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Free state tax online filing Publication 554 - Introductory Material Table of Contents What's New Reminders IntroductionVolunteer Income Tax Assistance and Tax Counseling for the Elderly. Free state tax online filing Ordering forms and publications. Free state tax online filing Tax questions. Free state tax online filing What's New Alternative minimum tax exemption increased. Free state tax online filing  The AMT exemption amount has increased to $51,900 ($80,800 if married filing jointly or qualifying widow(er); $40,400 if married filing separately). Free state tax online filing Earned income credit. Free state tax online filing  The maximum amount of income you can earn and still get the credit has increased. Free state tax online filing You may be able to take the credit if you earn less than: $14,340 ($19,680 if married filing jointly), do not have a qualifying child, and are at least 25 years old and under 65, $37,870 ($43,210 if married filing jointly), and you have one qualifying child, $43,038 ($48,378 if married filing jointly), and you have two qualifying children, or $46,227 ($51,567 if married filing jointly), and you have three or more qualifying children. Free state tax online filing For more information, see Earned Income Credit , later. Free state tax online filing Exemption phaseout. Free state tax online filing  You lose at least part of the benefit of your exemptions if your adjusted gross income is above a certain amount. 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Free state tax online filing  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 state tax online filing For more information, see Publication 501. Free state tax online filing Reminders Future developments. Free state tax online filing  For the latest information about developments related to Publication 554, such as legislation enacted after it was published, go to www. Free state tax online filing irs. Free state tax online filing gov/pub554. Free state tax online filing Tax return preparers. Free state tax online filing  Choose your preparer carefully. Free state tax online filing If you pay someone to prepare your return, the preparer is required, under the law, to sign the return and fill in the other blanks in the Paid Preparer's area of your return. Free state tax online filing Remember, however, that you are still responsible for the accuracy of every item entered on your return. Free state tax online filing If there is any underpayment, you are responsible for paying it, plus any interest and penalty that may be due. Free state tax online filing Sale of home by surviving spouse. Free state tax online filing  If you are an unmarried widow or widower, you may qualify to exclude up to $500,000 of any gain from the sale or exchange of your main home. Free state tax online filing For more information, see Sale of Home , later. Free state tax online filing Third party designee. Free state tax online filing  You can check the “Yes” box in the Third Party Designee area of your return to authorize the IRS to discuss your return with your preparer, a friend, family member, or any other person you choose. Free state tax online filing This allows the IRS to call the person you identified as your designee to answer any questions that may arise during the processing of your return. Free state tax online filing It also allows your designee to perform certain actions. Free state tax online filing See your income tax return instructions for details. Free state tax online filing Employment tax withholding. Free state tax online filing  Your wages are subject to withholding for income tax, social security tax, and Medicare tax even if you are receiving social security benefits. Free state tax online filing Photographs of missing children. Free state tax online filing  The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Free state tax online filing Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Free state tax online filing You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Free state tax online filing Introduction The purpose of this publication is to provide a general overview of selected topics that are of interest to older taxpayers. Free state tax online filing The publication will help you determine if you need to file a return and, if so, what items to report on your return. Free state tax online filing Each topic is discussed only briefly, so you will find references to other free IRS publications that provide more detail on these topics if you need it. Free state tax online filing Table I has a list of questions you may have about filing your federal tax return. Free state tax online filing To the right of each question is the location of the answer in this publication. Free state tax online filing Also, at the back of this publication there is an index to help you search for the topic you need. Free state tax online filing While most federal income tax laws apply equally to all taxpayers, regardless of age, there are some provisions that give special treatment to older taxpayers. Free state tax online filing The following are some examples. Free state tax online filing Higher gross income threshold for filing. Free state tax online filing You must be age 65 or older at the end of the year to get this benefit. Free state tax online filing You are considered age 65 on the day before your 65th birthday. Free