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Free State Tax Preparation Software

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Free State Tax Preparation Software

Free state tax preparation software 4. Free state tax preparation software   Detailed Examples Table of Contents These examples use actual forms to help you prepare your income tax return. Free state tax preparation software However, the information shown on the filled-in forms is not from any actual person or scenario. Free state tax preparation software Example 1—Mortgage loan modification. Free state tax preparation software    In 2007, Nancy Oak bought a main home for $435,000. Free state tax preparation software Nancy took out a $420,000 mortgage loan to buy the home and made a down payment of $15,000. Free state tax preparation software The loan was secured by the home. Free state tax preparation software The mortgage loan was a recourse debt, meaning that Nancy was personally liable for the debt. Free state tax preparation software In 2008, Nancy took out a second mortgage loan (also a recourse debt) in the amount of $30,000 that was used to substantially improve her kitchen. Free state tax preparation software    In 2011, when the outstanding principal of the first and second mortgage loans was $440,000, Nancy refinanced the two recourse loans into one recourse loan in the amount of $475,000. Free state tax preparation software The FMV of Nancy's home at the time of the refinancing was $500,000. Free state tax preparation software Nancy used the additional $35,000 debt ($475,000 new mortgage loan minus $440,000 outstanding principal of Nancy's first and second mortgage loans immediately before the refinancing) to pay off personal credit cards and to pay college tuition for her son. Free state tax preparation software After the refinancing, Nancy has qualified principal residence indebtedness in the amount of $440,000 because the refinanced debt is qualified principal residence indebtedness only to the extent the amount of debt is not more than the old mortgage principal just before the refinancing. Free state tax preparation software   In 2013, Nancy was unable to make her mortgage loan payments. Free state tax preparation software On August 31, 2013, when the outstanding balance of her refinanced mortgage loan was still $475,000 and the FMV of the property was $425,000, Nancy's bank agreed to a loan modification (a “workout”) that resulted in a $40,000 reduction in the principal balance of her loan. Free state tax preparation software Nancy was neither insolvent nor in bankruptcy at the time of the loan modification. Free state tax preparation software   Nancy received a 2013 Form 1099-C from her bank in January 2014 showing canceled debt of $40,000 in box 2. Free state tax preparation software Identifiable event code "F" appears in box 6. Free state tax preparation software This box shows the reason the creditor has filed Form 1099-C. Free state tax preparation software To determine if she must include the canceled debt in her income, Nancy must determine whether she meets any of the exceptions or exclusions that apply to canceled debts. Free state tax preparation software Nancy determines that the only exception or exclusion that applies to her is the qualified principal residence indebtedness exclusion. Free state tax preparation software   Next, Nancy determines the amount, if any, of the $40,000 of canceled debt that was qualified principal residence indebtedness. Free state tax preparation software Although Nancy has $440,000 of qualified principal residence indebtedness, part of her loan ($35,000) was not qualified principal residence indebtedness because it was used to pay off personal credit cards and college tuition for her son. Free state tax preparation software Applying the ordering rule, the qualified principal residence indebtedness exclusion applies only to the extent the amount canceled is more than the amount of the debt (immediately before the cancellation) that is not qualified principal residence indebtedness. Free state tax preparation software Thus, Nancy can exclude only $5,000 of the canceled debt as qualified principal residence indebtedness ($40,000 amount canceled minus $35,000 nonqualified debt). Free state tax preparation software   Because Nancy does not meet any other exception or exclusion, she checks only the box on line 1e of Form 982 and enters $5,000 on line 2. Free state tax preparation software Nancy must also enter $5,000 on line 10b and reduce the basis of her main home by the $5,000 she excluded from income, bringing the adjusted basis in her home to $460,000 ($435,000 purchase price plus $30,000 substantial improvement minus $5,000). Free state tax preparation software Nancy must also include the $35,000 nonqualified debt portion in income on Form 1040, line 21. Free state tax preparation software You can see Nancy's Form 1099-C and a portion of her Form 1040 below. Free state tax preparation software Nancy's 2013 Form 1099-C, Cancellation of Debt This image is too large to be displayed in the current screen. Free state tax preparation software Please click the link to view the image. Free state tax preparation software Form 1099-C, Cancellation of Debt Nancy's 2013 Form 1040 This image is too large to be displayed in the current screen. Free state tax preparation software Please click the link to view the image. Free state tax preparation software Form 1040, U. Free state tax preparation software S. Free state tax preparation software Individual Income Tax Nancy's Form 982 This image is too large to be displayed in the current screen. Free state tax preparation software Please click the link to view the image. Free state tax preparation software Form 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)              Example 2—Mortgage loan foreclosure. Free state tax preparation software    In 2005, John and Mary Elm bought a main home for $335,000. Free state tax preparation software John and Mary took out a $320,000 mortgage loan to buy the home and made a down payment of $15,000. Free state tax preparation software The loan was secured by the home and is a recourse debt, meaning John and Mary are personally liable for the debt. Free state tax preparation software   John and Mary became unable to make their mortgage loan payments and on March 1, 2013, when the outstanding balance of the mortgage loan was $315,000 and the FMV of the property was $290,000, the bank foreclosed on the property and simultaneously canceled the remaining mortgage debt. Free state tax preparation software Immediately before the foreclosure, John and Mary's only other assets and liabilities were a checking account with a balance of $6,000, retirement savings of $13,000, and credit card debt of $5,500. Free state tax preparation software   John and Mary received a 2013 Form 1099-C showing canceled debt of $25,000 in box 2 ($315,000 outstanding balance minus $290,000 FMV) and an FMV of $290,000 in box 7. Free state tax preparation software Identifiable event code "D" appears in box 6. Free state tax preparation software This box shows the reason the creditor has filed Form 1099-C. Free state tax preparation software In order to determine if John and Mary must include the canceled debt in income, they must first determine whether they meet any of the exceptions or exclusions that apply to canceled debts. Free state tax preparation software In this example, John and Mary meet both the insolvency and qualified principal residence indebtedness exclusions. Free state tax preparation software Their sample Form 1099-C is shown on this page. Free state tax preparation software   John and Mary complete the insolvency worksheet and determine that they were insolvent immediately before the cancellation because at that time their liabilities exceeded the FMV of their assets by $11,500 ($320,500 total liabilities minus $309,000 FMV of total assets). Free state tax preparation software However, because the entire debt canceled is qualified principal residence indebtedness, the insolvency exclusion only applies if John and Mary elect to apply the insolvency exclusion instead of the qualified principal residence exclusion. Free state tax preparation software   John and Mary do not elect to apply the insolvency exclusion instead of the qualified principal residence exclusion because under the insolvency exclusion their exclusion would be limited to the amount by which they were insolvent ($11,500). Free state tax preparation software Instead, John and Mary check box 1e of Form 982 to exclude the canceled debt under the qualified principal residence exclusion. Free state tax preparation software Under the qualified principal residence exclusion, the amount that John and Mary can exclude is not limited because their qualified principal residence indebtedness is not more than $2 million and no portion of the loan was nonqualified debt. Free state tax preparation software As a result, John and Mary enter the full $25,000 of canceled debt on line 2 of Form 982. Free state tax preparation software Because John and Mary no longer own the home due to the foreclosure, John and Mary have no remaining basis in the home at the time of the debt cancellation. Free state tax preparation software Thus, John and Mary leave line 10b of Form 982 blank. Free state tax preparation software   John and Mary must also