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Free State Tax Filing Online State Return

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Free State Tax Filing Online State Return

Free state tax filing online state return 2. Free state tax filing online state return   Accounting Methods Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Accounting MethodsCash Method Accrual Method Farm Inventory Cash Versus Accrual Method Special Methods of Accounting Combination Method Changes in Methods of Accounting Introduction You must use an accounting method that clearly shows your income and expenses. Free state tax filing online state return You must also figure your taxable income and file an income tax return for an annual accounting period called a tax year. Free state tax filing online state return This chapter discusses accounting methods. Free state tax filing online state return For information on accounting periods, see Publication 538, Accounting Periods and Methods, and the Instructions for Form 1128, Application To Adopt, Change, or Retain a Tax Year. Free state tax filing online state return Topics - This chapter discusses: Cash method Accrual method Farm inventory Special methods of accounting Changes in methods of accounting Useful Items - You may want to see: Publication 538 Accounting Periods and Methods 535 Business Expenses Form (and Instructions) 1128 Application To Adopt, Change, or Retain a Tax Year 3115 Application for Change in Accounting Method See chapter 16 for information about getting publications and forms. Free state tax filing online state return Accounting Methods An accounting method is a set of rules used to determine when and how your income and expenses are reported on your tax return. Free state tax filing online state return Your accounting method includes not only your overall method of accounting, but also the accounting treatment you use for any material item. Free state tax filing online state return A material item is one that affects the proper time for inclusion of income or allowance of a deduction. Free state tax filing online state return An item considered material for financial statement purposes is generally also considered material for income tax purposes. Free state tax filing online state return See Publication 538 for more information. Free state tax filing online state return You generally choose an accounting method for your farm business when you file your first income tax return that includes a Schedule F (Form 1040), Profit or Loss From Farming. Free state tax filing online state return If you later want to change your accounting method, you generally must get IRS approval. Free state tax filing online state return How to obtain IRS approval is discussed later under Changes in Methods of Accounting . Free state tax filing online state return Types of accounting methods. Free state tax filing online state return   Generally, you can use any of the following accounting methods. Free state tax filing online state return Each method is discussed in detail below. Free state tax filing online state return Cash method. Free state tax filing online state return Accrual method. Free state tax filing online state return Special methods of accounting for certain items of income and expenses. Free state tax filing online state return Combination (hybrid) method using elements of two or more of the above. Free state tax filing online state return Business and other items. Free state tax filing online state return   You can account for business and personal items using different accounting methods. Free state tax filing online state return For example, you can figure your business income under an accrual method, even if you use the cash method to figure personal items. Free state tax filing online state return Two or more businesses. Free state tax filing online state return   If you operate two or more separate and distinct businesses, you can use a different accounting method for each business. Free state tax filing online state return Generally, no business is separate and distinct unless a complete and separate set of books and records is maintained for each business. Free state tax filing online state return Cash Method Most farmers use the cash method because they find it easier to keep records using the cash method. Free state tax filing online state return However, certain farm corporations and partnerships and all tax shelters must use an accrual method of accounting. Free state tax filing online state return See Accrual Method Required , later. Free state tax filing online state return Income Under the cash method, include in your gross income all items of income you actually or constructively received during the tax year. Free state tax filing online state return Items of income include money received as well as property or services received. Free state tax filing online state return If you receive property or services, you must include the fair market value (FMV) of the property or services in income. Free state tax filing online state return See chapter 3 for information on how to report farm income on your income tax return. Free state tax filing online state return Constructive receipt. Free state tax filing online state return   Income is constructively received when an amount is credited to your account or made available to you without restriction. Free state tax filing online state return You do not need to have possession of the income for it to be treated as income for the tax year. Free state tax filing online state return If you authorize someone to be your agent and receive income for you, you are considered to have received the income when your agent receives it. Free state tax filing online state return Income is not constructively received if your receipt of the income is subject to substantial restrictions or limitations. Free state tax filing online state return Direct payments and counter-cyclical payments. Free state tax filing online state return   If you received direct payments or counter-cyclical payments under Subtitle A or C of the Farm Security and Rural Investment Act of 2002, you will not be considered to have constructively received a payment merely because you had the option to receive it in the year before it is required to be paid. Free state tax filing online state return Delaying receipt of income. Free state tax filing online state return   You cannot hold checks or postpone taking possession of similar property from one tax year to another to avoid paying tax on the income. Free state tax filing online state return You must report the income in the year the money or property is received or made available to you without restriction. Free state tax filing online state return Example. Free state tax filing online state return Frances Jones, a farmer, was entitled