state tax online filing Therefore, you are considered age 65 at the end of the year if your 65th birthday is on or before January 1 of the following year. Free state tax online filing Higher standard deduction. Free state tax online filing If you do not itemize deductions, you are entitled to a higher standard deduction if you are age 65 or older at the end of the year. Free state tax online filing You are considered age 65 at the end of the year if your 65th birthday is on or before January 1 of the following year. Free state tax online filing Credit for the elderly or the disabled. Free state tax online filing If you qualify, you may benefit from the credit for the elderly or the disabled. Free state tax online filing To determine if you qualify and how to figure this credit, see Credit for the Elderly or the Disabled , later. Free state tax online filing Return preparation assistance. Free state tax online filing   The IRS wants to make it easier for you to file your federal tax return. Free state tax online filing You may find it helpful to visit a Volunteer Income Tax Assistance (VITA), Tax Counseling for the Elderly (TCE), or American Association of Retired Persons (AARP) Tax-Aide site near you. Free state tax online filing Volunteer Income Tax Assistance and Tax Counseling for the Elderly. Free state tax online filing   These programs provide free help for low-income taxpayers and taxpayers age 60 or older to fill in and file their returns. Free state tax online filing For the VITA/TCE site nearest you, contact your local IRS office. Free state tax online filing For more information, see Free help with your tax return under How To Get Tax Help. Free state tax online filing   For the location of an AARP Tax-Aide site in your community, call 1-888-227-7669. Free state tax online filing When asked, be ready to press in or speak your 5-digit ZIP code. Free state tax online filing Or, you can visit their website on the Internet at www. Free state tax online filing aarp. Free state tax online filing org/money/taxaide. Free state tax online filing Comments and suggestions. Free state tax online filing   We welcome your comments about this publication and your suggestions for future editions. Free state tax online filing   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. Free state tax online filing NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Free state tax online filing Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Free state tax online filing   You can send your comments from www. Free state tax online filing irs. Free state tax online filing gov/formspubs/. Free state tax online filing Click on “More Information” and then on “Comment on Tax Forms and Publications. Free state tax online filing ”   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Free state tax online filing Ordering forms and publications. Free state tax online filing   Visit www. Free state tax online filing irs. Free state tax online filing gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 business days after your request is received. Free state tax online filing Internal Revenue Service 1201 N. Free state tax online filing Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. Free state tax online filing   If you have a tax question, check the information available on IRS. Free state tax online filing gov or call 1-800-829-1040. Free state tax online filing We cannot answer tax questions sent to either of the above addresses. Free state tax online filing Table I. Free state tax online filing What You Should Know About Federal Taxes Note. Free state tax online filing The following is a list of questions you may have about filling out your federal income tax return. Free state tax online filing  To the right of each question is the location of the answer in this publication. Free state tax online filing What I Should Know Where To Find the Answer Do I need to file a return? See chapter 1. Free state tax online filing Is my income taxable or nontaxable?  If it is nontaxable, must I still report it? See chapter 2. Free state tax online filing How do I report benefits I received from the Social Security Administration or the Railroad Retirement Board?  Are these benefits taxable? See Social Security and Equivalent Railroad Retirement Benefits in chapter 2. Free state tax online filing Must I report the sale of my home?  If I had a gain, is any part of it taxable? See Sale of Home in chapter 2. Free state tax online filing What are some of the items that I can deduct to reduce my income? See chapters 3 and 4. Free state tax online filing How do I report the amounts I set aside for my IRA? See Individual Retirement Arrangement (IRA) Contributions and Deductions in chapter 3. Free state tax online filing Would it be better for me to claim the standard deduction or itemize my deductions? See chapter 4. Free state tax online filing What are some of the credits I can claim to reduce my tax? See chapter 5 for discussions on the credit for the elderly or the disabled, the child and dependent care credit, and the earned income credit. Free state tax online filing Must I make estimated tax payments? See chapter 6. Free state tax online filing How do I contact the IRS or get more information? See chapter 7. 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Sale of Assets Financed with Tax-Exempt Bonds by State and Local Governments and 501(c)(3) Organizations

