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File state tax only for free 2. File state tax only for free   Accounting Methods Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Accounting MethodsCash Method Accrual Method Farm Inventory Cash Versus Accrual Method Special Methods of Accounting Combination Method Changes in Methods of Accounting Introduction You must use an accounting method that clearly shows your income and expenses. File state tax only for free You must also figure your taxable income and file an income tax return for an annual accounting period called a tax year. File state tax only for free This chapter discusses accounting methods. File state tax only for free For information on accounting periods, see Publication 538, Accounting Periods and Methods, and the Instructions for Form 1128, Application To Adopt, Change, or Retain a Tax Year. File state tax only for free Topics - This chapter discusses: Cash method Accrual method Farm inventory Special methods of accounting Changes in methods of accounting Useful Items - You may want to see: Publication 538 Accounting Periods and Methods 535 Business Expenses Form (and Instructions) 1128 Application To Adopt, Change, or Retain a Tax Year 3115 Application for Change in Accounting Method See chapter 16 for information about getting publications and forms. File state tax only for free Accounting Methods An accounting method is a set of rules used to determine when and how your income and expenses are reported on your tax return. File state tax only for free Your accounting method includes not only your overall method of accounting, but also the accounting treatment you use for any material item. File state tax only for free A material item is one that affects the proper time for inclusion of income or allowance of a deduction. File state tax only for free An item considered material for financial statement purposes is generally also considered material for income tax purposes. File state tax only for free See Publication 538 for more information. File state tax only for free You generally choose an accounting method for your farm business when you file your first income tax return that includes a Schedule F (Form 1040), Profit or Loss From Farming. File state tax only for free If you later want to change your accounting method, you generally must get IRS approval. File state tax only for free How to obtain IRS approval is discussed later under Changes in Methods of Accounting . File state tax only for free Types of accounting methods. File state tax only for free   Generally, you can use any of the following accounting methods. File state tax only for free Each method is discussed in detail below. File state tax only for free Cash method. File state tax only for free Accrual method. File state tax only for free Special methods of accounting for certain items of income and expenses. File state tax only for free Combination (hybrid) method using elements of two or more of the above. File state tax only for free Business and other items. File state tax only for free   You can account for business and personal items using different accounting methods. File state tax only for free For example, you can figure your business income under an accrual method, even if you use the cash method to figure personal items. File state tax only for free Two or more businesses. File state tax only for free   If you operate two or more separate and distinct businesses, you can use a different accounting method for each business. File state tax only for free Generally, no business is separate and distinct unless a complete and separate set of books and records is maintained for each business. File state tax only for free Cash Method Most farmers use the cash method because they find it easier to keep records using the cash method. File state tax only for free However, certain farm corporations and partnerships and all tax shelters must use an accrual method of accounting. File state tax only for free See Accrual Method Required , later. File state tax only for free Income Under the cash method, include in your gross income all items of income you actually or constructively received during the tax year. File state tax only for free Items of income include money received as well as property or services received. File state tax only for free If you receive property or services, you must include the fair market value (FMV) of the property or services in income. File state tax only for free See chapter 3 for information on how to report farm income on your income tax return. File state tax only for free Constructive receipt. File state tax only for free   Income is constructively received when an amount is credited to your account or made available to you without restriction. File state tax only for free You do not need to have possession of the income for it to be treated as income for the tax year. File state tax only for free If you authorize someone to be your agent and receive income for you, you are considered to have received the income when your agent receives it. File state tax only for free Income is not constructively received if your receipt of the income is subject to substantial restrictions or limitations. File state tax only for free Direct payments and counter-cyclical payments. File state tax only for free   If you received direct payments or counter-cyclical payments under Subtitle A or C of the Farm Security and Rural Investment Act of 2002, you will not be considered to have constructively received a payment merely because you had the option to receive it in the year before it is required to be paid. File state tax only for free Delaying receipt of income. File state tax only for free   You cannot hold checks or postpone taking possession of similar property from one tax year to another to avoid paying tax on the income. File state tax only for free You must report the income in the year the money or property is received or made available to you without restriction. File state tax only for free Example. File state tax only for free Frances Jones, a farmer, was entitled to receive a $10,000 payment on a grain contract in December 2013. File state tax only for free She was told in December that her payment was available. File state tax only for free She requested not to be paid until January 2014. File state tax only for free However, she must still include this payment in her 2013 income because it was made available to her in 2013. File state tax only for free Debts paid by another person or canceled. File state tax only for free   If your debts are paid by another person or are canceled by your creditors, you may have to report part or all of this debt relief as