to receive a $10,000 payment on a grain contract in December 2013. Free state tax filing online state return She was told in December that her payment was available. Free state tax filing online state return She requested not to be paid until January 2014. Free state tax filing online state return However, she must still include this payment in her 2013 income because it was made available to her in 2013. Free state tax filing online state return Debts paid by another person or canceled. Free state tax filing online state return   If your debts are paid by another person or are canceled by your creditors, you may have to report part or all of this debt relief as income. Free state tax filing online state return If you receive income in this way, you constructively receive the income when the debt is canceled or paid. Free state tax filing online state return See Cancellation of Debt in chapter 3. Free state tax filing online state return Deferred payment contract. Free state tax filing online state return   If you sell an item under a deferred payment contract that calls for payment in a future year, there is no constructive receipt in the year of sale. Free state tax filing online state return However, if the sales contract states that you have the right to the proceeds of the sale from the buyer at any time after delivery of the item, then you must include the sales price in income in the year of the sale, regardless of when you actually receive payment. Free state tax filing online state return Example. Free state tax filing online state return You are a farmer who uses the cash method and a calendar tax year. Free state tax filing online state return You sell grain in December 2013 under a bona fide arm's-length contract that calls for payment in 2014. Free state tax filing online state return You include the proceeds from the sale in your 2014 gross income since that is the year payment is received. Free state tax filing online state return However, if the contract states that you have the right to the proceeds from the buyer at any time after the grain is delivered, you must include the sales price in your 2013 income, regardless of when you actually receive payment. Free state tax filing online state return Repayment of income. Free state tax filing online state return   If you include an amount in income and in a later year you have to repay all or part of it, then you can usually deduct the repayment in the year repaid. Free state tax filing online state return If the repayment is more than $3,000, a special rule applies. Free state tax filing online state return For details, see Repayments in chapter 11 of Publication 535, Business Expenses. Free state tax filing online state return Expenses Under the cash method, generally you deduct expenses in the tax year you pay them. Free state tax filing online state return This includes business expenses for which you contest liability. Free state tax filing online state return However, you may not be able to deduct an expense paid in advance or you may be required to capitalize certain costs, as explained under Uniform Capitalization Rules in chapter 6. Free state tax filing online state return See chapter 4 for information on how to deduct farm business expenses on your income tax return. Free state tax filing online state return Prepayment. Free state tax filing online state return   Generally, you cannot deduct expenses paid in advance. Free state tax filing online state return This rule applies to any expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. Free state tax filing online state return Example. Free state tax filing online state return On November 1, 2013, you signed and paid $3,600 for a 3-year (36-month) insurance contract for equipment. Free state tax filing online state return In 2013, you are allowed to deduct only $200 (2/36 x $3,600) of the cost of the policy that is attributable to 2013. Free state tax filing online state return In 2014, you'll be able to deduct $1,200 (12/36 x $3,600); in 2015, you'll be able to deduct $1,200 (12/36 x $3,600); and in 2016 you'll be able to deduct the remaining balance of $1,000. Free state tax filing online state return An exception applies if the expense qualifies for the 12-month rule. Free state tax filing online state return See Publication 538 for more information and examples. Free state tax filing online state return See chapter 4 for special rules for prepaid farm supplies and prepaid livestock feed. Free state tax filing online state return Accrual Method Under an accrual method of accounting, you generally report income in the year earned and deduct or capitalize expenses in the year incurred. Free state tax filing online state return The purpose of an accrual method of accounting is to correctly match income and expenses. Free state tax filing online state return Certain businesses engaged in farming must use an accrual method of accounting for its farm business and for sales and purchases of inventory items. Free state tax filing online state return See Accrual Method Required and Farm Inventory , later. Free state tax filing online state return Income Generally, you include an amount in income for the tax year in which all events that fix your right to receive the income have occurred, and you can determine the amount with reasonable accuracy. Free state tax filing online state return Under this rule, include an amount in income on the earliest of the following dates. Free state tax filing online state return When you receive payment. Free state tax filing online state return When the income amount is due to you. Free state tax filing online state return When you earn the income. Free state tax filing online state return When title passes. Free state tax filing online state return If you use an accrual method of accounting, complete Part III of Schedule F (Form 1040) to report your income. Free state tax filing online state return Inventory. Free state tax filing online state return   If you keep an inventory, generally you must use an accrual method of accounting to determine your gross income. Free state tax filing online state return An inventory is necessary to clearly show income when the production, purchase, or sale of merchandise is an income-producing factor. Free state tax filing online state return See Publication 538 for more information. Free state tax filing online state return Also see Farm Inventory , later, for more information on items that must be included in inventory by farmers and inventory valuation methods for farmers. Free state tax filing online state return Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both of the following apply. Free state tax filing online state return The all-events test has been met. Free state tax filing online state return This test is met when: All events have occurred that