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Tax Act Free 2012

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Tax Act Free 2012

Tax act free 2012 32. Tax act free 2012   Child and Dependent Care Credit Table of Contents Reminders Introduction Useful Items - You may want to see: Tests To Claim the CreditQualifying Person Test Earned Income Test Work-Related Expense Test Joint Return Test Provider Identification Test How To Figure the CreditFiguring Total Work-Related Expenses Earned Income Limit Dollar Limit Amount of Credit How To Claim the CreditTax credit not refundable. Tax act free 2012 Employment Taxes for Household Employers Reminders Taxpayer identification number needed for each qualifying person. Tax act free 2012  You must include on line 2 of Form 2441 the name and taxpayer identification number (generally the social security number) of each qualifying person. Tax act free 2012 See Taxpayer identification number under Qualifying Person Test, later. Tax act free 2012 You may have to pay employment taxes. Tax act free 2012  If you pay someone to come to your home and care for your dependent or spouse, you may be a household employer who has to pay employment taxes. Tax act free 2012 Usually, you are not a household employer if the person who cares for your dependent or spouse does so at his or her home or place of business. Tax act free 2012 See Employment Taxes for Household Employers , later. Tax act free 2012 Introduction This chapter discusses the credit for child and dependent care expenses and covers the following topics. Tax act free 2012 Tests you must meet to claim the credit. Tax act free 2012 How to figure the credit. Tax act free 2012 How to claim the credit. Tax act free 2012 Employment taxes you may have to pay as a household employer. Tax act free 2012 You may be able to claim the credit if you pay someone to care for your dependent who is under age 13 or for your spouse or dependent who is not able to care for himself or herself. Tax act free 2012 The credit can be up to 35% of your expenses. Tax act free 2012 To qualify, you must pay these expenses so you can work or look for work. Tax act free 2012 This credit should not be confused with the child tax credit discussed in chapter 34. Tax act free 2012 Dependent care benefits. Tax act free 2012   If you received any dependent care benefits from your employer during the year, you may be able to exclude from your income all or part of them. Tax act free 2012 You must complete Form 2441, Part III, before you can figure the amount of your credit. Tax act free 2012 See Dependent Care Benefits under How To Figure the Credit, later. Tax act free 2012 Useful Items - You may want to see: Publication 501 Exemptions, Standard Deduction, and Filing Information 503 Child and Dependent Care Expenses 926 Household Employer's Tax Guide Form (and Instructions) 2441 Child and Dependent Care Expenses Schedule H (Form 1040) Household Employment Taxes W-7 Application for IRS Individual Taxpayer Identification Number W-10 Dependent Care Provider's Identification and Certification Tests To Claim the Credit To be able to claim the credit for child and dependent care expenses, you must file Form 1040 or Form 1040A, not Form 1040EZ, and meet all the following tests. Tax act free 2012 The care must be for one or more qualifying persons who are identified on Form 2441. Tax act free 2012 (See Qualifying Person Test . Tax act free 2012 ) You (and your spouse if filing jointly) must have earned income during the year. Tax act free 2012 (However, see Rule for student-spouse or spouse not able to care for self under Earned Income Test, later. Tax act free 2012 ) You must pay child and dependent care expenses so you (and your spouse if filing jointly) can work or look for work. Tax act free 2012 (See Work-Related Expense Test , later. Tax act free 2012 ) You must make payments for child and dependent care to someone you (and your spouse) cannot claim as a dependent. Tax act free 2012 If you make payments to your child, he or she cannot be your dependent and must be age 19 or older by the end of the year. Tax act free 2012 You cannot make payments to: Your spouse, or The parent of your qualifying person if your qualifying person is your child and under age 13. Tax act free 2012 (See Payments to Relatives or Dependents under Work-Related Expense Test, later. Tax act free 2012 ) Your filing status may be single, head of household, or qualifying widow(er) with dependent child. Tax act free 2012 If you are married, you must file a joint return, unless an exception applies to you. Tax act free 2012 (See Joint Return Test , later. Tax act free 2012 ) You must identify the care provider on your tax return. Tax act free 2012 (See Provider Identification Test , later. Tax act free 2012 ) If you exclude or deduct dependent care benefits provided by a dependent care benefits plan, the total amount you exclude or deduct must be less than the dollar limit for qualifying expenses (generally, $3,000 if one qualifying person was cared for or $6,000 if two or more qualifying persons were cared for). Tax act free 2012 (If two or more qualifying persons were cared for, the amount you exclude or deduct will always be less than the dollar limit, since the total amount you can exclude or deduct is limited to $5,000. Tax act free 2012 See Reduced Dollar Limit under How To Figure the Credit, later. Tax act free 2012 ) These tests are presented in Figure 32-A and are also explained in detail in this chapter. Tax act free 2012 Figure 32-A. Tax act free 2012 Can You Claim the Credit? Please click here for the text description of the image. Tax act free 2012 Figure 32-A Can You Claim the Credit? Qualifying Person Test Your child and dependent care expenses must be for the care of one or more qualifying persons. Tax act free 2012 A qualifying person is: Your qualifying child who is your dependent and who was under age 13 when the care was provided (but see Child of divorced or separated parents or parents living apart, later), Your spouse who was not physically or mentally able to care for himself or herself and lived with you for more than half the year, or A person who was not physically or mentally able to care for himself or herself, lived with you for more than half the year, and either: Was your dependent, or Would have been your dependent except that: He or she received gross income of $3,900 or more, He or she filed a joint return, or You, or your spouse if filing jointly, could be claimed as a dependent on someone else's 2013 return. Tax act free 2012 Dependent defined. Tax act free 2012   A dependent is a person, other than you or your spouse, for whom you can claim an exemption. Tax act free 2012 To be your dependent, a person must be your qualifying child (or your qualifying relative). Tax act free 2012 Qualifying child. Tax act free 2012   To be your qualifying child, a child must live with you for more than half the year and meet other requirements. Tax act free 2012 More information. Tax act free 2012   For more information about who is a dependent or a qualifying child, see chapter 3. Tax act free 2012 Physically or mentally not able to care for oneself. Tax act free 2012   Persons who cannot dress, clean, or feed themselves because of physical or mental problems are considered not able to care for themselves. Tax act free 2012 Also, persons who must have constant attention to prevent them from injuring themselves or others are considered not able to care for themselves. Tax act free 2012 Person qualifying for part of year. Tax act free 2012   You determine a person's qualifying status each day. Tax act free 2012 For example, if the person for whom you pay child and dependent care expenses no longer qualifies on September 16, count only those expenses through September 15. Tax act free 2012 Also see Yearly limit under Dollar Limit, later. Tax act free 2012 Birth or death of otherwise qualifying person. Tax act free 2012   In determining whether a person is a qualifying person, a person who was born or died in 2013 is treated as having lived with you for more than half of 2013 if your home was the person's home for more than half the time he or she was alive in 2013. Tax act free 2012 Taxpayer identification number. Tax act free 2012   You must include on your return the name and taxpayer identification number (generally the social security number) of the qualifying person(s). Tax act free 2012 If the correct information is not shown, the credit may be reduced or disallowed. Tax act free 2012 Individual taxpayer identification number (ITIN) for aliens. Tax act free 2012   If your qualifying person is a nonresident or resident alien who does not have and cannot get a social security number (SSN), use that person's ITIN. Tax act free 2012 The ITIN is entered wherever an SSN is requested on a tax return. Tax act free 2012 To apply for an ITIN, see Form W-7. Tax act free 2012   An ITIN is for tax use only. Tax act free 2012 It does not entitle the holder to social security benefits or change the holder's employment or immigration status under U. Tax act free 2012 S. Tax act free 2012 law. Tax act free 2012 Adoption taxpayer identification number (ATIN). Tax act free 2012   If your qualifying person is a child who was placed in your home for adoption and for whom you do not have an SSN, you must get an ATIN for the child. Tax act free 2012 File Form W-7A, Application for Taxpayer Identification Number for Pending U. Tax act free 2012 S. Tax act free 2012 Adoptions. Tax act free 2012 Child of divorced or separated parents or parents living apart. Tax act free 2012   Even if you cannot claim your child as a dependent, he or she is treated as your qualifying person if: The child was under age 13 or was not physically or mentally able to care for himself or herself, The child received over half of his or her support during the calendar year from one or both parents who are divorced or legally separated under a decree of divorce or separate maintenance, are separated under a written separation agreement, or lived apart at all times during the last 6 months of the calendar year, The child was in the custody of one or both parents for more than half the year, and You were the child's custodial parent. Tax act free 2012   The custodial parent is the parent with whom the child lived for the greater number of nights in 2013. Tax act free 2012 If the child was with each parent for an equal number of nights, the custodial parent is the parent with the higher adjusted gross income. Tax act free 2012 For details and an exception for a parent who works at night, see Pub. Tax act free 2012 501. Tax act free 2012   The noncustodial parent cannot treat the child as a qualifying person even if that parent is entitled to claim the child as a dependent under the special rules for a child of divorced or separated parents. Tax act free 2012 Earned Income Test To claim the credit, you (and your spouse if filing jointly) must have earned income during the year. Tax act free 2012 Earned income. Tax act free 2012   Earned income includes wages, salaries, tips, other taxable employee compensation, and net earnings from self-employment. Tax act free 2012 A net loss from self-employment reduces earned income. Tax act free 2012 Earned income also includes strike benefits and any disability pay you report as wages. Tax act free 2012   Generally, only taxable compensation is included. Tax act free 2012 However, you can elect to include nontaxable combat pay in earned income. Tax act free 2012 If you are filing a joint return and both you and your spouse received nontaxable combat pay, you can each make your own election. Tax act free 2012 (In other words, if one of you makes the election, the other one can also make it but does not have to. Tax act free 2012 ) You should figure your credit both ways and make the election if it gives you a greater tax benefit. Tax act free 2012 Members of certain religious faiths opposed to social security. Tax act free 2012   Certain income earned by persons who are members of certain religious faiths that are opposed to participation in Social Security Act programs and have an IRS-approved form that exempts certain income from social security and Medicare taxes may not be considered earned income for this purpose. Tax act free 2012 See Earned Income Test in Publication 503. Tax act free 2012 Not earned income. Tax act free 2012   Earned income does not include: Pensions and annuities, Social security and railroad retirement benefits, Workers' compensation, Interest and dividends, Unemployment compensation, Scholarship or fellowship grants, except for those reported on a Form W-2 and paid to you for teaching or other services, Nontaxable workfare payments, Child support payments received by you, Income of nonresident aliens that is not effectively connected with a U. Tax act free 2012 S. Tax act free 2012 trade or business, or Any amount received for work while an inmate in a penal institution. Tax act free 2012 Rule for student-spouse or spouse not able to care for self. Tax act free 2012   Your spouse is treated as having earned income for any month that he or she is: A full-time student, or Physically or mentally not able to care for himself or herself. Tax act free 2012 (Your spouse also must live with you for more than half the year. Tax act free 2012 )   If you are filing a joint return, this rule also applies to you. Tax act free 2012 You can be treated as having earned income for any month you are a full-time student or not able to care for yourself. Tax act free 2012   Figure the earned income of the nonworking spouse described under (1) or (2) above as explained under Earned Income Limit , later. Tax act free 2012   This rule applies to only one spouse for any one month. Tax act free 2012 If, in the same month, both you and your spouse do not work and are either full-time students or not physically or mentally able to care for yourselves, only one of you can be treated as having earned income in that month. Tax act free 2012 Full-time student. Tax act free 2012   You are a full-time student if you are enrolled at a school for the number of hours or classes that the school considers full time. Tax act free 2012 You must have been a full-time student for some part of each of 5 calendar months during the year. Tax act free 2012 (The months need not be consecutive. Tax act free 2012 ) School. Tax act free 2012   The term “school” includes high schools, colleges, universities, and technical, trade, and mechanical schools. Tax act free 2012 A school does not include an on-the-job training course, correspondence school, or school offering courses only through the Internet. Tax act free 2012 Work-Related Expense Test Child and dependent care expenses must be work-related to qualify for the credit. Tax act free 2012 Expenses are considered work-related only if both of the following are true. Tax act free 2012 They allow you (and your spouse if filing jointly) to work or look for work. Tax act free 2012 They are for a qualifying person's care. Tax act free 2012 Working or Looking for Work To be work-related, your expenses must allow you to work or look for work. Tax act free 2012 If you are married, generally both you and your spouse must work or look for work. Tax act free 2012 One spouse is treated as working during any month he or she is a full-time student or is not physically or mentally able to care for himself or herself. Tax act free 2012 Your work can be for others or in your own business or partnership. Tax act free 2012 It can be either full time or part time. Tax act free 2012 Work also includes actively looking for work. Tax act free 2012 However, if you do not find a job and