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H&r Block Basic

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H&r Block Basic

H&r block basic 33. H&r block basic   Credit for the Elderly or the Disabled Table of Contents Introduction Useful Items - You may want to see: Are You Eligible for the Credit?Qualified Individual Income Limits How to Claim the CreditCredit Figured for You Credit Figured by You Introduction If you qualify, you may be able to reduce the tax you owe by taking the credit for the elderly or the disabled which is figured on Schedule R (Form 1040A or 1040). H&r block basic This chapter explains the following. H&r block basic Who qualifies for the credit for the elderly or the disabled. H&r block basic How to claim the credit. H&r block basic You may be able to take the credit for the elderly or the disabled if: You are age 65 or older at the end of 2013, or You retired on permanent and total disability and have taxable disability income. H&r block basic Useful Items - You may want to see: Publication 524 Credit for the Elderly or the Disabled 554 Tax Guide for Seniors Form (and Instruction) Schedule R (Form 1040A or 1040) Credit for the Elderly or the Disabled Are You Eligible for the Credit? You can take the credit for the elderly or the disabled if you meet both of the following requirements. H&r block basic You are a qualified individual. H&r block basic Your income is not more than certain limits. H&r block basic You can use Figure 33-A and Table 33-1 as guides to see if you are eligible for the credit. H&r block basic Use Figure 33-A first to see if you are a qualified individual. H&r block basic If you are, go to Table 33-1 to make sure your income is not too high to take the credit. H&r block basic You can take the credit only if you file Form 1040 or Form 1040A. H&r block basic You cannot take the credit if you file Form 1040EZ. H&r block basic Qualified Individual You are a qualified individual for this credit if you are a U. H&r block basic S. H&r block basic citizen or resident alien, and either of the following applies. H&r block basic You were age 65 or older at the end of 2013. H&r block basic You were under age 65 at the end of 2013 and all three of the following statements are true. H&r block basic You retired on permanent and total disability (explained later). H&r block basic You received taxable disability income for 2013. H&r block basic On January 1, 2013, you had not reached mandatory retirement age (defined later under Disability income ). H&r block basic Age 65. H&r block basic   You are considered to be age 65 on the day before your 65th birthday. H&r block basic Therefore, if you were born on January 1, 1949, you are considered to be age 65 at the end of 2013. H&r block basic U. H&r block basic S. H&r block basic Citizen or Resident Alien You must be a U. H&r block basic S. H&r block basic citizen or resident alien (or be treated as a resident alien) to take the credit. H&r block basic Generally, you cannot take the credit if you were a nonresident alien at any time during the tax year. H&r block basic Exceptions. H&r block basic   You may be able to take the credit if you are a nonresident alien who is married to a U. H&r block basic S. H&r block basic citizen or resident alien at the end of the tax year and you and your spouse choose to treat you as a U. H&r block basic S. H&r block basic resident alien. H&r block basic If you make that choice, both you and your spouse are taxed on your worldwide incomes. H&r block basic If you were a nonresident alien at the beginning of the year and a resident alien at the end of the year, and you were married to a U. H&r block basic S. H&r block basic citizen or resident alien at the end of the year, you may be able to choose to be treated as a U. H&r block basic S. H&r block basic resident alien for the entire year. H&r block basic In that case, you may be allowed to take the credit. H&r block basic For information on these choices, see chapter 1 of Publication 519, U. H&r block basic S. H&r block basic Tax Guide for Aliens. H&r block basic Married Persons Generally, if you are married at the end of the tax year, you and your spouse must file a joint return to take the credit. H&r block basic However, if you and your spouse did not live in the same household at any time during the tax year, you can file either a joint return or separate returns and still take the credit. H&r block basic Head of household. H&r block basic   You can file as head of household and qualify to take the credit, even if your spouse lived with you during the first 6 months of the year, if you meet certain tests. H&r block basic See Head of Household in chapter 2 for the tests you must meet. H&r block basic Under Age 65 If you are under age 65 at the end of 2013, you can qualify for the credit only if you are retired on permanent and total disability (discussed next) and have taxable disability income (discussed later under Disability income ). H&r block basic You are retired on permanent and total disability if: You were permanently and totally disabled when you retired, and You retired on disability before the close of the tax year. H&r block basic Even if you do not retire formally, you may be considered retired on disability when you have stopped working because of your disability. H&r block basic If you retired on disability before 1977, and were not permanently and totally disabled at the time, you can qualify for the credit if you were permanently and totally disabled on January 1, 1976, or January 1, 1977. H&r block basic Permanent and total disability. H&r block basic    You are permanently and totally disabled if you cannot engage in any substantial gainful activity because of your physical or mental condition. H&r block basic A qualified physician must certify that the condition has lasted or can be expected to last continuously for 12 months or more, or that the condition can be expected to result in death. H&r block basic See Physician's statement , later. H&r block basic Substantial gainful activity. H&r block basic   Substantial gainful activity is the performance of significant duties over a reasonable period of time while working for pay or profit, or in work generally done for pay or profit. H&r block basic Full-time work (or part-time work done at your employer's convenience) in a competitive work situation for at least the minimum wage conclusively shows that you are able to engage in substantial gainful activity. H&r block basic   Substantial gainful activity is not work you do to take care of yourself or your home. H&r block basic It is not unpaid work on hobbies, institutional therapy or training, school attendance, clubs, social programs, and similar activities. H&r block basic However, doing this kind of work may show that you are able to engage in substantial gainful activity. H&r block basic    The fact that you have not worked for some time is not, of itself, conclusive evidence that you cannot engage in substantial gainful activity. H&r block basic Sheltered employment. H&r block basic   Certain work