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Filling Out 1040x

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Filling Out 1040x

Filling out 1040x 7. Filling out 1040x   Coverdell Education Savings Account (ESA) Table of Contents Introduction What Is a Coverdell ESAQualified Education Expenses ContributionsContribution Limits Additional Tax on Excess Contributions Rollovers and Other TransfersRollovers Changing the Designated Beneficiary Transfer Because of Divorce DistributionsTax-Free Distributions Taxable Distributions When Assets Must Be Distributed Introduction If your modified adjusted gross income (MAGI) is less than $110,000 ($220,000 if filing a joint return), you may be able to establish a Coverdell ESA to finance the qualified education expenses of a designated beneficiary. Filling out 1040x For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return. Filling out 1040x There is no limit on the number of separate Coverdell ESAs that can be established for a designated beneficiary. Filling out 1040x However, total contributions for the beneficiary in any year cannot be more than $2,000, no matter how many accounts have been established. Filling out 1040x See Contributions , later. Filling out 1040x This benefit applies not only to higher education expenses, but also to elementary and secondary education expenses. Filling out 1040x What is the tax benefit of the Coverdell ESA. Filling out 1040x   Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. Filling out 1040x   If, for a year, distributions from an account are not more than a designated beneficiary's qualified education expenses at an eligible educational institution, the beneficiary will not owe tax on the distributions. Filling out 1040x See Tax-Free Distributions , later. Filling out 1040x    Table 7-1 summarizes the main features of the Coverdell ESA. Filling out 1040x Table 7-1. Filling out 1040x Coverdell ESA at a Glance Do not rely on this table alone. Filling out 1040x It provides only general highlights. Filling out 1040x See the text for definitions of terms in bold type and for more complete explanations. Filling out 1040x Question Answer What is a Coverdell ESA? A savings account that is set up to pay the qualified education expenses of a designated beneficiary. Filling out 1040x Where can it be established? It can be opened in the United States at any bank or other IRS-approved entity that offers Coverdell ESAs. Filling out 1040x Who can have a Coverdell ESA? Any beneficiary who is under age 18 or is a special needs beneficiary. Filling out 1040x Who can contribute to a Coverdell ESA? Generally, any individual (including the beneficiary) whose modified adjusted gross income for the year is less than $110,000 ($220,000 in the case of a joint return). Filling out 1040x Are distributions tax free? Yes, if the distributions are not more than the beneficiary's adjusted qualified education expenses for the year. Filling out 1040x What Is a Coverdell ESA A Coverdell ESA is a trust or custodial account created or organized in the United States only for the purpose of paying the qualified education expenses of the Designated beneficiary (defined later) of the account. Filling out 1040x When the account is established, the designated beneficiary must be under age 18 or a special needs beneficiary. Filling out 1040x To be treated as a Coverdell ESA, the account must be designated as a Coverdell ESA when it is created. Filling out 1040x The document creating and governing the account must be in writing and must satisfy the following requirements. Filling out 1040x The trustee or custodian must be a bank or an entity approved by the IRS. Filling out 1040x The document must provide that the trustee or custodian can only accept a contribution that meets all of the following conditions. Filling out 1040x The contribution is in cash. Filling out 1040x The contribution is made before the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. Filling out 1040x The contribution would not result in total contributions for the year (not including rollover contributions) being more than $2,000. Filling out 1040x Money in the account cannot be invested in life insurance contracts. Filling out 1040x Money in the account cannot be combined with other property except in a common trust fund or common investment fund. Filling out 1040x The balance in the account generally must be distributed within 30 days after the earlier of the following events. Filling out 1040x The beneficiary reaches age 30, unless the beneficiary is a special needs beneficiary. Filling out 1040x The beneficiary's death. Filling out 1040x Qualified Education Expenses Generally, these are expenses required for the enrollment or attendance of the designated beneficiary at an eligible educational institution. Filling out 1040x For purposes of Coverdell ESAs, the expenses can be either qualified higher education expenses or qualified elementary and secondary education expenses. Filling out 1040x Designated beneficiary. Filling out 1040x   This is the individual named in the document creating the trust or custodial account to receive the benefit of the funds in the account. Filling out 1040x Contributions to a qualified tuition program (QTP). Filling out 1040x   A contribution to a QTP is a qualified education expense if the contribution is on behalf of the designated beneficiary of the Coverdell ESA. Filling out 1040x In the case of a change in beneficiary, this is a qualified expense only if the new beneficiary is a family member of that designated beneficiary. Filling out 1040x See chapter 8, Qualified Tuition Program . Filling out 1040x Eligible Educational Institution For purposes of Coverdell ESAs, an eligible educational institution can be either an eligible postsecondary school or an eligible elementary or secondary school. Filling out 1040x Eligible postsecondary school. Filling out 1040x   This is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Filling out 1040x S. Filling out 1040x Department of Education. Filling out 1040x It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Filling out 1040x The educational institution should be able to tell you if it is an eligible educational institution. Filling out 1040x   Certain educational institutions located outside the United States also participate in the U. Filling out 1040x S. Filling out 1040x Department of Education's Federal Student Aid (FSA) programs. Filling out 1040x Eligible elementary or secondary school. Filling out 1040x   This is any public, private, or religious school that provides elementary or secondary education (kindergarten through grade 12), as determined under state law. Filling out 1040x Qualified Higher Education Expenses These are expenses related to enrollment or attendance at an eligible postsecondary school. Filling out 1040x As shown in the following list, to be qualified, some of the expenses must be required by the school and some must be incurred by students who are enrolled at least half-time. Filling out 1040x The following expenses must be required for enrollment or attendance of a designated beneficiary at an eligible postsecondary school. Filling out 1040x Tuition and fees. Filling out 1040x Books, supplies, and equipment. Filling out 1040x Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible postsecondary school. Filling out 1040x Expenses for room and board must be incurred by students who are enrolled at least half-time (defined below). Filling out 1040x The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts. Filling out 1040x The allowance for room and board, as determined by the school, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student. Filling out 1040x The actual amount charged if the student is residing in housing owned or operated by the school. Filling out 1040x Half-time student. Filling out 1040x   A student is enrolled “at least half-time” if he or she is enrolled for at least half the full-time academic work load for the course of study the student is pursuing, as determined under the standards of the school where the student is enrolled. Filling out 1040x Qualified Elementary and Secondary Education Expenses These are expenses related to enrollment or attendance at an eligible elementary or secondary school. Filling out 1040x As shown in the following list, to be qualified, some of the expenses must be required or provided by the school. Filling out 1040x There are special rules for computer-related expenses. Filling out 1040x The following expenses must be incurred by a designated beneficiary in connection with enrollment or attendance at an eligible elementary or secondary school. Filling out 1040x Tuition and fees. Filling out 1040x Books, supplies, and equipment. Filling out 1040x Academic tutoring. Filling out 1040x Special needs services for a special needs beneficiary. Filling out 1040x The following expenses must be required or provided by an eligible elementary or secondary school in connection with attendance or enrollment at the school. Filling out 1040x Room and board. Filling out 1040x Uniforms. Filling out 1040x Transportation. Filling out 1040x Supplementary items and services (including extended day programs). Filling out 1040x The purchase of computer technology, equipment, or Internet access and related services is a qualified elementary and secondary education expense if it is to be used by the beneficiary and the beneficiary's family during any of the years the beneficiary is in elementary or secondary school. Filling out 1040x (This does not include expenses for computer software designed for sports, games, or hobbies unless the software is predominantly educational in nature. Filling out 1040x ) Contributions Any individual (including the designated beneficiary) can contribute to a Coverdell ESA if the individual's MAGI (defined later under Contribution Limits ) for the year is less than $110,000. Filling out 1040x For individuals filing joint returns, that amount is $220,000. Filling out 1040x Organizations, such as corporations and trusts, can also contribute to Coverdell ESAs. Filling out 1040x There is no requirement that an organization's income be below a certain level. Filling out 1040x Contributions must meet all of the following requirements. Filling out 1040x They must be in cash. Filling out 1040x They cannot be made after the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. Filling out 1040x They must be made by the due date of the contributor's tax return (not including extensions). Filling out 1040x Contributions can be made to one or several Coverdell ESAs for the same designated beneficiary provided that the total contributions are not more than the contribution limits (defined later) for a year. Filling out 1040x Contributions can be made, without penalty, to both a Coverdell ESA and a QTP in the same year for the same beneficiary. Filling out 1040x Table 7-2 summarizes many of the features of contributing to a Coverdell ESA. Filling out 1040x When contributions considered made. Filling out 1040x   Contributions made to a Coverdell ESA for the preceding tax year are considered to have been made on the last day of the preceding year. Filling out 1040x They must be made by the due date (not including extensions) for filing your return for the preceding year. Filling out 1040x   For example, if you make a contribution to a Coverdell ESA in February 2014, and you designate it as a contribution for 2013, you are considered to have made that contribution on December 31, 2013. Filling out 1040x Contribution Limits There are two yearly limits: One on the total amount that can be contributed for each designated beneficiary in any year, and One on the amount that any individual can contribute for any one designated beneficiary for a year. Filling out 1040x Limit for each designated beneficiary. Filling out 1040x   For 2013, the total of all contributions to all Coverdell ESAs set up for the benefit of any one designated beneficiary cannot be more than $2,000. Filling out 1040x This includes contributions (other than rollovers) to all the beneficiary's Coverdell ESAs from all sources. Filling out 1040x Rollovers are discussed under Rollovers and Other Transfers , later. Filling out 1040x Example. Filling out 1040x When Maria Luna was born in 2012, three separate Coverdell ESAs were set up for her, one by her parents, one by her grandfather, and one by her aunt. Filling out 1040x In 2013, the total of all contributions to Maria's three Coverdell ESAs cannot be more than $2,000. Filling out 1040x For example, if her grandfather contributed $2,000 to one of her Coverdell ESAs, no one else could contribute to any of her three accounts. Filling out 1040x Or, if her parents contributed $1,000 and her aunt $600, her grandfather or someone else could contribute no more than $400. Filling out 1040x These contributions could be put into any of Maria's Coverdell ESA accounts. Filling out 1040x Limit for each contributor. Filling out 1040x   Generally, you can contribute up to $2,000 for each designated beneficiary for 2013. Filling out 1040x This is the most you can contribute for the benefit of any one beneficiary for the year, regardless of the number of Coverdell ESAs set up for the beneficiary. Filling out 1040x Example. Filling out 1040x The facts are the same as in the previous example except that Maria Luna's older brother, Edgar, also has a Coverdell ESA. Filling out 1040x If their grandfather contributed $2,000 to Maria's Coverdell ESA in 2013, he could also contribute $2,000 to Edgar's Coverdell ESA. Filling out 1040x Reduced limit. Filling out 1040x   Your contribution limit may be reduced. Filling out 1040x If your MAGI (defined on this page) is between $95,000 and $110,000 (between $190,000 and $220,000 if filing a joint return), the $2,000 limit for each designated beneficiary is gradually reduced (see Figuring the limit , later). Filling out 1040x If your MAGI is $110,000 or more ($220,000 or more if filing a joint return), you cannot contribute to anyone's Coverdell ESA. Filling out 1040x Table 7-2. Filling out 1040x Coverdell ESA Contributions at a Glance Do not rely on this table alone. Filling out 1040x It provides only general highlights. Filling out 1040x See the text for more complete explanations. Filling out 1040x Question Answer Are contributions deductible? No. Filling out 1040x What is the annual contribution limit per designated beneficiary? $2,000 for each designated beneficiary. Filling out 1040x What if more than one Coverdell ESA has been opened for the same designated beneficiary? The annual contribution limit is $2,000 for each beneficiary, no matter how many Coverdell ESAs are set up for that beneficiary. Filling out 1040x What if more than one individual makes contributions for the same designated beneficiary? The annual contribution limit is $2,000 per beneficiary, no matter how many individuals contribute. Filling out 1040x Can contributions other than cash be made to a Coverdell ESA? No. Filling out 1040x When must contributions stop? No contributions can be made to a beneficiary's Coverdell ESA after he or she reaches age 18, unless the beneficiary is a special needs beneficiary. Filling out 1040x Modified adjusted gross income (MAGI). Filling out 1040x   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return. Filling out 1040x MAGI when using Form 1040A. Filling out 1040x   If you file Form 1040A, your MAGI is the AGI on line 22 of that form. Filling out 1040x MAGI when using Form 1040. Filling out 1040x   If you file Form 1040, your MAGI is the AGI on line 38 of that form, modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, and Exclusion of income by bona fide residents of Puerto Rico. Filling out 1040x MAGI when using Form 1040NR. Filling out 1040x   If you file Form 1040NR, your MAGI is the AGI on line 36 of that form. Filling out 1040x MAGI when using Form 1040NR-EZ. Filling out 1040x   If you file Form 1040NR-EZ, your MAGI is the AGI on line 10 of that form. Filling out 1040x   If you have any of these