income. File state tax only for free If you receive income in this way, you constructively receive the income when the debt is canceled or paid. File state tax only for free See Cancellation of Debt in chapter 3. File state tax only for free Deferred payment contract. File state tax only for free   If you sell an item under a deferred payment contract that calls for payment in a future year, there is no constructive receipt in the year of sale. File state tax only for free However, if the sales contract states that you have the right to the proceeds of the sale from the buyer at any time after delivery of the item, then you must include the sales price in income in the year of the sale, regardless of when you actually receive payment. File state tax only for free Example. File state tax only for free You are a farmer who uses the cash method and a calendar tax year. File state tax only for free You sell grain in December 2013 under a bona fide arm's-length contract that calls for payment in 2014. File state tax only for free You include the proceeds from the sale in your 2014 gross income since that is the year payment is received. File state tax only for free However, if the contract states that you have the right to the proceeds from the buyer at any time after the grain is delivered, you must include the sales price in your 2013 income, regardless of when you actually receive payment. File state tax only for free Repayment of income. File state tax only for free   If you include an amount in income and in a later year you have to repay all or part of it, then you can usually deduct the repayment in the year repaid. File state tax only for free If the repayment is more than $3,000, a special rule applies. File state tax only for free For details, see Repayments in chapter 11 of Publication 535, Business Expenses. File state tax only for free Expenses Under the cash method, generally you deduct expenses in the tax year you pay them. File state tax only for free This includes business expenses for which you contest liability. File state tax only for free However, you may not be able to deduct an expense paid in advance or you may be required to capitalize certain costs, as explained under Uniform Capitalization Rules in chapter 6. File state tax only for free See chapter 4 for information on how to deduct farm business expenses on your income tax return. File state tax only for free Prepayment. File state tax only for free   Generally, you cannot deduct expenses paid in advance. File state tax only for free This rule applies to any expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. File state tax only for free Example. File state tax only for free On November 1, 2013, you signed and paid $3,600 for a 3-year (36-month) insurance contract for equipment. File state tax only for free In 2013, you are allowed to deduct only $200 (2/36 x $3,600) of the cost of the policy that is attributable to 2013. File state tax only for free In 2014, you'll be able to deduct $1,200 (12/36 x $3,600); in 2015, you'll be able to deduct $1,200 (12/36 x $3,600); and in 2016 you'll be able to deduct the remaining balance of $1,000. File state tax only for free An exception applies if the expense qualifies for the 12-month rule. File state tax only for free See Publication 538 for more information and examples. File state tax only for free See chapter 4 for special rules for prepaid farm supplies and prepaid livestock feed. File state tax only for free Accrual Method Under an accrual method of accounting, you generally report income in the year earned and deduct or capitalize expenses in the year incurred. File state tax only for free The purpose of an accrual method of accounting is to correctly match income and expenses. File state tax only for free Certain businesses engaged in farming must use an accrual method of accounting for its farm business and for sales and purchases of inventory items. File state tax only for free See Accrual Method Required and Farm Inventory , later. File state tax only for free Income Generally, you include an amount in income for the tax year in which all events that fix your right to receive the income have occurred, and you can determine the amount with reasonable accuracy. File state tax only for free Under this rule, include an amount in income on the earliest of the following dates. File state tax only for free When you receive payment. File state tax only for free When the income amount is due to you. File state tax only for free When you earn the income. File state tax only for free When title passes. File state tax only for free If you use an accrual method of accounting, complete Part III of Schedule F (Form 1040) to report your income. File state tax only for free Inventory. File state tax only for free   If you keep an inventory, generally you must use an accrual method of accounting to determine your gross income. File state tax only for free An inventory is necessary to clearly show income when the production, purchase, or sale of merchandise is an income-producing factor. File state tax only for free See Publication 538 for more information. File state tax only for free Also see Farm Inventory , later, for more information on items that must be included in inventory by farmers and inventory valuation methods for farmers. File state tax only for free Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both of the following apply. File state tax only for free The all-events test has been met. File state tax only for free This test is met when: All events have occurred that fix the fact that you have a liability, and The amount of the liability can be determined with reasonable accuracy. File state tax only for free Economic performance has occurred. File state tax only for free Economic performance. File state tax only for free   Generally, you cannot deduct or capitalize a business expense until economic performance occurs. File state tax only for free If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided or as the property is used. File state tax only for free If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. File state tax only for free Example. File state tax only for free Jane, who is a farmer, uses a calendar tax year and an accrual method of accounting. File state tax only for free She entered into a contract with ABC Farm Consulting in 2012. File state tax only for free The contract stated that Jane pay ABC Farm Consulting $2,000 in December 2012. File state tax only for free It further stipulates that ABC Farm Consulting will develop a plan for integrating her farm with a larger farm operation based in a neighboring state by March 1, 2013. File state tax only for free Jane paid ABC Farm