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Tax Return Preparation State And Income Taxes

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Tax Return Preparation State And Income Taxes

Tax return preparation state and income taxes 15. Tax return preparation state and income taxes   Selling Your Home Table of Contents Reminder Introduction Useful Items - You may want to see: Main Home Figuring Gain or LossSelling Price Amount Realized Adjusted Basis Amount of Gain or Loss Dispositions Other Than Sales Determining Basis Excluding the GainMaximum Exclusion Ownership and Use Tests Reduced Maximum Exclusion Business Use or Rental of Home Reporting the SaleSeller-financed mortgage. Tax return preparation state and income taxes More information. Tax return preparation state and income taxes Special SituationsException for sales to related persons. Tax return preparation state and income taxes Recapturing (Paying Back) a Federal Mortgage Subsidy Reminder Home sold with undeducted points. Tax return preparation state and income taxes  If you have not deducted all the points you paid to secure a mortgage on your old home, you may be able to deduct the remaining points in the year of the sale. Tax return preparation state and income taxes See Mortgage ending early under Points in chapter 23. Tax return preparation state and income taxes Introduction This chapter explains the tax rules that apply when you sell your main home. Tax return preparation state and income taxes In most cases, your main home is the one in which you live most of the time. Tax return preparation state and income taxes If you sold your main home in 2013, you may be able to exclude from income any gain up to a limit of $250,000 ($500,000 on a joint return in most cases). Tax return preparation state and income taxes See Excluding the Gain , later. Tax return preparation state and income taxes Generally, if you can exclude all the gain, you do not need to report the sale on your tax return. Tax return preparation state and income taxes If you have gain that cannot be excluded, it is taxable. Tax return preparation state and income taxes Report it on Form 8949, Sales and Other Dispositions of Capital Assets, and Schedule D (Form 1040). Tax return preparation state and income taxes You may also have to complete Form 4797, Sales of Business Property. Tax return preparation state and income taxes See Reporting the Sale , later. Tax return preparation state and income taxes If you have a loss on the sale, you generally cannot deduct it on your return. Tax return preparation state and income taxes However, you may need to report it. Tax return preparation state and income taxes See Reporting the Sale , later. Tax return preparation state and income taxes The following are main topics in this chapter. Tax return preparation state and income taxes Figuring gain or loss. Tax return preparation state and income taxes Basis. Tax return preparation state and income taxes Excluding the gain. Tax return preparation state and income taxes Ownership and use tests. Tax return preparation state and income taxes Reporting the sale. Tax return preparation state and income taxes Other topics include the following. Tax return preparation state and income taxes Business use or rental of home. Tax return preparation state and income taxes Recapturing a federal mortgage subsidy. Tax return preparation state and income taxes Useful Items - You may want to see: Publication 523 Selling Your Home 530 Tax Information for Homeowners 547 Casualties, Disasters, and Thefts Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 982 Reduction of Tax Attributes Due to Discharge of Indebtedness 8828 Recapture of Federal Mortgage Subsidy 8949 Sales and Other Dispositions of Capital Assets Main Home This section explains the term “main home. Tax return preparation state and income taxes ” Usually, the home you live in most of the time is your main home and can be a: House, Houseboat, Mobile home, Cooperative apartment, or Condominium. Tax return preparation state and income taxes To exclude gain under the rules of this chapter, you in most cases must have owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date of sale. Tax return preparation state and income taxes Land. Tax return preparation state and income taxes   If you sell the land on which your main home is located, but not the house itself, you cannot exclude any gain you have from the sale of the land. Tax return preparation state and income taxes However, if you sell vacant land used as part of your main home and that is adjacent to it, you may be able to exclude the gain from the sale under certain circumstances. Tax return preparation state and income taxes See Vacant land under Main Home in Publication 523 for more information. Tax return preparation state and income taxes Example. Tax return preparation state and income taxes You buy a piece of land and move your main home to it. Tax return preparation state and income taxes Then you sell the land on which your main home was located. Tax return preparation state and income taxes This sale is not considered a sale of your main home, and you cannot exclude any gain on the sale of the land. Tax return preparation state and income taxes More than one home. Tax return preparation state and income taxes   If you have more than one home, you can exclude gain only from the sale of your main home. Tax return preparation state and income taxes You must include in income gain from the sale of any other home. Tax return preparation state and income taxes If you have two homes and live in both of them, your main home is ordinarily the one you live in most of the time during the year. Tax return preparation state and income taxes Example 1. Tax return preparation state and income taxes You own two homes, one in New York and one in Florida. Tax return preparation state and income taxes From 2009 through 2013, you live in the New York home for 7 months and in the Florida residence for 5 months of each year. Tax return preparation state and income taxes In the absence of facts and circumstances indicating otherwise, the New York home is your main home. Tax return preparation state and income taxes You would be eligible to exclude the gain from the sale of the New York home but not of the Florida home in 2013. Tax return preparation state and income taxes Example 2. Tax return preparation state and income taxes You own a house, but you live in another house that you rent. Tax return preparation state and income taxes The rented house is your main home. Tax return preparation state and income taxes Example 3. Tax return preparation state and income taxes You own two homes, one in Virginia and one in New Hampshire. Tax return preparation state and income taxes In 2009 and 2010, you lived in the Virginia home. Tax return preparation state and income taxes In 2011 and 2012, you lived in the New Hampshire home. Tax return preparation state and income taxes In 2013, you lived again in the Virginia home. Tax return preparation state and income taxes Your main home in 2009, 2010, and 2013 is the Virginia home. Tax return preparation state and income taxes Your main home in 2011 and 2012 is the New Hampshire home. Tax return preparation state and income taxes You would be eligible to exclude gain from the sale of either home (but not both) in 2013. Tax return preparation state and income taxes Property used partly as your main home. Tax return preparation state and income taxes   If you use only part of the property as your main home, the rules discussed in this publication apply only to the gain or loss on the sale of that part of the property. Tax return preparation state and income taxes For details, see Business Use or Rental of Home , later. Tax return preparation state and income taxes Figuring Gain or Loss To figure the gain or loss on the sale of your main home, you must know the selling price, the amount realized, and the adjusted basis. Tax return preparation state and income taxes Subtract the adjusted basis from the amount realized to get your gain or loss. Tax return preparation state and income taxes     Selling price     − Selling expenses       Amount realized       Amount realized     − Adjusted basis       Gain or loss   Selling Price The selling price is the total amount you receive for your home. Tax return preparation state and income taxes It includes money and the fair market value of any other property or any other services you receive and all notes, mortgages or other debts assumed by the buyer as part of the sale. Tax return preparation state and income taxes Payment by employer. Tax return preparation state and income taxes   You may have to sell your home because of a job transfer. Tax return preparation state and income taxes If your employer pays you for a loss on the sale or for your selling expenses, do not include the payment as part of the selling price. Tax return preparation state and income taxes Your employer will include it as wages in box 1 of your Form W-2, and you will include it in your income on Form 1040, line 7. Tax return preparation