adjustments, you can use Worksheet 7-1. Filling out 1040x MAGI for a Coverdell ESA , later, to figure your MAGI for Form 1040. Filling out 1040x Worksheet 7-1. Filling out 1040x MAGI for a Coverdell ESA 1. Filling out 1040x Enter your adjusted gross income  (Form 1040, line 38)   1. Filling out 1040x   2. Filling out 1040x Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)   2. Filling out 1040x       3. Filling out 1040x Enter your foreign housing deduction (Form 2555, line 50)   3. Filling out 1040x         4. Filling out 1040x Enter the amount of income from Puerto Rico you are excluding   4. Filling out 1040x       5. Filling out 1040x Enter the amount of income from American Samoa you are excluding (Form 4563, line 15)   5. Filling out 1040x       6. Filling out 1040x Add lines 2, 3, 4, and 5   6. Filling out 1040x   7. Filling out 1040x Add lines 1 and 6. Filling out 1040x This is your  modified adjusted gross income   7. Filling out 1040x   Figuring the limit. Filling out 1040x    To figure the limit on the amount you can contribute for each designated beneficiary, multiply $2,000 by a fraction. Filling out 1040x The numerator (top number) is your MAGI minus $95,000 ($190,000 if filing a joint return). Filling out 1040x The denominator (bottom number) is $15,000 ($30,000 if filing a joint return). Filling out 1040x Subtract the result from $2,000. Filling out 1040x This is the amount you can contribute for each beneficiary. Filling out 1040x You can use Worksheet 7-2. Filling out 1040x Coverdell ESA Contribution Limit to figure the limit on contributions. Filling out 1040x    Worksheet 7-2. Filling out 1040x Coverdell ESA Contribution Limit 1. Filling out 1040x Maximum contribution   1. Filling out 1040x $2,000 2. Filling out 1040x Enter your modified adjusted gross income (MAGI) for purposes of figuring the contribution limit to a Coverdell ESA (see definition or Worksheet 7-1, earlier)   2. Filling out 1040x   3. Filling out 1040x Enter $190,000 if married filing jointly; $95,000 for all other filers   3. Filling out 1040x   4. Filling out 1040x Subtract line 3 from line 2. Filling out 1040x If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. Filling out 1040x   5. Filling out 1040x Enter $30,000 if married filing jointly; $15,000 for all other filers   5. Filling out 1040x     Note. Filling out 1040x If the amount on line 4 is greater than or equal to the amount on line 5, stop here. Filling out 1040x You are not allowed to contribute to a Coverdell ESA for 2013. Filling out 1040x       6. Filling out 1040x Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. Filling out 1040x . Filling out 1040x 7. Filling out 1040x Multiply line 1 by line 6   7. Filling out 1040x   8. Filling out 1040x Subtract line 7 from line 1   8. Filling out 1040x   Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. Filling out 1040x Example. Filling out 1040x Paul, who is single, had a MAGI of $96,500 for 2013. Filling out 1040x Paul can contribute up to $1,800 in 2013 for each beneficiary, as shown in the illustrated Worksheet 7-2, Coverdell ESA Contribution Limit–Illustrated. Filling out 1040x Worksheet 7-2. Filling out 1040x Coverdell ESA Contribution Limit—Illustrated 1. Filling out 1040x Maximum contribution   1. Filling out 1040x $2,000 2. Filling out 1040x Enter your modified adjusted gross  income (MAGI) for purposes of figuring the contribution limit to a Coverdell ESA (see definition or Worksheet 7-1, earlier)   2. Filling out 1040x 96,500 3. Filling out 1040x Enter $190,000 if married filing jointly; $95,000 for all other filers   3. Filling out 1040x 95,000 4. Filling out 1040x Subtract line 3 from line 2. Filling out 1040x If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. Filling out 1040x 1,500 5. Filling out 1040x Enter $30,000 if married filing jointly; $15,000 for all other filers   5. Filling out 1040x 15,000   Note. Filling out 1040x If the amount on line 4 is greater than or equal to the amount on line 5,  stop here. Filling out 1040x You are not allowed to  contribute to a Coverdell ESA for 2013. Filling out 1040x       6. Filling out 1040x Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. Filling out 1040x . Filling out 1040x 100 7. Filling out 1040x Multiply line 1 by line 6   7. Filling out 1040x 200 8. Filling out 1040x Subtract line 7 from line 1   8. Filling out 1040x 1,800 Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. Filling out 1040x Additional Tax on Excess Contributions The beneficiary must pay a 6% excise tax each year on excess contributions that are in a Coverdell ESA at the end of the year. Filling out 1040x Excess contributions are the total of the following two amounts. Filling out 1040x Contributions to any designated beneficiary's Coverdell ESA for the year that are more than $2,000 (or, if less, the total of each contributor's limit for the year, as discussed earlier). Filling out 1040x Excess contributions for the preceding year, reduced by the total of the following two amounts: Distributions (other than those rolled over as discussed later) during the year, and The contribution limit for the current year minus the amount contributed for the current year. Filling out 1040x Exceptions. Filling out 1040x   The excise tax does not apply if excess contributions made during 2013 (and any earnings on them) are distributed before the first day of the sixth month of the following tax year (June 1, 2014, for a calendar year taxpayer). Filling out 1040x   However, you must include the distributed earnings in gross income for the year in which the excess contribution was made. Filling out 1040x You should receive Form 1099-Q, Payments From Qualified Education Programs, from each institution from which excess contributions were distributed. Filling out 1040x Box 2 of that form will show the amount of earnings on your excess contributions. Filling out 1040x Code “2” or “3” entered in the blank box below boxes 5 and 6 indicate the year in which the earnings are taxable. Filling out 1040x See Instructions for Recipient on the back of copy B of your Form 1099-Q. Filling out 1040x Enter the amount of earnings on line 21 of Form 1040 (or Form 1040NR) for the applicable tax year. Filling out 1040x For more information, see Taxable Distributions , later. Filling out 1040x   The excise tax does not apply to any rollover contribution. Filling out 1040x Note. Filling out 1040x Contributions made in one year for the preceding tax year are considered to have been made on the last day of the preceding year. Filling out 1040x Example. Filling out 1040x In 2012, Greta's parents and grandparents contributed a total of $2,300 to Greta's Coverdell ESA— an excess contribution of $300. Filling out 1040x Because Greta did not withdraw the excess before June 1, 2013, she had to pay an additional tax of $18 (6% × $300) when she filed her 2012 tax return. Filling out 1040x In 2013, excess contributions of $500 were made to Greta's account, however, she withdrew $250 from that account to use for qualified education expenses. Filling out 1040x Using the steps shown earlier under Additional Tax on Excess Contributions , Greta figures the excess contribution in her account at the end of 2013 as follows. Filling out 1040x (1)   $500 excess contributions made in 2013     + (2)   $300 excess contributions in ESA at end of 2012     − (2a)   $250 distribution during 2013         $550 excess at end of 2013   × 6%=$33           If Greta limits 2014 contributions to $1,450 ($2,000 maximum allowed − $550 excess contributions from 2013), she will not owe any additional tax in 2014 for excess contributions. Filling out 1040x Figuring and reporting the additional tax. Filling out 1040x   You figure this excise tax in Part V of Form 5329. Filling out 1040x Report the additional tax on Form 1040, line 58 (or Form 1040NR, line 56). Filling out 1040x Rollovers and Other Transfers Assets can be rolled over from one Coverdell ESA to another or the designated beneficiary can be changed. Filling out 1040x The beneficiary's interest can be transferred to a spouse or former spouse because of divorce. Filling out 1040x Rollovers Any amount distributed from a Coverdell ESA is not taxable if it is rolled over to another Coverdell ESA for the benefit of the same beneficiary or a member of the beneficiary's family (including the beneficiary's spouse) who is under age 30. Filling out 1040x This age limitation does not apply if the new beneficiary is a special needs beneficiary. Filling out 1040x An amount is rolled over if it is paid to another Coverdell ESA within 60 days after the date of the distribution. Filling out 1040x Do not report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040 or 1040NR. Filling out 1040x These are not taxable distributions. Filling out 1040x Members of the beneficiary's family. Filling out 1040x   For these purposes, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary. Filling out 1040x Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them. Filling out 1040x Brother, sister, stepbrother, or stepsister. Filling out 1040x Father or mother or ancestor of either. Filling out 1040x Stepfather or stepmother. Filling out 1040x Son or daughter of a brother or sister. Filling out 1040x Brother or sister of father or mother. Filling out 1040x Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. Filling out 1040x The spouse of any individual listed above. Filling out 1040x First cousin. Filling out 1040x Example. Filling out 1040x When Aaron graduated from college last year he had $5,000 left in his Coverdell ESA. Filling out 1040x He wanted to give this money to his younger sister, who was still in high school. Filling out 1040x In order to avoid paying tax on the distribution of the amount remaining in his account, Aaron contributed the same amount to his sister's Coverdell ESA within 60 days of the distribution. Filling out 1040x Only one rollover per Coverdell ESA is allowed during the 12-month period ending on the date of the payment or distribution. Filling out 1040x This rule does not apply to the rollover of a military death gratuity or payment from Servicemembers' Group Life Insurance (SGLI). Filling out 1040x Military death gratuity. Filling out 1040x   If you received a military death gratuity or a payment from Servicemembers' Group Life Insurance (SGLI), you may roll over all or part of the amount received to one or more Coverdell ESAs for the benefit of members of the beneficiary's family (see Members of the beneficiary's family , earlier). Filling out 1040x Such payments are made to an eligible survivor upon the death of a member of the armed forces. Filling out 1040x The contribution to a Coverdell ESA from survivor benefits received cannot be made later than 1 year after the date on which you receive the gratuity or SGLI payment. Filling out 1040x   This rollover contribution is not subject to (but is in addition to) the contribution limits discussed earlier under Contribution Limits . Filling out 1040x The amount you roll over cannot exceed the total survivor benefits you received, reduced by contributions from these benefits to a Roth IRA or other Coverdell ESAs. Filling out 1040x   The amount contributed from the survivor benefits is treated as part of your basis (cost) in the Coverdell ESA, and will not be taxed when distributed. Filling out 1040x See Distributions , later. Filling out 1040x The limit of one rollover per Coverdell ESA during a 12-month period does not apply to a military death gratuity or SGLI payment. Filling out 1040x Changing the Designated Beneficiary The designated beneficiary can be changed. Filling out 1040x See Members of the beneficiary's family , earlier. Filling out 1040x There are no tax consequences if, at the time of the change, the new beneficiary is under age 30 or is a special needs beneficiary. Filling out 1040x Example. Filling out 1040x Assume the same situation for Aaron as in the last example (see Rollovers , earlier). Filling out 1040x Instead of closing his Coverdell ESA and paying the distribution into his sister's Coverdell ESA, Aaron could have instructed the trustee of his account to simply change the name of the beneficiary on his account to that of his sister. Filling out 1040x Transfer Because of Divorce If a spouse or former spouse receives a Coverdell ESA under a divorce or separation instrument, it is not a taxable transfer. Filling out 1040x After the transfer, the spouse or former spouse treats the Coverdell ESA as his or her own. Filling out 1040x Example. Filling out 1040x In their divorce settlement, Peg received her ex-husband's Coverdell ESA. Filling out 1040x In this process, the account was transferred into her name. Filling out 1040x Peg now treats the funds in this Coverdell ESA as if she were the original owner. Filling out 1040x Distributions The designated beneficiary of a Coverdell ESA can take a distribution at any time. Filling out 1040x Whether the distributions are tax free depends, in part, on whether the distributions are equal to or less than the amount of Adjusted qualified education expenses (defined later) that the beneficiary has in the same tax year. Filling out 1040x See Table 7-3, Coverdell ESA Distributions at a Glance, for highlights. Filling out 1040x Table 7-3. Filling out 1040x Coverdell ESA Distributions at a Glance Do not rely on this table alone. Filling out 1040x It provides only general highlights. Filling out 1040x See the text for definitions of terms in bold type and for more complete explanations. Filling out 1040x Question Answer Is a distribution from a Coverdell ESA to pay for a designated beneficiary's qualified education expenses tax free? Generally, yes, to the extent the amount of the distribution is not more than the designated beneficiary's adjusted qualified education expenses. Filling out 1040x After the designated beneficiary completes his or her education at an eligible educational institution, can amounts remaining in the Coverdell ESA be distributed? Yes. Filling out 1040x Amounts must be distributed when the designated beneficiary reaches age 30, unless he or she is a special needs beneficiary. Filling out 1040x Also, certain transfers to members of the beneficiary's family are permitted. Filling out 1040x Does the designated beneficiary need to be enrolled for a minimum number of courses to take a tax-free distribution? No. Filling out 1040x Adjusted qualified education expenses. Filling out 1040x   To determine if total distributions for the year are more than the amount of qualified education expenses, reduce total qualified education expenses by any tax-free educational assistance. Filling out 1040x Tax-free educational assistance includes: The tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Filling out 1040x The amount you get by subtracting tax-free educational assistance from your total qualified education expenses is your adjusted qualified education expenses. Filling out 1040x Tax-Free Distributions Generally, distributions are tax free if they are not more than the beneficiary's adjusted qualified education expenses for the year. Filling out 1040x Do not report tax-free distributions (including qualifying rollovers) on your tax return. Filling out 1040x Taxable Distributions A portion of the distributions is generally taxable to the beneficiary if the total distributions are more than the beneficiary's adjusted qualified education expenses for the year. Filling out 1040x Excess distribution. Filling out 1040x   This is the part of the total distribution that is more than the beneficiary's adjusted qualified education expenses for the year. Filling out 1040x Earnings and basis. Filling out 1040x   You will receive a Form 1099-Q for each of the Coverdell ESAs from which money was distributed in 2013. Filling out 1040x The amount of your gross distribution will be shown in box 1. Filling out 1040x For 2013, instead of dividing the gross distribution between your earnings (box 2) and your basis (already-taxed amount) (box 3), the payer or trustee may report the fair market value (account balance) of the Coverdell ESA as of December 31, 2013. Filling out 1040x This will be shown in the blank box below boxes 5 and 6. Filling out 1040x   The amount contributed from survivor benefits (see Military death gratuity , earlier) is treated as part of your basis and will not be taxed when distributed. Filling out 1040x Figuring the Taxable Portion of a Distribution The taxable portion is the amount of the excess distribution that represents earnings that have accumulated tax free in the account. Filling out 1040x Figure the taxable portion for 2013 as shown in the following steps. Filling out 1040x Multiply the total amount distributed by a fraction. Filling out 1040x The numerator is the basis (contributions not previously distributed) at the end of 2012 plus total contributions for 2013 and the denominator is the value (balance) of the account at the end of 2013 plus the amount distributed during 2013. Filling out 1040x Subtract the amount figured in (1) from the total amount distributed during 2013. Filling out 1040x The result is the amount of earnings included in the distribution(s). Filling out 1040x Multiply the amount of earnings figured in (2) by a fraction. Filling out 1040x The numerator is the adjusted qualified education expenses paid during 2013 and the denominator is the total amount distributed during 2013. Filling out 1040x Subtract the amount figured in (3) from the amount figured in (2). Filling out 1040x The result is the amount the beneficiary must include in income. Filling out 1040x The taxable amount must be reported on Form 1040 or Form 1040NR, line 21. Filling out 1040x Example. Filling out 1040x You received an $850 distribution from your Coverdell ESA, to which $1,500 had been contributed before 2013. Filling out 1040x There were no contributions in 2013. Filling out 1040x This is your first distribution from the account, so your basis in the account on December 31, 2012, was $1,500. Filling out 1040x The value (balance) of your account on December 31, 2013, was $950. Filling out 1040x You had $700 of adjusted qualified education expenses (AQEE) for the year. Filling out 1040x Using the steps in Figuring the Taxable Portion of a Distribution , earlier, figure the taxable portion of your distribution as follows. Filling out 1040x   1. Filling out 1040x $850 (distribution) × $1,500 basis + $0 contributions  $950 value + $850 distribution       =$708 (basis portion of distribution)     2. Filling out 1040x $850 (distribution)−$708 (basis portion of distribution)     =$142 (earnings included in distribution)   3. Filling out 1040x $142 (earnings) × $700 AQEE  $850 distribution           =$117 (tax-free earnings)     4. Filling out 1040x $142 (earnings)−$117 (tax-free earnings)=$25 (taxable earnings)                 You must include $25 in income as distributed earnings not used for qualified education expenses. Filling out 1040x Report this amount on Form 1040, line 21, listing the type and amount of income on the dotted line. Filling out 1040x Worksheet 7-3, Coverdell ESA–Taxable Distributions and Basis , at the end of this chapter, can help you figure your adjusted qualified education expenses, how much of your distribution must be included in income, and the remaining basis in your Coverdell ESA(s). Filling out 1040x Coordination With American Opportunity and Lifetime Learning Credits The American opportunity or lifetime learning credit can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits. Filling out 1040x This means the beneficiary must reduce qualified higher education expenses by tax-free educational assistance, and then further reduce them by any expenses taken into account in determining an American opportunity or lifetime learning credit. Filling out 1040x Example. Filling out 1040x Derek Green had $5,800 of qualified higher education expenses for 2013, his first year in college. Filling out 1040x He paid his college expenses from the following sources. Filling out 1040x     Partial tuition scholarship (tax free) $1,500     Coverdell ESA distribution 1,000     Gift from parents 2,100     Earnings from part-time job 1,200           Of his $5,800 of qualified higher education expenses, $4,000 was tuition and related expenses that also qualified for an American opportunity credit. Filling out 1040x Derek's parents claimed a $2,500 American opportunity credit (based on $4,000 expenses) on their tax return. Filling out 1040x Before Derek can determine the taxable portion of his Coverdell ESA distribution, he must reduce his total qualified higher education expenses. Filling out 1040x     Total qualified higher education expenses $5,800     Minus: Tax-free educational assistance −1,500     Minus: Expenses taken into account in  figuring American opportunity credit − 4,000     Equals: Adjusted qualified higher education  expenses (AQHEE) $ 300           Since the adjusted qualified higher education expenses ($300) are less than the Coverdell ESA distribution ($1,000), part of the distribution will be taxable. Filling out 1040x The balance in Derek's account was $1,800 on December 31, 2013. Filling out 1040x Prior to 2013, $2,100 had been contributed to this account. Filling out 1040x Contributions for 2013 totaled $400. Filling out 1040x Using the four steps outlined earlier, Derek figures the taxable portion of his distribution as shown below. Filling out 1040x   1. Filling out 1040x $1,000 (distribution) × $2,100 basis + $400 contributions  $1,800 value + $1,000 distribution           =$893 (basis portion of distribution)     2. Filling out 1040x $1,000 (distribution)−$893 (basis portion of distribution)     = $107 (earnings included in distribution)   3. Filling out 1040x $107 (earnings) × $300 AQHEE  $1,000 distribution       =$32 (tax-free earnings)     4. Filling out 1040x $107 (earnings)−$32 (tax-free earnings)=$75 (taxable earnings)                 Derek must include $75 in income (Form 1040, line 21). Filling out 1040x This is the amount of distributed earnings not used for adjusted qualified higher education expenses. Filling out 1040x Coordination With Qualified Tuition Program (QTP) Distributions If a designated beneficiary receives distributions from both a Coverdell ESA and a QTP in the same year, and the total distribution is more than the beneficiary's adjusted qualified higher education expenses, those expenses must be allocated between the distribution from the Coverdell ESA and the distribution from the QTP before figuring how much of each distribution is taxable. Filling out 1040x The following two examples illustrate possible allocations. Filling out 1040x Example 1. Filling out 1040x In 2013, Beatrice graduated from high school and began her first semester of college. Filling out 1040x That year, she had $1,000 of qualified elementary and secondary education expenses (QESEE) for high school and $3,000 of qualified higher education expenses (QHEE) for college. Filling out 1040x To pay these expenses, Beatrice withdrew $800 from her Coverdell ESA and $4,200 from her QTP. Filling out 1040x No one claimed Beatrice as a dependent, nor was she eligible for an education credit. Filling out 1040x She did not receive any tax-free educational assistance in 2013. Filling out 1040x Beatrice must allocate her total qualified education expenses between the two distributions. Filling out 1040x Beatrice knows that tax-free treatment will be available if she applies her $800 Coverdell ESA distribution toward her $1,000 of qualified education expenses for high school. Filling out 1040x The qualified expenses are greater than the distribution, making the $800 Coverdell ESA distribution tax free. Filling out 1040x Next, Beatrice matches her $4,200 QTP distribution to her $3,000 of QHEE, and finds she has an excess QTP distribution of $1,200 ($4,200 QTP − $3,000 QHEE). Filling out 1040x She cannot use the extra $200 of high school expenses (from (1) above) against the QTP distribution because those expenses do not qualify a QTP for tax-free treatment. Filling out 1040x Finally, Beatrice figures the taxable and tax-free portions of her QTP distribution based on her $3,000 of QHEE. Filling out 1040x (See Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program for more information. Filling out 1040x ) Example 2. Filling out 1040x Assume the same facts as in Example 1 , except that Beatrice withdrew $1,800 from her Coverdell ESA and $3,200 from her QTP. Filling out 1040x In this case, she allocates her qualified education expenses as follows. Filling out 1040x Using the same reasoning as in Example 1, Beatrice matches $1,000 of her Coverdell ESA distribution to her $1,000 of QESEE—she has $800 of her distribution remaining. Filling out 1040x Because higher education expenses can also qualify a Coverdell ESA distribution for tax-free treatment, Beatrice allocates her $3,000 of QHEE between the remaining $800 Coverdell ESA and the $3,200 QTP distributions ($4,000 total). Filling out 1040x   $3,000 QHEE × $800 ESA distribution  $4,000 total distribution = $600 QHEE (ESA)     $3,000 QHEE × $3,200 QTP distribution  $4,000 total distribution = $2,400 QHEE (QTP)   Beatrice then figures the taxable part of her: Coverdell ESA distribution based on qualified education expenses of $1,600 ($1,000 QESEE + $600 QHEE). Filling out 1040x See Figuring the Taxable Portion of a Distribution , earlier, in this chapter. Filling out 1040x   QTP distribution based on her $2,400 of QHEE (see Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program). Filling out 1040x The above examples show two types of allocation between distributions from a Coverdell ESA and a QTP. Filling out 1040x However, you do not have to allocate your expenses in the same way. Filling out 1040x You can use any reasonable method. Filling out 1040x Losses on Coverdell ESA Investments If you have a loss on your investment in a Coverdell ESA, you may be able to deduct the loss on your income tax return. Filling out 1040x You can deduct the loss only when all amounts from that account have been distributed and the total distributions are less than your unrecovered basis. Filling out 1040x Your basis is the total amount of contributions to that Coverdell ESA. Filling out 1040x You claim the loss as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23 (Schedule A (Form 1040NR), line 9), subject to the 2%-of-adjusted-gross-income limit. Filling out 1040x If you have distributions from more than one Coverdell ESA account during a year, you must combine the information (amount of distribution, basis, etc. Filling out 1040x ) from all such accounts in order to determine your taxable earnings for the year. Filling out 1040x By doing this, the loss from one ESA account reduces the distributed earnings (if any) from any other ESA account. Filling out 1040x For examples of the calculation, see Losses on QTP Investments in chapter 8, Qualified Tuition Program. Filling out 1040x Additional Tax on Taxable Distributions Generally, if you receive a taxable distribution, you also must pay a 10% additional tax on the amount included in income. Filling out 1040x Exceptions. Filling out 1040x   The 10% additional tax does not apply to distributions: Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary. Filling out 1040x Made because the designated beneficiary is disabled. Filling out 1040x A person is considered to be disabled if he or she shows proof that he or she cannot do any substantial gainful activity because of his or her physical or mental condition. Filling out 1040x A physician must determine that his or her condition can be expected to result in death or to be of long-continued and indefinite duration. Filling out 1040x Included in income because the designated beneficiary received: A tax-free scholarship or fellowship (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), or Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Filling out 1040x Made on account of the attendance of the designated beneficiary at a U. Filling out 1040x S. Filling out 1040x military academy (such as the USMA at West Point). Filling out 1040x This exception applies only to the extent that the amount of the distribution does not exceed the costs of advanced education (as defined in section 2005(d)(3) of title 10 of the U. Filling out 1040x S. Filling out 1040x Code) attributable to such attendance. Filling out 1040x Included in income only because the qualified education expenses were taken into account in determining the American opportunity or lifetime learning credit (see Coordination With American Opportunity and Lifetime Learning Credits , earlier). Filling out 1040x Made before June 1, 2014, of an excess 2013 contribution (and any earnings on it). Filling out 1040x The distributed earnings must be included in gross income for the year in which the excess contribution was made. Filling out 1040x Exception (3) applies only to the extent the distribution is not more than the scholarship, allowance, or payment. Filling out 1040x Figuring the additional tax. Filling out 1040x    Use Part II of Form 5329, to figure any additional tax. Filling out 1040x Report the amount on Form 1040, line 58, or Form 1040NR, line 56. Filling out 1040x When Assets Must Be Distributed Any assets remaining in a Coverdell ESA must be distributed when either one of the following two events occurs. Filling out 1040x The designated beneficiary reaches age 30. Filling out 1040x In this case, the remaining assets must be distributed within 30 days after the beneficiary reaches age 30. Filling out 1040x However, this rule does not apply if the beneficiary is a special needs beneficiary. Filling out 1040x The designated beneficiary dies before reaching age 30. Filling out 1040x In this case, the remaining assets must generally be distributed within 30 days after the date of death. Filling out 1040x Exception for Transfer to Surviving Spouse or Family Member If a Coverdell ESA is transferred to a surviving spouse or other family member as the result of the death of the designated beneficiary, the Coverdell ESA retains its status. Filling out 1040x (“Family member” was defined earlier under Rollovers . Filling out 1040x ) This means the spouse or other family member can treat the Coverdell ESA as his or her own and does not need to withdraw the assets until he or she reaches age 30. Filling out 1040x This age limitation does not apply if the new beneficiary is a special needs beneficiary. Filling out 1040x There are no tax consequences as a result of the transfer. Filling out 1040x How To Figure the Taxable Earnings When a total distribution is made because the designated beneficiary either reached age 30 or died, the earnings that accumulated tax free in the account must be included in taxable income. Filling out 1040x You determine these earnings as shown in the following two steps. Filling out 1040x Multiply the amount distributed by a fraction. Filling out 1040x The numerator is the basis (contributions not previously distributed) at the end of 2012 plus total contributions for 2013 and the denominator is the balance in the account at the end of 2013 plus the amount distributed during 2013. Filling out 1040x Subtract the amount figured in (1) from the total amount distributed during 2013. Filling out 1040x The result is the amount of earnings included in the distribution. Filling out 1040x For an example, see steps (1) and (2) of the Example under Figuring the Taxable Portion of a Distribution, earlier. Filling out 1040x The beneficiary or other person receiving the distribution must report this amount on Form 1040, line 21, or Form 1040NR, line 21, listing the type and amount of income on the dotted line. Filling out 1040x Worksheet 7-3 Instructions. Filling out 1040x Coverdell ESA—Taxable Distributions and Basis Line G. Filling out 1040x Enter the total distributions received from all Coverdell ESAs during 2013. Filling out 1040x Do not include amounts rolled over to another ESA within 60 days (only one rollover is allowed during any 12-month period). Filling out 1040x Also, do not include excess