal use as described earlier in Dividing Expenses . File 2006 federal taxes free The expenses for personal use are not deductible as rental expenses. File 2006 federal taxes free   Your deductible rental expenses can be more than your gross rental income; however, see Limits on Rental Losses , later. File 2006 federal taxes free Used as a home but rented less than 15 days. File 2006 federal taxes free   If you use a dwelling unit as a home and you rent it less than 15 days during the year, its primary function is not considered to be rental and it should not be reported on Schedule E (Form 1040). File 2006 federal taxes free You are not required to report the rental income and rental expenses from this activity. File 2006 federal taxes free The expenses, including qualified mortgage interest, property taxes, and any qualified casualty loss will be reported as normally allowed on Schedule A (Form 1040). File 2006 federal taxes free See the Instructions for Schedule A (Form 1040) for more information on deducting these expenses. File 2006 federal taxes free Used as a home and rented 15 days or more. File 2006 federal taxes free   If you use a dwelling unit as a home and rent it 15 days or more during the year, include all your rental income in your income. File 2006 federal taxes free Since you used the dwelling unit for personal purposes, you must divide your expenses between the rental use and the personal use as described earlier in Dividing Expenses . File 2006 federal taxes free The expenses for personal use are not deductible as rental expenses. File 2006 federal taxes free   If you had a net profit from renting the dwelling unit for the year (that is, if your rental income is more than the total of your rental expenses, including depreciation), deduct all of your rental expenses. File 2006 federal taxes free You do not need to use Worksheet 9-1. File 2006 federal taxes free   However, if you had a net loss from renting the dwelling unit for the year, your deduction for certain rental expenses is limited. File 2006 federal taxes free To figure your deductible rental expenses and any carryover to next year, use Worksheet 9-1. File 2006 federal taxes free Depreciation You recover the cost of income-producing property through yearly tax deductions. File 2006 federal taxes free You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return. File 2006 federal taxes free Three factors determine how much depreciation you can deduct each year: (1) your basis in the property, (2) the recovery period for the property, and (3) the depreciation method used. File 2006 federal taxes free You cannot simply deduct your mortgage or principal payments, or the cost of furniture, fixtures, and equipment, as an expense. File 2006 federal taxes free You can deduct depreciation only on the part of your property used for rental purposes. File 2006 federal taxes free Depreciation reduces your basis for figuring gain or loss on a later sale or exchange. File 2006 federal taxes free You may have to use Form 4562 to figure and report your depreciation. File 2006 federal taxes free See How To Report Rental Income and Expenses , later. File 2006 federal taxes free Alternative minimum tax (AMT). File 2006 federal taxes free    If you use accelerated depreciation, you may be subject to the AMT. File 2006 federal taxes free Accelerated depreciation allows you to deduct more depreciation earlier in the recovery period than you could deduct using a straight line method (same deduction each year). File 2006 federal taxes free Claiming the correct amount of depreciation. File 2006 federal taxes free   You should claim the correct amount of depreciation each tax year. File 2006 federal taxes free If you did not claim all the depreciation you were entitled to deduct, you must still reduce your basis in the property by the full amount of depreciation that you could have deducted. File 2006 federal taxes free   If you deducted an incorrect amount of depreciation for property in any year, you may be able to make a correction by filing Form 1040X, Amended U. File 2006 federal taxes free S Individual Income Tax Return. File 2006 federal taxes free If you are not allowed to make the correction on an amended return, you can change your accounting method to claim the correct amount of depreciation. File 2006 federal taxes free See Claiming the correct amount of depreciation in chapter 2 of Publication 527 for more information. File 2006 federal taxes free Changing your accounting method to deduct unclaimed depreciation. File 2006 federal taxes free   To change your accounting method, you generally must file Form 3115, Application for Change in Accounting Method, to get the consent of the IRS. File 2006 federal taxes free In some instances, that consent is automatic. File 2006 federal taxes free For more information, see chapter 1 of Publication 946. File 2006 federal taxes free Land. File 2006 federal taxes free   You cannot depreciate the cost of land because land generally does not wear out, become obsolete, or get used up. File 2006 federal taxes free The costs of clearing, grading, planting, and landscaping are usually all part of the cost of land and cannot be depreciated. File 2006 federal taxes free More information. File 2006 federal taxes free   See Publication 527 for more information about depreciating rental property and see Publication 946 for more information about depreciation. File 2006 federal taxes free Limits