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Tax Planning Us 1040

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Tax Planning Us 1040

Tax planning us 1040 2. Tax planning us 1040   Depreciation of Rental Property Table of Contents The BasicsWhat Rental Property Can Be Depreciated? When Does Depreciation Begin and End? Depreciation Methods Basis of Depreciable Property Claiming the Special Depreciation Allowance MACRS DepreciationDepreciation Systems Property Classes Under GDS Recovery Periods Under GDS Conventions Figuring Your Depreciation Deduction Figuring MACRS Depreciation Under ADS Claiming the Correct Amount of Depreciation You recover the cost of income producing property through yearly tax deductions. Tax planning us 1040 You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return. Tax planning us 1040 Three factors determine how much depreciation you can deduct each year: (1) your basis in the property, (2) the recovery period for the property, and (3) the depreciation method used. Tax planning us 1040 You cannot simply deduct your mortgage or principal payments, or the cost of furniture, fixtures and equipment, as an expense. Tax planning us 1040 You can deduct depreciation only on the part of your property used for rental purposes. Tax planning us 1040 Depreciation reduces your basis for figuring gain or loss on a later sale or exchange. Tax planning us 1040 You may have to use Form 4562 to figure and report your depreciation. Tax planning us 1040 See Which Forms To Use in chapter 3. Tax planning us 1040 Also see Publication 946. Tax planning us 1040 Section 179 deduction. Tax planning us 1040   The section 179 deduction is a means of recovering part or all of the cost of certain qualifying property in the year you place the property in service. Tax planning us 1040 This deduction is not allowed for property used in connection with residential rental property. Tax planning us 1040 See chapter 2 of Publication 946. Tax planning us 1040 Alternative minimum tax (AMT). Tax planning us 1040   If you use accelerated depreciation, you may be subject to the AMT. Tax planning us 1040 Accelerated depreciation allows you to deduct more depreciation earlier in the recovery period than you could deduct using a straight line method (same deduction each year). Tax planning us 1040   The prescribed depreciation methods for rental real estate are not accelerated, so the depreciation deduction is not adjusted for the AMT. Tax planning us 1040 However, accelerated methods are generally used for other property connected with rental activities (for example, appliances and wall-to-wall carpeting). Tax planning us 1040   To find out if you are subject to the AMT, see the Instructions for Form 6251. Tax planning us 1040 The Basics The following section discusses the information you will need to have about the rental property and the decisions to be made before figuring your depreciation deduction. Tax planning us 1040 What Rental Property Can Be Depreciated? You can depreciate your property if it meets all the following requirements. Tax planning us 1040 You own the property. Tax planning us 1040 You use the property in your business or income-producing activity (such as rental property). Tax planning us 1040 The property has a determinable useful life. Tax planning us 1040 The property is expected to last more than one year. Tax planning us 1040 Property you own. Tax planning us 1040   To claim depreciation, you usually must be the owner of the property. Tax planning us 1040 You are considered as owning property even if it is subject to a debt. Tax planning us 1040 Rented property. Tax planning us 1040   Generally, if you pay rent for property, you cannot depreciate that property. Tax planning us 1040 Usually, only the owner can depreciate it. Tax planning us 1040 However, if you make permanent improvements to leased property, you may be able to depreciate the improvements. Tax planning us 1040 See Additions or improvements to property , later in this chapter, under Recovery Periods Under GDS. Tax planning us 1040 Cooperative apartments. Tax planning us 1040   If you are a tenant-stockholder in a cooperative housing corporation and rent your cooperative apartment to others, you can deduct depreciation on your stock in the corporation. Tax planning us 1040 See chapter 4, Special Situations. Tax planning us 1040 Property having a determinable useful life. Tax planning us 1040   To be depreciable, your property must have a determinable useful life. Tax planning us 1040 This means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. Tax planning us 1040 What Rental Property Cannot Be Depreciated? Certain property cannot be depreciated. Tax planning us 1040 This includes land and certain excepted property. Tax planning us 1040 Land. Tax planning us 1040   You cannot depreciate the cost of land because land generally does not wear out, become obsolete, or get used up. Tax planning us 1040 But if it does, the loss is accounted for upon disposition. Tax planning us 1040 The costs of clearing, grading, planting, and landscaping are usually all part of the cost of land and cannot be depreciated. Tax planning us 1040   Although you cannot depreciate land, you can depreciate certain land preparation costs, such as landscaping costs, incurred in preparing land for business use. Tax planning us 1040 These costs must be so closely associated with other depreciable property that you can determine a life for them along with the life of the associated property. Tax planning us 1040 Example. Tax planning us 1040 You built a new house to use as a rental and paid for grading, clearing, seeding, and planting bushes and trees. Tax planning us 1040 Some of the bushes and trees were planted right next to the house, while others were planted around the outer border of the lot. Tax planning us 1040 If you replace the house, you would have to destroy the bushes and trees right next to it. Tax planning us 1040 These bushes and trees are closely associated with the house, so they have a determinable useful life. Tax planning us 1040 Therefore, you can depreciate them. Tax planning us 1040 Add your other land preparation costs to the basis of your land because they have no determinable life and you cannot depreciate them. Tax planning us 1040 Excepted property. Tax planning us 1040   Even if the property meets all the requirements listed earlier under What Rental Property Can Be Depreciated , you cannot depreciate the following property. Tax planning us 1040 Property placed in service and disposed of (or taken out of business use) in the same year. Tax planning us 1040 Equipment used to build capital improvements. Tax planning us 1040 You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. Tax planning us 1040 For more information, see chapter 1 of Publication 946. Tax planning us 1040 When Does Depreciation Begin and End? You begin to depreciate your rental property when you place it in service for the production of income. Tax planning us 1040 You stop depreciating it either when you have fully recovered your cost or other basis, or when you retire it from service, whichever happens first. Tax planning us 1040 Placed in Service You place property in service in a rental activity when it is ready and available for a specific use in that activity. Tax planning us 1040 Even if you are not using the property, it is in service when it is ready and available for its specific use. Tax planning us 1040 Example 1. Tax planning us 1040 On November 22 of last year, you purchased a dishwasher for your rental property. Tax planning us 1040 The appliance was delivered on December 7, but was not installed and ready for use until January 3 of this year. Tax planning us 1040 Because the dishwasher was not ready for use last year, it is not considered placed in service until this year. Tax planning us 1040 If the appliance had been installed and ready for use when it was delivered in December of last year, it would have been considered placed in service in