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State taxes online for free Publication 547 - Main Content Table of Contents CasualtyFamily pet. State taxes online for free Progressive deterioration. State taxes online for free Special Procedure for Damage From Corrosive Drywall Theft Loss on Deposits Proof of Loss Figuring a LossGain from reimbursement. State taxes online for free Business or income-producing property. State taxes online for free Loss of inventory. State taxes online for free Leased property. State taxes online for free Exception for personal-use real property. State taxes online for free Decrease in Fair Market Value Adjusted Basis Insurance and Other Reimbursements Deduction Limits2% Rule $100 Rule 10% Rule Figuring the Deduction Figuring a GainPostponement of Gain When To Report Gains and LossesLoss on deposits. State taxes online for free Lessee's loss. State taxes online for free Disaster Area LossesDisaster loss to inventory. State taxes online for free Main home in disaster area. State taxes online for free Unsafe home. State taxes online for free Time limit for making choice. State taxes online for free Revoking your choice. State taxes online for free Figuring the loss deduction. State taxes online for free How to report the loss on Form 1040X. State taxes online for free Records. State taxes online for free Need a copy of your tax return for the preceding year? Postponed Tax Deadlines Contacting the Federal Emergency Management Agency (FEMA) How To Report Gains and LossesProperty held 1 year or less. State taxes online for free Property held more than 1 year. State taxes online for free Depreciable property. State taxes online for free Adjustments to Basis If Deductions Are More Than Income How To Get Tax HelpLow Income Taxpayer Clinics Casualty A casualty is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. State taxes online for free A sudden event is one that is swift, not gradual or progressive. State taxes online for free An unexpected event is one that is ordinarily unanticipated and unintended. State taxes online for free An unusual event is one that is not a day-to-day occurrence and that is not typical of the activity in which you were engaged. State taxes online for free Generally, casualty losses are deductible during the taxable year that the loss occurred. State taxes online for free See Table 3, later. State taxes online for free Deductible losses. State taxes online for free   Deductible casualty losses can result from a number of different causes, including the following. State taxes online for free Car accidents (but see Nondeductible losses , next, for exceptions). State taxes online for free Earthquakes. State taxes online for free Fires (but see Nondeductible losses , next, for exceptions). State taxes online for free Floods. State taxes online for free Government-ordered demolition or relocation of a home that is unsafe to use because of a disaster as discussed under Disaster Area Losses , later. State taxes online for free Mine cave-ins. State taxes online for free Shipwrecks. State taxes online for free Sonic booms. State taxes online for free Storms, including hurricanes and tornadoes. State taxes online for free Terrorist attacks. State taxes online for free Vandalism. State taxes online for free Volcanic eruptions. State taxes online for free Nondeductible losses. State taxes online for free   A casualty loss is not deductible if the damage or destruction is caused by the following. State taxes online for free Accidentally breaking articles such as glassware or china under normal conditions. State taxes online for free A family pet (explained below). State taxes online for free A fire if you willfully set it, or pay someone else to set it. State taxes online for free A car accident if your willful negligence or willful act caused it. State taxes online for free The same is true if the willful act or willful negligence of someone acting for you caused the accident. State taxes online for free Progressive deterioration (explained below). State taxes online for free However, see Special Procedure for Damage From Corrosive Drywall , later. State taxes online for free Family pet. State taxes online for free   Loss of property due to damage by a family pet is not deductible as a casualty loss unless the requirements discussed earlier under Casualty are met. State taxes online for free Example. State taxes online for free Your antique oriental rug was damaged by your new puppy before it was housebroken. State taxes online for free Because the damage was not unexpected and unusual, the loss is not deductible as a casualty loss. State taxes online for free Progressive deterioration. State taxes online for free   Loss of property due to progressive deterioration is not deductible as a casualty loss. State taxes online for free This is because the damage results from a steadily operating cause or a normal process, rather than from a sudden event. State taxes online for free The following are examples of damage due to progressive deterioration. State taxes online for free The steady weakening of a building due to normal wind and weather conditions. State taxes online for free The deterioration and damage to a water heater that bursts. State taxes online for free However, the rust and water damage to rugs and drapes caused by the bursting of a water heater does qualify as a casualty. State taxes online for free Most losses of property caused by droughts. State taxes online for free To be deductible, a drought-related loss generally must be incurred in a trade or business or in a transaction entered into for profit. State taxes online for free Termite or moth damage. State taxes online for free The damage or destruction of trees, shrubs, or other plants by a fungus, disease, insects, worms, or similar pests. State taxes online for free However, a sudden destruction due to an unexpected or unusual infestation of beetles or other insects may result in a casualty loss. State taxes online for free Special Procedure for Damage From Corrosive Drywall Under a special procedure, you can deduct the amounts you paid to repair damage to your home and household appliances due to corrosive drywall. State taxes online for free Under this procedure, you treat the amounts paid for repairs as a casualty loss in the year of payment. State taxes online for free For example, amounts you paid for repairs in 2013 are deductible on your 2013 tax return and amounts you paid for repairs in 2012 are deductible on your 2012 tax return. State taxes online for free Note. State taxes online for free If you paid for any repairs before 2013 and you choose to follow this special procedure, you can amend your return for the earlier year by filing Form 1040X, Amended U. State taxes online for free S. State taxes online for free Individual Income Tax Return, and attaching a completed Form 4684 for the appropriate year. State taxes online for free Form 4684 for the appropriate year can be found at IRS. State taxes online for free gov. State taxes online for free Generally, Form 1040X must be filed within 3 years after the date the original return was filed or within 2 years after the date the tax was paid, whichever is later. State taxes online for free Corrosive drywall. State taxes online for free   For purposes of this special procedure, “corrosive drywall” means drywall that is identified as problem drywall under the two-step identification method published by the Consumer Product Safety Commission (CPSC) and the Department of Housing and Urban Development (HUD) in their interim guidance dated January 28, 2010, as revised by the CPSC and HUD. State taxes online for free The revised identification guidance and remediation guidelines are available at www. State taxes online for free cpsc. State taxes online for free gov/Safety-Education/Safety-Education-Centers/Drywall. State taxes online for free Special instructions for completing Form 4684. State taxes online for free   If you choose to follow this special procedure, complete Form 4684, Section A, according to the instructions below. State taxes online for free The IRS will not challenge your treatment of damage resulting from corrosive drywall as a casualty loss if you determine and report the loss as explained below. State taxes online for free Top margin of Form 4684. State taxes online for free   Enter “Revenue Procedure 2010-36”. State taxes online for free Line 1. State taxes online for free   Enter the information required by the line 1 instructions. State taxes online for free Line 2. State taxes online for free   Skip this line. State taxes online for free Line 3. State taxes online for free   Enter the amount of insurance or other reimbursements you received (including through litigation). State taxes online for free If none, enter -0-. State taxes online for free Lines 4–7. State taxes online for free   Skip these lines. State taxes online for free Line 8. State taxes online for free   Enter the amount you paid to repair the damage to your home and household appliances due to corrosive drywall. State taxes online for free Enter only the amounts you paid to restore your home to the condition existing immediately before the damage. State taxes online for free Do not enter any amounts you paid for improvements or additions that increased the value of your home above its pre-loss value. State taxes online for free If you replaced a household appliance instead of repairing it, enter the lesser of: The current cost to replace the original appliance, or The basis of the original appliance (generally its cost). State taxes online for free Line 9. State taxes online for free   If line 8 is more than line 3, do one of the following. State taxes online for free If you have a pending claim for reimbursement (or you intend to pursue reimbursement), enter 75% of the difference between lines 3 and 8. State taxes online for free If item (1) does not apply to you, enter the full amount of the difference between lines 3 and 8. State taxes online for free If line 8 is less than or equal to line 3, you cannot claim a casualty loss deduction using this special procedure. State taxes online for free    If you have a pending claim for reimbursement (or you intend to pursue reimbursement), you may have income or an additional deduction in a later tax year depending on the actual amount of reimbursement received. State taxes online for free See Reimbursement Received After Deducting Loss, later. State taxes online for free Lines 10–18. State taxes online for free   Complete these lines according to the Instructions for Form 4684. State taxes online for free Choosing not to follow this special procedure. State taxes online for free   If you choose not to follow this special procedure, you are subject to all of the provisions that apply to the deductibility of casualty losses, and you must complete lines 1–9 according to the Instructions for Form 4684. State taxes online for free This means, for example, that you must establish that the damage, destruction, or loss of property resulted from an identifiable event as defined earlier under Casualty . State taxes online for free Furthermore, you must have proof that shows the following. State taxes online for free The loss is properly deductible in the tax year you claimed it and not in some other year. State taxes online for free See When To Report Gains and Losses , later. State taxes online for free The amount of the claimed loss. State taxes online for free See Proof of Loss , later. State taxes online for free No claim for reimbursement of any portion of the loss exists for which there is a reasonable prospect of recovery. State taxes online for free See When To Report Gains and Losses , later. State taxes online for free Theft A theft is the taking and removing of money or property with the intent to deprive the owner of it. State taxes online for free The taking of property must be illegal under the law of the state where it occurred and it must have been done with criminal intent. State taxes online for free You do not need to show a conviction for theft. State taxes online for free Theft includes the taking of money or property by the following means. State taxes online for free Blackmail. State taxes online for free Burglary. State taxes online for free Embezzlement. State taxes online for free Extortion. State taxes online for free Kidnapping for ransom. State taxes online for free Larceny. State taxes online for free Robbery. State taxes online for free The taking of money or property through fraud or misrepresentation is theft if it is illegal under state or local law. State taxes online for free Decline in market value of stock. State taxes online for free   You cannot deduct as a theft loss the decline in market value of stock acquired on the open market for investment if the decline is caused by disclosure of accounting fraud or other illegal misconduct by the officers or directors of the corporation that issued the stock. State taxes online for free However, you can deduct as a capital loss the loss you sustain when you sell or exchange the stock or the stock becomes completely worthless. State taxes online for free You report a capital loss on Schedule D (Form 1040). State taxes online for free For more information about stock sales, worthless stock, and capital losses, see chapter 4 of Publication 550. State taxes online for free Mislaid or lost property. State taxes online for free    The simple disappearance of money or property is not a theft. State taxes online for free However, an accidental loss or disappearance of property can qualify as a casualty if it results from an identifiable event that is sudden, unexpected, or unusual. State taxes online for free Sudden, unexpected, and unusual events were defined earlier under Casualty . State taxes online for free Example. State taxes online for free A car door is accidentally slammed on your hand, breaking the setting of your diamond ring. State taxes online for free The diamond falls from the ring and is never found. State taxes online for free The loss of the diamond is a casualty. State taxes online for free Losses from Ponzi-type investment schemes. State taxes online for free   The IRS has issued the following guidance to assist taxpayers who are victims of losses from Ponzi-type investment schemes: Revenue Ruling 2009-9, 2009-14 I. State taxes online for free R. State taxes online for free B. State taxes online for free 735 (available at www. State taxes online for free irs. State taxes online for free gov/irb/2009-14_IRB/ar07. State taxes online for free html). State taxes online for free Revenue Procedure 2009-20, 2009-14 I. State taxes online for free R. State taxes online for free B. State taxes online for free 749 (available at www. State taxes online for free irs. State taxes online for free gov/irb/2009-14_IRB/ar11. State taxes online for free html). State taxes online for free Revenue Procedure 2011-58, 2011-50 I. State taxes online for free R. State taxes online for free B. State taxes online for free 847 (available at www. State taxes online for free irs. State taxes online for free gov/irb/2011-50_IRB/ar11. State taxes online for free html). State taxes online for free If you qualify to use Revenue Procedure 2009-20, as modified by Revenue Procedure 2011-58, and you choose to follow the procedures in the guidance, first fill out Section C of Form 4684 to determine the amount to enter on Section B, line 28. State taxes online for free Skip lines 19 to 27, but you must fill out Section B, lines 29 to 39, as appropriate. State taxes online for free Section C of Form 4684 replaces Appendix A in Revenue Procedure 2009-20. State taxes online for free You do not need to complete Appendix A. State taxes online for free For more information, see the above revenue ruling and revenue procedures, and the Instructions for Form 4684. State taxes online for free   If you choose not to use the procedures in Revenue Procedure 2009-20, as modified by Revenue Procedure 2011-58, you may claim your theft loss by filling out Section B, lines 19 to 39, as appropriate. State taxes online for free Loss on Deposits A loss on deposits can occur when a bank, credit union, or other financial institution becomes insolvent or bankrupt. State taxes online for free If you incurred this type of loss, you can choose one of the following ways to deduct the loss. State taxes online for free As a casualty loss. State taxes online for free As an ordinary loss. State taxes online for free As a nonbusiness bad debt. State taxes online for free Casualty loss or ordinary loss. State taxes online for free   You can choose to deduct a loss on deposits as a casualty loss or as an ordinary loss for any year in which you can reasonably estimate how much of your deposits you have lost in an insolvent or bankrupt financial institution. State taxes online for free The choice generally is made on the return you file for that year and applies to all your losses on deposits for the year in that particular financial institution. State taxes online for free If you treat the loss as a casualty or ordinary loss, you cannot treat the same amount of the loss as a nonbusiness bad debt when it actually becomes worthless. State taxes online for free However, you can take a nonbusiness bad debt deduction for any amount of loss that is more than the estimated amount you deducted as a casualty or ordinary loss. State taxes online for free Once you make the choice, you cannot change it without permission from the Internal Revenue Service. State taxes online for free   If you claim an ordinary loss, report it as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23. State taxes online for free The maximum amount you can claim is $20,000 ($10,000 if you are married filing separately) reduced by any expected state insurance proceeds. State taxes online for free Your loss is subject to the 2%-of-adjusted-gross-income limit. State taxes online for free You cannot choose to claim an ordinary loss if any part of the deposit is federally insured. State taxes online for free Nonbusiness bad debt. State taxes online for free   If you do not choose to deduct the loss as a casualty loss or as an ordinary loss, you must wait until the year the actual loss is determined and deduct the loss as a nonbusiness bad debt in that year. State taxes online for free How to report. State taxes online for free   The kind of deduction you choose for your loss on deposits determines how you report your loss. State taxes online for free See Table 1. State taxes online for free More information. State taxes online for free   For more information, see Special Treatment for Losses on Deposits in Insolvent or Bankrupt Financial Institutions in the Instructions for Form 4684. State taxes online for free Deducted loss recovered. State taxes online for free   If you recover an amount you deducted as a loss in an earlier year, you may have to include the amount recovered in your income for the year of recovery. State taxes online for free If any part of the original deduction did not reduce your tax in the earlier year, you do not have to include that part of the recovery in your income. State taxes online for free For more information, see Recoveries in Publication 525. State taxes online for free Proof of Loss To deduct a casualty or theft loss, you must be able to show that there was a casualty or theft. State taxes online for free You also must be able to support the amount you take as a deduction. State taxes online for free Casualty loss proof. State taxes online for free   For a casualty loss, you should be able to show all of the following. State taxes online for free The type of casualty (car accident, fire, storm, etc. State taxes online for free ) and when it occurred. State taxes online for free That the loss was a direct result of the casualty. State taxes online for free That you were the owner of the property, or if you leased the property from someone else, that you were contractually liable to the owner for the damage. State taxes online for free Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery. State taxes online for free Theft loss proof. State taxes online for free   For a theft loss, you should be able to show all of the following. State taxes online for free When you discovered that your property was missing. State taxes online for free That your property was stolen. State taxes online for free That you were the owner of the property. State taxes online for free Whether a claim for reimbursement exists for which there is a reasonable expectation of recovery. State taxes online for free    It is important that you have records that will prove your deduction. State taxes online for free If you do not have the actual records to support your deduction, you can use other satisfactory evidence to support it. State taxes online for free Figuring a Loss To determine your deduction for a casualty or theft loss, you must first figure your loss. State taxes online for free Table 1. State taxes online for free Reporting Loss on Deposits IF you choose to report the loss as a(n). State taxes online for free . State taxes online for free . State taxes online for free   THEN report it on. State taxes online for free . State taxes online for free . State taxes online for free casualty loss   Form 4684 and Schedule A  (Form 1040). State taxes online for free ordinary loss   Schedule A (Form 1040). State taxes online for free nonbusiness bad debt   Form 8949 and Schedule D (Form 1040). State taxes online for free Amount of loss. State taxes online for free   Figure the amount of your loss using the following steps. State taxes online for free Determine your adjusted basis in the property before the casualty or theft. State taxes online for free Determine the decrease in fair market value (FMV) of the property as a result of the casualty or theft. State taxes online for free From the smaller of the amounts you determined in (1) and (2), subtract any insurance or other reimbursement you received or expect to receive. State taxes online for free For personal-use property and property used in performing services as an employee, apply the deduction limits, discussed later, to determine the amount of your deductible loss. State taxes online for free Gain from reimbursement. State taxes online for free   If your reimbursement is more than your adjusted basis in the property, you have a gain. State taxes online for free This is true even if the decrease in the FMV of the property is smaller than your adjusted basis. State taxes online for free If you have a gain, you may have to pay tax on it, or you may be able to postpone reporting the gain. State taxes online for free See Figuring a Gain , later. State taxes online for free Business or income-producing property. State taxes online for free   If you have business or income-producing property, such as rental property, and it is stolen or completely destroyed, the decrease in FMV is not considered. State taxes online for free Your loss is figured as follows:   Your adjusted basis in the property     MINUS     Any salvage value     MINUS     Any insurance or other reimbursement you  receive or expect to receive   Loss of inventory. State taxes online for free   There are two ways you can deduct a casualty or theft loss of inventory, including items you hold for sale to customers. State taxes online for free   One way is to deduct the loss through the increase in the cost of goods sold by properly reporting your opening and closing inventories. State taxes online for free Do not claim this loss again as a casualty or theft loss. State taxes online for free If you take the loss through the increase in the cost of goods sold, include any insurance or other reimbursement you receive for the loss in gross income. State taxes online for free   The other way is to deduct the loss separately. State taxes online for free If you deduct it separately, eliminate the affected inventory items from the cost of goods sold by making a downward adjustment to opening inventory or purchases. State taxes online for free Reduce the loss by the reimbursement you received. State taxes online for free Do not include the reimbursement in gross income. State taxes online for free If you do not receive the reimbursement by the end of the year, you may not claim a loss to the extent you have a reasonable prospect of recovery. State taxes online for free Leased property. State taxes online for free   If you are liable for casualty damage to property you lease, your loss is the amount you must pay to repair the property minus any insurance or other reimbursement you receive or expect to receive. State taxes online for free Separate computations. State taxes online for free   Generally, if a single casualty or theft involves more than one item of property, you must figure the loss on each item separately. State taxes online for free Then combine the losses to determine the total loss from that casualty or theft. State taxes online for free Exception for personal-use real property. State taxes online for free   In figuring a casualty loss on personal-use real property, the entire property (including any improvements, such as buildings, trees, and shrubs) is treated as one item. State taxes online for free Figure the loss using the smaller of the following. State taxes online for free The decrease in FMV of the entire property. State taxes online for free The adjusted basis of the entire property. State taxes online for free   See Real property under Figuring the Deduction, later. State taxes online for free Decrease in Fair Market Value Fair market value (FMV) is the price for which you could sell your property to a willing buyer when neither of you has to sell or buy and both of you know all the relevant facts. State taxes online for free The decrease in FMV used to figure the amount of a casualty or theft loss is the difference between the property's fair market value immediately before and immediately after the casualty or theft. State taxes online for free FMV of stolen property. State taxes online for free   The FMV of property immediately after a theft is considered to be zero because you no longer have the property. State taxes online for free Example. State taxes online for free Several years ago, you purchased silver dollars at face value for $150. State taxes online for free This is your adjusted basis in the property. State taxes online for free Your silver dollars were stolen this year. State taxes online for free The FMV of the coins was $1,000 just before they were stolen, and insurance did not cover them. State taxes online for free Your theft loss is $150. State taxes online for free Recovered stolen property. State taxes online for free   Recovered stolen property is your property that was stolen and later returned to you. State taxes online for free If you recovered property after you had already taken a theft loss deduction, you must refigure your loss using the smaller of the property's adjusted basis (explained later) or the decrease in FMV from the time just before it was stolen until the time it was recovered. State taxes online for free Use this amount to refigure your total loss for the year in which the loss was deducted. State taxes online for free   If your refigured loss is less than the loss you deducted, you generally have to report the difference as income in the recovery year. State taxes online for free But report the difference only up to the amount of the loss that reduced your tax. State taxes online for free For more information on the amount to report, see Recoveries in Publication 525. State taxes online for free Figuring Decrease in FMV — Items To Consider To figure the decrease in FMV because of a casualty or theft, you generally need a competent appraisal. State taxes online for free However, other measures also can be used to establish certain decreases. State taxes online for free See Appraisal and Cost of cleaning up or making repairs , next. State taxes online for free Appraisal. State taxes online for free   An appraisal to determine the difference between the FMV of the property immediately before a casualty or theft and immediately afterwards should be made by a competent appraiser. State taxes online for free The appraiser must recognize the effects of any general market decline that may occur along with the casualty. State taxes online for free This information is needed to limit any deduction to the actual loss resulting from damage to the property. State taxes online for free   Several factors are important in evaluating the accuracy of an appraisal, including the following. State taxes online for free The appraiser's familiarity with your property before and after the casualty or theft. State taxes online for free The appraiser's knowledge of sales of comparable property in the area. State taxes online for free The appraiser's knowledge of conditions in the area of the casualty. State taxes online for free The appraiser's method of appraisal. State taxes online for free You may be able to use an appraisal that you used to get a federal loan (or a federal loan guarantee) as the result of a federally declared disaster to establish the amount of your disaster loss. State taxes online for free For more information on disasters, see Disaster Area Losses, later. State taxes online for free Cost of cleaning up or making repairs. State taxes online for free   The cost of repairing damaged property is not part of a casualty loss. State taxes online for free Neither is the cost of cleaning up after a casualty. State taxes online for free But you can use the cost of cleaning up or of making repairs after a casualty as a measure of the decrease in FMV if you meet all the following conditions. State taxes online for free The repairs are actually made. State taxes online for free The repairs are necessary to bring the property back to its condition before the casualty. State taxes online for free The amount spent for repairs is not excessive. State taxes online for free The repairs take care of the damage only. State taxes online for free The value of the property after the repairs is not, due to the repairs, more than the value of the property before the casualty. State taxes online for free Landscaping. State taxes online for free   The cost of restoring landscaping to its original condition after a casualty may indicate the decrease in FMV. State taxes online for free You may be able to measure your loss by what you spend on the following. State taxes online for free Removing destroyed or damaged trees and shrubs, minus any salvage you receive. State taxes online for free Pruning and other measures taken to preserve damaged trees and shrubs. State taxes online for free Replanting necessary to restore the property to its approximate value before the casualty. State taxes online for free Car value. State taxes online for free   Books issued by various automobile organizations that list your car may be useful in figuring the value of your car. State taxes online for free You can use the books' retail values and modify them by factors such as the mileage and condition of your car to figure its value. State taxes online for free The prices are not official, but they may be useful in determining value and suggesting relative prices for comparison with current sales and offerings in your area. State taxes online for free If your car is not listed in the books, determine its value from other sources. State taxes online for free A dealer's offer for your car as a trade-in on a new car is not usually a measure of its true value. State taxes online for free Figuring Decrease in FMV — Items Not To Consider You generally should not consider the following items when attempting to establish the decrease in FMV of your property. State taxes online for free Cost of protection. State taxes online for free   The cost of protecting your property against a casualty or theft is not part of a casualty or theft loss. State taxes online for free The amount you spend on insurance or to board up your house against a storm is not part of your loss. State taxes online for free If the property is business property, these expenses are deductible as business expenses. State taxes online for free   If you make permanent improvements to your property to protect it against a casualty or theft, add the cost of these improvements to your basis in the property. State taxes online for free An example would be the cost of a dike to prevent flooding. State taxes online for free Exception. State taxes online for free   You cannot increase your basis in the property by, or deduct as a business expense, any expenditures you made with respect to qualified disaster mitigation payments (discussed later under Disaster Area Losses ). State taxes online for free Related expenses. State taxes online for free   The incidental expenses due to a casualty or theft, such as expenses for the treatment of personal injuries, for temporary housing, or for a rental car, are not part of your casualty or theft loss. State taxes online for free However, they may be deductible as business expenses if the damaged or stolen property is business property. State taxes online for free Replacement cost. State taxes online for free   The cost of replacing stolen or destroyed property is not part of a casualty or theft loss. State taxes online for free Example. State taxes online for free You bought a new chair 4 years ago for $300. State taxes online for free In April, a fire destroyed the chair. State taxes online for free You estimate that it would cost $500 to replace it. State taxes online for free If you had sold the chair before the fire, you estimate that you could have received only $100 for it because it was 4 years old. State taxes online for free The chair was not insured. State taxes online for free Your loss is $100, the FMV of the chair before the fire. State taxes online for free It is not $500, the replacement cost. State taxes online for free Sentimental value. State taxes online for free   Do not consider sentimental value when determining your loss. State taxes online for free If a family portrait, heirloom, or keepsake is damaged, destroyed, or stolen, you must base your loss on its FMV, as limited by your adjusted basis in the property. State taxes online for free Decline in market value of property in or near casualty area. State taxes online for free   A decrease in the value of your property because it is in or near an area that suffered a casualty, or that might again suffer a casualty, is not to be taken into consideration. State taxes online for free You have a loss only for actual casualty damage to your property. State taxes online for free However, if your home is in a federally declared disaster area, see Disaster Area Losses , later. State taxes online for free Costs of photographs and appraisals. State taxes online for free   Photographs taken after a casualty will be helpful in establishing the condition and value of the property after it was damaged. State taxes online for free Photographs showing the condition of the property after it was repaired, restored, or replaced may also be helpful. State taxes online for free   Appraisals are used to figure the decrease in FMV because of a casualty or theft. State taxes online for free See Appraisal , earlier, under Figuring Decrease in FMV — Items To Consider, for information about appraisals. State taxes online for free   The costs of photographs and appraisals used as evidence of the value and condition of property damaged as a result of a casualty are not a part of the loss. State taxes online for free They are expenses in determining your tax liability. State taxes online for free You can claim these costs as a miscellaneous itemized deduction subject to the 2%-of-adjusted-gross-income limit on Schedule A (Form 1040). State taxes online for free Adjusted Basis The measure of your investment in the property you own is its basis. State taxes online for free For property you buy, your basis is usually its cost to you. State taxes online for free For property you acquire in some other way, such as inheriting it, receiving it as a gift, or getting it in a nontaxable exchange, you must figure your basis in another way, as explained in Publication 551. State taxes online for free If you inherited the property from someone who died in 2010 and the executor of the decedent's estate made the election to file Form 8939, refer to the information provided by the executor or see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010. State taxes online for free Adjustments to basis. State taxes online for free    While you own the property, various events may take place that change your basis. State taxes online for free Some events, such as additions or permanent improvements to the property, increase basis. State taxes online for free Others, such as earlier casualty losses and depreciation deductions, decrease basis. State taxes online for free When you add the increases to the basis and subtract the decreases from the basis, the result is your adjusted basis. State taxes online for free See Publication 551 for more information on figuring the basis of your property. State taxes online for free Insurance and Other Reimbursements If you receive an insurance or other type of reimbursement, you must subtract the reimbursement when you figure your loss. State taxes online for free You do not have a casualty or theft loss to the extent you are reimbursed. State taxes online for free If you expect to be reimbursed for part or all of your loss, you must subtract the expected reimbursement when you figure your loss. State taxes online for free You must reduce your loss even if you do not receive payment until a later tax year. State taxes online for free See Reimbursement Received After Deducting Loss , later. State taxes online for free Failure to file a claim for reimbursement. State taxes online for free   If your property is covered by insurance, you must file a timely insurance claim for reimbursement of your loss. State taxes online for free Otherwise, you cannot deduct this loss as a casualty or theft. State taxes online for free The portion of the loss usually not covered by insurance (for example, a deductible) is not subject to this rule. State taxes online for free Example. State taxes online for free You have a car insurance policy with a $1,000 deductible. State taxes online for free Because your insurance did not cover the first $1,000 of an auto collision, the $1,000 would be deductible (subject to the $100 and 10% rules, discussed later). State taxes online for free This is true, even if you do not file an insurance claim, because your insurance policy would never have reimbursed you for the deductible. State taxes online for free Types of Reimbursements The most common type of reimbursement is an insurance payment for your stolen or damaged property. State taxes online for free Other types of reimbursements are discussed next. State taxes online for free Also see the Instructions for Form 4684. State taxes online for free Employer's emergency disaster fund. State taxes online for free   If you receive money from your employer's emergency disaster fund and you must use that money to rehabilitate or replace property on which you are claiming a casualty loss deduction, you must take that money into consideration in computing the casualty loss deduction. State taxes online for free Take into consideration only the amount you used to replace your destroyed or damaged property. State taxes online for free Example. State taxes online for free Your home was extensively damaged by a tornado. State taxes online for free Your loss after reimbursement from your insurance company was $10,000. State taxes online for free Your employer set up a disaster relief fund for its employees. State taxes online for free Employees receiving money from the fund had to use it to rehabilitate or replace their damaged or destroyed property. State taxes online for free You received $4,000 from the fund and spent the entire amount on repairs to your home. State taxes online for free In figuring your casualty loss, you must reduce your unreimbursed loss ($10,000) by the $4,000 you received from your employer's fund. State taxes online for free Your casualty loss before applying the deduction limits (discussed later) is $6,000. State taxes online for free Cash gifts. State taxes online for free   If you receive excludable cash gifts as a disaster victim and there are no limits on how you can use the money, you do not reduce your casualty loss by these excludable cash gifts. State taxes online for free This applies even if you use the money to pay for repairs to property damaged in the disaster. State taxes online for free Example. State taxes online for free Your home was damaged by a hurricane. State taxes online for free Relatives and neighbors made cash gifts to you that were excludable from your income. State taxes online for free You used part of the cash gifts to pay for repairs to your home. State taxes online for free There were no limits or restrictions on how you could use the cash gifts. State taxes online for free It was an excludable gift, so the money you received and used to pay for repairs to your home does not reduce your casualty loss on the damaged home. State taxes online for free Insurance payments for living expenses. State taxes online for free   You do not reduce your casualty loss by insurance payments you receive to cover living expenses in either of the following situations. State taxes online for free You lose the use of your main home because of a casualty. State taxes online for free Government authorities do not allow you access to your main home because of a casualty or threat of one. State taxes online for free Inclusion in income. State taxes online for free   If these insurance payments are more than the temporary increase in your living expenses, you must include the excess in your income. State taxes online for free Report this amount on Form 1040, line 21. State taxes online for free However, if the casualty occurs in a federally declared disaster area, none of the insurance payments are taxable. State taxes online for free See Qualified disaster relief payments , later, under Disaster Area Losses. State taxes online for free   A temporary increase in your living expenses is the difference between the actual living expenses you and your family incurred during the period you could not use your home and your normal living expenses for that period. State taxes online for free Actual living expenses are the reasonable and necessary expenses incurred because of the loss of your main home. State taxes online for free Generally, these expenses include the amounts you pay for the following. State taxes online for free Renting suitable housing. State taxes online for free Transportation. State taxes online for free Food. State taxes online for free Utilities. State taxes online for free Miscellaneous services. State taxes online for free Normal living expenses consist of these same expenses that you would have incurred but did not because of the casualty or the threat of one. State taxes online for free Example. State taxes online for free As a result of a fire, you vacated your apartment for a month and moved to a motel. State taxes online for free You normally pay $525 a month for rent. State taxes online for free None was charged for the month the apartment was vacated. State taxes online for free Your motel rent for this month was $1,200. State taxes online for free You normally pay $200 a month for food. State taxes online for free Your food expenses for the month you lived in the motel were $400. State taxes online for free You received $1,100 from your insurance company to cover your living expenses. State taxes online for free You determine the payment you must include