on Rental Losses If you have a loss from your rental real estate activity, two sets of rules may limit the amount of loss you can deduct. File 2006 federal taxes free You must consider these rules in the order shown below. File 2006 federal taxes free At-risk rules. File 2006 federal taxes free These rules are applied first if there is investment in your rental real estate activity for which you are not at risk. File 2006 federal taxes free This applies only if the real property was placed in service after 1986. File 2006 federal taxes free Passive activity limits. File 2006 federal taxes free Generally, rental real estate activities are considered passive activities and losses are not deductible unless you have income from other passive activities to offset them. File 2006 federal taxes free However, there are exceptions. File 2006 federal taxes free At-Risk Rules You may be subject to the at-risk rules if you have: A loss from an activity carried on as a trade or business or for the production of income, and Amounts invested in the activity for which you are not fully at risk. File 2006 federal taxes free Losses from holding real property (other than mineral property) placed in service before 1987 are not subject to the at-risk rules. File 2006 federal taxes free In most cases, any loss from an activity subject to the at-risk rules is allowed only to the extent of the total amount you have at risk in the activity at the end of the tax year. File 2006 federal taxes free You are considered at risk in an activity to the extent of cash and the adjusted basis of other property you contributed to the activity and certain amounts borrowed for use in the activity. File 2006 federal taxes free See Publication 925 for more information. File 2006 federal taxes free Passive Activity Limits In most cases, all rental real estate activities (except those of certain real estate professionals, discussed later) are passive activities. File 2006 federal taxes free For this purpose, a rental activity is an activity from which you receive income mainly for the use of tangible property, rather than for services. File 2006 federal taxes free Limits on passive activity deductions and credits. File 2006 federal taxes free    Deductions or losses from passive activities are limited. File 2006 federal taxes free You generally cannot offset income, other than passive income, with losses from passive activities. File 2006 federal taxes free Nor can you offset taxes on income, other than passive income, with credits resulting from passive activities. File 2006 federal taxes free Any excess loss or credit is carried forward to the next tax year. File 2006 federal taxes free   For a detailed discussion of these rules, see Publication 925. File 2006 federal taxes free    You may have to complete Form 8582 to figure the amount of any passive activity loss for the current tax year for all activities and the amount of the passive activity loss allowed on your tax return. File 2006 federal taxes free Real estate professionals. File 2006 federal taxes free   Rental activities in which you materially participated during the year are not passive activities if, for that year, you were a real estate professional. File 2006 federal taxes free For a detailed discussion of the requirements, see Publication 527. File 2006 federal taxes free For a detailed discussion of material participation, see Publication 925. File 2006 federal taxes free Exception for Personal Use of Dwelling Unit If you used the rental property as a home during the year, any income, deductions, gain, or loss allocable to such use shall not be taken into account for purposes of the passive activity loss limitation. File 2006 federal taxes free Instead, follow the rules explained in Personal Use of Dwelling Unit (Including Vacation Home), earlier. File 2006 federal taxes free Exception for Rental Real Estate Activities With Active Participation If you or your spouse actively participated in a passive rental real estate activity, you may be able to deduct up to $25,000 of loss from the activity from your nonpassive income. File 2006 federal taxes free This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities. File 2006 federal taxes free Similarly, you may be able to offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception. File 2006 federal taxes free Active participation. File 2006 federal taxes free   You actively participated in a rental real estate activity if you (and your spouse) owned at least 10% of the rental property and you made management decisions or arranged for others to provide services (such as repairs) in a significant and bona fide sense. File 2006 federal taxes free Management decisions that may count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions. File 2006 federal taxes free Maximum special allowance. File 2006 federal taxes free   The maximum special allowance is: $25,000 for single individuals and married individuals filing a joint return for the tax year, $12,500 for married individuals who file separate returns for the tax year and lived apart from their spouses at all times during the tax year, and $25,000 for a qualifying estate reduced by the special allowance for which the surviving spouse qualified. File 2006 federal taxes free   If your modified adjusted gross income (MAGI) is $100,000 or less ($50,000 or less if married filing separately), you can deduct your loss up to the amount specified above. File 