December, even if it was not actually used until this year. Tax planning us 1040 Example 2. Tax planning us 1040 On April 6, you purchased a house to use as residential rental property. Tax planning us 1040 You made extensive repairs to the house and had it ready for rent on July 5. Tax planning us 1040 You began to advertise the house for rent in July and actually rented it beginning September 1. Tax planning us 1040 The house is considered placed in service in July when it was ready and available for rent. Tax planning us 1040 You can begin to depreciate the house in July. Tax planning us 1040 Example 3. Tax planning us 1040 You moved from your home in July. Tax planning us 1040 During August and September you made several repairs to the house. Tax planning us 1040 On October 1, you listed the property for rent with a real estate company, which rented it on December 1. Tax planning us 1040 The property is considered placed in service on October 1, the date when it was available for rent. Tax planning us 1040 Conversion to business use. Tax planning us 1040   If you place property in service in a personal activity, you cannot claim depreciation. Tax planning us 1040 However, if you change the property's use to business or the production of income, you can begin to depreciate it at the time of the change. Tax planning us 1040 You place the property in service for business or income-producing use on the date of the change. Tax planning us 1040 Example. Tax planning us 1040 You bought a house and used it as your personal home several years before you converted it to rental property. Tax planning us 1040 Although its specific use was personal and no depreciation was allowable, you placed the home in service when you began using it as your home. Tax planning us 1040 You can begin to claim depreciation in the year you converted it to rental property because at that time its use changed to the production of income. Tax planning us 1040 Idle Property Continue to claim a deduction for depreciation on property used in your rental activity even if it is temporarily idle (not in use). Tax planning us 1040 For example, if you must make repairs after a tenant moves out, you still depreciate the rental property during the time it is not available for rent. Tax planning us 1040 Cost or Other Basis Fully Recovered You must stop depreciating property when the total of your yearly depreciation deductions equals your cost or other basis of your property. Tax planning us 1040 For this purpose, your yearly depreciation deductions include any depreciation that you were allowed to claim, even if you did not claim it. Tax planning us 1040 See Basis of Depreciable Property , later. Tax planning us 1040 Retired From Service You stop depreciating property when you retire it from service, even if you have not fully recovered its cost or other basis. Tax planning us 1040 You retire property from service when you permanently withdraw it from use in a trade or business or from use in the production of income because of any of the following events. Tax planning us 1040 You sell or exchange the property. Tax planning us 1040 You convert the property to personal use. Tax planning us 1040 You abandon the property. Tax planning us 1040 The property is destroyed. Tax planning us 1040 Depreciation Methods Generally, you must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate residential rental property placed in service after 1986. Tax planning us 1040 If you placed rental property in service before 1987, you are using one of the following methods. Tax planning us 1040 ACRS (Accelerated Cost Recovery System) for property placed in service after 1980 but before 1987. Tax planning us 1040 Straight line or declining balance method over the useful life of property placed in service before 1981. Tax planning us 1040 See MACRS Depreciation , later, for more information. Tax planning us 1040 Rental property placed in service before 2013. Tax planning us 1040   Continue to use the same method of figuring depreciation that you used in the past. Tax planning us 1040 Use of real property changed. Tax planning us 1040   Generally, you must use MACRS to depreciate real property that you acquired for personal use before 1987 and changed to business or income-producing use after 1986. Tax planning us 1040 This includes your residence that you changed to rental use. Tax planning us 1040 See Property Owned or Used in 1986 in Publication 946, chapter 1, for those situations in which MACRS is not allowed. Tax planning us 1040 Improvements made after 1986. Tax planning us 1040   Treat an improvement made after 1986 to property you placed in service before 1987 as separate depreciable property. Tax planning us 1040 As a result, you can depreciate that improvement as separate property under MACRS if it is the type of property that otherwise qualifies for MACRS depreciation. Tax planning us 1040 For more information about improvements, see Additions or improvements to property , later in this chapter under Recovery Periods Under GDS. Tax planning us 1040 This publication discusses MACRS depreciation only. Tax planning us 1040 If you need information about depreciating property placed in service before 1987, see Publication 534. Tax planning us 1040 Basis of Depreciable Property The basis of property used in a rental activity is generally its adjusted basis when you place it in service in that activity. Tax planning us 1040 This is its cost or other basis when you acquired it, adjusted for certain items occurring before you place it in service in the rental activity. Tax planning us 1040 If you depreciate your property under MACRS, you may also have to reduce your basis by certain deductions and credits with respect to the property. Tax planning us 1040 Basis and adjusted basis are explained in the following discussions. Tax planning us 1040 If you used the property for personal purposes before changing it to rental use, its basis for depreciation is the lesser of its adjusted basis or its fair market value when you change it to rental use. Tax planning us 1040 See Basis of Property Changed to Rental Use in chapter 4. Tax planning us 1040 Cost Basis The basis of property you buy is usually its cost. Tax planning us 1040 The cost is the amount you pay for it in cash, in debt obligation, in other property, or in services. Tax planning us 1040 Your cost also includes amounts you pay for: Sales tax charged on the purchase (but see Exception next), Freight charges to obtain the property, and Installation and testing charges. Tax planning us 1040 Exception. Tax planning us 1040   If you deducted state and local general sales taxes as an itemized deduction on Schedule A (Form 1040), do not include those sales taxes as part of your cost basis. Tax planning us 1040 Such taxes were deductible before 1987 and after 2003. Tax planning us 1040 Loans with low or no interest. Tax planning us 1040   If you buy property on any time-payment plan that charges little or no interest, the basis of your property is your stated purchase price, less the amount considered to be unstated interest. Tax planning us 1040 See Unstated Interest and Original Issue Discount (OID) in Publication 537, Installment Sales. Tax planning us 1040 Real property. Tax planning us 1040   If you buy real property, such as a building and land, certain fees and other expenses you pay are part of your cost basis in the property. Tax planning us 1040 Real estate taxes. Tax planning us 1040   If you buy real property and agree to pay real estate taxes on it that were owed by the seller and the seller does not reimburse you, the taxes you pay are treated as part of your basis in the property. Tax planning us 1040 You cannot deduct them as taxes paid. Tax planning us 1040   If you reimburse the seller for real estate taxes the seller paid for you, you can usually deduct that amount. Tax planning us 1040 Do not include that amount in your basis in the property. Tax planning us 1040 Settlement fees and other costs. Tax planning us 1040   The