fix the fact that you have a liability, and The amount of the liability can be determined with reasonable accuracy. Free state tax filing online state return Economic performance has occurred. Free state tax filing online state return Economic performance. Free state tax filing online state return   Generally, you cannot deduct or capitalize a business expense until economic performance occurs. Free state tax filing online state return If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided or as the property is used. Free state tax filing online state return If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Free state tax filing online state return Example. Free state tax filing online state return Jane, who is a farmer, uses a calendar tax year and an accrual method of accounting. Free state tax filing online state return She entered into a contract with ABC Farm Consulting in 2012. Free state tax filing online state return The contract stated that Jane pay ABC Farm Consulting $2,000 in December 2012. Free state tax filing online state return It further stipulates that ABC Farm Consulting will develop a plan for integrating her farm with a larger farm operation based in a neighboring state by March 1, 2013. Free state tax filing online state return Jane paid ABC Farm Consulting $2,000 in December 2012. Free state tax filing online state return Integration of operations according to the plan began in May 2013 and they completed the integration in December 2013. Free state tax filing online state return Economic performance for Jane's liability in the contract occurs as the services are provided. Free state tax filing online state return Jane incurs the $2,000 cost in 2013. Free state tax filing online state return An exception to the economic performance rule allows certain recurring items to be treated as incurred during a tax year even though economic performance has not occurred. Free state tax filing online state return For more information, see Economic Performance in Publication 538. Free state tax filing online state return Special rule for related persons. Free state tax filing online state return   Business expenses and interest owed to a related person who uses the cash method of accounting are not deductible until you make the payment and the corresponding amount is includible in the related person's gross income. Free state tax filing online state return Determine the relationship for this rule as of the end of the tax year for which the expense or interest would otherwise be deductible. Free state tax filing online state return For more information, see Internal Revenue Code section 267. Free state tax filing online state return Accrual Method Required Generally, the following businesses, if engaged in farming, must use an accrual method of accounting. Free state tax filing online state return A corporation (other than a family corporation) that had gross receipts of more than $1,000,000 for any tax year beginning after 1975. Free state tax filing online state return A family corporation that had gross receipts of more than $25,000,000 for any tax year beginning after 1985. Free state tax filing online state return A partnership with a corporation as a partner, if that corporation meets the requirements of (1) or (2) above. Free state tax filing online state return A tax shelter. Free state tax filing online state return Note. Free state tax filing online state return Items (1), (2), and (3) above do not apply to an S corporation or a business operating a nursery or sod farm, or the raising or harvesting of trees (other than fruit and nut trees). Free state tax filing online state return Family corporation. Free state tax filing online state return   A family corporation is generally a corporation that meets one of the following ownership requirements. Free state tax filing online state return Members of the same family own at least 50% of the total combined voting power of all classes of stock entitled to vote and at least 50% of the total shares of all other classes of stock of the corporation. Free state tax filing online state return Members of two families have owned, directly or indirectly, since October 4, 1976, at least 65% of the total combined voting power of all classes of voting stock and at least 65% of the total shares of all other classes of the corporation's stock. Free state tax filing online state return Members of three families have owned, directly or indirectly, since October 4, 1976, at least 50% of the total combined voting power of all classes of voting stock and at least 50% of the total shares of all other classes of the corporation's stock. Free state tax filing online state return For more information on family corporations, see Internal Revenue Code section 447. Free state tax filing online state return Tax shelter. Free state tax filing online state return   A tax shelter is a partnership, noncorporate enterprise, or S corporation that meets either of the following tests. Free state tax filing online state return Its principal purpose is the avoidance or evasion of federal income tax. Free state tax filing online state return It is a farming syndicate. Free state tax filing online state return A farming syndicate is an entity that meets either of the following tests. Free state tax filing online state return Interests in the activity have been offered for sale in an offering required to be registered with a federal or state agency with the authority to regulate the offering of securities for sale. Free state tax filing online state return More than 35% of the losses during the tax year are allocable to limited partners or limited entrepreneurs. Free state tax filing online state return   A “limited partner” is one whose personal liability for partnership debts is limited to the money or other property the partner contributed or is required to contribute to the partnership. Free state tax filing online state return   A “limited entrepreneur” is one who has an interest in an enterprise other than as a limited partner and does not actively participate in the management of the enterprise. Free state tax filing online state return Farm Inventory If you are required to keep an inventory, you should keep a complete record of your inventory as part of your farm records. Free state tax filing online state return This record should show the actual count or measurement of the inventory. Free state tax filing online state return It should also show all factors that enter into its valuation, including quality and weight, if applicable. Free state tax filing online state return Hatchery business. Free state tax filing online state return   If you are in the hatchery business, and use an accrual method of accounting, you must include in inventory eggs in the process of incubation. Free state tax filing online state