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Form 1040ez Instructions

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Form 1040ez Instructions

Form 1040ez instructions 18. Form 1040ez instructions   Alimony Table of Contents IntroductionSpouse or former spouse. Form 1040ez instructions Divorce or separation instrument. Form 1040ez instructions Useful Items - You may want to see: General RulesMortgage payments. Form 1040ez instructions Taxes and insurance. Form 1040ez instructions Other payments to a third party. Form 1040ez instructions Instruments Executed After 1984Payments to a third party. Form 1040ez instructions Exception. Form 1040ez instructions Substitute payments. Form 1040ez instructions Specifically designated as child support. Form 1040ez instructions Contingency relating to your child. Form 1040ez instructions Clearly associated with a contingency. Form 1040ez instructions How To Deduct Alimony Paid How To Report Alimony Received Recapture Rule Introduction This chapter discusses the rules that apply if you pay or receive alimony. Form 1040ez instructions It covers the following topics. Form 1040ez instructions What payments are alimony. Form 1040ez instructions What payments are not alimony, such as child support. Form 1040ez instructions How to deduct alimony you paid. Form 1040ez instructions How to report alimony you received as income. Form 1040ez instructions Whether you must recapture the tax benefits of alimony. Form 1040ez instructions Recapture means adding back in your income all or part of a deduction you took in a prior year. Form 1040ez instructions Alimony is a payment to or for a spouse or former spouse under a divorce or separation instrument. Form 1040ez instructions It does not include voluntary payments that are not made under a divorce or separation instrument. Form 1040ez instructions Alimony is deductible by the payer and must be included in the spouse's or former spouse's income. Form 1040ez instructions Although this chapter is generally written for the payer of the alimony, the recipient can use the information to determine whether an amount received is alimony. Form 1040ez instructions To be alimony, a payment must meet certain requirements. Form 1040ez instructions Different requirements generally apply to payments under instruments executed after 1984 and to payments under instruments executed before 1985. Form 1040ez instructions This chapter discusses the rules for payments under instruments executed after 1984. Form 1040ez instructions If you need the rules for payments under pre-1985 instruments, get and keep a copy of the 2004 version of Publication 504. Form 1040ez instructions That was the last year the information on pre-1985 instruments was included in Publication 504. Form 1040ez instructions Use Table 18-1 in this chapter as a guide to determine whether certain payments are considered alimony. Form 1040ez instructions Definitions. Form 1040ez instructions   The following definitions apply throughout this chapter. Form 1040ez instructions Spouse or former spouse. Form 1040ez instructions   Unless otherwise stated, the term “spouse” includes former spouse. Form 1040ez instructions Divorce or separation instrument. Form 1040ez instructions   The term “divorce or separation instrument” means: A decree of divorce or separate maintenance or a written instrument incident to that decree, A written separation agreement, or A decree or any type of court order requiring a spouse to make payments for the support or maintenance of the other spouse. Form 1040ez instructions This includes a temporary decree, an interlocutory (not final) decree, and a decree of alimony pendente lite (while awaiting action on the final decree or agreement). Form 1040ez instructions Useful Items - You may want to see: Publication 504 Divorced or Separated Individuals General Rules The following rules apply to alimony regardless of when the divorce or separation instrument was executed. Form 1040ez instructions Payments not alimony. Form 1040ez instructions   Not all payments under a divorce or separation instrument are alimony. Form 1040ez instructions Alimony does not include: Child support, Noncash property settlements, Payments that are your spouse's part of community income, as explained under Community Property in Publication 504, Payments to keep up the payer's property, or Use of the payer's property. Form 1040ez instructions Payments to a third party. Form 1040ez instructions   Cash payments, checks, or money orders to a third party on behalf of your spouse under the terms of your divorce or separation instrument can be alimony, if they otherwise qualify. Form 1040ez instructions These include payments for your spouse's medical expenses, housing costs (rent, utilities, etc. Form 1040ez instructions ), taxes, tuition, etc. Form 1040ez instructions The payments are