following settlement fees and closing costs for buying the property are part of your basis in the property. Tax planning us 1040 Abstract fees. Tax planning us 1040 Charges for installing utility services. Tax planning us 1040 Legal fees. Tax planning us 1040 Recording fees. Tax planning us 1040 Surveys. Tax planning us 1040 Transfer taxes. Tax planning us 1040 Title insurance. Tax planning us 1040 Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. Tax planning us 1040   The following are settlement fees and closing costs you cannot include in your basis in the property. Tax planning us 1040 Fire insurance premiums. Tax planning us 1040 Rent or other charges relating to occupancy of the property before closing. Tax planning us 1040 Charges connected with getting or refinancing a loan, such as: Points (discount points, loan origination fees), Mortgage insurance premiums, Loan assumption fees, Cost of a credit report, and Fees for an appraisal required by a lender. Tax planning us 1040   Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Tax planning us 1040 Assumption of a mortgage. Tax planning us 1040   If you buy property and become liable for an existing mortgage on the property, your basis is the amount you pay for the property plus the amount remaining to be paid on the mortgage. Tax planning us 1040 Example. Tax planning us 1040 You buy a building for $60,000 cash and assume a mortgage of $240,000 on it. Tax planning us 1040 Your basis is $300,000. Tax planning us 1040 Separating cost of land and buildings. Tax planning us 1040   If you buy buildings and your cost includes the cost of the land on which they stand, you must divide the cost between the land and the buildings to figure the basis for depreciation of the buildings. Tax planning us 1040 The part of the cost that you allocate to each asset is the ratio of the fair market value of that asset to the fair market value of the whole property at the time you buy it. Tax planning us 1040   If you are not certain of the fair market values of the land and the buildings, you can divide the cost between them based on their assessed values for real estate tax purposes. Tax planning us 1040 Example. Tax planning us 1040 You buy a house and land for $200,000. Tax planning us 1040 The purchase contract does not specify how much of the purchase price is for the house and how much is for the land. Tax planning us 1040 The latest real estate tax assessment on the property was based on an assessed value of $160,000, of which $136,000 was for the house and $24,000 was for the land. Tax planning us 1040 You can allocate 85% ($136,000 ÷ $160,000) of the purchase price to the house and 15% ($24,000 ÷ $160,000) of the purchase price to the land. Tax planning us 1040 Your basis in the house is $170,000 (85% of $200,000) and your basis in the land is $30,000 (15% of $200,000). Tax planning us 1040 Basis Other Than Cost You cannot use cost as a basis for property that you received: In return for services you performed; In an exchange for other property; As a gift; From your spouse, or from your former spouse as the result of a divorce; or As an inheritance. Tax planning us 1040 If you received property in one of these ways, see Publication 551 for information on how to figure your basis. Tax planning us 1040 Adjusted Basis To figure your property's basis for depreciation, you may have to make certain adjustments (increases and decreases) to the basis of the property for events occurring between the time you acquired the property and the time you placed it in service for business or the production of income. Tax planning us 1040 The result of these adjustments to the basis is the adjusted basis. Tax planning us 1040 Increases to basis. Tax planning us 1040   You must increase the basis of any property by the cost of all items properly added to a capital account. Tax planning us 1040 These include the following. Tax planning us 1040 The cost of any additions or improvements made before placing your property into service as a rental that have a useful life of more than 1 year. Tax planning us 1040 Amounts spent after a casualty to restore the damaged property. Tax planning us 1040 The cost of extending utility service lines to the property. Tax planning us 1040 Legal fees, such as the cost of defending and perfecting title, or settling zoning issues. Tax planning us 1040 Additions or improvements. Tax planning us 1040   Add to the basis of your property the amount an addition or improvement actually cost you, including any amount you borrowed to make the addition or improvement. Tax planning us 1040 This includes all direct costs, such as material and labor, but does not include your own labor. Tax planning us 1040 It also includes all expenses related to the addition or improvement. Tax planning us 1040   For example, if you had an architect draw up plans for remodeling your property, the architect's fee is a part of the cost of the remodeling. Tax planning us 1040 Or, if you had your lot surveyed to put up a fence, the cost of the survey is a part of the cost of the fence. Tax planning us 1040   Keep separate accounts for depreciable additions or improvements made after you place the property in service in your rental activity. Tax planning us 1040 For information on depreciating additions or improvements, see Additions or improvements to property , later in this chapter, under Recovery Periods Under GDS. Tax planning us 1040    The cost of landscaping improvements is usually treated as an addition to the basis of the land, which is not depreciable. Tax planning us 1040 However, see What Rental Property Cannot Be Depreciated, earlier. Tax planning us 1040 Assessments for local improvements. Tax planning us 1040   Assessments for items which tend to increase the value of property, such as streets and sidewalks, must be added to the basis of the property. Tax planning us 1040 For example, if your city installs curbing on the street in front of your house, and assesses you and your neighbors for its cost, you must add the assessment to the basis of your property. Tax planning us 1040 Also add the cost of legal fees paid to obtain a decrease in an assessment levied against property to pay for local improvements. Tax planning us 1040 You cannot deduct these items as taxes or depreciate them. Tax planning us 1040    However, you can deduct as taxes, charges or assessments for maintenance, repairs, or interest charges related to the improvements. Tax planning us 1040 Do not add them to your basis in the property. Tax planning us 1040 Deducting vs. Tax planning us 1040 capitalizing costs. Tax planning us 1040   Do not add to your basis costs you can deduct as current expenses. Tax planning us 1040 However, there are certain costs you can choose either to deduct or to capitalize. Tax planning us 1040 If you capitalize these costs, include them in your basis. Tax planning us 1040 If you deduct them, do not include them in your basis. Tax planning us 1040   The costs you may choose to deduct or capitalize include carrying charges, such as interest and taxes, that you must pay to own property. Tax planning us 1040   For more information about deducting or capitalizing costs and how to make the election, see Carrying Charges in Publication 535, chapter 7. Tax planning us 1040 Decreases to basis. Tax planning us 1040   You must decrease the basis of your property by any items that represent a return of your cost. Tax planning us 1040 These include the following. Tax planning us 1040 Insurance or other payment you receive as the result of a casualty or theft loss. Tax planning us 1040 Casualty loss not covered by insurance for which you took a deduction. Tax planning us 1040 Amount(s) you receive for granting an easement. Tax planning us 1040 Residential energy credits you were allowed before 1986, or after 2005, if you added the cost of the energy items to the basis of your home. Tax planning us 1040 Exclusion from income of subsidies for energy conservation measures. Tax planning us 1040 Special