2006 federal taxes free If your MAGI is more than $100,000 (more than $50,000 if married filing separately), your special allowance is limited to 50% of the difference between $150,000 ($75,000 if married filing separately) and your MAGI. File 2006 federal taxes free   Generally, if your MAGI is $150,000 or more ($75,000 or more if you are married filing separately), there is no special allowance. File 2006 federal taxes free More information. File 2006 federal taxes free   See Publication 925 for more information on the passive loss limits, including information on the treatment of unused disallowed passive losses and credits and the treatment of gains and losses realized on the disposition of a passive activity. File 2006 federal taxes free How To Report Rental Income and Expenses The basic form for reporting residential rental income and expenses is Schedule E (Form 1040). File 2006 federal taxes free However, do not use that schedule to report a not-for-profit activity. File 2006 federal taxes free See Not Rented for Profit, earlier. File 2006 federal taxes free Providing substantial services. File 2006 federal taxes free   If you provide substantial services that are primarily for your tenant's convenience, such as regular cleaning, changing linen, or maid service, report your rental income and expenses on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business (Sole Proprietorship). File 2006 federal taxes free Substantial services do not include the furnishing of heat and light, cleaning of public areas, trash collection, etc. File 2006 federal taxes free For information, see Publication 334, Tax Guide for Small Business. File 2006 federal taxes free You also may have to pay self-employment tax on your rental income using Schedule SE (Form 1040), Self-Employment Tax. File 2006 federal taxes free   Use Form 1065, U. File 2006 federal taxes free S. File 2006 federal taxes free Return of Partnership Income, if your rental activity is a partnership (including a partnership with your spouse unless it is a qualified joint venture). File 2006 federal taxes free Qualified joint venture. File 2006 federal taxes free   If you and your spouse each materially participate as the only members of a jointly owned and operated real estate business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership. File 2006 federal taxes free This election, in most cases, will not increase the total tax owed on the joint return, but it does give each of you credit for social security earnings on which retirement benefits are based and for Medicare coverage if your rental income is subject to self-employment tax. File 2006 federal taxes free For more information, see Publication 527. File 2006 federal taxes free Form 1098, Mortgage Interest Statement. File 2006 federal taxes free    If you paid $600 or more of mortgage interest on your rental property to any one person, you should receive a Form 1098, or similar statement showing the interest you paid for the year. File 2006 federal taxes free If you and at least one other person (other than your spouse if you file a joint return) were liable for, and paid interest on the mortgage, and the other person received the Form 1098, report your share of the interest on Schedule E (Form 1040), line 13. File 2006 federal taxes free Attach a statement to your return showing the name and address of the other person. File 2006 federal taxes free In the left margin of Schedule E, next to line 13, enter “See attached. File 2006 federal taxes free ” Schedule E (Form 1040) If you rent buildings, rooms, or apartments, and provide basic services such as heat and light, trash collection, etc. File 2006 federal taxes free , you normally report your rental income and expenses on Schedule E, Part I. File 2006 federal taxes free List your total income, expenses, and depreciation for each rental property. File 2006 federal taxes free Be sure to enter the number of fair rental and personal use days on line 2. File 2006 federal taxes free If you have more than three rental or royalty properties, complete and attach as many Schedules E as are needed to list the properties. File 2006 federal taxes free Complete lines 1 and 2 for each property. File 2006 federal taxes free However, fill in lines 23a through 26 on only one Schedule E. File 2006 federal taxes free On Schedule E, page 1, line 18, enter the depreciation you are claiming for each property. File 2006 federal taxes free To find out if you need to attach Form 4562, see Form 4562, in chapter 3 of Publication 527. File 2006 federal taxes free If you have a loss from your rental real estate activity, you also may need to complete one or both of the following forms. File 2006 federal taxes free Form 6198, At-Risk Limitations. File 2006 federal taxes free See At-Risk Rules , earlier. File 2006 federal taxes free Also see Publication 925. File 2006 federal taxes free Form 8582, Passive Activity Loss Limitations. File 2006 federal taxes free See Passive Activity Limits , earlier. File 2006 federal taxes free Page 2 of Schedule E is used to report income or loss from partnerships, S corporations, estates, trusts, and real estate mortgage investment conduits. File 2006 federal taxes free If you need to use page 2 of Schedule E, be sure to use page 2 of the same Schedule E you used to enter your rental activity on page 1. File 2006 federal taxes free Also, include the amount from line 26 (Part I) in the “Total income or (loss)” on