treated as received by your spouse and then paid to the third party. Form 1040ez instructions Life insurance premiums. Form 1040ez instructions   Alimony includes premiums you must pay under your divorce or separation instrument for insurance on your life to the extent your spouse owns the policy. Form 1040ez instructions Payments for jointly-owned home. Form 1040ez instructions   If your divorce or separation instrument states that you must pay expenses for a home owned by you and your spouse, some of your payments may be alimony. Form 1040ez instructions Mortgage payments. Form 1040ez instructions   If you must pay all the mortgage payments (principal and interest) on a jointly-owned home, and they otherwise qualify as alimony, you can deduct one-half of the total payments as alimony. Form 1040ez instructions If you itemize deductions and the home is a qualified home, you can claim one-half of the interest in figuring your deductible interest. Form 1040ez instructions Your spouse must report one-half of the payments as alimony received. Form 1040ez instructions If your spouse itemizes deductions and the home is a qualified home, he or she can claim one-half of the interest on the mortgage in figuring deductible interest. Form 1040ez instructions Taxes and insurance. Form 1040ez instructions   If you must pay all the real estate taxes or insurance on a home held as tenants in common, you can deduct one-half of these payments as alimony. Form 1040ez instructions Your spouse must report one-half of these payments as alimony received. Form 1040ez instructions If you and your spouse itemize deductions, you can each claim one-half of the real estate taxes and none of the home insurance. Form 1040ez instructions    If your home is held as tenants by the entirety or joint tenants, none of your payments for taxes or insurance are alimony. Form 1040ez instructions But if you itemize deductions, you can claim all of the real estate taxes and none of the home insurance. Form 1040ez instructions Other payments to a third party. Form 1040ez instructions   If you made other third-party payments, see Publication 504 to see whether any part of the payments qualifies as alimony. Form 1040ez instructions Instruments Executed After 1984 The following rules for alimony apply to payments under divorce or separation instruments executed after 1984. Form 1040ez instructions Exception for instruments executed before 1985. Form 1040ez instructions   There are two situations where the rules for instruments executed after 1984 apply to instruments executed before 1985. Form 1040ez instructions A divorce or separation instrument executed before 1985 and then modified after 1984 to specify that the after-1984 rules will apply. Form 1040ez instructions A temporary divorce or separation instrument executed before 1985 and incorporated into, or adopted by, a final decree executed after 1984 that: Changes the amount or period of payment, or Adds or deletes any contingency or condition. Form 1040ez instructions   For the rules for alimony payments under pre-1985 instruments not meeting these exceptions, get the 2004 version of Publication 504 at www. Form 1040ez instructions irs. Form 1040ez instructions gov/pub504. Form 1040ez instructions Example 1. Form 1040ez instructions In November 1984, you and your former spouse executed a written separation agreement. Form 1040ez instructions In February 1985, a decree of divorce was substituted for the written separation agreement. Form 1040ez instructions The decree of divorce did not change the terms for the alimony you pay your former spouse. Form 1040ez instructions The decree of divorce is treated as executed before 1985. Form 1040ez instructions Alimony payments under this decree are not subject to the rules for payments under instruments executed after 1984. Form 1040ez instructions Example 2. Form 1040ez instructions Assume the same facts as in Example 1 except that the decree of divorce changed the amount of the alimony. Form 1040ez instructions In this example, the decree of divorce is not treated as executed before 1985. Form 1040ez instructions The alimony payments are subject to the rules for payments under instruments executed after 1984. Form 1040ez instructions Alimony requirements. Form 1040ez instructions   A payment to or for a spouse under a divorce or separation instrument is alimony if the spouses do not file a joint return with each other and all the following requirements are met. Form 1040ez instructions The payment is in cash. Form 1040ez instructions The instrument does not designate the payment as not alimony. Form 1040ez instructions Spouses legally separated under a decree of divorce or separate maintenance are not members of the same household. Form 1040ez instructions There is no liability to make any payment (in cash or property) after the death of the recipient