state and income taxes Option to buy. Tax return preparation state and income taxes   If you grant an option to buy your home and the option is exercised, add the amount you receive for the option to the selling price of your home. Tax return preparation state and income taxes If the option is not exercised, you must report the amount as ordinary income in the year the option expires. Tax return preparation state and income taxes Report this amount on Form 1040, line 21. Tax return preparation state and income taxes Form 1099-S. Tax return preparation state and income taxes   If you received Form 1099-S, Proceeds From Real Estate Transactions, box 2 (Gross proceeds) should show the total amount you received for your home. Tax return preparation state and income taxes   However, box 2 will not include the fair market value of any services or property other than cash or notes you received or will receive. Tax return preparation state and income taxes Instead, box 4 will be checked to indicate your receipt or expected receipt of these items. Tax return preparation state and income taxes Amount Realized The amount realized is the selling price minus selling expenses. Tax return preparation state and income taxes Selling expenses. Tax return preparation state and income taxes   Selling expenses include: Commissions, Advertising fees, Legal fees, and Loan charges paid by the seller, such as loan placement fees or “points. Tax return preparation state and income taxes ” Adjusted Basis While you owned your home, you may have made adjustments (increases or decreases) to the basis. Tax return preparation state and income taxes This adjusted basis must be determined before you can figure gain or loss on the sale of your home. Tax return preparation state and income taxes For information on how to figure your home's adjusted basis, see Determining Basis , later. Tax return preparation state and income taxes Amount of Gain or Loss To figure the amount of gain or loss, compare the amount realized to the adjusted basis. Tax return preparation state and income taxes Gain on sale. Tax return preparation state and income taxes   If the amount realized is more than the adjusted basis, the difference is a gain and, except for any part you can exclude, in most cases is taxable. Tax return preparation state and income taxes Loss on sale. Tax return preparation state and income taxes   If the amount realized is less than the adjusted basis, the difference is a loss. Tax return preparation state and income taxes A loss on the sale of your main home cannot be deducted. Tax return preparation state and income taxes Jointly owned home. Tax return preparation state and income taxes   If you and your spouse sell your jointly owned home and file a joint return, you figure your gain or loss as one taxpayer. Tax return preparation state and income taxes Separate returns. Tax return preparation state and income taxes   If you file separate returns, each of you must figure your own gain or loss according to your ownership interest in the home. Tax return preparation state and income taxes Your ownership interest is generally determined by state law. Tax return preparation state and income taxes Joint owners not married. Tax return preparation state and income taxes   If you and a joint owner other than your spouse sell your jointly owned home, each of you must figure your own gain or loss according to your ownership interest in the home. Tax return preparation state and income taxes Each of you applies the rules discussed in this chapter on an individual basis. Tax return preparation state and income taxes Dispositions Other Than Sales Some special rules apply to other dispositions of your main home. Tax return preparation state and income taxes Foreclosure or repossession. Tax return preparation state and income taxes   If your home was foreclosed on or repossessed, you have a disposition. Tax return preparation state and income taxes See Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments, to determine if you have ordinary income, gain, or loss. Tax return preparation state and income taxes Abandonment. Tax return preparation state and income taxes   If you abandon your home, see Publication 4681 to determine if you have ordinary income, gain, or loss. Tax return preparation state and income taxes Trading (exchanging) homes. Tax return preparation state and income taxes   If you trade your old home for another home, treat the trade as a sale and a purchase. Tax return preparation state and income taxes Example. Tax return preparation state and income taxes You owned and lived in a home with an adjusted basis of $41,000. Tax return preparation state and income taxes A real estate dealer accepted your old home as a trade-in and allowed you $50,000 toward a new home priced at $80,000. Tax return preparation state and income taxes This is treated as a sale of your old home for $50,000 with a gain of $9,000 ($50,000 – $41,000). Tax return preparation state and income taxes If the dealer had allowed you $27,000 and assumed your unpaid mortgage of $23,000 on your old home, your sales price would still be $50,000 (the $27,000 trade-in allowed plus the $23,000 mortgage assumed). Tax return preparation state and income taxes Transfer to spouse. Tax return preparation state and income taxes   If you transfer your home to your spouse or you transfer it to your former spouse incident to your divorce, you in most cases have no gain or loss. Tax return preparation state and income taxes This is true even if you receive cash or other consideration for the home. Tax return preparation state and income taxes As a result, the rules in this chapter do not apply. Tax return preparation state and income taxes More information. Tax return preparation state and income taxes   If you need more information, see Transfer to spouse in Publication 523 and Property Settlements in Publication 504, Divorced or Separated Individuals. Tax return preparation state and income taxes Involuntary conversion. Tax return preparation state and income taxes   You have a disposition when your home is destroyed or condemned and you receive other property or money in payment, such as insurance or a condemnation award. Tax return preparation state and income taxes This is treated as a sale and you may be able to exclude all or part of any gain from the destruction or condemnation of your home, as explained later under Special Situations . Tax return preparation state and income taxes Determining Basis You need to know your basis in your home to figure any gain or loss when you sell it. Tax return preparation state and income taxes Your basis in your home is determined by how you got the home. Tax return preparation state and income taxes Generally, your basis is its cost if you bought it or built it. Tax return preparation state and income taxes If you got it in some other way (inheritance, gift, etc. Tax return preparation state and income taxes ), your basis is generally either its fair market value when you received it or the adjusted basis of the previous owner. Tax return preparation state and income taxes While you owned your home, you may have made adjustments (increases or decreases) to your home's basis. Tax return preparation state and income taxes The result of these adjustments is your home's adjusted basis, which is used to figure gain or loss on the sale of your home. Tax return preparation state and income taxes See Adjusted Basis , later. Tax return preparation state and income taxes You can find more information on basis and adjusted basis in chapter 13 of this publication and in Publication 523. Tax return preparation state and income taxes Cost As Basis The cost of property is the amount you paid for it in cash, debt obligations, other property, or services. Tax return preparation state and income taxes Purchase. Tax return preparation state and income taxes   If you bought your home, your basis is its cost to you. Tax return preparation state and income taxes This includes the purchase price and certain settlement or closing costs. Tax return preparation state and income taxes In most cases, your purchase price includes your down payment and any debt, such as a first or second mortgage or notes you gave the seller in payment for the home. Tax return preparation state and income taxes If you build, or contract to build, a new home, your purchase price can include costs of construction, as discussed in Publication 523. Tax return preparation state and income taxes Settlement fees or closing costs. Tax return preparation state and income taxes   When you bought your home, you may have paid settlement fees or closing costs in addition to the contract price of the property. Tax return preparation state and income taxes You can include in your basis some of the settlement fees and closing costs you paid for buying the home, but not the fees and costs for getting a mortgage loan. Tax return preparation state and income taxes A fee paid for buying the home is any fee you would have had to pay even if you paid cash for the home (that is, without the need for