determine whether they have a gain or loss from the foreclosure. Free state tax preparation software John and Mary complete Table 1-1 (shown below) and find that they have a $45,000 loss from the foreclosure. Free state tax preparation software Because this loss relates to their home, it is a nondeductible loss. Free state tax preparation software   John and Mary's Form 1099-C, Insolvency Worksheet, and Form 982 follow. Free state tax preparation software John and Mary's 2013 Form 1099-C, Cancellation of Debt This image is too large to be displayed in the current screen. Free state tax preparation software Please click the link to view the image. Free state tax preparation software Form 1099-C, Cancellation of Debt Table 1-1. Free state tax preparation software Worksheet for Foreclosures and Repossessions (for John and Mary Elm) Part 1. Free state tax preparation software Complete Part 1 only if you were personally liable for the debt (even if none of the debt was canceled). Free state tax preparation software Otherwise, go to Part 2. Free state tax preparation software 1. Free state tax preparation software Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable immediately after the transfer of property $315,000. Free state tax preparation software 00 2. Free state tax preparation software Enter the fair market value of the transferred property $290,000. Free state tax preparation software 00 3. Free state tax preparation software Ordinary income from the cancellation of debt upon foreclosure or repossession. Free state tax preparation software * Subtract line 2 from line 1. Free state tax preparation software If less than zero, enter zero. Free state tax preparation software Next, go to Part 2 $ 25,000. Free state tax preparation software 00 Part 2. Free state tax preparation software Gain or loss from foreclosure or repossession. Free state tax preparation software   4. Free state tax preparation software Enter the smaller of line 1 or line 2. Free state tax preparation software If you did not complete Part 1 (because you were not personally liable for the debt), enter the amount of outstanding debt immediately before the transfer of property $290,000. Free state tax preparation software 00 5. Free state tax preparation software Enter any proceeds you received from the foreclosure sale   6. Free state tax preparation software Add line 4 and line 5 $290,000. Free state tax preparation software 00 7. Free state tax preparation software Enter the adjusted basis of the transferred property $335,000. Free state tax preparation software 00 8. Free state tax preparation software Gain or loss from foreclosure or repossession. Free state tax preparation software Subtract line 7 from line 6 ($ 45,000. Free state tax preparation software 00) * The income may not be taxable. Free state tax preparation software See chapter 1 for more details. Free state tax preparation software Insolvency Worksheet—John and Mary Elm Date debt was canceled (mm/dd/yy) 03/01/13 Part I. Free state tax preparation software Total liabilities immediately before the cancellation (do not include the same liability in more than one category) Liabilities (debts) Amount Owed Immediately Before the Cancellation 1. Free state tax preparation software Credit card debt $ 5,500 2. Free state tax preparation software Mortgage(s) on real property (including first and second mortgages and home equity loans) (mortgage(s) can be on personal residence, any additional residence, or property held for investment or used in a trade or business) $ 315,000 3. Free state tax preparation software Car and other vehicle loans $ 4. Free state tax preparation software Medical bills owed $ 5. Free state tax preparation software Student loans $ 6. Free state tax preparation software Accrued or past-due mortgage interest $ 7. Free state tax preparation software Accrued or past-due real estate taxes $ 8. Free state tax preparation software Accrued or past-due utilities (water, gas, electric) $ 9. Free state tax preparation software Accrued or past-due child care costs $ 10. Free state tax preparation software Federal or state income taxes remaining due (for prior tax years) $ 11. Free state tax preparation software Judgments $ 12. Free state tax preparation software Business debts (including those owed as a sole proprietor or partner) $ 13. Free state tax preparation software Margin debt on stocks and other debt to purchase or secured by investment assets other than real property $ 14. Free state tax preparation software Other liabilities (debts) not included above $ 15. Free state tax preparation software Total liabilities immediately before the cancellation. Free state tax preparation software Add lines 1 through 14. Free state tax preparation software $ 320,500 Part II. Free state tax preparation software Fair market value (FMV) of assets owned immediately before the cancellation (do not include the FMV of the same asset in more than one category) Assets FMV Immediately Before  the Cancellation 16. Free state tax preparation software Cash and bank account balances $ 6,000 17. Free state tax preparation software Real property, including the value of land (can be main home, any additional home, or property held for investment or used in a trade or business) $ 290,000 18. Free state tax preparation software Cars and other vehicles $ 19. Free state tax preparation software Computers $ 20. Free state tax preparation software Household goods and furnishings (for example, appliances, electronics, furniture, etc. Free state tax preparation software ) $ 21. Free state tax preparation software Tools $ 22. Free state tax preparation software Jewelry $ 23. Free state tax preparation software Clothing $ 24. Free state tax preparation software Books $ 25. Free state tax preparation software Stocks and bonds $ 26. Free state tax preparation software Investments in coins, stamps, paintings, or other collectibles $ 27. Free state tax preparation software Firearms, sports, photographic, and other hobby equipment $ 28. Free state tax preparation software Interest in retirement accounts (IRA accounts, 401(k) accounts, and other retirement accounts) $ 13,000 29. Free state tax preparation software Interest in a pension plan $ 30. Free state tax preparation software Interest in education accounts $ 31. Free state tax preparation software Cash value of life insurance $ 32. Free state tax preparation software Security deposits with landlords, utilities, and others $ 33. Free state tax preparation software Interests in partnerships $ 34. Free state tax preparation software Value of investment in a business $ 35. Free state tax preparation software Other investments (for example, annuity contracts, guaranteed investment contracts, mutual funds, commodity accounts, interests in hedge funds, and options) $ 36. Free state tax preparation software Other assets not included above $ 37. Free state tax preparation software FMV of total assets immediately before the cancellation. Free state tax preparation software Add lines 16 through 36. Free state tax preparation software $ 309,000 Part III. Free state tax preparation software Insolvency 38. Free state tax preparation software Amount of Insolvency. Free state tax preparation software Subtract line 37 from line 15. Free state tax preparation software If zero or less, you are not insolvent. Free state tax preparation software $ 11,500 John and Mary's Form 982 This image is too large to be displayed in the current screen. Free state tax preparation software Please click the link to view the image. Free state tax preparation software Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment)          Example 3—Mortgage loan foreclosure with debt exceeding $2 million limit. Free state tax preparation software    In 2011, Kathy and Frank Willow got married and entered into a contract with Hive Construction Corporation to build a house for $3,000,000 to be used as their main home. Free state tax preparation software Kathy and Frank made a $400,000 down payment and took out a $2,600,000 mortgage to finance the remaining cost of the house. Free state tax preparation software Kathy and Frank are personally liable for the mortgage loan, which is secured by the home. Free state tax preparation software   In November 2013, when the outstanding principal balance on the mortgage loan was $2,500,000, the FMV of the property fell to $1,750,000 and Kathy and Frank abandoned the property by permanently moving out. Free state tax preparation software The lender foreclosed on the property and, on December 5, 2013, sold the property to another buyer for $1,750,000. Free state tax preparation software On December 26, 2013, the lender canceled the remaining debt. Free state tax preparation software Kathy and Frank have no tax attributes other than basis of personal-use property. Free state tax preparation software   The lender issued a 2013 Form 1099-C to Kathy and Frank showing canceled debt of $750,000 in box 2 (the remaining balance on the $2,500,000 mortgage debt after application of the foreclosure sale proceeds) and $1,750,000 in box 7 (FMV of the property). Free state tax preparation software Identifiable event code "D" appears in box 6. Free state tax preparation software This box shows the reason the creditor has filed Form 1099-C. Free state tax preparation software Although Kathy and Frank abandoned the property, the lender did not