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Free income tax service 6. Free income tax service   Basis of Assets Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Cost BasisReal Property Allocating the Basis Uniform Capitalization Rules Adjusted BasisIncreases to Basis Decreases to Basis Basis Other Than CostTaxable Exchanges Involuntary Conversions Nontaxable Exchanges Property Received as a Gift Property Transferred From a Spouse Inherited Property Property Distributed From a Partnership or Corporation Introduction Your basis is the amount of your investment in property for tax purposes. Free income tax service Use basis to figure the gain or loss on the sale, exchange, or other disposition of property. Free income tax service Also use basis to figure depreciation, amortization, depletion, and casualty losses. Free income tax service If you use property for both business or investment purposes and for personal purposes, you must allocate the basis based on the use. Free income tax service Only the basis allocated to the business or investment use of the property can be depreciated. Free income tax service Your original basis in property is adjusted (increased or decreased) by certain events. Free income tax service For example, if you make improvements to the property, increase your basis. Free income tax service If you take deductions for depreciation, or casualty losses, or claim certain credits, reduce your basis. Free income tax service Keep accurate records of all items that affect the basis of your assets. Free income tax service For information on keeping records, see chapter 1. Free income tax service Topics - This chapter discusses: Cost basis Adjusted basis Basis other than cost Useful Items - You may want to see: Publication 535 Business Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 946 How To Depreciate Property See chapter 16 for information about getting publications and forms. Free income tax service Cost Basis The basis of property you buy is usually its cost. Free income tax service Cost is the amount you pay in cash, debt obligations, other property, or services. Free income tax service Your cost includes amounts you pay for sales tax, freight, installation, and testing. Free income tax service The basis of real estate and business assets will include other items, discussed later. Free income tax service Basis generally does not include interest payments. Free income tax service However, see Carrying charges and Capitalized interest in chapter 4 of Publication 535. Free income tax service You also may have to capitalize (add to basis) certain other costs related to buying or producing property. Free income tax service Under the uniform capitalization rules, discussed later, you may have to capitalize direct costs and certain indirect costs of producing property. Free income tax service Loans with low or no interest. Free income tax service   If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price minus the amount considered to be unstated interest. Free income tax service You generally have unstated interest if your interest rate is less than the applicable federal rate. Free income tax service See the discussion of unstated interest in Publication 537, Installment Sales. Free income tax service Real Property Real property, also called real estate, is land and generally anything built on, growing on, or attached to land. Free income tax service If you buy real property, certain fees and other expenses you pay are part of your cost basis in the property. Free income tax service Some of these expenses are discussed next. Free income tax service Lump sum purchase. Free income tax service   If you buy improvements, such as buildings, and the land on which they stand for a lump sum, allocate your cost basis between the land and improvements. Free income tax service Allocate the cost basis according to the respective fair market values (FMVs) of the land and improvements at the time of purchase. Free income tax service Figure the basis of each asset by multiplying the lump sum by a fraction. Free income tax service The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. Free income tax service Fair market value (FMV). Free income tax service   FMV is the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts. Free income tax service Sales of similar property on or about the same date may help in figuring the FMV of the property. Free income tax service If you are not certain of the FMV of the land and improvements, you can allocate the basis according to their assessed values for real estate tax purposes. Free income tax service Real estate taxes. Free income tax service   If you pay the real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis. Free income tax service   If you reimburse the seller for taxes the seller paid for you, you generally can deduct that amount as a tax expense. Free income tax service Whether or not you reimburse the seller, do not include that amount in the basis of your property. Free income tax service Settlement costs. Free income tax service   Your basis includes the settlement fees and closing costs for buying the property. Free income tax service See Publication 551 for a detailed list of items you can and cannot include in basis. Free income tax service   Do not include fees and costs for getting a loan on the property. Free income tax service Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Free income tax service Points. Free income tax service   If you pay points to get a loan (including a mortgage, second mortgage, or line-of-credit), do not add the points to the basis of the related property. Free income tax service You may be able to deduct the points currently or over the term of the loan. Free income tax service For more information about deducting points, see Points in chapter 4 of Publication 535. Free income tax service Assumption of a mortgage. Free income tax service   If you buy property and assume (or buy the property subject to) an existing mortgage, your basis includes the amount you pay for the property plus the amount you owe on the mortgage. Free income tax service Example. Free income tax service If you buy a farm for $100,000 cash and assume a mortgage of $400,000, your basis is $500,000. Free income tax service Constructing assets. Free income tax service   If you build property or have assets built for you, your expenses for this construction are part of your basis. Free income tax service Some of these expenses include the following costs: Land, Labor and materials, Architect's fees, Building permit charges, Payments to contractors, Payments for rental equipment, and Inspection fees. Free income tax service   In addition, if you use your own employees, farm materials, and equipment to build an asset, do not deduct the following expenses. Free income tax service You must capitalize them (include them in the asset's basis). Free income tax service Employee wages paid for the construction work, reduced by any employment credits allowed. Free income tax service Depreciation on equipment you own while it is used in the construction. Free income tax service Operating and maintenance costs for equipment used in the construction. Free income tax service The cost of business supplies and materials used in the construction. Free income tax service    Do not include the value of your own labor, or any other labor you did not pay for, in the basis of any property you construct. Free income tax service Allocating the Basis In some instances, the rules for determining basis apply to a group of assets acquired in the same transaction or to property that consists of separate items. Free income tax service To determine the basis of these assets or separate items, there must be an allocation of basis. Free income tax service Group of assets acquired. Free income tax service   If you buy multiple assets for a lump sum, allocate the amount you pay among the assets. Free income tax service Use this allocation to figure your basis for depreciation and gain or loss on a later disposition of any of these assets. Free income tax service You and the seller may agree in the sales contract to a specific allocation of the purchase price among the assets. Free income tax service If this allocation is based on the value of each asset and you and the seller have adverse tax interests, the allocation generally will be accepted. Free income tax service Farming business acquired. Free income tax service   If you buy a group of assets that makes up a farming business, there are special rules you must use to allocate the purchase price among the assets. Free income tax service Generally, reduce the purchase price by any cash received. Free income tax service Allocate the remaining purchase price to the other business assets received in proportion to (but not more than) their FMV and in a certain order. Free income tax service See Trade or Business Acquired under Allocating the Basis in Publication 551 for more information. Free income tax service Transplanted embryo. Free income tax service   If you buy a cow that is pregnant with a transplanted embryo, allocate to the basis of the cow the part of the purchase price equal to the FMV of the cow without the implant. Free income tax service Allocate the rest of the purchase price to the basis of the calf. Free income tax service Neither the cost allocated to the cow nor the cost allocated to the calf is deductible as a current business expense. Free income tax service Uniform Capitalization Rules Under the uniform capitalization rules, you must include certain direct and indirect costs in the basis of property you produce or in your inventory costs, rather than claim them as a current deduction. Free income tax service You recover these costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. Free income tax service Generally, you are subject to the uniform capitalization rules if you do any of the following: Produce real or tangible personal property, or Acquire property for resale. Free income tax service However, this rule does not apply to personal property if your average annual gross receipts for the 3-tax-year period ending with the year preceding the current tax year are $10 million or less. Free income tax service You produce property if you construct, build, install, manufacture, develop, improve, or create the property. Free income tax service You are not subject to the uniform capitalization rules if the property is produced for personal use. Free income tax service In a farming business, you produce property if you raise or grow any agricultural or horticultural commodity, including plants and animals. Free income tax service Plants. Free income tax service   A plant produced in a farming business includes the following items: A fruit, nut, or other crop-bearing tree; An ornamental tree; A vine; A bush; Sod; and The crop or yield of a plant that will have more than one crop or yield. Free income tax service Animals. Free income tax service   An animal produced in a farming business includes any stock, poultry or other bird, and fish or other sea life. Free income tax service The direct and indirect costs of producing plants or animals include preparatory costs and preproductive period costs. Free income tax service Preparatory costs include the acquisition costs of the seed, seedling, plant, or animal. Free income tax service For plants, preproductive period costs include the costs of items such as irrigation, pruning, frost protection, spraying, and harvesting. Free income tax service For animals, preproductive period costs include the costs of items such as feed, maintaining pasture or pen areas, breeding, veterinary services, and bedding. Free income tax service Exceptions. Free income tax service   In a farming business, the uniform capitalization rules do not apply to: Any animal, Any plant with a preproductive period of 2 years or less, or Any costs of replanting certain plants lost or damaged due to casualty. Free income tax service   Exceptions (1) and (2) do not apply to a corporation, partnership, or tax shelter required to use an accrual method of accounting. Free income tax service See Accrual Method Required under Accounting Methods in chapter 2. Free income tax service   In addition, you can elect not to use the uniform capitalization rules for plants with a preproductive period of more than 2 