financing). Tax return preparation state and income taxes    Chapter 13 lists some of the settlement fees and closing costs that you can include in the basis of property, including your home. Tax return preparation state and income taxes It also lists some settlement costs that cannot be included in basis. Tax return preparation state and income taxes   Also see Publication 523 for additional items and a discussion of basis other than cost. Tax return preparation state and income taxes Adjusted Basis Adjusted basis is your cost or other basis increased or decreased by certain amounts. Tax return preparation state and income taxes To figure your adjusted basis, you can use Worksheet 1 in Publication 523. Tax return preparation state and income taxes Do not use Worksheet 1 if you acquired an interest in your home from a decedent who died in 2010 and whose executor filed Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent. Tax return preparation state and income taxes Increases to basis. Tax return preparation state and income taxes   These include the following. Tax return preparation state and income taxes Additions and other improvements that have a useful life of more than 1 year. Tax return preparation state and income taxes Special assessments for local improvements. Tax return preparation state and income taxes Amounts you spent after a casualty to restore damaged property. Tax return preparation state and income taxes Improvements. Tax return preparation state and income taxes   These add to the value of your home, prolong its useful life, or adapt it to new uses. Tax return preparation state and income taxes You add the cost of additions and other improvements to the basis of your property. Tax return preparation state and income taxes   For example, putting a recreation room or another bathroom in your unfinished basement, putting up a new fence, putting in new plumbing or wiring, putting on a new roof, or paving your unpaved driveway are improvements. Tax return preparation state and income taxes An addition to your house, such as a new deck, a sunroom, or a new garage, is also an improvement. Tax return preparation state and income taxes Repairs. Tax return preparation state and income taxes   These maintain your home in good condition but do not add to its value or prolong its life. Tax return preparation state and income taxes You do not add their cost to the basis of your property. Tax return preparation state and income taxes   Examples of repairs include repainting your house inside or outside, fixing your gutters or floors, repairing leaks or plastering, and replacing broken window panes. Tax return preparation state and income taxes Decreases to basis. Tax return preparation state and income taxes   These include the following. Tax return preparation state and income taxes Discharge of qualified principal residence indebtedness that was excluded from income. Tax return preparation state and income taxes Some or all of the cancellation of debt income that was excluded due to your bankruptcy or insolvency. Tax return preparation state and income taxes For details, see Publication 4681. Tax return preparation state and income taxes Gain you postponed from the sale of a previous home before May 7, 1997. Tax return preparation state and income taxes Deductible casualty losses. Tax return preparation state and income taxes Insurance payments you received or expect to receive for casualty losses. Tax return preparation state and income taxes Payments you received for granting an easement or right-of-way. Tax return preparation state and income taxes Depreciation allowed or allowable if you used your home for business or rental purposes. Tax return preparation state and income taxes Energy-related credits allowed for expenditures made on the residence. Tax return preparation state and income taxes (Reduce the increase in basis otherwise allowable for expenditures on the residence by the amount of credit allowed for those expenditures. Tax return preparation state and income taxes ) Adoption credit you claimed for improvements added to the basis of your home. Tax return preparation state and income taxes Nontaxable payments from an adoption assistance program of your employer you used for improvements you added to the basis of your home. Tax return preparation state and income taxes Energy conservation subsidy excluded from your gross income because you received it (directly or indirectly) from a public utility after 1992 to buy or install any energy conservation measure. Tax return preparation state and income taxes An energy conservation measure is an installation or modification primarily designed either to reduce consumption of electricity or natural gas or to improve the management of energy demand for a home. Tax return preparation state and income taxes District of Columbia first-time homebuyer credit (allowed on the purchase of a principal residence in the District of Columbia beginning on August 5, 1997 and before January 1, 2012). Tax return preparation state and income taxes General sales taxes (allowed beginning 2004 and ending before 2014) claimed as an itemized deduction on Schedule A (Form 1040) that were imposed on the purchase of personal property, such as a houseboat used as your home or a mobile home. Tax return preparation state and income taxes Discharges of qualified principal residence indebtedness. Tax return preparation state and income taxes   You may be able to exclude from gross income a discharge of qualified principal residence indebtedness. Tax return preparation state and income taxes This exclusion applies to discharges made after 2006 and before 2014. Tax return preparation state and income taxes If you choose to exclude this income, you must reduce (but not below zero) the basis of the principal residence by the amount excluded from your gross income. Tax return preparation state and income taxes   File Form 982 with your tax return. Tax return preparation state and income taxes See the form's instructions for detailed information. Tax return preparation state and income taxes Recordkeeping. Tax return preparation state and income taxes You should keep records to prove your home's adjusted basis. Tax return preparation state and income taxes Ordinarily, you must keep records for 3 years after the due date for filing your return for the tax year in which you sold your home. Tax return preparation state and income taxes But if you sold a home before May 7, 1997, and postponed tax on any gain, the basis of that home affects the basis of the new home you bought. Tax return preparation state and income taxes Keep records proving the basis of both homes as long as they are needed for tax purposes. Tax return preparation state and income taxes The records you should keep include: Proof of the home's purchase price and purchase expenses, Receipts and other records for all improvements, additions, and other items that affect the home's adjusted basis, Any worksheets or other computations you used to figure the adjusted basis of the home you sold, the gain or loss on the sale, the exclusion, and the taxable gain, Any Form 982 you filed to report any discharge of qualified principal residence indebtedness, Any Form 2119, Sale of Your Home, you filed to postpone gain from the sale of a previous home before May 7, 1997, and Any worksheets you used to prepare Form 2119, such as the Adjusted Basis of Home Sold Worksheet or the Capital Improvements Worksheet from the Form 2119 instructions, or other source of computations. Tax return preparation state and income taxes Excluding the Gain You may qualify to exclude from your income all or part of any gain from the sale of your main home. Tax return preparation state and income taxes This means that, if you qualify, you will not have to pay tax on the gain up to the limit described under Maximum Exclusion , next. Tax return preparation state and income taxes To qualify, you must meet the ownership and use tests described later. Tax return preparation state and income taxes You can choose not to take the exclusion by including the gain from the sale in your gross income on your tax return for the year of the sale. Tax return preparation state and income taxes You can use Worksheet 2 in Publication 523 to figure the amount of your exclusion and your taxable gain, if any. Tax return preparation state and income taxes If you have any taxable gain from the sale of your home, you may have to increase your withholding or make estimated tax payments. Tax return preparation state and income taxes See Publication 505, Tax Withholding and Estimated Tax. Tax return preparation state and income taxes Maximum Exclusion You can exclude up to $250,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if all of the following are true. Tax return preparation state and income taxes You meet the ownership test. Tax return preparation state and income taxes You meet the use test. Tax return preparation state and income taxes During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home. Tax return preparation state and income taxes For details