have no earned income for the year, you cannot take this credit. Tax act free 2012 See Earned Income Test , earlier. Tax act free 2012 An expense is not considered work-related merely because you had it while you were working. Tax act free 2012 The purpose of the expense must be to allow you to work. Tax act free 2012 Whether your expenses allow you to work or look for work depends on the facts. Tax act free 2012 Example 1. Tax act free 2012 The cost of a babysitter while you and your spouse go out to eat is not normally a work-related expense. Tax act free 2012 Example 2. Tax act free 2012 You work during the day. Tax act free 2012 Your spouse works at night and sleeps during the day. Tax act free 2012 You pay for care of your 5-year-old child during the hours when you are working and your spouse is sleeping. Tax act free 2012 Your expenses are considered work-related. Tax act free 2012 Volunteer work. Tax act free 2012    For this purpose, you are not considered to be working if you do unpaid volunteer work or volunteer work for a nominal salary. Tax act free 2012 Work for part of year. Tax act free 2012   If you work or actively look for work during only part of the period covered by the expenses, then you must figure your expenses for each day. Tax act free 2012 For example, if you work all year and pay care expenses of $250 a month ($3,000 for the year), all the expenses are work-related. Tax act free 2012 However, if you work or look for work for only 2 months and 15 days during the year and pay expenses of $250 a month, your work-related expenses are limited to $625 (2½ months × $250). Tax act free 2012 Temporary absence from work. Tax act free 2012   You do not have to figure your expenses for each day during a short, temporary absence from work, such as for vacation or a minor illness, if you have to pay for care anyway. Tax act free 2012 Instead, you can figure your credit including the expenses you paid for the period of absence. Tax act free 2012   An absence of 2 weeks or less is a short, temporary absence. Tax act free 2012 An absence of more than 2 weeks may be considered a short, temporary absence, depending on the circumstances. Tax act free 2012 Example. Tax act free 2012 You pay a nanny to care for your 2-year-old son and 4-year-old daughter so you can work. Tax act free 2012 You become ill and miss 4 months of work but receive sick pay. Tax act free 2012 You continue to pay the nanny to care for the children while you are ill. Tax act free 2012 Your absence is not a short, temporary absence, and your expenses are not considered work-related. Tax act free 2012 Part-time work. Tax act free 2012   If you work part-time, you generally must figure your expenses for each day. Tax act free 2012 However, if you have to pay for care weekly, monthly, or in another way that includes both days worked and days not worked, you can figure your credit including the expenses you paid for days you did not work. Tax act free 2012 Any day when you work at least 1 hour is a day of work. Tax act free 2012 Example 1. Tax act free 2012 You work 3 days a week. Tax act free 2012 While you work, your 6-year-old child attends a dependent care center, which complies with all state and local regulations. Tax act free 2012 You can pay the center $150 for any 3 days a week or $250 for 5 days a week. Tax act free 2012 Your child attends the center 5 days a week. Tax act free 2012 Your work-related expenses are limited to $150 a week. Tax act free 2012 Example 2. Tax act free 2012 The facts are the same as in Example 1 except the center does not offer a 3-day option. Tax act free 2012 The entire $250 weekly fee may be a work-related expense. Tax act free 2012 Care of a Qualifying Person To be work-related, your expenses must be to provide care for a qualifying person. Tax act free 2012 You do not have to choose the least expensive way of providing care. Tax act free 2012 The cost of a paid care provider may be an expense for the care of a qualifying person even if another care provider is available at no cost. Tax act free 2012 Expenses are for the care of a qualifying person only if their main purpose is the person's well-being and protection. Tax act free 2012 Expenses for household services qualify if part of the services is for the care of qualifying persons. Tax act free 2012 See Household services , later. Tax act free 2012 Expenses not for care. Tax act free 2012   Expenses for care do not include amounts you pay for food, lodging, clothing, education, and entertainment. Tax act free 2012 However, you can include small amounts paid for these items if they are incidental to and cannot be separated from the cost of caring for the qualifying person. Tax act free 2012   Child support payments are not for care and do not qualify for the credit. Tax act free 2012 Education. Tax act free 2012   Expenses for a child in nursery school, preschool, or similar programs for children below the level of kindergarten are expenses for care. Tax act free 2012 Expenses to attend kindergarten or a higher grade are not expenses for care. Tax act free 2012 Do not use these expenses to figure your credit. Tax act free 2012   However, expenses for before- or after-school care of a child in kindergarten or a higher grade may be expenses for care. Tax act free 2012   Summer school and tutoring programs are not for care. Tax act free 2012 Example 1. Tax act free 2012 You take your 3-year-old child to a nursery school that provides lunch and educational activities as a part of its preschool childcare service. Tax act free 2012 The lunch and educational activities are incidental to the childcare, and their cost cannot be separated from the cost of care. Tax act free 2012 You can count the total cost when you figure the credit. Tax act free 2012 Example 2. Tax act free 2012 You place your 10-year-old child in a boarding school so you can work full time. Tax act free 2012 Only the part of the boarding school expense that is for the care of your child is a work-related expense. Tax act free 2012 You can count that part of the expense in figuring your credit if it can be separated from the cost of education. Tax act free 2012 You cannot count any part of the amount you pay the school for your child's education. Tax act free 2012 Care outside your home. Tax act free 2012   You can count the cost of care provided outside your home if the care is for your dependent under age 13 or any other qualifying person who regularly spends at least 8 hours each day in your home. Tax act free 2012 Dependent care center. Tax act free 2012   You can count care provided outside your home by a dependent care center only if the center complies with all state and local regulations that apply to these centers. Tax act free 2012   A dependent care center is a place that provides care for more than six persons (other than persons who live there) and receives a fee, payment, or grant for providing services for any of those persons, even if the center is not run for profit. Tax act free 2012 Camp. Tax act free 2012   The cost of sending your child to an overnight camp is not considered a work-related expense. Tax act free 2012 The cost of sending your child to a day camp may be a work-related expense, even if the camp specializes in a particular activity, such as computers or soccer. Tax act free 2012 Transportation. Tax act free 2012   If a care provider takes a qualifying person to or from a place where care is provided, that transportation is for the care of the qualifying person. Tax act free 2012 This includes transportation by bus, subway, taxi, or private car. Tax act free 2012 However, transportation not provided by a care provider is not for the care of a qualifying person. Tax act free 2012 Also, if you pay the transportation cost for the care provider to come to your home, that expense is not for care of a qualifying person. Tax act free 2012 Fees and deposits. Tax act free 2012   Fees you paid to an agency to get the services of a care provider, deposits you paid to an agency or preschool, application fees, and other indirect expenses are work-related expenses if you have to pay them to get care, even though they are not directly for care. Tax act free 2012 However, a forfeited deposit is not for the care of a qualifying person if care is not provided. Tax act free 2012 Example 1. Tax act free 2012 You paid a fee to an agency to get the services of the nanny who cares for your 2-year-old daughter while you work. Tax act free 2012 The fee you paid is a work-related expense. Tax act free 2012 Example 2. Tax act free 2012 You placed a deposit with a preschool to reserve a place for your 3-year-old child. Tax act free 2012 You later sent your child to a different preschool and forfeited the deposit. Tax act free 2012 The forfeited deposit is not for care and so is not a work-related expense. Tax act free 2012 Household services. Tax act free 2012   Expenses you pay for household services meet the work-related expense test if they are at least partly for the well-being and protection of a qualifying person. Tax act free 2012   Household services are ordinary and usual services done in and around your home that are necessary to run your home. Tax act free 2012 They include the services of a housekeeper, maid, or cook. Tax act free 2012 However, they do not include the services of a chauffeur, bartender, or gardener. Tax act free 2012 See Household Services in Publication 503 for more information. Tax act free 2012   In this chapter, the term housekeeper refers to any household employee whose services include the care of a qualifying person. Tax act free 2012 Taxes paid on wages. Tax act free 2012   The taxes you pay on wages for qualifying child and dependent care services are work-related expenses. Tax act free 2012 See Employment Taxes for Household Employers , later. Tax act free 2012 Payments to Relatives or Dependents You can count work-related payments you make to relatives who are not your dependents, even if they live in your home. Tax act free 2012 However, do not count any amounts you pay to: A dependent for whom you (or your spouse if filing jointly) can claim an exemption, Your child who was under age 19 at the end of the year, even if he or she is not your dependent, A person who was your spouse any time during the year, or The parent of your qualifying person if your qualifying person is your child and under age 13. Tax act free 2012 Joint Return Test Generally, married couples must file a joint return to take the credit. Tax act free 2012 However, if you are legally separated or living apart from your spouse, you may be able to file a separate return and still take the credit. Tax act free 2012 Legally separated. Tax act free 2012   You are not considered married if you are legally separated from your spouse under a decree of divorce or separate maintenance. Tax act free 2012 You may be eligible to take the credit on your return using head of household filing status. Tax act free 2012 Married and living apart. Tax act free 2012   You are not considered married and are eligible to take the credit if all the following apply. Tax act free 2012 You file a return apart from your spouse. Tax act free 2012 Your home is the home of a qualifying person for more than half the year. Tax act free 2012 You pay more than half the cost of keeping up your home for the year. Tax act free 2012 Your spouse does not live in your home for the last 6 months of the year. Tax act free 2012 Costs of keeping up a home. Tax act free 2012   The costs of keeping up a home normally include property taxes, mortgage interest, rent, utility charges, home repairs, insurance on the home, and food eaten at home. Tax act free 2012   The costs of keeping up a home do not include payments for clothing, education, medical treatment, vacations, life insurance, transportation, or mortgage principal. Tax act free 2012   They also do not include the purchase, permanent improvement, or replacement of property. Tax act free 2012 For example, you cannot include the cost of replacing a water heater. Tax act free 2012 However, you can include the cost of repairing a water heater. Tax act free 2012 Death of spouse. Tax act free 2012   If your spouse died during the year and you do not remarry before the end of the year, you generally must file a joint return to take the credit. Tax act free 2012 If you do remarry before the end of the year, the credit can be claimed on your deceased spouse's return. Tax act free 2012 Provider Identification Test You must identify all persons or organizations that provide care for your child or dependent. Tax act free 2012 Use Form 2441, Part I, to show the information. Tax act free 2012 If you do not have any care providers and you are filing Form 2441 only to report taxable income in Part III, enter “none” in line 1, column (a). Tax act free 2012 Information needed. Tax act free 2012   To identify the care provider, you must give the provider's: Name, Address, and Taxpayer identification number. Tax act free 2012   If the care provider is an individual, the taxpayer identification number is his or her social security number or individual taxpayer identification number. Tax act free 2012 If the care provider is an organization, then it is the employer identification number (EIN). Tax act free 2012   You do not have to show the taxpayer identification number if the care provider is a tax-exempt organization (such as a church or school). Tax act free 2012 In this case, enter “Tax-Exempt” in the space where Form 2441 asks for the number. Tax act free 2012   If you cannot provide all of the information or if the information is incorrect, you must be able to show that you used due diligence (discussed later) in trying to furnish the necessary information. Tax act free 2012 Getting the information. Tax act free 2012   You can use Form W-10 to request the required information from the care provider. Tax act free 2012 If you do not use Form W-10, you can get the information from one of the other sources listed in the instructions for Form W-10 including: A copy of the provider's social security card, A copy of the provider's completed Form W-4 if he or she is your household employee, A copy of the statement furnished by your employer if the provider is your employer's dependent care plan, or A letter or invoice from the provider if it shows the information. Tax act free 2012    You should keep this information with your tax records. Tax act free 2012 Do not send Form W-10 (or other document containing this information) to the Internal Revenue Service. Tax act free 2012 Due diligence. Tax act free 2012   If the care provider information you give is incorrect or incomplete, your credit may not be allowed. Tax act free 2012 However, if you can show that you used due diligence in trying to supply the information, you can still claim the credit. Tax act free 2012   You can show due diligence by getting and keeping the provider's completed Form W-10 or one of the other sources of information just listed. Tax act free 2012 Care providers can be penalized if they do not provide this information to you or if they provide incorrect information. Tax act free 2012 Provider refusal. Tax act free 2012   If the provider refuses to give you their identifying information, you should report on Form 2441 whatever information you have (such as the name and address). Tax act free 2012 Enter “See Attached Statement” in the columns calling for the information you do not have. Tax act free 2012 Then attach a statement explaining that you requested the information from the care provider, but the provider did not give you the information. Tax act free 2012 Be sure to write your name and social security number on this