contributions that were distributed with the related earnings (or less any loss) before the first day of the sixth month of the tax year following the year for which the contributions were made. Filling out 1040x Line 2. Filling out 1040x Your basis (amount already taxed) in this Coverdell ESA as of December 31, 2012, is the total of:   •All contributions to this Coverdell ESA before 2013 •Minus the tax-free portion of any distributions from this Coverdell ESA before 2013. Filling out 1040x   If your last distribution from this Coverdell ESA was before 2013, you must start with the basis in your account as of the end of the last year in which you took a distribution. Filling out 1040x For years before 2002, you can find that amount on the last line of the worksheet in the Instructions for Form 8606, Nondeductible IRAs, that you completed for that year. Filling out 1040x For years after 2001, you can find that amount by using the ending basis from the worksheet in Publication 970 for that year. Filling out 1040x You can determine your basis in this Coverdell ESA as of December 31, 2012, by adding to the basis as of the end of that year any contributions made to that account after the year of the distribution and before 2013. Filling out 1040x Line 4. Filling out 1040x Enter the total distributions received from this Coverdell ESA in 2013. Filling out 1040x Do not include amounts rolled over to another Coverdell ESA within 60 days (only one rollover is allowed during any 12-month period). Filling out 1040x   Also, do not include excess contributions that were distributed with the related earnings (or less any loss) before the first day of the sixth month of the tax year following the year of the contributions. Filling out 1040x Line 7. Filling out 1040x Enter the total value of this Coverdell ESA as of December 31, 2013, plus any outstanding rollovers contributed to the account after 2012, but before the end of the 60-day rollover period. Filling out 1040x A statement should be sent to you by January 31, 2014, for this Coverdell ESA showing the value on December 31, 2013. Filling out 1040x   A rollover is a tax-free withdrawal from one Coverdell ESA that is contributed to another Coverdell ESA. Filling out 1040x An outstanding rollover is any amount withdrawn within 60 days before the end of 2013 (November 2 through December 31) that was rolled over after December 31, 2013, but within the 60-day rollover period. Filling out 1040x Worksheet 7-3. Filling out 1040x Coverdell ESA—Taxable Distributions and Basis How to complete this worksheet. Filling out 1040x • • • Complete Part I, lines A through H, on only one worksheet. Filling out 1040x  Complete a separate Part II, lines 1 through 15, for each of your Coverdell ESAs. Filling out 1040x  Complete Part III, the Summary (line 16), on only one worksheet. Filling out 1040x Part I. Filling out 1040x Qualified Education Expenses (Complete for total expenses)       A. Filling out 1040x Enter your total qualified education expenses for 2013   A. Filling out 1040x   B. Filling out 1040x Enter those qualified education expenses paid for with tax-free educational assistance (for example, tax-free scholarships, veterans' educational benefits, Pell grants, employer-provided educational assistance)   B. Filling out 1040x         C. Filling out 1040x Enter those qualified higher education expenses deducted on Schedule C or C-EZ (Form 1040). Filling out 1040x Schedule F (Form 1040), or as a miscellaneous itemized deduction on Schedule A (Form 1040 or 1040NR)   C. Filling out 1040x         D. Filling out 1040x Enter those qualified higher education expenses on which  an American opportunity or lifetime learning credit was based   D. Filling out 1040x         E. Filling out 1040x Add lines B, C, and D   D. Filling out 1040x   F. Filling out 1040x Subtract line E from line A. Filling out 1040x This is your adjusted qualified education expense for 2013   E. Filling out 1040x   G. Filling out 1040x Enter your total distributions from all Coverdell ESAs during 2013. Filling out 1040x Do not include rollovers  or the return of excess contributions (see instructions)   F. Filling out 1040x   H. Filling out 1040x Divide line F by line G. Filling out 1040x Enter the result as a decimal (rounded to at least 3 places). Filling out 1040x If the  result is 1. Filling out 1040x 000 or more, enter 1. Filling out 1040x 000   G. Filling out 1040x . Filling out 1040x Part II. Filling out 1040x Taxable Distributions and Basis (Complete separately for each account) 1. Filling out 1040x Enter the amount contributed to this Coverdell ESA for 2013, including contributions made for 2013 from January 1, 2014, through April 15, 2014. Filling out 1040x Do not include rollovers or the return of excess contributions   1. Filling out 1040x   2. Filling out 1040x Enter your basis in this Coverdell ESA as of December 31, 2012 (see instructions)   2. Filling out 1040x   3. Filling out 1040x Add lines 1 and 2   3. Filling out 1040x   4. Filling out 1040x Enter the total distributions from this Coverdell ESA during 2013. Filling out 1040x Do not include rollovers  or the return of excess contributions (see instructions)   4. Filling out 1040x   5. Filling out 1040x Multiply line 4 by line H. Filling out 1040x This is the amount of adjusted qualified  education expense attributable to this Coverdell ESA   5. Filling out 1040x         6. Filling out 1040x Subtract line 5 from line 4   6. Filling out 1040x         7. Filling out 1040x Enter the total value of this Coverdell ESA as of December 31, 2013,  plus any outstanding rollovers (see instructions)   7. Filling out 1040x         8. Filling out 1040x Add lines 4 and 7   8. Filling out 1040x         9. Filling out 1040x Divide line 3 by line 8. Filling out 1040x Enter the result as a decimal (rounded to  at least 3 places). Filling out 1040x If the result is 1. Filling out 1040x 000 or more, enter 1. Filling out 1040x 000   9. Filling out 1040x . Filling out 1040x       10. Filling out 1040x Multiply line 4 by line 9. Filling out 1040x This is the amount of basis allocated to your  distributions, and is tax free   10. Filling out 1040x     Note. Filling out 1040x If line 6 is zero, skip lines 11 through 13, enter -0- on line 14, and go to line 15. Filling out 1040x       11. Filling out 1040x Subtract line 10 from line 4   11. Filling out 1040x   12. Filling out 1040x Divide line 5 by line 4. Filling out 1040x Enter the result as a decimal (rounded to  at least 3 places). Filling out 1040x If the result is 1. Filling out 1040x 000 or more, enter 1. Filling out 1040x 000   12. Filling out 1040x . Filling out 1040x       13. Filling out 1040x Multiply line 11 by line 12. Filling out 1040x This is the amount of qualified education  expenses allocated to your distributions, and is tax free   13. Filling out 1040x   14. Filling out 1040x Subtract line 13 from line 11. Filling out 1040x This is the portion of the distributions from this  Coverdell ESA in 2013 that you must include in income   14. Filling out 1040x   15. Filling out 1040x Subtract line 10 from line 3. Filling out 1040x This is your basis in this Coverdell ESA as of December 31, 2013   15. Filling out 1040x   Part III. Filling out 1040x Summary (Complete only once)       16. Filling out 1040x Taxable amount. Filling out 1040x Add together all amounts on line 14 for all your Coverdell ESAs. Filling out 1040x Enter here  and include on Form 1040, line 21, or Form 1040NR, line 21, listing the type and amount of income on the dotted line   16. Filling out 1040x   Prev  Up  Next   Home   More Online Publications
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The Filling Out 1040x

Filling out 1040x 4. Filling out 1040x   How Income of Aliens Is Taxed Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Resident Aliens Nonresident AliensTrade or Business in the United States Effectively Connected Income The 30% Tax Income From Real Property Transportation Tax Interrupted Period of Residence Expatriation TaxExpatriation Before June 4, 2004 Expatriation After June 3, 2004, and Before June 17, 2008 Expatriation After June 16, 2008 Introduction Resident and nonresident aliens are taxed in different ways. Filling out 1040x Resident aliens are generally taxed in the same way as U. Filling out 1040x S. Filling out 1040x citizens. Filling out 1040x Nonresident aliens are taxed based on the source of their income and whether or not their income is effectively connected with a U. Filling out 1040x S. Filling out 1040x trade or business. Filling out 1040x The following discussions will help you determine if income you receive during the tax year is effectively connected with a U. Filling out 1040x S. Filling out 1040x trade or business and how it is taxed. Filling out 1040x Topics - This chapter discusses: Income that is effectively connected with a U. Filling out 1040x S. Filling out 1040x trade or business. Filling out 1040x Income that is not effectively connected with a U. Filling out 1040x S. Filling out 1040x trade or business. Filling out 1040x Interrupted period of residence. Filling out 1040x Expatriation tax. Filling out 1040x Useful Items - You may want to see: Publication 544 Sales and Other Dispositions of Assets 1212 List of Original Issue Discount Instruments Form (and Instructions) 6251 Alternative Minimum Tax—Individuals Schedule D (Form 1040) Capital Gains and Losses See chapter 12 for information about getting these publications and forms. Filling out 1040x Resident Aliens Resident aliens are generally taxed in the same way as U. Filling out 1040x S. Filling out 1040x citizens. Filling out 1040x This means that their worldwide income is subject to U. Filling out 1040x S. Filling out 1040x tax and must be reported on their U. Filling out 1040x S. Filling out 1040x tax return. Filling out 1040x Income of resident aliens is subject to the graduated tax rates that apply to U. Filling out 1040x S. Filling out 1040x citizens. Filling out 1040x Resident aliens use the Tax Table or Tax Computation Worksheets located in the Form 1040 instructions, which apply to U. Filling out 1040x S. Filling out 1040x citizens. Filling out 1040x Nonresident Aliens A nonresident alien's income that is subject to U. Filling out 1040x S. Filling out 1040x income tax must be divided into two categories: Income that is effectively connected with a trade or business in the United States, and Income that is not effectively connected with a trade or business in the United States (discussed under The 30% Tax, later). Filling out 1040x The difference between these two categories is that effectively connected income, after allowable deductions, is taxed at graduated rates. Filling out 1040x These are the same rates that apply to U. Filling out 1040x S. Filling out 1040x citizens and residents. Filling out 1040x Income that is not effectively connected is taxed at a flat 30% (or lower treaty) rate. Filling out 1040x If you were formerly a U. Filling out 1040x S. Filling out 1040x citizen or resident alien, these rules may not apply. Filling out 1040x See Expatriation Tax, later, in this chapter. Filling out 1040x Trade or Business in the United States Generally, you must be engaged in a trade or business during the tax year to be able to treat income received in that year as effectively connected with that trade or business. Filling out 1040x Whether you are engaged in a trade or business in the United States depends on the nature of your activities. Filling out 1040x The discussions that follow will help you determine whether you are engaged in a trade or business in the United States. Filling out 1040x Personal Services If you perform personal services in the United States at any time during the tax year, you usually are considered engaged in a trade or business in the United States. Filling out 1040x Certain compensation paid to a nonresident alien by a foreign employer is not included in gross income. Filling out 1040x For more information, see Services Performed for Foreign Employer in chapter 3. Filling out 1040x Other Trade or Business Activities Other examples of being engaged in a trade or business in the United States follow. Filling out 1040x Students and trainees. Filling out 1040x   You are considered engaged in a trade or business in the United States if you are temporarily present in the United States as a nonimmigrant under an “F,” “J,” “M,” or “Q” visa. Filling out 1040x A nonresident alien temporarily present in the United States under a “J” visa includes a nonresident alien individual admitted to the United States as an exchange visitor under the Mutual Educational and Cultural Exchange Act of 1961. Filling out 1040x The taxable part of any scholarship or fellowship grant that is U. Filling out 1040x S. Filling out 1040x source income is treated as effectively connected with a trade or business in the United States. Filling out 1040x Business operations. Filling out 1040x   If you own and operate a business in the United States selling services, products, or merchandise, you are, with certain exceptions, engaged in a trade or business in the United States. Filling out 1040x Partnerships. Filling out 1040x   If you are a member of a partnership that at any time during the tax year is engaged in a trade or business in the United States, you are considered to be engaged in a trade or business in the United States. Filling out 1040x Beneficiary of an estate or trust. Filling out 1040x   If you are the beneficiary of an estate or trust that is engaged in a trade or business in the United States, you are treated as being engaged in the same trade or business. Filling out 1040x Trading in stocks, securities, and commodities. Filling out 1040x   If your only U. Filling out 1040x S. Filling out 1040x business activity is trading in stocks, securities, or commodities (including hedging transactions) through a U. Filling out 1040x S. Filling out 1040x resident broker or other agent, you are not engaged in a trade or business in the United States. Filling out 1040x   For transactions in stocks or securities, this applies to any nonresident alien, including a dealer or broker in stocks and securities. Filling out 1040x   For transactions in commodities, this applies to commodities that are usually traded on an organized commodity exchange and to transactions that are usually carried out at such an exchange. Filling out 1040x   This discussion does not apply if you have a U. Filling out 1040x S. Filling out 1040x office or other fixed place of business at any time during the tax year through which, or by the direction of which, you carry out your transactions in stocks, securities, or commodities. Filling out 1040x Trading for a nonresident alien's own account. Filling out 1040x   You are not engaged in a trade or business in the United States if trading for your own account in stocks, securities, or commodities is your only U. Filling out 1040x S. Filling out 1040x business activity. Filling out 1040x This applies even if the trading takes place while you are present in the United States or is done by your employee or your broker or other agent. Filling out 1040x   This does not apply to trading for your own account if you are a dealer in stocks, securities, or commodities. Filling out 1040x This does not necessarily mean, however, that as a dealer you are considered to be engaged in a trade or business in the United States. Filling out 1040x Determine that based on the facts and circumstances in each case or under the rules given above in Trading in stocks, securities, and commodities . Filling out 1040x Effectively Connected Income If you are engaged in a U. Filling out 1040x S. Filling out 1040x trade or business, all income, gain, or loss for the tax year that you get from sources within the United States (other than certain investment income) is treated as effectively connected income. Filling out 1040x This applies whether or not there is any connection between the income and the trade or business being carried on in the United States during the tax year. Filling