on gain allocated to periods of nonqualified use, see Periods of nonqualified use , later. Tax return preparation state and income taxes You may be able to exclude up to $500,000 of the gain (other than gain allocated to periods of nonqualified use) on the sale of your main home if you are married and file a joint return and meet the requirements listed in the discussion of the special rules for joint returns, later, under Married Persons . Tax return preparation state and income taxes Ownership and Use Tests To claim the exclusion, you must meet the ownership and use tests. Tax return preparation state and income taxes This means that during the 5-year period ending on the date of the sale, you must have: Owned the home for at least 2 years (the ownership test), and Lived in the home as your main home for at least 2 years (the use test). Tax return preparation state and income taxes Exception. Tax return preparation state and income taxes   If you owned and lived in the property as your main home for less than 2 years, you can still claim an exclusion in some cases. Tax return preparation state and income taxes However, the maximum amount you may be able to exclude will be reduced. Tax return preparation state and income taxes See Reduced Maximum Exclusion , later. Tax return preparation state and income taxes Example 1—home owned and occupied for at least 2 years. Tax return preparation state and income taxes Mya bought and moved into her main home in September 2011. Tax return preparation state and income taxes She sold the home at a gain in October 2013. Tax return preparation state and income taxes During the 5-year period ending on the date of sale in October 2013, she owned and lived in the home for more than 2 years. Tax return preparation state and income taxes She meets the ownership and use tests. Tax return preparation state and income taxes Example 2—ownership test met but use test not met. Tax return preparation state and income taxes Ayden bought a home, lived in it for 6 months, moved out, and never occupied the home again. Tax return preparation state and income taxes He later sold the home for a gain. Tax return preparation state and income taxes He owned the home during the entire 5-year period ending on the date of sale. Tax return preparation state and income taxes He meets the ownership test but not the use test. Tax return preparation state and income taxes He cannot exclude any part of his gain on the sale unless he qualified for a reduced maximum exclusion (explained later). Tax return preparation state and income taxes Period of Ownership and Use The required 2 years of ownership and use during the 5-year period ending on the date of the sale do not have to be continuous nor do they both have to occur at the same time. Tax return preparation state and income taxes You meet the tests if you can show that you owned and lived in the property as your main home for either 24 full months or 730 days (365 × 2) during the 5-year period ending on the date of sale. Tax return preparation state and income taxes Temporary absence. Tax return preparation state and income taxes   Short temporary absences for vacations or other seasonal absences, even if you rent out the property during the absences, are counted as periods of use. Tax return preparation state and income taxes The following examples assume that the reduced maximum exclusion (discussed later) does not apply to the sales. Tax return preparation state and income taxes Example 1. Tax return preparation state and income taxes David Johnson, who is single, bought and moved into his home on February 1, 2011. Tax return preparation state and income taxes Each year during 2011 and 2012, David left his home for a 2-month summer vacation. Tax return preparation state and income taxes David sold the house on March 1, 2013. Tax return preparation state and income taxes Although the total time David used his home is less than 2 years (21 months), he meets the requirement and may exclude gain. Tax return preparation state and income taxes The 2-month vacations are short temporary absences and are counted as periods of use in determining whether David used the home for the required 2 years. Tax return preparation state and income taxes Example 2. Tax return preparation state and income taxes Professor Paul Beard, who is single, bought and moved into a house on August 18, 2010. Tax return preparation state and income taxes He lived in it as his main home continuously until January 5, 2012, when he went abroad for a 1-year sabbatical leave. Tax return preparation state and income taxes On February 6, 2013, 1 month after returning from the leave, Paul sold the house at a gain. Tax return preparation state and income taxes Because his leave was not a short temporary absence, he cannot include the period of leave to meet the 2-year use test. Tax return preparation state and income taxes He cannot exclude any part of his gain, because he did not use the residence for the required 2 years. Tax return preparation state and income taxes Ownership and use tests met at different times. Tax return preparation state and income taxes   You can meet the ownership and use tests during different 2-year periods. Tax return preparation state and income taxes However, you must meet both tests during the 5-year period ending on the date of the sale. Tax return preparation state and income taxes Example. Tax return preparation state and income taxes Beginning in 2002, Helen Jones lived in a rented apartment. Tax return preparation state and income taxes The apartment building was later converted to condominiums, and she bought her same apartment on December 3, 2010. Tax return preparation state and income taxes In 2011, Helen became ill and on April 14 of that year she moved to her daughter's home. Tax return preparation state and income taxes On July 12, 2013, while still living in her daughter's home, she sold her condominium. Tax return preparation state and income taxes Helen can exclude gain on the sale of her condominium because she met the ownership and use tests during the 5-year period from July 13, 2008, to July 12, 2013, the date she sold the condominium. Tax return preparation state and income taxes She owned her condominium from December 3, 2010, to July 12, 2013 (more than 2 years). Tax return preparation state and income taxes She lived in the property from July 13, 2008 (the beginning of the 5-year period), to April 14, 2011 (more than 2 years). Tax return preparation state and income taxes The time Helen lived in her daughter's home during the 5-year period can be counted toward her period of ownership, and the time she lived in her rented apartment during the 5-year period can be counted toward her period of use. Tax return preparation state and income taxes Cooperative apartment. Tax return preparation state and income taxes   If you sold stock as a tenant-stockholder in a cooperative housing corporation, the ownership and use tests are met if, during the 5-year period ending on the date of sale, you: Owned the stock for at least 2 years, and Lived in the house or apartment that the stock entitles you to occupy as your main home for at least 2 years. Tax return preparation state and income taxes Exceptions to Ownership and Use Tests The following sections contain exceptions to the ownership and use tests for certain taxpayers. Tax return preparation state and income taxes Exception for individuals with a disability. Tax return preparation state and income taxes   There is an exception to the use test if: You become physically or mentally unable to care for yourself, and You owned and lived in your home as your main home for a total of at least 1 year during the 5-year period before the sale of your home. Tax return preparation state and income taxes Under this exception, you are considered to live in your home during any time within the 5-year period that you own the home and live in a facility (including a nursing home) licensed by a state or political subdivision to care for persons in your condition. Tax return preparation state and income taxes If you meet this exception to the use test, you still have to meet the 2-out-of-5-year ownership test to claim the exclusion. Tax return preparation state and income taxes Previous home destroyed or condemned. Tax return preparation state and income taxes   For the ownership and use tests, you add the time you owned and lived in a previous home that was destroyed or condemned to the time you owned and lived in the replacement home on whose sale you wish to exclude gain. Tax return preparation state and income taxes This rule applies if any part of the basis of the home you sold depended on the basis of the destroyed or condemned home. Tax return preparation state and income taxes Otherwise, you must have owned and lived in the same home for 2 of the 5 years before the sale to qualify for the exclusion. Tax return preparation state and income taxes Members of the uniformed services or Foreign Service, employees of the intelligence community, or employees or volunteers of the Peace Corps. Tax return