statement. Tax act free 2012 The statement will show that you used due diligence in trying to furnish the necessary information. Tax act free 2012 U. Tax act free 2012 S. Tax act free 2012 citizens and resident aliens living abroad. Tax act free 2012   If you are living abroad, your care provider may not have, and may not be required to get, a U. Tax act free 2012 S. Tax act free 2012 taxpayer identification number (for example, an SSN or EIN). Tax act free 2012 If so, enter “LAFCP” (Living Abroad Foreign Care Provider) in the space for the care provider's taxpayer identification number. Tax act free 2012 How To Figure the Credit Your credit is a percentage of your work-related expenses. Tax act free 2012 Your expenses are subject to the earned income limit and the dollar limit. Tax act free 2012 The percentage is based on your adjusted gross income. Tax act free 2012 Figuring Total Work-Related Expenses To figure the credit for 2013 work-related expenses, count only those you paid by December 31, 2013. Tax act free 2012 Expenses prepaid in an earlier year. Tax act free 2012   If you pay for services before they are provided, you can count the prepaid expenses only in the year the care is received. Tax act free 2012 Claim the expenses for the later year as if they were actually paid in that later year. Tax act free 2012 Expenses not paid until the following year. Tax act free 2012   Do not count 2012 expenses that you paid in 2013 as work-related expenses for 2013. Tax act free 2012 You may be able to claim an additional credit for them on your 2013 return, but you must figure it separately. Tax act free 2012 See Payments for prior year's expenses under Amount of Credit in Publication 503. Tax act free 2012    If you had expenses in 2013 that you did not pay until 2014, you cannot count them when figuring your 2013 credit. Tax act free 2012 You may be able to claim a credit for them on your 2014 return. Tax act free 2012 Expenses reimbursed. Tax act free 2012   If a state social services agency pays you a nontaxable amount to reimburse you for some of your child and dependent care expenses, you cannot count the expenses that are reimbursed as work-related expenses. Tax act free 2012 Example. Tax act free 2012 You paid work-related expenses of $3,000. Tax act free 2012 You are reimbursed $2,000 by a state social services agency. Tax act free 2012 You can use only $1,000 to figure your credit. Tax act free 2012 Medical expenses. Tax act free 2012   Some expenses for the care of qualifying persons who are not able to care for themselves may qualify as work-related expenses and also as medical expenses. Tax act free 2012 You can use them either way, but you cannot use the same expenses to claim both a credit and a medical expense deduction. Tax act free 2012   If you use these expenses to figure the credit and they are more than the earned income limit or the dollar limit, discussed later, you can add the excess to your medical expenses. Tax act free 2012 However, if you use your total expenses to figure your medical expense deduction, you cannot use any part of them to figure your credit. Tax act free 2012    Amounts excluded from your income under your employer's dependent care benefits plan cannot be used to claim a medical expense deduction. Tax act free 2012 Dependent Care Benefits If you receive dependent care benefits, your dollar limit for purposes of the credit may be reduced. Tax act free 2012 See Reduced Dollar Limit , later. Tax act free 2012 But, even if you cannot take the credit, you may be able to take an exclusion or deduction for the dependent care benefits. Tax act free 2012 Dependent care benefits. Tax act free 2012   Dependent care benefits include: Amounts your employer paid directly to either you or your care provider for the care of your qualifying person while you work, The fair market value of care in a daycare facility provided or sponsored by your employer, and Pre-tax contributions you made under a dependent care flexible spending arrangement. Tax act free 2012 Your salary may have been reduced to pay for these benefits. Tax act free 2012 If you received benefits as an employee, they should be shown in box 10 of your Form W-2. Tax act free 2012 See Statement for employee , later. Tax act free 2012 Benefits you received as a partner should be shown in box 13 of your Schedule K-1 (Form 1065) with code O. Tax act free 2012 Enter the amount of these benefits on Form 2441, Part III, line 12. Tax act free 2012 Exclusion or deduction. Tax act free 2012   If your employer provides dependent care benefits under a qualified plan, you may be able to exclude these benefits from your income. Tax act free 2012 Your employer can tell you whether your benefit plan qualifies. Tax act free 2012 To claim the exclusion, you must complete Part III of Form 2441. Tax act free 2012 You cannot use Form 1040EZ. Tax act free 2012   If you are self-employed and receive benefits from a qualified dependent care benefit plan, you are treated as both employer and employee. Tax act free 2012 Therefore, you would not get an exclusion from wages. Tax act free 2012 Instead, you would get a deduction on Form 1040, Schedule C, line 14; Schedule E, line 19 or 28; or Schedule F, line 15. Tax act free 2012 To claim the deduction, you must use Form 2441. Tax act free 2012   The amount you can exclude or deduct is limited to the smallest of: The total amount of dependent care benefits you received during the year, The total amount of qualified expenses you incurred during the year, Your earned income, Your spouse's earned income, or $5,000 ($2,500 if married filing separately). Tax act free 2012 The definition of earned income for the exclusion or deduction is the same as the definition used when figuring the credit except that earned income for the exclusion or deduction does not include any dependent care benefits you receive. Tax act free 2012 See Earned Income Limit, later. Tax act free 2012    You can choose to include your nontaxable combat pay in earned income when figuring your exclusion or deduction, even if you choose not to include it in earned income for the earned income credit or the credit for child and dependent care expenses. Tax act free 2012 Statement for employee. Tax act free 2012   Your employer must give you a Form W-2 (or similar statement) showing in box 10 the total amount of dependent care benefits provided to you during the year under a qualified plan. Tax act free 2012 Your employer will also include any dependent care benefits over $5,000 in your wages shown on your Form W-2 in box 1. Tax act free 2012 Effect of exclusion on credit. Tax act free 2012   If you exclude dependent care benefits from your income, the amount of the excluded benefits: Is not included in your work-related expenses, and Reduces the dollar limit, discussed later. Tax act free 2012 Earned Income Limit The amount of work-related expenses you use to figure your credit cannot be more than: Your earned income for the year if you are single at the end of the year, or The smaller of your or your spouse's earned income for the year if you are married at the end of the year. Tax act free 2012 Earned income is defined under Earned Income Test , earlier. Tax act free 2012 For purposes of item (2), use your spouse's earned income for the entire year, even if you were married for only part of the year. Tax act free 2012 Separated spouse. Tax act free 2012   If you are legally separated or married and living apart from your spouse (as described under Joint Return Test , earlier), you are not considered married for purposes of the earned income limit. Tax act free 2012 Use only your income in figuring the earned income limit. Tax act free 2012 Surviving spouse. Tax act free 2012   If your spouse died during the year and you file a joint return as a surviving spouse, you may, but are not required to, take into account the earned income of your spouse who died during the year. Tax act free 2012 Community property laws. Tax act free 2012   You should disregard community property laws when you figure earned income for this credit. Tax act free 2012 You or your spouse is a student or not able to care for self. Tax act free 2012   Your spouse who is either a full-time student or not able to care for himself or herself is treated as having earned income. Tax act free 2012 His or her earned income for each month is considered to be at least $250 if there is one qualifying person in your home, or at least $500 if there are two or more. Tax act free 2012 Spouse works. Tax act free 2012   If your spouse works during that month, use the higher of $250 (or $500) or his or her actual earned income for that month. Tax act free 2012 Spouse qualifies for part of month. Tax act free 2012    If your spouse is a full-time student or not able to care for himself or herself for only part of a month, the full $250 (or $500) still applies for that month. Tax act free 2012 You are a student or not able to care for self. Tax act free 2012   These rules also apply if you are a student or not able to care for yourself and you are filing a joint return. Tax act free 2012 For each month or part of a month you are a student or not able to care for yourself, your earned income is considered to be at least $250 (or $500). Tax act free 2012 If you also work during that month, use the higher of $250 (or $500) or your actual earned income for that month. Tax act free 2012 Both spouses qualify. Tax act free 2012   If, in the same month, both you and your spouse are either full-time students or not able to care for yourselves, only one spouse can be considered to have this earned income of $250 (or $500) for that month. Tax act free 2012 Dollar Limit There is a dollar limit on the amount of your work-related expenses you can use to figure the credit. Tax act free 2012 This limit is $3,000 for one qualifying person, or $6,000 for two or more qualifying persons. Tax act free 2012 If you paid work-related expenses for the care of two or more qualifying persons, the applicable dollar limit is $6,000. Tax act free 2012 This $6,000 limit does not need to be divided equally among them. Tax act free 2012 For example, if your work-related expenses for the care of one qualifying person are $3,200 and your work-related expenses for another qualifying person are $2,800, you can use the total, $6,000, when figuring the credit. Tax act free 2012 Yearly limit. Tax act free 2012   The dollar limit is a yearly limit. Tax act free 2012 The amount of the dollar limit remains the same no matter how long, during the year, you have a qualifying person in your household. Tax act free 2012 Use the $3,000 limit if you paid work-related expenses for the care of one qualifying person at any time during the year. Tax act free 2012 Use $6,000 if you paid work-related expenses for the care of more than one qualifying person at any time during the year. Tax act free 2012 Reduced Dollar Limit If you received dependent care benefits that you exclude or deduct from your income, you must subtract that amount from the dollar limit that applies to you. Tax act free 2012 Your reduced dollar limit is figured on Form 2441, Part III. Tax act free 2012 See Dependent Care Benefits , earlier, for information on excluding or deducting these benefits. Tax act free 2012 Example 1. Tax act free 2012 George is a widower with one child and earns $24,000 a year. Tax act free 2012 He pays work-related expenses of $2,900 for the care of his 4-year-old child and qualifies to claim the credit for child and dependent care expenses. Tax act free 2012 His employer pays an additional $1,000 under a dependent care benefit plan. Tax act free 2012 This $1,000 is excluded from George's income. Tax act free 2012 Although the dollar limit for his work-related expenses is $3,000 (one qualifying person), George figures his credit on only $2,000 of the $2,900 work-related expenses he paid. Tax act free 2012 This is because his dollar limit is reduced as shown next. Tax act free 2012   George's Reduced Dollar Limit 1) Maximum allowable expenses for one qualifying person $3,000 2) Minus: Dependent care benefits George excludes from income −1,000 3) Reduced dollar limit on expenses George can use for the credit $2,000 Example 2. Tax act free 2012 Randall is married and both he and his wife are employed. Tax act free 2012 Each has earned income in excess of $6,000. Tax act free 2012 They have two children, Anne and Andy, ages 2 and 4, who attend a daycare facility licensed and regulated by the state. Tax act free 2012 Randall's work-related expenses are $6,000 for the year. Tax act free 2012 Randall's employer has a dependent care assistance program as part of its cafeteria plan, which allows employees to make pre-tax contributions to a dependent care flexible spending arrangement. Tax act free 2012 Randall has elected to take the maximum $5,000 exclusion from his salary to cover dependent care expenses through this program. Tax act free 2012 Although the dollar limit for his work- related expenses is $6,000 (two or more qualifying persons), Randall figures his credit on only $1,000 of the $6,000 work-related expense paid. Tax act free 2012 This is because his dollar limit is reduced as shown next. Tax act free 2012   Randall's Reduced Dollar Limit 1) Maximum allowable expenses for two qualifying persons $6,000 2) Minus: Dependent care benefits Randall selects from employer's cafeteria plan and excludes from income −5,000 3) Reduced dollar limit on expenses Randall can use for the credit $1,000 Amount of Credit To determine the amount of your credit, multiply your work-related expenses (after applying the earned income and dollar limits) by a percentage. Tax act free 2012 This percentage depends on your adjusted gross income shown on Form 1040, line 38, or Form 1040A, line 22. Tax act free 2012 The following table shows the percentage to use based on adjusted gross income. Tax act free 2012   IF your adjusted gross income is: THEN the percentage is:       Over   But not over         $0   $15,000   35%       15,000   17,000   34%       17,000   19,000   33%       19,000   21,000   32%       21,000   23,000   31%       23,000   25,000   30%       25,000   27,000   29%       27,000   29,000   28%       29,000   31,000   27%       31,000   33,000   26%       33,000   35,000   25%       35,000   37,000   24%       37,000   39,000   23%       39,000   41,000   22%       41,000   43,000   21%       43,000   No limit   20%   How To Claim the Credit To claim the credit, you can file Form 1040 or Form 1040A. Tax act free 2012 You cannot claim the credit on Form 1040EZ. Tax act free 2012 Form 1040 or 1040A. Tax act free 2012   You must complete Form 2441 and attach it to your Form 1040 or 1040A. Tax act free 2012 Enter the credit on Form 1040, line 48, or Form 1040A, line 29. Tax act free 2012 Limit on credit. Tax act free 2012   The amount of credit you can claim is generally limited to the amount of your tax. Tax act free 2012 For more information, see the Instructions for Form 2441. Tax act free 2012 Tax credit not refundable. Tax act free 2012   You cannot get a refund for any part of the credit that is more than this limit. Tax act free 2012 Recordkeeping. Tax act free 2012 You should keep records of your work-related expenses. Tax act free 2012 Also, if your dependent or spouse is not able to care for himself or herself, your records should show both the nature and the length of the disability. Tax act free 2012 Other records you should keep to support your claim for the credit are described earlier under Provider Identification Test . Tax act free 2012 Employment Taxes for Household Employers If you pay someone to come to your home and care for your dependent or spouse, you