Tax Exempt Bonds (“TEB”) focuses on providing participants in the municipal bond industry with quality service to assist issuers and conduit borrowers in understanding their tax responsibilities. TEB has initiated an outreach and educational services program to increase understanding and compliance with tax law applicable to tax-exempt bonds. As part of this service TEB is providing the following information with respect to the sale of property financed by tax-exempt bonds. Governmental issuers and 501(c)(3) organizations may use this information to establish practices to monitor tax compliance throughout the period that their bonds are outstanding. This information is not intended to be cited as an authoritative source. TEB recommends that issuers and 501(c)(3) organizations review this basic information concerning remedial actions in consultation with their counsel.

For remedial action with respect to exempt facility bonds, see section 1.142-2 of the Income Tax Regulations (the “Regulations”), and for build America bonds, see IRM 7.2.3.1.2.3.

Generally

To raise needed funds, state and local governments and 501(c)(3) organizations may plan to sell property financed with tax-exempt bonds. The sale of such property could cause the bond issue to become taxable. A timely remedial action, if necessary, will help ensure that the interest on the bond issue remains tax-exempt.

There are three basic remedial action options as generally described below:

  • Redemption or defeasance of nonqualified bonds
  • Alternative use of disposition proceeds
  • Alternative use of facility

Governmental Bonds Example

A governmental bond is one that is not a private activity bond. A bond is a private activity bond if both: (i) more than 10% of the proceeds of a bond issue are used for a private business use (the private business use test); and (ii) more than 10% of the debt service on the bonds is directly or indirectly secured by an interest in property or payments with respect to property used for a private business use or derived from payments in respect of property used for a private business use (the private security or payment test). The sale of bond-financed property, a “deliberate action,” may cause the bond issue to meet both of these tests.

Private business use, generally, is use directly or indirectly in a trade or business carried on by any person other than a governmental unit. The result of meeting both the private business use test and the private security or payment test (together, the private business tests) is that the tax-exempt bond issue becomes a taxable private activity bond.

An example of when governmental bonds are likely to meet the private business tests is the sale of a tax-exempt bond financed facility to a corporation. The sale is a deliberate action because the sale was within the issuer’s control. Depending on how much of the proceeds of the bond issue that the issuer used to construct or acquire the facility and how long after the bonds are issued that the sale occurs, the private business use test may be met since the purchaser is not a governmental entity. If the present value of the sales price is greater than 10% of the present value of the debt service on the bonds, the private security or payment test is met. If the revenues from the facility were pledged as security for the payment of debt service on the bonds and are expected to be more than 10% of the present value of the debt service, the private security or payment test is met (regardless of the sales price to the new purchaser). If the bond issue meets both the private business use test and the private security or payment test, the bonds are taxable unless remedial action is taken as described below.

Qualified 501(c)(3) Bonds Example

If the bonds financing the property are qualified 501(c)(3) bonds, the private business use test threshold of 10% is reduced to 5%. The 5% is further reduced by the percentage of proceeds of the bonds used to pay costs of issuance. (Up to 2% of the proceeds may be used for costs of issuance.) Additionally, use of tax-exempt bond financed property in an unrelated trade or business of any 501(c)(3) organization, as described in section 513 of the Internal Revenue Code (the “Code”), is considered private business use and counts toward the 5% limit.

An example of qualified 501(c)(3) bonds likely to meet the private business tests is the sale of tax-exempt bond financed land to a taxable corporation. The sale is a deliberate action because the sale was within the issuer’s (or 501(c)(3) borrower’s) control. Depending on how much of the proceeds of the bond issue that the issuer or 501(c)(3) borrower used to construct or acquire the facility and how long after the bonds are issued that the sale occurs, the private business use test may be met since the purchaser is not a governmental entity or a 501(c)(3) organization. If the parcel of land sold was pledged as security for the payment of debt service on the bonds, the private security or payment test is met if the sales price is more than 5% of the present value of the debt service on the bonds. If the revenues from the facility were pledged as security for the payment of debt service on the bonds and are expected to be more than 5% of the present value of the debt service, the private security or payment test is met (regardless of the sales price to the new purchaser). If the bond issue meets both the private business use test and the private security or payment test, the bonds are taxable unless remedial action is taken as described below.

A qualified 501(c)(3) bond is one where, among other requirements, the tax-exempt bond financed property is owned by a 501(c)(3) organization or a governmental unit. An example of qualified 501(c)(3) bonds failing to meet this requirement is the sale of the tax-exempt bond financed land to a taxable corporation. Accordingly, the bonds are taxable unless remedial action is taken as described below.