offered at qualified locations to physically or mentally impaired persons is considered sheltered employment. H&r block basic These qualified locations are in sheltered workshops, hospitals, and similar institutions, homebound programs, and Department of Veterans Affairs (VA) sponsored homes. H&r block basic   Compared to commercial employment, pay is lower for sheltered employment. H&r block basic Therefore, one usually does not look for sheltered employment if he or she can get other employment. H&r block basic The fact that one has accepted sheltered employment is not proof of the person's ability to engage in substantial gainful activity. H&r block basic Physician's statement. H&r block basic   If you are under age 65, you must have your physician complete a statement certifying that you were permanently and totally disabled on the date you retired. H&r block basic You can use the statement in the Instructions for Schedule R. H&r block basic    Figure 33-A. H&r block basic Are You a Qualified Individual? This image is too large to be displayed in the current screen. H&r block basic Please click the link to view the image. H&r block basic Figure 33-A Are You a Qualified Individual?   You do not have to file this statement with your Form 1040 or Form 1040A, but you must keep it for your records. H&r block basic Veterans. H&r block basic   If the Department of Veterans Affairs (VA) certifies that you are permanently and totally disabled, you can substitute VA Form 21-0172, Certification of Permanent and Total Disability, for the physician's statement you are required to keep. H&r block basic VA Form 21-0172 must be signed by a person authorized by the VA to do so. H&r block basic You can get this form from your local VA regional office. H&r block basic Physician's statement obtained in earlier year. H&r block basic   If you got a physician's statement in an earlier year and, due to your continued disabled condition, you were unable to engage in any substantial gainful activity during 2013, you may not need to get another physician's statement for 2013. H&r block basic For a detailed explanation of the conditions you must meet, see the instructions for Schedule R, Part II. H&r block basic If you meet the required conditions, check the box on your Schedule R, Part II, line 2. H&r block basic   If you checked box 4, 5, or 6 in Part I of Schedule R, enter in the space above the box on line 2 in Part II the first name(s) of the spouse(s) for whom the box is checked. H&r block basic Table 33-1. H&r block basic Income Limits IF your filing status is . H&r block basic . H&r block basic . H&r block basic THEN, even if you qualify (see Figure 33-A ), you CANNOT take the credit if. H&r block basic . H&r block basic . H&r block basic   Your adjusted gross income (AGI)* is equal to or more than. H&r block basic . H&r block basic . H&r block basic     OR the total of your nontaxable social security and other nontaxable pension(s), annuities, or disability income is equal to or more than. H&r block basic . H&r block basic . H&r block basic   single, head of household, or qualifying widow(er) with dependent child   $17,500     $5,000   married filing jointly and only one spouse qualifies in Figure 33-A   $20,000     $5,000   married filing jointly and both spouses qualify in Figure 33-A   $25,000     $7,500   married filing separately and you lived apart from your spouse for all of 2013   $12,500     $3,750   * AGI is the amount on Form 1040A, line 22, or Form 1040, line 38. H&r block basic Disability income. H&r block basic   If you are under age 65, you must also have taxable disability income to qualify for the credit. H&r block basic Disability income must meet both of the following requirements. H&r block basic It must be paid under your employer's accident or health plan or pension plan. H&r block basic It must be included in your income as wages (or payments instead of wages) for the time you are absent from work because of permanent and total disability. H&r block basic Payments that are not disability income. H&r block basic   Any payment you receive from a plan that does not provide for disability retirement is not disability income. H&r block basic Any lump-sum payment for accrued annual leave that you receive when you retire on disability is a salary payment and is not disability income. H&r block basic   For purposes of the credit for the elderly or the disabled, disability income does not include amounts you receive after you reach mandatory retirement age. H&r block basic Mandatory retirement age is the age set by your employer at which you would have had to retire, had you not become disabled. H&r block basic Income Limits To determine if you can claim the credit, you must consider two income limits. H&r block basic The first limit is the amount of your adjusted gross income (AGI). H&r block basic The second limit is the amount of nontaxable social security and other nontaxable pensions, annuities, or disability income you received. H&r block basic The limits are shown in Table 33-1. H&r block basic If your AGI and nontaxable pensions, annuities, or disability income are less than the income limits, you may be able to claim the credit. H&r block basic See How to Claim the Credit , later. H&r block basic If either your AGI or your nontaxable pensions, annuities, or disability income are equal to or more than the income limits, you cannot take the credit. H&r block basic How to Claim the Credit You can figure the credit yourself or the Internal Revenue Service will figure it for you. H&r block basic Credit Figured for You If you choose to have the IRS figure the credit for you, read the following discussion for the form you will file (Form 1040 or 1040A). H&r block basic If you want the IRS to figure your tax, see chapter 30. H&r block basic Form 1040. H&r block basic   If you want the IRS to figure your credit, see Form 1040 Line Entries under Tax Figured by IRS in chapter 30. H&r block basic Form 1040A. H&r block basic   If you want the IRS to figure your credit, see Form 1040A Line Entries under Tax Figured by IRS in chapter 30. H&r block basic Credit Figured by You If you choose to figure the credit yourself, fill out the front of Schedule R. H&r block basic Next, fill out Schedule R, Part III. H&r block basic If you file Form 1040A, enter the amount from Schedule R, line 22, on Form 1040A, line 30. H&r block basic If you file Form 1040, include the amount from Schedule R, line 22, on line 53; check box c, and enter “Sch R” on the line next to that box. H&r block basic For a step-by-step discussion about filling out Part III of Schedule R, see Figuring the Credit Yourself in Publication 524. H&r block basic Limit on credit. H&r block basic   The amount of the credit you can claim is generally limited to the amount of your tax. H&r block basic Use the Credit Limit Worksheet in the Instructions for Schedule R to determine if your credit is limited. H&r block basic Prev  Up  Next   Home   More Online Publications
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Understanding your CP31 Notice