years. Free income tax service If you make this election, special rules apply. Free income tax service This election cannot be made by a corporation, partnership, or tax shelter required to use an accrual method of accounting. Free income tax service This election also does not apply to any costs incurred for the planting, cultivation, maintenance, or development of any citrus or almond grove (or any part thereof) within the first 4 years the trees were planted. Free income tax service    If you elect not to use the uniform capitalization rules, you must use the alternative depreciation system for all property used in any of your farming businesses and placed in service in any tax year during which the election is in effect. Free income tax service See chapter 7, for additional information on depreciation. Free income tax service Example. Free income tax service You grow trees that have a preproductive period of more than 2 years. Free income tax service The trees produce an annual crop. Free income tax service You are an individual and the uniform capitalization rules apply to your farming business. Free income tax service You must capitalize the direct costs and an allocable part of indirect costs incurred due to the production of the trees. Free income tax service You are not required to capitalize the costs of producing the annual crop because its preproductive period is 2 years or less. Free income tax service Preproductive period of more than 2 years. Free income tax service   The preproductive period of plants grown in commercial quantities in the United States is based on their nationwide weighted average preproductive period. Free income tax service Plants producing the crops or yields shown in Table 6-1 have a nationwide weighted average preproductive period of more than 2 years. Free income tax service Other plants (not shown in Table 6-1) may also have a nationwide weighted average preproductive period of more than 2 years. Free income tax service More information. Free income tax service   For more information on the uniform capitalization rules that apply to property produced in a farming business, see Regulations section 1. Free income tax service 263A-4. Free income tax service Table 6-1. Free income tax service Plants With a Preproductive Period of More Than 2 Years Plants producing the following crops or yields have a nationwide weighted average preproductive period of more than 2 years. Free income tax service Almonds Apples Apricots Avocados Blueberries Cherries Chestnuts Coffee beans Currants Dates Figs Grapefruit Grapes Guavas Kiwifruit Kumquats Lemons Limes Macadamia nuts Mangoes Nectarines Olives Oranges Peaches Pears Pecans Persimmons Pistachio nuts Plums Pomegranates Prunes Tangelos Tangerines Tangors Walnuts Adjusted Basis Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments to the cost basis or basis other than cost (discussed later) of the property. Free income tax service The adjustments to the original basis are increases or decreases to the cost basis or other basis which result in the adjusted basis of the property. Free income tax service Increases to Basis Increase the basis of any property by all items properly added to a capital account. Free income tax service These include the cost of any improvements having a useful life of more than 1 year. Free income tax service The following costs increase the basis of property. Free income tax service The cost of extending utility service lines to property. Free income tax service Legal fees, such as the cost of defending and perfecting title. Free income tax service Legal fees for seeking a decrease in an assessment levied against property to pay for local improvements. Free income tax service Assessments for items such as paving roads and building ditches that increase the value of the property assessed. Free income tax service Do not deduct these expenses as taxes. Free income tax service However, you can deduct as taxes amounts assessed for maintenance or repairs, or for meeting interest charges related to the improvements. Free income tax service If you make additions or improvements to business property, depreciate the basis of each addition or improvement as separate depreciable property using the rules that would apply to the original property if you had placed it in service at the same time you placed the addition or improvement in service. Free income tax service See chapter 7. Free income tax service Deducting vs. Free income tax service capitalizing costs. Free income tax service   Do not add to your basis costs you can deduct as current expenses. Free income tax service For example, amounts paid for incidental repairs or maintenance are deductible as business expenses and are not added to basis. Free income tax service However, you can elect either to deduct or to capitalize certain other costs. Free income tax service See chapter 7 in Publication 535. Free income tax service Decreases to Basis The following are some items that reduce the basis of property. Free income tax service Section 179 deduction. Free income tax service Deductions previously allowed or allowable for amortization, depreciation, and depletion. Free income tax service Alternative motor vehicle credit. Free income tax service See Form 8910. Free income tax service Alternative fuel vehicle refueling property credit. Free income tax service See Form 8911. Free income tax service Residential energy efficient property credits. Free income tax service See Form 5695. Free income tax service Investment credit (part or all) taken. Free income tax service Casualty and theft losses and insurance reimbursements. Free income tax service Payments you receive for granting an easement. Free income tax service Exclusion from income of subsidies for energy conservation measures. Free income tax service Certain canceled debt excluded from income. Free income tax service Rebates from a manufacturer or seller. Free income tax service Patronage dividends received from a cooperative association as a result of a purchase of property. Free income tax service See Patronage Dividends in chapter 3. Free income tax service Gas-guzzler tax. Free income tax service See Form 6197. Free income tax service Some of these items are discussed next. Free income tax service For a more detailed list of items that decrease basis, see section 1016 of the Internal Revenue Code and Publication 551. Free income tax service Depreciation and section 179 deduction. Free income tax service   The adjustments you must make to the basis of the property if you take the section 179 deduction or depreciate the property are explained next. Free income tax service For more information on these deductions, see chapter 7. Free income tax service Section 179 deduction. Free income tax service   If you take the section 179 expense deduction for all or part of the cost of qualifying business property, decrease the basis of the property by the deduction. Free income tax service Depreciation. Free income tax service   Decrease the basis of property by the depreciation you deducted or could have deducted on your tax returns under the method of depreciation you chose. Free income tax service If you took less depreciation than you could have under the method chosen, decrease the basis by the amount you could have taken under that method. Free income tax service If you did not take a depreciation deduction, reduce the basis by the full amount of the depreciation you could have taken. Free income tax service   If you deducted more depreciation than you should have, decrease your basis by the amount you should have deducted plus the part of the excess depreciation you deducted that actually reduced your tax liability for any year. Free income tax service   See chapter 7 for information on figuring the depreciation you should have claimed. Free income tax service   In decreasing your basis for depreciation, take into account the amount deducted on your tax returns as depreciation and any depreciation you must capitalize under the uniform capitalization rules. Free income tax service Casualty and theft losses. Free income tax service   If you have a casualty or theft loss, decrease the basis of the property by any insurance or other reimbursement. Free income tax service Also, decrease it by any deductible loss not covered by insurance. Free income tax service See chapter 11 for information about figuring your casualty or theft loss. Free income tax service   You must increase your basis in the property by the amount you spend on clean-up costs (such as debris removal) and repairs that restore the property to its pre-casualty condition. Free income tax service To make this determination, compare the repaired property to the property before the casualty. Free income tax service Easements. Free income tax service   The amount you receive for granting an easement is usually considered to be proceeds from the sale of an interest in the real property. Free income tax service It reduces the basis of the affected part of the property. Free income tax service If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain. Free income tax service See Easements and rights-of-way in chapter 3. Free income tax service Exclusion from income of subsidies for energy conservation measures. Free income tax service   You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of an energy conservation measure for a dwelling unit. Free income tax service Reduce the basis of the property by the excluded amount. Free income tax service Canceled debt excluded from income. Free income tax service   If a debt you owe is canceled or forgiven, other than as a gift or bequest, you generally must include the canceled amount in your gross income for tax purposes. Free income tax service A debt includes any indebtedness for which you are liable or which attaches to property you hold. Free income tax service   You can exclude your canceled debt from income if the debt is any of the following. Free income tax service Debt canceled in a bankruptcy case or when you are insolvent. Free income tax service Qualified farm debt. Free income tax service Qualified real property business debt (provided you are not a C corporation). Free income tax service Qualified principal residence indebtedness. Free income tax service Discharge of certain indebtedness of a qualified individual because of Midwestern disasters. Free income tax service If you exclude canceled debt described in (1) or (2), you may have to reduce the basis of your depreciable and nondepreciable property. Free income tax service If you exclude canceled debt described in (3), you must only reduce the basis of your depreciable property by the excluded amount. Free income tax service   For more information about canceled debt in a bankruptcy case, see Publication 908, Bankruptcy Tax Guide. Free income tax service For more information about insolvency and canceled debt that is qualified farm debt or qualified principal residence indebtedness, see chapter 3. Free income tax service For more information about qualified real property business debt, see Publication 334, Tax Guide for Small Business. Free income tax service For more information about canceled debt in Midwestern disaster areas, see Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas. Free income tax service Basis Other Than Cost There are times when you cannot use cost as basis. Free income tax service In these situations, the fair market value or the adjusted basis of property may be used. Free income tax service Examples are discussed next. Free income tax service Property changed from personal to business or rental use. Free income tax service   When you hold property for personal use and then change it to business use or use it to produce rent, you must figure its basis for depreciation. Free income tax service An example of changing property from personal to business use would be changing the use of your pickup truck that you originally purchased for your personal use to use in your farming business. Free income tax service   The basis for depreciation is the lesser of: The FMV of the property on the date of the change, or Your adjusted basis on the date of the change. Free income tax service   If you later sell or dispose of this property, the basis you use will depend on whether you are figuring a gain or loss. Free income tax service The basis for figuring a