return Products held for sale. Free state tax filing online state return   All harvested and purchased farm products held for sale or for feed or seed, such as grain, hay, silage, concentrates, cotton, tobacco, etc. Free state tax filing online state return , must be included in inventory. Free state tax filing online state return Supplies. Free state tax filing online state return   Supplies acquired for sale or that become a physical part of items held for sale must be included in inventory. Free state tax filing online state return Deduct the cost of supplies in the year used or consumed in operations. Free state tax filing online state return Do not include incidental supplies in inventory as these are deductible in the year of purchase. Free state tax filing online state return Livestock. Free state tax filing online state return   Livestock held primarily for sale must be included in inventory. Free state tax filing online state return Livestock held for draft, breeding, or dairy purposes can either be depreciated or included in inventory. Free state tax filing online state return See also Unit-livestock-price method , later. Free state tax filing online state return If you are in the business of breeding and raising chinchillas, mink, foxes, or other fur-bearing animals, these animals are livestock for inventory purposes. Free state tax filing online state return Growing crops. Free state tax filing online state return   Generally, growing crops are not required to be included in inventory. Free state tax filing online state return However, if the crop has a preproductive period of more than 2 years, you may have to capitalize (or include in inventory) costs associated with the crop. Free state tax filing online state return See Uniform capitalization rules below. Free state tax filing online state return Also see Uniform Capitalization Rules in  chapter 6. Free state tax filing online state return Items to include in inventory. Free state tax filing online state return   Your inventory should include all items held for sale, or for use as feed, seed, etc. Free state tax filing online state return , whether raised or purchased, that are unsold at the end of the year. Free state tax filing online state return Uniform capitalization rules. Free state tax filing online state return   The following applies if you are required to use an accrual method of accounting. Free state tax filing online state return The uniform capitalization rules apply to all costs of raising a plant, even if the preproductive period of raising a plant is 2 years or less. Free state tax filing online state return The costs of animals are subject to the uniform capitalization rules. Free state tax filing online state return Inventory valuation methods. Free state tax filing online state return   The following methods, described below, are those generally available for valuing inventory. Free state tax filing online state return The method you use must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. Free state tax filing online state return Cost. Free state tax filing online state return Lower of cost or market. Free state tax filing online state return Farm-price method. Free state tax filing online state return Unit-livestock-price method. Free state tax filing online state return Cost and lower of cost or market methods. Free state tax filing online state return   See Publication 538 for information on these valuation methods. Free state tax filing online state return If you value your livestock inventory at cost or the lower of cost or market, you do not need IRS approval to change to the unit-livestock-price method. Free state tax filing online state return However, if you value your livestock inventory using the farm-price method, then you must obtain permission from the IRS to change to the unit-livestock-price method. Free state tax filing online state return Farm-price method. Free state tax filing online state return   Under this method, each item, whether raised or purchased, is valued at its market price less the direct cost of disposition. Free state tax filing online state return Market price is the current price at the nearest market in the quantities you usually sell. Free state tax filing online state return Cost of disposition includes broker's commissions, freight, hauling to market, and other marketing costs. Free state tax filing online state return If you use this method, you must use it for your entire inventory, except that livestock can be inventoried under the unit-livestock-price method. Free state tax filing online state return Unit-livestock-price method. Free state tax filing online state return   This method recognizes the difficulty of establishing the exact costs of producing and raising each animal. Free state tax filing online state return You group or classify livestock according to type and age and use a standard unit price for each animal within a class or group. Free state tax filing online state return The unit price you assign should reasonably approximate the normal costs incurred in producing the animals in such classes. Free state tax filing online state return Unit prices and classifications are subject to approval by the IRS on examination of your return. Free state tax filing online state return You must annually reevaluate your unit livestock prices and adjust the prices upward or downward to reflect increases or decreases in the costs of raising livestock. Free state tax filing online state return IRS approval is not required for these adjustments. Free state tax filing online state return Any other changes in unit prices or classifications do require IRS approval. Free state tax filing online state return   If you use this method, include all raised livestock in inventory, regardless of whether they are held for sale or for draft, breeding, sport, or dairy purposes. Free state tax filing online state return This method accounts only for the increase in cost of raising an animal to maturity. Free state tax filing online state return It does not provide for any decrease in the animal's market value after it reaches maturity. Free state tax filing online state return Also, if you raise cattle, you are not required to inventory hay you grow to feed your herd. Free state tax filing online state return   Do not include sold or lost animals in the year-end inventory. Free state tax filing online state return If your records do not show which animals were sold or lost, treat the first animals acquired as sold or lost. Free state tax filing online state return The animals on hand at the end of the year are considered those most recently acquired. Free state tax filing online state return   You must include in inventory all livestock purchased primarily for sale. Free state tax filing online state return You can choose either to include