Your refund check was returned to us, so you need to update your address.

Printable samples of this notice (PDF)

Tax publications you may find useful

How to get help

Calling the 1-800 number listed on the top right corner of your notice is the fastest way to get your questions answered.

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

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


What you need to do

Update your address in one of the following ways:

  • Online: Go to Where’s My Refund? to complete your change of address online, you’ll need your Social Security number, filing status, and the amount of your refund.
  • By phone: Call the number listed on your notice.
  • By mail: Complete and mail the Contact information section that came with your notice.

Answers to Common Questions

When will I receive my refund check?
You should receive your refund 3-4 weeks after you submit your correct address. For information about your refund, go to Where’s My Refund? or call the IRS toll free at 1-800-829-1954. You’ll need to provide your Social Security Number (or Individual Taxpayer Identification Number), your filing status and the exact whole dollar amount of your refund.

What do I need to do to get my refund through direct deposit next year?
When filing your tax return, complete the requested banking information in the "Refund" section of your tax form if you want to direct deposit the entire amount into one account. If you want to deposit into more than one account, you must file Form 8888, Direct Deposit of Refund to More Than One Account, with your return.

Since my refund check was returned, can I request that you mail it to my work address instead?
Refund checks are mailed only to the address of record, which is the address provided on the tax return or the result of a permanent address change request submitted after the return is filed.

I filed jointly, but my spouse and I are now divorced. Where will you send the refund? Can you send us two checks?
A refund check is mailed to the address of record, which is the address provided on the tax return or the result of a permanent address change request submitted after the return is filed.
 
The IRS issues one check per return.


Tips for next year

To receive your refund more quickly, consider requesting your refund through direct deposit. You can even request that your refund be distributed to separate accounts, such as checking, savings, or retirement accounts. To request this, use Form 8888, Direct Deposit of Refund to More Than One Account.

Consider filing your taxes electronically. Filing online can help you avoid mistakes and find credits and deductions that you may qualify for. In many cases you can file for free. Learn more about e-file.