in income as follows. State taxes online for free 1. State taxes online for free Insurance payment for living expenses $1,100 2. State taxes online for free Actual expenses during the month you are unable to use your home because of the fire $1,600   3. State taxes online for free Normal living expenses 725   4. State taxes online for free Temporary increase in living expenses: Subtract line 3  from line 2 875 5. State taxes online for free Amount of payment includible in income: Subtract line 4 from line 1 $ 225 Tax year of inclusion. State taxes online for free   You include the taxable part of the insurance payment in income for the year you regain the use of your main home or, if later, for the year you receive the taxable part of the insurance payment. State taxes online for free Example. State taxes online for free Your main home was destroyed by a tornado in August 2011. State taxes online for free You regained use of your home in November 2012. State taxes online for free The insurance payments you received in 2011 and 2012 were $1,500 more than the temporary increase in your living expenses during those years. State taxes online for free You include this amount in income on your 2012 Form 1040. State taxes online for free If, in 2013, you receive further payments to cover the living expenses you had in 2011 and 2012, you must include those payments in income on your 2013 Form 1040. State taxes online for free Disaster relief. State taxes online for free   Food, medical supplies, and other forms of assistance you receive do not reduce your casualty loss, unless they are replacements for lost or destroyed property. State taxes online for free Table 2. State taxes online for free Deduction Limit Rules for Personal-Use and Employee Property       $100 Rule 10% Rule 2% Rule General Application You must reduce each casualty or theft loss by $100 when figuring your deduction. State taxes online for free Apply this rule to personal-use property after you have figured the amount of your loss. State taxes online for free You must reduce your total casualty or theft loss by 10% of your adjusted gross income. State taxes online for free Apply this rule to personal-use property after you reduce each loss by $100 (the $100 rule). State taxes online for free You must reduce your total casualty or theft loss by 2% of your adjusted gross income. State taxes online for free Apply this rule to property you used in performing services as an employee after you have figured the amount of your loss and added it to your job expenses and most other miscellaneous itemized deductions. State taxes online for free Single Event Apply this rule only once, even if many pieces of property are affected. State taxes online for free Apply this rule only once, even if many pieces of property are affected. State taxes online for free Apply this rule only once, even if many pieces of property are affected. State taxes online for free More Than One Event Apply to the loss from each event. State taxes online for free Apply to the total of all your losses from all events. State taxes online for free Apply to the total of all your losses from all events. State taxes online for free More Than One Person— With Loss From the   Same Event  (other than a married couple  filing jointly) Apply separately to each person. State taxes online for free Apply separately to each person. State taxes online for free Apply separately to each person. State taxes online for free Married Couple—  With Loss From the  Same Event Filing Joint Return Apply as if you were one person. State taxes online for free Apply as if you were one person. State taxes online for free Apply as if you were one person. State taxes online for free Filing Separate Return Apply separately to each spouse. State taxes online for free Apply separately to each spouse. State taxes online for free Apply separately to each spouse. State taxes online for free More Than One Owner (other than a married couple filing jointly) Apply separately to each owner of jointly owned property. State taxes online for free Apply separately to each owner of jointly owned property. State taxes online for free Apply separately to each owner of jointly owned property. State taxes online for free    Qualified disaster relief payments you receive for expenses you incurred as a result of a federally declared disaster, are not taxable income to you. State taxes online for free For more information, see Qualified disaster relief payments under Disaster Area Losses, later. State taxes online for free   Disaster unemployment assistance payments are unemployment benefits that are taxable. State taxes online for free   Generally, disaster relief grants received under the Robert T. State taxes online for free Stafford Disaster Relief and Emergency Assistance Act are not included in your income. State taxes online for free See Federal disaster relief grants , later, under Disaster Area Losses. State taxes online for free Loan proceeds. State taxes online for free   Do not reduce your casualty loss by loan proceeds you use to rehabilitate or replace property on which you are claiming a casualty loss deduction. State taxes online for free If you have a federal loan that is canceled (forgiven), see Federal loan canceled , later, under Disaster Area Losses. State taxes online for free Reimbursement Received After Deducting Loss If you figured your casualty or theft loss using the amount of your expected reimbursement, you may have to adjust your tax return for the tax year in which you get your actual reimbursement. State taxes online for free This section explains the adjustment you may have to make. State taxes online for free Actual reimbursement less than expected. State taxes online for free   If you later receive less reimbursement than you expected, include that difference as a loss with your other losses (if any) on your return for the year in which you can reasonably expect no more reimbursement. State taxes online for free Example. State taxes online for free Your personal car had a FMV of $2,000 when it was destroyed in a collision with another car in 2012. State taxes online for free The accident was due to the negligence of the other driver. State taxes online for free At the end of 2012, there was a reasonable prospect that the owner of the other car would reimburse you in full. State taxes online for free You did not have a deductible loss in 2012. State taxes online for free In January 2013, the court awards you a judgment of $2,000. State taxes online for free However, in July it becomes apparent that you will be unable to collect any amount from the other driver. State taxes online for free Since this is your only casualty or theft loss, you can deduct the loss in 2013 that is figured by applying the Deduction Limits (discussed later). State taxes online for free Actual reimbursement more than expected. State taxes online for free   If you later receive more reimbursement than you expected, after you have claimed a deduction for the loss, you may have to include the extra reimbursement in your income for the year you receive it. State taxes online for free However, if any part of the original deduction did not reduce your tax for the earlier year, do not include that part of the reimbursement in your income. State taxes online for free You do not refigure your tax for the year you claimed the deduction. State taxes online for free See Recoveries in Publication 525 to find out how much extra reimbursement to include in income. State taxes online for free Example. State taxes online for free In 2012, a hurricane destroyed your motorboat. State taxes online for free Your loss was $3,000, and you estimated that your insurance would cover $2,500 of it. State taxes online for free You did not itemize deductions on your 2012 return, so you could not deduct the loss. State taxes online for free When the insurance company reimburses you for the loss, you do not report any of the reimbursement as income. State taxes online for free This is true even if it is for the full $3,000 because you did not deduct the loss on your 2012 return. State taxes online for free The loss did not reduce your tax. State taxes online for free    If the total of all the reimbursements you receive is more than your adjusted basis in the destroyed or stolen property, you will have a gain on the casualty or theft. State taxes online for free If you have already taken a deduction for a loss and you receive the reimbursement in a later year, you may have to include the gain in your income for the later year. State taxes online for free Include the gain as ordinary income up to the amount of your deduction that reduced your tax for the earlier year. State taxes online for free You may be able to postpone reporting any remaining gain as explained under Postponement of Gain, later. State taxes online for free Actual reimbursement same as expected. State taxes online for free   If you receive exactly the reimbursement you expected to receive, you do not have to include any of the reimbursement in your income and you cannot deduct any additional loss. State taxes online for free Example. State taxes online for free In December 2013, you had a collision while driving your personal car. State taxes online for free Repairs to the car cost $950. State taxes online for free You had $100 deductible collision insurance. State taxes online for free Your insurance company agreed to reimburse you for the rest of the damage. State taxes online for free Because you expected a reimbursement from the insurance company, you did not have a casualty loss deduction in 2013. State taxes online for free Due to the $100 rule, you cannot deduct the $100 you paid as the deductible. State taxes online for free When you receive the $850 from the insurance company in 2014, do not report it as income. State taxes online for free Deduction Limits After you have figured your casualty or theft loss, you must figure how much of the loss you can deduct. State taxes online for free The deduction for casualty and theft losses of employee property and personal-use property is limited. State taxes online for free A loss on employee property is subject to the 2% rule, discussed next. State taxes online for free With certain exceptions, a loss on property you own for your personal use is subject to the $100 and 10% rules, discussed later. State taxes online for free The 2%, $100, and 10% rules are also summarized in Table 2 . State taxes online for free Losses on business property (other than employee property) and income-producing property are not subject to these rules. State taxes online for free However, if your casualty or theft loss involved a home you used for business or rented out, your deductible loss may be limited. State taxes online for free See the Instructions for Form 4684, Section B. State taxes online for free If the casualty or theft loss involved property used in a passive activity, see Form 8582, Passive Activity Loss Limitations, and its instructions. State taxes online for free 2% Rule The casualty and theft loss deduction for employee property, when added to your job expenses and most other miscellaneous itemized deductions on Schedule A (Form 1040) or Form 1040NR, Schedule A, must be reduced by 2% of your adjusted gross income. State taxes online for free Employee property is property used in performing services as an employee. State taxes online for free $100 Rule After you have figured your casualty or theft loss on personal-use property, as discussed earlier, you must reduce that loss by $100. State taxes online for free This reduction applies to each total casualty or theft loss. State taxes online for free It does not matter how many pieces of property are involved in an event. State taxes online for free Only a single $100 reduction applies. State taxes online for free Example. State taxes online for free You have $750 deductible collision insurance on your car. State taxes online for free The car is damaged in a collision. State taxes online for free The insurance company pays you for the damage minus the $750 deductible. State taxes online for free The amount of the casualty loss is based solely on the deductible. State taxes online for free The casualty loss is $650 ($750 − $100) because the first $100 of a casualty loss on personal-use property is not deductible. State taxes online for free Single event. State taxes online for free   Generally, events closely related in origin cause a single casualty. State taxes online for free It is a single casualty when the damage is from two or more closely related causes, such as wind and flood damage caused by the same storm. State taxes online for free A single casualty may also damage two or more pieces of property, such as a hailstorm that damages both your home and your car parked in your driveway. State taxes online for free Example 1. State taxes online for free A thunderstorm destroyed your pleasure boat. State taxes online for free You also lost some boating equipment in the storm. State taxes online for free Your loss was $5,000 on the boat and $1,200 on the equipment. State taxes online for free Your insurance company reimbursed you $4,500 for the damage to your boat. State taxes online for free You had no insurance coverage on the equipment. State taxes online for free Your casualty loss is from a single event and the $100 rule applies once. State taxes online for free Figure your loss before applying the 10% rule (discussed later) as follows. State taxes online for free     Boat Equipment 1. State taxes online for free Loss $5,000 $1,200 2. State taxes online for free Subtract insurance 4,500 -0- 3. State taxes online for free Loss after reimbursement $ 500 $1,200 4. State taxes online for free Total loss $1,700 5. State taxes online for free Subtract $100 100 6. State taxes online for free Loss before 10% rule $1,600 Example 2. State taxes online for free Thieves broke into your home in January and stole a ring and a fur coat. State taxes online for free You had a loss of $200 on the ring and $700 on the coat. State taxes online for free This is a single theft. State taxes online for free The $100 rule applies to the total $900 loss. State taxes online for free Example 3. State taxes online for free In September, hurricane winds blew the roof off your home. State taxes online for free Flood waters caused by the hurricane further damaged your home and destroyed your furniture and personal car. State taxes online for free This is considered a single casualty. State taxes online for free The $100 rule is applied to your total loss from the flood waters and the wind. State taxes online for free More than one loss. State taxes online for free   If you have more than one casualty or theft loss during your tax year, you must reduce each loss by $100. State taxes online for free Example. State taxes online for free Your family car was damaged in an accident in January. State taxes online for free Your loss after the insurance reimbursement was $75. State taxes online for free In February, your car was damaged in another accident. State taxes online for free This time your loss after the insurance reimbursement was $90. State taxes online for free Apply the $100 rule to each separate casualty loss. State taxes online for free Since neither accident resulted in a loss of over $100, you are not entitled to any deduction for these accidents. State taxes online for free More than one person. State taxes online for free   If two or more individuals (other than a husband and wife filing a joint return) have losses from the same casualty or theft, the $100 rule applies separately to each individual. State taxes online for free Example. State taxes online for free A fire damaged your house and also damaged the personal property of your house guest. State taxes online for free You must reduce your loss by $100. State taxes online for free Your house guest must reduce his or her loss by $100. State taxes online for free Married taxpayers. State taxes online for free   If you and your spouse file a joint return, you are treated as one individual in applying the $100 rule. State taxes online for free It does not matter whether you own the property jointly or separately. State taxes online for free   If you and your spouse have a casualty or theft loss and you file separate returns, each of you must reduce your loss by $100. State taxes online for free This is true even if you own the property jointly. State taxes online for free If one spouse owns the property, only that spouse can figure a loss deduction on a separate return. State taxes online for free   If the casualty or theft loss is on property you own as tenants by the entirety, each of you can figure your deduction on only one-half of the loss on separate returns. State taxes online for free Neither of you can figure your deduction on the entire loss on a separate return. State taxes online for free Each of you must reduce the loss by $100. State taxes online for free More than one owner. State taxes online for free   If two or more individuals (other than a husband and wife filing a joint return) have a loss on property jointly owned, the $100 rule applies separately to each. State taxes online for free For example, if two sisters live together in a home they own jointly and they have a casualty loss on the home, the $100 rule applies separately to each sister. State taxes online for free 10% Rule You must reduce the total of all your casualty or theft losses on personal-use property by 10% of your adjusted gross income. State taxes online for free Apply this rule after you reduce each loss by $100. State taxes online for free For more information, see the Form 4684 instructions. State taxes online for free If you have both gains and losses from casualties or thefts, see Gains and losses , later in this discussion. State taxes online for free Example. State taxes online for free In June, you discovered that your house had been burglarized. State taxes online for free Your loss after insurance reimbursement was $2,000. State taxes online for free Your adjusted gross income for the year you discovered the theft is $29,500. State taxes online for free Figure your theft loss as follows. State taxes online for free 1. State taxes online for free Loss after insurance $2,000 2. State taxes online for free Subtract $100 100 3. State taxes online for free Loss after $100 rule $1,900 4. State taxes online for free Subtract 10% of $29,500 AGI $2,950 5. State taxes online for free Theft loss deduction $-0- You do not have a theft loss deduction because your loss ($1,900) is less than 10% of your adjusted gross income ($2,950). State taxes online for free More than one loss. State taxes online for free   If you have more than one casualty or theft loss during your tax year, reduce each loss by any reimbursement and by $100. State taxes online for free Then you must reduce the total of all your losses by 10% of your adjusted gross income. State taxes online for free Example. State taxes online for free In March, you had a car accident that totally destroyed your car. State taxes online for free You did not have collision insurance on your car, so you did not receive any insurance reimbursement. State taxes online for free Your loss on the car was $1,800. State taxes online for free In November, a fire damaged your basement and totally destroyed the furniture, washer, dryer, and other items you had stored there. State taxes online for free Your loss on the basement items after reimbursement was $2,100. State taxes online for free Your adjusted gross income for the year that the accident and fire occurred is $25,000. State taxes online for free You figure your casualty loss deduction as follows. State taxes online for free     Car Basement 1. State taxes online for free Loss $1,800 $2,100 2. State taxes online for free Subtract $100 per incident 100 100 3. State taxes online for free Loss after $100 rule $1,700 $2,000 4. State taxes online for free Total loss $3,700 5. State taxes online for free Subtract 10% of $25,000 AGI 2,500 6. State taxes online for free Casualty loss deduction $1,200 Married taxpayers. State taxes online for free   If you and your spouse file a joint return, you are treated as one individual in applying the 10% rule. State taxes online for free It does not matter if you own the property jointly or separately. State taxes online for free   If you file separate returns, the 10% rule applies to each return on which a loss is claimed. State taxes online for free More than one owner. State taxes online for free   If two or more individuals (other than husband and wife filing a joint return) have a loss on property that is owned jointly, the 10% rule applies separately to each. State taxes online for free Gains and losses. State taxes online for free   If you have casualty or theft gains as well as losses to personal-use property, you must compare your total gains to your total losses. State taxes online for free Do this after you have reduced each loss by any reimbursements and by $100 but before you have reduced the losses by 10% of your adjusted gross income. State taxes online for free Casualty or theft gains do not include gains you choose to postpone. State taxes online for free See Postponement of Gain, later. State taxes online for free Losses more than gains. State taxes online for free   If your losses are more than your recognized gains, subtract your gains from your losses and reduce the result by 10% of your adjusted gross income. State taxes online for free The rest, if any, is your deductible loss from personal-use property. State taxes online for free Example. State taxes online for free Your theft loss after reducing it by reimbursements and by $100 is $2,700. State taxes online for free Your casualty gain is $700. State taxes online for free Your loss is more than your gain, so you must reduce your $2,000 net loss ($2,700 − $700) by 10% of your