out 1040x Two tests, described next under Investment Income, determine whether certain items of investment income (such as interest, dividends, and royalties) are treated as effectively connected with that business. Filling out 1040x In limited circumstances, some kinds of foreign source income may be treated as effectively connected with a trade or business in the United States. Filling out 1040x For a discussion of these rules, see Foreign Income , later. Filling out 1040x Investment Income Investment income from U. Filling out 1040x S. Filling out 1040x sources that may or may not be treated as effectively connected with a U. Filling out 1040x S. Filling out 1040x trade or business generally falls into the following three categories. Filling out 1040x Fixed or determinable income (interest, dividends, rents, royalties, premiums, annuities, etc. Filling out 1040x ). Filling out 1040x Gains (some of which are considered capital gains) from the sale or exchange of the following types of property. Filling out 1040x Timber, coal, or domestic iron ore with a retained economic interest. Filling out 1040x Patents, copyrights, and similar property on which you receive contingent payments after October 4, 1966. Filling out 1040x Patents transferred before October 5, 1966. Filling out 1040x Original issue discount obligations. Filling out 1040x Capital gains (and losses). Filling out 1040x Use the two tests, described next, to determine whether an item of U. Filling out 1040x S. Filling out 1040x source income falling in one of the three categories above and received during the tax year is effectively connected with your U. Filling out 1040x S. Filling out 1040x trade or business. Filling out 1040x If the tests indicate that the item of income is effectively connected, you must include it with your other effectively connected income. Filling out 1040x If the item of income is not effectively connected, include it with all other income discussed under The 30% Tax later, in this chapter. Filling out 1040x Asset-use test. Filling out 1040x   This test usually applies to income that is not directly produced by trade or business activities. Filling out 1040x Under this test, if an item of income is from assets (property) used in, or held for use in, the trade or business in the United States, it is considered effectively connected. Filling out 1040x   An asset is used in, or held for use in, the trade or business in the United States if the asset is: Held for the principal purpose of promoting the conduct of a trade or business in the United States, Acquired and held in the ordinary course of the trade or business conducted in the United States (for example, an account receivable or note receivable arising from that trade or business), or Otherwise held to meet the present needs of the trade or business in the United States and not its anticipated future needs. Filling out 1040x Generally, stock of a corporation is not treated as an asset used in, or held for use in, a trade or business in the United States. Filling out 1040x Business-activities test. Filling out 1040x   This test usually applies when income, gain, or loss comes directly from the active conduct of the trade or business. Filling out 1040x The business-activities test is most important when: Dividends or interest are received by a dealer in stocks or securities, Royalties are received in the trade or business of licensing patents or similar property, or Service fees are earned by a servicing business. Filling out 1040x Under this test, if the conduct of the U. Filling out 1040x S. Filling out 1040x trade or business was a material factor in producing the income, the income is considered effectively connected. Filling out 1040x Personal Service Income You usually are engaged in a U. Filling out 1040x S. Filling out 1040x trade or business when you perform personal services in the United States. Filling out 1040x Personal service income you receive in a tax year in which you are engaged in a U. Filling out 1040x S. Filling out 1040x trade or business is effectively connected with a U. Filling out 1040x S. Filling out 1040x trade or business. Filling out 1040x Income received in a year other than the year you performed the services is also effectively connected if it would have been effectively connected if received in the year you performed the services. Filling out 1040x Personal service income includes wages, salaries, commissions, fees, per diem allowances, and employee allowances and bonuses. Filling out 1040x The income may be paid to you in the form of cash, services, or property. Filling out 1040x If you are engaged in a U. Filling out 1040x S. Filling out 1040x trade or business only because you perform personal services in the United States during the tax year, income and gains from assets, and gains and losses from the sale or exchange of capital assets are generally not effectively connected with your trade or business. Filling out 1040x However, if there is a direct economic relationship between your holding of the asset and your trade or business of performing personal services, the income, gain, or loss is effectively connected. Filling out 1040x Pensions. Filling out 1040x   If you were a nonresident alien engaged in a U. Filling out 1040x S. Filling out 1040x trade or business after 1986 because you performed personal services in the United States, and you later receive a pension or retirement pay attributable to these services, such payments are effectively connected income in each year you receive them. Filling out 1040x This is true whether or not you are engaged in a U. Filling out 1040x S. Filling out 1040x trade or business in the year you receive the retirement pay. Filling out 1040x Transportation Income Transportation income (defined in chapter 2) is effectively connected if you meet both of the following conditions. Filling out 1040x You had a fixed place of business in the United States involved in earning the income. Filling out 1040x At least 90% of your U. Filling out 1040x S. Filling out 1040x source transportation income is attributable to regularly scheduled transportation. Filling out 1040x “Fixed place of business” generally means a place, site, structure, or other similar facility through which you engage in a trade or business. Filling out 1040x “Regularly scheduled transportation” means that a ship or aircraft follows a published schedule with repeated sailings or flights at regular intervals between the same points for voyages or flights that begin or end in the United States. Filling out 1040x This definition applies to both scheduled and chartered air transportation. Filling out 1040x If you do not meet the two conditions above, the income is not effectively connected and is taxed at a 4% rate. Filling out 1040x See Transportation Tax, later, in this chapter. Filling out 1040x Business Profits and Losses and Sales Transactions All profits or losses from U. Filling out 1040x S. Filling out 1040x sources that are from the operation of a business in the United States are effectively connected with a trade or business in the United States. Filling out 1040x For example, profit from the sale in the United States of inventory property purchased either in this country or in a foreign country is effectively connected trade or business income. Filling out 1040x A share of U. Filling out 1040x S. Filling out 1040x source profits or losses of a partnership that is engaged in a trade or business in the United States is also effectively connected with a trade or business in the United States. Filling out 1040x Real Property Gain or Loss Gains and losses from the sale or exchange of U. Filling out 1040x S. Filling out 1040x real property interests (whether or not they are capital assets) are taxed as if you are engaged in a trade or business in the United States. Filling out 1040x You must treat the gain or loss as effectively connected with that trade or business. Filling out 1040x U. Filling out 1040x S. Filling out 1040x real property interest. Filling out 1040x   This is any interest in real property located in the United States or the U. Filling out 1040x S. Filling out 1040x Virgin Islands or any interest (other than as a creditor) in a domestic corporation that is a U. Filling out 1040x S. Filling out 1040x real property holding corporation. Filling out 1040x Real property includes the following. Filling out 1040x Land and unsevered natural products of the land, such as growing crops and timber, and mines, wells, and other natural deposits. Filling out 1040x Improvements on land, including buildings, other permanent structures, and their structural components. Filling out 1040x Personal property associated with the use of real property, such as equipment used in farming, mining, forestry, or construction or property used in lodging facilities or rented office space, unless the personal property is: Disposed of more than one year before or after the disposition of the real property, or Separately sold to persons unrelated either to the seller or to the buyer of the real property. Filling out 1040x U. Filling out 1040x S. Filling out 1040x real property holding corporation. Filling out 1040x   A corporation is a U. Filling out 1040x S. Filling out 1040x real property holding corporation if the fair market value of the corporation's U. Filling out 1040x S. Filling out 1040x real property interests are at least 50% of the total fair market value of: The corporation's U. Filling out 1040x S. Filling out 1040x real property interests, plus The corporation's interests in real property located outside the United States, plus The corporation's other assets that are used in, or held for use in, a trade or business. Filling out 1040x   Gain or loss on the sale of the stock in any domestic corporation is taxed as if you are engaged in a U. Filling out 1040x S. Filling out 1040x trade or business unless you establish that the corporation is not a U. Filling out 1040x S. Filling out 1040x real property holding corporation. Filling out 1040x   A U. Filling out 1040x S. Filling out 1040x real property interest does not include a class of stock of a corporation that is regularly traded on an established securities market, unless you hold more than 5% of the fair market value of that class of stock. Filling out 1040x An interest in a foreign corporation owning U. Filling out 1040x S. Filling out 1040x real property generally is not a U. Filling out 1040x S. Filling out 1040x real property interest unless the corporation chooses to be treated as a domestic corporation. Filling out 1040x Qualified investment entities. Filling out 1040x   Special rules apply to qualified investment entities (QIEs). Filling out 1040x A QIE is any real estate investment trust (REIT) or any regulated investment company (RIC) that is a U. Filling out 1040x S. Filling out 1040x real property holding corporation. Filling out 1040x    Generally, any distribution from a QIE to a shareholder that is attributable to gain from the sale or exchange of a U. Filling out 1040x S. Filling out 1040x real property interest is treated as a U. Filling out 1040x S. Filling out 1040x real property gain by the shareholder receiving the distribution. Filling out 1040x A distribution by a QIE on stock regularly traded on an established securities market in the United States is not treated as gain from the sale or exchange of a U. Filling out 1040x S. Filling out 1040x real property interest if you did not own more than 5% of that stock at any time during the 1-year period ending on the date of the distribution. Filling out 1040x A distribution that you do not treat as gain from the sale or exchange of a U. Filling out 1040x S. Filling out 1040x real property interest is included in your gross income as a regular dividend. Filling out 1040x Note. Filling out 1040x Beginning January 1, 2014 (unless extended by legislation), a RIC that is a U. Filling out 1040x S. Filling out 1040x real property holding corporation will only be treated as a QIE for certain distributions from the RIC that are directly or indirectly attributable to distributions received by the RIC from a REIT. Filling out 1040x Domestically controlled QIE. Filling out 1040x   The sale of an interest in a domestically controlled QIE is not the sale of a U. Filling out 1040x S. Filling out 1040x real property interest. Filling out 1040x The entity is domestically controlled if at all times during the testing period less than 50% in value of its stock was held, directly or indirectly, by foreign persons. Filling out 1040x The testing period is the shorter of (a) the 5-year period ending on the date of disposition, or (b) the period during which the entity was in existence. Filling out 1040x Wash sale. Filling out 1040x    If you dispose of an interest in a domestically controlled QIE in an applicable wash sale transaction, special rules apply. Filling out 1040x An applicable wash sale transaction is one in which you: Dispose of an interest in the domestically controlled QIE during the 30-day period before the ex-dividend date of a distribution that you would (but for the disposition) have treated as gain from the sale or exchange of a U. Filling out 1040x S. Filling out 1040x real property interest, and Acquire, or enter into a contract or option to acquire, a substantially identical interest in that entity during the 61-day period that began on the first day of the 30-day period. Filling out 1040x If this occurs, you are treated as having gain from the sale or exchange of a U. Filling out 1040x S. Filling out 1040x real property interest in an amount equal to the distribution made after June 15, 2006, that would have been treated as such gain. Filling out 1040x This also applies to any substitute dividend payment. Filling out 1040x   A transaction is not treated as an applicable wash sale transaction if: You actually receive the distribution from the domestically controlled QIE related to the interest disposed of, or acquired, in the transaction, or You dispose of any class of stock in a QIE that is regularly traded on an established securities market in the United States but only if you did not own more than 5% of that class of stock at any time during the 1-year period ending on the date of the distribution. Filling out 1040x Alternative minimum tax. Filling out 1040x   There may be a minimum tax on your net gain from the disposition of U. Filling out 1040x S. Filling out 1040x real property interests. Filling out 1040x Figure the amount of this tax, if any, on Form 6251. Filling out 1040x Withholding of tax. Filling out 1040x   If you dispose of a U. Filling out 1040x S. Filling out 1040x real property interest, the buyer may have to withhold tax. Filling out 1040x See the discussion of Tax Withheld on Real Property Sales in chapter 8. Filling out 1040x Foreign Income You must treat three kinds of foreign source income as effectively connected with a trade or business in the United States if: You have an office or other fixed place of business in the United States to which the income can be attributed, That office or place of business is a material factor in producing the income, and The income is produced in the ordinary course of the trade or business carried on through that office or other fixed place of business. Filling out 1040x An office or other fixed place of business is a material factor if it significantly contributes to, and is an essential economic element in, the earning of the income. Filling out 1040x The three kinds of foreign source income are listed below. Filling out 1040x Rents and royalties for the use of, or for the privilege of using, intangible personal property located outside the United States or from any interest in such property. Filling out 1040x Included are rents or royalties for the use, or for the privilege of using, outside the United States, patents, copyrights, secret processes and formulas, goodwill, trademarks, trade brands, franchises, and similar properties if the rents or royalties are from the active conduct of