Page Last Reviewed or Updated: 19-Mar-2014

The H&r Block Basic

H&r block basic 2. H&r block basic   Depreciation of Rental Property Table of Contents The BasicsWhat Rental Property Can Be Depreciated? When Does Depreciation Begin and End? Depreciation Methods Basis of Depreciable Property Claiming the Special Depreciation Allowance MACRS DepreciationDepreciation Systems Property Classes Under GDS Recovery Periods Under GDS Conventions Figuring Your Depreciation Deduction Figuring MACRS Depreciation Under ADS Claiming the Correct Amount of Depreciation You recover the cost of income producing property through yearly tax deductions. H&r block basic You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return. H&r block basic Three factors determine how much depreciation you can deduct each year: (1) your basis in the property, (2) the recovery period for the property, and (3) the depreciation method used. H&r block basic You cannot simply deduct your mortgage or principal payments, or the cost of furniture, fixtures and equipment, as an expense. H&r block basic You can deduct depreciation only on the part of your property used for rental purposes. H&r block basic Depreciation reduces your basis for figuring gain or loss on a later sale or exchange. H&r block basic You may have to use Form 4562 to figure and report your depreciation. H&r block basic See Which Forms To Use in chapter 3. H&r block basic Also see Publication 946. H&r block basic Section 179 deduction. H&r block basic   The section 179 deduction is a means of recovering part or all of the cost of certain qualifying property in the year you place the property in service. H&r block basic This deduction is not allowed for property used in connection with residential rental property. H&r block basic See chapter 2 of Publication 946. H&r block basic Alternative minimum tax (AMT). H&r block basic   If you use accelerated depreciation, you may be subject to the AMT. H&r block basic Accelerated depreciation allows you to deduct more depreciation earlier in the recovery period than you could deduct using a straight line method (same deduction each year). H&r block basic   The prescribed depreciation methods for rental real estate are not accelerated, so the depreciation deduction is not adjusted for the AMT. H&r block basic However, accelerated methods are generally used for other property connected with rental activities (for example, appliances and wall-to-wall carpeting). H&r block basic   To find out if you are subject to the AMT, see the Instructions for Form 6251. H&r block basic The Basics The following section discusses the information you will need to have about the rental property and the decisions to be made before figuring your depreciation deduction. H&r block basic What Rental Property Can Be Depreciated? You can depreciate your property if it meets all the following requirements. H&r block basic You own the property. H&r block basic You use the property in your business or income-producing activity (such as rental property). H&r block basic The property has a determinable useful life. H&r block basic The property is expected to last more than one year. H&r block basic Property you own. H&r block basic   To claim depreciation, you usually must be the owner of the property. H&r block basic You are considered as owning property even if it is subject to a debt. H&r block basic Rented property. H&r block basic   Generally, if you pay rent for property, you cannot depreciate that property. H&r block basic Usually, only the owner can depreciate it. H&r block basic However, if you make permanent improvements to leased property, you may be able to depreciate the improvements. H&r block basic See Additions or improvements to property , later in this chapter, under Recovery Periods Under GDS. H&r block basic Cooperative apartments. H&r block basic   If you are a tenant-stockholder in a cooperative housing corporation and rent your cooperative apartment to others, you can deduct depreciation on your stock in the corporation. H&r block basic See chapter 4, Special Situations. H&r block basic Property having a determinable useful life. H&r block basic   To be depreciable, your property must have a determinable useful life. H&r block basic This means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. H&r block basic What Rental Property Cannot Be Depreciated? Certain property cannot be depreciated. H&r block basic This includes land and certain excepted property. H&r block basic Land. H&r block basic   You cannot depreciate the cost of land because land generally does not wear out, become obsolete, or get used up. H&r block basic But if it does, the loss is accounted for upon disposition. H&r block basic The costs of clearing, grading, planting, and landscaping are usually all part of the cost of land and cannot be depreciated. H&r block basic   Although you cannot depreciate land, you can depreciate certain land preparation costs, such as landscaping costs, incurred in preparing land for business use. H&r block basic These costs must be so closely associated with other depreciable property that you can determine a life for them along with the life of the associated property. H&r block basic Example. H&r block basic You built a new house to use as a rental and paid for grading, clearing, seeding, and planting bushes and trees. H&r block basic Some of the bushes and trees were planted right next to the house, while others were planted around the outer border of the lot. H&r block basic If you replace the house, you would have to destroy the bushes and trees right next to it. H&r block basic These bushes and trees are closely associated with the house, so they have a determinable useful life. H&r block basic Therefore, you can depreciate them. H&r block basic Add your other land preparation costs to the basis of your land because they have no determinable life and you cannot depreciate them. H&r block basic Excepted property. H&r block basic   Even if the property meets all the requirements listed earlier under What Rental Property Can Be Depreciated , you cannot depreciate the following property. H&r block basic Property placed in service and disposed of (or taken out of business use) in the same year. H&r block basic Equipment used to build capital improvements. H&r block basic You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. H&r block basic For more information, see chapter 1 of Publication 946. H&r block basic When Does Depreciation Begin and End? You begin to depreciate your rental property when you place it in service for the production of income. H&r block basic You stop depreciating it either when you have fully recovered your cost or other basis, or when you retire it from service, whichever happens first. H&r block basic Placed in Service You place property in service in a rental activity when it is ready and available for a specific use in that activity. H&r block basic Even if you are not using the property, it is in service when it is ready and available for its specific use. H&r block basic Example 1. H&r block basic On November 22 of last year, you purchased a dishwasher for your rental property. H&r block basic The appliance was delivered on December 7, but was not installed and ready for use until January 3 of this year. H&r block basic Because the dishwasher was not ready for use last year, it is not considered placed in service until this year. H&r block basic If the appliance had been installed and ready for use when it was delivered in December of last year, it would have been considered placed in service in December, even if it was not actually used until this year. H&r block basic Example 2. H&r block basic On April 6, you purchased a house to use as residential rental property. H&r block basic You made extensive repairs to the house and had it ready for rent on July 5. H&r block basic You began to advertise the house for rent in July and actually rented it beginning September 1. H&r block basic The house is considered placed in service in July when it was ready and available for rent. H&r block basic You can begin to depreciate the house in July. H&r block basic Example 3. H&r block basic You moved from your home in July. H&r block basic During August and September you made several repairs to the house. H&r block basic On October 1, you listed the property for rent with a real estate company, which rented it on December 1. H&r block basic The property is considered placed in service on October 1, the date when it was available for rent. H&r block basic Conversion to business use. H&r block basic   If you place property in service in a personal activity, you cannot claim depreciation. H&r block basic However, if you change the property's use to business or the production of income, you can begin to depreciate it at the time of the change. H&r block basic You place the property in service for business or income-producing use on the date of the change. H&r block basic Example. H&r block basic You bought a house and used it as your personal home several years before you converted it to rental property. H&r block basic Although its specific use was personal and no depreciation was allowable, you placed the home in service when you began using it as your home. H&r block basic You can begin to claim depreciation in the year you converted it to rental property because at that time its use changed to the production of income. H&r block basic Idle Property Continue to claim