depreciation allowance claimed on qualified property. Tax planning us 1040 Depreciation you deducted, or could have deducted, on your tax returns under the method of depreciation you chose. Tax planning us 1040 If you did not deduct enough or deducted too much in any year, see Depreciation under Decreases to Basis in Publication 551. Tax planning us 1040   If your rental property was previously used as your main home, you must also decrease the basis by the following. Tax planning us 1040 Gain you postponed from the sale of your main home before May 7, 1997, if the replacement home was converted to your rental property. Tax planning us 1040 District of Columbia first-time homebuyer credit allowed on the purchase of your main home after August 4, 1997 and before January 1, 2012. Tax planning us 1040 Amount of qualified principal residence indebtedness discharged on or after January 1, 2007. Tax planning us 1040 Claiming the Special Depreciation Allowance For 2013, your residential rental property may qualify for a special depreciation allowance. Tax planning us 1040 This allowance is figured before you figure your regular depreciation deduction. Tax planning us 1040 See Publication 946, chapter 3, for details. Tax planning us 1040 Also see the Instructions for Form 4562, Line 14. Tax planning us 1040 If you qualify for, but choose not to take, a special depreciation allowance, you must attach a statement to your return. Tax planning us 1040 The details of this election are in Publication 946, chapter 3, and the Instructions for Form 4562, Line 14. Tax planning us 1040 MACRS Depreciation Most business and investment property placed in service after 1986 is depreciated using MACRS. Tax planning us 1040 This section explains how to determine which MACRS depreciation system applies to your property. Tax planning us 1040 It also discusses other information you need to know before you can figure depreciation under MACRS. Tax planning us 1040 This information includes the property's: Recovery class, Applicable recovery period, Convention, Placed-in-service date, Basis for depreciation, and Depreciation method. Tax planning us 1040 Depreciation Systems MACRS consists of two systems that determine how you depreciate your property—the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Tax planning us 1040 You must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. Tax planning us 1040 Excluded Property You cannot use MACRS for certain personal property (such as furniture or appliances) placed in service in your rental property in 2013 if it had been previously placed in service before 1987 when MACRS became effective. Tax planning us 1040 In most cases, personal property is excluded from MACRS if you (or a person related to you) owned or used it in 1986 or if your tenant is a person (or someone related to the person) who owned or used it in 1986. Tax planning us 1040 However, the property is not excluded if your 2013 deduction under MACRS (using a half-year convention) is less than the deduction you would have under ACRS. Tax planning us 1040 For more information, see What Method Can You Use To Depreciate Your Property? in Publication 946, chapter 1. Tax planning us 1040 Electing ADS If you choose, you can use the ADS method for most property. Tax planning us 1040 Under ADS, you use the straight line method of depreciation. Tax planning us 1040 The election of ADS for one item in a class of property generally applies to all property in that class that is placed in service during the tax year of the election. Tax planning us 1040 However, the election applies on a property-by-property basis for residential rental property and nonresidential real property. Tax planning us 1040 If you choose to use ADS for your residential rental property, the election must be made in the first year the property is placed in service. Tax planning us 1040 Once you make this election, you can never revoke it. Tax planning us 1040 For property placed in service during 2013, you make the election to use ADS by entering the depreciation on Form 4562, Part III, Section C, line 20c. Tax planning us 1040 Property Classes Under GDS Each item of property that can be depreciated under MACRS is assigned to a property class, determined by its class life. Tax planning us 1040 The property class generally determines the depreciation method, recovery period, and convention. Tax planning us 1040 The property classes under GDS are: 3-year property, 5-year property, 7-year property, 10-year property, 15-year property, 20-year property, Nonresidential real property, and Residential rental property. Tax planning us 1040 Under MACRS, property that you placed in service during 2013 in your rental activities generally falls into one of the following classes. Tax planning us 1040 5-year property. Tax planning us 1040 This class includes computers and peripheral equipment, office machinery (typewriters, calculators, copiers, etc. Tax planning us 1040 ), automobiles, and light trucks. Tax planning us 1040 This class also includes appliances, carpeting, furniture, etc. Tax planning us 1040 , used in a residential rental real estate activity. Tax planning us 1040 Depreciation on automobiles, other property used for transportation, computers and related peripheral equipment, and property of a type generally used for entertainment, recreation, or amusement is limited. Tax planning us 1040 See chapter 5 of Publication 946. Tax planning us 1040 7-year property. Tax planning us 1040 This class includes office furniture and equipment (desks, file cabinets, etc. Tax planning us 1040 ). Tax planning us 1040 This class also includes any property that does not have a class life and that has not been designated by law as being in any other class. Tax planning us 1040 15-year property. Tax planning us 1040 This class includes roads, fences, and shrubbery (if depreciable). Tax planning us 1040 Residential rental property. Tax planning us 1040 This class includes any real property that is a rental building or structure (including a mobile home) for which 80% or more of the gross rental income for the tax year is from dwelling units. Tax planning us 1040 It does not include a unit in a hotel, motel, inn, or other establishment where more than half of the units are used on a transient basis. Tax planning us 1040 If you live in any part of the building or structure, the gross rental income includes the fair rental value of the part you live in. Tax planning us 1040 The other property classes do not generally apply to property used in rental activities. Tax planning us 1040 These classes are not discussed in this publication. Tax planning us 1040 See Publication 946 for more information. Tax planning us 1040 Recovery Periods Under GDS The recovery period of property is the number of years over which you recover its cost or other basis. Tax planning us 1040 The recovery periods are generally longer under ADS than GDS. Tax planning us 1040 The recovery period of property depends on its property class. Tax planning us 1040 Under GDS, the recovery period of an asset is generally the same as its property class. Tax planning us 1040 Class lives and recovery periods for most assets are listed in Appendix B of Publication 946. Tax planning us 1040 See Table 2-1 for recovery periods of property commonly used in residential rental activities. Tax planning us 1040 Qualified Indian reservation property. Tax planning us 1040   Shorter recovery periods are provided under MACRS for qualified Indian reservation property placed in service on Indian reservations. Tax planning us 1040 For more information, see chapter 4 of Publication 946. Tax planning us 1040 Additions or improvements to property. Tax planning us 1040   Treat additions or improvements you make to your depreciable rental property as separate property items for depreciation purposes. Tax planning us 1040   The property class and recovery period of the addition or improvement is the one that would apply to the original property if you had placed it in service