adjusted gross income. State taxes online for free Gains more than losses. State taxes online for free   If your recognized gains are more than your losses, subtract your losses from your gains. State taxes online for free The difference is treated as a capital gain and must be reported on Schedule D (Form 1040). State taxes online for free The 10% rule does not apply to your gains. State taxes online for free Example. State taxes online for free Your theft loss is $600 after reducing it by reimbursements and by $100. State taxes online for free Your casualty gain is $1,600. State taxes online for free Because your gain is more than your loss, you must report the $1,000 net gain ($1,600 − $600) on Schedule D (Form 1040). State taxes online for free More information. State taxes online for free   For information on how to figure recognized gains, see Figuring a Gain , later. State taxes online for free Figuring the Deduction Generally, you must figure your loss separately for each item stolen, damaged, or destroyed. State taxes online for free However, a special rule applies to real property you own for personal use. State taxes online for free Real property. State taxes online for free   In figuring a loss to real estate you own for personal use, all improvements (such as buildings and ornamental trees and the land containing the improvements) are considered together. State taxes online for free Example 1. State taxes online for free In June, a fire destroyed your lakeside cottage, which cost $144,800 (including $14,500 for the land) several years ago. State taxes online for free (Your land was not damaged. State taxes online for free ) This was your only casualty or theft loss for the year. State taxes online for free The FMV of the property immediately before the fire was $180,000 ($145,000 for the cottage and $35,000 for the land). State taxes online for free The FMV immediately after the fire was $35,000 (value of the land). State taxes online for free You collected $130,000 from the insurance company. State taxes online for free Your adjusted gross income for the year the fire occurred is $80,000. State taxes online for free Your deduction for the casualty loss is $6,700, figured in the following manner. State taxes online for free 1. State taxes online for free Adjusted basis of the entire property (cost in this example) $144,800 2. State taxes online for free FMV of entire property  before fire $180,000 3. State taxes online for free FMV of entire property after fire 35,000 4. State taxes online for free Decrease in FMV of entire property (line 2 − line 3) $145,000 5. State taxes online for free Loss (smaller of line 1 or line 4) $144,800 6. State taxes online for free Subtract insurance 130,000 7. State taxes online for free Loss after reimbursement $14,800 8. State taxes online for free Subtract $100 100 9. State taxes online for free Loss after $100 rule $14,700 10. State taxes online for free Subtract 10% of $80,000 AGI 8,000 11. State taxes online for free Casualty loss deduction $ 6,700 Example 2. State taxes online for free You bought your home a few years ago. State taxes online for free You paid $150,000 ($10,000 for the land and $140,000 for the house). State taxes online for free You also spent an additional $2,000 for landscaping. State taxes online for free This year a fire destroyed your home. State taxes online for free The fire also damaged the shrubbery and trees in your yard. State taxes online for free The fire was your only casualty or theft loss this year. State taxes online for free Competent appraisers valued the property as a whole at $175,000 before the fire, but only $50,000 after the fire. State taxes online for free Shortly after the fire, the insurance company paid you $95,000 for the loss. State taxes online for free Your adjusted gross income for this year is $70,000. State taxes online for free You figure your casualty loss deduction as follows. State taxes online for free 1. State taxes online for free Adjusted basis of the entire property (cost of land, building, and landscaping) $152,000 2. State taxes online for free FMV of entire property  before fire $175,000 3. State taxes online for free FMV of entire property after fire 50,000 4. State taxes online for free Decrease in FMV of entire property (line 2 − line 3) $125,000 5. State taxes online for free Loss (smaller of line 1 or line 4) $125,000 6. State taxes online for free Subtract insurance 95,000 7. State taxes online for free Loss after reimbursement $30,000 8. State taxes online for free Subtract $100 100 9. State taxes online for free Loss after $100 rule $29,900 10. State taxes online for free Subtract 10% of $70,000 AGI 7,000 11. State taxes online for free Casualty loss deduction $ 22,900 Personal property. State taxes online for free   Personal property is any property that is not real property. State taxes online for free If your personal property is stolen or is damaged or destroyed by a casualty, you must figure your loss separately for each item of property. State taxes online for free Then combine these separate losses to figure the total loss. State taxes online for free Reduce the total loss by $100 and 10% of your adjusted gross income to figure the loss deduction. State taxes online for free Example 1. State taxes online for free In August, a storm destroyed your pleasure boat, which cost $18,500. State taxes online for free This was your only casualty or theft loss for the year. State taxes online for free Its FMV immediately before the storm was $17,000. State taxes online for free You had no insurance, but were able to salvage the motor of the boat and sell it for $200. State taxes online for free Your adjusted gross income for the year the casualty occurred is $70,000. State taxes online for free Although the motor was sold separately, it is part of the boat and not a separate item of property. State taxes online for free You figure your casualty loss deduction as follows. State taxes online for free 1. State taxes online for free Adjusted basis (cost in this example) $18,500 2. State taxes online for free FMV before storm $17,000 3. State taxes online for free FMV after storm 200 4. State taxes online for free Decrease in FMV  (line 2 − line 3) $16,800 5. State taxes online for free Loss (smaller of line 1 or line 4) $16,800 6. State taxes online for free Subtract insurance -0- 7. State taxes online for free Loss after reimbursement $16,800 8. State taxes online for free Subtract $100 100 9. State taxes online for free Loss after $100 rule $16,700 10. State taxes online for free Subtract 10% of $70,000 AGI 7,000 11. State taxes online for free Casualty loss deduction $ 9,700 Example 2. State taxes online for free In June, you were involved in an auto accident that totally destroyed your personal car and your antique pocket watch. State taxes online for free You had bought the car for $30,000. State taxes online for free The FMV of the car just before the accident was $17,500. State taxes online for free Its FMV just after the accident was $180 (scrap value). State taxes online for free Your insurance company reimbursed you $16,000. State taxes online for free Your watch was not insured. State taxes online for free You had purchased it for $250. State taxes online for free Its FMV just before the accident was $500. State taxes online for free Your adjusted gross income for the year the accident occurred is $97,000. State taxes online for free Your casualty loss deduction is zero, figured as follows. State taxes online for free     Car Watch 1. State taxes online for free Adjusted basis (cost) $30,000 $250 2. State taxes online for free FMV before accident $17,500 $500 3. State taxes online for free FMV after accident 180 -0- 4. State taxes online for free Decrease in FMV (line 2 − line 3) $17,320 $500 5. State taxes online for free Loss (smaller of line 1 or line 4) $17,320 $250 6. State taxes online for free Subtract insurance 16,000 -0- 7. State taxes online for free Loss after reimbursement $1,320 $250 8. State taxes online for free Total loss $1,570 9. State taxes online for free Subtract $100 100 10. State taxes online for free Loss after $100 rule $1,470 11. State taxes online for free Subtract 10% of $97,000 AGI 9,700 12. State taxes online for free Casualty loss deduction $ -0- Both real and personal properties. State taxes online for free   When a casualty involves both real and personal properties, you must figure the loss separately for each type of property. State taxes online for free However, you apply a single $100 reduction to the total loss. State taxes online for free Then, you apply the 10% rule to figure the casualty loss deduction. State taxes online for free Example. State taxes online for free In July, a hurricane damaged your home, which cost you $164,000 including land. State taxes online for free The FMV of the property (both building and land) immediately before the storm was $170,000 and its FMV immediately after the storm was $100,000. State taxes online for free Your household furnishings were also damaged. State taxes online for free You separately figured the loss on each damaged household item and arrived at a total loss of $600. State taxes online for free You collected $50,000 from the insurance company for the damage to your home, but your household furnishings were not insured. State taxes online for free Your adjusted gross income for the year the hurricane occurred is $65,000. State taxes online for free You figure your casualty loss deduction from the hurricane in the following manner. State taxes online for free 1. State taxes online for free Adjusted basis of real property (cost in this example) $164,000 2. State taxes online for free FMV of real property before hurricane $170,000 3. State taxes online for free FMV of real property after hurricane 100,000 4. State taxes online for free Decrease in FMV of real property (line 2 − line 3) $70,000 5. State taxes online for free Loss on real property (smaller of line 1 or line 4) $70,000 6. State taxes online for free Subtract insurance 50,000 7. State taxes online for free Loss on real property after reimbursement $20,000 8. State taxes online for free Loss on furnishings $600 9. State taxes online for free Subtract insurance -0- 10. State taxes online for free Loss on furnishings after reimbursement $600 11. State taxes online for free Total loss (line 7 plus line 10) $20,600 12. State taxes online for free Subtract $100 100 13. State taxes online for free Loss after $100 rule $20,500 14. State taxes online for free Subtract 10% of $65,000 AGI 6,500 15. State taxes online for free Casualty loss deduction $14,000 Property used partly for business and partly for personal purposes. State taxes online for free   When property is used partly for personal purposes and partly for business or income-producing purposes, the casualty or theft loss deduction must be figured separately for the personal-use portion and for the business or income-producing portion. State taxes online for free You must figure each loss separately because the losses attributed to these two uses are figured in two different ways. State taxes online for free When figuring each loss, allocate the total cost or basis, the FMV before and after the casualty or theft loss, and the insurance or other reimbursement between the business and personal use of the property. State taxes online for free The $100 rule and the 10% rule apply only to the casualty or theft loss on the personal-use portion of the property. State taxes online for free Example. State taxes online for free You own a building that you constructed on leased land. State taxes online for free You use half of the building for your business and you live in the other half. State taxes online for free The cost of the building was $400,000. State taxes online for free You made no further improvements or additions to it. State taxes online for free A flood in March damaged the entire building. State taxes online for free The FMV of the building was $380,000 immediately before the flood and $320,000 afterwards. State taxes online for free Your insurance company reimbursed you $40,000 for the flood damage. State taxes online for free Depreciation on the business part of the building before the flood totaled $24,000. State taxes online for free Your adjusted gross income for the year the flood occurred is $125,000. State taxes online for free You have a deductible business casualty loss of $10,000. State taxes online for free You do not have a deductible personal casualty loss because of the 10% rule. State taxes online for free You figure your loss as follows. State taxes online for free     Business   Personal     Part   Part 1. State taxes online for free Cost (total $400,000) $200,000   $200,000 2. State taxes online for free Subtract depreciation 24,000   -0- 3. State taxes online for free Adjusted basis $176,000   $200,000 4. State taxes online for free FMV before flood (total $380,000) $190,000   $190,000 5. State taxes online for free FMV after flood (total $320,000) 160,000   160,000 6. State taxes online for free Decrease in FMV  (line 4 − line 5) $30,000   $30,000 7. State taxes online for free Loss (smaller of line 3 or line 6) $30,000   $30,000 8. State taxes online for free Subtract insurance 20,000   20,000 9. State taxes online for free Loss after reimbursement $10,000   $10,000 10. State taxes online for free Subtract $100 on personal-use property -0-   100 11. State taxes online for free Loss after $100 rule $10,000   $9,900 12. State taxes online for free Subtract 10% of $125,000 AGI on personal-use property -0-   12,500 13. State taxes online for free Deductible business loss $10,000     14. State taxes online for free Deductible personal loss $-0- Figuring a Gain If you receive an insurance payment or other reimbursement that is more than your adjusted basis in the destroyed, damaged, or stolen property, you have a gain from the casualty or theft. State taxes online for free Your gain is figured as follows. State taxes online for free The amount you receive (discussed next), minus Your adjusted basis in the property at the time of the casualty or theft. State taxes online for free See Adjusted Basis , earlier, for information on adjusted basis. State taxes online for free Even if the decrease in FMV of your property is smaller than the adjusted basis of your property, use your adjusted basis to figure the gain. State taxes online for free Amount you receive. State taxes online for free   The amount you receive includes any money plus the value of any property you receive minus any expenses you have in obtaining reimbursement. State taxes online for free It also includes any reimbursement used to pay off a mortgage or other lien on the damaged, destroyed, or stolen property. State taxes online for free Example. State taxes online for free A hurricane destroyed your personal residence and the insurance company awarded you $145,000. State taxes online for free You received $140,000 in cash. State taxes online for free The remaining $5,000 was paid directly to the holder of a mortgage on the property. State taxes online for free The amount you received includes the $5,000 reimbursement paid on the mortgage. State taxes online for free Main home destroyed. State taxes online for free   If you have a gain because your main home was destroyed, you generally can exclude the gain from your income as if you had sold or exchanged your home. State taxes online for free You may be able to exclude up to $250,000 of the gain (up to $500,000 if married filing jointly). State taxes online for free To exclude a gain, you generally must have owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date it was destroyed. State taxes online for free For information on this exclusion, see Publication 523. State taxes online for free If your gain is more than the amount you can exclude, but you buy replacement property, you may be able to postpone reporting the excess gain. State taxes online for free See Postponement of Gain , later. State taxes online for free Reporting a gain. State taxes online for free   You generally must report your gain as income in the year you receive the reimbursement. State taxes online for free However, you do not have to report your gain if you meet certain requirements and choose to postpone reporting the gain according to the rules explained under Postponement of Gain, next. State taxes online for free   For information on how to report a gain, see How To Report Gains and Losses , later. State taxes online for free    If you have a casualty or theft gain on personal-use property that you choose to postpone reporting (as explained next) and you also have another casualty or theft loss on personal-use property, do not consider the gain you are postponing when figuring your casualty or theft loss deduction. State taxes online for free See 10% Rule under Deduction Limits, earlier. State taxes online for free Postponement of Gain Do not report a gain if you receive reimbursement in the form of property similar or related in service or use to the destroyed or stolen property. State taxes online for free Your basis in the new property is generally the same as your adjusted basis in the property it replaces. State taxes online for free You must ordinarily report the gain on your stolen or destroyed property if you receive money or unlike property as reimbursement. State taxes online for free However, you can choose to postpone reporting the gain if you purchase property that is similar or related in service or use to the stolen or destroyed property within a specified replacement period, discussed later. State taxes online for free You also can choose to postpone reporting the gain if you purchase a controlling interest (at least 80%) in a corporation owning property that is similar or related in service or use to the property. State taxes online for free See Controlling interest in a corporation , later. State taxes online for free If you have a gain on damaged property, you can postpone reporting the gain if you spend the reimbursement to restore the property. State taxes online for free To postpone reporting all the gain, the cost of your replacement property must be at least as much as the reimbursement you receive. State taxes online for free If the cost of the replacement property is less than the reimbursement, you must include the gain in your income up to the amount of the unspent reimbursement. State taxes online for free Example. State taxes online for free In 1970, you bought an oceanfront cottage for your personal use at a cost of $18,000. State taxes online for free You made no further improvements or additions to it. State taxes online for free When a storm destroyed the cottage this January, the cottage was worth $250,000. State taxes online for free You received $146,000 from the insurance company in March. State taxes online for free You had a gain of $128,000 ($146,000 − $18,000). State taxes online for free You spent $144,000 to rebuild the cottage. State taxes online for free Since this is less than the insurance proceeds received, you must include $2,000 ($146,000 − $144,000) in your income. State taxes online for free Buying replacement property from a related person. State taxes online for free   You cannot postpone reporting a gain from a casualty or theft if you buy the replacement property from a related person (discussed later). State taxes online for free This rule applies to the following taxpayers. State taxes online for free C corporations. State taxes online for free Partnerships in which more than 50% of the capital or profits interests is owned by C corporations. State taxes online for free All others (including individuals, partnerships — other than those in (2) — and S corporations) if the total realized gain for the tax year on all destroyed or stolen properties on which there are realized gains is more than $100,000. State taxes online for free For casualties and thefts described in (3) above, gains cannot be offset by any losses when determining whether the total gain is more than $100,000. State taxes online for free If the property is owned by a partnership, the $100,000 limit applies to the partnership and each partner. State taxes online for free If the property is owned by an S corporation, the $100,000 limit applies to the S corporation and each shareholder. State taxes online for free Exception. State taxes online for free   This rule does not apply if the related person acquired the property from an unrelated person within the period of time allowed for replacing the destroyed or stolen property. State taxes online for free Related persons. State taxes online for free   Under this rule, related persons include, for example, a parent and child, a brother and sister, a corporation and an individual who owns more than 50% of its outstanding stock, and two partnerships in which the same C corporations own more than 50% of the capital or profits interests. State taxes online for free For more information on related persons, see Nondeductible Loss under Sales and Exchanges Between Related Persons in chapter 2 of Publication 544. State taxes online for free Death of a taxpayer. State taxes online for free   If a taxpayer dies after having a gain but before buying replacement property, the gain must be reported for the year in which the decedent realized the gain. State taxes online for free The executor of the estate or the person succeeding to the funds from the casualty or theft cannot postpone reporting the gain by buying replacement property. State taxes online for free Replacement Property You must buy replacement property for the specific purpose of replacing your destroyed or stolen property. State taxes online for free Property you acquire as a gift or inheritance does not qualify. State taxes online for free You do not have to use the same funds you receive as
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Estimated Taxes