a deduction for depreciation on property used in your rental activity even if it is temporarily idle (not in use). H&r block basic For example, if you must make repairs after a tenant moves out, you still depreciate the rental property during the time it is not available for rent. H&r block basic Cost or Other Basis Fully Recovered You must stop depreciating property when the total of your yearly depreciation deductions equals your cost or other basis of your property. H&r block basic For this purpose, your yearly depreciation deductions include any depreciation that you were allowed to claim, even if you did not claim it. H&r block basic See Basis of Depreciable Property , later. H&r block basic Retired From Service You stop depreciating property when you retire it from service, even if you have not fully recovered its cost or other basis. H&r block basic You retire property from service when you permanently withdraw it from use in a trade or business or from use in the production of income because of any of the following events. H&r block basic You sell or exchange the property. H&r block basic You convert the property to personal use. H&r block basic You abandon the property. H&r block basic The property is destroyed. H&r block basic Depreciation Methods Generally, you must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate residential rental property placed in service after 1986. H&r block basic If you placed rental property in service before 1987, you are using one of the following methods. H&r block basic ACRS (Accelerated Cost Recovery System) for property placed in service after 1980 but before 1987. H&r block basic Straight line or declining balance method over the useful life of property placed in service before 1981. H&r block basic See MACRS Depreciation , later, for more information. H&r block basic Rental property placed in service before 2013. H&r block basic   Continue to use the same method of figuring depreciation that you used in the past. H&r block basic Use of real property changed. H&r block basic   Generally, you must use MACRS to depreciate real property that you acquired for personal use before 1987 and changed to business or income-producing use after 1986. H&r block basic This includes your residence that you changed to rental use. H&r block basic See Property Owned or Used in 1986 in Publication 946, chapter 1, for those situations in which MACRS is not allowed. H&r block basic Improvements made after 1986. H&r block basic   Treat an improvement made after 1986 to property you placed in service before 1987 as separate depreciable property. H&r block basic As a result, you can depreciate that improvement as separate property under MACRS if it is the type of property that otherwise qualifies for MACRS depreciation. H&r block basic For more information about improvements, see Additions or improvements to property , later in this chapter under Recovery Periods Under GDS. H&r block basic This publication discusses MACRS depreciation only. H&r block basic If you need information about depreciating property placed in service before 1987, see Publication 534. H&r block basic Basis of Depreciable Property The basis of property used in a rental activity is generally its adjusted basis when you place it in service in that activity. H&r block basic This is its cost or other basis when you acquired it, adjusted for certain items occurring before you place it in service in the rental activity. H&r block basic If you depreciate your property under MACRS, you may also have to reduce your basis by certain deductions and credits with respect to the property. H&r block basic Basis and adjusted basis are explained in the following discussions. H&r block basic If you used the property for personal purposes before changing it to rental use, its basis for depreciation is the lesser of its adjusted basis or its fair market value when you change it to rental use. H&r block basic See Basis of Property Changed to Rental Use in chapter 4. H&r block basic Cost Basis The basis of property you buy is usually its cost. H&r block basic The cost is the amount you pay for it in cash, in debt obligation, in other property, or in services. H&r block basic Your cost also includes amounts you pay for: Sales tax charged on the purchase (but see Exception next), Freight charges to obtain the property, and Installation and testing charges. H&r block basic Exception. H&r block basic   If you deducted state and local general sales taxes as an itemized deduction on Schedule A (Form 1040), do not include those sales taxes as part of your cost basis. H&r block basic Such taxes were deductible before 1987 and after 2003. H&r block basic Loans with low or no interest. H&r block basic   If you buy property on any time-payment plan that charges little or no interest, the basis of your property is your stated purchase price, less the amount considered to be unstated interest. H&r block basic See Unstated Interest and Original Issue Discount (OID) in Publication 537, Installment Sales. H&r block basic Real property. H&r block basic   If you buy real property, such as a building and land, certain fees and other expenses you pay are part of your cost basis in the property. H&r block basic Real estate taxes. H&r block basic   If you buy real property and agree to pay real estate taxes on it that were owed by the seller and the seller does not reimburse you, the taxes you pay are treated as part of your basis in the property. H&r block basic You cannot deduct them as taxes paid. H&r block basic   If you reimburse the seller for real estate taxes the seller paid for you, you can usually deduct that amount. H&r block basic Do not include that amount in your basis in the property. H&r block basic Settlement fees and other costs. H&r block basic   The following settlement fees and closing costs for buying the property are part of your basis in the property. H&r block basic Abstract fees. H&r block basic Charges for installing utility services. H&r block basic Legal fees. H&r block basic Recording fees. H&r block basic Surveys. H&r block basic Transfer taxes. H&r block basic Title insurance. H&r block basic Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. H&r block basic   The following are settlement fees and closing costs you cannot include in your basis in the property. H&r block basic Fire insurance premiums. H&r block basic Rent or other charges relating to occupancy of the property before closing. H&r block basic Charges connected with getting or refinancing a loan, such as: Points (discount points, loan origination fees), Mortgage insurance premiums, Loan assumption fees, Cost of a credit report, and Fees for an appraisal required by a lender. H&r block basic   Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance. H&r block basic Assumption of a mortgage. H&r block basic   If you buy property and become liable for an existing mortgage on the property, your basis is the amount you pay for the property plus the amount remaining to be paid on the mortgage. H&r block basic Example. H&r block basic You buy a building for $60,000 cash and assume a mortgage of $240,000 on it. H&r block basic Your basis is $300,000. H&r block basic Separating cost of land and buildings. H&r block basic   If you buy buildings and your cost includes the cost of the land on which they stand, you must divide the cost between the land and the buildings to figure the basis for depreciation of the buildings. H&r block basic The part of the cost that you allocate to each asset is the ratio of the fair market value of that asset to the fair market value of the whole property at the time you buy it. H&r block basic   If you are not certain of the fair market values of the land and the buildings, you can divide the cost between them based on their assessed values for real estate tax purposes. H&r block basic Example. H&r block basic You buy a house and land for $200,000. H&r block basic The purchase contract does not specify how much of the purchase price is for the house and how much is for the land. H&r block basic The latest real estate tax assessment on the property was based on an assessed value of $160,000, of which $136,000 was for the house and $24,000 was for the land. H&r block basic You can allocate 85% ($136,000 ÷ $160,000) of the purchase price to the house and 15% ($24,000 ÷ $160,000) of the purchase price to the land. H&r block basic Your basis in the house is $170,000 (85% of $200,000) and your basis in the land is $30,000 (15% of $200,000). H&r block basic Basis Other Than Cost You cannot use cost as a basis for property that you received: In return for services you performed; In an exchange for other property; As a gift; From your spouse, or from your former spouse as the result of a divorce; or As an inheritance. H&r block basic If you received property in one of these ways, see Publication 551 for information on how to figure your basis. H&r block basic Adjusted Basis To figure your property's basis for depreciation, you may have to make certain adjustments (increases and decreases) to the basis of the property for events occurring between the time you acquired the property and the time you placed it in service for business or the production of income. H&r block basic The result of these adjustments to the basis is the adjusted basis. H&r block basic Increases to basis. H&r block basic   You must increase the basis of any property by the cost of all items properly added to a