preparation state and income taxes   You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve on “qualified official extended duty” as a member of the uniformed services or Foreign Service of the United States, or as an employee of the intelligence community. Tax return preparation state and income taxes You can choose to have the 5-year test period for ownership and use suspended during any period you or your spouse serve outside the United States either as an employee of the Peace Corps on "qualified official extended duty" or as an enrolled volunteer or volunteer leader of the Peace Corps. Tax return preparation state and income taxes This means that you may be able to meet the 2-year use test even if, because of your service, you did not actually live in your home for at least the required 2 years during the 5-year period ending on the date of sale. Tax return preparation state and income taxes   If this helps you qualify to exclude gain, you can choose to have the 5-year test period suspended by filing a return for the year of sale that does not include the gain. Tax return preparation state and income taxes For more information about the suspension of the 5-year test period, see Members of the uniformed services or Foreign Service, employees of the intelligence community, or employees or volunteers of the Peace Corps in Publication 523. Tax return preparation state and income taxes Married Persons If you and your spouse file a joint return for the year of sale and one spouse meets the ownership and use tests, you can exclude up to $250,000 of the gain. Tax return preparation state and income taxes (But see Special rules for joint returns , next. Tax return preparation state and income taxes ) Special rules for joint returns. Tax return preparation state and income taxes   You can exclude up to $500,000 of the gain on the sale of your main home if all of the following are true. Tax return preparation state and income taxes You are married and file a joint return for the year. Tax return preparation state and income taxes Either you or your spouse meets the ownership test. Tax return preparation state and income taxes Both you and your spouse meet the use test. Tax return preparation state and income taxes During the 2-year period ending on the date of the sale, neither you nor your spouse excluded gain from the sale of another home. Tax return preparation state and income taxes If either spouse does not satisfy all these requirements, the maximum exclusion that can be claimed by the couple is the total of the maximum exclusions that each spouse would qualify for if not married and the amounts were figured separately. Tax return preparation state and income taxes For this purpose, each spouse is treated as owning the property during the period that either spouse owned the property. Tax return preparation state and income taxes Example 1—one spouse sells a home. Tax return preparation state and income taxes Emily sells her home in June 2013 for a gain of $300,000. Tax return preparation state and income taxes She marries Jamie later in the year. Tax return preparation state and income taxes She meets the ownership and use tests, but Jamie does not. Tax return preparation state and income taxes Emily can exclude up to $250,000 of gain on a separate or joint return for 2013. Tax return preparation state and income taxes The $500,000 maximum exclusion for certain joint returns does not apply because Jamie does not meet the use test. Tax return preparation state and income taxes Example 2—each spouse sells a home. Tax return preparation state and income taxes The facts are the same as in Example 1 except that Jamie also sells a home in 2013 for a gain of $200,000 before he marries Emily. Tax return preparation state and income taxes He meets the ownership and use tests on his home, but Emily does not. Tax return preparation state and income taxes Emily can exclude $250,000 of gain and Jamie can exclude $200,000 of gain on the respective sales of their individual homes. Tax return preparation state and income taxes However, Emily cannot use Jamie's unused exclusion to exclude more than $250,000 of gain. Tax return preparation state and income taxes Therefore, Emily and Jamie must recognize $50,000 of gain on the sale of Emily's home. Tax return preparation state and income taxes The $500,000 maximum exclusion for certain joint returns does not apply because Emily and Jamie do not both meet the use test for the same home. Tax return preparation state and income taxes Sale of main home by surviving spouse. Tax return preparation state and income taxes   If your spouse died and you did not remarry before the date of sale, you are considered to have owned and lived in the property as your main home during any period of time when your spouse owned and lived in it as a main home. Tax return preparation state and income taxes   If you meet all of the following requirements, you may qualify to exclude up to $500,000 of any gain from the sale or exchange of your main home. Tax return preparation state and income taxes The sale or exchange took place after 2008. Tax return preparation state and income taxes The sale or exchange took place no more than 2 years after the date of death of your spouse. Tax return preparation state and income taxes You have not remarried. Tax return preparation state and income taxes You and your spouse met the use test at the time of your spouse's death. Tax return preparation state and income taxes You or your spouse met the ownership test at the time of your spouse's death. Tax return preparation state and income taxes Neither you nor your spouse excluded gain from the sale of another home during the last 2 years. Tax return preparation state and income taxes Example. Tax return preparation state and income taxes   Harry owned and used a house as his main home since 2009. Tax return preparation state and income taxes Harry and Wilma married on July 1, 2013, and from that date they use Harry's house as their main home. Tax return preparation state and income taxes Harry died on August 15, 2013, and Wilma inherited the property. Tax return preparation state and income taxes Wilma sold the property on September 3, 2013, at which time she had not remarried. Tax return preparation state and income taxes Although Wilma owned and used the house for less than 2 years, Wilma is considered to have satisfied the ownership and use tests because her period of ownership and use includes the period that Harry owned and used the property before death. Tax return preparation state and income taxes Home transferred from spouse. Tax return preparation state and income taxes   If your home was transferred to you by your spouse (or former spouse if the transfer was incident to divorce), you are considered to have owned it during any period of time when your spouse owned it. Tax return preparation state and income taxes Use of home after divorce. Tax return preparation state and income taxes   You are considered to have used property as your main home during any period when: You owned it, and Your spouse or former spouse is allowed to live in it under a divorce or separation instrument and uses it as his or her main home. Tax return preparation state and income taxes Reduced Maximum Exclusion If you fail to meet the requirements to qualify for the $250,000 or $500,000 exclusion, you may still qualify for a reduced exclusion. Tax return preparation state and income taxes This applies to those who: Fail to meet the ownership and use tests, or Have used the exclusion within 2 years of selling their current home. Tax return preparation state and income taxes In both cases, to qualify for a reduced exclusion, the sale of your main home must be due to one of the following reasons. Tax return preparation state and income taxes A change in place of employment. Tax return preparation state and income taxes Health. Tax return preparation state and income taxes Unforeseen circumstances. Tax return preparation state and income taxes Unforeseen circumstances. Tax return preparation state and income taxes   The sale of your main home is because of an unforeseen circumstance if your primary reason for the sale is the occurrence of an event that you could not reasonably have anticipated before buying and occupying your main home. Tax return preparation state and income taxes   See Publication 523 for more information and to use Worksheet 3 to figure your reduced maximum exclusion. Tax return preparation state and income taxes Business Use or Rental of Home You may be able to exclude gain from the sale of a home you have used for business or to produce rental income. Tax return preparation state and income taxes But you must meet the ownership and use tests. Tax return preparation state and income taxes Periods of nonqualified use. Tax return preparation state and income taxes   In most cases, gain from the sale or exchange of your main home will not qualify for the exclusion to the extent that the gains are allocated to periods of nonqualified use. Tax return preparation state and income taxes Nonqualified use is