gain is your adjusted basis in the property when you sell the property. Free income tax service Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. Free income tax service Then make adjustments (increases and decreases) for the period after the change in the property's use, as discussed earlier under Adjusted Basis . Free income tax service Property received for services. Free income tax service   If you receive property for services, include the property's FMV in income. Free income tax service The amount you include in income becomes your basis. Free income tax service If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary. Free income tax service Example. Free income tax service George Smith is an accountant and also operates a farming business. Free income tax service George agreed to do some accounting work for his neighbor in exchange for a dairy cow. Free income tax service The accounting work and the cow are each worth $1,500. Free income tax service George must include $1,500 in income for his accounting services. Free income tax service George's basis in the cow is $1,500. Free income tax service Taxable Exchanges A taxable exchange is one in which the gain is taxable, or the loss is deductible. Free income tax service A taxable gain or deductible loss also is known as a recognized gain or loss. Free income tax service A taxable exchange occurs when you receive cash or get property that is not similar or related in use to the property exchanged. Free income tax service If you receive property in exchange for other property in a taxable exchange, the basis of the property you receive is usually its FMV at the time of the exchange. Free income tax service Example. Free income tax service You trade a tract of farmland with an adjusted basis of $2,000 for a tractor that has an FMV of $6,000. Free income tax service You must report a taxable gain of $4,000 for the land. Free income tax service The tractor has a basis of $6,000. Free income tax service Involuntary Conversions If you receive property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, figure the basis of the replacement property you receive using the basis of the converted property. Free income tax service Similar or related property. Free income tax service   If the replacement property is similar or related in service or use to the converted property, the replacement property's basis is the same as the old property's basis on the date of the conversion. Free income tax service However, make the following adjustments. Free income tax service Decrease the basis by the following amounts. Free income tax service Any loss you recognize on the involuntary conversion. Free income tax service Any money you receive that you do not spend on similar property. Free income tax service Increase the basis by the following amounts. Free income tax service Any gain you recognize on the involuntary conversion. Free income tax service Any cost of acquiring the replacement property. Free income tax service Money or property not similar or related. Free income tax service   If you receive money or property not similar or related in service or use to the converted property and you buy replacement property similar or related in service or use to the converted property, the basis of the replacement property is its cost decreased by the gain not recognized on the involuntary conversion. Free income tax service Allocating the basis. Free income tax service   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. Free income tax service Basis for depreciation. Free income tax service   Special rules apply in determining and depreciating the basis of MACRS property acquired in an involuntary conversion. Free income tax service For information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7. Free income tax service For more information about involuntary conversions, see chapter 11. Free income tax service Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. Free income tax service A nontaxable gain or loss also is known as an unrecognized gain or loss. Free income tax service If you receive property in a nontaxable exchange, its basis is usually the same as the basis of the property you transferred. Free income tax service Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. Free income tax service For an exchange to qualify as a like-kind exchange, you must hold for business or investment purposes both the property you transfer and the property you receive. Free income tax service There must also be an exchange of like-kind property. Free income tax service For more information, see Like-Kind Exchanges in  chapter 8. Free income tax service The basis of the property you receive generally is the same as the adjusted basis of the property you gave up. Free income tax service Example 1. Free income tax service You traded a truck you used in your farming business for a new smaller truck to use in farming. Free income tax service The adjusted basis of the old truck was $10,000. Free income tax service The FMV of the new truck is $30,000. Free income tax service Because this is a nontaxable exchange, you do not recognize any gain, and your basis in the new truck is $10,000, the same as the adjusted basis of the truck you traded. Free income tax service Example 2. Free income tax service You trade a field cultivator (adjusted basis of $8,000) for a planter (FMV of $9,000). Free income tax service You use both the field cultivator and the planter in your farming business. Free income tax service The basis of the planter you receive is $8,000, the same as the field cultivator traded Exchange expenses. Free income tax service   Exchange expenses generally are the closing costs that you pay. Free income tax service They include such items as brokerage commissions, attorney fees, and deed preparation fees. Free income tax service Add them to the basis of the like-kind property you receive. Free income tax service Property plus cash. Free income tax service   If you trade property in a like-kind exchange and also pay money, the basis of the property you receive is the adjusted basis of the property you gave up plus the money you paid. Free income tax service Example. Free income tax service You trade in a truck (adjusted basis of $3,000) for another truck (FMV of $7,500) and pay $4,000. Free income tax service Your basis in the new truck is $7,000 (the $3,000 adjusted basis of the old truck plus the $4,000 cash). Free income tax service Special rules for related persons. Free income tax service   If a like-kind exchange takes place directly or indirectly between related persons and either party disposes of the property within 2 years after the exchange, the exchange no longer qualifies for like-kind exchange treatment. Free income tax service Each person must report any gain or loss not recognized on the original exchange unless the loss is not deductible under the related party rules. Free income tax service Each person reports it on the tax return filed for the year in which the later disposition occurred. Free income tax service If this rule applies, the basis of the property received in the original exchange will be its FMV. Free income tax service For more information, see chapter 8. Free income tax service Exchange of business property. Free income tax service   Exchanging the property of one business for the property of another business generally is a multiple property exchange. Free income tax service For information on figuring basis, see Multiple Property Exchanges in chapter 1 of Publication 544. Free income tax service Basis for depreciation. Free income tax service   Special rules apply in determining and depreciating the basis of MACRS property acquired in a like-kind transaction. Free income tax service For information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7. Free income tax service Partially Nontaxable Exchanges A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like-kind property. Free income tax service The basis of the property you receive is the same as the adjusted basis of the property you gave up with the following adjustments. Free income tax service Decrease the basis by the following amounts. Free income tax service Any money you receive. Free income tax service Any loss you recognize on the exchange. Free income tax service Increase the basis by the following amounts. Free income tax service Any additional costs you incur. Free income tax service Any gain you recognize on the exchange. Free income tax service If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. Free income tax service Example 1. Free income tax service You trade farmland (basis of $100,000) for another tract of farmland (FMV of $110,000) and $30,000 cash. Free income tax service You realize a gain of $40,000. Free income tax service This is the FMV of the land received plus the cash minus the basis of the land you traded ($110,000 + $30,000 − $100,000). Free income tax service Include your gain in income (recognize gain) only to the extent of the cash received. Free income tax service Your basis in the land you received is figured as follows. Free income tax service Basis of land traded $100,000 Minus: Cash received (adjustment 1(a)) − 30,000   $70,000 Plus: Gain recognized (adjustment 2(b)) + 30,000 Basis of land received $100,000 Example 2. Free income tax service You trade a truck (adjusted basis of $22,750) for another truck (FMV of $20,000) and $10,000 cash. Free income tax service You realize a gain of $7,250. Free income tax service This is the FMV of the truck received plus the cash minus the adjusted basis of the truck you traded ($20,000 + $10,000 − $22,750). Free income tax service You include all the gain in your income (recognize gain) because the gain is less than the cash you received. Free income tax service Your basis in the truck you received is figured as follows. Free income tax service Adjusted basis of truck traded $22,750 Minus: Cash received (adjustment 1(a)) −10,000   $12,750 Plus: Gain recognized (adjustment 2(b)) + 7,250 Basis of truck received $20,000 Allocation of basis. Free income tax service   If you receive like-kind and unlike properties in the exchange, allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. Free income tax service The rest is the basis of the like-kind property. Free income tax service Example. Free income tax service You traded a tractor with an adjusted basis of $15,000 for another tractor that had an FMV of $12,500. Free income tax service You also received $1,000 cash and a truck that had an FMV of $3,000. Free income tax service The truck is unlike property. Free income tax service You realized a gain of $1,500. Free income tax service This is the FMV of the tractor received plus the FMV of the truck received plus the cash minus the adjusted basis of the tractor you traded ($12,500 + $3,000 + $1,000 − $15,000). Free income tax service You include in income (recognize) all $1,500 of the gain because it is less than the FMV of the unlike property plus the cash received. Free income tax service Your basis in the properties you received is figured as follows. Free income tax service Adjusted basis of old tractor $15,000 Minus: Cash received (adjustment 1(a)) − 1,000   $14,000 Plus: Gain recognized (adjustment 2(b)) + 1,500 Total basis of properties received $15,500 Allocate the total basis of $15,500 first to the unlike property—the truck ($3,000). Free income tax service This is the truck's FMV. Free income tax service The rest ($12,500) is the basis of the tractor. Free income tax service Sale and Purchase If you sell property and buy similar property in two mutually dependent transactions, you may have to treat the sale and purchase as a single nontaxable exchange. Free income tax service Example. Free income tax service You used a tractor on your farm for 3 years. Free income tax service Its adjusted basis is $22,000 and its FMV is $40,000. Free income tax service You are interested in a new tractor, which sells for $60,000. Free income tax service Ordinarily, you would trade your old tractor for the new one and pay the dealer $20,000. Free income tax service Your basis for depreciating the new tractor would then be $42,000 ($20,000 + $22,000, the adjusted basis of your old tractor). Free income tax service However, you want a higher basis for depreciating the new tractor, so you agree to pay the dealer $60,000 for the