line 41 (Part V). File 2006 federal taxes free Worksheet 9-1. File 2006 federal taxes free Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home Use this worksheet only if you answer “yes” to all of the following questions. File 2006 federal taxes free Did you use the dwelling unit as a home this year? (See Dwelling Unit Used as a Home . File 2006 federal taxes free ) Did you rent the dwelling unit at a fair rental price 15 days or more this year? Is the total of your rental expenses and depreciation more than your rental income? PART I. File 2006 federal taxes free Rental Use Percentage A. File 2006 federal taxes free Total days available for rent at fair rental price A. File 2006 federal taxes free       B. File 2006 federal taxes free Total days available for rent (line A) but not rented B. File 2006 federal taxes free       C. File 2006 federal taxes free Total days of rental use. File 2006 federal taxes free Subtract line B from line A C. File 2006 federal taxes free       D. File 2006 federal taxes free Total days of personal use (including days rented at less than fair rental price) D. File 2006 federal taxes free       E. File 2006 federal taxes free Total days of rental and personal use. File 2006 federal taxes free Add lines C and D E. File 2006 federal taxes free       F. File 2006 federal taxes free Percentage of expenses allowed for rental. File 2006 federal taxes free Divide line C by line E     F. File 2006 federal taxes free   PART II. File 2006 federal taxes free Allowable Rental Expenses 1. File 2006 federal taxes free Enter rents received 1. File 2006 federal taxes free   2a. File 2006 federal taxes free Enter the rental portion of deductible home mortgage interest and qualified mortgage insurance premiums (see instructions) 2a. File 2006 federal taxes free       b. File 2006 federal taxes free Enter the rental portion of real estate taxes b. File 2006 federal taxes free       c. File 2006 federal taxes free Enter the rental portion of deductible casualty and theft losses (see instructions) c. File 2006 federal taxes free       d. File 2006 federal taxes free Enter direct rental expenses (see instructions) d. File 2006 federal taxes free       e. File 2006 federal taxes free Fully deductible rental expenses. File 2006 federal taxes free Add lines 2a–2d. File 2006 federal taxes free Enter here and  on the appropriate lines on Schedule E (see instructions) 2e. File 2006 federal taxes free   3. File 2006 federal taxes free Subtract line 2e from line 1. File 2006 federal taxes free If zero or less, enter -0- 3. File 2006 federal taxes free   4a. File 2006 federal taxes free Enter the rental portion of expenses directly related to operating or maintaining  the dwelling unit (such as repairs, insurance, and utilities) 4a. File 2006 federal taxes free       b. File 2006 federal taxes free Enter the rental portion of excess mortgage interest and qualified mortgage insurance premiums (see instructions) b. File 2006 federal taxes free       c. File 2006 federal taxes free Carryover of operating expenses from 2012 worksheet c. File 2006 federal taxes free       d. File 2006 federal taxes free Add lines 4a–4c d. File 2006 federal taxes free       e. File 2006 federal taxes free Allowable expenses. File 2006 federal taxes free Enter the smaller of line 3 or line 4d (see instructions) 4e. File 2006 federal taxes free   5. File 2006 federal taxes free Subtract line 4e from line 3. File 2006 federal taxes free If zero or less, enter -0- 5. File 2006 federal taxes free   6a. File 2006 federal taxes free Enter the rental portion of excess casualty and theft losses (see instructions) 6a. File 2006 federal taxes free       b. File 2006 federal taxes free Enter the rental portion of depreciation of the dwelling unit b. File 2006 federal taxes free       c. File 2006 federal taxes free Carryover of excess casualty losses and depreciation from 2012 worksheet c. File 2006 federal taxes free       d. File 2006 federal taxes free Add lines 6a–6c d. File 2006 federal taxes free       e. File 2006 federal taxes free Allowable excess casualty and theft losses and depreciation. File 2006 federal taxes free Enter the smaller of  line 5 or line 6d (see instructions) 6e. File 2006 federal taxes free   PART III. File 2006 federal taxes free Carryover of Unallowed Expenses to Next Year 7a. File 2006 federal taxes free Operating expenses to be carried over to next year. File 2006 federal taxes free Subtract line 4e from line 4d 7a. File 2006 federal taxes free   b. File 2006 federal taxes free Excess casualty and theft losses and depreciation to be carried over to next year. File 2006 federal taxes free  Subtract line 6e from line 6d b. File 2006 federal taxes free   Worksheet 9-1 Instructions. File 2006 federal taxes free Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home Caution. File 2006 federal taxes free Use the percentage determined in Part I, line F, to figure the rental portions to enter on lines 2a–2c, 4a–4b, and 6a–6b of  Part II. File 2006 federal taxes free Line 2a. File 2006 federal taxes free Figure the mortgage interest on the dwelling unit that you could deduct on Schedule A as if you had not rented the unit. File 2006 federal taxes free Do not include interest on a loan that did not benefit the dwelling unit. File 2006 federal taxes free For example, do not include interest on a home equity loan used to pay off credit cards or other personal loans, buy a car, or pay college