Consulting $2,000 in December 2012. File state tax only for free Integration of operations according to the plan began in May 2013 and they completed the integration in December 2013. File state tax only for free Economic performance for Jane's liability in the contract occurs as the services are provided. File state tax only for free Jane incurs the $2,000 cost in 2013. File state tax only for free An exception to the economic performance rule allows certain recurring items to be treated as incurred during a tax year even though economic performance has not occurred. File state tax only for free For more information, see Economic Performance in Publication 538. File state tax only for free Special rule for related persons. File state tax only for free   Business expenses and interest owed to a related person who uses the cash method of accounting are not deductible until you make the payment and the corresponding amount is includible in the related person's gross income. File state tax only for free Determine the relationship for this rule as of the end of the tax year for which the expense or interest would otherwise be deductible. File state tax only for free For more information, see Internal Revenue Code section 267. File state tax only for free Accrual Method Required Generally, the following businesses, if engaged in farming, must use an accrual method of accounting. File state tax only for free A corporation (other than a family corporation) that had gross receipts of more than $1,000,000 for any tax year beginning after 1975. File state tax only for free A family corporation that had gross receipts of more than $25,000,000 for any tax year beginning after 1985. File state tax only for free A partnership with a corporation as a partner, if that corporation meets the requirements of (1) or (2) above. File state tax only for free A tax shelter. File state tax only for free Note. File state tax only for free Items (1), (2), and (3) above do not apply to an S corporation or a business operating a nursery or sod farm, or the raising or harvesting of trees (other than fruit and nut trees). File state tax only for free Family corporation. File state tax only for free   A family corporation is generally a corporation that meets one of the following ownership requirements. File state tax only for free Members of the same family own at least 50% of the total combined voting power of all classes of stock entitled to vote and at least 50% of the total shares of all other classes of stock of the corporation. File state tax only for free Members of two families have owned, directly or indirectly, since October 4, 1976, at least 65% of the total combined voting power of all classes of voting stock and at least 65% of the total shares of all other classes of the corporation's stock. File state tax only for free Members of three families have owned, directly or indirectly, since October 4, 1976, at least 50% of the total combined voting power of all classes of voting stock and at least 50% of the total shares of all other classes of the corporation's stock. File state tax only for free For more information on family corporations, see Internal Revenue Code section 447. File state tax only for free Tax shelter. File state tax only for free   A tax shelter is a partnership, noncorporate enterprise, or S corporation that meets either of the following tests. File state tax only for free Its principal purpose is the avoidance or evasion of federal income tax. File state tax only for free It is a farming syndicate. File state tax only for free A farming syndicate is an entity that meets either of the following tests. File state tax only for free Interests in the activity have been offered for sale in an offering required to be registered with a federal or state agency with the authority to regulate the offering of securities for sale. File state tax only for free More than 35% of the losses during the tax year are allocable to limited partners or limited entrepreneurs. File state tax only for free   A “limited partner” is one whose personal liability for partnership debts is limited to the money or other property the partner contributed or is required to contribute to the partnership. File state tax only for free   A “limited entrepreneur” is one who has an interest in an enterprise other than as a limited partner and does not actively participate in the management of the enterprise. File state tax only for free Farm Inventory If you are required to keep an inventory, you should keep a complete record of your inventory as part of your farm records. File state tax only for free This record should show the actual count or measurement of the inventory. File state tax only for free It should also show all factors that enter into its valuation, including quality and weight, if applicable. File state tax only for free Hatchery business. File state tax only for free   If you are in the hatchery business, and use an accrual method of accounting, you must include in inventory eggs in the process of incubation. File state tax only for free Products held for sale. File state tax only for free   All harvested and purchased farm products held for sale or for feed or seed, such as grain, hay, silage, concentrates, cotton, tobacco, etc. File state tax only for free , must be included in inventory. File state tax only for free Supplies. File state tax only for free   Supplies acquired for sale or that become a physical part of items held for sale must be included in inventory. File state tax only for free Deduct the cost of supplies in the year used or consumed in operations. File state tax only for free Do not include incidental supplies in inventory as these are deductible in the year of purchase. File state tax only for free Livestock. File state tax only for free   Livestock held primarily for sale must be included in inventory. File state tax only for free Livestock held for draft, breeding, or dairy purposes can either be depreciated or included in inventory. File state tax only for free See also Unit-livestock-price method , later. File state tax only for free If you are in the business of breeding and raising chinchillas, mink, foxes, or other fur-bearing animals, these animals are livestock for inventory purposes. File state tax only for free Growing crops. File state tax only for free   Generally, growing crops are not required to be included in inventory. File state tax only for free However, if the crop has a preproductive period of more than 2 years, you may have to capitalize (or include in inventory) costs associated with the crop. File state tax only for free See Uniform capitalization rules below. File state tax only for free Also see Uniform