new tractor if he will pay you $40,000 for your old tractor. Free income tax service Because the two transactions are dependent on each other, you are treated as having exchanged your old tractor for the new one and paid $20,000 ($60,000 − $40,000). Free income tax service Your basis for depreciating the new tractor is $42,000, the same as if you traded the old tractor. Free income tax service Property Received as a Gift To figure the basis of property you receive as a gift, you must know its adjusted basis (defined earlier) to the donor just before it was given to you. Free income tax service You also must know its FMV at the time it was given to you and any gift tax paid on it. Free income tax service FMV equal to or greater than donor's adjusted basis. Free income tax service   If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis when you received the gift. Free income tax service Increase your basis by all or part of any gift tax paid, depending on the date of the gift. Free income tax service   Also, for figuring gain or loss from a sale or other disposition of the property, or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis (the donor's adjusted basis) by any required adjustments to basis while you held the property. Free income tax service See Adjusted Basis , earlier. Free income tax service   If you received a gift during the tax year, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it due to the net increase in value of the gift. Free income tax service Figure the increase by multiplying the gift tax paid by the following fraction. Free income tax service Net increase in value of the gift Amount of the gift   The net increase in value of the gift is the FMV of the gift minus the donor's adjusted basis. Free income tax service The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. Free income tax service Example. Free income tax service In 2013, you received a gift of property from your mother that had an FMV of $50,000. Free income tax service Her adjusted basis was $20,000. Free income tax service The amount of the gift for gift tax purposes was $36,000 ($50,000 minus the $14,000 annual exclusion). Free income tax service She paid a gift tax of $7,320. Free income tax service Your basis, $26,076, is figured as follows. Free income tax service Fair market value $50,000 Minus: Adjusted basis −20,000 Net increase in value $30,000 Gift tax paid $7,320 Multiplied by ($30,000 ÷ $36,000) × . Free income tax service 83 Gift tax due to net increase in value $6,076 Adjusted basis of property to your mother +20,000 Your basis in the property $26,076 Note. Free income tax service If you received a gift before 1977, your basis in the gift (the donor's adjusted basis) includes any gift tax paid on it. Free income tax service However, your basis cannot exceed the FMV of the gift when it was given to you. Free income tax service FMV less than donor's adjusted basis. Free income tax service   If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. Free income tax service Your basis for figuring gain is the donor's adjusted basis plus or minus any required adjustments to basis while you held the property. Free income tax service Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustments to basis while you held the property. Free income tax service (See Adjusted Basis , earlier. Free income tax service )   If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and get a gain, you have neither gain nor loss on the sale or other disposition of the property. Free income tax service Example. Free income tax service You received farmland as a gift from your parents when they retired from farming. Free income tax service At the time of the gift, the land had an FMV of $80,000. Free income tax service Your parents' adjusted basis was $100,000. Free income tax service After you received the land, no events occurred that would increase or decrease your basis. Free income tax service If you sell the land for $120,000, you will have a $20,000 gain because you must use the donor's adjusted basis at the time of the gift ($100,000) as your basis to figure a gain. Free income tax service If you sell the land for $70,000, you will have a $10,000 loss because you must use the FMV at the time of the gift ($80,000) as your basis to figure a loss. Free income tax service If the sales price is between $80,000 and $100,000, you have neither gain nor loss. Free income tax service For instance, if the sales price was $90,000 and you tried to figure a gain using the donor's adjusted basis ($100,000), you would get a $10,000 loss. Free income tax service If you then tried to figure a loss using the FMV ($80,000), you would get a $10,000 gain. Free income tax service Business property. Free income tax service   If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deductions is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property. Free income tax service Property Transferred From a Spouse The basis of property transferred to you or transferred in trust for your benefit by your spouse is the same as your spouse's adjusted basis. Free income tax service The same rule applies to a transfer by your former spouse if the transfer is incident to divorce. Free income tax service However, for property transferred in trust, adjust your basis for any gain recognized by your spouse or former spouse if the liabilities assumed plus the liabilities to which the property is subject are more than the adjusted basis of the property transferred. Free income tax service The transferor must give you the records needed to determine the adjusted basis and holding period of the property as of the date of the transfer. Free income tax service For more information, see Property Settlements in Publication 504, Divorced or Separated Individuals. Free income tax service Inherited Property Your basis in property you inherited from a decedent, who died before January 1, 2010, or after December 31, 2010, is generally one of the following: The FMV of the property at the date of the decedent's death. Free income tax service If a federal estate return is filed, you can use its appraised value. Free income tax service The FMV on the alternate valuation date, if the personal representative for the estate elects to use alternate valuation. Free income tax service For information on the alternate valuation, see the Instructions for Form 706. Free income tax service The decedent's adjusted basis in land to the extent of the value that is excluded from the decedent's taxable estate as a qualified conservation easement. Free income tax service If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. Free income tax service Special-use valuation method. Free income tax service   Under certain conditions, when a person dies, the executor or personal representative of that person's estate may elect to value qualified real property at other than its FMV. Free income tax service If so, the executor or personal representative values the qualified real property based on its use as a farm or other closely held business. Free income tax service If the executor or personal representative elects this method of valuation for estate tax purposes, this value is the basis of the property for the qualified heirs. Free income tax service The qualified heirs should be able to get the necessary value from the executor or personal representative of the estate. Free income tax service   If you are a qualified heir who received special-use valuation property, increase your basis by any gain recognized by the estate or trust because of post-death appreciation. Free income tax service Post-death appreciation is the property's FMV on the date of distribution minus the property's FMV either on the date of the individual's death or on the alternate valuation date. Free income tax service Figure all FMVs without regard to the special-use valuation. Free income tax service   You may be liable for an additional estate tax if, within 10 years after the death of the decedent, you transfer the property or the property stops being used as a farm. Free income tax service This tax does not apply if you dispose of the property in a like-kind exchange or in an involuntary conversion in which all of the proceeds are reinvested in qualified replacement property. Free income tax service The tax also does not apply if you transfer the property to a member of your family and certain requirements are met. Free income tax service   You can elect to increase your basis in special-use valuation property if it becomes subject to the additional estate tax. Free income tax service To increase your basis, you must make an irrevocable election and pay interest on the additional estate tax figured from the date 9 months after the decedent's death until the date of payment of the additional estate tax. Free income tax service If you meet these requirements, increase your basis in the property to its FMV on the date of the decedent's death or the alternate valuation date. Free income tax service The increase in your basis is considered to have occurred immediately before the event that resulted in the additional estate tax. Free income tax service   You make the election by filing, with Form 706-A, United States Additional Estate Tax Return, a statement that: Contains your (and the estate's) name, address, and taxpayer identification number; Identifies the election as an election under section 1016(c) of the Internal Revenue Code; Specifies the property for which you are making the election; and Provides any additional information required by the Form 706-A instructions. Free income tax service   For more information, see Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, Form 706-A, and the related instructions. Free income tax service Property inherited from a decedent who died in 2010. Free income tax service   If you inherited property from a decedent who died in 2010, different rules may apply. Free income tax service See Publication 4895, Tax Treatment of Property Acquired From a Decendent Dying in 2010, for details. Free income tax service Property Distributed From a Partnership or Corporation The following rules apply to determine a partner's basis and a shareholder's basis in property distributed respectively from a partnership to the partner with respect to the partner's interest in the partnership and from a corporation to the shareholder with respect to the shareholder's ownership of stock in the corporation. Free income tax service Partner's basis. Free income tax service   Unless there is a complete liquidation of a partner's interest, the basis of property (other than money) distributed by a partnership to the partner is its adjusted basis to the partnership immediately before the distribution. Free income tax service However, the basis of the property to the partner cannot be more than the adjusted basis of his or her interest in the partnership reduced by any money received in the same transaction. Free income tax service For more information, see Partner's Basis for Distributed Property in Publication 541, Partnerships. Free income tax service Shareholder's basis. Free income tax service   The basis of property distributed by a corporation to a shareholder is its fair market value. Free income tax service For more information about corporate distributions, see Distributions to Shareholders in Publication 542, Corporations. Free income tax service Prev  Up  Next   Home   More Online Publications
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Update: Effect of Sequestration on Certain State & Local Government Filers of Form 8038-CP

Pursuant to the requirements of the Balanced Budget and Emergency Deficit Control Act of 1985, as amended, refund payments to certain state and local government filers claiming refundable credits under section 6431 of the Internal Revenue Code applicable to certain qualified bonds are subject to sequestration. This means that refund payments processed on or after October 1, 2013 and on or before September 30, 2014 will be reduced by the fiscal year 2014 sequestration rate of 7.2 percent, irrespective of when the amounts claimed by an issuer on any Form 8038-CP was filed with the IRS. The sequestration reduction rate will be applied unless and until a law is enacted that cancels or otherwise impacts the sequester, at which time the sequestration reduction rate is subject to change.