need to also file a Form 1099-A because the lender canceled the debt in connection with the foreclosure in the same calendar year. Free state tax preparation software Kathy and Frank are filing a joint return for 2013. Free state tax preparation software   Because the foreclosure occurred prior to the debt cancellation, Kathy and Frank first calculate their gain or loss from the foreclosure using Table 1-1. Free state tax preparation software Because Kathy and Frank remained personally liable for the $750,000 debt remaining after the foreclosure ($2,500,000 outstanding debt immediately before the foreclosure minus $1,750,000 satisfied through the sale of the home), Kathy and Frank enter $1,750,000 on line 1 of Table 1-1 ($2,500,000 outstanding debt immediately before the foreclosure minus the $750,000 for which they remained liable). Free state tax preparation software Completing Table 1-1, Kathy and Frank find that they have no ordinary income from the cancellation of debt upon foreclosure and that they have a $1,250,000 loss. Free state tax preparation software Because this loss relates to their home, it is a nondeductible loss. Free state tax preparation software   Because the lender later canceled the remaining amount of the debt, Kathy and Frank must also determine whether that canceled debt is taxable. Free state tax preparation software Immediately before the cancellation, Kathy and Frank had $15,000 in a savings account, household furnishings with an FMV of $17,000, a car with an FMV of $10,000, and $18,000 in credit card debt. Free state tax preparation software Kathy and Frank also had the $750,000 remaining balance on the mortgage loan at that time. Free state tax preparation software The household furnishings originally cost $30,000. Free state tax preparation software The car had been fully paid off (so there was no related outstanding debt) and was originally purchased for $16,000. Free state tax preparation software Kathy and Frank had no adjustments to the cost basis of the car. Free state tax preparation software Kathy and Frank had no other assets or liabilities at the time of the cancellation. Free state tax preparation software Kathy and Frank complete the insolvency worksheet to calculate that they were insolvent to the extent of $726,000 immediately before the cancellation ($768,000 of total liabilities minus $42,000 FMV of total assets). Free state tax preparation software   At the beginning of 2014, Kathy and Frank had $9,000 in their savings account and $15,000 in credit card debt. Free state tax preparation software Kathy and Frank also owned the same car at that time (still with an FMV of $10,000 and basis of $16,000) and the same household furnishings (still with an FMV of $17,000 and a basis of $30,000). Free state tax preparation software Kathy and Frank had no other assets or liabilities at that time. Free state tax preparation software Kathy and Frank no longer own the home because the lender foreclosed on it in 2013. Free state tax preparation software   Because the canceled debt is qualified principal residence indebtedness, the insolvency exclusion does not apply unless Kathy and Frank elect to apply the insolvency exclusion instead of the qualified principal residence indebtedness exclusion. Free state tax preparation software The maximum amount that Kathy and Frank can treat as qualified principal residence indebtedness is $2,000,000. Free state tax preparation software The remaining $500,000 ($2,500,000 outstanding mortgage loan minus $2,000,000 limit on qualified principal residence indebtedness) is not qualified principal residence indebtedness. Free state tax preparation software Because only a part of the loan is qualified principal residence indebtedness, Kathy and Frank must apply the ordering rule to the canceled debt. Free state tax preparation software Under the ordering rule, the qualified principal residence indebtedness exclusion applies only to the extent that the amount canceled ($750,000) exceeds the amount of the loan (immediately before the cancellation) that is not qualified principal residence indebtedness ($500,000). Free state tax preparation software This means that Kathy and Frank can only exclude $250,000 ($750,000 amount canceled minus $500,000 nonqualified debt) under the qualified principal residence indebtedness exclusion. Free state tax preparation software   Kathy and Frank do not elect to have the insolvency exclusion apply instead of the qualified principal residence exclusion. Free state tax preparation software Nonetheless, they can still apply the insolvency exclusion to the $500,000 nonqualified debt because it is not qualified principal residence indebtedness. Free state tax preparation software Kathy and Frank can exclude the remaining $500,000 canceled debt under the insolvency exclusion because they were insolvent immediately before the cancellation to the extent of $726,000. Free state tax preparation software Thus, Kathy and Frank check the boxes on lines 1b and 1e of Form 982 and enter $750,000 on line 2 ($250,000 excluded under the qualified principal residence indebtedness exclusion plus $500,000 excluded under the insolvency exclusion). Free state tax preparation software   Next, Kathy and Frank reduce their tax attributes using Part II of Form 982. Free state tax preparation software Because Kathy and Frank no longer own the home due to the foreclosure, Kathy and Frank have no remaining basis in the home at the time of the debt cancellation. Free state tax preparation software Thus, Kathy and Frank leave line 10b of Form 982 blank. Free state tax preparation software However, Kathy and Frank are also excluding nonqualified debt under the insolvency exclusion. Free state tax preparation software As a result, Kathy and Frank must reduce the basis of property they own based on the amount of canceled debt they are excluding from income under the insolvency rules. Free state tax preparation software Because Kathy and Frank have no tax attributes other than basis of personal-use property to reduce, Kathy and Frank figure the amount they must include on line 10a of Form 982 by taking the smallest of: The $46,000 bases of their personal-use property held at the beginning of 2014 ($16,000 basis in the car plus $30,000 basis in household furnishings), The $500,000 of the nonbusiness debt (other than qualified principal residence indebtedness) that they are excluding from income on line 2 of Form 982, or The $43,000 excess of the total bases of the property and the amount of money they held immediately after the cancellation over their total liabilities immediately after the cancellation ($15,000 in savings account plus $30,000 basis in household furnishings plus $16,000 adjusted basis in car minus $18,000 credit card debt). Free state tax preparation software Kathy and Frank enter $43,000 on Form 982, line 10a and reduce their bases in the car and the household furnishings in proportion to the total adjusted bases in all their property. Free state tax preparation software Kathy and Frank reduce the basis in the car by $14,956. Free state tax preparation software 52 ($43,000 x $16,000/$46,000). Free state tax preparation software And they reduce the basis in the household furnishings by $28,043. Free state tax preparation software 48 ($43,000 x $30,000/$46,000). Free state tax preparation software   Following are Kathy and Frank's sample forms and worksheets. Free state tax preparation software Frank and Kathy's 2013 Form 1099-C, Cancellation of Debt This image is too large to be displayed in the current screen. Free state tax preparation software Please click the link to view the image. Free state tax preparation software Form 1099-C, Cancellation of Debt Table 1-1. Free state tax preparation software Worksheet for Foreclosures and Repossessions (for Frank and Kathy Willow) Part 1. Free state tax preparation software Complete Part 1 only if you were personally liable for the debt (even if none of the debt was canceled). Free state tax preparation software Otherwise, go to Part 2. Free state tax preparation software 1. Free state tax preparation software Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable immediately after the transfer of property $1,750,000. Free state tax preparation software 00 2. Free state tax preparation software Enter the fair market value of the transferred property $1,750,000. Free state tax preparation software 00 3. Free state tax preparation software Ordinary income from the cancellation of debt upon foreclosure or repossession. Free state tax preparation software * Subtract line 2 from line 1. Free state tax preparation software If less than zero, enter zero. Free state tax preparation software Next, go to Part 2 $0. Free state tax preparation software 00 Part 2. Free state tax preparation software Gain or loss from foreclosure or repossession. Free state tax preparation software   4. Free state tax preparation software Enter the smaller of line 1 or line 2. Free state tax preparation software If you did not complete Part 1 (because you were not personally liable for the debt), enter the amount of outstanding debt immediately before the transfer of property. Free state tax preparation software $1,750,000. Free state tax preparation software 00 5. Free state tax preparation software Enter any proceeds you received from the foreclosure sale   6. Free state tax preparation