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Estimated tax is the method used to pay tax on income that is not subject to withholding. This includes income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes and awards. You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension, or other income is not enough.

Estimated tax is used to pay income tax and self-employment tax, as well as other taxes and amounts reported on your tax return. If you do not pay enough through withholding or estimated tax payments, you may be charged a penalty. If you do not pay enough by the due date of each payment period you may be charged a penalty even if you are due a refund when you file your tax return.

How to Pay Estimated Tax

If you are filing as a sole proprietor, partner, S corporation shareholder and/or a self-employed individual, you should use Form 1040-ES, Estimated Tax for Individuals (PDF), to figure and pay your estimated tax. For additional information on filing for a sole proprietor, partners, and/or S corporation shareholder, refer to Publication 505, Tax Withholding and Estimated Tax.

If you are filing as a corporation you should use Form 1120-W, Estimated Tax for Corporations (PDF), to figure the estimated tax. You must deposit the payments. For additional information on filing for a corporation, refer to Publication 542, Corporations.

Who Must Pay Estimated Tax

If you are filing as a sole proprietor, partner, S corporation shareholder, and/or a self-employed individual, you generally have to make estimated tax payments if you expect to owe tax of $1,000 or more when you file your return.

If you are filing as a corporation you generally have to make estimated tax payments for your corporation if you expect it to owe tax of $500 or more when you file its return.

If you had a tax liability for the prior year, you may have to pay estimated tax for the current year. See the worksheet in Form 1040-ES (PDF) for more details on who must pay estimated tax.

Who Does Not Have To Pay Estimated Tax

If you receive salaries and wages, you can avoid having to pay estimated tax by asking your employer to withhold more tax from your earnings. To do this, file a new Form W-4 (PDF) with your employer. There is a special line on Form W-4 for you to enter the additional amount you want your employer to withhold.

You do not have to pay estimated tax for the current year if you meet all three of the following conditions.

  • You had no tax liability for the prior year
  • You were a U.S. citizen or resident for the whole year
  • Your prior tax year covered a 12 month period

You had no tax liability for the prior year if your total tax was zero or you did not have to file an income tax return. For additional information on how to figure your estimated tax, refer to Publication 505, Tax Withholding and Estimated Tax.

Estimated tax requirements are different for farmers and fishermen. Publication 505, Tax Withholding and Estimated Tax, provides more information about these special estimated tax rules.

How To Figure Estimated Tax

To figure your estimated tax, you must figure your expected adjusted gross income, taxable income, taxes, deductions, and credits for the year.

When figuring your estimated tax for the current year, it may be helpful to use your income, deductions, and credits for prior year as a starting point. Use your prior year's federal tax return as a guide. You can use the worksheet in Form 1040-ES (PDF) to figure your estimated tax. You will need to estimate the amount of income you expect to earn for the year. If you estimated your earnings too high, simply complete another Form 1040-ES worksheet to refigure your estimated tax for the next quarter. If you estimated your earnings too low, again complete another Form 1040-ES worksheet to recalculate your estimated tax for the next quarter. You want to estimate your income as accurately as you can to avoid penalties.

You must make adjustments both for changes in your own situation and for recent changes in the tax law.

When To Pay Estimated Taxes

For estimated tax purposes, the year is divided into four payment periods. Each period has a specific payment due date. If you do not pay enough tax by the due date of each of the payment periods, you may be charged a penalty even if you are due a refund when you file your income tax return, see underpayment of tax below for more information.

Using the EFTPS system is the easiest way to pay your federal taxes for individuals as well as businesses. Make ALL of your federal tax payments including federal tax deposits (FTDs), installment agreement and estimated tax payments using Electronic Federal Tax Payment System (EFTPS). If it is easier to pay your estimated taxes weekly, bi-weekly, monthly, etc. you can, as long as you have paid enough in by the end of the quarter. Using EFTPS, you can access a history of your payments, so you know how much and when you made your estimated tax payments.

Underpayment of Estimated Tax

If you did not pay enough tax throughout the year, either through withholding or by making estimated tax payments, you may have to pay a penalty for underpayment of estimated tax. Generally, most taxpayers will avoid this penalty if they owe less than $1,000 in tax after subtracting their withholdings and credits, or if they paid at least 90% of the tax for the current year, or 100% of the tax shown on the return for the prior year, whichever is smaller. There are special rules for farmers and fishermen. Please refer to Publication 505 Tax Withholding and Estimated Tax, for additional information.

However, if your income is received unevenly during the year, you may be able to avoid or lower the penalty by annualizing your income and making unequal payments. Use Form 2210 (PDF), Underpayment of Estimated Tax by Individuals, Estates, and Trusts, to see if you owe a penalty for underpaying your estimated tax. Please refer to the Form 1040 Instructions (PDF) or the Form 1040A Instructions for where to report the estimated tax penalty on your return.