Remedial Action under the Treasury Regulations

The Regulations permit an issuer to take remedial action to preclude the sale of tax-exempt bond financed assets from causing the bonds to become taxable bonds. There are five basic conditions that an issuer must meet to qualify to take a remedial action. The conditions are:

  • The issuer must have reasonably expected on the issue date that the bonds would not meet either the applicable private business tests (including the ownership test for qualified 501(c)(3) bonds) or the private loan financing test for the entire term of the bonds.
  • The term of the bonds must not be longer than reasonably necessary for the qualified purposes of the issue (as a guideline, the term is not greater than 120% of the average reasonably expected economic life of the financed property).
  • Generally, the terms of a sale must be a bona fide and arm’s-length arrangement for fair market value.
  • Disposition proceeds must be treated as gross proceeds for arbitrage and rebate purposes. Disposition proceeds are any amounts, including property, derived from the sale, exchange or other disposition of the tax-exempt bond financed property.
  • Except for a remedial action involving the redemption or defeasance of nonqualified bonds, the proceeds must have been spent on a qualified purpose before the date of the deliberate action, that is, the sale of the bond-financed assets.

Redemption or Defeasance of Nonqualified Bonds

Generally, in the case of a sale of bond-financed property, the nonqualified bonds are the portion of the outstanding bonds equal to the percentage of the proceeds of the bond issue that financed that property. For example, if 50% of the proceeds of a bond issue financed the sold property, the nonqualified bonds equal 50% of the outstanding bonds of the issue at the time of the sale.

The first type of remedial action available is the redemption or defeasance of all of the nonqualified bonds within 90 days of the deliberate action. (Generally, proceeds of another issue of tax-exempt bonds may not be used for this redemption.) If the disposition proceeds are all cash, the issuer need not redeem or defease all of the nonqualified bonds, but must use all of the disposition proceeds to redeem a pro rata portion of nonqualified bonds. The redemption must be on the earliest call date after the deliberate action, or if the earliest call date is more than 90 days after the deliberate action, the issuer must establish a defeasance escrow within 90 days of the deliberate action. Defeasance is only permitted as a remedial action if the first call date is no more than 10 ½ years from the issue date of the bonds. The issuer must provide written notice to the Commissioner of the escrow within 90 days of its establishment.

Alternative Use of Disposition Proceeds

The second type of remedial action, available when the seller receives only cash, allows the issuer to spend the disposition proceeds within two years of the date of the sale for an alternative qualifying use. The issuer must treat the disposition proceeds as proceeds of the bonds, and must not take any action after the date of the sale to cause either the applicable private business use tests or the private loan financing test to be met. (If the bonds are qualified 501(c)(3) bonds, the disposition proceeds must be used for a qualified purpose under section 145 of the Code.) If the issuer does not expect the full amount of the disposition proceeds to be spent for a qualifying purpose within the two year period, it must use the balance of disposition proceeds to redeem (or defease) nonqualified bonds as allowed for the first type of remedial action described above.

Note: If the proceeds of a governmental bond issue are to be subsequently used by a 501(c)(3) organization, remediation by spending the disposition proceeds for an alternate use requires that the nonqualified bonds satisfy all the requirements for qualified 501(c)(3) bonds beginning on the date of the sale.

Alternative Use of Facility

The third type of remedial action available to the issuer is when the tax-exempt financed facility will be used after the sale for a purpose that is a qualifying purpose for another type of tax-exempt bonds (provided that the purchaser of the facility does not use tax-exempt bond proceeds for its purchase). The nonqualified bonds must satisfy all the requirements for the alternate type of tax-exempt bonds beginning on the date of the sale. The issuer must either apply any disposition proceeds resulting from the sale to pay the debt service on the bonds on the next available payment date or deposit the proceeds into an escrow within 90 days of their receipt. If the issuer must establish an escrow, the investment yield on the disposition proceeds must be restricted to the yield on the bonds and the escrow used to pay debt service on the next available payment date.

Allocation of Disposition Proceeds

For all three remedial actions, if the property was financed by different sources, the issuer must first allocate disposition proceeds to the outstanding bonds in proportion to the principal amounts of the outstanding bonds. If the disposition proceeds are not greater than the principal amount of outstanding bonds allocated to the sold property, the proceeds must first be allocated to the outstanding bonds before allocating to bonds no longer outstanding or to sources not derived from borrowing (such as revenues of the issuer).