Capitalization Rules in  chapter 6. File state tax only for free Items to include in inventory. File state tax only for free   Your inventory should include all items held for sale, or for use as feed, seed, etc. File state tax only for free , whether raised or purchased, that are unsold at the end of the year. File state tax only for free Uniform capitalization rules. File state tax only for free   The following applies if you are required to use an accrual method of accounting. File state tax only for free The uniform capitalization rules apply to all costs of raising a plant, even if the preproductive period of raising a plant is 2 years or less. File state tax only for free The costs of animals are subject to the uniform capitalization rules. File state tax only for free Inventory valuation methods. File state tax only for free   The following methods, described below, are those generally available for valuing inventory. File state tax only for free The method you use must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. File state tax only for free Cost. File state tax only for free Lower of cost or market. File state tax only for free Farm-price method. File state tax only for free Unit-livestock-price method. File state tax only for free Cost and lower of cost or market methods. File state tax only for free   See Publication 538 for information on these valuation methods. File state tax only for free If you value your livestock inventory at cost or the lower of cost or market, you do not need IRS approval to change to the unit-livestock-price method. File state tax only for free However, if you value your livestock inventory using the farm-price method, then you must obtain permission from the IRS to change to the unit-livestock-price method. File state tax only for free Farm-price method. File state tax only for free   Under this method, each item, whether raised or purchased, is valued at its market price less the direct cost of disposition. File state tax only for free Market price is the current price at the nearest market in the quantities you usually sell. File state tax only for free Cost of disposition includes broker's commissions, freight, hauling to market, and other marketing costs. File state tax only for free If you use this method, you must use it for your entire inventory, except that livestock can be inventoried under the unit-livestock-price method. File state tax only for free Unit-livestock-price method. File state tax only for free   This method recognizes the difficulty of establishing the exact costs of producing and raising each animal. File state tax only for free You group or classify livestock according to type and age and use a standard unit price for each animal within a class or group. File state tax only for free The unit price you assign should reasonably approximate the normal costs incurred in producing the animals in such classes. File state tax only for free Unit prices and classifications are subject to approval by the IRS on examination of your return. File state tax only for free You must annually reevaluate your unit livestock prices and adjust the prices upward or downward to reflect increases or decreases in the costs of raising livestock. File state tax only for free IRS approval is not required for these adjustments. File state tax only for free Any other changes in unit prices or classifications do require IRS approval. File state tax only for free   If you use this method, include all raised livestock in inventory, regardless of whether they are held for sale or for draft, breeding, sport, or dairy purposes. File state tax only for free This method accounts only for the increase in cost of raising an animal to maturity. File state tax only for free It does not provide for any decrease in the animal's market value after it reaches maturity. File state tax only for free Also, if you raise cattle, you are not required to inventory hay you grow to feed your herd. File state tax only for free   Do not include sold or lost animals in the year-end inventory. File state tax only for free If your records do not show which animals were sold or lost, treat the first animals acquired as sold or lost. File state tax only for free The animals on hand at the end of the year are considered those most recently acquired. File state tax only for free   You must include in inventory all livestock purchased primarily for sale. File state tax only for free You can choose either to include in inventory or depreciate livestock purchased for draft, breeding, sport or dairy purposes. File state tax only for free However, you must be consistent from year to year, regardless of the method you have chosen. File state tax only for free You cannot change your method without obtaining approval from the IRS. File state tax only for free   You must include in inventory animals purchased after maturity or capitalize them at their purchase price. File state tax only for free If the animals are not mature at purchase, increase the cost at the end of each tax year according to the established unit price. File state tax only for free However, in the year of purchase, do not increase the cost of any animal purchased during the last 6 months of the year. File state tax only for free This “no increase” rule does not apply to tax shelters which must make an adjustment for any animal purchased during the year. File state tax only for free It also does not apply to taxpayers that must make an adjustment to reasonably reflect the particular period in the year in which animals are purchased, if necessary to avoid significant distortions in income. File state tax only for free Uniform capitalization rules. File state tax only for free   A farmer can determine costs required to be allocated under the uniform capitalization rules by using the farm-price or unit-livestock-price inventory method. File state tax only for free This applies to any plant or animal, even if the farmer does not hold or treat the plant or animal as inventory property. File state tax only for free Cash Versus Accrual Method The following examples compare the cash and accrual methods of accounting. File state tax only for free Example 1. File state tax only for free You are a farmer who uses an accrual method of accounting. File state tax only for free You keep your books on the calendar year basis. File state tax only for free You sell grain in December 2013 but you are not paid until January 2014. File state tax only for free Because the accrual method was used and 2013 was the tax year in which the grain was sold, you must both include the sales proceeds and deduct the costs incurred in producing the grain on your 2013 tax return. File state tax