The penalty may also be waived if:

  1. The failure to make estimated payments was caused by a casualty, disaster, or other unusual circumstance and it would be inequitable to impose the penalty, or
  2. You retired (after reaching age 62) or became disabled during the tax year for which estimated payments were required to be made or in the preceding tax year, and the underpayment was due to reasonable cause and not willful neglect.

You should also use Form 2210 (PDF) to request a waiver of the penalty for the reasons shown above.

Page Last Reviewed or Updated: 31-Oct-2013

The State Taxes Online For Free

State taxes online for free Publication 971 - Main Content Table of Contents How To Request ReliefException for agreements relating to TEFRA partnership proceedings. State taxes online for free The IRS Must Contact Your Spouse or Former Spouse Tax Court Review of Request Community Property LawsRelief for Married Persons Who Did Not File Joint Returns Innocent Spouse ReliefUnderstated Tax Erroneous Items Actual Knowledge or Reason To Know Indications of Unfairness for Innocent Spouse Relief Separation of Liability ReliefLimitations on Relief Equitable ReliefConditions for Getting Equitable Relief Factors for Determining Whether To Grant Equitable Relief RefundsProof Required Refunds Under Equitable Relief Limit on Amount of Refund Filled-in Form 8857 Flowcharts How To Request Relief File Form 8857 to ask the IRS for the types of relief discussed in this publication. State taxes online for free If you are requesting relief for more than three tax years, you must file an additional Form 8857. State taxes online for free The IRS will review your Form 8857 and let you know if you qualify. State taxes online for free A completed Form 8857 is shown later. State taxes online for free When to file Form 8857. State taxes online for free   You should file Form 8857 as soon as you become aware of a tax liability for which you believe only your spouse or former spouse should be held responsible. State taxes online for free The following are some of the ways you may become aware of such a liability. State taxes online for free The IRS is examining your tax return and proposing to increase your tax liability. State taxes online for free The IRS sends you a notice. State taxes online for free   You must file Form 8857 no later than two years after the date on which the IRS first attempted to collect the tax from you that occurs after July 22, 1998. State taxes online for free (But see the exceptions below for different filing deadlines that apply. State taxes online for free ) For this reason, do not delay filing because you do not have all the documentation. State taxes online for free   Collection activities that may start the 2-year period are: The IRS offset your income tax refund against an amount you owed on a joint return for another year and the IRS informed you about your right to file Form 8857. State taxes online for free The filing of a claim by the IRS in a court proceeding in which you were a party or the filing of a claim in a proceeding that involves your property. State taxes online for free This includes the filing of a proof of claim in a bankruptcy proceeding. State taxes online for free The filing of a suit by the United States against you to collect the joint liability. State taxes online for free The issuance of a section 6330 notice, which notifies you of the IRS' intent to levy and your right to a collection due process (CDP) hearing. State taxes online for free The collection-related notices include, but are not limited to, Letter 11 and Letter 1058. State taxes online for free Exception for equitable relief. State taxes online for free   On July 25, 2011, the IRS issued Notice 2011-70 (available at www. State taxes online for free irs. State taxes online for free gov/irb/2011-32_IRB/ar11. State taxes online for free html) expanding the amount of time to request equitable relief. State taxes online for free The amount of time to request equitable relief depends on whether you are seeking relief from a balance due, seeking a credit or refund, or both: Balance Due – Generally, you must file your request within the time period the IRS has to collect the tax. State taxes online for free Generally, the IRS has 10 years from the date the tax liability was assessed to collect the tax. State taxes online for free In certain cases, the 10-year period is suspended. State taxes online for free The amount of time the suspension is in effect will extend the time the IRS has to collect the tax. State taxes online for free See Pub. State taxes online for free 594, The IRS Collection Process, for details. State taxes online for free Credit or Refund – Generally, you must file your request within 3 years after the date the original return was filed or within 2 years after the date the tax was paid, whichever is later. State taxes online for free But you may have more time to file if you live in a federally declared disaster area or you are physically or mentally unable to manage your financial affairs. State taxes online for free See Pub. State taxes online for free 556, Examination of Returns, Appeal Rights, and Claims for Refund, for details. State taxes online for free Both a Balance Due and a Credit or Refund – If you are seeking a refund of amounts you paid and relief from a balance due over and above what you have paid, the time period for credit or refund will apply to any payments you have made, and the time period for collection of a balance due amount will apply to any unpaid liability. State taxes online for free Exception for relief based on community property laws. State taxes online for free   If you are requesting relief based on community property laws, a different filing deadline applies. State taxes online for free See Relief from liability arising from community property law discussed later under Community Property Laws . State taxes online for free Form 8857 filed by or on behalf of a decedent. State taxes online for free   An executor (including any other duly appointed representative) may pursue a Form 8857 filed during the decedent's lifetime. State taxes online for free An executor (including any other duly appointed representative) may also file Form 8857 as long as the decedent satisfied the eligibility requirements while alive. State taxes online for free For purposes of separation of liability relief (discussed later), the decedent's marital status is determined on the earlier of the date relief was requested or the date of death. State taxes online for free Situations in which you are not entitled to relief. State taxes online for free   You are not entitled to innocent spouse relief for any tax year to which the following situations apply. State taxes online for free In a final decision dated after July 22, 1998, a court considered whether to grant you relief from joint liability and decided not to do so. State taxes online for free In a final decision dated after July 22, 1998, a court did not consider whether to grant you relief from joint liability, but you meaningfully participated in the proceeding and could have asked for relief. State taxes online for free You entered into an offer in compromise with the IRS. State taxes online for free You entered into a closing agreement with the IRS that disposed of the same liability for which you want to seek relief. State taxes online for free Exception for agreements relating to TEFRA partnership proceedings. State taxes online for free   You may be entitled to relief, discussed in (4) earlier, if you entered into a closing agreement for both partnership items and nonpartnership items, while you were a party to a pending TEFRA partnership proceeding. State taxes online for free (TEFRA is an acronym that refers to the “Tax Equity and Fiscal Responsibility Act of 1982” that prescribed the tax treatment of partnership items. State taxes online for free ) You are not entitled to relief for the nonpartnership items, but you will be entitled to relief for the partnership items (if you otherwise qualify). State taxes online for free Transferee liability not affected by innocent spouse relief provisions. State taxes online for free   The innocent spouse relief provisions do not affect tax liabilities that arise under federal or state transferee liability or property laws. State taxes online for free Therefore, even if you are relieved of the tax liability under the innocent spouse relief provisions, you may remain liable for the unpaid tax, interest, and penalties to the extent provided by these laws. State taxes online for free Example. State taxes online for free Herb and Wanda timely filed their 2008 joint income tax return on April 15, 2009. State taxes online for free Herb died in March 2010, and the executor of Herb's will transferred all of the estate's assets to Wanda. State taxes online for free In August 2010, the IRS assessed a deficiency for the 2008 return. State taxes online for free The items causing the deficiency belong to Herb. State taxes online for free Wanda is relieved of the deficiency under the innocent spouse relief provisions, and Herb's estate remains solely liable for it. State taxes online for free However, the IRS may collect the deficiency from Wanda to the extent permitted under federal or state transferee liability or property laws. State taxes online for free The IRS Must Contact Your Spouse or Former Spouse By law, the IRS must contact your spouse or former spouse. State taxes online for free There are no exceptions, even for victims of spousal abuse or domestic violence. State taxes online for free We will inform your spouse or former spouse that you filed Form 8857 and will allow him or her to participate in the process. State taxes online for free If you are requesting relief from joint and several liability on a joint return, the IRS must also inform him or her of its preliminary and final determinations regarding your request for relief. State taxes online for free However, to protect your privacy, the IRS will not disclose your personal information (for example, your current name, address, phone number(s), information about your employer, your income or assets) or any other information that does not relate to making a determination about your request for relief from liability. State taxes online for free If you petition the Tax Court (explained below), your spouse or former spouse may see your personal information. State taxes online for free Tax Court Review of Request After you file Form 8857, you may be able to petition (ask) the United States Tax Court to review your request for relief in the following two situations. State taxes online for free The IRS sends you a final determination letter regarding your request for relief. State taxes online for free You do not receive a final determination letter from the IRS within six months from the date you filed Form 8857. State taxes online for free If you seek equitable relief for an underpaid tax, you will be able to get a Tax Court review of your request only if the tax arose or remained unpaid on or after December 20, 2006. State taxes online for free The United States Tax Court is an independent judicial body and is not part of the IRS. State taxes online for free You must file a petition with the United States Tax Court in order for it to review your request for relief. State taxes online for free You must file the petition no later than the 90th day after the date the IRS mails its final determination notice to you. State taxes online for free If you do not file a petition, or you file it late, the Tax Court cannot review your request for relief. State taxes online for free You can get a copy of the rules for filing a petition by writing to the Tax Court at the following address:    United States Tax Court 400 Second Street, NW Washington, DC 20217 Or you can visit the Tax Court's website at www. State taxes online for free ustaxcourt. State taxes online for free gov Community Property Laws You must generally follow community property laws when filing a tax return if you are married and live in a community property state. State taxes online for free Community property states are Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. State taxes online for free Generally, community property laws require you to allocate community income and expenses equally between both spouses. State taxes online for free However, community property laws are not taken into account in determining whether an item belongs to you or to your spouse (or former spouse) for purposes of requesting any relief from liability. State taxes online for free Relief for Married Persons Who Did Not File Joint Returns Married persons who live in community property states, but who did not file joint returns, have two ways to get relief. State taxes online for free Relief From Liability Arising From Community Property Law You are not responsible for the tax relating to an item of community income if all the following conditions exist. State taxes online for free You did not file a joint return for the tax year. State taxes online for free You did not include the item of community income in gross income. State taxes online for free The item of community income you did not include is one of the following: Wages, salaries, and other compensation your spouse (or former spouse) received for services he or she performed as an employee. State taxes online for free Income your spouse (or former spouse) derived from a trade or business he or she operated as a sole proprietor. State taxes online for free Your spouse's (or former spouse's) distributive share of partnership income. State taxes online for free Income from your spouse's (or former spouse's) separate property (other than income described in (a), (b), or (c)). State taxes online for free Use the appropriate community property law to determine what is separate property. State taxes online for free Any other income that belongs to your spouse (or former spouse) under community property law. State taxes online for free You establish that you did not know of, and had no reason to know of, that community income. State taxes online for free See  Actual Knowledge or Reason To Know , below. State taxes online for free Under all facts and circumstances, it would not be fair to include the item of community income in your gross income. State taxes online for free See Indications of unfairness for liability arising from community property law, later. State taxes online for free Actual knowledge or reason to know. State taxes online for free   You knew or had reason to know of an item of community income if: You actually knew of the item of community income, or A reasonable person in similar circumstances would have known of the item of community income. State taxes online for free Amount of community income unknown. State taxes online for free   If you are aware of the source of the item of community income or the income-producing activity, but are unaware of the specific amount, you are considered to know or have reason to know of the item of community income. State taxes online for free Not knowing the specific amount is not a basis for relief. State taxes online for free Reason to know. State taxes online for free   The IRS will consider all facts and circumstances in determining whether you had reason to know of an item of community income. State taxes online for free The facts and circumstances include: The nature of the item of community income and the amount of the item relative to other income items. State taxes online for free The financial situation of you and your spouse (or former spouse). State taxes online for free Your educational background and business experience. State taxes online for free Whether the item of community income represented a departure from a recurring pattern reflected in prior years' returns (for example, omitted income from an investment regularly reported on prior years' returns). State taxes online for free Indications of unfairness for liability arising from community property law. State taxes online for free   The IRS will consider all of the facts and circumstances of the case in order to determine whether it is unfair to hold you responsible for the understated tax due to the item of community income. State taxes online for free   The following are examples of factors the IRS will consider. State taxes online for free Whether you received a benefit, either directly or indirectly, from the omitted item of community income (defined below). State taxes online for free Whether your spouse (or former spouse) deserted you. State taxes online for free Whether you and your spouse have been divorced or separated. State taxes online for free  For other factors see Factors for Determining Whether To Grant Equitable Relief later. State taxes online for free Benefit from omitted item of community income. State taxes online for free   A benefit includes normal support, but does not include de minimis (small) amounts. State taxes online for free Evidence of a direct or indirect benefit may consist of transfers of property or rights to property, including transfers received several years after the filing of the return. State taxes online for free   For example, if you receive property, including life insurance proceeds, from your spouse (or former spouse) and the property is traceable to omitted items of community income attributable to your spouse (or former spouse), you are considered to have benefitted from those omitted items of community income. State taxes online for free Equitable Relief If you do not qualify for the relief described above and are now liable for an underpaid or understated tax you believe should be paid only by your spouse (or former spouse), you may request equitable relief (discussed later). State taxes online for free How and When To Request Relief You request relief by filing Form 8857, as discussed earlier. State taxes online for free Fill in Form 8857 according to the instructions. State taxes online for free For relief from liability arising from community property law, you must file Form 8857 no later than 6 months before the expiration of the period of limitations on assessment (including extensions) against your spouse for the tax year for which you are requesting relief. State taxes online for free However, if the IRS begins an examination of your return during that 6-month period, the latest time for requesting relief is 30 days after the date the IRS' initial contact letter to you. State taxes online for free The period of limitation on assessment is the amount of time, generally three years, that the IRS has from the date you filed the return to assess taxes that you owe. State taxes online for free Innocent Spouse Relief By requesting innocent spouse relief, you can be relieved of responsibility for paying tax, interest, and penalties if your spouse (or former spouse) improperly reported items or omitted items on your tax return. State taxes online for free Generally, the tax, interest, and penalties that qualify for relief can only be collected from your spouse (or former spouse). State taxes online for free However, you are jointly and individually responsible for any tax, interest, and penalties that do not qualify for relief. State taxes online for free The IRS can collect these amounts from either you or your spouse (or former spouse). State taxes online for free You must meet all of the following conditions to qualify for innocent spouse relief. State taxes