capital account. H&r block basic These include the following. H&r block basic The cost of any additions or improvements made before placing your property into service as a rental that have a useful life of more than 1 year. H&r block basic Amounts spent after a casualty to restore the damaged property. H&r block basic The cost of extending utility service lines to the property. H&r block basic Legal fees, such as the cost of defending and perfecting title, or settling zoning issues. H&r block basic Additions or improvements. H&r block basic   Add to the basis of your property the amount an addition or improvement actually cost you, including any amount you borrowed to make the addition or improvement. H&r block basic This includes all direct costs, such as material and labor, but does not include your own labor. H&r block basic It also includes all expenses related to the addition or improvement. H&r block basic   For example, if you had an architect draw up plans for remodeling your property, the architect's fee is a part of the cost of the remodeling. H&r block basic Or, if you had your lot surveyed to put up a fence, the cost of the survey is a part of the cost of the fence. H&r block basic   Keep separate accounts for depreciable additions or improvements made after you place the property in service in your rental activity. H&r block basic For information on depreciating additions or improvements, see Additions or improvements to property , later in this chapter, under Recovery Periods Under GDS. H&r block basic    The cost of landscaping improvements is usually treated as an addition to the basis of the land, which is not depreciable. H&r block basic However, see What Rental Property Cannot Be Depreciated, earlier. H&r block basic Assessments for local improvements. H&r block basic   Assessments for items which tend to increase the value of property, such as streets and sidewalks, must be added to the basis of the property. H&r block basic For example, if your city installs curbing on the street in front of your house, and assesses you and your neighbors for its cost, you must add the assessment to the basis of your property. H&r block basic Also add the cost of legal fees paid to obtain a decrease in an assessment levied against property to pay for local improvements. H&r block basic You cannot deduct these items as taxes or depreciate them. H&r block basic    However, you can deduct as taxes, charges or assessments for maintenance, repairs, or interest charges related to the improvements. H&r block basic Do not add them to your basis in the property. H&r block basic Deducting vs. H&r block basic capitalizing costs. H&r block basic   Do not add to your basis costs you can deduct as current expenses. H&r block basic However, there are certain costs you can choose either to deduct or to capitalize. H&r block basic If you capitalize these costs, include them in your basis. H&r block basic If you deduct them, do not include them in your basis. H&r block basic   The costs you may choose to deduct or capitalize include carrying charges, such as interest and taxes, that you must pay to own property. H&r block basic   For more information about deducting or capitalizing costs and how to make the election, see Carrying Charges in Publication 535, chapter 7. H&r block basic Decreases to basis. H&r block basic   You must decrease the basis of your property by any items that represent a return of your cost. H&r block basic These include the following. H&r block basic Insurance or other payment you receive as the result of a casualty or theft loss. H&r block basic Casualty loss not covered by insurance for which you took a deduction. H&r block basic Amount(s) you receive for granting an easement. H&r block basic Residential energy credits you were allowed before 1986, or after 2005, if you added the cost of the energy items to the basis of your home. H&r block basic Exclusion from income of subsidies for energy conservation measures. H&r block basic Special depreciation allowance claimed on qualified property. H&r block basic Depreciation you deducted, or could have deducted, on your tax returns under the method of depreciation you chose. H&r block basic If you did not deduct enough or deducted too much in any year, see Depreciation under Decreases to Basis in Publication 551. H&r block basic   If your rental property was previously used as your main home, you must also decrease the basis by the following. H&r block basic Gain you postponed from the sale of your main home before May 7, 1997, if the replacement home was converted to your rental property. H&r block basic District of Columbia first-time homebuyer credit allowed on the purchase of your main home after August 4, 1997 and before January 1, 2012. H&r block basic Amount of qualified principal residence indebtedness discharged on or after January 1, 2007. H&r block basic Claiming the Special Depreciation Allowance For 2013, your residential rental property may qualify for a special depreciation allowance. H&r block basic This allowance is figured before you figure your regular depreciation deduction. H&r block basic See Publication 946, chapter 3, for details. H&r block basic Also see the Instructions for Form 4562, Line 14. H&r block basic If you qualify for, but choose not to take, a special depreciation allowance, you must attach a statement to your return. H&r block basic The details of this election are in Publication 946, chapter 3, and the Instructions for Form 4562, Line 14. H&r block basic MACRS Depreciation Most business and investment property placed in service after 1986 is depreciated using MACRS. H&r block basic This section explains how to determine which MACRS depreciation system applies to your property. H&r block basic It also discusses other information you need to know before you can figure depreciation under MACRS. H&r block basic This information includes the property's: Recovery class, Applicable recovery period, Convention, Placed-in-service date, Basis for depreciation, and Depreciation method. H&r block basic Depreciation Systems MACRS consists of two systems that determine how you depreciate your property—the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). H&r block basic You must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. H&r block basic Excluded Property You cannot use MACRS for certain personal property (such as furniture or appliances) placed in service in your rental property in 2013 if it had been previously placed in service before 1987 when MACRS became effective. H&r block basic In most cases, personal property is excluded from MACRS if you (or a person related to you) owned or used it in 1986 or if your tenant is a person (or someone related to the person) who owned or used it in 1986. H&r block basic However, the property is not excluded if your 2013 deduction under MACRS (using a half-year convention) is less than the deduction you would have under ACRS. H&r block basic For more information, see What Method Can You Use To Depreciate Your Property? in Publication 946, chapter 1. H&r block basic Electing ADS If you choose, you can use the ADS method for most property. H&r block basic Under ADS, you use the straight line method of depreciation. H&r block basic The election of ADS for one item in a class of property generally applies to all property in that class that is placed in service during the tax year of the election. H&r block basic However, the election applies on a property-by-property basis for residential rental property and nonresidential real property. H&r block basic If you choose to use ADS for your residential rental property, the election must be made in the first year the property is placed in service. H&r block basic Once you make this election, you can never revoke it. H&r block basic For property placed in service during 2013, you make the election to use ADS by entering the depreciation on Form 4562, Part III, Section C, line 20c. H&r block basic Property Classes Under GDS Each item of property that can be depreciated under MACRS is assigned to a property class, determined by its class life. H&r block basic The property class generally determines the depreciation method, recovery period, and convention. H&r block basic The property classes under GDS are: 3-year property, 5-year property, 7-year property, 10-year property, 15-year property, 20-year property, Nonresidential real property, and Residential rental property. H&r block basic Under MACRS, property that you placed in service during 2013 in your rental activities generally falls into one of the following classes. H&r block basic 5-year property. H&r block basic This class includes computers and peripheral equipment, office machinery (typewriters, calculators, copiers, etc. H&r block basic ), automobiles, and light trucks. H&r block basic This class also includes appliances, carpeting, furniture, etc. H&r block basic , used in a residential rental real estate activity. H&r block basic Depreciation on automobiles, other property used for transportation, computers and related peripheral equipment, and property of a type generally used for entertainment, recreation, or amusement is limited. H&r block basic See chapter 5 of Publication 946. H&r block basic 7-year property. H&r block basic This class includes office furniture and equipment (desks, file cabinets, etc. H&r block basic ). H&r block basic This class also includes any property that does not have a class life and