only for free Example 2. File state tax only for free Assume the same facts as in Example 1 except that you use the cash method and there was no constructive receipt of the sales proceeds in 2013. File state tax only for free Under this method, you include the sales proceeds in income for 2014, the year you receive payment. File state tax only for free Deduct the costs of producing the grain in the year you pay for them. File state tax only for free Special Methods of Accounting There are special methods of accounting for certain items of income and expense. File state tax only for free Crop method. File state tax only for free   If you do not harvest and dispose of your crop in the same tax year that you plant it, you can, with IRS approval, use the crop method of accounting. File state tax only for free You cannot use the crop method for any tax return, including your first tax return, unless you receive approval from the IRS. File state tax only for free Under this method, you deduct the entire cost of producing the crop, including the expense of seed or young plants, in the year you realize income from the crop. File state tax only for free    See chapter 4 for details on deducting the costs of operating a farm. File state tax only for free Also see Regulations section 1. File state tax only for free 162-12. File state tax only for free Other special methods. File state tax only for free   Other special methods of accounting apply to the following items. File state tax only for free Amortization, see chapter 7. File state tax only for free Casualties, see chapter 11. File state tax only for free Condemnations, see chapter 11. File state tax only for free Depletion, see chapter 7. File state tax only for free Depreciation, see chapter 7. File state tax only for free Farm business expenses, see chapter 4. File state tax only for free Farm income, see chapter 3. File state tax only for free Installment sales, see chapter 10. File state tax only for free Soil and water conservation expenses, see chapter 5. File state tax only for free Thefts, see chapter 11. File state tax only for free Combination Method Generally, you can use any combination of cash, accrual, and special methods of accounting if the combination clearly shows your income and expenses and you use it consistently. File state tax only for free However, the following restrictions apply. File state tax only for free If you use the cash method for figuring your income, you must use the cash method for reporting your expenses. File state tax only for free If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. File state tax only for free Changes in Methods of Accounting A change in your method of accounting includes a change in: Your overall method, such as from the cash method to an accrual method, and Your treatment of any material item, such as a change in your method of valuing inventory (for example, a change from the farm-price method to the unit-livestock-price method, discussed earlier). File state tax only for free Generally, once you have set up your accounting method, you must receive approval from the IRS before you can change to another method of accounting. File state tax only for free You may also have to pay a fee. File state tax only for free To obtain approval, you must generally file Form 3115. File state tax only for free There are instances when you can obtain automatic consent to change certain methods of accounting. File state tax only for free See the List of Automatic Accounting Method Changes located in the Instructions for Form 3115. File state tax only for free For more information on changes in methods of accounting, see Form 3115 and the Instructions for Form 3115. File state tax only for free Also see Publication 538. File state tax only for free Prev  Up  Next   Home   More Online Publications
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Susquehanna River Basin Commission

The Susquehanna River Basin Commission is an interstate body, with representatives from New York, Maryland, Pennsylvania and the federal government, that manages the environmental stewardship and economic development of the Susquehanna river and its tributaries.

Contact the Agency or Department

Website: Susquehanna River Basin Commission

E-mail:

Address: 1721 Front St
Harrisburg, PA 17102

Phone Number: (717) 238-0423

The File State Tax Only For Free

File state tax only for free 1. File state tax only for free   Scholarships, Fellowships, Grants, and Tuition Reductions Table of Contents Reminder Introduction Scholarships and FellowshipsTax-Free Scholarships and Fellowships Taxable Scholarships and Fellowships Reporting Scholarships and Fellowships Other Types of Educational AssistanceFulbright Grants Pell Grants and Other Title IV Need-Based Education Grants Payment to Service Academy Cadets Veterans' Benefits Qualified Tuition Reduction Reminder Individual retirement arrangements (IRAs). File state tax only for free  You can set up and make contributions to an IRA if you receive taxable compensation. File state tax only for free Under this rule, a taxable scholarship or fellowship is compensation only if it is shown in box 1 of your Form W-2, Wage and Tax Statement. File state tax only for free For more information about IRAs, see Publication 590. File state tax only for free Introduction This chapter discusses the income tax treatment of various types of educational assistance you may receive if you are studying, teaching, or researching in the United States. File state tax only for free The educational assistance can be for a primary or secondary school, a college or university, or a vocational school. File state tax only for free Included are discussions of: Scholarships, Fellowships, Need-based education grants, such as a Pell Grant, and Qualified tuition reductions. File state tax only for free Many types of educational assistance are tax free if they meet the requirements discussed here. File state tax only for free Special rules apply to U. File state tax only for free S. File state tax only for free citizens and resident aliens who have received scholarships or fellowships for studying, teaching, or researching abroad. File state tax only for free For information about these rules, see Publication 54, Tax Guide for U. File state tax only for free S. File state tax only for free Citizens and Resident Aliens Abroad. File state tax only for free Scholarships and Fellowships A scholarship is generally an amount paid or allowed to, or for the benefit of, a student (whether an undergraduate or a graduate) at an educational institution to aid in the pursuit of his or her studies. File state tax only for free A fellowship is generally an amount paid for