at the same time as the addition or improvement. Tax planning us 1040   The recovery period for an addition or improvement to property begins on the later of: The date the addition or improvement is placed in service, or The date the property to which the addition or improvement was made is placed in service. Tax planning us 1040 Example. Tax planning us 1040 You own a residential rental house that you have been renting since 1986 and depreciating under ACRS. Tax planning us 1040 You built an addition onto the house and placed it in service in 2013. Tax planning us 1040 You must use MACRS for the addition. Tax planning us 1040 Under GDS, the addition is depreciated as residential rental property over 27. Tax planning us 1040 5 years. Tax planning us 1040 Table 2-1. Tax planning us 1040 MACRS Recovery Periods for Property Used in Rental Activities   MACRS Recovery Period   Type of Property General Depreciation System Alternative Depreciation System   Computers and their peripheral equipment 5 years 5 years   Office machinery, such as: Typewriters Calculators Copiers 5 years 6 years   Automobiles 5 years 5 years   Light trucks 5 years 5 years   Appliances, such as: Stoves Refrigerators 5 years 9 years   Carpets 5 years 9 years   Furniture used in rental property 5 years 9 years   Office furniture and equipment, such as: Desks Files 7 years 10 years   Any property that does not have a class life and that has not been designated by law as being in any other class 7 years 12 years   Roads 15 years 20 years   Shrubbery 15 years 20 years   Fences 15 years 20 years   Residential rental property (buildings or structures) and structural components such as furnaces, waterpipes, venting, etc. Tax planning us 1040 27. Tax planning us 1040 5 years 40 years   Additions and improvements, such as a new roof The same recovery period as that of the property to which the addition or improvement is made, determined as if the property were placed in service at the same time as the addition or improvement. Tax planning us 1040   Conventions A convention is a method established under MACRS to set the beginning and end of the recovery period. Tax planning us 1040 The convention you use determines the number of months for which you can claim depreciation in the year you place property in service and in the year you dispose of the property. Tax planning us 1040 Mid-month convention. Tax planning us 1040    A mid-month convention is used for all residential rental property and nonresidential real property. Tax planning us 1040 Under this convention, you treat all property placed in service, or disposed of, during any month as placed in service, or disposed of, at the midpoint of that month. Tax planning us 1040 Mid-quarter convention. Tax planning us 1040   A mid-quarter convention must be used if the mid-month convention does not apply and the total depreciable basis of MACRS property placed in service in the last 3 months of a tax year (excluding nonresidential real property, residential rental property, and property placed in service and disposed of in the same year) is more than 40% of the total basis of all such property you place in service during the year. Tax planning us 1040   Under this convention, you treat all property placed in service, or disposed of, during any quarter of a tax year as placed in service, or disposed of, at the midpoint of the quarter. Tax planning us 1040 Example. Tax planning us 1040 During the tax year, Tom Martin purchased the following items to use in his rental property. Tax planning us 1040 He elects not to claim the special depreciation allowance discussed earlier. Tax planning us 1040 A dishwasher for $400 that he placed in service in January. Tax planning us 1040 Used furniture for $100 that he placed in service in September. Tax planning us 1040 A refrigerator for $800 that he placed in service in October. Tax planning us 1040 Tom uses the calendar year as his tax year. Tax planning us 1040 The total basis of all property placed in service that year is $1,300. Tax planning us 1040 The $800 basis of the refrigerator placed in service during the last 3 months of his tax year exceeds $520 (40% × $1,300). Tax planning us 1040 Tom must use the mid-quarter convention instead of the half-year convention for all three items. Tax planning us 1040 Half-year convention. Tax planning us 1040    The half-year convention is used if neither the mid-quarter convention nor the mid-month convention applies. Tax planning us 1040 Under this convention, you treat all property placed in service, or disposed of, during a tax year as placed in service, or disposed of, at the midpoint of that tax year. Tax planning us 1040   If this convention applies, you deduct a half year of depreciation for the first year and the last year that you depreciate the property. Tax planning us 1040 You deduct a full year of depreciation for any other year during the recovery period. Tax planning us 1040 Figuring Your Depreciation Deduction You can figure your MACRS depreciation deduction in one of two ways. Tax planning us 1040 The deduction is substantially the same both ways. Tax planning us 1040 You can either: Actually compute the deduction using the depreciation method and convention that apply over the recovery period of the property, or Use the percentage from the MACRS percentage tables. Tax planning us 1040 In this publication we will use the percentage tables. Tax planning us 1040 For instructions on how to compute the deduction, see chapter 4 of Publication 946. Tax planning us 1040 Residential rental property. Tax planning us 1040   You must use the straight line method and a mid-month convention for residential rental property. Tax planning us 1040 In the first year that you claim depreciation for residential rental property, you can claim depreciation only for the number of months the property is in use, and you must use the mid-month convention (explained under Conventions , earlier). Tax planning us 1040 5-, 7-, or 15-year property. Tax planning us 1040   For property in the 5- or 7-year class, use the 200% declining balance method and a half-year convention. Tax planning us 1040 However, in limited cases you must use the mid-quarter convention, if it applies. Tax planning us 1040 For property in the 15-year class, use the 150% declining balance method and a half-year convention. Tax planning us 1040   You can also choose to use the 150% declining balance method for property in the 5- or 7-year class. Tax planning us 1040 The choice to use the 150% method for one item in a class of property applies to all property in that class that is placed in service during the tax year of the election. Tax planning us 1040 You make this election on Form 4562. Tax planning us 1040 In Part III, column (f), enter “150 DB. Tax planning us 1040 ” Once you make this election, you cannot change to another method. Tax planning us 1040   If you use either the 200% or 150% declining balance method, you figure your deduction using the straight line method in the first tax year that the straight line method gives you an equal or larger deduction. Tax planning us 1040   You can also choose to use the straight line method with a half-year or mid-quarter convention for 5-, 7-, or 15-year property. Tax planning us 1040 The choice to use the straight line method for one item in a class of property applies to all property in that class that is placed in service during the tax year of the election. Tax planning us 1040 You elect the straight line method on Form 4562. Tax planning us 1040 In Part III, column (f), enter “S/L. Tax planning us 1040 ” Once you make this election, you cannot change to another method. Tax planning us 1040 MACRS Percentage Tables You can use the percentages in Table 2-2, earlier, to compute annual depreciation under MACRS. Tax planning us 1040 The tables show the percentages for the first few years or until the change to the straight line method is made. Tax planning us 1040 See Appendix A of Publication 946 for complete tables. Tax planning us 