online for free You filed a joint return. State taxes online for free There is an understated tax on the return that is due to erroneous items (defined later) of your spouse (or former spouse). State taxes online for free You can show that when you signed the joint return you did not know, and had no reason to know, that the understated tax existed (or the extent to which the understated tax existed). State taxes online for free See Actual Knowledge or Reason To Know, later. State taxes online for free Taking into account all the facts and circumstances, it would be unfair to hold you liable for the understated tax. State taxes online for free See Indications of Unfairness for Innocent Spouse Relief , later. State taxes online for free Innocent spouse relief will not be granted if the IRS proves that you and your spouse (or former spouse) transferred property to one another as part of a fraudulent scheme. State taxes online for free A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, former spouse, or business partner. State taxes online for free Understated Tax You have an understated tax if the IRS determined that your total tax should be more than the amount that was actually shown on your return. State taxes online for free Erroneous Items Erroneous items are either of the following. State taxes online for free Unreported income. State taxes online for free This is any gross income item received by your spouse (or former spouse) that is not reported. State taxes online for free Incorrect deduction, credit, or basis. State taxes online for free This is any improper deduction, credit, or property basis claimed by your spouse (or former spouse). State taxes online for free The following are examples of erroneous items. State taxes online for free The expense for which the deduction is taken was never paid or incurred. State taxes online for free For example, your spouse, a cash-basis taxpayer, deducted $10,000 of advertising expenses on Schedule C of your joint Form 1040, but never paid for any advertising. State taxes online for free The expense does not qualify as a deductible expense. State taxes online for free For example, your spouse claimed a business fee deduction of $10,000 that was for the payment of state fines. State taxes online for free Fines are not deductible. State taxes online for free No factual argument can be made to support the deductibility of the expense. State taxes online for free For example, your spouse claimed $4,000 for security costs related to a home office, which were actually veterinary and food costs for your family's two dogs. State taxes online for free Actual Knowledge or Reason To Know You knew or had reason to know of an understated tax if: You actually knew of the understated tax, or A reasonable person in similar circumstances would have known of the understated tax. State taxes online for free Actual knowledge. State taxes online for free   If you actually knew about an erroneous item that belongs to your spouse (or former spouse), the relief discussed here does not apply to any part of the understated tax due to that item. State taxes online for free You and your spouse (or former spouse) remain jointly liable for that part of the understated tax. State taxes online for free For information about the criteria for determining whether you actually knew about an erroneous item, see Actual Knowledge later under Separation of Liability Relief. State taxes online for free Reason to know. State taxes online for free   If you had reason to know about an erroneous item that belongs to your spouse (or former spouse), the relief discussed here does not apply to any part of the understated tax due to that item. State taxes online for free You and your spouse (or former spouse) remain jointly liable for that part of the understated tax. State taxes online for free   The IRS will consider all facts and circumstances in determining whether you had reason to know of an understated tax due to an erroneous item. State taxes online for free The facts and circumstances include: The nature of the erroneous item and the amount of the erroneous item relative to other items. State taxes online for free The financial situation of you and your spouse (or former spouse). State taxes online for free Your educational background and business experience. State taxes online for free The extent of your participation in the activity that resulted in the erroneous item. State taxes online for free Whether you failed to ask, at or before the time the return was signed, about items on the return or omitted from the return that a reasonable person would question. State taxes online for free Whether the erroneous item represented a departure from a recurring pattern reflected in prior years' returns (for example, omitted income from an investment regularly reported on prior years' returns). State taxes online for free Partial relief when a portion of erroneous item is unknown. State taxes online for free   You may qualify for partial relief if, at the time you filed your return, you had no knowledge or reason to know of only a portion of an erroneous item. State taxes online for free You will be relieved of the understated tax due to that portion of the item if all other requirements are met for that portion. State taxes online for free Example. State taxes online for free At the time you signed your joint return, you knew that your spouse did not report $5,000 of gambling winnings. State taxes online for free The IRS examined your tax return several months after you filed it and determined that your spouse's unreported gambling winnings were actually $25,000. State taxes online for free You established that you did not know about, and had no reason to know about, the additional $20,000 because of the way your spouse handled gambling winnings. State taxes online for free The understated tax due to the $20,000 will qualify for innocent spouse relief if you meet the other requirements. State taxes online for free The understated tax due to the $5,000 of gambling winnings you knew about will not qualify for relief. State taxes online for free Indications of Unfairness for Innocent Spouse Relief The IRS will consider all of the facts and circumstances of the case in order to determine whether it is unfair to hold you responsible for the understated tax. State taxes online for free The following are examples of factors the IRS will consider. State taxes online for free Whether you received a significant benefit (defined below), either directly or indirectly, from the understated tax. State taxes online for free Whether your spouse (or former spouse) deserted you. State taxes online for free Whether you and your spouse have been divorced or separated. State taxes online for free Whether you received a benefit on the return from the understated tax. State taxes online for free For other factors, see Factors for Determining Whether To Grant Equitable Relief later under Equitable Relief. State taxes online for free Significant benefit. State taxes online for free   A significant benefit is any benefit in excess of normal support. State taxes online for free Normal support depends on your particular circumstances. State taxes online for free Evidence of a direct or indirect benefit may consist of transfers of property or rights to property, including transfers that may be received several years after the year of the understated tax. State taxes online for free Example. State taxes online for free You receive money from your spouse that is beyond normal support. State taxes online for free The money can be traced to your spouse's lottery winnings that were not reported on your joint return. State taxes online for free You will be considered to have received a significant benefit from that income. State taxes online for free This is true even if your spouse gives you the money several years after he or she received it. State taxes online for free Separation of Liability Relief Under this type of relief, the understated tax (plus interest and penalties) on your joint return is allocated between you and your spouse (or former spouse). State taxes online for free The understated tax allocated to you is generally the amount you are responsible for. State taxes online for free This type of relief is available only for unpaid liabilities resulting from the understated tax. State taxes online for free Refunds are not allowed. State taxes online for free To request separation of liability relief, you must have filed a joint return and meet either of the following requirements at the time you file Form 8857. State taxes online for free You are no longer married to, or are legally separated from, the spouse with whom you filed the joint return for which you are requesting relief. State taxes online for free (Under this rule, you are no longer married if you are widowed. State taxes online for free ) You were not a member of the same household (explained below) as the spouse with whom you filed the joint return at any time during the 12-month per- iod ending on the date you file Form 8857. State taxes online for free Members of the same household. State taxes online for free   You and your spouse are not members of the same household if you are living apart and are estranged. State taxes online for free However, you and your spouse are considered members of the same household if any of the following conditions are met. State taxes online for free You and your spouse reside in the same dwelling. State taxes online for free You and your spouse reside in separate dwellings but are not estranged, and one of you is temporarily absent from the other's household as explained in (3) below. State taxes online for free Either spouse is temporarily absent from the household and it is reasonable to assume that the absent spouse will return to the household, and the household or a substantially equivalent household is maintained in anticipation of the absent spouse's return. State taxes online for free Examples of temporary absences include absence due to imprisonment, illness, business, vacation, military service, or education. State taxes online for free Burden of proof. State taxes online for free   You must be able to prove that you meet all of the requirements for separation of liability relief (except actual knowledge) and that you did not transfer property to avoid tax (discussed later). State taxes online for free You must also establish the basis for allocating the erroneous items. State taxes online for free Limitations on Relief Even if you meet the requirements discussed previously, separation of liability relief will not be granted in the following situations. State taxes online for free The IRS proves that you and your spouse (or former spouse) transferred assets to one another as part of a fraudulent scheme. State taxes online for free A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, former spouse, or business partner. State taxes online for free The IRS proves that at the time you signed your joint return, you had actual knowledge (explained below) of any erroneous items giving rise to the deficiency that were allocable to your spouse (or former spouse). State taxes online for free For the definition of erroneous items, see Erroneous Items earlier under Innocent Spouse Relief. State taxes online for free Your spouse (or former spouse) transferred property to you to avoid tax or the payment of tax. State taxes online for free See Transfers of Property To Avoid Tax , later. State taxes online for free Actual Knowledge The relief discussed here does not apply to any part of the understated tax due to your spouse's (or former spouse's) erroneous items of which you had actual knowledge. State taxes online for free You and your spouse (or former spouse) remain jointly and severally liable for this part of the understated tax. State taxes online for free If you had actual knowledge of only a portion of an erroneous item, the IRS will not grant relief for that portion of the item. State taxes online for free You had actual knowledge of an erroneous item if: You knew that an item of unreported income was received. State taxes online for free (This rule applies whether or not there was a receipt of cash. State taxes online for free ) You knew of the facts that made an incorrect deduction or credit unallowable. State taxes online for free For a false or inflated deduction, you knew that the expense was not incurred, or not incurred to the extent shown on the tax return. State taxes online for free Knowledge of the source of an erroneous item is not sufficient to establish actual knowledge. State taxes online for free Also, your actual knowledge may not be inferred when you merely had a reason to know of the erroneous item. State taxes online for free Similarly, the IRS does not have to establish that you knew of the source of an erroneous item in order to establish that you had actual knowledge of the item itself. State taxes online for free Your actual knowledge of the proper tax treatment of an erroneous item is not relevant for purposes of demonstrating that you had actual knowledge of that item. State taxes online for free Neither is your actual knowledge of how the erroneous item was treated on the tax return. State taxes online for free For example, if you knew that your spouse received dividend income, relief is not available for that income even if you did not know it was taxable. State taxes online for free Example. State taxes online for free Bill and Karen Green filed a joint return showing Karen's wages of $50,000 and Bill's self-employment income of $10,000. State taxes online for free The IRS audited their return and found that Bill did not report $20,000 of self-employment income. State taxes online for free The additional income resulted in a $6,000 understated tax, plus interest and penalties. State taxes online for free After obtaining a legal separation from Bill, Karen filed Form 8857 to request separation of liability relief. State taxes online for free The IRS proved that Karen actually knew about the $20,000 of additional income at the time she signed the joint return. State taxes online for free Bill is liable for all of the understated tax, interest, and penalties because all of it was due to his unreported income. State taxes online for free Karen is also liable for the understated tax, interest, and penalties due to the $20,000 of unreported income because she actually knew of the item. State taxes online for free The IRS can collect the entire $6,000 plus interest and penalties from either Karen or Bill because they are jointly and individually liable for it. State taxes online for free Factors supporting actual knowledge. State taxes online for free   The IRS may rely on all facts and circumstances in determining whether you actually knew of an erroneous item at the time you signed the return. State taxes online for free The following are examples of factors the IRS may use. State taxes online for free Whether you made a deliberate effort to avoid learning about the item in order to be shielded from liability. State taxes online for free Whether you and your spouse (or former spouse) jointly owned the property that resulted in the erroneous item. State taxes online for free Exception for spousal abuse or domestic violence. State taxes online for free   Even if you had actual knowledge, you may still qualify for relief if you establish that: You were the victim of spousal abuse or domestic violence before signing the return, and Because of that abuse, you did not challenge the treatment of any items on the return because you were afraid your spouse (or former spouse) would retaliate against you. State taxes online for free   If you establish that you signed your joint return under duress (threat of harm or other form of coercion), then it is not a joint return, and you are not liable for any tax shown on that return or any tax deficiency for that return. State taxes online for free However, you may be required to file a separate return for that tax year. State taxes online for free For more information about duress, see the instructions for Form 8857. State taxes online for free Transfers of Property To Avoid Tax If your spouse (or former spouse) transfers property (or the right to property) to you for the main purpose of avoiding tax or payment of tax, the tax liability allocated to you will be increased by the fair market value of the property on the date of the transfer. State taxes online for free The increase may not be more than the entire amount of the liability. State taxes online for free A transfer will be presumed to have as its main purpose the avoidance of tax or payment of tax if the transfer is made after the date that is 1 year before the date on which the IRS sent its first letter of proposed deficiency. State taxes online for free This presumption will not apply if: The transfer was made under a divorce decree, separate maintenance agreement, or a written instrument incident to such an agreement, or You establish that the transfer did not have as its main purpose the avoidance of tax or payment of tax. State taxes online for free If the presumption does not apply, but the IRS can establish that the purpose of the transfer was the avoidance of tax or payment of tax, the tax liability allocated to you will be increased as explained above. State taxes online for free Equitable Relief If you do not qualify for innocent spouse relief, separation of liability relief, or relief from liability arising from community property law, you may still be relieved of responsibility for tax, interest, and penalties through equitable relief. State taxes online for free Unlike innocent spouse relief or separation of liability relief, you can get equitable relief from an understated tax (defined earlier under Innocent Spouse Relief ) or an underpaid tax. State taxes online for free An underpaid tax is an amount of tax you properly reported on your return but you have not paid. State taxes online for free For example, your joint 2009 return shows that you and your spouse owed $5,000. State taxes online for free You paid $2,000 with the return. State taxes online for free You have an underpaid tax of $3,000. State taxes online for free Conditions for Getting Equitable Relief You may qualify for equitable relief if you meet all of the following conditions. State taxes online for free You are not eligible for innocent spouse relief, separation of liability relief, or relief from liability arising from community property law. State taxes online for free You have an understated tax or an underpaid tax. State taxes online for free You did not pay the tax. State taxes online for free However, see Refunds , later, for situations in which you are entitled to a refund of payments you made. State taxes online for free You establish that, taking into account all the facts and circumstances, it would be unfair to hold you liable for the understated or underpaid tax. State taxes online for free See Factors for Determining Whether To Grant Equitable Relief, later. State taxes online for free You and your spouse (or former spouse) did not transfer assets to one another as a part of a fraudulent scheme. State taxes online for free A fraudulent scheme includes a scheme to defraud the IRS or another third party, such as a creditor, former spouse, or business partner. State taxes online for free Your spouse (or former spouse) did not transfer property to you for the main purpose of avoiding tax