Remedial Actions-Examples

The following examples assume that the above-described five conditions for remedial action are satisfied. Also, in these examples, no bond proceeds were used for costs of issuance or to fund a reserve fund.


Example 1. - Disposition proceeds are less than the principal amount of the outstanding bonds allocated to the sold property.

Issuer issues $10 million of bonds to finance the construction of a community center. Issuer later sells the center for $5 million, its fair market value. At this time, all $10 million of the bonds are still outstanding. The issuer may choose to remediate by using all $5 million of disposition proceeds to redeem within 90 days or establish a defeasance escrow for a pro rata portion of the $10 million of nonqualified bonds. The remaining outstanding $5 million of bonds would not be private activity bonds because the issuer has remediated as required by the Regulations.

Or, the issuer could remediate by using the alternative use of disposition proceeds option. Under this option, the issuer must apply the total amount of disposition proceeds, $5 million, to a qualifying alternative use within two years (or use a combination of the alternative use of disposition proceeds and redemption or defeasance options).

The disposition proceeds are considered gross proceeds of the bonds and as such are subject to the applicable yield restriction and arbitrage rebate rules pending their use as described above.

Example 2.- Disposition proceeds are greater than the principal amount of the outstanding bonds allocated to the sold property.

Issuer issues $10 million of bonds to finance a school and land. Issuer subsequently sells a portion of the land for $3 million. At this time, all $10 million of the bonds are still outstanding. The principal amount of outstanding bonds allocated to the sold property is $2 million. If the issuer chooses to remediate by redeeming bonds, it must redeem $2 million of outstanding bonds leaving the issuer with $1 million of gross proceeds.

Or, the issuer could remediate by using the alternative use of disposition proceeds option. If so, the Issuer must apply the total amount of the disposition proceeds, $3 million, to a qualifying use within two years (or use a combination of the alternative use of disposition proceeds and redemption or defeasance options).

The disposition proceeds are considered gross proceeds of the bonds and as such are subject to the applicable yield restriction and arbitrage rebate rules pending their use as described above.

Example 3. - Disposition proceeds are greater than the principal amount of the outstanding bonds allocated to the sold property and the conduit borrower finances the project in part with tax-exempt bond proceeds and in part with an equity contribution.

A 501(c)(3) conduit borrower contributed $4 million of cash from its revenues and used $6 million of tax-exempt bonds to finance a $10 million acquisition of a continuing care facility. Subsequently, the conduit borrower sells the facility for $12 million. At this time, all $6 million of the bonds are still outstanding. Thus the issuer has $6 million of nonqualified bonds. The issuer may remediate by either redeeming all of the $6 million nonqualified bonds or by requiring the conduit borrower to use $12 million of disposition proceeds for an alternative use within two years (provided all requirements of qualified 501(c)(3) bonds are met).

Of the $12 million of disposition proceeds, $6 million are considered gross proceeds of the bonds and as such are subject to the applicable yield restriction and arbitrage rebate rules pending their use as described above.

Gross Proceeds - Example 2 versus Example 3

When the tax-exempt bond financed property is sold for an amount in excess of the principal amount of the outstanding bonds allocated to that property, a different result occurs with respect to that excess amount depending on whether all the bonds of the issue have been redeemed. In Example 3, where the issuer redeemed all of the outstanding bonds, the remaining disposition proceeds are not gross proceeds of the bonds and, therefore, are no longer subject to the federal tax restrictions. This is because the amount of gross proceeds cannot exceed the amount of the outstanding bonds of the issue. Whereas in Example 2, although the issuer has redeemed the nonqualified bonds, the issuer still has bonds of the issue outstanding and thus the additional disposition proceeds are gross proceeds of the bonds and subject to the applicable yield restriction and arbitrage rebate rules pending their use.

Correction of Violations Using TEB Voluntary Closing Agreement Program (VCAP)

If an issuer or conduit borrower discovers that it has sold bond financed assets causing the applicable private business tests to be met but is ineligible to self-correct through a remedial action provision, TEB encourages the issuer to take advantage of its Voluntary Closing Agreement Program (TEB VCAP) to resolve federal tax violations relating to bonds as described in Notice 2008-31 and IRM section 7.2.3.

Page Last Reviewed or Updated: 04-Sep-2013

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