spouse. Form 1040ez instructions The payment is not treated as child support. Form 1040ez instructions Each of these requirements is discussed below. Form 1040ez instructions Cash payment requirement. Form 1040ez instructions   Only cash payments, including checks and money orders, qualify as alimony. Form 1040ez instructions The following do not qualify as alimony. Form 1040ez instructions Transfers of services or property (including a debt instrument of a third party or an annuity contract). Form 1040ez instructions Execution of a debt instrument by the payer. Form 1040ez instructions The use of the payer's property. Form 1040ez instructions Payments to a third party. Form 1040ez instructions   Cash payments to a third party under the terms of your divorce or separation instrument can qualify as cash payments to your spouse. Form 1040ez instructions See Payments to a third party under General Rules, earlier. Form 1040ez instructions   Also, cash payments made to a third party at the written request of your spouse may qualify as alimony if all the following requirements are met. Form 1040ez instructions The payments are in lieu of payments of alimony directly to your spouse. Form 1040ez instructions The written request states that both spouses intend the payments to be treated as alimony. Form 1040ez instructions You receive the written request from your spouse before you file your return for the year you made the payments. Form 1040ez instructions Payments designated as not alimony. Form 1040ez instructions   You and your spouse can designate that otherwise qualifying payments are not alimony. Form 1040ez instructions You do this by including a provision in your divorce or separation instrument that states the payments are not deductible as alimony by you and are excludable from your spouse's income. Form 1040ez instructions For this purpose, any instrument (written statement) signed by both of you that makes this designation and that refers to a previous written separation agreement is treated as a written separation agreement (and therefore a divorce or separation instrument). Form 1040ez instructions If you are subject to temporary support orders, the designation must be made in the original or a later temporary support order. Form 1040ez instructions   Your spouse can exclude the payments from income only if he or she attaches a copy of the instrument designating them as not alimony to his or her return. Form 1040ez instructions The copy must be attached each year the designation applies. Form 1040ez instructions Spouses cannot be members of the same household. Form 1040ez instructions    Payments to your spouse while you are members of the same household are not alimony if you are legally separated under a decree of divorce or separate maintenance. Form 1040ez instructions A home you formerly shared is considered one household, even if you physically separate yourselves in the home. Form 1040ez instructions   You are not treated as members of the same household if one of you is preparing to leave the household and does leave no later than 1 month after the date of the payment. Form 1040ez instructions Exception. Form 1040ez instructions   If you are not legally separated under a decree of divorce or separate maintenance, a payment under a written separation agreement, support decree, or other court order may qualify as alimony even if you are members of the same household when the payment is made. Form 1040ez instructions Table 18-1. Form 1040ez instructions Alimony Requirements (Instruments Executed After 1984) Payments ARE alimony if all of the following are true: Payments are NOT alimony if any of the following are true: Payments are required by a divorce or separation instrument. Form 1040ez instructions Payments are not required by a divorce or separation instrument. Form 1040ez instructions Payer and recipient spouse do not file a joint return with each other. Form 1040ez instructions Payer and recipient spouse file a joint return with each other. Form 1040ez instructions Payment is in cash (including checks or money orders). Form 1040ez instructions Payment is: Not in cash, A noncash property settlement, Spouse's part of community income, or To keep up the payer's property. Form 1040ez instructions Payment is not designated in the instrument as not alimony. Form 1040ez instructions Payment is designated in the instrument as not alimony. Form 1040ez instructions Spouses legally separated under a decree of divorce or separate maintenance are not members of the same household. Form 1040ez instructions Spouses legally separated under a decree of divorce or separate maintenance are members of the same household. Form 1040ez instructions Payments are not required after death of the recipient spouse. Form 1040ez instructions Payments are required after death of the recipient spouse. Form 1040ez instructions