software Add line 4 and line 5 $1,750,000. Free state tax preparation software 00 7. Free state tax preparation software Enter the adjusted basis of the transferred property $3,000,000. Free state tax preparation software 00 8. Free state tax preparation software Gain or loss from foreclosure or repossession. Free state tax preparation software Subtract line 7 from line 6 ($1,250,000. Free state tax preparation software 00) * The income may not be taxable. Free state tax preparation software See chapter 1 for more details. Free state tax preparation software    Insolvency Worksheet—Frank and Kathy Willow Date debt was canceled (mm/dd/yy) 12/26/13 Part I. Free state tax preparation software Total liabilities immediately before the cancellation (do not include the same liability in more than one category) Liabilities (debts) Amount Owed Immediately Before the Cancellation 1. Free state tax preparation software Credit card debt $ 18,000 2. Free state tax preparation software Mortgage(s) on real property (including first and second mortgages and home equity loans) (mortgage(s) can be on personal residence, any additional residence, or property held for investment or used in a trade or business) $ 750,000 3. Free state tax preparation software Car and other vehicle loans $ 4. Free state tax preparation software Medical bills owed $ 5. Free state tax preparation software Student loans $ 6. Free state tax preparation software Accrued or past-due mortgage interest $ 7. Free state tax preparation software Accrued or past-due real estate taxes $ 8. Free state tax preparation software Accrued or past-due utilities (water, gas, electric) $ 9. Free state tax preparation software Accrued or past-due child care costs $ 10. Free state tax preparation software Federal or state income taxes remaining due (for prior tax years) $ 11. Free state tax preparation software Judgments $ 12. Free state tax preparation software Business debts (including those owed as a sole proprietor or partner) $ 13. Free state tax preparation software Margin debt on stocks and other debt to purchase or secured by investment assets other than real property $ 14. Free state tax preparation software Other liabilities (debts) not included above $ 15. Free state tax preparation software Total liabilities immediately before the cancellation. Free state tax preparation software Add lines 1 through 14. Free state tax preparation software $ 768,000 Part II. Free state tax preparation software Fair market value (FMV) of assets owned immediately before the cancellation (do not include the FMV of the same asset in more than one category) Assets FMV Immediately Before  the Cancellation 16. Free state tax preparation software Cash and bank account balances $ 15,000 17. Free state tax preparation software Real property, including the value of land (can be main home, any additional home, or property held for investment or used in a trade or business) $ 18. Free state tax preparation software Cars and other vehicles $ 10,000 19. Free state tax preparation software Computers $ 20. Free state tax preparation software Household goods and furnishings (for example, appliances, electronics, furniture, etc. Free state tax preparation software ) $ 17,000 21. Free state tax preparation software Tools $ 22. Free state tax preparation software Jewelry $ 23. Free state tax preparation software Clothing $ 24. Free state tax preparation software Books $ 25. Free state tax preparation software Stocks and bonds $ 26. Free state tax preparation software Investments in coins, stamps, paintings, or other collectibles $ 27. Free state tax preparation software Firearms, sports, photographic, and other hobby equipment $ 28. Free state tax preparation software Interest in retirement accounts (IRA accounts, 401(k) accounts, and other retirement accounts) $ 29. Free state tax preparation software Interest in a pension plan $ 30. Free state tax preparation software Interest in education accounts $ 31. Free state tax preparation software Cash value of life insurance $ 32. Free state tax preparation software Security deposits with landlords, utilities, and others $ 33. Free state tax preparation software Interests in partnerships $ 34. Free state tax preparation software Value of investment in a business $ 35. Free state tax preparation software Other investments (for example, annuity contracts, guaranteed investment contracts, mutual funds, commodity accounts, interests in hedge funds, and options) $ 36. Free state tax preparation software Other assets not included above $ 37. Free state tax preparation software FMV of total assets immediately before the cancellation. Free state tax preparation software Add lines 16 through 36. Free state tax preparation software $ 42,000 Part III. Free state tax preparation software Insolvency 38. Free state tax preparation software Amount of Insolvency. Free state tax preparation software Subtract line 37 from line 15. Free state tax preparation software If zero or less, you are not insolvent. Free state tax preparation software $ 726,000    Frank and Kathy's Form 982 This image is too large to be displayed in the current screen. Free state tax preparation software Please click the link to view the image. Free state tax preparation software Form 982, Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) Prev  Up  Next   Home   More Online Publications
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The Free State Tax Preparation Software

Free state tax preparation software 3. Free state tax preparation software   Lifetime Learning Credit Table of Contents Introduction Can You Claim the CreditWho Can Claim the Credit Who Cannot Claim the Credit What Expenses QualifyQualified Education Expenses No Double Benefit Allowed Expenses That Do Not Qualify Who Is an Eligible Student Who Can Claim a Dependent's Expenses Figuring the CreditEffect of the Amount of Your Income on the Amount of Your Credit Claiming the Credit Introduction For 2013, there are two tax credits available to help you offset the costs of higher education by reducing the amount of your income tax. Free state tax preparation software They are the American opportunity credit and the lifetime learning credit. Free state tax preparation software This chapter discusses the lifetime learning credit. Free state tax preparation software The American opportunity credit is discussed in chapter 2, The American Opportunity Credit . Free state tax preparation software This chapter explains: Who can claim the lifetime learning credit, What expenses qualify for the credit, Who is an eligible student, Who can claim a dependent's expenses, How to figure the credit, How to claim the credit, and When the credit must be repaid. Free state tax preparation software What is the tax benefit of the lifetime learning credit. Free state tax preparation software   For the tax year, you may be able to claim a lifetime learning credit of up to $2,000 for qualified education expenses paid for all eligible students. Free state tax preparation software There is no limit on the number of years the lifetime learning credit can be claimed for each student. Free state tax preparation software   A tax credit reduces the amount of income tax you may have to pay. Free state tax preparation software Unlike a deduction, which reduces the amount of income subject to tax, a credit directly reduces the tax itself. Free state tax preparation software The lifetime learning credit is a nonrefundable credit. Free state tax preparation software This means that it can reduce your tax to zero, but if the credit is more than your tax the excess will not be refunded to you. Free state tax preparation software   Your allowable lifetime learning credit may be limited by the amount of your income and the amount of your tax. Free state tax preparation software Can you claim more than one education credit this year. Free state tax preparation software   For each student, you can elect for any year only one of the credits. Free state tax preparation software For example, if you elect to take the lifetime learning credit for a child on your 2013 tax return, you cannot, for that same child, also claim the American opportunity credit for 2013. Free state tax preparation software   If you are eligible to claim the lifetime learning credit and you are also eligible to claim the American opportunity credit for the same student in the same year, you can choose to claim either credit, but not both. Free state tax preparation software   If you pay qualified education expenses for more than one student in the same year, you can choose to take certain credits on a per-student, per-year basis. Free state tax preparation software This means that, for example, you can claim the American opportunity credit for one student and the lifetime learning credit for another student in the same year. Free state tax preparation software Differences between the American opportunity and lifetime learning credits. Free state tax preparation software   There are several differences between these two credits. Free state tax preparation software For example, you can claim the American opportunity credit for the same student for no more than 4 tax years, but any year in which the Hope Scholarship Credit was claimed counts toward the 4 years. Free state tax preparation software However, there is no limit on the number of years for which you can claim a lifetime