any period after 2008 during which neither you nor your spouse (or your former spouse) used the property as a main home with the following exceptions. Tax return preparation state and income taxes Exceptions. Tax return preparation state and income taxes   A period of nonqualified use does not include: Any portion of the 5-year period ending on the date of the sale or exchange after the last date you (or your spouse) use the property as a main home; Any period (not to exceed an aggregate period of 10 years) during which you (or your spouse) are serving on qualified official extended duty: As a member of the uniformed services; As a member of the Foreign Service of the United States; or As an employee of the intelligence community; and Any other period of temporary absence (not to exceed an aggregate period of 2 years) due to change of employment, health conditions, or such other unforeseen circumstances as may be specified by the IRS. Tax return preparation state and income taxes The gain resulting from the sale of the property is allocated between qualified and nonqualified use periods based on the amount of time the property was held for qualified and nonqualified use. Tax return preparation state and income taxes Gain from the sale or exchange of a main home allocable to periods of qualified use will continue to qualify for the exclusion for the sale of your main home. Tax return preparation state and income taxes Gain from the sale or exchange of property allocable to nonqualified use will not qualify for the exclusion. Tax return preparation state and income taxes Calculation. Tax return preparation state and income taxes   To figure the portion of the gain allocated to the period of nonqualified use, multiply the gain by the following fraction:   Total nonqualified use during the period of ownership after 2008      Total period of ownership     This calculation can be found in Worksheet 2, line 10, in Publication 523. Tax return preparation state and income taxes Example 1. Tax return preparation state and income taxes On May 23, 2007, Amy, who is unmarried for all years in this example, bought a house. Tax return preparation state and income taxes She moved in on that date and lived in it until May 31, 2009, when she moved out of the house and put it up for rent. Tax return preparation state and income taxes The house was rented from June 1, 2009, to March 31, 2011. Tax return preparation state and income taxes Amy claimed depreciation deductions in 2009 through 2011 totaling $10,000. Tax return preparation state and income taxes Amy moved back into the house on April 1, 2011, and lived there until she sold it on January 31, 2013, for a gain of $200,000. Tax return preparation state and income taxes During the 5-year period ending on the date of the sale (January 31, 2008-January 31, 2013), Amy owned and lived in the house for more than 2 years as shown in the following table. Tax return preparation state and income taxes Five Year Period Used as  Home Used as  Rental 1/31/08 – 5/31/09 16 months       6/1/09 – 3/31/11   22 months 4/1/11 – 1/31/13 22 months         38 months 22 months During the period Amy owned the house (2,080 days), her period of nonqualified use was 668 days. Tax return preparation state and income taxes Amy divides 668 by 2,080 and obtains a decimal (rounded to at least three decimal places) of 0. Tax return preparation state and income taxes 321. Tax return preparation state and income taxes To figure her gain attributable to the period of nonqualified use, she multiplies $190,000 (the gain not attributable to the $10,000 depreciation deduction) by 0. Tax return preparation state and income taxes 321. Tax return preparation state and income taxes Because the gain attributable to periods of nonqualified use is $60,990, Amy can exclude $129,010 of her gain. Tax return preparation state and income taxes Example 2. Tax return preparation state and income taxes William owned and used a house as his main home from 2007 through 2010. Tax return preparation state and income taxes On January 1, 2011, he moved to another state. Tax return preparation state and income taxes He rented his house from that date until April 30, 2013, when he sold it. Tax return preparation state and income taxes During the 5-year period ending on the date of sale (May 1, 2008-April 30, 2013), William owned and lived in the house for more than 2 years. Tax return preparation state and income taxes He must report the sale on Form 4797 because it was rental property at the time of sale. Tax return preparation state and income taxes Because the period of nonqualified use does not include any part of the 5-year period after the last date William lived in the house, he has no period of nonqualified use. Tax return preparation state and income taxes Because he met the ownership and use tests, he can exclude gain up to $250,000. Tax return preparation state and income taxes However, he cannot exclude the part of the gain equal to the depreciation he claimed or could have claimed for renting the house, as explained next. Tax return preparation state and income taxes Depreciation after May 6, 1997. Tax return preparation state and income taxes   If you were entitled to take depreciation deductions because you used your home for business purposes or as rental property, you cannot exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997. Tax return preparation state and income taxes If you can show by adequate records or other evidence that the depreciation allowed was less than the amount allowable, then you may limit the amount of gain recognized to the depreciation allowed. Tax return preparation state and income taxes See Publication 544 for more information. Tax return preparation state and income taxes Property used partly for business or rental. Tax return preparation state and income taxes   If you used property partly as a home and partly for business or to produce rental income, see Publication 523. Tax return preparation state and income taxes Reporting the Sale Do not report the 2013 sale of your main home on your tax return unless: You have a gain and do not qualify to exclude all of it, You have a gain and choose not to exclude it, or You received Form 1099-S. Tax return preparation state and income taxes If any of these conditions apply, report the entire gain or loss. Tax return preparation state and income taxes For details on how to report the gain or loss, see the Instructions for Schedule D (Form 1040) and the Instructions for Form 8949. Tax return preparation state and income taxes If you used the home for business or to produce rental income, you may have to use Form 4797 to report the sale of the business or rental part (or the sale of the entire property if used entirely for business or rental). Tax return preparation state and income taxes See Business Use or Rental of Home in Publication 523 and the Instructions for Form 4797. Tax return preparation state and income taxes Installment sale. Tax return preparation state and income taxes    Some sales are made under arrangements that provide for part or all of the selling price to be paid in a later year. Tax return preparation state and income taxes These sales are called “installment sales. Tax return preparation state and income taxes ” If you finance the buyer's purchase of your home yourself instead of having the buyer get a loan or mortgage from a bank, you probably have an installment sale. Tax return preparation state and income taxes You may be able to report the part of the gain you cannot exclude on the installment basis. Tax return preparation state and income taxes    Use Form 6252, Installment Sale Income, to report the sale. Tax return preparation state and income taxes Enter your exclusion on line 15 of Form 6252. Tax return preparation state and income taxes Seller-financed mortgage. Tax return preparation state and income taxes   If you sell your home and hold a note, mortgage, or other financial agreement, the payments you receive in most cases consist of both interest and principal. Tax return preparation state and income taxes You must separately report as interest income the interest you receive as part of each payment. Tax return preparation state and income taxes If the buyer of your home uses the property as a main or second home, you must also report the name, address, and social security number (SSN) of the buyer on line 1 of Schedule B (Form 1040A or 1040). Tax return preparation state and income taxes The buyer must give you his or her SSN, and you must give the buyer your SSN. Tax return preparation state and income taxes Failure to meet these requirements may result in a $50 penalty for each failure. Tax return preparation state and income taxes If either you or the buyer does not have and is not eligible to get an SSN, see Social Security Number in chapter 1. Tax return preparation state and income taxes More information. Tax return preparation state and income taxes   For more information on installment sales, see Publication 537, Installment Sales. Tax return preparation state and income taxes Special