the benefit of an individual to aid in the pursuit of study or research. File state tax only for free Amount of scholarship or fellowship. File state tax only for free   The amount of a scholarship or fellowship includes the following: The value of contributed services and accommodations. File state tax only for free This includes such services and accommodations as room (lodging), board (meals), laundry service, and similar services or accommodations that are received by an individual as a part of a scholarship or fellowship. File state tax only for free The amount of tuition, matriculation, and other fees that are paid or remitted to the student to aid the student in pursuing study or research. File state tax only for free Any amount received in the nature of a family allowance as a part of a scholarship or fellowship. File state tax only for free Tax-Free Scholarships and Fellowships A scholarship or fellowship is tax free (excludable from gross income) only if you are a candidate for a degree at an eligible educational institution. File state tax only for free A scholarship or fellowship is tax free only to the extent: It does not exceed your expenses; It is not designated or earmarked for other purposes (such as room and board), and does not require (by its terms) that it cannot be used for qualified education expenses; and It does not represent payment for teaching, research, or other services required as a condition for receiving the scholarship. File state tax only for free (But for exceptions, see Payment for services,later. File state tax only for free Use Worksheet 1–1 to figure the amount of a scholarship or fellowship you can exclude from gross income. File state tax only for free Candidate for a degree. File state tax only for free   You are a candidate for a degree if you: Attend a primary or secondary school or are pursuing a degree at a college or university, or Attend an educational institution that: Provides a program that is acceptable for full credit toward a bachelor's or higher degree, or offers a program of training to prepare students for gainful employment in a recognized occupation; and Is authorized under federal or state law to provide such a program and is accredited by a nationally recognized accreditation agency. File state tax only for free Eligible educational institution. File state tax only for free   An eligible educational institution is one whose primary function is the presentation of formal instruction and that normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities. File state tax only for free Qualified education expenses. File state tax only for free   For purposes of tax-free scholarships and fellowships, these are expenses for: Tuition and fees required to enroll at or attend an eligible educational institution, and Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. File state tax only for free These items must be required of all students in your course of instruction. File state tax only for free Expenses that do not qualify. File state tax only for free   Qualified education expenses do not include the cost of: Room and board, Travel, Research, Clerical help, or Equipment and other expenses that are not required for enrollment in or attendance at an eligible educational institution. File state tax only for free Payment for services. File state tax only for free   Generally, you cannot exclude from your gross income the part of any scholarship or fellowship that represents payment for teaching, research, or other services required as a condition for receiving the scholarship. File state tax only for free This applies even if all candidates for a degree must perform the services to receive the degree. File state tax only for free (See exceptions next. File state tax only for free ) Exceptions. File state tax only for free   You do not have to treat as payment for services the part of any scholarship or fellowship that represents payment for teaching, research, or other services if you receive the amount under: The National Health Service Corps Scholarship Program, or The Armed Forces Health Professions Scholarship and Financial Assistance Program. File state tax only for free Example 1. File state tax only for free You received a scholarship of $2,500. File state tax only for free The scholarship was not received under either of the exceptions mentioned above. File state tax only for free As a condition for receiving the scholarship, you must serve as a part-time teaching assistant. File state tax only for free Of the $2,500 scholarship, $1,000 represents payment for teaching. File state tax only for free The provider of your scholarship gives you a Form W-2 showing $1,000 as income. File state tax only for free Your qualified education expenses were at least $1,500. File state tax only for free Assuming that all other conditions are met, $1,500 of your scholarship is tax free. File state tax only for free The $1,000 you received for teaching is taxable. File state tax only for free Example 2. File state tax only for free You are a candidate for a degree at a medical school. File state tax only for free You receive a scholarship (not under either of the exceptions mentioned above) for your medical education and training. File state tax only for free The terms of your scholarship require you to perform future services. File state tax only for free A substantial penalty applies if you do not comply. File state tax only for free The entire amount of your grant is taxable as payment for services in the year it is received. File state tax only for free Athletic Scholarships An athletic scholarship is tax free only if and to the extent it meets the requirements discussed later. File state tax only for free Worksheet 1-1. File state tax only for free    You can use Worksheet 1-1, Taxable Scholarship and Fellowship Income , later, to figure the tax-free and taxable parts of your athletic scholarship. File state tax only for free    Worksheet 1-1. File state tax only for free Taxable Scholarship and Fellowship Income 1. File state tax only for free Enter the total amount of any scholarship or fellowship for 2013. File state tax only for free See Amount of scholarship or fellowship, earlier. File state tax only for free 1. File state tax only for free       If you are a degree candidate at an eligible educational institution, go to line 2. File state tax only for free If you are not a degree candidate at an eligible educational institution, stop here. File state tax only for free The entire amount is taxable. File state tax only for free For information on how to report this amount on your tax return, see Reporting Scholarships and Fellowships , earlier, in this chapter. File state tax