a trade or business in the United States. Filling out 1040x Dividends, interest, or amounts received for the provision of a guarantee of indebtedness issued after September 27, 2010, from the active conduct of a banking, financing, or similar business in the United States. Filling out 1040x A substitute dividend or interest payment received under a securities lending transaction or a sale-repurchase transaction is treated the same as the amounts received on the transferred security. Filling out 1040x Income, gain, or loss from the sale outside the United States, through the U. Filling out 1040x S. Filling out 1040x office or other fixed place of business, of: Stock in trade, Property that would be included in inventory if on hand at the end of the tax year, or Property held primarily for sale to customers in the ordinary course of business. Filling out 1040x Item (3) will not apply if you sold the property for use, consumption, or disposition outside the United States and an office or other fixed place of business in a foreign country was a material factor in the sale. Filling out 1040x Any foreign source income that is equivalent to any item of income described above is treated as effectively connected with a U. Filling out 1040x S. Filling out 1040x trade or business. Filling out 1040x For example, foreign source interest and dividend equivalents are treated as U. Filling out 1040x S. Filling out 1040x effectively connected income if the income is derived by a foreign person in the active conduct of a banking, financing, or similar business within the United States. Filling out 1040x Tax on Effectively Connected Income Income you receive during the tax year that is effectively connected with your trade or business in the United States is, after allowable deductions, taxed at the rates that apply to U. Filling out 1040x S. Filling out 1040x citizens and residents. Filling out 1040x Generally, you can receive effectively connected income only if you are a nonresident alien engaged in trade or business in the United States during the tax year. Filling out 1040x However, income you receive from the sale or exchange of property, the performance of services, or any other transaction in another tax year is treated as effectively connected in that year if it would have been effectively connected in the year the transaction took place or you performed the services. Filling out 1040x Example. Filling out 1040x Ted Richards, a nonresident alien, entered the United States in August 2012, to perform personal services in the U. Filling out 1040x S. Filling out 1040x office of his overseas employer. Filling out 1040x He worked in the U. Filling out 1040x S. Filling out 1040x office until December 25, 2012, but did not leave this country until January 11, 2013. Filling out 1040x On January 8, 2013, he received his final paycheck for services performed in the United States during 2012. Filling out 1040x All of Ted's income during his stay here is U. Filling out 1040x S. Filling out 1040x source income. Filling out 1040x During 2012, Ted was engaged in the trade or business of performing personal services in the United States. Filling out 1040x Therefore, all amounts paid to him in 2012 for services performed in the United States during 2012 are effectively connected with that trade or business during 2012. Filling out 1040x The salary payment Ted received in January 2013 is U. Filling out 1040x S. Filling out 1040x source income to him in 2013. Filling out 1040x It is effectively connected with a trade or business in the United States because he was engaged in a trade or business in the United States during 2012 when he performed the services that earned the income. Filling out 1040x Real property income. Filling out 1040x   You may be able to choose to treat all income from real property as effectively connected. Filling out 1040x See Income From Real Property , later, in this chapter. Filling out 1040x The 30% Tax Tax at a 30% (or lower treaty) rate applies to certain items of income or gains from U. Filling out 1040x S. Filling out 1040x sources but only if the items are not effectively connected with your U. Filling out 1040x S. Filling out 1040x trade or business. Filling out 1040x Fixed or Determinable Income The 30% (or lower treaty) rate applies to the gross amount of U. Filling out 1040x S. Filling out 1040x source fixed or determinable annual or periodic gains, profits, or income. Filling out 1040x Income is fixed when it is paid in amounts known ahead of time. Filling out 1040x Income is determinable whenever there is a basis for figuring the amount to be paid. Filling out 1040x Income can be periodic if it is paid from time to time. Filling out 1040x It does not have to be paid annually or at regular intervals. Filling out 1040x Income can be determinable or periodic even if the length of time during which the payments are made is increased or decreased. Filling out 1040x Items specifically included as fixed or determinable income are interest (other than original issue discount), dividends, dividend equivalent payments (defined in chapter 2), rents, premiums, annuities, salaries, wages, and other compensation. Filling out 1040x A substitute dividend or interest payment received under a securities lending transaction or a sale-repurchase transaction is treated the same as the amounts received on the transferred security. Filling out 1040x Other items of income, such as royalties, also may be subject to the 30% tax. Filling out 1040x Some fixed or determinable income may be exempt from U. Filling out 1040x S. Filling out 1040x tax. Filling out 1040x See chapter 3 if you are not sure whether the income is taxable. Filling out 1040x Original issue discount (OID). Filling out 1040x   If you sold, exchanged, or received a payment on a bond or other debt instrument that was issued at a discount after March 31, 1972, all or part of the original issue discount (OID) (other than portfolio interest) may be subject to the 30% tax. Filling out 1040x The amount of OID is the difference between the stated redemption price at maturity and the issue price of the debt instrument. Filling out 1040x The 30% tax applies in the following circumstances. Filling out 1040x You received a payment on a debt instrument. Filling out 1040x In this case, the amount of OID subject to tax is the OID that accrued while you held the debt instrument minus the OID previously taken into account. Filling out 1040x But the tax on the OID cannot be more than the payment minus the tax on the interest payment on the debt instrument. Filling out 1040x You sold or exchanged the debt instrument. Filling out 1040x The amount of OID subject to tax is the OID that accrued while you held the debt instrument minus the amount already taxed in (1) above. Filling out 1040x   Report on your return the amount of OID shown on Form 1042-S, Foreign Person's U. Filling out 1040x S. Filling out 1040x Source Income Subject to Withholding, if you bought the debt instrument at original issue. Filling out 1040x However, you must recompute your proper share of OID shown on Form 1042-S if any of the following apply. Filling out 1040x You bought the debt instrument at a premium or paid an acquisition premium. Filling out 1040x The debt instrument is a stripped bond or a stripped coupon (including zero coupon instruments backed by U. Filling out 1040x S. Filling out 1040x Treasury securities). Filling out 1040x The debt instrument is a contingent payment or inflation-indexed debt instrument. Filling out 1040x For the definition of premium and acquisition premium and instructions on how to recompute OID, get Publication 1212. Filling out 1040x   If you held a bond or other debt instrument that was issued at a discount before April 1, 1972, contact the IRS for further information. Filling out 1040x See chapter 12. Filling out 1040x Gambling Winnings In general, nonresident aliens are subject to the 30% tax on the gross proceeds from gambling won in the United States if that income is not effectively connected with a U. Filling out 1040x S. Filling out 1040x trade or business and is not exempted by treaty. Filling out 1040x However, no tax is imposed on nonbusiness gambling income a nonresident alien wins playing blackjack, baccarat, craps, roulette, or big-6 wheel in the United States. Filling out 1040x Nonresident aliens are taxed at graduated rates on net gambling income won in the United States that is effectively connected with a U. Filling out 1040x S. Filling out 1040x trade or business. Filling out 1040x Social Security Benefits A nonresident alien must include 85% of any U. Filling out 1040x S. Filling out 1040x social security benefit (and the social security equivalent part of a tier 1 railroad retirement benefit) in U. Filling out 1040x S. Filling out 1040x source fixed or determinable annual or periodic income. Filling out 1040x Social security benefits include monthly retirement, survivor, and disability benefits. Filling out 1040x This income is exempt under some tax treaties. Filling out 1040x See Table 1 in Publication 901, U. Filling out 1040x S. Filling out 1040x Tax Treaties, for a list of tax treaties that exempt U. Filling out 1040x S. Filling out 1040x social security benefits from U. Filling out 1040x S. Filling out 1040x tax. Filling out 1040x Sales or Exchanges of Capital Assets These rules apply only to those capital gains and losses from sources in the United States that are not effectively connected with a trade or business in the United States. Filling out 1040x They apply even if you are engaged in a trade or business in the United States. Filling out 1040x These rules do not apply to the sale or exchange of a U. Filling out 1040x S. Filling out 1040x real property interest or to the sale of any property that is effectively connected with a trade or business in the United States. Filling out 1040x See Real Property Gain or Loss , earlier, under Effectively Connected Income. Filling out 1040x A capital asset is everything you own except: Inventory. Filling out 1040x Business accounts or notes receivable. Filling out 1040x Depreciable property used in a trade or business. Filling out 1040x Real property used in a trade or business. Filling out 1040x Supplies regularly used in a trade or business. Filling out 1040x Certain copyrights, literary or musical or artistic compositions, letters or memoranda, or similar property. Filling out 1040x Certain U. Filling out 1040x S. Filling out 1040x government publications. Filling out 1040x Certain commodities derivative financial instruments held by a commodities derivatives dealer. Filling out 1040x Hedging transactions. Filling out 1040x A capital gain is a gain on the sale or exchange of a capital asset. Filling out 1040x A capital loss is a loss on the sale or exchange of a capital asset. Filling out 1040x If the sale is in foreign currency, for the purpose of determining gain, the cost and selling price of the property should be expressed in U. Filling out 1040x S. Filling out 1040x currency at the rate of exchange prevailing as of the date of the purchase and date of the sale, respectively. Filling out 1040x You may want to read Publication 544. Filling out 1040x However, use Publication 544 only to determine what is a sale or exchange of a capital asset, or what is treated as such. Filling out 1040x Specific tax treatment that applies to U. Filling out 1040x S. Filling out 1040x citizens or residents generally does not apply to you. Filling out 1040x The following gains are subject to the 30% (or lower treaty) rate without regard to the 183-day rule, discussed later. Filling out 1040x Gains on the disposal of timber, coal, or domestic iron ore with a retained economic interest. Filling out 1040x Gains on contingent payments received from the sale or exchange of patents, copyrights, and similar property after October 4, 1966. Filling out 1040x Gains on certain transfers of all substantial rights to, or an undivided interest in, patents if the transfers were made before October 5, 1966. Filling out 1040x Gains on the sale or exchange of original issue discount obligations. Filling out 1040x Gains in (1) are not subject to the 30% (or lower treaty) rate if you choose to treat the gains as effectively connected with a U. Filling out 1040x S. Filling out 1040x trade or business. Filling out 1040x See Income From Real Property , later. Filling out 1040x 183-day rule. Filling out 1040x   If you were in the United States for 183 days or more during the tax year, your net gain from sales or exchanges of capital assets is taxed at a 30% (or lower treaty) rate. Filling out 1040x For purposes of the 30% (or lower treaty) rate, net gain is the excess of your capital gains from U. Filling out 1040x S. Filling out 1040x sources over your capital losses from U. Filling out 1040x S. Filling out 1040x sources. Filling out 1040x This rule applies even if any of the transactions occurred while you were not in the United States. Filling out 1040x   To determine your net gain, consider the amount of your gains and losses that would be recognized and taken into account only if, and to the extent that, they would be recognized and taken into account if you were in a U. Filling out 1040x S. Filling out 1040x trade or business during the year and the gains and losses were effectively connected with that trade or business during the tax year. Filling out 1040x   In arriving at your net gain, do not take the following into consideration. Filling out 1040x The four types of gains listed earlier. Filling out 1040x The deduction for a capital loss carryover. Filling out 1040x Capital losses in excess of capital gains. Filling out 1040x Exclusion for gain from the sale or exchange of qualified small business stock (section 1202 exclusion). Filling out 1040x Losses from the sale or exchange of property held for personal use. Filling out 1040x However, losses resulting from casualties or thefts may be deductible on Schedule A (Form 1040NR). Filling out 1040x See Itemized Deductions in chapter 5. Filling out 1040x   If you are not engaged in a trade or business in the United States and have not established a tax year for a prior period, your tax year will be the calendar year for purposes of the 183-day rule. Filling out 1040x Also, you must file your tax return on a calendar-year basis. Filling out 1040x   If you were in the United States for less than 183 days during the tax year, capital gains (other than gains listed earlier) are tax exempt unless they are effectively connected with a trade or business in the United States during your tax year. Filling out 1040x Reporting. Filling out 1040x   Report your gains and losses from the sales or exchanges of capital assets that are not effectively connected with a trade or business in the United States on page 4 of Form 1040NR. Filling out 1040x Report gains and losses from sales or exchanges of capital assets (including real property) that are effectively connected with a trade or business in the United States on a separate Schedule D (Form 1040), Form 4797, or both. Filling out 1040x Attach them to Form 1040NR. Filling out 1040x Income From Real Property If you have income from real property located in the United States that you own or have an interest in and hold for the production of income, you can choose to treat all income from that property as income effectively connected with a trade or business in the United States. Filling out 1040x The choice applies to all income from real property located in the United States and held for the production of income and to all income from any interest in such property. Filling out 1040x This includes income from rents, royalties from mines, oil or gas wells, or other natural resources. Filling out 1040x It also includes gains from the sale or exchange of timber, coal, or domestic iron ore with a retained economic interest. Filling out 1040x You can make this choice only for real property income that is not otherwise effectively connected with your U. Filling out 1040x S. Filling out 1040x