These reductions apply to Build America Bonds, Qualified School Construction Bonds, Qualified Zone Academy Bonds, New Clean Renewable Energy Bonds, and Qualified Energy Conservation Bonds for which the issuer elected to receive a direct credit subsidy pursuant to section 6431.  Issuers should complete Form 8038-CP in the manner provided by the Form 8038-CP Instructions, and affected issuers will be notified through correspondence that a portion of their requested payment was subject to the sequester reduction.  Issuers should use this correspondence to identify the portion(s) of amounts requested that were subject to the sequester reduction.

Issuers with any questions about the status of refunds claimed on Form 8038-CP, including any sequester reduction, should contact IRS Customer Account Services at 1-877-829-5500.

Click here to see the FY2013 article.

Page Last Reviewed or Updated: 26-Mar-2014

The Free Income Tax Service

Free income tax service 2. Free income tax service   Filing Status Table of Contents What's New Introduction Useful Items - You may want to see: Marital StatusDivorced persons. Free income tax service Divorce and remarriage. Free income tax service Annulled marriages. Free income tax service Head of household or qualifying widow(er) with dependent child. Free income tax service Considered married. Free income tax service Same-sex marriage. Free income tax service Spouse died during the year. Free income tax service Married persons living apart. Free income tax service Single Married Filing JointlyFiling a Joint Return Married Filing SeparatelySpecial Rules Head of HouseholdConsidered Unmarried Keeping Up a Home Qualifying Person Qualifying Widow(er) With Dependent Child What's New Filing status for same-sex married couples. Free income tax service  If you have a same-sex spouse whom you legally married in a state (or foreign country) that recognizes same-sex marriage, you and your spouse generally must use the married filing jointly or married filing separately filing status on your 2013 return, even if you and your spouse now live in a state (or foreign country) that does not recognize same-sex marriage. Free income tax service See Same-sex marriage under Marital Status, later. Free income tax service Introduction This chapter helps you determine which filing status to use. Free income tax service There are five filing statuses. Free income tax service Single. Free income tax service Married Filing Jointly. Free income tax service Married Filing Separately. Free income tax service Head of Household. Free income tax service Qualifying Widow(er) With Dependent Child. Free income tax service If more than one filing status applies to you, choose the one that will give you the lowest tax. Free income tax service You must determine your filing status before you can determine whether you must file a tax return (chapter 1), your standard deduction (chapter 20), and your tax (chapter 30). Free income tax service You also use your filing status to determine whether you are eligible to claim certain deductions and credits. Free income tax service Useful Items - You may want to see: Publication 501 Exemptions, Standard Deduction, and Filing Information 519 U. Free income tax service S. Free income tax service Tax Guide for Aliens 555 Community Property Marital Status In general, your filing status depends on whether you are considered unmarried or married. Free income tax service Unmarried persons. Free income tax service   You are considered unmarried for the whole year if, on the last day of your tax year, you are unmarried or legally separated from your spouse under a divorce or separate maintenance decree. Free income tax service State law governs whether you are married or legally separated under a divorce or separate maintenance decree. Free income tax service Divorced persons. Free income tax service   If you are divorced under a final decree by the last day of the year, you are considered unmarried for the whole year. Free income tax service Divorce and remarriage. Free income tax service   If you obtain a divorce for the sole purpose of filing tax returns as unmarried individuals, and at the time of divorce you intend to and do, in fact, remarry each other in the next tax year, you and your spouse must file as married individuals in both years. Free income tax service Annulled marriages. Free income tax service    If you obtain a court decree of annulment, which holds that no valid marriage ever existed, you are considered unmarried even if you filed joint returns for earlier years. Free income tax service You must file Form 1040X, Amended U. Free income tax service S. Free income tax service Individual Income Tax Return, claiming single or head of household status for all tax years that are affected by the annulment and are not closed by the statute of limitations for filing a tax return. Free income tax service Generally, for a credit or refund, you must file Form 1040X within 3 years (including extensions) after the date you filed your original return or within 2 years after the date you paid the tax, whichever is later. Free income tax service If you filed your original return early (for example, March 1), your return is considered filed on the due date (generally April 15). Free income tax service However, if you had an extension to file (for example, until October 15) but you filed earlier and we received it on July 1, your return is considered filed on July 1. Free income tax service Head of household or qualifying widow(er) with dependent child. Free income tax service   If you are considered unmarried, you may be able to file as a head of household or as a qualifying widow(er) with a dependent child. Free income tax service See Head of Household and Qualifying Widow(er) With Dependent Child to see if you qualify. Free income tax service Married persons. Free income tax service   If you are considered married, you and your spouse can file a joint return or separate returns. Free income tax service Considered married. Free income tax service   You are considered married for the whole year if, on the last day of your tax year, you and your spouse meet any one of the following tests. Free income tax service You are married and living together as a married couple. Free income tax service You are living together in a common law marriage recognized in the state where you now live or in the state where the common law marriage began. Free income tax service You are married and living apart, but not legally separated under a decree of divorce or separate maintenance. Free income tax service You are separated under an interlocutory (not final) decree of divorce. Free income tax service Same-sex marriage. Free income tax service   For federal tax purposes, individuals of the same sex are considered married if they were lawfully married in a state (or foreign country) whose laws authorize the marriage of two individuals of the same sex, even if the state (or foreign country) in which they now live does not recognize same-sex marriage. Free income tax service The term “spouse” includes an individual married to a person of the same sex if the couple is lawfully married under state (or foreign) law. Free income tax service However, individuals who have entered into a registered domestic partnership, civil union, or other similar relationship that is not considered a marriage under state (or foreign) law are not considered married for federal tax purposes. Free income tax service For more details, see Publication 501. Free income tax service Spouse died during the year. Free income tax service   If your spouse died during the year, you are considered married for the whole year for filing status purposes. Free income tax service   If you did not remarry before the end of the tax year, you can file a joint return for yourself and your deceased spouse. Free income tax service For the next 2 years, you may be entitled to the special benefits described later under Qualifying Widow(er) With Dependent Child . Free income tax service   If you remarried before the end of the tax year, you can file a joint return with your new spouse. Free income tax service Your deceased spouse's filing status is married filing separately for that year. Free income tax service Married persons living apart. Free income tax service   If you live apart from your spouse and meet certain tests, you may be able to file as head of household even if you are not divorced or legally separated. Free income tax service If you qualify to file as head of household instead of married filing separately, your standard deduction will be higher. Free income tax service Also, your tax may be lower, and you may be able to claim the earned income credit. Free income tax service See Head of Household , later. Free income tax service Single Your filing status is single if you are considered unmarried and you do not qualify for another filing status. Free income tax service To determine your marital status, see Marital Status , earlier. Free income tax service Widow(er). Free income tax service   Your filing status may be single if you were widowed before January 1, 2013, and did not remarry before the end of 2013. Free income tax service You may, however, be able to use another filing status that will give you a lower tax. Free income tax service See Head of Household and Qualifying Widow(er) With Dependent Child , later, to see if you qualify. Free income tax service How to file. Free income tax service   You can file Form 1040. Free income tax service If you have taxable income of less than $100,000, you may be able to file Form 1040A. Free income tax service If, in addition, you have no dependents, and are under 65 and not blind, and meet other requirements, you can file Form 1040EZ. Free income tax service If you file Form 1040A or Form 1040, show your filing status as single by checking the box on line 1. Free income tax service Use the Single column of the Tax Table or Section A of the Tax Computation Worksheet to figure your tax. Free income tax service Married Filing Jointly You can choose married filing jointly as your filing status if you are considered married and both you and your spouse agree to file a joint return. Free income tax service On a joint return, you and your spouse report your combined income and deduct your combined allowable expenses. Free income tax service You can file a joint return even if one of you had no income or deductions. Free income tax service If you and your spouse decide to file a joint return, your tax may be lower than your combined tax for the other filing statuses. Free income tax service Also, your standard deduction (if you do not itemize deductions) may be higher, and you may qualify for tax benefits that do not apply to other filing statuses. Free income tax service If you and your spouse each have income, you may want to figure your tax both on a joint return and on separate returns (using the filing status of married filing separately). Free income tax service You can choose the method that gives the two of you the lower combined tax. Free income tax service How to file. Free income tax service   If you file as married filing jointly, you can use Form 1040. Free income tax service If you