may be a household employer. Tax act free 2012 If you are a household employer, you will need an employer identification number (EIN) and you may have to pay employment taxes. Tax act free 2012 If the individuals who work in your home are self-employed, you are not liable for any of the taxes discussed in this section. Tax act free 2012 Self-employed persons who are in business for themselves are not household employees. Tax act free 2012 Usually, you are not a household employer if the person who cares for your dependent or spouse does so at his or her home or place of business. Tax act free 2012 If you use a placement agency that exercises control over what work is done and how it will be done by a babysitter or companion who works in your home, the worker is not your employee. Tax act free 2012 This control could include providing rules of conduct and appearance and requiring regular reports. Tax act free 2012 In this case, you do not have to pay employment taxes. Tax act free 2012 But, if an agency merely gives you a list of sitters and you hire one from that list, and pay the sitter directly, the sitter may be your employee. Tax act free 2012 If you have a household employee, you may be subject to: Social security and Medicare taxes, Federal unemployment tax, and Federal income tax withholding. Tax act free 2012 Social security and Medicare taxes are generally withheld from the employee's pay and matched by the employer. Tax act free 2012 Federal unemployment (FUTA) tax is paid by the employer only and provides for payments of unemployment compensation to workers who have lost their jobs. Tax act free 2012 Federal income tax is withheld from the employee's total pay if the employee asks you to do so and you agree. Tax act free 2012 For more information on a household employer's tax responsibilities, see Publication 926 and Schedule H (Form 1040) and its instructions. Tax act free 2012 State employment tax. Tax act free 2012   You may also have to pay state unemployment tax. Tax act free 2012 Contact your state unemployment tax office for information. Tax act free 2012 You should also find out whether you need to pay or collect other state employment taxes or carry workers' compensation insurance. Tax act free 2012 For a list of state unemployment tax agencies, visit the U. Tax act free 2012 S. Tax act free 2012 Department of Labor's website. Tax act free 2012 A link to that website is in Publication 926, or you can find it with an online search. Tax act free 2012 Prev  Up  Next   Home   More Online Publications
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The Tax Act Free 2012

Tax act free 2012 1. Tax act free 2012   Investment Income Table of Contents Topics - This chapter discusses: Useful Items - You may want to see: General InformationSSN for joint account. Tax act free 2012 Custodian account for your child. Tax act free 2012 Penalty for failure to supply SSN. Tax act free 2012 Certification. Tax act free 2012 Underreported interest and dividends. Tax act free 2012 How to stop backup withholding due to underreporting. Tax act free 2012 How to stop backup withholding due to an incorrect identification number. Tax act free 2012 Reporting backup withholding. Tax act free 2012 Nonresident aliens. Tax act free 2012 Penalties. Tax act free 2012 Savings account with parent as trustee. Tax act free 2012 Interest IncomeInterest not reported on Form 1099-INT. Tax act free 2012 Nominees. Tax act free 2012 Incorrect amount. Tax act free 2012 Information reporting requirement. Tax act free 2012 Taxable Interest — General Below-Market Loans U. Tax act free 2012 S. Tax act free 2012 Savings Bonds U. Tax act free 2012 S. Tax act free 2012 Treasury Bills, Notes, and Bonds Bonds Sold Between Interest Dates Insurance State or Local Government Obligations Discount on Debt InstrumentsOriginal Issue Discount (OID) Market Discount Bonds Discount on Short-Term Obligations Election To Report All Interest as OID When To Report Interest IncomeConstructive receipt. Tax act free 2012 How To Report Interest IncomeSchedule B (Form 1040A or 1040). Tax act free 2012 Worksheet for savings bonds distributed from a retirement or profit-sharing plan. Tax act free 2012 File Form 1099-INT with the IRS. Tax act free 2012 Dividends and Other DistributionsDividends not reported on Form 1099-DIV. Tax act free 2012 Nominees. Tax act free 2012 Ordinary Dividends Capital Gain Distributions Nondividend Distributions Liquidating Distributions Distributions of Stock and Stock Rights Other Distributions How To Report Dividend IncomeElection. Tax act free 2012 Independent contractor. Tax act free 2012 Investment interest deducted. Tax act free 2012 Exception 1. Tax act free 2012 Exception 2. Tax act free 2012 Undistributed capital gains. Tax act free 2012 File Form 1099-DIV with the IRS. Tax act free 2012 Stripped Preferred Stock REMICs, FASITs, and Other CDOsREMICs Collateralized Debt Obligations (CDOs) FASITs S CorporationsLimit on losses and deductions. Tax act free 2012 Passive activity losses. Tax act free 2012 Form 8582. Tax act free 2012 Investment ClubsInvestments in name of member. Tax act free 2012 Tax Treatment of the Club Topics - This chapter discusses: Interest Income , Discount on Debt Instruments , When To Report Interest Income , How To Report Interest Income , Dividends and Other Distributions , How To Report Dividend Income , Stripped Preferred Stock , Real estate mortgage investment conduits (REMICs), financial asset securitization investment trusts (FASITs), and other collateralized debt obligations (CDOs) , S Corporations , and Investment Clubs . Tax act free 2012 Useful Items - You may want to see: Publication 525 Taxable and Nontaxable Income 537 Installment Sales 590 Individual Retirement Arrangements (IRAs) 925 Passive Activity and At-Risk Rules 1212 Guide to Original Issue Discount (OID) Instruments Form (and Instructions) Schedule B (Form 1040A or 1040) Interest and Ordinary Dividends Schedule D (Form 1040) Capital Gains and Losses 1040 U. Tax act free 2012 S. Tax act free 2012 Individual Income Tax Return 1040A U. Tax act free 2012 S. Tax act free 2012 Individual Income Tax Return 1040EZ Income Tax Return for Single and Joint Filers With No Dependents 1099 General Instructions for Certain Information Returns 2439 Notice to Shareholder of Undistributed Long-Term Capital Gains 3115 Application for Change in Accounting Method 6251 Alternative Minimum Tax — Individuals 8582 Passive Activity Loss Limitations 8615 Tax for Certain Children Who Have Unearned Income 8814 Parents' Election To Report Child's Interest and Dividends 8815 Exclusion of Interest From Series EE and I U. Tax act free 2012 S. Tax act free 2012 Savings Bonds Issued After 1989 8818 Optional Form To Record Redemption of Series EE and I U. Tax act free 2012 S. Tax act free 2012 Savings Bonds Issued After 1989 8824 Like-Kind Exchanges 8949 Sales and Other Dispositions of Capital Assets 8960 Net Investment Income Tax—Individuals, Estates, and Trusts See chapter 5, How To Get Tax Help , for information about getting these publications and forms. Tax act free 2012 General Information A few items of general interest are covered here. Tax act free 2012 Recordkeeping. Tax act free 2012 You should keep a list showing sources and investment income amounts you receive during the year. Tax act free 2012 Also keep the forms you receive showing your investment income (Forms 1099-INT, Interest Income, and 1099-DIV, Dividends and Distributions, for example) as an important part of your records. Tax act free 2012 Net investment income tax (NIIT). Tax act free 2012   Beginning in 2013, you may be subject to the NIIT. Tax act free 2012 The NIIT is a 3. Tax act free 2012 8% tax on the lesser of your net investment income or the amount of your modified adjusted gross income (MAGI) that is over a threshold amount based on your filing status. Tax act free 2012    Filing Status Threshold Amount Married filing jointly $250,000 Married filing separately $125,000 Single $200,000 Head of household (with qualifying person) $200,000 Qualifying Widow(er) with dependent child $250,000    For more information, see Form 8960 and Instructions for Form 8960. Tax act free 2012 Tax on unearned income of certain children. Tax act free 2012   Part of a child's 2013 unearned income may be taxed at the parent's tax rate. Tax act free 2012 This may happen if all of the following are true. Tax act free 2012 The child had more than $2,000 of unearned income. Tax act free 2012 The child is required to file a tax return. Tax act free 2012 The child was: Under age 18 at the end of 2013, Age 18 at the end of 2013 and did not have earned income that was more than half of the child's support, or A full-time student over age 18 and under age 24 at the end of 2013 and did not have earned income that was more than half of the child's support. Tax act free 2012 At least one of the child's parents was alive at the end of 2013. Tax act free 2012 The child does not file a joint return for 2013. Tax act free 2012 A child born on January 1, 1996, is considered to be age 18 at the end of 2013; a child born on January 1, 1995, is considered to be age 19 at the end of 2013; a child born on January 1, 1990, is considered to be age 24 at the end of 2013. Tax act free 2012   If all of these statements are true, Form 8615 must be completed and attached to the child's tax return. Tax act free 2012 If any of these statements is not true, Form 8615 is not required and the child's income is taxed at his or her own tax rate. Tax act free 2012    However, the parent can choose to include the child's interest and dividends on the parent's return if certain requirements are met. Tax act free 2012 Use Form 8814 for this purpose. Tax act free 2012   For more information about the tax on unearned income of children and the parents' election, see Publication 929, Tax Rules for Children and Dependents. Tax act free 2012 Beneficiary of an estate or trust. Tax act free 2012   Interest, dividends, and other investment income you receive as a beneficiary of an estate or trust is generally taxable income. Tax act free 2012 You should receive a Schedule K-1 (Form 1041), Beneficiary's Share of Income, Deductions, Credits, etc. Tax act free 2012 , from the fiduciary. Tax act free 2012 Your copy of Schedule K-1 (Form 1041) and its instructions will tell you where to report the income on your Form 1040. Tax act free 2012 Social security number (SSN). Tax act free 2012   You must give your name and SSN or individual tax identification number (ITIN) to any person required by federal tax law to make a return, statement, or other document that relates to you. Tax act free 2012 This includes payers of interest and dividends. Tax act free 2012 If you do not give your SSN or ITIN to the payer of interest, you may have to pay a penalty. Tax act free 2012 SSN for joint account. Tax act free 2012   If the funds in a joint account belong to one person, list that person's name first on the account and give that person's SSN to the payer. Tax act free 2012 (For information on who owns the funds in a joint account, see Joint accounts , later. Tax act free 2012 ) If the joint account contains combined funds, give the SSN of the person whose name is listed first on the account. Tax act free 2012 This is because only one name and SSN can be shown on Form 1099. Tax act free 2012   These rules apply both to joint ownership by a married couple and to joint ownership by other individuals. Tax act free 2012 For example, if you open a joint savings account with your child using funds belonging to the child, list the child's name first on the account and give the child's SSN. Tax act free 2012 Custodian account for your child. Tax act free 2012   If your child is the actual owner of an account that is recorded in your name as custodian for the child, give the child's SSN to the payer. Tax act free 2012 For example, you must give your child's SSN to the payer of dividends on stock owned by your child, even though the dividends are paid to you as custodian. Tax act free 2012 Penalty for failure to supply SSN. Tax act free 2012   You will be subject to a penalty if, when required, you fail to: Include your SSN on any return, statement, or other document, Give your SSN to another person who must include it on any return, statement, or other document, or Include the SSN of another person on any return, statement, or other document. Tax act free 2012 The penalty is $50 for each failure up to a maximum penalty of $100,000 for any calendar year. Tax act free 2012   You will not be subject to this penalty if you can show that your failure to provide the SSN was due to reasonable cause and not to willful neglect. Tax act free 2012   If you fail to supply an SSN, you may also be subject to backup withholding. Tax act free 2012 Backup withholding. Tax act free 2012   Your investment income is generally not subject to regular withholding. Tax act free 2012 However, it may be subject to backup withholding to ensure that income tax is collected on the income. Tax act free 2012 Under backup withholding, the bank, broker, or other payer of interest, original issue discount (OID), dividends, cash patronage dividends, or royalties must withhold, as income tax, on the amount you are paid, applying the appropriate withholding rate. Tax act free 2012   Backup withholding applies if: You do not give the payer your identification number (either a social security number or an employer identification number) in the required manner, The IRS notifies the payer that you gave an incorrect identification number, The IRS notifies the payer that you are subject to backup withholding on interest or dividends because you have underreported interest or dividends on your income tax return, or You are required, but fail, to certify that you are not subject to backup withholding for the reason described in (3). Tax act free 2012 Certification. Tax act free 2012   For new accounts paying interest or dividends, you must certify under penalties of perjury that your SSN is correct and that you are not subject to backup withholding. Tax act free 2012 Your payer will give you a Form W-9, Request for Taxpayer Identification Number and Certification, or similar form, to make this certification. Tax act free 2012 If you fail to make this certification, backup withholding may begin immediately on your new account or investment. Tax act free 2012 Underreported interest and dividends. Tax act free 2012   You will be considered to have underreported your interest and dividends if the IRS has determined for a tax year that: You failed to include any part of a reportable interest or dividend payment required to be shown on your return, or You were required to file a return and to include a reportable interest or dividend payment on that return, but you failed to file the return. Tax act free 2012 How to stop backup withholding due to underreporting. Tax act free 2012   If you have been notified that you underreported interest or dividends, you can request a determination from the IRS to prevent backup withholding from starting or to stop backup withholding once it has begun. Tax act free 2012 You must show that at least one of the following situations applies. Tax act free 2012 No underreporting occurred. Tax act free 2012 You have a bona fide dispute with the IRS about whether underreporting occurred. Tax act free 2012 Backup withholding will cause or is causing an undue hardship, and it is unlikely that you will underreport interest and dividends in the future. Tax act free 2012 You have corrected the underreporting by filing a return if you did not previously file one and by paying all taxes, penalties, and interest due for any