learning credit based on the same student's expenses. Free state tax preparation software The differences between these credits are shown in Appendix B, Highlights of Education Tax Benefits for Tax Year 2013 near the end of this publication. Free state tax preparation software Overview of the lifetime learning credit. Free state tax preparation software   See Table 3-1, Overview of the Lifetime Learning Credit for the basics of the lifetime learning credit. Free state tax preparation software The details are discussed in this chapter. Free state tax preparation software Can You Claim the Credit The following rules will help you determine if you are eligible to claim the lifetime learning credit on your tax return. Free state tax preparation software Who Can Claim the Credit Generally, you can claim the lifetime learning credit if all three of the following requirements are met. Free state tax preparation software You pay qualified education expenses of higher education. Free state tax preparation software You pay the education expenses for an eligible student. Free state tax preparation software The eligible student is either yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Free state tax preparation software Table 3-1. Free state tax preparation software Overview of the Lifetime Learning Credit Maximum credit Up to $2,000 credit per return Limit on modified adjusted gross income (MAGI) $127,000 if married filling jointly;  $63,000 if single, head of household, or qualifying widow(er) Refundable or nonrefundable Nonrefundable—credit limited to the amount of tax you must pay on your taxable income Number of years of postsecondary education Available for all years of postsecondary education and for courses to acquire or improve job skills Number of tax years credit available Available for an unlimited number of years Type of program required Student does not need to be pursuing a program leading to a degree or other recognized education credential Number of courses Available for one or more courses Felony drug conviction Felony drug convictions do not make the student ineligible Qualified expenses Tuition and fees required for enrollment or attendance (including amounts required to be paid to the institution for course-related books, supplies, and equipment) Payments for academic periods Payments made in 2013 for academic periods beginning in 2013 or beginning in the first 3 months of 2014 Note. Free state tax preparation software Qualified education expenses paid by a dependent for whom you claim an exemption, or by a third party for that dependent, are considered paid by you. Free state tax preparation software “Qualified education expenses” are defined later under Qualified Education Expenses . Free state tax preparation software “Eligible students” are defined later under Who Is an Eligible Student . Free state tax preparation software A dependent for whom you claim an exemption is defined later under Who Can Claim a Dependent's Expenses . Free state tax preparation software You may find Figure 3-1, Can You Claim the Lifetime Learning Credit for 2013 , later, helpful in determining if you can claim a lifetime learning credit on your tax return. Free state tax preparation software Who Cannot Claim the Credit You cannot claim the lifetime learning credit for 2013 if any of the following apply. Free state tax preparation software Your filing status is married filing separately. Free state tax preparation software You are listed as a dependent on another person's tax return (such as your parents'). Free state tax preparation software See Who Can Claim a Dependent's Expenses , later. Free state tax preparation software Your modified adjusted gross income (MAGI) is $63,000 or more ($127,000 or more in the case of a joint return). Free state tax preparation software MAGI is explained later under Effect of the Amount of Your Income on the Amount of Your Credit . Free state tax preparation software You (or your spouse) were a nonresident alien for any part of 2013 and the nonresident alien did not elect to be treated as a resident alien for tax purposes. Free state tax preparation software More information on nonresident aliens can be found in Publication 519. Free state tax preparation software You claim the American Opportunity Credit (see chapter 2) or a Tuition and Fees Deduction (see chapter 6) for the same student in 2013. Free state tax preparation software What Expenses Qualify The lifetime learning credit is based on qualified education expenses you pay for yourself, your spouse, or a dependent for whom you claim an exemption on your tax return. Free state tax preparation software Generally, the credit is allowed for qualified education expenses paid in 2013 for an academic period beginning in 2013 or in the first 3 months of 2014. Free state tax preparation software For example, if you paid $1,500 in December 2013 for qualified tuition for the spring 2014 semester beginning in January 2014, you may be able to use that $1,500 in figuring your 2013 credit. Free state tax preparation software Academic period. Free state tax preparation software   An academic period includes a semester, trimester, quarter, or other period of study (such as a summer school session) as reasonably determined by an educational institution. Free state tax preparation software In the case of an educational institution that uses credit hours or clock hours and does not have academic terms, each payment period can be treated as an academic period. Free state tax preparation software Paid with borrowed funds. Free state tax preparation software   You can claim a lifetime learning credit for qualified education expenses paid with the proceeds of a loan. Free state tax preparation software You use the expenses to figure the lifetime learning credit for the year in which the expenses are paid, not the year in which the loan is repaid. Free state tax preparation software Treat loan disbursements sent directly to the educational institution as paid on the date the institution credits the student's account. Free state tax preparation software Student withdraws from class(es). Free state tax preparation software   You can claim a lifetime learning credit for qualified education expenses not refunded when a student withdraws. Free state tax preparation software Qualified Education Expenses For purposes of the lifetime learning credit, qualified education expenses are tuition and certain related expenses required for enrollment in a course at an eligible educational institution. Free state tax preparation software The course must be either part of a postsecondary degree program or taken by the student to acquire or improve job skills. Free state tax preparation software Eligible educational institution. Free state tax preparation software   An eligible educational institution is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Free state tax preparation software S. Free state tax preparation software Department of Education. Free state tax preparation software It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Free state tax preparation software The educational institution should be able to tell you if it is an eligible educational institution. Free state tax preparation software   Certain educational institutions located outside the United States also participate in the U. Free state tax preparation software S. Free state tax preparation software Department of Education's Federal Student Aid (FSA) programs. Free state tax preparation software Related expenses. Free state tax preparation software   Student-activity fees and expenses for course-related books, supplies, and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution for enrollment or attendance. Free state tax preparation software Prepaid expenses. Free state tax preparation software   Qualified education expenses paid in 2013 for an academic period that begins in the first three months of 2014 can be used in figuring an education credit for 2013 only. Free state tax preparation software See Academic period , earlier. Free state tax preparation software For example, you pay $2,000 in December 2013 for qualified tuition for the 2014 winter quarter that begins in January 2014, you can use that $2,000 in figuring an education credit for 2013 only (if you meet all the other requirements). Free state tax preparation software You cannot use any amount you paid in 2012 or 2014 to figure the qualified education expenses you use to figure your 2013 education credit(s). Free state tax preparation software In the following examples, assume that each student is an eligible student at an eligible educational institution. Free state tax preparation software Example 1. Free state tax preparation software   Jackson is a sophomore in University V's degree program in dentistry. Free state tax preparation software This year, in addition to tuition, he is required to pay a fee to the university for the rental of the dental equipment he will use in this program. Free state tax preparation software Because the equipment rental fee must be paid to University V for enrollment and attendance, Jackson's equipment rental fee is a qualified expense. Free state tax preparation software Example 2. Free state tax preparation software   Donna and Charles, both first-year students at College W, are required to have certain books and other reading materials to use in their