only for free       2. File state tax only for free Enter the amount from line 1 that was for teaching, research, or any other services required as a condition for receiving the scholarship. File state tax only for free (Do not include amounts received for these items under the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program. File state tax only for free ) 2. File state tax only for free     3. File state tax only for free Subtract line 2 from line 1 3. File state tax only for free     4. File state tax only for free Enter the amount from line 3 that your scholarship or fellowship required you to use for other than qualified education expenses 4. File state tax only for free     5. File state tax only for free Subtract line 4 from line 3 5. File state tax only for free     6. File state tax only for free Enter the amount of your qualified education expenses 6. File state tax only for free     7. File state tax only for free Enter the smaller of line 5 or line 6. File state tax only for free This amount is the most you can exclude from your gross income (the tax-free part of the scholarship or fellowship) 7. File state tax only for free     8. File state tax only for free Subtract line 7 from line 5 8. File state tax only for free     9. File state tax only for free Taxable part. File state tax only for free Add lines 2, 4, and 8. File state tax only for free See Reporting Scholarships and Fellowships , earlier, for how to report this amount on your tax return 9. File state tax only for free     Taxable Scholarships and Fellowships If and to the extent your scholarship or fellowship does not meet the requirements described earlier, it is taxable and must be included in gross income. File state tax only for free You can use Worksheet 1–1, Taxable Scholarship and Fellowship Income, later, to figure the tax-free and taxable parts of your scholarship or fellowship. File state tax only for free Reporting Scholarships and Fellowships Whether you must report your scholarship or fellowship depends on whether you must file a return and whether any part of your scholarship or fellowship is taxable. File state tax only for free If your only income is a completely tax-free scholarship or fellowship, you do not have to file a tax return and no reporting is necessary. File state tax only for free If all or part of your scholarship or fellowship is taxable and you are required to file a tax return, report the taxable amount as explained below. File state tax only for free You must report the taxable amount whether or not you received a Form W-2. File state tax only for free If you receive an incorrect Form W-2, ask the payer for a corrected one. File state tax only for free For information on whether you must file a return, see Publication 501, Exemptions, Standard Deduction, and Filing Information, or your income tax form instructions. File state tax only for free How To Report How you report any taxable scholarship or fellowship income depends on which return you file. File state tax only for free Form 1040EZ. File state tax only for free   If you file Form 1040EZ, include the taxable amount in the total on line 1. File state tax only for free If the taxable amount was not reported on Form W-2, also enter “SCH” and the taxable amount in the space to the left of line 1. File state tax only for free Form 1040A. File state tax only for free   If you file Form 1040A, include the taxable amount in the total on line 7. File state tax only for free If the taxable amount was not reported on Form W-2, also enter “SCH” and the taxable amount in the space to the left of line 7. File state tax only for free Form 1040. File state tax only for free   If you file Form 1040, include the taxable amount in the total on line 7. File state tax only for free If the taxable amount was not reported on Form W-2, also enter “SCH” and the taxable amount on the dotted line next to line 7. File state tax only for free Schedule SE (Form 1040). File state tax only for free   To determine your net earnings from self-employment, include amounts you receive under a scholarship as pay for your services that are reported to you on Form 1099-MISC, Miscellaneous Income. File state tax only for free If your net earnings are $400 or more, you must pay self-employment tax. File state tax only for free Use Schedule SE, Self-Employment Tax, to figure this tax. File state tax only for free Form 1040NR. File state tax only for free   If you file Form 1040NR, report the taxable amount on line 12. File state tax only for free Generally, you must report the amount shown in box 2 of Form(s) 1042-S, Foreign Person's U. File state tax only for free S. File state tax only for free Source Income Subject to Withholding. File state tax only for free See the Instructions for Form 1040NR for more information. File state tax only for free Form 1040NR-EZ. File state tax only for free   If you file Form 1040NR-EZ, report the taxable amount on line 5. File state tax only for free Generally, you must report the amount shown in box 2 of Form(s) 1042-S. File state tax only for free See the Instructions for Form 1040NR-EZ for more information. File state tax only for free Other Types of Educational Assistance The following discussions deal with other common types of educational assistance. File state tax only for free Fulbright Grants A Fulbright grant is generally treated as a scholarship or fellowship in figuring how much of the grant is tax free. File state tax only for free Pell Grants and Other Title IV Need-Based Education Grants These need-based grants are treated as scholarships for purposes of determining their tax treatment. File state tax only for free They are tax free to the extent used for qualified education expenses during the period for which a grant is awarded. File state tax only for free Payment to Service Academy Cadets An appointment to a United States military academy is not a scholarship or fellowship. File state tax only for free Payment you receive as a cadet or midshipman at an armed services academy is pay for personal services and will be reported to you in box 1 of Form W-2. File state tax only for free Include this pay in your income in the year you receive it unless one of the exceptions, discussed earlier under Payment for services , applies. File state tax only for free Veterans' Benefits Payments you receive for education, training, or subsistence under any law administered by the Department of Veterans Affairs (VA) are tax free. File state tax only for free Do not include these payments as income on your federal tax return. File state tax only for free If you qualify for one or more of the education benefits discussed in chapters 2 through 12, you may have