or the payment of tax. State taxes online for free See Transfers of Property To Avoid Tax, earlier, under Separation of Liability Relief. State taxes online for free You did not file or fail to file your return with the intent to commit fraud. State taxes online for free The income tax liability from which you seek relief must be attributable to an item of the spouse (or former spouse) with whom you filed the joint return, unless one of the following exceptions applies: The item is attributable or partially attributable to you solely due to the operation of community property law. State taxes online for free If you meet this exception, that item will be considered attributable to your spouse (or former spouse) for purposes of equitable relief. State taxes online for free If the item is titled in your name, the item is presumed to be attributable to you. State taxes online for free However, you can rebut this presumption based on the facts and circumstances. State taxes online for free You did not know, and had no reason to know, that funds intended for the payment of tax were misappropriated by your spouse (or former spouse) for his or her benefit. State taxes online for free If you meet this exception, the IRS will consider granting equitable relief although the underpaid tax may be attributable in part or in full to your item, and only to the extent the funds intended for payment were taken by your spouse (or former spouse). State taxes online for free You establish that you were the victim of spousal abuse or domestic violence before signing the return, and that, as a result of the prior abuse, you did not challenge the treatment of any items on the return for fear of your spouse's (or former spouse's) retaliation. State taxes online for free If you meet this exception, relief will be considered although the understated tax or underpaid tax may be attributable in part or in full to your item. State taxes online for free Factors for Determining Whether To Grant Equitable Relief The IRS will consider all of the facts and circumstances in order to determine whether it is unfair to hold you responsible for the understated or underpaid tax. State taxes online for free The following are examples of factors that the IRS will consider to determine whether to grant equitable relief. State taxes online for free The IRS will consider all factors and weigh them appropriately. State taxes online for free Relevant Factors The following are examples of factors that may be relevant to whether the IRS will grant equitable relief. State taxes online for free Whether you are separated (whether legally or not) or divorced from your spouse. State taxes online for free A temporary absence, such as an absence due to imprisonment, illness, business, vacation, military service, or education, is not considered separation for this purpose. State taxes online for free A temporary absence is one where it is reasonable to assume that the absent spouse will return to the household, and the household or a substantially equivalent household is maintained in anticipation of the absent spouse's return. State taxes online for free Whether you would suffer a significant economic hardship if relief is not granted. State taxes online for free (In other words, you would not be able to pay your reasonable basic living expenses. State taxes online for free ) Whether you have a legal obligation under a divorce decree or agreement to pay the tax. State taxes online for free This factor will not weigh in favor of relief if you knew or had reason to know, when entering into the divorce decree or agreement, that your former spouse would not pay the income tax liability. State taxes online for free Whether you received a significant benefit (beyond normal support) from the underpaid tax or item causing the understated tax. State taxes online for free (For a definition of significant benefit, see Indications of Unfairness for Innocent Spouse Relief earlier. State taxes online for free ) Whether you have made a good faith effort to comply with federal income tax laws for the tax year for which you are requesting relief or the following years. State taxes online for free Whether you knew or had reason to know about the items causing the understated tax or that the tax would not be paid, as explained next. State taxes online for free Knowledge or reason to know. State taxes online for free   In the case of an underpaid tax, the IRS will consider whether you did not know and had no reason to know that your spouse (or former spouse) would not pay the income tax liability. State taxes online for free   In the case of an income tax liability that arose from an understated tax, the IRS will consider whether you did not know and had no reason to know of the item causing the understated tax. State taxes online for free Reason to know of the item giving rise to the understated tax will not be weighed more heavily than other factors. State taxes online for free Actual knowledge of the item giving rise to the understated tax, however, is a strong factor weighing against relief. State taxes online for free This strong factor may be overcome if the factors in favor of equitable relief are particularly compelling. State taxes online for free Reason to know. State taxes online for free   In determining whether you had reason to know, the IRS will consider your level of education, any deceit or evasiveness of your spouse (or former spouse), your degree of involvement in the activity generating the income tax liability, your involvement in business and household financial matters, your business or financial expertise, and any lavish or unusual expenditures compared with past spending levels. State taxes online for free Example. State taxes online for free You and your spouse filed a joint 2009 return. State taxes online for free That return showed you owed $10,000. State taxes online for free You had $5,000 of your own money and you took out a loan to pay the other $5,000. State taxes online for free You gave 2 checks for $5,000 each to your spouse to pay the $10,000 liability. State taxes online for free Without telling you, your spouse took the $5,000 loan and spent it on himself. State taxes online for free You and your spouse were divorced in 2010. State taxes online for free In addition, you had no knowledge or reason to know at the time you signed the return that the tax would not be paid. State taxes online for free These facts indicate to the IRS that it may be unfair to hold you liable for the $5,000 underpaid tax. State taxes online for free The IRS will consider these facts, together with all of the other facts and circumstances, to determine whether to grant you equitable relief from the $5,000 underpaid tax. State taxes online for free Factors Weighing in Favor of Equitable Relief The following are examples of factors that will weigh in favor of equitable relief, but will not weigh against equitable relief. State taxes online for free Whether your spouse (or former spouse) abused you. State taxes online for free Whether you were in poor mental or physical health on the date you signed the return or at the time you requested relief. State taxes online for free Refunds If you are granted relief, refunds are: Permitted under innocent spouse relief as explained later under Limit on Amount of Refund . State taxes online for free Not permitted under separation of liability relief. State taxes online for free Permitted in limited circumstances under equitable relief, as explained under Refunds Under Equitable Relief. State taxes online for free Proof Required The IRS will only refund payments you made with your own money. State taxes online for free However, you must provide proof that you made the payments with your own money. State taxes online for free Examples of proof are a copy of your bank statement or a canceled check. State taxes online for free No proof is required if your individual refund was used by the IRS to pay a tax you owed on a joint tax return for another year. State taxes online for free Refunds Under Equitable Relief In the following situations, you are eligible to receive a refund of certain payments you made. State taxes online for free Underpaid tax. State taxes online for free   If you are granted relief for an underpaid tax, you are eligible for a refund of separate payments that you made after July 22, 1998. State taxes online for free However, you are not eligible for refunds of payments made with the joint return, joint payments, or payments that your spouse (or former spouse) made. State taxes online for free For example, withholding tax and estimated tax payments cannot be refunded because they are considered made with the joint return. State taxes online for free   The amount of the refund is subject to the limit discussed later under Limit on Amount of Refund. State taxes online for free Understated tax. State taxes online for free   If you are granted relief for an understated tax, you are eligible for a refund of certain payments made under an installment agreement that you entered into with the IRS, if you have not defaulted on the installment agreement. State taxes online for free You are not in default if the IRS did not issue you a notice of default or take any action to end the installment agreement. State taxes online for free Only installment payments made after the date you filed Form 8857 are eligible for a refund. State taxes online for free   The amount of the refund is subject to the limit discussed next. State taxes online for free Limit on Amount of Refund The amount of your refund is limited. State taxes online for free Read the following chart to find out the limit. State taxes online for free IF you file Form 8857. State taxes online for free . State taxes online for free . State taxes online for free THEN the refund cannot be more than. State taxes online for free . State taxes online for free . State taxes online for free Within 3 years after filing your return The part of the tax paid within 3 years (plus any extension of time for filing your return) before you filed Form 8857. State taxes online for free After the 3-year period, but within 2 years from the time you paid the tax The tax you paid within 2 years immediately before you filed Form 8857. State taxes online for free Filled-in Form 8857 This part explains how Janie Boulder fills out Form 8857 to request innocent spouse relief. State taxes online for free Janie and Joe Boulder filed a joint tax return for 2007. State taxes online for free They claimed one dependency exemption for their son Michael. State taxes online for free Their return was adjusted by the IRS because Joe did not report a $5,000 award he won that year. State taxes online for free Janie did not know about the award when the return was filed. State taxes online for free They agreed to the adjustment but could not pay the additional amount due of $815 ($650 tax + $165 penalty and interest). State taxes online for free Janie and Joe were divorced on May 13, 2009. State taxes online for free In February 2010, Janie filed her 2009 federal income tax return as head of household. State taxes online for free She expected a refund of $1,203. State taxes online for free In May 2010, she received a notice informing her that the IRS had offset her refund against the $815 owed on her joint 2007 income tax return and that she had a right to file Form 8857. State taxes online for free Janie applies the conditions listed earlier under Innocent Spouse Relief to see if she qualifies for relief. State taxes online for free Janie meets the first and second conditions because the joint tax return they filed has an understated tax due to Joe's erroneous item. State taxes online for free Janie believes she meets the third condition. State taxes online for free She did not know about the award and had no reason to know about it because of the secretive way Joe conducted his financial affairs. State taxes online for free Janie believes she meets the fourth condition. State taxes online for free She believes it would be unfair to be held liable for the tax because she did not benefit from the award. State taxes online for free Joe spent it on personal items for his use only. State taxes online for free Because Janie believes she qualifies for innocent spouse relief, she first completes Part I of Form 8857 to determine if she should file the form. State taxes online for free In Part I, she makes all entries under the Tax Year 1 column because she is requesting relief for only one year. State taxes online for free Part I Line 1. State taxes online for free   She enters “2007” on line 1 because this is the tax year for which she is requesting relief. State taxes online for free Line 2. State taxes online for free   She checks the box because she wants a refund. State taxes online for free Note. State taxes online for free Because the IRS used her individual refund to pay the tax owed on the joint tax return, she does not need to provide proof of payment. State taxes online for free Line 3. State taxes online for free   She checks the “No” box because the IRS did not use her share of a joint refund to pay Joe's past-due debts. State taxes online for free Line 4. State taxes online for free   She checks the “Yes” box because she filed a joint tax return for tax year 2007. State taxes online for free Line 5. State taxes online for free   She skips this line because she checked the “Yes” box on line 4. State taxes online for free Part II Line 6. State taxes online for free   She enters her name, address, social security number, county, and best daytime phone number. State taxes online for free Part III Line 7. State taxes online for free   She enters Joe's name, address, social security number, and best daytime phone number. State taxes online for free Line 8. State taxes online for free   She checks the “divorced since” box and enters the date she was divorced as “05/13/2009. State taxes online for free ” She attaches a copy of her entire divorce decree (not Illustrated) to the form. State taxes online for free Line 9. State taxes online for free   She checks the box for “High school diploma, equivalent, or less,” because she had completed high school when her 2007 joint tax return was filed. State taxes online for free Line 10. State taxes online for free   She checks the “No” box because she was not a victim of spousal abuse or domestic violence. State taxes online for free Line 11. State taxes online for free   She checks the “No” box because neither she nor Joe incurred any large expenses during the year for which she wants relief. State taxes online for free Line 12. State taxes online for free   She checks the “Yes” box because she signed the 2007 joint tax return. State taxes online for free Line 13. State taxes online for free   She checks the “No” box because she did not have a mental or physical condition when the return was filed and does not have one now. State taxes online for free Part IV Line 14. State taxes online for free   Because she was not involved in preparing the return, she checks the box, “You were not involved in preparing the returns. State taxes online for free ” Line 15. State taxes online for free   She checks the box, “You did not know anything was incorrect or missing” because she did not know that Joe had received a $5,000 award. State taxes online for free She explains this in the space provided. State taxes online for free Line 16. State taxes online for free   She checks the box, “You knew that person had income” because she knew Joe had income from wages. State taxes online for free She also lists Joe's income. State taxes online for free Under “Type of Income” she enters “wages. State taxes online for free ” Under “Who paid it to that person,” she enters the name of Joe's employer, “Allied. State taxes online for free ” Under “Tax Year 1” she enters the amount of Joe's wages, “$40,000. State taxes online for free ” Because she is only requesting relief for one tax year, she leaves the entry spaces for “Tax Year 2” and “Tax Year 3” blank. State taxes online for free Line 17. State taxes online for free   She checks the “No” box because she did not know any amount was owed to the IRS when the 2007 return was signed. State taxes online for free Line 18. State taxes online for free   She checks the “No” box because, when the return was signed, she was not having financial problems. State taxes online for free Line 19. State taxes online for free   She checks the box, “You were not involved in handling money for the household” because Joe handled all the money for the household. State taxes online for free She provides additional information in the space provided. State taxes online for free Line 20. State taxes online for free   She checks the “No” box because Joe has never transferred money or property to her. State taxes online for free Part V Line 21. State taxes online for free   She enters the number “1” on both the line for “Adults” and the line for “Children” because her current household consists of herself and her son. State taxes online for free Line 22. State taxes online for free   She enters her average monthly income for her entire household. State taxes online for free Line 23. State taxes online for free   She lists her assets, which are $500 for the fair market value of a car, $450 in her checking account, and $100 in her savings account. State taxes online for free Signing and mailing Form 8857. State taxes online for free    Janie signs and dates the form. State taxes online for free She attaches the copy of her divorce decree (not illustrated) required by line 8. State taxes online for free Finally, she sends the form to the IRS address or fax number shown in the instructions for Form 8857. State taxes online for free This image is too large to be displayed in the current screen. State taxes online for free Please click the link to view the image. State taxes online for free Boulder's filled-in Form 8857 page 1 This image is too large to be displayed in the current screen. State taxes online for free Please click the link to view the image. State taxes online for free Boulder's filled-in Form 8857 page 2 This image is too large to be displayed in the current screen. State taxes online for free Please click the link to view the image. State taxes online for free Boulder's filled-in Form 8857 page 3 This image is too large to be displayed in the current screen. State taxes online for free Please click the link to view the image. State taxes online for free Boulder's filled-in Form 8857 page 4 Flowcharts The following flowcharts provide a quick way for determining whether you may qualify for relief. State taxes online for free But do not rely on these flowcharts alone. State taxes online for free Also read the earlier discussions. State taxes online for free Figure A. State taxes online for free Do You Qualify for Innocent Spouse Relief? Please click here for the text description of the image. State taxes online for free "Do You Qualify for Innocent Spouse Relief?" Figure B. State taxes online for free Do You Qualify for Separation of Liability Relief? Please click here for the text description of the image. State taxes online for free "Do You Qualify for Separation of Liability Relief?" Figure C. State taxes online for free Do You Qualify for Equitable Relief? This image is too large to be displayed in the current screen. State taxes online for free Please click the link to view the image. 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