mandatory first-year classes. Free state tax preparation software The college has no policy about how students should obtain these materials, but any student who purchases them from College W's bookstore will receive a bill directly from the college. Free state tax preparation software Charles bought his books from a friend, so what he paid for them is not a qualified education expense. Free state tax preparation software Donna bought hers at College W's bookstore. Free state tax preparation software Although Donna paid College W directly for her first-year books and materials, her payment is not a qualified expense because the books and materials are not required to be purchased from College W for enrollment or attendance at the institution. Free state tax preparation software Example 3. Free state tax preparation software   When Marci enrolled at College X for her freshman year, she had to pay a separate student activity fee in addition to her tuition. Free state tax preparation software This activity fee is required of all students, and is used solely to fund on-campus organizations and activities run by students, such as the student newspaper and student government. Free state tax preparation software No portion of the fee covers personal expenses. Free state tax preparation software Although labeled as a student activity fee, the fee is required for Marci's enrollment and attendance at College X. Free state tax preparation software Therefore, it is a qualified expense. Free state tax preparation software No Double Benefit Allowed You cannot do any of the following: Deduct higher education expenses on your income tax return (as, for example, a business expense) and also claim a lifetime learning credit based on those same expenses. Free state tax preparation software Claim a lifetime learning credit in the same year that you are claiming a tuition and fees deduction for the same student. Free state tax preparation software Claim a lifetime learning credit and an American opportunity credit based on the same qualified education expenses. Free state tax preparation software Claim a lifetime learning credit based on the same expenses used to figure the tax-free portion of a distribution from a Coverdell education savings account (ESA) or qualified tuition program (QTP). Free state tax preparation software See Coordination With American Opportunity and Lifetime Learning Credits in chapter 7, Coverdell Education Savings Account, and Coordination With American Opportunity and Lifetime Learning Credits in chapter 8, Qualified Tuition Program. Free state tax preparation software Claim a credit based on qualified education expenses paid with tax-free educational assistance, such as a scholarship, grant, or assistance provided by an employer. Free state tax preparation software See Adjustments to Qualified Education Expenses, next. Free state tax preparation software This image is too large to be displayed in the current screen. Free state tax preparation software Please click the link to view the image. Free state tax preparation software Figure 3-1 Adjustments to Qualified Education Expenses For each student, reduce the qualified education expenses paid by or on behalf of that student under the following rules. Free state tax preparation software The result is the amount of adjusted qualified education expenses for each student. Free state tax preparation software Tax-free educational assistance. Free state tax preparation software   For tax-free educational assistance received in 2013, reduce the qualified educational expenses for each academic period by the amount of tax-free educational assistance allocable to that academic period. Free state tax preparation software See Academic period , earlier. Free state tax preparation software   Some tax-free educational assistance received after 2013 may be treated as a refund of qualified education expenses paid in 2013. Free state tax preparation software This tax-free educational assistance is any tax-free educational assistance received by you or anyone else after 2013 for qualified education expenses paid on behalf of a student in 2013 (or attributable to enrollment at an eligible educational institution during 2013). Free state tax preparation software   If this tax-free educational assistance is received after 2013 but before you file your 2013 income tax return, see Refunds received after 2013 but before your income tax return is filed , later. Free state tax preparation software If this tax-free educational assistance is received after 2013 and after you file your 2013 income tax return, see Refunds received after 2013 and after your income tax return is filed , later. Free state tax preparation software   Tax-free educational assistance includes: The tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Free state tax preparation software Generally, any scholarship or fellowship is treated as tax free. Free state tax preparation software However, a scholarship or fellowship is not treated as tax free to the extent the student includes it in gross income (if the student is required to file a tax return for the year the scholarship or fellowship is received) and either of the following is true. Free state tax preparation software The scholarship or fellowship (or any part of it) must be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Free state tax preparation software The scholarship or fellowship (or any part of it) may be applied (by its terms) to expenses (such as room and board) other than qualified education expenses as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Free state tax preparation software You may be able to increase the combined value of an education credit and certain educational assistance if the student includes some or all of the educational assistance in income in the year it is received. Free state tax preparation software For examples, see Coordination with Pell grants and other scholarships, later. Free state tax preparation software Refunds. Free state tax preparation software   A refund of qualified education expenses may reduce adjusted qualified education expenses for the tax year or require repayment (recapture) of a credit claimed in an earlier year. Free state tax preparation software Some tax-free educational assistance received after 2013 may be treated as a refund. Free state tax preparation software See Tax-free educational assistance , earlier. Free state tax preparation software Refunds received in 2013. Free state tax preparation software   For each student, figure the adjusted qualified education expenses for 2013 by adding all the qualified education expenses for 2013 and subtracting any refunds of those expenses received from the eligible educational institution during 2013. Free state tax preparation software Refunds received after 2013 but before your income tax return is filed. Free state tax preparation software   If anyone receives a refund after 2013 of qualified education expenses paid on behalf of a student in 2013 and the refund is paid before you file an income tax return for 2013, the amount of qualified education expenses for 2013 is reduced by the amount of the refund. Free state tax preparation software Refunds received after 2013 and after your income tax return is filed. Free state tax preparation software   If anyone receives a refund after 2013 of qualified education expenses paid on behalf of a student in 2013 and the refund is paid after you file an income tax return for 2013, you may need to repay some or all of the credit. Free state tax preparation software See Credit recapture, next. Free state tax preparation software Credit recapture. Free state tax preparation software    If any tax-free educational assistance for the qualified education expenses paid in 2013 or any refund of your qualified education expenses paid in 2013 is received after you file your 2013 income tax return, you must recapture (repay) any excess credit. Free state tax preparation software You do this by refiguring the amount of your adjusted qualified education expenses for 2013 by reducing the expenses by the amount of the refund or tax-free educational assistance. Free state tax preparation software You then refigure your education credit(s) for 2013 and figure the amount by which your 2013 tax liability would have increased if you had claimed the refigured credit(s). Free state tax preparation software Include that amount as an additional tax for the year the refund or tax-free assistance was received. Free state tax preparation software Example. Free state tax preparation software   You pay $9,300 in tuition and fees in December 2013, and your child began college in January 2014. Free state tax preparation software You filed your 2013 tax return on February 14, 2014, and claimed a lifetime learning credit of $1,860. Free state tax preparation software You claimed no other tax credits. Free state tax preparation software After you filed your return, your child withdrew from two courses and you received a refund of $2,900. Free state tax preparation software You must refigure your 2013 lifetime learning credit using $6,400 of qualified education expenses instead of $9,300. Free state tax preparation software The refigured credit is $1,280 and your tax liability increased by $580. Free state tax preparation software See instructions for your 2014 income tax return to determine where