and your spouse have taxable income of less than $100,000, you may be able to file Form 1040A. Free income tax service If, in addition, you and your spouse have no dependents, are both under 65 and not blind, and meet other requirements, you can file Form 1040EZ. Free income tax service If you file Form 1040 or Form 1040A, show this filing status by checking the box on line 2. Free income tax service Use the Married filing jointly column of the Tax Table or Section B of the Tax Computation Worksheet to figure your tax. Free income tax service Spouse died. Free income tax service   If your spouse died during the year, you are considered married for the whole year and can choose married filing jointly as your filing status. Free income tax service See Spouse died during the year under Marital Status, earlier, for more information. Free income tax service   If your spouse died in 2014 before filing a 2013 return, you can choose married filing jointly as your filing status on your 2013 return. Free income tax service Divorced persons. Free income tax service   If you are divorced under a final decree by the last day of the year, you are considered unmarried for the whole year and you cannot choose married filing jointly as your filing status. Free income tax service Filing a Joint Return Both you and your spouse must include all of your income, exemptions, and deductions on your joint return. Free income tax service Accounting period. Free income tax service   Both of you must use the same accounting period, but you can use different accounting methods. Free income tax service See Accounting Periods and Accounting Methods in chapter 1. Free income tax service Joint responsibility. Free income tax service   Both of you may be held responsible, jointly and individually, for the tax and any interest or penalty due on your joint return. Free income tax service This means that if one spouse does not pay the tax due, the other may have to. Free income tax service Or, if one spouse does not report the correct tax, both spouses may be responsible for any additional taxes assessed by the IRS. Free income tax service One spouse may be held responsible for all the tax due even if all the income was earned by the other spouse. Free income tax service You may want to file separately if: You believe your spouse is not reporting all of his or her income, or You do not want to be responsible for any taxes due if your spouse does not have enough tax withheld or does not pay enough estimated tax. Free income tax service Divorced taxpayer. Free income tax service   You may be held jointly and individually responsible for any tax, interest, and penalties due on a joint return filed before your divorce. Free income tax service This responsibility may apply even if your divorce decree states that your former spouse will be responsible for any amounts due on previously filed joint returns. Free income tax service Relief from joint responsibility. Free income tax service   In some cases, one spouse may be relieved of joint responsibility for tax, interest, and penalties on a joint return for items of the other spouse that were incorrectly reported on the joint return. Free income tax service You can ask for relief no matter how small the liability. Free income tax service   There are three types of relief available. Free income tax service Innocent spouse relief. Free income tax service Separation of liability (available only to joint filers who are divorced, widowed, legally separated, or have not lived together for the 12 months ending on the date the election for this relief is filed). Free income tax service Equitable relief. Free income tax service    You must file Form 8857, Request for Innocent Spouse Relief, to request relief from joint responsibility. Free income tax service Publication 971, Innocent Spouse Relief, explains these kinds of relief and who may qualify for them. Free income tax service Signing a joint return. Free income tax service   For a return to be considered a joint return, both spouses generally must sign the return. Free income tax service Spouse died before signing. Free income tax service   If your spouse died before signing the return, the executor or administrator must sign the return for your spouse. Free income tax service If neither you nor anyone else has yet been appointed as executor or administrator, you can sign the return for your spouse and enter “Filing as surviving spouse” in the area where you sign the return. Free income tax service Spouse away from home. Free income tax service   If your spouse is away from home, you should prepare the return, sign it, and send it to your spouse to sign so that it can be filed on time. Free income tax service Injury or disease prevents signing. Free income tax service   If your spouse cannot sign because of disease or injury and tells you to sign for him or her, you can sign your spouse's name in the proper space on the return followed by the words “By (your name), Husband (or Wife). Free income tax service ” Be sure to also sign in the space provided for your signature. Free income tax service Attach a dated statement, signed by you, to the return. Free income tax service The statement should include the form number of the return you are filing, the tax year, and the reason your spouse cannot sign, and should state that your spouse has agreed to your signing for him or her. Free income tax service Signing as guardian of spouse. Free income tax service   If you are the guardian of your spouse who is mentally incompetent, you can sign the return for your spouse as guardian. Free income tax service Spouse in combat zone. Free income tax service   You can sign a joint return for your spouse if your spouse cannot sign because he or she is serving in a combat zone (such as the Persian Gulf Area, Serbia, Montenegro, Albania, or Afghanistan), even if you do not have a power of attorney or other statement. Free income tax service Attach a signed statement to your return explaining that your spouse is serving in a combat zone. Free income tax service For more information on special tax rules for persons who are serving in a combat zone, or who are in missing status as a result of serving in a combat zone, see Publication 3, Armed Forces' Tax Guide. Free income tax service Other reasons spouse cannot sign. Free income tax service    If your spouse cannot sign the joint return for any other reason, you can sign for your spouse only if you are given a valid power of attorney (a legal document giving you permission to act for your spouse). Free income tax service Attach the power of attorney (or a copy of it) to your tax return. Free income tax service You can use Form 2848, Power of Attorney and Declaration of Representative. Free income tax service Nonresident alien or dual-status alien. Free income tax service   Generally, a married couple cannot file a joint return if either one is a nonresident alien at any time during the tax year. Free income tax service However, if one spouse was a nonresident alien or dual-status alien who was married to a U. Free income tax service S. Free income tax service citizen or resident alien at the end of the year, the spouses can choose to file a joint return. Free income tax service If you do file a joint return, you and your spouse are both treated as U. Free income tax service S. Free income tax service residents for the entire tax year. Free income tax service See chapter 1 of Publication 519. Free income tax service Married Filing Separately You can choose married filing separately as your filing status if you are married. Free income tax service This filing status may benefit you if you want to be responsible only for your own tax or if it results in less tax than filing a joint return. Free income tax service If you and your spouse do not agree to file a joint return, you must use this filing status unless you qualify for head of household status, discussed later. Free income tax service You may be able to choose head of household filing status if you are considered unmarried because you live apart from your spouse and meet certain tests (explained later, under Head of Household ). Free income tax service This can apply to you even if you are not divorced or legally separated. Free income tax service If you qualify to file as head of household, instead of as married filing separately, your tax may be lower, you may be able to claim the earned income credit and certain other credits, and your standard deduction will be higher. Free income tax service The head of household filing status allows you to choose the standard deduction even if your spouse chooses to itemize deductions. Free income tax service See Head of Household , later, for more information. Free income tax service You will generally pay more combined tax on separate returns than you would on a joint return for the reasons listed under Special Rules, later. Free income tax service However, unless you are required to file separately, you should figure your tax both ways (on a joint return and on separate returns). Free income tax service This way you can make sure you are using the filing status that results in the lowest combined tax. Free income tax service When figuring the combined tax of a married couple, you may want to consider state taxes as well as federal taxes. Free income tax service How to file. Free income tax service   If you file a separate return, you generally report only your own income, exemptions, credits, and deductions. Free income tax service You can claim an exemption for your spouse only if your spouse had no gross income, is not filing a return, and was not the dependent of another person. Free income tax service You can file Form 1040. Free income tax service If your taxable income is less than $100,000, you may be able to file Form 1040A. Free income tax service Select this filing status by checking the box on line 3 of either form. Free income tax service Enter your spouse's full name and SSN or ITIN in the spaces provided. Free income tax service If your spouse does not have and is not required to have an SSN or ITIN, enter “NRA” in the space for your spouse's SSN. Free income tax service Use the Married filing separately column of the Tax Table or Section C of the Tax Computation Worksheet to figure your tax. Free income tax service Special Rules If you choose married filing separately as your filing status, the following special rules apply. Free income tax service Because of these special rules, you usually pay more tax on a separate return than if you use another filing status you qualify for. Free income tax service   Your tax rate generally is higher than on a joint return. Free income tax service Your exemption amount for figuring the alternative minimum tax is half that allowed on a joint return. Free income tax service You cannot take the credit for child and dependent care expenses in most cases, and the amount you can exclude from income under an employer's dependent care assistance program is limited to $2,500 (instead of $5,000). Free income tax service If you are legally separated or living apart from your spouse, you may be able to file a separate return and still take the credit. Free income tax service For more