trade or business. Filling out 1040x If you make the choice, you can claim deductions attributable to the real property income and only your net income from real property is taxed. Filling out 1040x This choice does not treat a nonresident alien, who is not otherwise engaged in a U. Filling out 1040x S. Filling out 1040x trade or business, as being engaged in a trade or business in the United States during the year. Filling out 1040x Example. Filling out 1040x You are a nonresident alien and are not engaged in a U. Filling out 1040x S. Filling out 1040x trade or business. Filling out 1040x You own a single-family house in the United States that you rent out. Filling out 1040x Your rental income for the year is $10,000. Filling out 1040x This is your only U. Filling out 1040x S. Filling out 1040x source income. Filling out 1040x As discussed earlier under The 30% Tax, the rental income is subject to a tax at a 30% (or lower treaty) rate. Filling out 1040x You received a Form 1042-S showing that your tenants properly withheld this tax from the rental income. Filling out 1040x You do not have to file a U. Filling out 1040x S. Filling out 1040x tax return (Form 1040NR) because your U. Filling out 1040x S. Filling out 1040x tax liability is satisfied by the withholding of tax. Filling out 1040x If you make the choice discussed earlier, you can offset the $10,000 income by certain rental expenses. Filling out 1040x (See Publication 527, Residential Rental Property, for information on rental expenses. Filling out 1040x ) Any resulting net income is taxed at graduated rates. Filling out 1040x If you make this choice, report the rental income and expenses on Schedule E (Form 1040) and attach the schedule to Form 1040NR. Filling out 1040x For the first year you make the choice, also attach the statement discussed next. Filling out 1040x Making the choice. Filling out 1040x   Make the initial choice by attaching a statement to your return, or amended return, for the year of the choice. Filling out 1040x Include the following in your statement. Filling out 1040x That you are making the choice. Filling out 1040x Whether the choice is under Internal Revenue Code section 871(d) (explained earlier) or a tax treaty. Filling out 1040x A complete list of all your real property, or any interest in real property, located in the United States. Filling out 1040x Give the legal identification of U. Filling out 1040x S. Filling out 1040x timber, coal, or iron ore in which you have an interest. Filling out 1040x The extent of your ownership in the property. Filling out 1040x The location of the property. Filling out 1040x A description of any major improvements to the property. Filling out 1040x The dates you owned the property. Filling out 1040x Your income from the property. Filling out 1040x Details of any previous choices and revocations of the real property income choice. Filling out 1040x   This choice stays in effect for all later tax years unless you revoke it. Filling out 1040x Revoking the choice. Filling out 1040x   You can revoke the choice without IRS approval by filing Form 1040X, Amended U. Filling out 1040x S. Filling out 1040x Individual Income Tax Return, for the year you made the choice and for later tax years. Filling out 1040x You must file Form 1040X within 3 years from the date your return was filed or 2 years from the time the tax was paid, whichever is later. Filling out 1040x If this time period has expired for the year of choice, you cannot revoke the choice for that year. Filling out 1040x However, you may revoke the choice for later tax years only if you have IRS approval. Filling out 1040x For information on how to get IRS approval, see Regulation section 1. Filling out 1040x 871-10(d)(2). Filling out 1040x Transportation Tax A 4% tax rate applies to transportation income that is not effectively connected because it does not meet the two conditions listed earlier under Transportation Income . Filling out 1040x If you receive transportation income subject to the 4% tax, you should figure the tax and show it on line 57 of Form 1040NR. Filling out 1040x Attach a statement to your return that includes the following information (if applicable). Filling out 1040x Your name, taxpayer identification number, and tax year. Filling out 1040x A description of the types of services performed (whether on or off board). Filling out 1040x Names of vessels or registration numbers of aircraft on which you performed the services. Filling out 1040x Amount of U. Filling out 1040x S. Filling out 1040x source transportation income derived from each type of service for each vessel or aircraft for the calendar year. Filling out 1040x Total amount of U. Filling out 1040x S. Filling out 1040x source transportation income derived from all types of services for the calendar year. Filling out 1040x This 4% tax applies to your U. Filling out 1040x S. Filling out 1040x source gross transportation income. Filling out 1040x This only includes transportation income that is treated as derived from sources in the United States if the transportation begins or ends in the United States. Filling out 1040x For transportation income from personal services, the transportation must be between the United States and a U. Filling out 1040x S. Filling out 1040x possession. Filling out 1040x For personal services of a nonresident alien, this only applies to income derived from, or in connection with, an aircraft. Filling out 1040x Interrupted Period of Residence You are subject to tax under a special rule if you interrupt your period of U. Filling out 1040x S. Filling out 1040x residence with a period of nonresidence. Filling out 1040x The special rule applies if you meet all of the following conditions. Filling out 1040x You were a U. Filling out 1040x S. Filling out 1040x resident for a period that includes at least 3 consecutive calendar years. Filling out 1040x You were a U. Filling out 1040x S. Filling out 1040x resident for at least 183 days in each of those years. Filling out 1040x You ceased to be treated as a U. Filling out 1040x S. Filling out 1040x resident. Filling out 1040x You then again became a U. Filling out 1040x S. Filling out 1040x resident before the end of the third calendar year after the end of the period described in (1) above. Filling out 1040x Under this special rule, you are subject to tax on your U. Filling out 1040x S. Filling out 1040x source gross income and gains on a net basis at the graduated rates applicable to individuals (with allowable deductions) for the period you were a nonresident alien, unless you would be subject to a higher tax under the 30% tax (discussed earlier) on income not connected with a U. Filling out 1040x S. Filling out 1040x trade or business. Filling out 1040x For information on how to figure the special tax, see How To Figure the Expatriation Tax (If You Expatriated Before June 17, 2008) under Expatriation Tax , below. Filling out 1040x Example. Filling out 1040x John Willow, a citizen of New Zealand, entered the United States on April 1, 2008, as a lawful permanent resident. Filling out 1040x On August 1, 2010, John ceased to be a lawful permanent resident and returned to New Zealand. Filling out 1040x During his period of residence, he was present in the United States for at least 183 days in each of three consecutive years (2008, 2009, and 2010). Filling out 1040x He returned to the United States on October 5, 2013, as a lawful permanent resident. Filling out 1040x He became a resident before the close of the third calendar year (2013) beginning after the end of his first period of residence (August 1, 2010). Filling out 1040x Therefore, he is subject to tax under the special rule for the period of nonresidence (August 2, 2010, through October 4, 2013) if it is more than the tax that would normally apply to him as a nonresident alien. Filling out 1040x Reporting requirements. Filling out 1040x   If you are subject to this tax for any year in the period you were a nonresident alien, you must file Form 1040NR for that year. Filling out 1040x The return is due by the due date (including extensions) for filing your U. Filling out 1040x S. Filling out 1040x income tax return for the year that you again become a U. Filling out 1040x S. Filling out 1040x resident. Filling out 1040x If you already filed returns for that period, you must file amended returns. Filling out 1040x You must attach a statement to your return that identifies the source of all of your U. Filling out 1040x S. Filling out 1040x and foreign gross income and the items of income subject to this special rule. Filling out 1040x Expatriation Tax The expatriation tax provisions apply to U. Filling out 1040x S. Filling out 1040x citizens who have renounced their citizenship and long-term residents who have ended their residency. Filling out 1040x The rules that apply are based on the dates of expatriation, which are described in the following sections. Filling out 1040x Expatriation Before June 4, 2004. Filling out 1040x Expatriation After June 3, 2004, and Before June 17, 2008. Filling out 1040x Expatriation After June 16, 2008. Filling out 1040x Long-term resident defined. Filling out 1040x   You are a long-term resident if you were a lawful permanent resident of the United States in at least 8 of the last 15 tax years ending with the year your residency ends. Filling out 1040x In determining if you meet the 8-year requirement, do not count any year that you are treated as a resident of a foreign country under a tax treaty and do not waive treaty benefits. Filling out 1040x Expatriation Before June 4, 2004 If you expatriated before June 4, 2004, the expatriation rules apply if one of the principal purposes of the action is the avoidance of U. Filling out 1040x S. Filling out 1040x taxes. Filling out 1040x Unless you received a ruling from the IRS that you did not expatriate to avoid U. Filling out 1040x S. Filling out 1040x taxes, you are presumed to have tax avoidance as a principal purpose if: Your average annual net income tax for the last 5 tax years ending before the date of your action to relinquish your citizenship or terminate your residency was more than $100,000, or Your net worth on the date of your action was $500,000 or more. Filling out 1040x The amounts above are adjusted for inflation if your expatriation action is after 1997 (see Table 4-1). Filling out 1040x Table 4-1. Filling out 1040x Inflation-Adjusted Amounts for Expatriation Actions Before June 4, 2004 IF you expatriated during . Filling out 1040x . Filling out 1040x . Filling out 1040x   THEN the rules outlined on this page apply if . Filling out 1040x . Filling out 1040x . Filling out 1040x     Your 5-year average annual net income tax was more than . Filling out 1040x . Filling out 1040x . Filling out 1040x OR Your net worth equaled or exceeded . Filling out 1040x . Filling out 1040x . Filling out 1040x 1999   110,000   552,000 2000   112,000   562,000 2001   116,000   580,000 2002   120,000   599,000 2003   122,000   608,000 2004 (before June 4)*   124,000   622,000 *If you expatriated after June 3, 2004, see Expatriation After June 3, 2004, and Before June 17, 2008 or Expatriation After June 16, 2008. Filling out 1040x Reporting requirements. Filling out 1040x   If you lost your U. Filling out 1040x S. Filling out 1040x citizenship, you should have filed Form 8854 with a consular office or a federal court at the time of loss of citizenship. Filling out 1040x If you ended your long-term residency, you should have filed Form 8854 with the Internal Revenue Service when you filed your dual-status tax return for the year your residency ended. Filling out 1040x   Your U. Filling out 1040x S. Filling out 1040x residency is considered to have ended when you ceased to be a lawful permanent resident or you began to be treated as a resident of another country under a tax treaty and do not waive treaty benefits. Filling out 1040x Penalties. Filling out 1040x   If you failed to file Form 8854, you may have to pay a penalty equal to the greater of 5% of the expatriation tax or $1,000. Filling out 1040x The penalty will be assessed for each year of the 10-year period beginning on the date of expatriation during which your failure to file continues. Filling out 1040x The penalty will not be imposed if you can show that the failure is due to reasonable cause and not willful neglect. Filling out 1040x Expatriation tax. Filling out 1040x   The expatriation tax applies to the 10-year period following the date of expatriation or termination of residency. Filling out 1040x It is figured in the same way as for those expatriating after June 3, 2004, and before June 17, 2008. Filling out 1040x See How To Figure the Expatriation Tax (If You Expatriated Before June 17, 2008) in the next section. Filling out 1040x Expatriation After June 3, 2004, and Before June 17, 2008 If you expatriated after June 3, 2004, and before June 17, 2008, the expatriation rules apply to you if any of the following statements apply. Filling out 1040x Your average annual net income tax for the 5 tax years ending before the date of expatriation or termination of residency is more than: $124,000 if you expatriated or terminated residency in 2004. Filling out 1040x $127,000 if you expatriated or terminated residency in 2005. Filling out 1040x $131,000 if you expatriated or terminated residency in 2006. Filling out 1040x $136,000 if you expatriated or terminated residency in 2007. Filling out 1040x $139,000 if you expatriated or terminated residency in 2008. Filling out 1040x Your net worth is $2 million or more on the date of your expatriation or termination of residency. Filling out 1040x You fail to certify on Form 8854 that you have complied with all U. Filling out 1040x S. Filling out 1040x federal tax obligations for the 5 tax years preceding the date of your expatriation or termination of residency. Filling out 1040x Exception for dual-citizens and certain minors. Filling out 1040x   Certain dual-citizens and certain minors (defined next) are not subject to the expatriation tax even if they meet (1) or (2) earlier. Filling out 1040x However, they still must provide the certification required in (3). Filling out 1040x Certain dual-citizens. Filling out 1040x   You may qualify for the exception described above if all of the following apply. Filling out 1040x You became at birth a U. Filling out 1040x S. Filling out 1040x citizen and a citizen of another country and you continue to be a citizen of that other country. Filling out 1040x You were never a resident alien of the United States (as defined in chapter 1). Filling out 1040x You never held a U. Filling out 1040x S. Filling out 1040x passport. Filling out 1040x You were present in the United States for no more than 30 days during any calendar year that is 1 of the 10 calendar years preceding your loss of U. Filling out 1040x S. Filling out 1040x citizenship. Filling out 1040x Certain minors. Filling out 1040x   You may qualify for the exception described above if you meet all of the following requirements. Filling out 1040x You became a U. Filling out 1040x S. Filling out 1040x citizen at birth. Filling out 1040x Neither of your parents was a U. Filling out 1040x S. Filling out 1040x citizen at the time of your birth. Filling out 1040x You expatriated before you were 18½. Filling out 1040x You were present in the United States for not more than 30 days during any calendar year that is 1 of the 10 calendar years preceding your expatriation. Filling out 1040x Tax consequences of presence in the United States. Filling out 1040x   The following rules apply if you do not meet the exception above for dual-citizens and certain minors and the expatriation rules would otherwise apply to you. Filling out 1040x   The expatriation tax does not apply to any tax year during the 10-year period if you are physically present in the United States for more than 30 days during the calendar year ending in that year. Filling out 1040x Instead, you are treated as a U. Filling out 1040x S. Filling out 1040x