1040 The percentages in Tables 2-2a, 2-2b, and 2-2c make the change from declining balance to straight line in the year that straight line will give a larger deduction. Tax planning us 1040 If you elect to use the straight line method for 5-, 7-, or 15-year property, or the 150% declining balance method for 5- or 7-year property, use the tables in Appendix A of Publication 946. Tax planning us 1040 How to use the percentage tables. Tax planning us 1040   You must apply the table rates to your property's unadjusted basis (defined below) each year of the recovery period. Tax planning us 1040   Once you begin using a percentage table to figure depreciation, you must continue to use it for the entire recovery period unless there is an adjustment to the basis of your property for a reason other than: Depreciation allowed or allowable, or An addition or improvement that is depreciated as a separate item of property. Tax planning us 1040   If there is an adjustment for any reason other than (1) or (2), for example, because of a deductible casualty loss, you can no longer use the table. Tax planning us 1040 For the year of the adjustment and for the remaining recovery period, figure depreciation using the property's adjusted basis at the end of the year and the appropriate depreciation method, as explained earlier under Figuring Your Depreciation Deduction . Tax planning us 1040 See Figuring the Deduction Without Using the Tables in Publication 946, chapter 4. Tax planning us 1040 Unadjusted basis. Tax planning us 1040   This is the same basis you would use to figure gain on a sale (see Basis of Depreciable Property , earlier), but without reducing your original basis by any MACRS depreciation taken in earlier years. Tax planning us 1040   However, you do reduce your original basis by other amounts claimed on the property, including: Any amortization, Any section 179 deduction, and Any special depreciation allowance. Tax planning us 1040 For more information, see chapter 4 of Publication 946. Tax planning us 1040 Please click here for the text description of the image. Tax planning us 1040 Table 2-2 Tables 2-2a, 2-2b, and 2-2c. Tax planning us 1040   The percentages in these tables take into account the half-year and mid-quarter conventions. Tax planning us 1040 Use Table 2-2a for 5-year property, Table 2-2b for 7-year property, and Table 2-2c for 15-year property. Tax planning us 1040 Use the percentage in the second column (half-year convention) unless you are required to use the mid-quarter convention (explained earlier). Tax planning us 1040 If you must use the mid-quarter convention, use the column that corresponds to the calendar year quarter in which you placed the property in service. Tax planning us 1040 Example 1. Tax planning us 1040 You purchased a stove and refrigerator and placed them in service in June. Tax planning us 1040 Your basis in the stove is $600 and your basis in the refrigerator is $1,000. Tax planning us 1040 Both are 5-year property. Tax planning us 1040 Using the half-year convention column in Table 2-2a, the depreciation percentage for Year 1 is 20%. Tax planning us 1040 For that year your depreciation deduction is $120 ($600 × . Tax planning us 1040 20) for the stove and $200 ($1,000 × . Tax planning us 1040 20) for the refrigerator. Tax planning us 1040 For Year 2, the depreciation percentage is 32%. Tax planning us 1040 That year's depreciation deduction will be $192 ($600 × . Tax planning us 1040 32) for the stove and $320 ($1,000 × . Tax planning us 1040 32) for the refrigerator. Tax planning us 1040 Example 2. Tax planning us 1040 Assume the same facts as in Example 1, except you buy the refrigerator in October instead of June. Tax planning us 1040 Since the refrigerator was placed in service in the last 3 months of the tax year, and its basis ($1,000) is more than 40% of the total basis of all property placed in service during the year ($1,600 × . Tax planning us 1040 40 = $640), you are required to use the mid-quarter convention to figure depreciation on both the stove and refrigerator. Tax planning us 1040 Because you placed the refrigerator in service in October, you use the fourth quarter column of Table 2-2a and find the depreciation percentage for Year 1 is 5%. Tax planning us 1040 Your depreciation deduction for the refrigerator is $50 ($1,000 x . Tax planning us 1040 05). Tax planning us 1040 Because you placed the stove in service in June, you use the second quarter column of Table 2-2a and find the depreciation percentage for Year 1 is 25%. Tax planning us 1040 For that year, your depreciation deduction for the stove is $150 ($600 x . Tax planning us 1040 25). Tax planning us 1040 Table 2-2d. Tax planning us 1040    Use this table when you are using the GDS 27. Tax planning us 1040 5 year option for residential rental property. Tax planning us 1040 Find the row for the month that you placed the property in service. Tax planning us 1040 Use the percentages listed for that month to figure your depreciation deduction. Tax planning us 1040 The mid-month convention is taken into account in the percentages shown in the table. Tax planning us 1040 Continue to use the same row (month) under the column for the appropriate year. Tax planning us 1040 Example. Tax planning us 1040 You purchased a single family rental house for $185,000 and placed it in service on February 8. Tax planning us 1040 The sales contract showed that the building cost $160,000 and the land cost $25,000. Tax planning us 1040 Your basis for depreciation is its original cost, $160,000. Tax planning us 1040 This is the first year of service for your residential rental property and you decide to use GDS which has a recovery period of 27. Tax planning us 1040 5 years. Tax planning us 1040 Using Table 2-2d, you find that the percentage for property placed in service in February of Year 1 is 3. Tax planning us 1040 182%. Tax planning us 1040 That year's depreciation deduction is $5,091 ($160,000 x . Tax planning us 1040 03182). Tax planning us 1040 Figuring MACRS Depreciation Under ADS Table 2–1, earlier, shows the ADS recovery periods for property used in rental activities. Tax planning us 1040 See Appendix B in Publication 946 for other property. Tax planning us 1040 If your property is not listed in Appendix B, it is considered to have no class life. Tax planning us 1040 Under ADS, personal property with no class life is depreciated using a recovery period of 12 years. Tax planning us 1040 Use the mid-month convention for residential rental property and nonresidential real property. Tax planning us 1040 For all other property, use the half-year or mid-quarter convention, as appropriate. Tax planning us 1040 See Publication 946 for ADS depreciation tables. Tax planning us 1040 Claiming the Correct Amount of Depreciation You should claim the correct amount of depreciation each tax year. Tax planning us 1040 If you did not claim all the depreciation you were entitled to deduct, you must still reduce your basis in the property by the full amount of depreciation that you could have deducted. Tax planning us 1040 For more information, see Depreciation under Decreases to Basis in Publication 551. Tax planning us 1040 If you deducted an incorrect amount of depreciation for property in any year, you may be able to make a correction by filing Form 1040X, Amended U. Tax planning us 1040 S. Tax planning us 1040 Individual Income Tax Return. Tax planning us 1040 If you are not allowed to make the correction on an amended return, you can change your accounting method to claim the correct amount of depreciation. Tax planning us 1040 Filing an amended return. Tax planning us 1040   You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. Tax planning us 1040 You claimed the incorrect amount because of a mathematical error made in any year. Tax planning us 1040 You claimed the incorrect amount because of a posting error made in any year. Tax planning us 1040 You have not adopted a method of accounting for property placed in service by you in tax