to include this tax. Free state tax preparation software If you pay qualified education expenses in 2014 for an academic period that begins in the first 3 months of 2014 and you receive tax-free educational assistance, or a refund, as described above, you may choose to reduce your qualified education expenses for 2014 instead of reducing your expenses for 2013. Free state tax preparation software Amounts that do not reduce qualified education expenses. Free state tax preparation software   Do not reduce qualified education expenses by amounts paid with funds the student receives as: Payment for services, such as wages, A loan, A gift, An inheritance, or A withdrawal from the student's personal savings. Free state tax preparation software   Do not reduce the qualified education expenses by any scholarship or fellowship reported as income on the student's tax return in the following situations. Free state tax preparation software The use of the money is restricted, by the terms of the scholarship or fellowship, to costs of attendance (such as room and board) other than qualified education expenses, as defined in Qualified education expenses in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Free state tax preparation software The use of the money is not restricted. Free state tax preparation software For examples, see Adjustments to Qualified Education Expenses in chapter 2, American Opportunity Credit. Free state tax preparation software Coordination with Pell grants and other scholarships. Free state tax preparation software   In some cases, you may be able to reduce your tax liability by including scholarships in income. Free state tax preparation software If you are claiming an education credit for a claimed dependent who received a scholarship, you may be able to reduce your tax liability if the student includes the scholarship in income. Free state tax preparation software The scholarship must be one that may (by its terms) be applied to expenses (such as room and board) other than qualified education expenses. Free state tax preparation software Example 1—No scholarship. Free state tax preparation software Judy Green, who is unmarried, is taking courses at a public community college to be recertified to teach in public schools. Free state tax preparation software Her AGI and her MAGI, for purposes of the credit, are $27,000. Free state tax preparation software Judy takes the standard deduction of $5,950 and personal exemption of $3,800, reducing her AGI to taxable income of $17,250 and her tax before credits is $2,156. Free state tax preparation software She claims no credits other than the lifetime learning credit. Free state tax preparation software In July 2013 she paid $700 for the summer 2013 semester; in August 2013 she paid $1,900 for the fall 2013 semester; and in December 2013 she paid another $1,900 for the spring semester beginning in January 2014. Free state tax preparation software Judy and the college meet all requirements for the lifetime learning tax credit. Free state tax preparation software She can use all of the $4,500 tuition she paid in 2013 when figuring her 2013 lifetime learning credit. Free state tax preparation software She claims a $900 lifetime learning credit and her tax after credits is $1,256. Free state tax preparation software Example 2—Scholarship excluded from income. Free state tax preparation software The facts are the same as in Example 1—No scholarship, except that Judy was awarded a $1,500 scholarship. Free state tax preparation software Under the terms of her scholarship, it may be used to pay any educational expenses, including room and board. Free state tax preparation software If Judy excludes the scholarship from income, she will be deemed (for purposes of computing her education credit) as having used the scholarship to pay for tuition, required fees, and course materials. Free state tax preparation software Only $3,000 of the $4,500 tuition she paid in 2013 could be used when figuring her 2013 lifetime learning credit. Free state tax preparation software Her lifetime learning credit would be reduced to $600 and her tax after credits would be $1,556. Free state tax preparation software Example 3—Scholarship included in income. Free state tax preparation software The facts are the same as in Example 2—Scholarship excluded from income. Free state tax preparation software If, unlike Example 2, Judy includes the $1,500 scholarship in income, she will be deemed to have used the entire scholarship to pay for room and board. Free state tax preparation software Judy's AGI will increase to $28,500, her taxable income would be $18,750, and her tax before credits would be $2,381. Free state tax preparation software She would be able to use the $4,500 of adjusted qualified education expenses to figure her credit. Free state tax preparation software Judy could claim a $900 lifetime learning credit and her tax after credits would be $1,481. Free state tax preparation software Expenses That Do Not Qualify Qualified education expenses do not include amounts paid for: Insurance, Medical expenses (including student health fees), Room and board, Transportation, or Similar personal, living, or family expenses. Free state tax preparation software This is true even if the amount must be paid to the institution as a condition of enrollment or attendance. Free state tax preparation software Sports, games, hobbies, and noncredit courses. Free state tax preparation software   Qualified education expenses generally do not include expenses that relate to any course of instruction or other education that involves sports, games or hobbies, or any noncredit course. Free state tax preparation software However, if the course of instruction or other education is part of the student's degree program or is taken by the student to acquire or improve job skills, these expenses can qualify. Free state tax preparation software Comprehensive or bundled fees. Free state tax preparation software   Some eligible educational institutions combine all of their fees for an academic period into one amount. Free state tax preparation software If you do not receive or do not have access to an allocation showing how much you paid for qualified education expenses and how much you paid for personal expenses, such as those listed above, contact the institution. Free state tax preparation software The institution is required to make this allocation and provide you with the amount you paid (or were billed) for qualified education expenses on Form 1098-T. Free state tax preparation software See Figuring the Credit , later, for more information about Form 1098-T. Free state tax preparation software Who Is an Eligible Student For purposes of the lifetime learning credit, an eligible student is a student who is enrolled in one or more courses at an eligible educational institution (as defined under Qualified Education Expenses , earlier). Free state tax preparation software Who Can Claim a Dependent's Expenses If there are qualified education expenses for your dependent during a tax year, either you or your dependent, but not both of you, can claim a lifetime learning credit for your dependent's expenses for that year. Free state tax preparation software For you to claim a lifetime learning credit for your dependent's expenses, you must also claim an exemption for your dependent. Free state tax preparation software You do this by listing your dependent's name and other required information on Form 1040 (or Form 1040A), line 6c. Free state tax preparation software IF you. Free state tax preparation software . Free state tax preparation software . Free state tax preparation software THEN only. Free state tax preparation software . Free state tax preparation software . Free state tax preparation software claim an exemption on your tax return for a dependent who is an eligible student you can claim the lifetime learning credit based on that dependent's expenses. Free state tax preparation software The dependent cannot claim the credit. Free state tax preparation software do not claim an exemption on your tax return for a dependent who is an eligible student (even if entitled to the exemption) the dependent can claim the lifetime learning credit. Free state tax preparation software You cannot claim the credit based on this dependent's expenses. Free state tax preparation software Expenses paid by dependent. Free state tax preparation software   If you claim an exemption on your tax return for an eligible student who is your dependent, treat any expenses paid (or deemed paid) by your dependent as if you had paid them. Free state tax preparation software Include these expenses when figuring the amount of your lifetime learning credit. Free state tax preparation software    Qualified education expenses paid directly to an eligible educational institution for your dependent under a court-approved divorce decree are treated as paid by your dependent. Free state tax preparation software Expenses paid by you. Free state tax preparation software   If you claim an exemption for a dependent who is an eligible student, only you can include any expenses you paid when figuring the amount of the lifetime learning credit. Free state tax preparation software If neither you nor anyone else claims an exemption for the dependent, only the dependent can include any expenses you paid when figuring the lifetime