Payment is not treated as child support. Form 1040ez instructions Payment is treated as child support. Form 1040ez instructions These payments are deductible by the payer and includible in income by the recipient. Form 1040ez instructions These payments are neither deductible by the payer nor includible in income by the recipient. Form 1040ez instructions Liability for payments after death of recipient spouse. Form 1040ez instructions   If any part of payments you make must continue to be made for any period after your spouse's death, that part of your payments is not alimony, whether made before or after the death. Form 1040ez instructions If all of the payments would continue, then none of the payments made before or after the death are alimony. Form 1040ez instructions   The divorce or separation instrument does not have to expressly state that the payments cease upon the death of your spouse if, for example, the liability for continued payments would end under state law. Form 1040ez instructions Example. Form 1040ez instructions You must pay your former spouse $10,000 in cash each year for 10 years. Form 1040ez instructions Your divorce decree states that the payments will end upon your former spouse's death. Form 1040ez instructions You must also pay your former spouse or your former spouse's estate $20,000 in cash each year for 10 years. Form 1040ez instructions The death of your spouse would not terminate these payments under state law. Form 1040ez instructions The $10,000 annual payments may qualify as alimony. Form 1040ez instructions The $20,000 annual payments that do not end upon your former spouse's death are not alimony. Form 1040ez instructions Substitute payments. Form 1040ez instructions   If you must make any payments in cash or property after your spouse's death as a substitute for continuing otherwise qualifying payments before the death, the otherwise qualifying payments are not alimony. Form 1040ez instructions To the extent that your payments begin, accelerate, or increase because of the death of your spouse, otherwise qualifying payments you made may be treated as payments that were not alimony. Form 1040ez instructions Whether or not such payments will be treated as not alimony depends on all the facts and circumstances. Form 1040ez instructions Example 1. Form 1040ez instructions Under your divorce decree, you must pay your former spouse $30,000 annually. Form 1040ez instructions The payments will stop at the end of 6 years or upon your former spouse's death, if earlier. Form 1040ez instructions Your former spouse has custody of your minor children. Form 1040ez instructions The decree provides that if any child is still a minor at your spouse's death, you must pay $10,000 annually to a trust until the youngest child reaches the age of majority. Form 1040ez instructions The trust income and corpus (principal) are to be used for your children's benefit. Form 1040ez instructions These facts indicate that the payments to be made after your former spouse's death are a substitute for $10,000 of the $30,000 annual payments. Form 1040ez instructions Of each of the $30,000 annual payments, $10,000 is not alimony. Form 1040ez instructions Example 2. Form 1040ez instructions Under your divorce decree, you must pay your former spouse $30,000 annually. Form 1040ez instructions The payments will stop at the end of 15 years or upon your former spouse's death, if earlier. Form 1040ez instructions The decree provides that if your former spouse dies before the end of the 15-year period, you must pay the estate the difference between $450,000 ($30,000 × 15) and the total amount paid up to that time. Form 1040ez instructions For example, if your spouse dies at the end of the tenth year, you must pay the estate $150,000 ($450,000 − $300,000). Form 1040ez instructions These facts indicate that the lump-sum payment to be made after your former spouse's death is a substitute for the full amount of the $30,000 annual payments. Form 1040ez instructions None of the annual payments are alimony. Form 1040ez instructions The result would be the same if the payment required at death were to be discounted by an appropriate interest factor to account for the prepayment. Form 1040ez instructions Child support. Form 1040ez instructions   A payment that is specifically designated as child support or treated as specifically designated as child support under your divorce or separation instrument is not alimony. Form 1040ez instructions The amount of child support may vary over time. Form 1040ez instructions Child support payments are not deductible by the payer and are not taxable to the recipient. Form 1040ez instructions Specifically designated as child support. Form 1040ez instructions   A payment will be treated as specifically designated as child support to the extent that the payment is reduced either: On the