that has not been designated by law as being in any other class. H&r block basic 15-year property. H&r block basic This class includes roads, fences, and shrubbery (if depreciable). H&r block basic Residential rental property. H&r block basic This class includes any real property that is a rental building or structure (including a mobile home) for which 80% or more of the gross rental income for the tax year is from dwelling units. H&r block basic It does not include a unit in a hotel, motel, inn, or other establishment where more than half of the units are used on a transient basis. H&r block basic If you live in any part of the building or structure, the gross rental income includes the fair rental value of the part you live in. H&r block basic The other property classes do not generally apply to property used in rental activities. H&r block basic These classes are not discussed in this publication. H&r block basic See Publication 946 for more information. H&r block basic Recovery Periods Under GDS The recovery period of property is the number of years over which you recover its cost or other basis. H&r block basic The recovery periods are generally longer under ADS than GDS. H&r block basic The recovery period of property depends on its property class. H&r block basic Under GDS, the recovery period of an asset is generally the same as its property class. H&r block basic Class lives and recovery periods for most assets are listed in Appendix B of Publication 946. H&r block basic See Table 2-1 for recovery periods of property commonly used in residential rental activities. H&r block basic Qualified Indian reservation property. H&r block basic   Shorter recovery periods are provided under MACRS for qualified Indian reservation property placed in service on Indian reservations. H&r block basic For more information, see chapter 4 of Publication 946. H&r block basic Additions or improvements to property. H&r block basic   Treat additions or improvements you make to your depreciable rental property as separate property items for depreciation purposes. H&r block basic   The property class and recovery period of the addition or improvement is the one that would apply to the original property if you had placed it in service at the same time as the addition or improvement. H&r block basic   The recovery period for an addition or improvement to property begins on the later of: The date the addition or improvement is placed in service, or The date the property to which the addition or improvement was made is placed in service. H&r block basic Example. H&r block basic You own a residential rental house that you have been renting since 1986 and depreciating under ACRS. H&r block basic You built an addition onto the house and placed it in service in 2013. H&r block basic You must use MACRS for the addition. H&r block basic Under GDS, the addition is depreciated as residential rental property over 27. H&r block basic 5 years. H&r block basic Table 2-1. H&r block basic MACRS Recovery Periods for Property Used in Rental Activities   MACRS Recovery Period   Type of Property General Depreciation System Alternative Depreciation System   Computers and their peripheral equipment 5 years 5 years   Office machinery, such as: Typewriters Calculators Copiers 5 years 6 years   Automobiles 5 years 5 years   Light trucks 5 years 5 years   Appliances, such as: Stoves Refrigerators 5 years 9 years   Carpets 5 years 9 years   Furniture used in rental property 5 years 9 years   Office furniture and equipment, such as: Desks Files 7 years 10 years   Any property that does not have a class life and that has not been designated by law as being in any other class 7 years 12 years   Roads 15 years 20 years   Shrubbery 15 years 20 years   Fences 15 years 20 years   Residential rental property (buildings or structures) and structural components such as furnaces, waterpipes, venting, etc. H&r block basic 27. H&r block basic 5 years 40 years   Additions and improvements, such as a new roof The same recovery period as that of the property to which the addition or improvement is made, determined as if the property were placed in service at the same time as the addition or improvement. H&r block basic   Conventions A convention is a method established under MACRS to set the beginning and end of the recovery period. H&r block basic The convention you use determines the number of months for which you can claim depreciation in the year you place property in service and in the year you dispose of the property. H&r block basic Mid-month convention. H&r block basic    A mid-month convention is used for all residential rental property and nonresidential real property. H&r block basic Under this convention, you treat all property placed in service, or disposed of, during any month as placed in service, or disposed of, at the midpoint of that month. H&r block basic Mid-quarter convention. H&r block basic   A mid-quarter convention must be used if the mid-month convention does not apply and the total depreciable basis of MACRS property placed in service in the last 3 months of a tax year (excluding nonresidential real property, residential rental property, and property placed in service and disposed of in the same year) is more than 40% of the total basis of all such property you place in service during the year. H&r block basic   Under this convention, you treat all property placed in service, or disposed of, during any quarter of a tax year as placed in service, or disposed of, at the midpoint of the quarter. H&r block basic Example. H&r block basic During the tax year, Tom Martin purchased the following items to use in his rental property. H&r block basic He elects not to claim the special depreciation allowance discussed earlier. H&r block basic A dishwasher for $400 that he placed in service in January. H&r block basic Used furniture for $100 that he placed in service in September. H&r block basic A refrigerator for $800 that he placed in service in October. H&r block basic Tom uses the calendar year as his tax year. H&r block basic The total basis of all property placed in service that year is $1,300. H&r block basic The $800 basis of the refrigerator placed in service during the last 3 months of his tax year exceeds $520 (40% × $1,300). H&r block basic Tom must use the mid-quarter convention instead of the half-year convention for all three items. H&r block basic Half-year convention. H&r block basic    The half-year convention is used if neither the mid-quarter convention nor the mid-month convention applies. H&r block basic Under this convention, you treat all property placed in service, or disposed of, during a tax year as placed in service, or disposed of, at the midpoint of that tax year. H&r block basic   If this convention applies, you deduct a half year of depreciation for the first year and the last year that you depreciate the property. H&r block basic You deduct a full year of depreciation for any other year during the recovery period. H&r block basic Figuring Your Depreciation Deduction You can figure your MACRS depreciation deduction in one of two ways. H&r block basic The deduction is substantially the same both ways. H&r block basic You can either: Actually compute the deduction using the depreciation method and convention that apply over the recovery period of the property, or Use the percentage from the MACRS percentage tables. H&r block basic In this publication we will use the percentage tables. H&r block basic For instructions on how to compute the deduction, see chapter 4 of Publication 946. H&r block basic Residential rental property. H&r block basic   You must use the straight line method and a mid-month convention for residential rental property. H&r block basic In the first year that you claim depreciation for residential rental property, you can claim depreciation only for the number of months the property is in use, and you must use the mid-month convention (explained under Conventions , earlier). H&r block basic 5-, 7-, or 15-year property. H&r block basic   For property in the 5- or 7-year class, use the 200% declining balance method and a half-year convention. H&r block basic However, in limited cases you must use the mid-quarter convention, if it applies. H&r block basic For property in the 15-year class, use the 150% declining balance method and a half-year convention. H&r block basic   You can also choose to use the 150% declining balance method for property in the 5- or 7-year class. H&r block basic The choice to use the 150% method for one item in a class of property applies to all property in that class that is placed in service during the tax year of the election. H&r block basic You make this election on Form 4562. H&r block basic In Part III, column (f), enter “150 DB. H&r block basic ” Once you make this election, you cannot change to another method. H&r block basic   If you use either the 200% or 150% declining balance method, you figure your deduction using the straight line method in the first tax year that the straight line method gives you an equal or larger deduction. H&r block basic   You can also choose to use the straight line method with a half-year or mid-quarter convention for 5-, 7-, or 15-year property. H&r block basic The choice to use the straight line method for one item in a class of property applies to all property in that class that is placed in service during the tax year of the election. H&r block basic You elect the straight line method