underreported interest or dividend payments. Tax act free 2012   If the IRS determines that backup withholding should stop, it will provide you with a certification and will notify the payers who were sent notices earlier. Tax act free 2012 How to stop backup withholding due to an incorrect identification number. Tax act free 2012   If you have been notified by a payer that you are subject to backup withholding because you have provided an incorrect SSN or employer identification number, you can stop it by following the instructions the payer gives you. Tax act free 2012 Reporting backup withholding. Tax act free 2012   If backup withholding is deducted from your interest or dividend income or other reportable payment, the bank or other business must give you an information return for the year (for example, a Form 1099-INT) indicating the amount withheld. Tax act free 2012 The information return will show any backup withholding as “Federal income tax withheld. Tax act free 2012 ” Nonresident aliens. Tax act free 2012    Generally, payments made to nonresident aliens are not subject to backup withholding. Tax act free 2012 You can use Form W-8BEN, Certificate of Foreign Status of Beneficial Owner for United States Tax Withholding, to certify exempt status. Tax act free 2012 However, this does not exempt you from the 30% (or lower treaty) withholding rate that may apply to your investment income. Tax act free 2012 For information on the 30% rate, see Publication 519, U. Tax act free 2012 S. Tax act free 2012 Tax Guide for Aliens. Tax act free 2012 Penalties. Tax act free 2012   There are civil and criminal penalties for giving false information to avoid backup withholding. Tax act free 2012 The civil penalty is $500. Tax act free 2012 The criminal penalty, upon conviction, is a fine of up to $1,000, or imprisonment of up to 1 year, or both. Tax act free 2012 Where to report investment income. Tax act free 2012   Table 1-1 gives an overview of the forms and schedules to use to report some common types of investment income. Tax act free 2012 But see the rest of this publication for detailed information about reporting investment income. Tax act free 2012 Joint accounts. Tax act free 2012   If two or more persons hold property (such as a savings account, bond, or stock) as joint tenants, tenants by the entirety, or tenants in common, each person's share of any interest or dividends from the property is determined by local law. Tax act free 2012 Community property states. Tax act free 2012   If you are married and receive a distribution that is community income, one-half of the distribution is generally considered to be received by each spouse. Tax act free 2012 If you file separate returns, you must each report one-half of any taxable distribution. Tax act free 2012 See Publication 555, Community Property, for more information on community income. Tax act free 2012   If the distribution is not considered community property and you and your spouse file separate returns, each of you must report your separate taxable distributions. Tax act free 2012 Example. Tax act free 2012 You and your spouse have a joint money market account. Tax act free 2012 Under state law, half the income from the account belongs to you, and half belongs to your spouse. Tax act free 2012 If you file separate returns, you each report half the income. Tax act free 2012 Income from property given to a child. Tax act free 2012   Property you give as a parent to your child under the Model Gifts of Securities to Minors Act, the Uniform Gifts to Minors Act, or any similar law becomes the child's property. Tax act free 2012   Income from the property is taxable to the child, except that any part used to satisfy a legal obligation to support the child is taxable to the parent or guardian having that legal obligation. Tax act free 2012 Savings account with parent as trustee. Tax act free 2012   Interest income from a savings account opened for a minor child, but placed in the name and subject to the order of the parents as trustees, is taxable to the child if, under the law of the state in which the child resides, both of the following are true. Tax act free 2012 The savings account legally belongs to the child. Tax act free 2012 The parents are not legally permitted to use any of the funds to support the child. Tax act free 2012 Table 1-1. Tax act free 2012 Where To Report Common Types of Investment Income (For detailed information about reporting investment income, see the rest of this publication, especially How To Report Interest Income and How To Report Dividend Income in chapter 1. Tax act free 2012 ) Type of Income If you file Form 1040, report on . Tax act free 2012 . Tax act free 2012 . Tax act free 2012 If you can file Form 1040A, report on . Tax act free 2012 . Tax act free 2012 . Tax act free 2012 If you can file Form 1040EZ, report on . Tax act free 2012 . Tax act free 2012 . Tax act free 2012 Tax-exempt interest (Form 1099-INT, box 8) Line 8b Line 8b Space to the left of line 2 (enter “TEI” and the amount) Taxable interest that totals $1,500 or less Line 8a (You may need to file Schedule B as well. Tax act free 2012 ) Line 8a (You may need to file Schedule B as well. Tax act free 2012 ) Line 2 Taxable interest that totals more than $1,500 Line 8a; also use Schedule B, line 1 Line 8a; also use Schedule B, line 1   Savings bond interest you will exclude because of higher education expenses Schedule B; also use Form 8815 Schedule B; also use Form 8815   Ordinary dividends that total $1,500 or less Line 9a (You may need to file Schedule B as well. Tax act free 2012 ) Line 9a (You may need to file Schedule B as well. Tax act free 2012 )   Ordinary dividends that total more than $1,500 Line 9a; also use Schedule B, line 5 Line 9a; also use Schedule B, line 5   Qualified dividends (if you do not have to file Schedule D) Line 9b; also use the Qualified Dividends and Capital Gain Tax Worksheet, line 2 Line 9b; also use the Qualified Dividends and Capital Gain Tax Worksheet, line 2   Qualified dividends (if you have to file Schedule D) Line 9b; also use the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet, line 2 You cannot use Form 1040A    You cannot use Form 1040EZ Capital gain distributions (if you do not have to file Schedule D) Line 13; also use the Qualified Dividends and Capital Gain Tax Worksheet, line 3 Line 10; also use the Qualified Dividends and Capital Gain Tax Worksheet, line 3   Capital gain distributions (if you have to file Schedule D) Schedule D, line 13; also use the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet     Section 1250, 1202, or collectibles gain (Form 1099-DIV, box 2b, 2c, or 2d) Form 8949 and Schedule D     Nondividend distributions (Form 1099-DIV, box 3) Generally not reported*     Undistributed capital gains (Form 2439, boxes 1a - 1d) Schedule D     Gain or loss from sales of stocks or bonds Line 13; also use Form 8949, Schedule D, and the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet You cannot use Form 1040A   Gain or loss from exchanges of like-kind investment property Line 13; also use Schedule D, Form 8824, and the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet     *Report any amounts in excess of your basis in your mutual fund shares on Form 8949. Tax act free 2012 Use Part II if you held the shares more than 1 year. Tax act free 2012 Use Part I if you held your mutual fund shares 1 year or less. Tax act free 2012 For details on Form 8949, see Reporting Capital Gains and Losses in chapter 4, and the Instructions for Form 8949. Tax act free 2012 Accuracy-related penalty. Tax act free 2012   An accuracy-related penalty of 20% can be charged for underpayments of tax due to negligence or disregard of rules or regulations or substantial understatement of tax. Tax act free 2012 For information on the penalty and any interest that applies, see Penalties in chapter 2. Tax act free 2012 Interest Income This section discusses the tax treatment of different types of interest income. Tax act free 2012 In general, any interest that you receive or that is credited to your account and can be withdrawn is taxable income. Tax act free 2012 (It does not have to be entered in your passbook. Tax act free 2012 ) Exceptions to this rule are discussed later. Tax act free 2012 Form 1099-INT. Tax act free 2012   Interest income is generally reported to you on Form 1099-INT, or a similar statement, by banks, savings and loans, and other payers of interest. Tax act free 2012 This form shows you the interest you received during the year. Tax act free 2012 Keep this form for your records. Tax act free 2012 You do not have to attach it to your tax return. Tax act free 2012   Report on your tax return the total interest income you receive for the tax year. Tax act free 2012 Interest not reported on Form 1099-INT. Tax act free 2012   Even if you do not receive Form 1099-INT, you must still report all of your interest income. Tax act free 2012 For example, you may receive distributive shares of interest from partnerships or S corporations. Tax act free 2012 This interest is reported to you on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. Tax act free 2012 , and Schedule K-1 (Form 1120S), Shareholder's Share of Income, Deductions, Credits, etc. Tax act free 2012 Nominees. Tax act free 2012   Generally, if someone receives interest as a nominee for you, that person must give you a Form 1099-INT showing the interest received on your behalf. Tax act free 2012   If you receive a Form 1099-INT that includes amounts belonging to another person, see the discussion on Nominee distributions , later, under How To Report Interest Income. Tax act free 2012 Incorrect amount. Tax act free 2012   If you receive a Form 1099-INT that shows an incorrect amount (or other incorrect information), you should ask the issuer for a corrected form. Tax act free 2012 The new Form 1099-INT you receive will be marked “Corrected. Tax act free 2012 ” Form 1099-OID. Tax act free 2012   Reportable interest income also may be shown on Form 1099-OID, Original Issue Discount. Tax act free 2012 For more information about amounts shown on this form, see Original Issue Discount (OID) , later in this chapter. Tax act free 2012 Exempt-interest dividends. Tax act free 2012   Exempt-interest dividends you receive from a mutual fund or other regulated investment company, including those received from a qualified fund of funds in any tax year beginning after December 22, 2010, are not included in your taxable income. Tax act free 2012 (However, see Information reporting requirement , next. Tax act free 2012 ) Exempt-interest dividends should be shown in box 10 of Form 1099-DIV. Tax act free 2012 You do not reduce your basis for distributions that are exempt-interest dividends. Tax act free 2012 Information reporting requirement. Tax act free 2012   Although exempt-interest dividends are not taxable, you must show them on your tax return if you have to file. Tax act free 2012 This is an information reporting requirement and does not change the exempt-interest dividends into taxable income. Tax act free 2012 See How To Report Interest Income , later. Tax act free 2012 Note. Tax act free 2012 Exempt-interest dividends paid from specified private activity bonds may be subject to the alternative minimum tax. Tax act free 2012 The exempt-interest dividends subject to the alternative minimum tax are shown in box 11 of Form 1099-DIV. Tax act free 2012 See Form 6251 and its instructions for more information about this tax. Tax act free 2012 Private activity bonds are discussed later under State or Local Government Obligations. Tax act free 2012 Interest on VA dividends. Tax act free 2012   Interest on insurance dividends left on deposit with the Department of Veterans Affairs (VA) is not taxable. Tax act free 2012 This includes interest paid on dividends on converted United States Government Life Insurance policies and on National Service Life Insurance policies. Tax act free 2012 Individual retirement arrangements (IRAs). Tax act free 2012   Interest on a Roth IRA generally is not taxable. Tax act free 2012 Interest on a traditional IRA is tax deferred. Tax act free 2012 You generally do not include it in your income until you make withdrawals from the IRA. Tax act free 2012 See Publication 590 for more information. Tax act free 2012 Taxable Interest — General Taxable interest includes interest you receive from bank accounts, loans you make to others, and other sources. Tax act free 2012 The following are some sources of taxable interest. Tax act free 2012 Dividends that are actually interest. Tax act free 2012   Certain distributions commonly called dividends are actually interest. Tax act free 2012 You must report as interest so-called “dividends” on deposits or on share accounts in: Cooperative banks, Credit unions, Domestic building and loan associations, Domestic savings and loan associations, Federal savings and loan associations, and Mutual savings banks. Tax act free 2012  The “dividends” will be shown as interest income on Form 1099-INT. Tax act free 2012 Money market funds. Tax act free 2012   Money market funds are offered by nonbank financial institutions such as mutual funds and stock brokerage houses, and pay dividends. Tax act free 2012 Generally, amounts you receive from money market funds should be reported as dividends, not as interest. Tax act free 2012 Certificates of deposit and other deferred interest accounts. Tax act free 2012   If you open any of these accounts, interest may be paid at fixed intervals of 1 year or less during the term of the account. Tax act free 2012 You generally must include this interest in your income when you actually receive it or are entitled to receive it without paying a substantial penalty. Tax act free 2012 The same is true for accounts that mature in 1 year or less and pay interest in a single payment at maturity. Tax act free 2012 If interest is deferred for more than 1 year, see Original Issue Discount (OID) , later. Tax act free 2012 Interest subject to penalty for early withdrawal. Tax act free 2012   If you withdraw funds from a deferred interest account before maturity, you may have to pay a penalty. Tax act free 2012 You must report the total amount of interest paid or credited to your account during the year, without subtracting the penalty. Tax act free 2012 See Penalty on early withdrawal of savings under How To Report Interest Income, later, for more information on how to report the interest and deduct the penalty. Tax act free 2012 Money borrowed to invest in certificate of deposit. Tax act free 2012   The interest you pay on money borrowed from a bank or savings institution to meet the minimum deposit required for a certificate of deposit from the institution and the interest you earn on the certificate are two separate items. Tax act free 2012 You must report the total interest you earn on the certificate in your income. Tax act free 2012 If you itemize deductions, you can deduct the interest you pay as investment interest, up to the amount of your net investment income. Tax act free 2012 See Interest Expenses in chapter 3. Tax act free 2012 Example. Tax act free 2012 You deposited $5,000 with a bank and borrowed $5,000 from the bank to make up the $10,000 minimum deposit required to buy a 6-month certificate of deposit. Tax act free 2012 The certificate earned $575 at maturity in 2013, but you received only $265, which represented the $575 you earned minus $310 interest charged on your $5,000 loan. Tax act free 2012 The bank gives you a Form 1099-INT for 2013 showing the $575 interest you earned. Tax act free 2012 The bank also gives you a statement showing that you paid $310 interest for 2013. Tax act free 