happening of a contingency relating to your child, or At a time that can be clearly associated with the contingency. Form 1040ez instructions A payment may be treated as specifically designated as child support even if other separate payments are specifically designated as child support. Form 1040ez instructions Contingency relating to your child. Form 1040ez instructions   A contingency relates to your child if it depends on any event relating to that child. Form 1040ez instructions It does not matter whether the event is certain or likely to occur. Form 1040ez instructions Events relating to your child include the child's: Becoming employed, Dying, Leaving the household, Leaving school, Marrying, or Reaching a specified age or income level. Form 1040ez instructions Clearly associated with a contingency. Form 1040ez instructions   Payments that would otherwise qualify as alimony are presumed to be reduced at a time clearly associated with the happening of a contingency relating to your child only in the following situations. Form 1040ez instructions The payments are to be reduced not more than 6 months before or after the date the child will reach 18, 21, or local age of majority. Form 1040ez instructions The payments are to be reduced on two or more occasions that occur not more than 1 year before or after a different one of your children reaches a certain age from 18 to 24. Form 1040ez instructions This certain age must be the same for each child, but need not be a whole number of years. Form 1040ez instructions In all other situations, reductions in payments are not treated as clearly associated with the happening of a contingency relating to your child. Form 1040ez instructions   Either you or the IRS can overcome the presumption in the two situations above. Form 1040ez instructions This is done by showing that the time at which the payments are to be reduced was determined independently of any contingencies relating to your children. Form 1040ez instructions For example, if you can show that the period of alimony payments is customary in the local jurisdiction, such as a period equal to one-half of the duration of the marriage, you can overcome the presumption and may be able to treat the amount as alimony. Form 1040ez instructions How To Deduct Alimony Paid You can deduct alimony you paid, whether or not you itemize deductions on your return. Form 1040ez instructions You must file Form 1040. Form 1040ez instructions You cannot use Form 1040A or Form 1040EZ. Form 1040ez instructions Enter the amount of alimony you paid on Form 1040, line 31a. Form 1040ez instructions In the space provided on line 31b, enter your spouse's social security number (SSN) or individual taxpayer identification number (ITIN). Form 1040ez instructions If you paid alimony to more than one person, enter the SSN or ITIN of one of the recipients. Form 1040ez instructions Show the SSN or ITIN and amount paid to each other recipient on an attached statement. Form 1040ez instructions Enter your total payments on line 31a. Form 1040ez instructions You must provide your spouse's SSN or ITIN. Form 1040ez instructions If you do not, you may have to pay a $50 penalty and your deduction may be disallowed. Form 1040ez instructions For more information on SSNs and ITINs, see Social Security Number (SSN) in chapter 1. Form 1040ez instructions How To Report Alimony Received Report alimony you received as income on Form 1040, line 11. Form 1040ez instructions You cannot use Form 1040A or Form 1040EZ. Form 1040ez instructions You must give the person who paid the alimony your SSN or ITIN. Form 1040ez instructions If you do not, you may have to pay a $50 penalty. Form 1040ez instructions Recapture Rule If your alimony payments decrease or end during the first 3 calendar years, you may be subject to the recapture rule. Form 1040ez instructions If you are subject to this rule, you have to include in income in the third year part of the alimony payments you previously deducted. Form 1040ez instructions Your spouse can deduct in the third year part of the alimony payments he or she previously included in income. Form 1040ez instructions The 3-year period starts with the first calendar year you make a payment qualifying as alimony under a decree of divorce or separate maintenance or a written separation agreement. Form 1040ez instructions Do not include any time in which payments were being made under temporary support orders. Form 1040ez instructions The second and third years are the next 2 calendar years, whether or not payments are made during those years. Form 1040ez instructions The reasons for a reduction or end of alimony payments that can require a recapture include: A change in your divorce or separation instrument, A failure to make timely payments, A reduction in your ability to provide support, or A reduction in your spouse's support needs. Form 