on Form 4562. H&r block basic In Part III, column (f), enter “S/L. H&r block basic ” Once you make this election, you cannot change to another method. H&r block basic MACRS Percentage Tables You can use the percentages in Table 2-2, earlier, to compute annual depreciation under MACRS. H&r block basic The tables show the percentages for the first few years or until the change to the straight line method is made. H&r block basic See Appendix A of Publication 946 for complete tables. H&r block basic The percentages in Tables 2-2a, 2-2b, and 2-2c make the change from declining balance to straight line in the year that straight line will give a larger deduction. H&r block basic If you elect to use the straight line method for 5-, 7-, or 15-year property, or the 150% declining balance method for 5- or 7-year property, use the tables in Appendix A of Publication 946. H&r block basic How to use the percentage tables. H&r block basic   You must apply the table rates to your property's unadjusted basis (defined below) each year of the recovery period. H&r block basic   Once you begin using a percentage table to figure depreciation, you must continue to use it for the entire recovery period unless there is an adjustment to the basis of your property for a reason other than: Depreciation allowed or allowable, or An addition or improvement that is depreciated as a separate item of property. H&r block basic   If there is an adjustment for any reason other than (1) or (2), for example, because of a deductible casualty loss, you can no longer use the table. H&r block basic For the year of the adjustment and for the remaining recovery period, figure depreciation using the property's adjusted basis at the end of the year and the appropriate depreciation method, as explained earlier under Figuring Your Depreciation Deduction . H&r block basic See Figuring the Deduction Without Using the Tables in Publication 946, chapter 4. H&r block basic Unadjusted basis. H&r block basic   This is the same basis you would use to figure gain on a sale (see Basis of Depreciable Property , earlier), but without reducing your original basis by any MACRS depreciation taken in earlier years. H&r block basic   However, you do reduce your original basis by other amounts claimed on the property, including: Any amortization, Any section 179 deduction, and Any special depreciation allowance. H&r block basic For more information, see chapter 4 of Publication 946. H&r block basic Please click here for the text description of the image. H&r block basic Table 2-2 Tables 2-2a, 2-2b, and 2-2c. H&r block basic   The percentages in these tables take into account the half-year and mid-quarter conventions. H&r block basic Use Table 2-2a for 5-year property, Table 2-2b for 7-year property, and Table 2-2c for 15-year property. H&r block basic Use the percentage in the second column (half-year convention) unless you are required to use the mid-quarter convention (explained earlier). H&r block basic If you must use the mid-quarter convention, use the column that corresponds to the calendar year quarter in which you placed the property in service. H&r block basic Example 1. H&r block basic You purchased a stove and refrigerator and placed them in service in June. H&r block basic Your basis in the stove is $600 and your basis in the refrigerator is $1,000. H&r block basic Both are 5-year property. H&r block basic Using the half-year convention column in Table 2-2a, the depreciation percentage for Year 1 is 20%. H&r block basic For that year your depreciation deduction is $120 ($600 × . H&r block basic 20) for the stove and $200 ($1,000 × . H&r block basic 20) for the refrigerator. H&r block basic For Year 2, the depreciation percentage is 32%. H&r block basic That year's depreciation deduction will be $192 ($600 × . H&r block basic 32) for the stove and $320 ($1,000 × . H&r block basic 32) for the refrigerator. H&r block basic Example 2. H&r block basic Assume the same facts as in Example 1, except you buy the refrigerator in October instead of June. H&r block basic Since the refrigerator was placed in service in the last 3 months of the tax year, and its basis ($1,000) is more than 40% of the total basis of all property placed in service during the year ($1,600 × . H&r block basic 40 = $640), you are required to use the mid-quarter convention to figure depreciation on both the stove and refrigerator. H&r block basic Because you placed the refrigerator in service in October, you use the fourth quarter column of Table 2-2a and find the depreciation percentage for Year 1 is 5%. H&r block basic Your depreciation deduction for the refrigerator is $50 ($1,000 x . H&r block basic 05). H&r block basic Because you placed the stove in service in June, you use the second quarter column of Table 2-2a and find the depreciation percentage for Year 1 is 25%. H&r block basic For that year, your depreciation deduction for the stove is $150 ($600 x . H&r block basic 25). H&r block basic Table 2-2d. H&r block basic    Use this table when you are using the GDS 27. H&r block basic 5 year option for residential rental property. H&r block basic Find the row for the month that you placed the property in service. H&r block basic Use the percentages listed for that month to figure your depreciation deduction. H&r block basic The mid-month convention is taken into account in the percentages shown in the table. H&r block basic Continue to use the same row (month) under the column for the appropriate year. H&r block basic Example. H&r block basic You purchased a single family rental house for $185,000 and placed it in service on February 8. H&r block basic The sales contract showed that the building cost $160,000 and the land cost $25,000. H&r block basic Your basis for depreciation is its original cost, $160,000. H&r block basic This is the first year of service for your residential rental property and you decide to use GDS which has a recovery period of 27. H&r block basic 5 years. H&r block basic Using Table 2-2d, you find that the percentage for property placed in service in February of Year 1 is 3. H&r block basic 182%. H&r block basic That year's depreciation deduction is $5,091 ($160,000 x . H&r block basic 03182). H&r block basic Figuring MACRS Depreciation Under ADS Table 2–1, earlier, shows the ADS recovery periods for property used in rental activities. H&r block basic See Appendix B in Publication 946 for other property. H&r block basic If your property is not listed in Appendix B, it is considered to have no class life. H&r block basic Under ADS, personal property with no class life is depreciated using a recovery period of 12 years. H&r block basic Use the mid-month convention for residential rental property and nonresidential real property. H&r block basic For all other property, use the half-year or mid-quarter convention, as appropriate. H&r block basic See Publication 946 for ADS depreciation tables. H&r block basic Claiming the Correct Amount of Depreciation You should claim the correct amount of depreciation each tax year. H&r block basic If you did not claim all the depreciation you were entitled to deduct, you must still reduce your basis in the property by the full amount of depreciation that you could have deducted. H&r block basic For more information, see Depreciation under Decreases to Basis in Publication 551. H&r block basic If you deducted an incorrect amount of depreciation for property in any year, you may be able to make a correction by filing Form 1040X, Amended U. H&r block basic S. H&r block basic Individual Income Tax Return. H&r block basic If you are not allowed to make the correction on an amended return, you can change your accounting method to claim the correct amount of depreciation. H&r block basic Filing an amended return. H&r block basic   You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. H&r block basic You claimed the incorrect amount because of a mathematical error made in any year. H&r block basic You claimed the incorrect amount because of a posting error made in any year. H&r block basic You have not adopted a method of accounting for property placed in service by you in tax years ending after December 29, 2003. H&r block basic You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. H&r block basic   Generally, you adopt a method of accounting for depreciation by using a permissible method of determining depreciation when you file your first tax return for the property used in your rental activity. H&r block basic This also occurs when you use the same impermissible method of determining depreciation (for example, using the wrong MACRS recovery period) in two or more consecutively filed tax returns. H&r block basic   If an amended return is allowed, you must file it by the later of the following dates. H&r block basic 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. H&r block basic A return filed before an unextended due date is considered filed on that due date. H&r block basic 2 years from the time you paid your tax for that year. H&r block basic Changing your accounting method. H&r block basic   To change your accounting method, you generally must file Form 3115, Application for Change in Accounting Method, to get the consent of the IRS. H&r block basic In some instances, that consent is automatic. H&r block basic For more information, see Changing Your Accounting Method in Publication 946,  chapter 1. H&r block basic Prev  Up  Next   Home   More Online Publications