2012 You must include the $575 in your income. Tax act free 2012 If you itemize your deductions on Schedule A (Form 1040), Itemized Deductions, you can deduct $310, subject to the net investment income limit. Tax act free 2012 Gift for opening account. Tax act free 2012   If you receive noncash gifts or services for making deposits or for opening an account in a savings institution, you may have to report the value as interest. Tax act free 2012   For deposits of less than $5,000, gifts or services valued at more than $10 must be reported as interest. Tax act free 2012 For deposits of $5,000 or more, gifts or services valued at more than $20 must be reported as interest. Tax act free 2012 The value is determined by the cost to the financial institution. Tax act free 2012 Example. Tax act free 2012 You open a savings account at your local bank and deposit $800. Tax act free 2012 The account earns $20 interest. Tax act free 2012 You also receive a $15 calculator. Tax act free 2012 If no other interest is credited to your account during the year, the Form 1099-INT you receive will show $35 interest for the year. Tax act free 2012 You must report $35 interest income on your tax return. Tax act free 2012 Interest on insurance dividends. Tax act free 2012   Interest on insurance dividends left on deposit with an insurance company that can be withdrawn annually is taxable to you in the year it is credited to your account. Tax act free 2012 However, if you can withdraw it only on the anniversary date of the policy (or other specified date), the interest is taxable in the year that date occurs. Tax act free 2012 Prepaid insurance premiums. Tax act free 2012   Any increase in the value of prepaid insurance premiums, advance premiums, or premium deposit funds is interest if it is applied to the payment of premiums due on insurance policies or made available for you to withdraw. Tax act free 2012 U. Tax act free 2012 S. Tax act free 2012 obligations. Tax act free 2012   Interest on U. Tax act free 2012 S. Tax act free 2012 obligations, such as U. Tax act free 2012 S. Tax act free 2012 Treasury bills, notes, and bonds, issued by any agency or instrumentality of the United States is taxable for federal income tax purposes. Tax act free 2012 Interest on tax refunds. Tax act free 2012   Interest you receive on tax refunds is taxable income. Tax act free 2012 Interest on condemnation award. Tax act free 2012   If the condemning authority pays you interest to compensate you for a delay in payment of an award, the interest is taxable. Tax act free 2012 Installment sale payments. Tax act free 2012   If a contract for the sale or exchange of property provides for deferred payments, it also usually provides for interest payable with the deferred payments. Tax act free 2012 That interest is taxable when you receive it. Tax act free 2012 If little or no interest is provided for in a deferred payment contract, part of each payment may be treated as interest. Tax act free 2012 See Unstated Interest and Original Issue Discount (OID) in Publication 537. Tax act free 2012 Interest on annuity contract. Tax act free 2012   Accumulated interest on an annuity contract you sell before its maturity date is taxable. Tax act free 2012 Usurious interest. Tax act free 2012   Usurious interest is interest charged at an illegal rate. Tax act free 2012 This is taxable as interest unless state law automatically changes it to a payment on the principal. Tax act free 2012 Interest income on frozen deposits. Tax act free 2012   Exclude from your gross income interest on frozen deposits. Tax act free 2012 A deposit is frozen if, at the end of the year, you cannot withdraw any part of the deposit because: The financial institution is bankrupt or insolvent, or The state in which the institution is located has placed limits on withdrawals because other financial institutions in the state are bankrupt or insolvent. Tax act free 2012   The amount of interest you must exclude is the interest that was credited on the frozen deposits minus the sum of: The net amount you withdrew from these deposits during the year, and The amount you could have withdrawn as of the end of the year (not reduced by any penalty for premature withdrawals of a time deposit). Tax act free 2012 If you receive a Form 1099-INT for interest income on deposits that were frozen at the end of 2013, see Frozen deposits under How To Report Interest Income for information about reporting this interest income exclusion on your tax return. Tax act free 2012   The interest you exclude is treated as credited to your account in the following year. Tax act free 2012 You must include it in income in the year you can withdraw it. Tax act free 2012 Example. Tax act free 2012 $100 of interest was credited on your frozen deposit during the year. Tax act free 2012 You withdrew $80 but could not withdraw any more as of the end of the year. Tax act free 2012 You must include $80 in your income and exclude $20 from your income for the year. Tax act free 2012 You must include the $20 in your income for the year you can withdraw it. Tax act free 2012 Bonds traded flat. Tax act free 2012    If you buy a bond at a discount when interest has been defaulted or when the interest has accrued but has not been paid, the transaction is described as trading a bond flat. Tax act free 2012 The defaulted or unpaid interest is not income and is not taxable as interest if paid later. Tax act free 2012 When you receive a payment of that interest, it is a return of capital that reduces the remaining cost basis of your bond. Tax act free 2012 Interest that accrues after the date of purchase, however, is taxable interest income for the year received or accrued. Tax act free 2012 See Bonds Sold Between Interest Dates , later in this chapter. Tax act free 2012 Below-Market Loans If you make a below-market gift or demand loan, you must report as interest income any forgone interest (defined later) from that loan. Tax act free 2012 The below-market loan rules and exceptions are described in this section. Tax act free 2012 For more information, see section 7872 of the Internal Revenue Code and its regulations. Tax act free 2012 If you receive a below-market loan, you may be able to deduct the forgone interest as well as any interest you actually paid, but not if it is personal interest. Tax act free 2012 Loans subject to the rules. Tax act free 2012   The rules for below-market loans apply to: Gift loans, Pay-related loans, Corporation-shareholder loans, Tax avoidance loans, and Certain loans made to qualified continuing care facilities under a continuing care contract. Tax act free 2012 A pay-related loan is any below-market loan between an employer and an employee or between an independent contractor and a person for whom the contractor provides services. Tax act free 2012 A tax avoidance loan is any below-market loan where the avoidance of federal tax is one of the main purposes of the interest arrangement. Tax act free 2012 Forgone interest. Tax act free 2012   For any period, forgone interest is: The amount of interest that would be payable for that period if interest accrued on the loan at the applicable federal rate and was payable annually on December 31, minus Any interest actually payable on the loan for the period. Tax act free 2012 Applicable federal rate. Tax act free 2012   Applicable federal rates are published by the IRS each month in the Internal Revenue Bulletin. Tax act free 2012 Some IRS offices have these bulletins available for research. Tax act free 2012 See chapter 5, How To Get Tax Help , for other ways to get this information. Tax act free 2012 Rules for below-market loans. Tax act free 2012   The rules that apply to a below-market loan depend on whether the loan is a gift loan, demand loan, or term loan. Tax act free 2012 Gift and demand loans. Tax act free 2012   A gift loan is any below-market loan where the forgone interest is in the nature of a gift. Tax act free 2012   A demand loan is a loan payable in full at any time upon demand by the lender. Tax act free 2012 A demand loan is a below-market loan if no interest is charged or if interest is charged at a rate below the applicable federal rate. Tax act free 2012   A demand loan or gift loan that is a below-market loan is generally treated as an arm's-length transaction in which the lender is treated as having made: A loan to the borrower in exchange for a note that requires the payment of interest at the applicable federal rate, and An additional payment to the borrower in an amount equal to the forgone interest. Tax act free 2012 The borrower is generally treated as transferring the additional payment back to the lender as interest. Tax act free 2012 The lender must report that amount as interest income. Tax act free 2012   The lender's additional payment to the borrower is treated as a gift, dividend, contribution to capital, pay for services, or other payment, depending on the substance of the transaction. Tax act free 2012 The borrower may have to report this payment as taxable income, depending on its classification. Tax act free 2012 These transfers are considered to occur annually, generally on December 31. Tax act free 2012 Term loans. Tax act free 2012   A term loan is any loan that is not a demand loan. Tax act free 2012 A term loan is a below-market loan if the amount of the loan is more than the present value of all payments due under the loan. Tax act free 2012   A lender who makes a below-market term loan other than a gift loan is treated as transferring an additional lump-sum cash payment to the borrower (as a dividend, contribution to capital, etc. Tax act free 2012 ) on the date the loan is made. Tax act free 2012 The amount of this payment is the amount of the loan minus the present value, at the applicable federal rate, of all payments due under the loan. Tax act free 2012 An equal amount is treated as original issue discount (OID). Tax act free 2012 The lender must report the annual part of the OID as interest income. Tax act free 2012 The borrower may be able to deduct the OID as interest expense. Tax act free 2012 See Original Issue Discount (OID) , later. Tax act free 2012 Exceptions to the below-market loan rules. Tax act free 2012   Exceptions to the below-market loan rules are discussed here. Tax act free 2012 Exception for loans of $10,000 or less. Tax act free 2012   The rules for below-market loans do not apply to any day on which the total outstanding amount of loans between the borrower and lender is $10,000 or less. Tax act free 2012 This exception applies only to: Gift loans between individuals if the gift loan is not directly used to buy or carry income-producing assets, and Pay-related loans or corporation-shareholder loans if the avoidance of federal tax is not a principal purpose of the interest arrangement. Tax act free 2012 This exception does not apply to a term loan described in (2) earlier that previously has been subject to the below-market loan rules. Tax act free 2012 Those rules will continue to apply even if the outstanding balance is reduced to $10,000 or less. Tax act free 2012 Exception for loans to continuing care facilities. Tax act free 2012   Loans to qualified continuing care facilities under continuing care contracts are not subject to the rules for below-market loans for the calendar year if the lender or the lender's spouse is age 62 or older at the end of the year. Tax act free 2012 For the definitions of qualified continuing care facility and continuing care contract, see Internal Revenue Code section 7872(h). Tax act free 2012 Exception for loans without significant tax effect. Tax act free 2012   Loans are excluded from the below-market loan rules if their interest arrangements do not have a significant effect on the federal tax liability of the borrower or the lender. Tax act free 2012 These loans include: Loans made available by the lender to the general public on the same terms and conditions that are consistent with the lender's customary business practice; Loans subsidized by a federal, state, or municipal government that are made available under a program of general application to the public; Certain employee-relocation loans; Certain loans from a foreign person, unless the interest income would be effectively connected with the conduct of a U. Tax act free 2012 S. Tax act free 2012 trade or business and would not be exempt from U. Tax act free 2012 S. Tax act free 2012 tax under an income tax treaty; Gift loans to a charitable organization, contributions to which are deductible, if the total outstanding amount of loans between the organization and lender is $250,000 or less at all times during the tax year; and Other loans on which the interest arrangement can be shown to have no significant effect on the federal tax liability of the lender or the borrower. Tax act free 2012 For a loan described in (6) above, all the facts and circumstances are used to determine if the interest arrangement has a significant effect on the federal tax liability of the lender or borrower. Tax act free 2012 Some factors to be considered are: Whether items of income and deduction generated by the loan offset each other; The amount of these items; The cost to you of complying with the below-market loan rules, if they were to apply; and Any reasons other than taxes for structuring the transaction as a below-market loan. Tax act free 2012 If you structure a transaction to meet this exception and one of the principal purposes of that structure is the avoidance of federal tax, the loan will be considered a tax-avoidance loan, and this exception will not apply. Tax act free 2012 Limit on forgone interest for gift loans of $100,000 or less. Tax act free 2012   For gift loans between individuals, if the outstanding loans between the lender and borrower total $100,000 or less, the forgone interest to be included in income by the lender and deducted by the borrower is limited to the amount of the borrower's net investment income for the year. Tax act free 2012 If the borrower's net investment income is $1,000 or less, it is treated as zero. Tax act free 2012 This limit does not apply to a loan if the avoidance of federal tax is one of the main purposes of the interest arrangement. Tax act free 2012 Effective dates. Tax act free 2012    These rules apply to term loans made after June 6, 1984, and to demand loans outstanding after that date. Tax act free 2012 U. Tax act free 2012 S. Tax act free 2012 Savings Bonds This section provides tax information on U. Tax act free 2012 S. Tax act free 2012 savings bonds. Tax act free 2012 It explains how to report the interest income on these bonds and how to treat transfers of these bonds. Tax act free 2012 U. Tax act free 2012 S. Tax act free 2012 savings bonds currently offered to individuals include Series EE bonds and Series I bonds. Tax act free 2012 For other information on U. Tax act free 2012 S. Tax act free 2012 savings bonds, write to:  For Series HH/H: Bureau of the Fiscal Service Division of Customer Assistance P. Tax act free 2012 O. Tax act free 2012 Box 2186 Parkersburg, WV 26106-2186  For Series EE and I paper savings bonds: Bureau of the Fiscal Service Division of Customer Assistance P. Tax act free 2012 O. Tax act free 2012 Box 7012 Parkersburg, WV 26106-7012  For Series EE and I electronic bonds: Bureau of the Fiscal Service  Division of Customer Assistance P. Tax act free 2012 O. Tax act free 2012 Box 7015 Parkersburg, WV 26106-7015 Or, on the Internet, visit: www. Tax act free 2012 treasurydirect. Tax act free 2012 gov/indiv/indiv. Tax act free 2012 htm. Tax act free 2012 Accrual method taxpayers. Tax act free 2012   If you use an accrual method of accounting, you must report