in inventory or depreciate livestock purchased for draft, breeding, sport or dairy purposes. Free state tax filing online state return However, you must be consistent from year to year, regardless of the method you have chosen. Free state tax filing online state return You cannot change your method without obtaining approval from the IRS. Free state tax filing online state return   You must include in inventory animals purchased after maturity or capitalize them at their purchase price. Free state tax filing online state return If the animals are not mature at purchase, increase the cost at the end of each tax year according to the established unit price. Free state tax filing online state return However, in the year of purchase, do not increase the cost of any animal purchased during the last 6 months of the year. Free state tax filing online state return This “no increase” rule does not apply to tax shelters which must make an adjustment for any animal purchased during the year. Free state tax filing online state return It also does not apply to taxpayers that must make an adjustment to reasonably reflect the particular period in the year in which animals are purchased, if necessary to avoid significant distortions in income. Free state tax filing online state return Uniform capitalization rules. Free state tax filing online state return   A farmer can determine costs required to be allocated under the uniform capitalization rules by using the farm-price or unit-livestock-price inventory method. Free state tax filing online state return This applies to any plant or animal, even if the farmer does not hold or treat the plant or animal as inventory property. Free state tax filing online state return Cash Versus Accrual Method The following examples compare the cash and accrual methods of accounting. Free state tax filing online state return Example 1. Free state tax filing online state return You are a farmer who uses an accrual method of accounting. Free state tax filing online state return You keep your books on the calendar year basis. Free state tax filing online state return You sell grain in December 2013 but you are not paid until January 2014. Free state tax filing online state return Because the accrual method was used and 2013 was the tax year in which the grain was sold, you must both include the sales proceeds and deduct the costs incurred in producing the grain on your 2013 tax return. Free state tax filing online state return Example 2. Free state tax filing online state return Assume the same facts as in Example 1 except that you use the cash method and there was no constructive receipt of the sales proceeds in 2013. Free state tax filing online state return Under this method, you include the sales proceeds in income for 2014, the year you receive payment. Free state tax filing online state return Deduct the costs of producing the grain in the year you pay for them. Free state tax filing online state return Special Methods of Accounting There are special methods of accounting for certain items of income and expense. Free state tax filing online state return Crop method. Free state tax filing online state return   If you do not harvest and dispose of your crop in the same tax year that you plant it, you can, with IRS approval, use the crop method of accounting. Free state tax filing online state return You cannot use the crop method for any tax return, including your first tax return, unless you receive approval from the IRS. Free state tax filing online state return Under this method, you deduct the entire cost of producing the crop, including the expense of seed or young plants, in the year you realize income from the crop. Free state tax filing online state return    See chapter 4 for details on deducting the costs of operating a farm. Free state tax filing online state return Also see Regulations section 1. Free state tax filing online state return 162-12. Free state tax filing online state return Other special methods. Free state tax filing online state return   Other special methods of accounting apply to the following items. Free state tax filing online state return Amortization, see chapter 7. Free state tax filing online state return Casualties, see chapter 11. Free state tax filing online state return Condemnations, see chapter 11. Free state tax filing online state return Depletion, see chapter 7. Free state tax filing online state return Depreciation, see chapter 7. Free state tax filing online state return Farm business expenses, see chapter 4. Free state tax filing online state return Farm income, see chapter 3. Free state tax filing online state return Installment sales, see chapter 10. Free state tax filing online state return Soil and water conservation expenses, see chapter 5. Free state tax filing online state return Thefts, see chapter 11. Free state tax filing online state return Combination Method Generally, you can use any combination of cash, accrual, and special methods of accounting if the combination clearly shows your income and expenses and you use it consistently. Free state tax filing online state return However, the following restrictions apply. Free state tax filing online state return If you use the cash method for figuring your income, you must use the cash method for reporting your expenses. Free state tax filing online state return If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. Free state tax filing online state return Changes in Methods of Accounting A change in your method of accounting includes a change in: Your overall method, such as from the cash method to an accrual method, and Your treatment of any material item, such as a change in your method of valuing inventory (for example, a change from the farm-price method to the unit-livestock-price method, discussed earlier). Free state tax filing online state return Generally, once you have set up your accounting method, you must receive approval from the IRS before you can change to another method of accounting. Free state tax filing online state return You may also have to pay a fee. Free state tax filing online state return To obtain approval, you must generally file Form 3115. Free state tax filing online state return There are instances when you can obtain automatic consent to change certain methods of accounting. Free state tax filing online state return See the List of Automatic Accounting Method Changes located in the Instructions for Form 3115. Free state tax filing online state return For more information on changes in methods of accounting, see Form 3115 and the Instructions for Form 3115. Free state tax filing online state return Also see Publication 538. Free state tax filing online state return Prev  Up  Next   Home   More Online Publications
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Understanding your CP21A Notice