years ending after December 29, 2003. Tax planning us 1040 You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. Tax planning us 1040   Generally, you adopt a method of accounting for depreciation by using a permissible method of determining depreciation when you file your first tax return for the property used in your rental activity. Tax planning us 1040 This also occurs when you use the same impermissible method of determining depreciation (for example, using the wrong MACRS recovery period) in two or more consecutively filed tax returns. Tax planning us 1040   If an amended return is allowed, you must file it by the later of the following dates. Tax planning us 1040 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. Tax planning us 1040 A return filed before an unextended due date is considered filed on that due date. Tax planning us 1040 2 years from the time you paid your tax for that year. Tax planning us 1040 Changing your accounting method. Tax planning us 1040   To change your accounting method, you generally must file Form 3115, Application for Change in Accounting Method, to get the consent of the IRS. Tax planning us 1040 In some instances, that consent is automatic. Tax planning us 1040 For more information, see Changing Your Accounting Method in Publication 946,  chapter 1. Tax planning us 1040 Prev  Up  Next   Home   More Online Publications
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Tax planning us 1040 33. Tax planning us 1040   Credit for the Elderly or the Disabled Table of Contents Introduction Useful Items - You may want to see: Are You Eligible for the Credit?Qualified Individual Income Limits How to Claim the CreditCredit Figured for You Credit Figured by You Introduction If you qualify, you may be able to reduce the tax you owe by taking the credit for the elderly or the disabled which is figured on Schedule R (Form 1040A or 1040). Tax planning us 1040 This chapter explains the following. Tax planning us 1040 Who qualifies for the credit for the elderly or the disabled. Tax planning us 1040 How to claim the credit. Tax planning us 1040 You may be able to take the credit for the elderly or the disabled if: You are age 65 or older at the end of 2013, or You retired on permanent and total disability and have taxable disability income. Tax planning us 1040 Useful Items - You may want to see: Publication 524 Credit for the Elderly or the Disabled 554 Tax Guide for Seniors Form (and Instruction) Schedule R (Form 1040A or 1040) Credit for the Elderly or the Disabled Are You Eligible for the Credit? You can take the credit for the elderly or the disabled if you meet both of the following requirements. Tax planning us 1040 You are a qualified individual. Tax planning us 1040 Your income is not more than certain limits. Tax planning us 1040 You can use Figure 33-A and Table 33-1 as guides to see if you are eligible for the credit. Tax planning us 1040 Use Figure 33-A first to see if you are a qualified individual. Tax planning us 1040 If you are, go to Table 33-1 to make sure your income is not too high to take the credit. Tax planning us 1040 You can take the credit only if you file Form 1040 or Form 1040A. Tax planning us 1040 You cannot take the credit if you file Form 1040EZ. Tax planning us 1040 Qualified Individual You are a qualified individual for this credit if you are a U. Tax planning us 1040 S. Tax planning us 1040 citizen or resident alien, and either of the following applies. Tax planning us 1040 You were age 65 or older at the end of 2013. Tax planning us 1040 You were under age 65 at the end of 2013 and all three of the following statements are true. Tax planning us 1040 You retired on permanent and total disability (explained later). Tax planning us 1040 You received taxable disability income for 2013. Tax planning us 1040 On January 1, 2013, you had not reached mandatory retirement age (defined later under Disability income ). Tax planning us 1040 Age 65. Tax planning us 1040   You are considered to be age 65 on the day before your 65th birthday. Tax planning us 1040 Therefore, if you were born on January 1, 1949, you are considered to be age 65 at the end of 2013. Tax planning us 1040 U. Tax planning us 1040 S. Tax planning us 1040 Citizen or Resident Alien You must be a U. Tax planning us 1040 S. Tax planning us 1040 citizen or resident alien (or be treated as a resident alien) to take the credit. Tax planning us 1040 Generally, you cannot take the credit if you were a nonresident alien at any time during the tax year. Tax planning us 1040 Exceptions. Tax planning us 1040   You may be able to take the credit if you are a nonresident alien who is married to a U. Tax planning us 1040 S. Tax planning us 1040 citizen or resident alien at the end of the tax year and you and your spouse choose to treat you as a U. Tax planning us 1040 S. Tax planning us 1040 resident alien. Tax planning us 1040 If you make that choice, both you and your spouse are taxed on your worldwide incomes. Tax planning us 1040 If you were a nonresident alien at the beginning of the year and a resident alien at the end of the year, and you were married to a U. Tax planning us 1040 S. Tax planning us 1040 citizen or resident alien at the end of the year, you may be able to choose to be treated as a U. Tax planning us 1040 S. Tax planning us 1040 resident alien for the entire year. Tax planning us 1040 In that case, you may be allowed to take the credit. Tax planning us 1040 For information on these choices, see chapter 1 of Publication 519, U. Tax planning us 1040 S. Tax planning us 1040 Tax Guide for Aliens. Tax planning us 1040 Married Persons Generally, if you are married at the end of the tax year, you and your spouse must file a joint return to take the credit. Tax planning us 1040 However, if you and your spouse did not live in the same household at any time during the tax year, you can file either a joint return or separate returns and still take the credit. Tax planning us 1040 Head of household. Tax planning us 1040   You can file as head of household and qualify to take the credit, even if your spouse lived with you during the first 6 months of the year, if you meet certain tests. Tax planning us 1040 See Head of Household in chapter 2 for the tests you must meet. Tax planning us 1040 Under Age 65 If you are under age 65 at the end of 2013, you can qualify for the credit only if you are retired on permanent and total disability (discussed next) and have taxable disability income (discussed later under Disability income ). Tax planning us 1040 You are retired on permanent and total disability if: You were permanently and totally disabled when you retired, and You retired on disability before the close of the tax year. Tax planning us 1040 Even if you do not retire formally, you may be considered retired on disability when you have stopped working because of your disability. Tax planning us 1040 If you retired on disability before 1977, and were not permanently and totally disabled at the time, you can qualify for the credit if you were permanently and totally disabled on January 1, 1976, or January 1, 1977. Tax planning us 1040 Permanent and total disability. Tax planning us 1040    You are permanently and totally disabled if you cannot engage in any substantial gainful activity because of your physical or mental condition. Tax planning us 1040 A qualified physician must certify that the condition has lasted or can be expected to last continuously for 12 months or more, or that the condition can be expected to result in death. Tax planning us 1040 See Physician's statement , later. Tax planning us 1040 Substantial gainful activity. Tax planning us 1040   Substantial gainful activity is the performance of significant duties over a reasonable period of time while working for pay or profit, or in work generally done for pay or profit. Tax planning us 1040 Full-time work (or part-time work done at your employer's convenience) in a competitive work situation for at least the minimum wage conclusively shows