interest on U. Tax act free 2012 S. Tax act free 2012 savings bonds each year as it accrues. Tax act free 2012 You cannot postpone reporting interest until you receive it or until the bonds mature. Tax act free 2012 Cash method taxpayers. Tax act free 2012   If you use the cash method of accounting, as most individual taxpayers do, you generally report the interest on U. Tax act free 2012 S. Tax act free 2012 savings bonds when you receive it. Tax act free 2012 But see Reporting options for cash method taxpayers , later. Tax act free 2012 Series HH bonds. Tax act free 2012   These bonds were issued at face value. Tax act free 2012 Interest is paid twice a year by direct deposit to your bank account. Tax act free 2012 If you are a cash method taxpayer, you must report interest on these bonds as income in the year you receive it. Tax act free 2012   Series HH bonds were first offered in 1980 and last offered in August 2004. Tax act free 2012 Before 1980, series H bonds were issued. Tax act free 2012 Series H bonds are treated the same as series HH bonds. Tax act free 2012 If you are a cash method taxpayer, you must report the interest when you receive it. Tax act free 2012   Series H bonds have a maturity period of 30 years. Tax act free 2012 Series HH bonds mature in 20 years. Tax act free 2012 The last series H bonds matured in 2009. Tax act free 2012 The last series HH bonds will mature in 2024. Tax act free 2012 Series EE and series I bonds. Tax act free 2012   Interest on these bonds is payable when you redeem the bonds. Tax act free 2012 The difference between the purchase price and the redemption value is taxable interest. Tax act free 2012 Series EE bonds. Tax act free 2012   Series EE bonds were first offered in January 1980 and have a maturity period of 30 years. Tax act free 2012 Before July 1980, series E bonds were issued. Tax act free 2012 The original 10-year maturity period of series E bonds has been extended to 40 years for bonds issued before December 1965 and 30 years for bonds issued after November 1965. Tax act free 2012 Paper series EE and series E bonds are issued at a discount. Tax act free 2012 The face value is payable to you at maturity. Tax act free 2012 Electronic series EE bonds are issued at their face value. Tax act free 2012 The face value plus accrued interest is payable to you at maturity. Tax act free 2012 As of January 1, 2012, paper savings bonds were no longer sold at financial institutions. Tax act free 2012    Owners of paper series EE bonds can convert them to electronic bonds. Tax act free 2012 These converted bonds do not retain the denomination listed on the paper certificate but are posted at their purchase price (with accrued interest). Tax act free 2012 Series I bonds. Tax act free 2012   Series I bonds were first offered in 1998. Tax act free 2012 These are inflation-indexed bonds issued at their face amount with a maturity period of 30 years. Tax act free 2012 The face value plus all accrued interest is payable to you at maturity. Tax act free 2012 Reporting options for cash method taxpayers. Tax act free 2012   If you use the cash method of reporting income, you can report the interest on series EE, series E, and series I bonds in either of the following ways. Tax act free 2012 Method 1. Tax act free 2012 Postpone reporting the interest until the earlier of the year you cash or dispose of the bonds or the year in which they mature. Tax act free 2012 (However, see Savings bonds traded , later. Tax act free 2012 )  Note. Tax act free 2012 Series EE bonds issued in 1983 matured in 2013. Tax act free 2012 If you have used method 1, you generally must report the interest on these bonds on your 2013 return. Tax act free 2012 The last series E bonds were issued in 1980 and matured in 2010. Tax act free 2012 If you used method 1, you generally should have reported the interest on these bonds on your 2010 return. Tax act free 2012 Method 2. Tax act free 2012 Choose to report the increase in redemption value as interest each year. Tax act free 2012  You must use the same method for all series EE, series E, and series I bonds you own. Tax act free 2012 If you do not choose method 2 by reporting the increase in redemption value as interest each year, you must use method 1. Tax act free 2012 If you plan to cash your bonds in the same year you will pay for higher educational expenses, you may want to use method 1 because you may be able to exclude the interest from your income. Tax act free 2012 To learn how, see Education Savings Bond Program, later. Tax act free 2012 Change from method 1. Tax act free 2012   If you want to change your method of reporting the interest from method 1 to method 2, you can do so without permission from the IRS. Tax act free 2012 In the year of change, you must report all interest accrued to date and not previously reported for all your bonds. Tax act free 2012   Once you choose to report the interest each year, you must continue to do so for all series EE, series E, and series I bonds you own and for any you get later, unless you request permission to change, as explained next. Tax act free 2012 Change from method 2. Tax act free 2012   To change from method 2 to method 1, you must request permission from the IRS. Tax act free 2012 Permission for the change is automatically granted if you send the IRS a statement that meets all the following requirements. Tax act free 2012 You have typed or printed the following number at the top: “131. Tax act free 2012 ” It includes your name and social security number under “131. Tax act free 2012 ” It includes the year of change (both the beginning and ending dates). Tax act free 2012 It identifies the savings bonds for which you are requesting this change. Tax act free 2012 It includes your agreement to: Report all interest on any bonds acquired during or after the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest; and Report all interest on the bonds acquired before the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest, with the exception of the interest reported in prior tax years. Tax act free 2012   You must attach this statement to your tax return for the year of change, which you must file by the due date (including extensions). Tax act free 2012   You can have an automatic extension of 6 months from the due date of your return for the year of change (excluding extensions) to file the statement with an amended return. Tax act free 2012 On the statement, type or print “Filed pursuant to section 301. Tax act free 2012 9100-2. Tax act free 2012 ” To get this extension, you must have filed your original return for the year of the change by the due date (including extensions). Tax act free 2012    By the date you file the original statement with your return, you must also send a signed copy to the address below. Tax act free 2012    Internal Revenue Service Attention: CC:IT&A (Automatic Rulings Branch) P. Tax act free 2012 O. Tax act free 2012 Box 7604 Benjamin Franklin Station Washington, DC 20044   If you use a private delivery service, send the signed copy to the address below. Tax act free 2012 Internal Revenue Service Attention: CC:IT&A  (Automatic Rulings Branch) Room 5336 1111 Constitution Avenue, NW Washington, DC 20224    Instead of filing this statement, you can request permission to change from method 2 to method 1 by filing Form 3115. Tax act free 2012 In that case, follow the form instructions for an automatic change. Tax act free 2012 No user fee is required. Tax act free 2012 Co-owners. Tax act free 2012   If a U. Tax act free 2012 S. Tax act free 2012 savings bond is issued in the names of co-owners, such as you and your child or you and your spouse, interest on the bond is generally taxable to the co-owner who bought the bond. Tax act free 2012 One co-owner's funds used. Tax act free 2012   If you used your funds to buy the bond, you must pay the tax on the interest. Tax act free 2012 This is true even if you let the other co-owner redeem the bond and keep all the proceeds. Tax act free 2012 Under these circumstances, the co-owner who redeemed the bond will receive a Form 1099-INT at the time of redemption and must provide you with another Form 1099-INT showing the amount of interest from the bond taxable to you. Tax act free 2012 The co-owner who redeemed the bond is a “nominee. Tax act free 2012 ” See Nominee distributions under How To Report Interest Income, later, for more information about how a person who is a nominee reports interest income belonging to another person. Tax act free 2012 Both co-owners' funds used. Tax act free 2012   If you and the other co-owner each contribute part of the bond's purchase price, the interest is generally taxable to each of you, in proportion to the amount each of you paid. Tax act free 2012 Community property. Tax act free 2012   If you and your spouse live in a community property state and hold bonds as community property, one-half of the interest is considered received by each of you. Tax act free 2012 If you file separate returns, each of you generally must report one-half of the bond interest. Tax act free 2012 For more information about community property, see Publication 555. Tax act free 2012 Table 1-2. Tax act free 2012   These rules are also shown in Table 1-2. Tax act free 2012 Child as only owner. Tax act free 2012   Interest on U. Tax act free 2012 S. Tax act free 2012 savings bonds bought for and registered only in the name of your child is income to your child, even if you paid for the bonds and are named as beneficiary. Tax act free 2012 If the bonds are series EE, series E, or series I bonds, the interest on the bonds is income to your child in the earlier of the year the bonds are cashed or disposed of or the year the bonds mature, unless your child chooses to report the interest income each year. Tax act free 2012 Choice to report interest each year. Tax act free 2012   The choice to report the accrued interest each year can be made either by your child or by you for your child. Tax act free 2012 This choice is made by filing an income tax return that shows all the interest earned to date, and by stating on the return that your child chooses to report the interest each year. Tax act free 2012 Either you or your child should keep a copy of this return. Tax act free 2012   Unless your child is otherwise required to file a tax return for any year after making this choice, your child does not have to file a return only to report the annual accrual of U. Tax act free 2012 S. Tax act free 2012 savings bond interest under this choice. Tax act free 2012 However, see Tax on unearned income of certain children , earlier, under General Information. Tax act free 2012 Neither you nor your child can change the way you report the interest unless you request permission from the IRS, as discussed earlier under Change from method 2 . Tax act free 2012 Ownership transferred. Tax act free 2012   If you bought series E, series EE, or series I bonds entirely with your own funds and had them reissued in your co-owner's name or beneficiary's name alone, you must include in your gross income for the year of reissue all interest that you earned on these bonds and have not previously reported. Tax act free 2012 But, if the bonds were reissued in your name alone, you do not have to report the interest accrued at that time. Tax act free 2012   This same rule applies when bonds (other than bonds held as community property) are transferred between spouses or incident to divorce. Tax act free 2012 Example. Tax act free 2012 You bought series EE bonds entirely with your own funds. Tax act free 2012 You did not choose to report the accrued interest each year. Tax act free 2012 Later, you transfer the bonds to your former spouse under a divorce agreement. Tax act free 2012 You must include the deferred accrued interest, from the date of the original issue of the bonds to the date of transfer, in your income in the year of transfer. Tax act free 2012 Your former spouse includes in income the interest on the bonds from the date of transfer to the date of redemption. Tax act free 2012 Table 1-2. Tax act free 2012 Who Pays the Tax on U. Tax act free 2012 S. Tax act free 2012 Savings Bond Interest IF . Tax act free 2012 . Tax act free 2012 . Tax act free 2012 THEN the interest must be reported by . Tax act free 2012 . Tax act free 2012 . Tax act free 2012 you buy a bond in your name and the name of another person as co-owners, using only your own funds you. Tax act free 2012 you buy a bond in the name of another person, who is the sole owner of the bond the person for whom you bought the bond. Tax act free 2012 you and another person buy a bond as co-owners, each contributing part of the purchase price both you and the other co-owner, in proportion to the amount each paid for the bond. Tax act free 2012 you and your spouse, who live in a community property state, buy a bond that is community property you and your spouse. Tax act free 2012 If you file separate returns, both you and your spouse generally report one-half of the interest. Tax act free 2012 Purchased jointly. Tax act free 2012   If you and a co-owner each contributed funds to buy series E, series EE, or series I bonds jointly and later have the bonds reissued in the co-owner's name alone, you must include in your gross income for the year of reissue your share of all the interest earned on the bonds that you have not previously reported. Tax act free 2012 The former co-owner does not have to include in gross income at the time of reissue his or her share of the interest earned that was not reported before the transfer. Tax act free 2012 This interest, however, as well as all interest earned after the reissue, is income to the former co-owner. Tax act free 2012   This income-reporting rule also applies when the bonds are reissued in the name of your former co-owner and a new co-owner. Tax act free 2012 But the new co-owner will report only his or her share of the interest earned after the transfer. Tax act free 2012   If bonds that you and a co-owner bought jointly are reissued to each of you separately in the same proportion as your contribution to the purchase price, neither you nor your co-owner has to report at that time the interest earned before the bonds were reissued. Tax act free 2012 Example 1. Tax act free 2012 You and your spouse each spent an equal amount to buy a $1,000 series EE savings bond. Tax act free 2012 The bond was issued to you and your spouse as co-owners. Tax act free 2012 You both postpone reporting interest on the bond. Tax act free 2012 You later have the bond reissued as two $500 bonds, one in your name and one in your spouse's name. Tax act free 2012 At that time neither you nor your spouse has to report the interest earned to the date of reissue. Tax act free 2012 Example 2. Tax act free 2012 You bought a $1,000 series EE savings bond entirely with your own funds. Tax act free 2012 The bond was issued to you and your spouse as co-owners. Tax act free 2012 You both postponed reporting interest on the bond. Tax act free 2012 You later have the bond reissued as two $500 bonds, one in your name and one in your spouse's name. Tax act free 2012 You must report half the interest earned to the date of reissue. Tax act free 2012 Transfer to a trust. Tax act free 2012   If you own series E, series EE, or series I bonds and transfer them to a trust, giving up all rights of ownership, you must include in your income for that year the interest earned to the date of transfer if you have not already reported it. Tax act free 2012 However, if you are considered the owner of the trust and if the increase in value both before and after the transfer continues to be taxable to you, you can continue to defer