learning credit. Free state tax preparation software Expenses paid by others. Free state tax preparation software   Someone other than you, your spouse, or your dependent (such as a relative or former spouse) may make a payment directly to an eligible educational institution to pay for an eligible student's qualified education expenses. Free state tax preparation software In this case, the student is treated as receiving the payment from the other person and, in turn, paying the institution. Free state tax preparation software If you claim an exemption on your tax return for the student, you are considered to have paid the expenses. Free state tax preparation software Example. Free state tax preparation software In 2013, Ms. Free state tax preparation software Allen makes a payment directly to an eligible educational institution for her grandson Todd's qualified education expenses. Free state tax preparation software For purposes of claiming a lifetime learning credit, Todd is treated as receiving the money from his grandmother and, in turn, paying his qualified education expenses himself. Free state tax preparation software Unless an exemption for Todd is claimed on someone else's 2013 tax return, only Todd can use the payment to claim a lifetime learning credit. Free state tax preparation software If anyone, such as Todd's parents, claims an exemption for Todd on his or her 2013 tax return, whoever claims the exemption may be able to use the expenses to claim a lifetime learning credit. Free state tax preparation software If anyone else claims an exemption for Todd, Todd cannot claim a lifetime learning credit. Free state tax preparation software Tuition reduction. Free state tax preparation software   When an eligible educational institution provides a reduction in tuition to an employee of the institution (or spouse or dependent child of an employee), the amount of the reduction may or may not be taxable. Free state tax preparation software If it is taxable, the employee is treated as receiving a payment of that amount and, in turn, paying it to the educational institution on behalf of the student. Free state tax preparation software For more information on tuition reductions, see Qualified Tuition Reduction in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions. Free state tax preparation software Figuring the Credit The amount of the lifetime learning credit is 20% of the first $10,000 of qualified education expenses you paid for all eligible students. Free state tax preparation software The maximum amount of lifetime learning credit you can claim for 2013 is $2,000 (20% × $10,000). Free state tax preparation software However, that amount may be reduced based on your MAGI. Free state tax preparation software See Effect of the Amount of Your Income on the Amount of Your Credit , later. Free state tax preparation software Example. Free state tax preparation software Bruce and Toni Harper are married and file a joint tax return. Free state tax preparation software For 2013, their MAGI is $75,000. Free state tax preparation software Toni is attending a local college (an eligible educational institution) to earn credits toward a degree in nursing. Free state tax preparation software She already has a bachelor's degree in history and wants to become a nurse. Free state tax preparation software In August 2013, Toni paid $5,000 of qualified education expenses for her fall 2013 semester. Free state tax preparation software Bruce and Toni can claim a $1,000 (20% × $5,000) lifetime learning credit on their 2013 joint tax return. Free state tax preparation software Form 1098-T. Free state tax preparation software   To help you figure your lifetime learning credit, the student should receive Form 1098-T. Free state tax preparation software Generally, an eligible educational institution (such as a college or university) must send Form 1098-T (or acceptable substitute) to each enrolled student by January 31, 2014. Free state tax preparation software An institution may choose to report either payments received (box 1), or amounts billed (box 2), for qualified education expenses. Free state tax preparation software However, the amounts in boxes 1 and 2 of Form 1098-T might be different from what you paid. Free state tax preparation software When figuring the credit, use only the amounts you paid or are deemed to have paid in 2013 for qualified education expenses. Free state tax preparation software   In addition, Form 1098-T should give other information for that institution, such as adjustments made for prior years, the amount of scholarships or grants, reimbursements or refunds, and whether the student was enrolled at least half-time or was a graduate student. Free state tax preparation software    The eligible educational institution may ask for a completed Form W-9S, or similar statement to obtain the student's name, address, and taxpayer identification number. Free state tax preparation software Effect of the Amount of Your Income on the Amount of Your Credit The amount of your lifetime learning credit is phased out (gradually reduced) if your MAGI is between $53,000 and $63,000 ($107,000 and $127,000 if you file a joint return). Free state tax preparation software You cannot claim a lifetime learning credit if your MAGI is $63,000 or more ($127,000 or more if you file a joint return). Free state tax preparation software Modified adjusted gross income (MAGI). Free state tax preparation software   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return. Free state tax preparation software MAGI when using Form 1040A. Free state tax preparation software   If you file Form 1040A, your MAGI is the AGI on line 22 of that form. Free state tax preparation software MAGI when using Form 1040. Free state tax preparation software   If you file Form 1040, your MAGI is the AGI on line 38 of that form, modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, and Exclusion of income by bona fide residents of Puerto Rico. Free state tax preparation software You can use Worksheet 3-1 to figure your MAGI. Free state tax preparation software Worksheet 3-1. Free state tax preparation software MAGI for the Lifetime Learning Credit 1. Free state tax preparation software Enter your adjusted gross income  (Form 1040, line 38)   1. Free state tax preparation software   2. Free state tax preparation software Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)   2. Free state tax preparation software       3. Free state tax preparation software Enter your foreign housing deduction (Form 2555, line 50)   3. Free state tax preparation software       4. Free state tax preparation software Enter the amount of income from Puerto Rico you are excluding   4. Free state tax preparation software       5. Free state tax preparation software Enter the amount of income from American Samoa you are excluding (Form 4563, line 15)   5. Free state tax preparation software       6. Free state tax preparation software Add the amounts on lines 2, 3, 4, and 5   6. Free state tax preparation software   7. Free state tax preparation software Add the amounts on lines 1 and 6. Free state tax preparation software  This is your modified adjusted  gross income. Free state tax preparation software Enter this amount  on Form 8863, line 14   7. Free state tax preparation software   Phaseout. Free state tax preparation software   If your MAGI is within the range of incomes where the credit must be reduced, you will figure your reduced credit using lines 10-18 of Form 8863. Free state tax preparation software The same method is shown in the following example. Free state tax preparation software Example. Free state tax preparation software You are filing a joint return with a MAGI of $112,000. Free state tax preparation software In 2013, you paid $6,600 of qualified education expenses. Free state tax preparation software You figure the tentative lifetime learning credit (20% of the first $10,000 of qualified education expenses you paid for all eligible students). Free state tax preparation software The result is a $1,320 (20% x $6,600) tentative credit. Free state tax preparation software Because your MAGI is within the range of incomes where the credit must be reduced, you must multiply your tentative credit ($1,320) by a fraction. Free state tax preparation software The numerator of the fraction is $127,000 (the upper limit for those filing a joint return) minus your MAGI. Free state tax preparation software The denominator is $20,000, the range of incomes for the phaseout ($107,000 to $127,000). Free state tax preparation software The result is the amount of your phased out (reduced) lifetime learning credit ($990). Free state tax preparation software   $1,320 × $127,000 − $112,000  $20,000 = $990   Claiming the Credit You claim the lifetime learning credit by completing Form 8863 and submitting it with your Form 1040 or 1040A. Free state tax preparation software Enter the credit on Form 1040, line 49, or Form 1040A, line 31. Free state tax preparation software Note. Free state tax preparation software In Appendix A, Illustrated Example of Education Credits at the end of this publication, there is an example illustrating the use of Form 8863 when both the American opportunity credit and the lifetime learning credit are claimed on the same tax return. Free state tax preparation software Prev  Up  Next   Home   More Online Publications