information about these expenses, the credit, and the exclusion, see chapter 32. Free income tax service You cannot take the earned income credit. Free income tax service You cannot take the exclusion or credit for adoption expenses in most cases. Free income tax service You cannot take the education credits (the American opportunity credit and lifetime learning credit), the deduction for student loan interest, or the tuition and fees deduction. Free income tax service You cannot exclude any interest income from qualified U. Free income tax service S. Free income tax service savings bonds you used for higher education expenses. Free income tax service If you lived with your spouse at any time during the tax year: You cannot claim the credit for the elderly or the disabled, and You must include in income a greater percentage (up to 85%) of any social security or equivalent railroad retirement benefits you received. Free income tax service The following credits and deductions are reduced at income levels half those for a joint return: The child tax credit, The retirement savings contributions credit, The deduction for personal exemptions, and Itemized deductions. Free income tax service Your capital loss deduction limit is $1,500 (instead of $3,000 on a joint return). Free income tax service If your spouse itemizes deductions, you cannot claim the standard deduction. Free income tax service If you can claim the standard deduction, your basic standard deduction is half the amount allowed on a joint return. Free income tax service Adjusted gross income (AGI) limits. Free income tax service   If your AGI on a separate return is lower than it would have been on a joint return, you may be able to deduct a larger amount for certain deductions that are limited by AGI, such as medical expenses. Free income tax service Individual retirement arrangements (IRAs). Free income tax service   You may not be able to deduct all or part of your contributions to a traditional IRA if you or your spouse were covered by an employee retirement plan at work during the year. Free income tax service Your deduction is reduced or eliminated if your income is more than a certain amount. Free income tax service This amount is much lower for married individuals who file separately and lived together at any time during the year. Free income tax service For more information, see How Much Can You Deduct in chapter 17. Free income tax service Rental activity losses. Free income tax service   If you actively participated in a passive rental real estate activity that produced a loss, you generally can deduct the loss from your nonpassive income, up to $25,000. Free income tax service This is called a special allowance. Free income tax service However, married persons filing separate returns who lived together at any time during the year cannot claim this special allowance. Free income tax service Married persons filing separate returns who lived apart at all times during the year are each allowed a $12,500 maximum special allowance for losses from passive real estate activities. Free income tax service See Limits on Rental Losses in chapter 9. Free income tax service Community property states. Free income tax service   If you live in Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, or Wisconsin and file separately, your income may be considered separate income or community income for income tax purposes. Free income tax service See Publication 555. Free income tax service Joint Return After Separate Returns You can change your filing status from a separate return to a joint return by filing an amended return using Form 1040X. Free income tax service You generally can change to a joint return any time within 3 years from the due date of the separate return or returns. Free income tax service This does not include any extensions. Free income tax service A separate return includes a return filed by you or your spouse claiming married filing separately, single, or head of household filing status. Free income tax service Separate Returns After Joint Return Once you file a joint return, you cannot choose to file separate returns for that year after the due date of the return. Free income tax service Exception. Free income tax service   A personal representative for a decedent can change from a joint return elected by the surviving spouse to a separate return for the decedent. Free income tax service The personal representative has 1 year from the due date of the return (including extensions) to make the change. Free income tax service See Publication 559, Survivors, Executors, and Administrators, for more information on filing a return for a decedent. Free income tax service Head of Household You may be able to file as head of household if you meet all the following requirements. Free income tax service You are unmarried or “considered unmarried” on the last day of the year. Free income tax service See Marital Status , earlier, and Considered Unmarried , later. Free income tax service You paid more than half the cost of keeping up a home for the year. Free income tax service A qualifying person lived with you in the home for more than half the year (except for temporary absences, such as school). Free income tax service However, if the qualifying person is your dependent parent, he or she does not have to live with you. Free income tax service See Special rule for parent , later, under Qualifying Person. Free income tax service If you qualify to file as head of household, your tax rate usually will be lower than the rates for single or married filing separately. Free income tax service You will also receive a higher standard deduction than if you file as single or married filing separately. Free income tax service Kidnapped child. Free income tax service   A child may qualify you to file as head of household even if the child has been kidnapped. Free income tax service For more information, see Publication 501. Free income tax service How to file. Free income tax service   If you file as head of household, you can use Form 1040. Free income tax service If your taxable income is less than $100,000, you may be able to file Form 1040A. Free income tax service Indicate your choice of this filing status by checking the box on line 4 of either form. Free income tax service Use the Head of a household column of the Tax Table or Section D of the Tax Computation Worksheet to figure your tax. Free income tax service Considered Unmarried To qualify for head of household status, you must be either unmarried or considered unmarried on the last day of the year. Free income tax service You are considered unmarried on the last day of the tax year if you meet all the following tests. Free income tax service You file a separate return (defined earlier under Joint Return After Separate Returns ). Free income tax service You paid more than half the cost of keeping up your home for the tax year. Free income tax service Your spouse did not live in your home during the last 6 months of the tax year. Free income tax service Your spouse is considered to live in your home even if he or she is temporarily absent due to special circumstances. Free income tax service See Temporary absences , under Qualifying Person, later. Free income tax service Your home was the main home of your child, stepchild, or foster child for more than half the year. Free income tax service (See Home of qualifying person , under Qualifying Person, later, for rules applying to a child's birth, death, or temporary absence during the year. Free income tax service ) You must be able to claim an exemption for the child. Free income tax service However, you meet this test if you cannot claim the exemption only because the noncustodial parent can claim the child using the rules described in Children of divorced or separated parents (or parents who live apart) under Qualifying Child in chapter 3, or in Support Test for Children of Divorced or Separated Parents (or Parents Who Live Apart) under Qualifying Relative in chapter 3. Free income tax service The general rules for claiming an exemption for a dependent are explained under Exemptions for Dependents in chapter 3. Free income tax service If you were considered married for part of the year and lived in a community property state (listed earlier under Married Filing Separately), special rules may apply in determining your income and expenses. Free income tax service See Publication 555 for more information. Free income tax service Nonresident alien spouse. Free income tax service   You are considered unmarried for head of household purposes if your spouse was a nonresident alien at any time during the year and you do not choose to treat your nonresident spouse as a resident alien. Free income tax service However, your spouse is not a qualifying person for head of household purposes. Free income tax service You must have another qualifying person and meet the other tests to be eligible to file as a head of household. Free income tax service Choice to treat spouse as resident. Free income tax service   You are considered married if you choose to treat your spouse as a resident alien. Free income tax service See Publication 519. Free income tax service Keeping Up a Home To qualify for head of household status, you must pay more than half of the cost of keeping up a home for the year. Free income tax service You can determine whether you paid more than half of the cost of keeping up a home by using Worksheet 2–1. Free income tax service Worksheet 2-1. Free income tax service Cost of Keeping Up a Home   Amount You Paid Total Cost Property taxes $ $ Mortgage interest expense     Rent     Utility charges     Repairs/maintenance     Property insurance     Food consumed on the premises     Other household expenses     Totals $ $ Minus total amount you paid   () Amount others paid   $ If the total amount you paid is more than the amount others paid, you meet the requirement of paying more than half the cost of keeping up the home. Free income tax service Costs you include. Free income tax service   Include in the cost of keeping up a home expenses such as rent, mortgage interest, real estate taxes, insurance on the home, repairs, utilities, and food eaten in the home. Free income tax service   If you used payments you received under Temporary Assistance for Needy Families (TANF) or other public assistance programs to pay part of the cost of keeping up your home, you cannot count them as money you paid. Free income tax service However, you must include them in the total cost of keeping up your home to figure if you paid over half the cost. Free income tax service Costs you do not include. Free income tax service   Do not include the costs of clothing, education, medical treatment, vacations, life insurance, or transportation. Free income tax service Also, do not include the rental value of a home you own or the value of your services or those of a member of your household. Free income tax service Qualifying Person See Table 2-1 to see who is a qualifying person. Free income tax service Any person not described in Table 2-1 is not a qualifying person. Free income tax service Table 2-1. Free income tax service Who Is a Qualifying Person Qualifying You To File as Head of