1040ez instructions When to apply the recapture rule. Form 1040ez instructions   You are subject to the recapture rule in the third year if the alimony you pay in the third year decreases by more than $15,000 from the second year or the alimony you pay in the second and third years decreases significantly from the alimony you pay in the first year. Form 1040ez instructions   When you figure a decrease in alimony, do not include the following amounts. Form 1040ez instructions Payments made under a temporary support order. Form 1040ez instructions Payments required over a period of at least 3 calendar years that vary because they are a fixed part of your income from a business or property, or from compensation for employment or self-employment. Form 1040ez instructions Payments that decrease because of the death of either spouse or the remarriage of the spouse receiving the payments before the end of the third year. Form 1040ez instructions Figuring the recapture. Form 1040ez instructions   You can use Worksheet 1 in Publication 504 to figure recaptured alimony. Form 1040ez instructions Including the recapture in income. Form 1040ez instructions   If you must include a recapture amount in income, show it on Form 1040, line 11 (“Alimony received”). Form 1040ez instructions Cross out “received” and enter “recapture. Form 1040ez instructions ” On the dotted line next to the amount, enter your spouse's last name and SSN or ITIN. Form 1040ez instructions Deducting the recapture. Form 1040ez instructions   If you can deduct a recapture amount, show it on Form 1040, line 31a (“Alimony paid”). Form 1040ez instructions Cross out “paid” and enter “recapture. Form 1040ez instructions ” In the space provided, enter your spouse's SSN or ITIN. Form 1040ez instructions Prev  Up  Next   Home   More Online Publications
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The Form 1040ez Instructions

Form 1040ez instructions 6. Form 1040ez instructions   How To Figure Cost of Goods Sold Table of Contents Introduction Figuring Cost of Goods Sold on Schedule C, Lines 35 Through 42Line 35 Inventory at Beginning of Year Line 36 Purchases Less Cost of Items Withdrawn for Personal Use Line 37 Cost of Labor Line 38 Materials and Supplies Line 39 Other Costs Line 40 Add Lines 35 through 39 Line 41 Inventory at End of Year Line 42 Cost of Goods Sold Introduction If you make or buy goods to sell, you can deduct the cost of goods sold from your gross receipts on Schedule C. Form 1040ez instructions However, to determine these costs, you must value your inventory at the beginning and end of each tax year. Form 1040ez instructions This chapter applies to you if you are a manufacturer, wholesaler, or retailer or if you are engaged in any business that makes, buys, or sells goods to produce income. Form 1040ez instructions This chapter does not apply to a personal service business, such as the business of a doctor, lawyer, carpenter, or painter. Form 1040ez instructions However, if you work in a personal service business and also sell or charge for the materials and supplies normally used in your business, this chapter applies to you. Form 1040ez instructions If you must account for an inventory in your business, you must generally use an accrual method of accounting for your purchases and sales. Form 1040ez instructions For more information, see chapter 2. Form 1040ez instructions Figuring Cost of Goods Sold on Schedule C, Lines 35 Through 42 Figure your cost of goods sold by filling out lines 35 through 42 of Schedule C. Form 1040ez instructions These lines are reproduced below and are explained in the discussion that follows. Form 1040ez instructions 35 Inventory at beginning of year. Form 1040ez instructions If different from last year's closing inventory, attach explanation   36 Purchases less cost of items withdrawn for personal use   37 Cost of labor. Form 1040ez instructions Do not include any amounts paid to yourself   38 Materials and supplies   39 Other costs   40 Add lines 35 through 39   41 Inventory at end of year   42 Cost of goods sold. Form 1040ez instructions Subtract line 41 from line 40. Form 1040ez instructions  Enter the result here and on line 4   Line 35 Inventory at Beginning of Year If you are a merchant, beginning inventory is the cost of merchandise on hand at the beginning of the year that you will sell to customers. Form 1040ez instructions If you are a manufacturer or producer, it includes the total cost of raw materials, work in process, finished goods, and materials and supplies used in manufacturing the goods (see Inventories in chapter 2). Form 1040ez instructions Opening inventory usually will be identical to the closing inventory of the year before. Form 1040ez instructions You must explain any difference in a schedule attached to your return. Form 1040ez instructions Donation of inventory. Form 1040ez