that you are able to engage in substantial gainful activity. Tax planning us 1040   Substantial gainful activity is not work you do to take care of yourself or your home. Tax planning us 1040 It is not unpaid work on hobbies, institutional therapy or training, school attendance, clubs, social programs, and similar activities. Tax planning us 1040 However, doing this kind of work may show that you are able to engage in substantial gainful activity. Tax planning us 1040    The fact that you have not worked for some time is not, of itself, conclusive evidence that you cannot engage in substantial gainful activity. Tax planning us 1040 Sheltered employment. Tax planning us 1040   Certain work offered at qualified locations to physically or mentally impaired persons is considered sheltered employment. Tax planning us 1040 These qualified locations are in sheltered workshops, hospitals, and similar institutions, homebound programs, and Department of Veterans Affairs (VA) sponsored homes. Tax planning us 1040   Compared to commercial employment, pay is lower for sheltered employment. Tax planning us 1040 Therefore, one usually does not look for sheltered employment if he or she can get other employment. Tax planning us 1040 The fact that one has accepted sheltered employment is not proof of the person's ability to engage in substantial gainful activity. Tax planning us 1040 Physician's statement. Tax planning us 1040   If you are under age 65, you must have your physician complete a statement certifying that you were permanently and totally disabled on the date you retired. Tax planning us 1040 You can use the statement in the Instructions for Schedule R. Tax planning us 1040    Figure 33-A. Tax planning us 1040 Are You a Qualified Individual? This image is too large to be displayed in the current screen. Tax planning us 1040 Please click the link to view the image. Tax planning us 1040 Figure 33-A Are You a Qualified Individual?   You do not have to file this statement with your Form 1040 or Form 1040A, but you must keep it for your records. Tax planning us 1040 Veterans. Tax planning us 1040   If the Department of Veterans Affairs (VA) certifies that you are permanently and totally disabled, you can substitute VA Form 21-0172, Certification of Permanent and Total Disability, for the physician's statement you are required to keep. Tax planning us 1040 VA Form 21-0172 must be signed by a person authorized by the VA to do so. Tax planning us 1040 You can get this form from your local VA regional office. Tax planning us 1040 Physician's statement obtained in earlier year. Tax planning us 1040   If you got a physician's statement in an earlier year and, due to your continued disabled condition, you were unable to engage in any substantial gainful activity during 2013, you may not need to get another physician's statement for 2013. Tax planning us 1040 For a detailed explanation of the conditions you must meet, see the instructions for Schedule R, Part II. Tax planning us 1040 If you meet the required conditions, check the box on your Schedule R, Part II, line 2. Tax planning us 1040   If you checked box 4, 5, or 6 in Part I of Schedule R, enter in the space above the box on line 2 in Part II the first name(s) of the spouse(s) for whom the box is checked. Tax planning us 1040 Table 33-1. Tax planning us 1040 Income Limits IF your filing status is . Tax planning us 1040 . Tax planning us 1040 . Tax planning us 1040 THEN, even if you qualify (see Figure 33-A ), you CANNOT take the credit if. Tax planning us 1040 . Tax planning us 1040 . Tax planning us 1040   Your adjusted gross income (AGI)* is equal to or more than. Tax planning us 1040 . Tax planning us 1040 . Tax planning us 1040     OR the total of your nontaxable social security and other nontaxable pension(s), annuities, or disability income is equal to or more than. Tax planning us 1040 . Tax planning us 1040 . Tax planning us 1040   single, head of household, or qualifying widow(er) with dependent child   $17,500     $5,000   married filing jointly and only one spouse qualifies in Figure 33-A   $20,000     $5,000   married filing jointly and both spouses qualify in Figure 33-A   $25,000     $7,500   married filing separately and you lived apart from your spouse for all of 2013   $12,500     $3,750   * AGI is the amount on Form 1040A, line 22, or Form 1040, line 38. Tax planning us 1040 Disability income. Tax planning us 1040   If you are under age 65, you must also have taxable disability income to qualify for the credit. Tax planning us 1040 Disability income must meet both of the following requirements. Tax planning us 1040 It must be paid under your employer's accident or health plan or pension plan. Tax planning us 1040 It must be included in your income as wages (or payments instead of wages) for the time you are absent from work because of permanent and total disability. Tax planning us 1040 Payments that are not disability income. Tax planning us 1040   Any payment you receive from a plan that does not provide for disability retirement is not disability income. Tax planning us 1040 Any lump-sum payment for accrued annual leave that you receive when you retire on disability is a salary payment and is not disability income. Tax planning us 1040   For purposes of the credit for the elderly or the disabled, disability income does not include amounts you receive after you reach mandatory retirement age. Tax planning us 1040 Mandatory retirement age is the age set by your employer at which you would have had to retire, had you not become disabled. Tax planning us 1040 Income Limits To determine if you can claim the credit, you must consider two income limits. Tax planning us 1040 The first limit is the amount of your adjusted gross income (AGI). Tax planning us 1040 The second limit is the amount of nontaxable social security and other nontaxable pensions, annuities, or disability income you received. Tax planning us 1040 The limits are shown in Table 33-1. Tax planning us 1040 If your AGI and nontaxable pensions, annuities, or disability income are less than the income limits, you may be able to claim the credit. Tax planning us 1040 See How to Claim the Credit , later. Tax planning us 1040 If either your AGI or your nontaxable pensions, annuities, or disability income are equal to or more than the income limits, you cannot take the credit. Tax planning us 1040 How to Claim the Credit You can figure the credit yourself or the Internal Revenue Service will figure it for you. Tax planning us 1040 Credit Figured for You If you choose to have the IRS figure the credit for you, read the following discussion for the form you will file (Form 1040 or 1040A). Tax planning us 1040 If you want the IRS to figure your tax, see chapter 30. Tax planning us 1040 Form 1040. Tax planning us 1040   If you want the IRS to figure your credit, see Form 1040 Line Entries under Tax Figured by IRS in chapter 30. Tax planning us 1040 Form 1040A. Tax planning us 1040   If you want the IRS to figure your credit, see Form 1040A Line Entries under Tax Figured by IRS in chapter 30. Tax planning us 1040 Credit Figured by You If you choose to figure the credit yourself, fill out the front of Schedule R. Tax planning us 1040 Next, fill out Schedule R, Part III. Tax planning us 1040 If you file Form 1040A, enter the amount from Schedule R, line 22, on Form 1040A, line 30. Tax planning us 1040 If you file Form 1040, include the amount from Schedule R, line 22, on line 53; check box c, and enter “Sch R” on the line next to that box. Tax planning us 1040 For a step-by-step discussion about filling out Part III of Schedule R, see Figuring the Credit Yourself in Publication 524. Tax planning us 1040 Limit on credit. Tax planning us 1040   The amount of the credit you can claim is generally limited to the amount of your tax. Tax planning us 1040 Use the Credit Limit Worksheet in the Instructions for Schedule R to determine if your credit is limited. Tax planning us 1040 Prev  Up  Next   Home   More Online Publications