Household?1 Caution. Free income tax service See the text of this chapter for the other requirements you must meet to claim head of household filing status. Free income tax service IF the person is your . Free income tax service . Free income tax service . Free income tax service   AND . Free income tax service . Free income tax service . Free income tax service   THEN that person is . Free income tax service . Free income tax service . Free income tax service qualifying child (such as a son, daughter, or grandchild who lived with you more than half the year and meets certain other tests)2   he or she is single   a qualifying person, whether or not you can claim an exemption for the person. Free income tax service   he or she is married and you can claim an exemption for him or her   a qualifying person. Free income tax service   he or she is married and you cannot claim an exemption for him or her   not a qualifying person. Free income tax service 3 qualifying relative4 who is your father or mother   you can claim an exemption for him or her5   a qualifying person. Free income tax service 6   you cannot claim an exemption for him or her   not a qualifying person. Free income tax service qualifying relative4 other than your father or mother (such as a grandparent, brother, or sister who meets certain tests)   he or she lived with you more than half the year, and he or she is related to you in one of the ways listed under Relatives who do not have to live with you in chapter 3 and you can claim an exemption for him or her5   a qualifying person. Free income tax service   he or she did not live with you more than half the year   not a qualifying person. Free income tax service   he or she is not related to you in one of the ways listed under Relatives who do not have to live with you in chapter 3 and is your qualifying relative only because he or she lived with you all year as a member of your household   not a qualifying person. Free income tax service   you cannot claim an exemption for him or her   not a qualifying person. Free income tax service 1A person cannot qualify more than one taxpayer to use the head of household filing status for the year. Free income tax service 2The term “qualifying child” is defined in chapter 3. Free income tax service Note. Free income tax service If you are a noncustodial parent, the term “qualifying child” for head of household filing status does not include a child who is your qualifying child for exemption purposes only because of the rules described under Children of divorced or separated parents (or parents who live apart) under Qualifying Child in chapter 3. Free income tax service If you are the custodial parent and those rules apply, the child generally is your qualifying child for head of household filing status even though the child is not a qualifying child for whom you can claim an exemption. Free income tax service 3This person is a qualifying person if the only reason you cannot claim the exemption is that you can be claimed as a dependent on someone else's return. Free income tax service 4The term “ qualifying relative ” is defined in chapter 3. Free income tax service 5If you can claim an exemption for a person only because of a multiple support agreement, that person is not a qualifying person. Free income tax service See Multiple Support Agreement in chapter 3. Free income tax service 6See Special rule for parent . Free income tax service Example 1—child. Free income tax service Your unmarried son lived with you all year and was 18 years old at the end of the year. Free income tax service He did not provide more than half of his own support and does not meet the tests to be a qualifying child of anyone else. Free income tax service As a result, he is your qualifying child (see Qualifying Child in chapter 3) and, because he is single, your qualifying person for you to claim head of household filing status. Free income tax service Example 2—child who is not qualifying person. Free income tax service The facts are the same as in Example 1 except your son was 25 years old at the end of the year and his gross income was $5,000. Free income tax service Because he does not meet the age test (explained under Qualifying Child in chapter 3), your son is not your qualifying child. Free income tax service Because he does not meet the gross income test (explained later under Qualifying Relative in chapter 3), he is not your qualifying relative. Free income tax service As a result, he is not your qualifying person for head of household purposes. Free income tax service Example 3—girlfriend. Free income tax service Your girlfriend lived with you all year. Free income tax service Even though she may be your qualifying relative if the gross income and support tests (explained in chapter 3) are met, she is not your qualifying person for head of household purposes because she is not related to you in one of the ways listed under Relatives who do not have to live with you in chapter 3. Free income tax service See Table 2-1. Free income tax service Example 4—girlfriend's child. Free income tax service The facts are the same as in Example 3 except your girlfriend's 10-year-old son also lived with you all year. Free income tax service He is not your qualifying child and, because he is your girlfriend's qualifying child, he is not your qualifying relative (see Not a Qualifying Child Test in chapter 3). Free income tax service As a result, he is not your qualifying person for head of household purposes. Free income tax service Home of qualifying person. Free income tax service   Generally, the qualifying person must live with you for more than half of the year. Free income tax service Special rule for parent. Free income tax service   If your qualifying person is your father or mother, you may be eligible to file as head of household even if your father or mother does not live with you. Free income tax service However, you must be able to claim an exemption for your father or mother. Free income tax service Also, you must pay more than half the cost of keeping up a home that was the main home for the entire year for your father or mother. Free income tax service   You are keeping up a main home for your father or mother if you pay more than half the cost of keeping your parent in a rest home or home for the elderly. Free income tax service Death or birth. Free income tax service   You may be eligible to file as head of household even if the individual who qualifies you for this filing status is born or dies during the year. Free income tax service If the individual is your qualifying child, the child must have lived with you for more than half the part of the year he or she was alive. Free income tax service If the individual is anyone else, see Publication 501. Free income tax service Temporary absences. Free income tax service   You and your qualifying person are considered to live together even if one or both of you are temporarily absent from your home due to special circumstances such as illness, education, business, vacation, or military service. Free income tax service It must be reasonable to assume the absent person will return to the home after the temporary absence. Free income tax service You must continue to keep up the home during the absence. Free income tax service Qualifying Widow(er) With Dependent Child If your spouse died in 2013, you can use married filing jointly as your filing status for 2013 if you otherwise qualify to use that status. Free income tax service The year of death is the last year for which you can file jointly with your deceased spouse. Free income tax service See Married Filing Jointly , earlier. Free income tax service You may be eligible to use qualifying widow(er) with dependent child as your filing status for 2 years following the year your spouse died. Free income tax service For example, if your spouse died in 2012, and you have not remarried, you may be able to use this filing status for 2013 and 2014. Free income tax service This filing status entitles you to use joint return tax rates and the highest standard deduction amount (if you do not itemize deductions). Free income tax service It does not entitle you to file a joint return. Free income tax service How to file. Free income tax service   If you file as qualifying widow(er) with dependent child, you can use Form 1040. Free income tax service If you also have taxable income of less than $100,000 and meet certain other conditions, you may be able to file Form 1040A. Free income tax service Check the box on line 5 of either form. Free income tax service Use the Married filing jointly column of the Tax Table or Section B of the Tax Computation Worksheet to figure your tax. Free income tax service Eligibility rules. Free income tax service   You are eligible to file your 2013 return as a qualifying widow(er) with dependent child if you meet all of the following tests. Free income tax service You were entitled to file a joint return with your spouse for the year your spouse died. Free income tax service It does not matter whether you actually filed a joint return. Free income tax service Your spouse died in 2011 or 2012 and you did not remarry before the end of 2013. Free income tax service You have a child or stepchild for whom you can claim an exemption. Free income tax service This does not include a foster child. Free income tax service This child lived in your home all year, except for temporary absences. Free income tax service See Temporary absences , earlier, under Head of Household. Free income tax service There are also exceptions, described later, for a child who was born or died during the year and for a kidnapped child. Free income tax service You paid more than half the cost of keeping up a home for the year. Free income tax service See Keeping Up a Home , earlier, under Head of Household. Free income tax service Example. Free income tax service John's wife died in 2011. Free income tax service John has not remarried. Free income tax service During 2012 and 2013, he continued to keep up a home for himself and his child, who lives with him and for whom he can claim an exemption. Free income tax service For 2011 he was entitled to file a joint return for himself and his deceased wife. Free income tax service For 2012 and 2013, he can file as qualifying widower with a dependent child. Free income tax service After 2013 he can file as head of household if he qualifies. Free income tax service Death or birth. Free income tax service    You may be eligible to file as a qualifying widow(er) with dependent child if the child who qualifies you for this filing status is born or dies during the year. Free income tax service You must have provided more than half of the cost of keeping up a home that was the child's main home during the entire part of the year he or she was alive. Free income tax service Kidnapped child. Free income tax service   A child may qualify you for qualifying widow(er) with dependent child, even if the child has been kidnapped. Free income tax service See Publication 501. Free income tax service    As mentioned earlier, this filing status is available for only 2 years following the year your spouse died. 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