instructions   If you contribute inventory (property that you sell in the course of your business), the amount you can claim as a contribution deduction is the smaller of its fair market value on the day you contributed it or its basis. Form 1040ez instructions The basis of donated inventory is any cost incurred for the inventory in an earlier year that you would otherwise include in your opening inventory for the year of the contribution. Form 1040ez instructions You must remove the amount of your contribution deduction from your opening inventory. Form 1040ez instructions It is not part of the cost of goods sold. Form 1040ez instructions   If the cost of donated inventory is not included in your opening inventory, the inventory's basis is zero and you cannot claim a charitable contribution deduction. Form 1040ez instructions Treat the inventory's cost as you would ordinarily treat it under your method of accounting. Form 1040ez instructions For example, include the purchase price of inventory bought and donated in the same year in the cost of goods sold for that year. Form 1040ez instructions   A special rule may apply to certain donations of food inventory. Form 1040ez instructions See Publication 526, Charitable Contributions. Form 1040ez instructions Example 1. Form 1040ez instructions You are a calendar year taxpayer who uses an accrual method of accounting. Form 1040ez instructions In 2013, you contributed property from inventory to a church. Form 1040ez instructions It had a fair market value of $600. Form 1040ez instructions The closing inventory at the end of 2012 properly included $400 of costs due to the acquisition of the property, and in 2012, you properly deducted $50 of administrative and other expenses attributable to the property as business expenses. Form 1040ez instructions The charitable contribution allowed for 2013 is $400 ($600 − $200). Form 1040ez instructions The $200 is the amount that would be ordinary income if you had sold the contributed inventory at fair market value on the date of the gift. Form 1040ez instructions The cost of goods sold you use in determining gross income for 2013 must not include the $400. Form 1040ez instructions You remove that amount from opening inventory for 2013. Form 1040ez instructions Example 2. Form 1040ez instructions If, in Example 1, you acquired the contributed property in 2013 at a cost of $400, you would include the $400 cost of the property in figuring the cost of goods sold for 2013 and deduct the $50 of administrative and other expenses attributable to the property for that year. Form 1040ez instructions You would not be allowed any charitable contribution deduction for the contributed property. Form 1040ez instructions Line 36 Purchases Less Cost of Items Withdrawn for Personal Use If you are a merchant, use the cost of all merchandise you bought for sale. Form 1040ez instructions If you are a manufacturer or producer, this includes the cost of all raw materials or parts purchased for manufacture into a finished product. Form 1040ez instructions Trade discounts. Form 1040ez instructions   The differences between the stated prices of articles and the actual prices you pay for them are called trade discounts. Form 1040ez instructions You must use the prices you pay (not the stated prices) in figuring your cost of purchases. Form 1040ez instructions Do not show the discount amount separately as an item in gross income. Form 1040ez instructions   An automobile dealer must record the cost of a car in inventory reduced by any manufacturer's rebate that represents a trade discount. Form 1040ez instructions Cash discounts. Form 1040ez instructions   Cash discounts are amounts your suppliers let you deduct from your purchase invoices for prompt payments. Form 1040ez instructions There are two methods of accounting for cash discounts. Form 1040ez instructions You can either credit them to a separate discount account or deduct them from total purchases for the year. Form 1040ez instructions Whichever method you use, you must be consistent. Form 1040ez instructions If you want to change your method of figuring inventory cost, you must file Form 3115, Application for Change in Accounting Method. Form 1040ez instructions For more information, see Change in Accounting Method in chapter 2. Form 1040ez instructions   If you credit cash discounts to a separate account, you must include this credit balance in your business income at the end of the tax year. Form 1040ez instructions If you use this method, do not reduce your cost of goods sold by the cash discounts. Form 1040ez instructions Purchase returns and allowances. Form 1040ez instructions   You must deduct all returns and allowances from your total purchases during the year. Form 1040ez instructions Merchandise withdrawn from sale. Form 1040ez instructions   If you withdraw merchandise for your