citizen or resident and taxed on your worldwide income for that tax year. Filling out 1040x You must file Form 1040, 1040A, or 1040EZ and figure your tax as prescribed in the instructions for those forms. Filling out 1040x   When counting the number of days of presence during a calendar year, count any day you were physically present in the United States at any time during the day. Filling out 1040x However, do not count any days (up to a limit of 30 days) on which you performed personal services in the United States for an employer who is not related to you if either of the following apply. Filling out 1040x You have ties with other countries. Filling out 1040x You have ties with other countries if: You became (within a reasonable period after your expatriation or termination of residency) a citizen or resident of the country in which you, your spouse, or either of your parents were born, and You became fully liable for income tax in that country. Filling out 1040x You were physically present in the United States for 30 days or less during each year in the 10-year period ending on the date of expatriation or termination of residency. Filling out 1040x Do not count any day you were an exempt individual or were unable to leave the United States because of a medical condition that arose while you were in the United States. Filling out 1040x See Exempt individual and Medical condition in chapter 1 under Substantial Presence Test, but disregard the information about Form 8843. Filling out 1040x Related employer. Filling out 1040x   If your employer in the United States is any of the following, then your employer is related to you. Filling out 1040x You must count any days you performed services in the United States for that employer as days of presence in the United States. Filling out 1040x Members of your family. Filling out 1040x This includes only your brothers and sisters, half-brothers and half-sisters, spouse, ancestors (parents, grandparents, etc. Filling out 1040x ), and lineal descendants (children, grandchildren, etc. Filling out 1040x ). Filling out 1040x A partnership in which you directly or indirectly own more than 50% of the capital interest or the profits interest. Filling out 1040x A corporation in which you directly or indirectly own more than 50% in value of the outstanding stock. Filling out 1040x (See Publication 550, chapter 4, Constructive ownership of stock, for how to determine whether you directly or indirectly own outstanding stock. Filling out 1040x ) A tax-exempt charitable or educational organization that is directly or indirectly controlled, in any manner or by any method, by you or by a member of your family, whether or not this control is legally enforceable. Filling out 1040x Date of tax expatriation. Filling out 1040x   For purposes of U. Filling out 1040x S. Filling out 1040x tax rules, the date of your expatriation or termination of residency is the later of the dates on which you perform the following actions. Filling out 1040x You notify either the Department of State or the Department of Homeland Security (whichever is appropriate) of your expatriating act or termination of residency. Filling out 1040x You file Form 8854 in accordance with the form instructions. Filling out 1040x Annual return. Filling out 1040x   If the expatriation tax applies to you, you must file Form 8854 each year during the 10-year period following the date of expatriation. Filling out 1040x You must file this form even if you owe no U. Filling out 1040x S. Filling out 1040x tax. Filling out 1040x Penalty. Filling out 1040x   If you fail to file Form 8854 for any tax year, fail to include all information required to be shown on the form, or include incorrect information, you may have to pay a penalty of $10,000. Filling out 1040x You will not have to pay a penalty if you show that the failure is due to reasonable cause and not to willful neglect. Filling out 1040x How To Figure the Expatriation Tax (If You Expatriated Before June 17, 2008) If the expatriation tax applies to you, you are generally subject to tax on your U. Filling out 1040x S. Filling out 1040x source gross income and gains on a net basis at the graduated rates applicable to individuals (with allowable deductions) unless you would be subject to a higher tax under the 30% tax (discussed earlier) on income not connected with a U. Filling out 1040x S. Filling out 1040x trade or business. Filling out 1040x For this purpose, U. Filling out 1040x S. Filling out 1040x source gross income (defined in chapter 2) includes gains from the sale or exchange of: Property (other than stock or debt obligations) located in the United States, Stock issued by a U. Filling out 1040x S. Filling out 1040x domestic corporation, and Debt obligations of U. Filling out 1040x S. Filling out 1040x persons or of the United States, a state or political subdivision thereof, or the District of Columbia. Filling out 1040x U. Filling out 1040x S. Filling out 1040x source income also includes any income or gain derived from stock in certain controlled foreign corporations if you owned, or were considered to own, at any time during the 2-year period ending on the date of expatriation, more than 50% of: The total combined voting power of all classes of that corporation's stock, or The total value of the stock. Filling out 1040x The income or gain is considered U. Filling out 1040x S. Filling out 1040x source income only to the extent of your share of earnings and profits earned or accumulated before the date of expatriation and during the periods you met the ownership requirements discussed above. Filling out 1040x Any exchange of property is treated as a sale of the property at its fair market value on the date of the exchange and any gain is treated as U. Filling out 1040x S. Filling out 1040x source gross income in the tax year of the exchange unless you enter into a gain recognition agreement under Notice 97-19. Filling out 1040x Other information. Filling out 1040x   For more information on the expatriation tax provisions, including exceptions to the tax and special U. Filling out 1040x S. Filling out 1040x source rules, see section 877 of the Internal Revenue Code. Filling out 1040x Expatriation Tax Return If you expatriated or terminated your U. Filling out 1040x S. Filling out 1040x residency, or you are subject to the expatriation tax, you must file Form 8854, Initial and Annual Expatriation Statement. Filling out 1040x Attach it to Form 1040NR if you are required to file that form. Filling out 1040x If you are present in the United States following your expatriation and are subject to tax as a U. Filling out 1040x S. Filling out 1040x citizen or resident, file Form 8854 with Form 1040. Filling out 1040x Expatriation After June 16, 2008 If you expatriated after June 16, 2008, the expatriation rules apply to you if you meet any of the following conditions. Filling out 1040x Your average annual net income tax for the 5 years ending before the date of expatriation or termination of residency is more than: $139,000 if you expatriated or terminated residency in 2008. Filling out 1040x $145,000 if you expatriated or terminated residency in 2009 or 2010. Filling out 1040x $147,000 if you expatriated or terminated residency in 2011. Filling out 1040x $151,000 if you expatriated or terminated residency in 2012. Filling out 1040x $155,000 if you expatriated or terminated residency in 2013. Filling out 1040x Your net worth is $2 million or more on the date of your expatriation or termination of residency. Filling out 1040x You fail to certify on Form 8854 that you have complied with all U. Filling out 1040x S. Filling out 1040x federal tax obligations for the 5 years preceding the date of your expatriation or termination of residency. Filling out 1040x Exception for dual-citizens and certain minors. Filling out 1040x   Certain dual-citizens and certain minors (defined next) are not subject to the expatriation tax even if they meet (1) or (2) above. Filling out 1040x However, they still must provide the certification required in (3) above. Filling out 1040x Certain dual-citizens. Filling out 1040x   You may qualify for the exception described above if both of the following apply. Filling out 1040x You became at birth a U. Filling out 1040x S. Filling out 1040x citizen and a citizen of another country and you continue to be a citizen of, and are taxed as a resident of, that other country. Filling out 1040x You have been a resident of the United States for not more than 10 years during the 15-year tax period ending with the tax year during which the expatriation occurs. Filling out 1040x For the purpose of determining U. Filling out 1040x S. Filling out 1040x residency, use the substantial presence test described in chapter 1. Filling out 1040x Certain minors. Filling out 1040x   You may qualify for the exception described earlier if you meet both of the following requirements. Filling out 1040x You expatriated before you were 18½. Filling out 1040x You have been a resident of the United States for not more than 10 tax years before the expatriation occurs. Filling out 1040x For the purpose of determining U. Filling out 1040x S. Filling out 1040x residency, use the substantial presence test described in chapter 1. Filling out 1040x Expatriation date. Filling out 1040x   Your expatriation date is the date you relinquish U. Filling out 1040x S. Filling out 1040x citizenship (in the case of a former citizen) or terminate your long-term residency (in the case of a former U. Filling out 1040x S. Filling out 1040x resident). Filling out 1040x Former U. Filling out 1040x S. Filling out 1040x citizen. Filling out 1040x   You are considered to have relinquished your U. Filling out 1040x S. Filling out 1040x citizenship on the earliest of the following dates. Filling out 1040x The date you renounced U. Filling out 1040x S. Filling out 1040x citizenship before a diplomatic or consular officer of the United States (provided that the voluntary renouncement was later confirmed by the issuance of a certificate of loss of nationality). Filling out 1040x The date you furnished to the State Department a signed statement of voluntary relinquishment of U. Filling out 1040x S. Filling out 1040x nationality confirming the performance of an expatriating act (provided that the voluntary relinquishment was later confirmed by the issuance of a certificate of loss of nationality). Filling out 1040x The date the State Department issued a certificate of loss of nationality. Filling out 1040x The date that a U. Filling out 1040x S. Filling out 1040x court canceled your certificate of naturalization. Filling out 1040x Former long-term resident. Filling out 1040x   You are considered to have terminated your long-term residency on the earliest of the following dates. Filling out 1040x The date you voluntarily relinquished your lawful permanent resident status by filing Department of Homeland Security Form I-407 with a U. Filling out 1040x S. Filling out 1040x consular or immigration officer, and the Department of Homeland Security determined that you have, in fact, abandoned your lawful permanent resident status. Filling out 1040x The date you became subject to a final administrative order for your removal from the United States under the Immigration and Nationality Act and you actually left the United States as a result of that order. Filling out 1040x If you were a dual resident of the United States and a country with which the United States has an income tax treaty, the date you began to be treated as a resident of that country and you determined that, for purposes of the treaty, you are a resident of the treaty country and notify the IRS of that treatment on Forms 8833 and 8854. Filling out 1040x See Effect of Tax Treaties in chapter 1 for more information about dual residents. Filling out 1040x How To Figure the Expatriation Tax (If You Expatriate After June 16, 2008) In the year you expatriate, you are subject to income tax on the net unrealized gain (or loss) in your property as if the property had been sold for its fair market value on the day before your expatriation date (“mark-to-market tax”). Filling out 1040x This applies to most types of property interests you held on the date of relinquishment of citizenship or termination of residency. Filling out 1040x But see Exceptions , later. Filling out 1040x Gains arising from deemed sales must be taken into account for the tax year of the deemed sale without regard to other U. Filling out 1040x S. Filling out 1040x internal revenue laws. Filling out 1040x Losses from deemed sales must be taken into account to the extent otherwise provided under U. Filling out 1040x S. Filling out 1040x internal revenue laws. Filling out 1040x However, Internal Revenue Code section 1091 (relating to the disallowance of losses on wash sales of stock and securities) does not apply. Filling out 1040x The net gain that you otherwise must include in your income is reduced (but not below zero) by: $600,000 if you expatriated or terminated residency before January 1, 2009. Filling out 1040x $626,000 if you expatriated or terminated residency in 2009. Filling out 1040x $627,000 if you expatriated or terminated residency in 2010. Filling out 1040x $636,000 if you expatriated or terminated residency in 2011. Filling out 1040x $651,000 if you expatriated or terminated residency in 2012. Filling out 1040x $668,000 if you expatriated or terminated residency in 2013. Filling out 1040x Exceptions. Filling out 1040x   The mark-to-market tax does not apply to the following. Filling out 1040x Eligible deferred compensation items. Filling out 1040x Ineligible deferred compensation items. Filling out 1040x Interests in nongrantor trusts. Filling out 1040x Specified tax deferred accounts. Filling out 1040x Instead, items (1) and (3) may be subject to withholding at source. Filling out 1040x In the case of item (2), you are treated as receiving the present value of your accrued benefit as of the day before the expatriation date. Filling out 1040x In the case of item (4), you are treated as receiving a distribution of your entire interest in the account on the day before your expatriation date. Filling out 1040x See paragraphs (d), (e), and (f) of section 877A for more information. Filling out 1040x Expatriation Tax Return If you expatriated or terminated your U. Filling out 1040x S. Filling out 1040x residency, or you are subject to the expatriation rules (as discussed earlier in the first paragraph under Expatriation After June 16, 2008), you must file Form 8854. Filling out 1040x Attach it to Form 1040 or Form 1040NR if you are required to file either of those forms. Filling out 1040x Deferral of payment of mark-to-market tax. Filling out 1040x   You can make an irrevocable election to defer payment of the mark-to-market tax imposed on the deemed sale of property. Filling out 1040x If you make this election, the following rules apply. Filling out 1040x You can make the election on a property-by-property basis. Filling out 1040x The deferred tax attributable to a particular property is due on the return for the tax year in which you dispose of the property. Filling out 1040x Interest is charged for the period the tax is deferred. Filling out 1040x The due date for the payment of the deferred tax cannot be extended beyond the earlier of the following dates. Filling out 1040x The due date of the return required for the year of death. Filling out 1040x The time that the security provided for the property fails to be adequate. Filling out 1040x See item (6) below. Filling out 1040x You make the election on Form 8854. Filling out 1040x You must provide adequate security (such as a bond). Filling out 1040x You must make an irrevocable waiver of any right under any treaty of the United States which would preclude assessment or collection of the mark-to-market tax. Filling out 1040x   For more information about the deferral of payment, see the Instructions for Form 8854. Filling out 1040x Prev  Up  Next   Home   More Online Publications