Situations The situations that follow may affect your exclusion. Tax return preparation state and income taxes Sale of home acquired in a like-kind exchange. Tax return preparation state and income taxes   You cannot claim the exclusion if: You acquired your home in a like-kind exchange (also known as a section 1031 exchange), or your basis in your home is determined by reference to the basis of the home in the hands of the person who acquired the property in a like-kind exchange (for example, you received the home from that person as a gift), and You sold the home during the 5-year period beginning with the date your home was acquired in the like-kind exchange. Tax return preparation state and income taxes Gain from a like-kind exchange is not taxable at the time of the exchange. Tax return preparation state and income taxes This means that gain will not be taxed until you sell or otherwise dispose of the property you receive. Tax return preparation state and income taxes To defer gain from a like-kind exchange, you must have exchanged business or investment property for business or investment property of a like kind. Tax return preparation state and income taxes For more information about like-kind exchanges, see Publication 544, Sales and Other Dispositions of Assets. Tax return preparation state and income taxes Home relinquished in a like-kind exchange. Tax return preparation state and income taxes   If you use your main home partly for business or rental purposes and then exchange the home for another property, see Publication 523. Tax return preparation state and income taxes Expatriates. Tax return preparation state and income taxes   You cannot claim the exclusion if the expatriation tax applies to you. Tax return preparation state and income taxes The expatriation tax applies to certain U. Tax return preparation state and income taxes S. Tax return preparation state and income taxes citizens who have renounced their citizenship (and to certain long-term residents who have ended their residency). Tax return preparation state and income taxes For more information about the expatriation tax, see Expatriation Tax in chapter 4 of Publication 519, U. Tax return preparation state and income taxes S. Tax return preparation state and income taxes Tax Guide for Aliens. Tax return preparation state and income taxes Home destroyed or condemned. Tax return preparation state and income taxes   If your home was destroyed or condemned, any gain (for example, because of insurance proceeds you received) qualifies for the exclusion. Tax return preparation state and income taxes   Any part of the gain that cannot be excluded (because it is more than the maximum exclusion) can be postponed under the rules explained in: Publication 547, in the case of a home that was destroyed, or Publication 544, chapter 1, in the case of a home that was condemned. Tax return preparation state and income taxes Sale of remainder interest. Tax return preparation state and income taxes   Subject to the other rules in this chapter, you can choose to exclude gain from the sale of a remainder interest in your home. Tax return preparation state and income taxes If you make this choice, you cannot choose to exclude gain from your sale of any other interest in the home that you sell separately. Tax return preparation state and income taxes Exception for sales to related persons. Tax return preparation state and income taxes   You cannot exclude gain from the sale of a remainder interest in your home to a related person. Tax return preparation state and income taxes Related persons include your brothers, sisters, half-brothers, half-sisters, spouse, ancestors (parents, grandparents, etc. Tax return preparation state and income taxes ), and lineal descendants (children, grandchildren, etc. Tax return preparation state and income taxes ). Tax return preparation state and income taxes Related persons also include certain corporations, partnerships, trusts, and exempt organizations. Tax return preparation state and income taxes Recapturing (Paying Back) a Federal Mortgage Subsidy If you financed your home under a federally subsidized program (loans from tax-exempt qualified mortgage bonds or loans with mortgage credit certificates), you may have to recapture all or part of the benefit you received from that program when you sell or otherwise dispose of your home. Tax return preparation state and income taxes You recapture the benefit by increasing your federal income tax for the year of the sale. Tax return preparation state and income taxes You may have to pay this recapture tax even if you can exclude your gain from income under the rules discussed earlier; that exclusion does not affect the recapture tax. Tax return preparation state and income taxes Loans subject to recapture rules. Tax return preparation state and income taxes   The recapture applies to loans that: Came from the proceeds of qualified mortgage bonds, or Were based on mortgage credit certificates. Tax return preparation state and income taxes The recapture also applies to assumptions of these loans. Tax return preparation state and income taxes When recapture applies. Tax return preparation state and income taxes   Recapture of the federal mortgage subsidy applies only if you meet both of the following conditions. Tax return preparation state and income taxes You sell or otherwise dispose of your home at a gain within the first 9 years after the date you close your mortgage loan. Tax return preparation state and income taxes Your income for the year of disposition is more than that year's adjusted qualifying income for your family size for that year (related to the income requirements a person must meet to qualify for the federally subsidized program). Tax return preparation state and income taxes When recapture does not apply. Tax return preparation state and income taxes   Recapture does not apply in any of the following situations. Tax return preparation state and income taxes Your mortgage loan was a qualified home improvement loan (QHIL) of not more than $15,000 used for alterations, repairs, and improvements that protect or improve the basic livability or energy efficiency of your home. Tax return preparation state and income taxes Your mortgage loan was a QHIL of not more than $150,000 in the case of a QHIL used to repair damage from Hurricane Katrina to homes in the hurricane disaster area; a QHIL funded by a qualified mortgage bond that is a qualified Gulf Opportunity Zone Bond; or a QHIL for an owner-occupied home in the Gulf Opportunity Zone (GO Zone), Rita GO Zone, or Wilma GO Zone. Tax return preparation state and income taxes For more information, see Publication 4492, Information for Taxpayers Affected by Hurricanes Katrina, Rita, and Wilma. Tax return preparation state and income taxes Also see Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas. Tax return preparation state and income taxes The home is disposed of as a result of your death. Tax return preparation state and income taxes You dispose of the home more than 9 years after the date you closed your mortgage loan. Tax return preparation state and income taxes You transfer the home to your spouse, or to your former spouse incident to a divorce, where no gain is included in your income. Tax return preparation state and income taxes You dispose of the home at a loss. Tax return preparation state and income taxes Your home is destroyed by a casualty, and you replace it on its original site within 2 years after the end of the tax year when the destruction happened. Tax return preparation state and income taxes The replacement period is extended for main homes destroyed in a federally declared disaster area, a Midwestern disaster area, the Kansas disaster area, and the Hurricane Katrina disaster area. Tax return preparation state and income taxes For more information, see Replacement Period in Publication 547. Tax return preparation state and income taxes You refinance your mortgage loan (unless you later meet the conditions listed previously under When recapture applies ). Tax return preparation state and income taxes Notice of amounts. Tax return preparation state and income taxes   At or near the time of settlement of your mortgage loan, you should receive a notice that provides the federally subsidized amount and other information you will need to figure your recapture tax. Tax return preparation state and income taxes How to figure and report the recapture. Tax return preparation state and income taxes    The recapture tax is figured on Form 8828. Tax return preparation state and income taxes If you sell your home and your mortgage is subject to recapture rules, you must file Form 8828 even if you do not owe a recapture tax. Tax return preparation state and income taxes Attach Form 8828 to your Form 1040. Tax return preparation state and income taxes For more information, see Form 8828 and its instructions. Tax return preparation state and income taxes Prev  Up  Next   Home   More Online Publications
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Letter 3127C Frequently Asked Questions (FAQs)