reporting the interest earned each year. Tax act free 2012 You must include the total interest in your income in the year you cash or dispose of the bonds or the year the bonds finally mature, whichever is earlier. Tax act free 2012   The same rules apply to previously unreported interest on series EE or series E bonds if the transfer to a trust consisted of series HH or series H bonds you acquired in a trade for the series EE or series E bonds. Tax act free 2012 See Savings bonds traded , later. Tax act free 2012 Decedents. Tax act free 2012   The manner of reporting interest income on series E, series EE, or series I bonds, after the death of the owner (decedent), depends on the accounting and income-reporting methods previously used by the decedent. Tax act free 2012 Decedent who reported interest each year. Tax act free 2012   If the bonds transferred because of death were owned by a person who used an accrual method, or who used the cash method and had chosen to report the interest each year, the interest earned in the year of death up to the date of death must be reported on that person's final return. Tax act free 2012 The person who acquires the bonds includes in income only interest earned after the date of death. Tax act free 2012 Decedent who postponed reporting interest. Tax act free 2012   If the transferred bonds were owned by a decedent who had used the cash method and had not chosen to report the interest each year, and who had bought the bonds entirely with his or her own funds, all interest earned before death must be reported in one of the following ways. Tax act free 2012 The surviving spouse or personal representative (executor, administrator, etc. Tax act free 2012 ) who files the final income tax return of the decedent can choose to include on that return all interest earned on the bonds before the decedent's death. Tax act free 2012 The person who acquires the bonds then includes in income only interest earned after the date of death. Tax act free 2012 If the choice in (1) is not made, the interest earned up to the date of death is income in respect of the decedent and should not be included in the decedent's final return. Tax act free 2012 All interest earned both before and after the decedent's death (except any part reported by the estate on its income tax return) is income to the person who acquires the bonds. Tax act free 2012 If that person uses the cash method and does not choose to report the interest each year, he or she can postpone reporting it until the year the bonds are cashed or disposed of or the year they mature, whichever is earlier. Tax act free 2012 In the year that person reports the interest, he or she can claim a deduction for any federal estate tax paid on the part of the interest included in the decedent's estate. Tax act free 2012 For more information on income in respect of a decedent, see Publication 559, Survivors, Executors, and Administrators. Tax act free 2012 Example 1. Tax act free 2012 Your uncle, a cash method taxpayer, died and left you a $1,000 series EE bond. Tax act free 2012 He had bought the bond for $500 and had not chosen to report the interest each year. Tax act free 2012 At the date of death, interest of $200 had accrued on the bond, and its value of $700 was included in your uncle's estate. Tax act free 2012 Your uncle's executor chose not to include the $200 accrued interest in your uncle's final income tax return. Tax act free 2012 The $200 is income in respect of the decedent. Tax act free 2012 You are a cash method taxpayer and do not choose to report the interest each year as it is earned. Tax act free 2012 If you cash the bond when it reaches maturity value of $1,000, you report $500 interest income—the difference between maturity value of $1,000 and the original cost of $500. Tax act free 2012 For that year, you can deduct (as a miscellaneous itemized deduction not subject to the 2%-of-adjusted-gross-income limit) any federal estate tax paid because the $200 interest was included in your uncle's estate. Tax act free 2012 Example 2. Tax act free 2012 If, in Example 1 , the executor had chosen to include the $200 accrued interest in your uncle's final return, you would report only $300 as interest when you cashed the bond at maturity. Tax act free 2012 $300 is the interest earned after your uncle's death. Tax act free 2012 Example 3. Tax act free 2012 If, in Example 1 , you make or have made the choice to report the increase in redemption value as interest each year, you include in gross income for the year you acquire the bond all of the unreported increase in value of all series E, series EE, and series I bonds you hold, including the $200 on the bond you inherited from your uncle. Tax act free 2012 Example 4. Tax act free 2012 When your aunt died, she owned series HH bonds that she had acquired in a trade for series EE bonds. Tax act free 2012 You were the beneficiary of these bonds. Tax act free 2012 Your aunt used the cash method and did not choose to report the interest on the series EE bonds each year as it accrued. Tax act free 2012 Your aunt's executor chose not to include any interest earned before your aunt's death on her final return. Tax act free 2012 The income in respect of the decedent is the sum of the unreported interest on the series EE bonds and the interest, if any, payable on the series HH bonds but not received as of the date of your aunt's death. Tax act free 2012 You must report any interest received during the year as income on your return. Tax act free 2012 The part of the interest payable but not received before your aunt's death is income in respect of the decedent and may qualify for the estate tax deduction. Tax act free 2012 For information on when to report the interest on the series EE bonds traded, see Savings bonds traded , later. Tax act free 2012 Savings bonds distributed from a retirement or profit-sharing plan. Tax act free 2012   If you acquire a U. Tax act free 2012 S. Tax act free 2012 savings bond in a taxable distribution from a retirement or profit-sharing plan, your income for the year of distribution includes the bond's redemption value (its cost plus the interest accrued before the distribution). Tax act free 2012 When you redeem the bond (whether in the year of distribution or later), your interest income includes only the interest accrued after the bond was distributed. Tax act free 2012 To figure the interest reported as a taxable distribution and your interest income when you redeem the bond, see Worksheet for savings bonds distributed from a retirement or profit-sharing plan under How To Report Interest Income, later. Tax act free 2012 Savings bonds traded. Tax act free 2012   If you postponed reporting the interest on your series EE or series E bonds, you did not recognize taxable income when you traded the bonds for series HH or series H bonds, unless you received cash in the trade. Tax act free 2012 (You cannot trade series I bonds for series HH bonds. Tax act free 2012 After August 31, 2004, you cannot trade any other series of bonds for series HH bonds. Tax act free 2012 ) Any cash you received is income up to the amount of the interest earned on the bonds traded. Tax act free 2012 When your series HH or series H bonds mature, or if you dispose of them before maturity, you report as interest the difference between their redemption value and your cost. Tax act free 2012 Your cost is the sum of the amount you paid for the traded series EE or series E bonds plus any amount you had to pay at the time of the trade. Tax act free 2012 Example. Tax act free 2012 You traded series EE bonds (on which you postponed reporting the interest) for $2,500 in series HH bonds and $223 in cash. Tax act free 2012 You reported the $223 as taxable income on your tax return. Tax act free 2012 At the time of the trade, the series EE bonds had accrued interest of $523 and a redemption value of $2,723. Tax act free 2012 You hold the series HH bonds until maturity, when you receive $2,500. Tax act free 2012 You must report $300 as interest income in the year of maturity. Tax act free 2012 This is the difference between their redemption value, $2,500, and your cost, $2,200 (the amount you paid for the series EE bonds). Tax act free 2012 (It is also the difference between the accrued interest of $523 on the series EE bonds and the $223 cash received on the trade. Tax act free 2012 ) Choice to report interest in year of trade. Tax act free 2012   You could have chosen to treat all of the previously unreported accrued interest on series EE or series E bonds traded for series HH bonds as income in the year of the trade. Tax act free 2012 If you made this choice, it is treated as a change from method 1. Tax act free 2012 See Change from method 1 under Series EE and series I bonds, earlier. Tax act free 2012 Form 1099-INT for U. Tax act free 2012 S. Tax act free 2012 savings bond interest. Tax act free 2012   When you cash a bond, the bank or other payer that redeems it must give you a Form 1099-INT if the interest part of the payment you receive is $10 or more. Tax act free 2012 Box 3 of your Form 1099-INT should show the interest as the difference between the amount you received and the amount paid for the bond. Tax act free 2012 However, your Form 1099-INT may show more interest than you have to include on your income tax return. Tax act free 2012 For example, this may happen if any of the following are true. Tax act free 2012 You chose to report the increase in the redemption value of the bond each year. Tax act free 2012 The interest shown on your Form 1099-INT will not be reduced by amounts previously included in income. Tax act free 2012 You received the bond from a decedent. Tax act free 2012 The interest shown on your Form 1099-INT will not be reduced by any interest reported by the decedent before death, or on the decedent's final return, or by the estate on the estate's income tax return. Tax act free 2012 Ownership of the bond was transferred. Tax act free 2012 The interest shown on your Form 1099-INT will not be reduced by interest that accrued before the transfer. Tax act free 2012 You were named as a co-owner, and the other co-owner contributed funds to buy the bond. Tax act free 2012 The interest shown on your Form 1099-INT will not be reduced by the amount you received as nominee for the other co-owner. Tax act free 2012 (See Co-owners , earlier in this section, for more information about the reporting requirements. Tax act free 2012 ) You received the bond in a taxable distribution from a retirement or profit-sharing plan. Tax act free 2012 The interest shown on your Form 1099-INT will not be reduced by the interest portion of the amount taxable as a distribution from the plan and not taxable as interest. Tax act free 2012 (This amount is generally shown on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Tax act free 2012 , for the year of distribution. Tax act free 2012 )   For more information on including the correct amount of interest on your return, see U. Tax act free 2012 S. Tax act free 2012 savings bond interest previously reported or Nominee distributions under How To Report Interest Income, later. Tax act free 2012    Interest on U. Tax act free 2012 S. Tax act free 2012 savings bonds is exempt from state and local taxes. Tax act free 2012 The Form 1099-INT you receive will indicate the amount that is for U. Tax act free 2012 S. Tax act free 2012 savings bonds interest in box 3. Tax act free 2012 Do not include this income on your state or local income tax return. Tax act free 2012 Education Savings Bond Program You may be able to exclude from income all or part of the interest you receive on the redemption of qualified U. Tax act free 2012 S. Tax act free 2012 savings bonds during the year if you pay qualified higher educational expenses during the same year. Tax act free 2012 This exclusion is known as the Education Savings Bond Program. Tax act free 2012 You do not qualify for this exclusion if your filing status is married filing separately. Tax act free 2012 Form 8815. Tax act free 2012   Use Form 8815 to figure your exclusion. Tax act free 2012 Attach the form to your Form 1040 or Form 1040A. Tax act free 2012 Qualified U. Tax act free 2012 S. Tax act free 2012 savings bonds. Tax act free 2012   A qualified U. Tax act free 2012 S. Tax act free 2012 savings bond is a series EE bond issued after 1989 or a series I bond. Tax act free 2012 The bond must be issued either in your name (sole owner) or in your and your spouse's names (co-owners). Tax act free 2012 You must be at least 24 years old before the bond's issue date. Tax act free 2012 For example, a bond bought by a parent and issued in the name of his or her child under age 24 does not qualify for the exclusion by the parent or child. Tax act free 2012    The issue date of a bond may be earlier than the date the bond is purchased because the issue date assigned to a bond is the first day of the month in which it is purchased. Tax act free 2012 Beneficiary. Tax act free 2012   You can designate any individual (including a child) as a beneficiary of the bond. Tax act free 2012 Verification by IRS. Tax act free 2012   If you claim the exclusion, the IRS will check it by using bond redemption information from the Department of Treasury. Tax act free 2012 Qualified expenses. Tax act free 2012   Qualified higher educational expenses are tuition and fees required for you, your spouse, or your dependent (for whom you claim an exemption) to attend an eligible educational institution. Tax act free 2012   Qualified expenses include any contribution you make to a qualified tuition program or to a Coverdell education savings account. Tax act free 2012 For information about these programs, see Publication 970, Tax Benefits for Education. Tax act free 2012   Qualified expenses do not include expenses for room and board or for courses involving sports, games, or hobbies that are not part of a degree or certificate granting program. Tax act free 2012 Eligible educational institutions. Tax act free 2012   These institutions include most public, private, and nonprofit universities, colleges, and vocational schools that are accredited and eligible to participate in student aid programs run by the Department of Education. Tax act free 2012 Reduction for certain benefits. Tax act free 2012   You must reduce your qualified higher educational expenses by all of the following tax-free benefits. Tax act free 2012 Tax-free part of scholarships and fellowships. Tax act free 2012 Expenses used to figure the tax-free portion of distributions from a Coverdell ESA. Tax act free 2012 Expenses used to figure the tax-free portion of distributions from a qualified tuition program. Tax act free 2012 Any tax-free payments (other than gifts or inheritances) received as educational assistance, such as: Veterans' educational assistance benefits, Qualified tuition reductions, or Employer-provided educational assistance. Tax act free 2012 Any expense used in figuring the American Opportunity and lifetime learning credits. Tax act free 2012 For information about these benefits, see Publication 970. Tax act free 2012 Amount excludable. Tax act free 2012   If the total proceeds (interest and principal) from the qualified U. Tax act free 2012 S. Tax act free 2012 savings bonds you redeem during the year are not more than your adjusted qualified higher educational expenses for the year, you may be able to exclude all of the interest. Tax act free 2012 If the proceeds are more than the expenses, you may be able to exclude only part of the interest. Tax act free 2012   To determine the excludable amount, multiply the interest part of the proceeds by a fraction. Tax act free 2012 The numer