tuition. File 2006 federal taxes free Include interest on a loan used to buy, build, or improve the dwelling unit, or to refinance such a loan. File 2006 federal taxes free Include the rental portion of this interest in the total you enter on line 2a of the worksheet. File 2006 federal taxes free   Figure the qualified mortgage insurance premiums on the dwelling unit that you could deduct on line 13 of Schedule A as if you had not rented the unit. File 2006 federal taxes free See the Schedule A instructions. File 2006 federal taxes free However, figure your adjusted gross income (Form 1040, line 38) without your rental income and expenses from the dwelling unit. File 2006 federal taxes free See Line 4b to deduct the part of the qualified mortgage insurance premiums not allowed because of the adjusted gross income limit. File 2006 federal taxes free Include the rental portion of the amount from Schedule A, line 13, in the total you enter on line 2a of the worksheet. File 2006 federal taxes free   Note. File 2006 federal taxes free Do not file this Schedule A or use it to figure the amount to deduct on line 13 of that schedule. File 2006 federal taxes free Instead, figure the personal portion on a separate Schedule A. File 2006 federal taxes free If you have deducted mortgage interest or qualified mortgage insurance premiums on the dwelling unit on other forms, such as Schedule C or F, remember to reduce your Schedule A deduction by that amount. File 2006 federal taxes free           Line 2c. File 2006 federal taxes free Figure the casualty and theft losses related to the dwelling unit that you could deduct on Schedule A as if you had not rented the dwelling unit. File 2006 federal taxes free To do this, complete Section A of Form 4684, Casualties and Thefts, treating the losses as personal losses. File 2006 federal taxes free If any of the loss is due to a federally declared disaster, see the Instructions for Form 4684. File 2006 federal taxes free On Form 4684, line 17, enter 10% of your adjusted gross income figured without your rental income and expenses from the dwelling unit. File 2006 federal taxes free Enter the rental portion of the result from Form 4684, line 18, on line 2c of this worksheet. File 2006 federal taxes free   Note. File 2006 federal taxes free Do not file this Form 4684 or use it to figure your personal losses on Schedule A. File 2006 federal taxes free Instead, figure the personal portion on a separate Form 4684. File 2006 federal taxes free           Line 2d. File 2006 federal taxes free Enter the total of your rental expenses that are directly related only to the rental activity. File 2006 federal taxes free These include interest on loans used for rental activities other than to buy, build, or improve the dwelling unit. File 2006 federal taxes free Also include rental agency fees, advertising, office supplies, and depreciation on office equipment used in your rental activity. File 2006 federal taxes free           Line 2e. File 2006 federal taxes free You can deduct the amounts on lines 2a, 2b, 2c, and 2d as rental expenses on Schedule E even if your rental expenses are more than your rental income. File 2006 federal taxes free Enter the amounts on lines 2a, 2b, 2c, and 2d on the appropriate lines of Schedule E. File 2006 federal taxes free           Line 4b. File 2006 federal taxes free On line 2a, you entered the rental portion of the mortgage interest and qualified mortgage insurance premiums you could deduct on Schedule A if you had not rented the dwelling unit. File 2006 federal taxes free If you had additional mortgage interest and qualified mortgage insurance premiums that would not be deductible on Schedule A because of limits imposed on them, enter on line 4b of this worksheet the rental portion of those excess amounts. File 2006 federal taxes free Do not include interest on a loan that did not benefit the dwelling unit (as explained in the line 2a instructions). File 2006 federal taxes free           Line 4e. File 2006 federal taxes free You can deduct the amounts on lines 4a, 4b, and 4c as rental expenses on Schedule E only to the extent they are not more than the amount on line 4e. File 2006 federal taxes free *           Line 6a. File 2006 federal taxes free To find the rental portion of excess casualty and theft losses, use the Form 4684 you prepared for line 2c of this worksheet. File 2006 federal taxes free   A. File 2006 federal taxes free Enter the amount from Form 4684, line 10       B. File 2006 federal taxes free Enter the rental portion of line A       C. File 2006 federal taxes free Enter the amount from line 2c of this worksheet       D. File 2006 federal taxes free Subtract line C from line B. File 2006 federal taxes free Enter the result here and on line 6a of this worksheet               Line 6e. File 2006 federal taxes free You can deduct the amounts on lines 6a, 6b, and 6c as rental expenses on Schedule E only to the extent they are not more than the amount on line 6e. File 2006 federal taxes free * *Allocating the limited deduction. File 2006 federal taxes free If you cannot deduct all of the amount on line 4d or 6d this year, you can allocate the allowable deduction in any way you wish among the expenses included on line 4d or 6d. File 2006 federal taxes free Enter the amount you allocate to each expense on the appropriate line of Schedule E, Part I. File 2006 federal taxes free Prev  Up  Next   Home   More Online Publications