to reduce the amount of education expenses qualifying for a specific benefit by part or all of your VA payments. File state tax only for free This applies only to the part of your VA payments that is required to be used for education expenses. File state tax only for free You may want to visit the Veteran's Administration website at www. File state tax only for free gibill. File state tax only for free va. File state tax only for free gov for specific information about the various VA benefits for education. File state tax only for free Example. File state tax only for free You have returned to college and are receiving two education benefits under the latest GI Bill: (1) a $1,534 monthly basic housing allowance (BHA) that is directly deposited to your checking account, and (2) $3,840 paid directly to your college for tuition. File state tax only for free Neither of these benefits is taxable and you do not report them on your tax return. File state tax only for free You also want to claim an American opportunity credit on your return. File state tax only for free You paid $5,000 in qualified education expenses (see chapter 2, American Opportunity Credit , later). File state tax only for free To figure the amount of credit, you must first subtract the $3,840 from your qualified education expenses because this payment under the GI Bill was required to be used for education expenses. File state tax only for free You do not subtract any amount of the BHA because it was paid to you and its use was not restricted. File state tax only for free Qualified Tuition Reduction If you are allowed to study tuition free or for a reduced rate of tuition, you may not have to pay tax on this benefit. File state tax only for free This is called a “tuition reduction. File state tax only for free ” You do not have to include a qualified tuition reduction in your income. File state tax only for free A tuition reduction is qualified only if you receive it from, and use it at, an eligible educational institution. File state tax only for free You do not have to use the tuition reduction at the eligible educational institution from which you received it. File state tax only for free In other words, if you work for an eligible educational institution and the institution arranges for you to take courses at another eligible educational institution without paying any tuition, you may not have to include the value of the free courses in your income. File state tax only for free The rules for determining if a tuition reduction is qualified, and therefore tax free, are different if the education provided is below the graduate level or is graduate education. File state tax only for free You must include in your income any tuition reduction you receive that is payment for your services. File state tax only for free Eligible educational institution. File state tax only for free   An eligible educational institution is one that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities. File state tax only for free Officers, owners, and highly compensated employees. File state tax only for free   Qualified tuition reductions apply to officers, owners, or highly compensated employees only if benefits are available to employees on a nondiscriminatory basis. File state tax only for free This means that the tuition reduction benefits must be available on substantially the same basis to each member of a group of employees. File state tax only for free The group must be defined under a reasonable classification set up by the employer. File state tax only for free The classification must not discriminate in favor of owners, officers, or highly compensated employees. File state tax only for free Payment for services. File state tax only for free   Generally, you must include in income the part of any qualified tuition reduction that represents payment for teaching, research, or other services by the student required as a condition of receiving the qualified tuition reduction. File state tax only for free This applies even if all candidates for a degree must perform the services to receive the degree. File state tax only for free (See below for exceptions. File state tax only for free ) Exceptions. File state tax only for free   You do not have to include in income the part of any scholarship or fellowship that represents payment for teaching, research, or other services if you receive the amount under: The National Health Service Corps Scholarship Program, or The Armed Forces Health Professions Scholarship and Financial Assistance Program. File state tax only for free Education Below the Graduate Level If you receive a tuition reduction for education below the graduate level (including primary, secondary, or high school), it is a qualified tuition reduction, and therefore tax free, only if your relationship to the educational institution providing the benefit is described below. File state tax only for free You are an employee of the eligible educational institution. File state tax only for free You were an employee of the eligible educational institution, but you retired or left on disability. File state tax only for free You are a widow or widower of an individual who died while an employee of the eligible educational institution or who retired or left on disability. File state tax only for free You are the dependent child or spouse of an individual described in (1) through (3), above. File state tax only for free Child of deceased parents. File state tax only for free   For purposes of the qualified tuition reduction, a child is a dependent child if the child is under age 25 and both parents have died. File state tax only for free Child of divorced parents. File state tax only for free   For purposes of the qualified tuition reduction, a dependent child of divorced parents is treated as the dependent of both parents. File state tax only for free Graduate Education A tuition reduction you receive for graduate education is qualified, and therefore tax free, if both of the following requirements are met. File state tax only for free It is provided by an eligible educational institution. File state tax only for free You are a graduate student who performs teaching or research activities for the educational institution. File state tax only for free You must include in income any other tuition reductions for graduate education that you receive. File state tax only for free How To Report Any tuition reduction that is taxable should be included as wages in box 1 of your Form W-2. File state tax only for free Report the amount from Form W-2, box 1, on line 7 (Form 1040 or Form 1040A) or line 1 (Form 1040EZ). File state tax only for free Prev  Up  Next   Home   More Online Publications