We made the change(s) you requested to your tax return for the tax year specified on the notice. You owe money on your taxes as a result of the change(s).

Tax publications you may find useful

How to get help

Calling the toll free number listed on the top right corner of your notice is the fastest way to get your questions answered.

You can also authorize someone (such as an accountant) to contact the IRS on your behalf using this Power of Attorney and Declaration of Representative (Form 2848).

Or you may qualify for help from a Low Income Taxpayer Clinic.
 


What you need to do

  • Read your notice carefully ― it will explain why you owe money on your taxes.
  • Pay the amount owed by the date on the notice's payment coupon.
  • Make payment arrangements if you can't pay the full amount you owe.
  • Contact us if you disagree with the change(s) we made.
  • Correct the copy of your tax return that you kept for your records.

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Answers to Common Questions

The notice says "Based on the information you provided, we changed your 200X Form 1040 to correct your:..." but I don't remember sending any change to IRS. How can I find out what IRS received to initiate this change?
Please contact us at the number listed on the top right corner of your notice for specific information about your tax return.

What do I say when I call the IRS?
Mention that you got a CP21A notice with a balance due and you need to review your account with a customer service representative. Be sure to have a copy of your notice and your tax return before you call.

What should I do if I disagree with the changes you made?
If you disagree, contact us at the toll-free number listed on the top right corner of your notice.

What happens if I can't pay the full amount I owe?
You can arrange to make a payment plan with us if you can't pay the full amount you owe.

Am I charged interest on the money I owe?
If you don't full pay the amount you owe by the date on the payment coupon, interest will accrue on the unpaid balance after that date.

Will I receive a penalty if I can't pay the full amount?
Yes, you'll receive a late payment penalty. You can contact us at the number listed on your notice if you’re unable to pay the full amount shown in your specific notice because of circumstances beyond your control. Contact us by the due date of your payment and, depending on your situation, we may be able to remove the penalty.

Can I set up a payment plan?
Yes. Call the toll-free number listed on the top right corner of your notice to discuss payment options or check out more information on payment options and how to make a payment arrangement.

There are other options, such as paying by credit card. Note: There may be a fee to pay by credit card.

What if I need to make another correction to my account?
You'll need to file Form 1040X, Amended U.S. Individual Income Tax Return.

What if I have tried to get answers and after contacting IRS several times have not been successful?
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Page Last Reviewed or Updated: 26-Feb-2014

The Free State Tax Filing Online State Return

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