personal or family use, you must exclude this cost from the total amount of merchandise you bought for sale. Form 1040ez instructions Do this by crediting the purchases or sales account with the cost of merchandise you withdraw for personal use. Form 1040ez instructions You must also charge the amount to your drawing account. Form 1040ez instructions   A drawing account is a separate account you should keep to record the business income you withdraw to pay for personal and family expenses. Form 1040ez instructions As stated above, you also use it to record withdrawals of merchandise for personal or family use. Form 1040ez instructions This account is also known as a “withdrawals account” or “personal account. Form 1040ez instructions ” Line 37 Cost of Labor Labor costs are usually an element of cost of goods sold only in a manufacturing or mining business. Form 1040ez instructions Small merchandisers (wholesalers, retailers, etc. Form 1040ez instructions ) usually do not have labor costs that can properly be charged to cost of goods sold. Form 1040ez instructions In a manufacturing business, labor costs properly allocable to the cost of goods sold include both the direct and indirect labor used in fabricating the raw material into a finished, saleable product. Form 1040ez instructions Direct labor. Form 1040ez instructions   Direct labor costs are the wages you pay to those employees who spend all their time working directly on the product being manufactured. Form 1040ez instructions They also include a part of the wages you pay to employees who work directly on the product part time if you can determine that part of their wages. Form 1040ez instructions Indirect labor. Form 1040ez instructions   Indirect labor costs are the wages you pay to employees who perform a general factory function that does not have any immediate or direct connection with making the saleable product, but that is a necessary part of the manufacturing process. Form 1040ez instructions Other labor. Form 1040ez instructions   Other labor costs not properly chargeable to the cost of goods sold can be deducted as selling or administrative expenses. Form 1040ez instructions Generally, the only kinds of labor costs properly chargeable to your cost of goods sold are the direct or indirect labor costs and certain other costs treated as overhead expenses properly charged to the manufacturing process, as discussed later under Line 39 Other Costs. Form 1040ez instructions Line 38 Materials and Supplies Materials and supplies, such as hardware and chemicals, used in manufacturing goods are charged to cost of goods sold. Form 1040ez instructions Those that are not used in the manufacturing process are treated as deferred charges. Form 1040ez instructions You deduct them as a business expense when you use them. Form 1040ez instructions Business expenses are discussed in chapter 8. Form 1040ez instructions Line 39 Other Costs Examples of other costs incurred in a manufacturing or mining process that you charge to your cost of goods sold are as follows. Form 1040ez instructions Containers. Form 1040ez instructions   Containers and packages that are an integral part of the product manufactured are a part of your cost of goods sold. Form 1040ez instructions If they are not an integral part of the manufactured product, their costs are shipping or selling expenses. Form 1040ez instructions Freight-in. Form 1040ez instructions   Freight-in, express-in, and cartage-in on raw materials, supplies you use in production, and merchandise you purchase for sale are all part of cost of goods sold. Form 1040ez instructions Overhead expenses. Form 1040ez instructions   Overhead expenses include expenses such as rent, heat, light, power, insurance, depreciation, taxes, maintenance, labor, and supervision. Form 1040ez instructions The overhead expenses you have as direct and necessary expenses of the manufacturing operation are included in your cost of goods sold. Form 1040ez instructions Line 40 Add Lines 35 through 39 The total of lines 35 through 39 equals the cost of the goods available for sale during the year. Form 1040ez instructions Line 41 Inventory at End of Year Subtract the value of your closing inventory (including, as appropriate, the allocable parts of the cost of raw materials and supplies, direct labor, and overhead expenses) from line 40. Form 1040ez instructions Inventory at the end of the year is also known as closing or ending inventory. Form 1040ez instructions Your ending inventory will usually become the beginning inventory of your next tax year. Form 1040ez instructions Line 42 Cost of Goods Sold When you subtract your closing inventory (inventory at the end of the year) from the cost of goods available for sale, the remainder is your cost of goods sold during the tax year. Form 1040ez instructions Prev  Up  Next   Home   More Online Publications