What is the letter telling me?

This letter is confirming your oral or written request to make a change to your current Installment Agreement. The change can be payment amount, payment date or adding an additional liability to the agreement. The letter explains the necessary fees charged for this service.

What do I have to do?

Follow the instructions in the letter and make the change on the date provided.

How much time do I have?

The letter tells you when the change takes place.

What happens if I don't take any action?

You must continue to make your installment payments as the letter directs.

Who should I contact?

If you have any questions you may call the toll free number provided in the letter. The person who answers will assist you.

What if I don't agree or have already taken corrective action?

If you don't agree with the installment terms, you should contact us immediately. If you have already taken corrective action, you should receive a monthly reminder notice.

Page Last Reviewed or Updated: 03-Feb-2014

The Tax Return Preparation State And Income Taxes

Tax return preparation state and income taxes Publication 929 - Main Content Table of Contents Part 1. Tax return preparation state and income taxes Rules for All Dependents Filing RequirementsEarned Income Only Unearned Income Only Both Earned and Unearned Income Other Filing Requirements Should a Return Be Filed Even If Not Required? Responsibility for Child's ReturnThird party designee. Tax return preparation state and income taxes Designated as representative. Tax return preparation state and income taxes IRS notice. Tax return preparation state and income taxes Standard DeductionStandard Deduction of Zero Dependent's Own Exemption Withholding From WagesExceptions. Tax return preparation state and income taxes Part 2. Tax return preparation state and income taxes Tax on Unearned Income of Certain ChildrenWhich Parent's Return To Use Parent's Election To Report Child's Interest and DividendsEffect of Making the Election Figuring Child's Income Figuring Additional Tax Tax for Certain Children Who Have Unearned IncomeProviding Parental Information (Form 8615, Lines A–C) Step 1. Tax return preparation state and income taxes Figuring the Child's Net Unearned Income (Form 8615, Part I) Step 2. Tax return preparation state and income taxes Figuring a Tentative Tax at the Parent's Tax Rate (Form 8615, Part II) Step 3. Tax return preparation state and income taxes Figuring the Child's Tax (Form 8615, Part III) Alternative Minimum Tax Illustrated Example Part 1. Tax return preparation state and income taxes Rules for All Dependents This part of the publication discusses the filing requirements for dependents, who is responsible for a child's return, how to figure a dependent's standard deduction and exemption (if any), and whether a dependent can claim exemption from federal income tax withholding. Tax return preparation state and income taxes Filing Requirements Whether a dependent has to file a return generally depends on the amount of the dependent's earned and unearned income and whether the dependent is married, is age 65 or older, or is blind. Tax return preparation state and income taxes A dependent may have to file a return even if his or her income is less than the amount that would normally require a return. Tax return preparation state and income taxes See Other Filing Requirements, later. Tax return preparation state and income taxes The following sections apply to dependents with: Earned income only, Unearned income only, and Both earned and unearned income. Tax return preparation state and income taxes  To find out whether a dependent must file, read the section that applies, or use Table 1. Tax return preparation state and income taxes Earned Income Only A dependent whose gross income is only earned income must file a return if the gross income is more than the amount listed in the following table. Tax return preparation state and income taxes Marital Status Amount Single   Under 65 and not blind $6,100 Either 65 or older or blind $7,600 65 or older and blind $9,100 Married*   Under 65 and not blind $6,100 Either 65 or older or blind $7,300 65 or older and blind $8,500 *If a dependent's spouse itemizes deductions on a separate return, the dependent must file a return if the dependent has $5 or more of gross income (earned and/or unearned). Tax return preparation state and income taxes Example. Tax return preparation state and income taxes William is 16. Tax return preparation state and income taxes His mother claims an exemption for him on her income tax return. Tax return preparation state and income taxes He worked part time on weekends during the school year and full time during the summer. Tax return preparation state and income taxes He earned $7,000 in wages. Tax return preparation state and income taxes He did not have any unearned income. Tax return preparation state and income taxes He must file a tax return because he has earned income only and his gross income is more than $6,100. Tax return preparation state and income taxes If he is blind, he does not have to file a return because his gross income is not more than $7,600. Tax return preparation state and income taxes Unearned Income Only A dependent whose gross income is only unearned income must file a return if the gross income is more than the amount listed in the following table. Tax return preparation state and income taxes Marital Status Amount Single   Under 65 and not blind $1,000 Either 65 or older or blind $2,500 65 or older and blind $4,000 Married*   Under 65 and not blind $1,000 Either 65 or older or blind $2,200 65 or older and blind $3,400 *If a dependent's spouse itemizes deductions on a separate return, the dependent must file a return if the dependent has $5 or more of gross income (earned and/or unearned). Tax return preparation state and income taxes Example. Tax return preparation state and income taxes Sarah is 18 and single. Tax return preparation state and income taxes Her parents can claim an exemption for her on their income tax return. Tax return preparation state and income taxes She received $1,970 of taxable interest and dividend income. Tax return preparation state and income taxes She did not work during the year. Tax return preparation state and income taxes She must file a tax return because she has unearned income only and her gross income is more than $1,000. Tax return preparation state and income taxes If she is blind, she does not have to file a return because she has unearned income only and her gross income is not more than $2,500. Tax return preparation state and income taxes Election to report child's unearned income on parent's return. Tax return preparation state and income taxes   A parent of a child under age 19 (or under age 24 if a full-time student) may be able to elect to include the child's interest and dividend income on the parent's return. Tax return preparation state and income taxes See Parent's Election To Report Child's Interest and Dividends in Part 2. Tax return preparation state and income taxes If the parent makes this election, the child does not have to file a return. Tax return preparation state and income taxes Both Earned and Unearned Income A dependent who has both earned and unearned income generally must file a return if the dependent's gross income is more than line 5 of the following worksheet. Tax return preparation state and income taxes Filing Requirement Worksheet for Most Dependents 1. Tax return preparation state and income taxes Enter dependent's earned income plus $350     2. Tax return preparation state and income taxes Minimum amount   $1,000 3. Tax return preparation state and income taxes Compare lines 1 and 2. Tax return preparation state and income taxes Enter the larger amount     4. Tax return preparation state and income taxes Maximum amount   6,100 5. Tax return preparation state and income taxes Compare lines 3 and 4. Tax return preparation state and income taxes Enter the smaller amount     6. Tax return preparation state and income taxes Enter the dependent's gross income. Tax return preparation state and income taxes If line 6 is more than line 5, the dependent must file an income tax return. Tax return preparation state and income taxes If the dependent is married and his or her spouse itemizes deductions on a separate return, the dependent must file an income tax return if line 6 is $5 or more. Tax return preparation state and income taxes       Table 1. Tax return preparation state and income taxes 2013 Filing Requirements for Dependents If your parent (or someone else) can claim you as a dependent, use this table to see if you must file a return. Tax return preparation state and income taxes   See the definitions of “dependent,”“earned income,”“unearned income,” and “gross income” in the Glossary. Tax return preparation state and income taxes   Single dependents—Were you either age 65 or older or blind?     No. Tax return preparation state and income taxes You must file a return if any of the following apply. Tax return preparation state and income taxes       Your unearned income was over $1,000. Tax return preparation state and income taxes Your earned income was over $6,100. Tax return preparation state and income taxes Your gross income was more than the larger of—       $1,000, or Your earned income (up to $5,750) plus $350. Tax return preparation state and income taxes         Yes. Tax return preparation state and income taxes You must file a return if any of the following apply. Tax return preparation state and income taxes     Your unearned income was over $2,500 ($4,000 if 65 or older and blind), Your earned income was over $7,600 ($9,100 if 65 or older and blind), Your gross income was more than the larger of—       $2,500 ($4,000 if 65 or older and blind), or Your earned income (up to $5,750) plus $1,850 ($3,350 if 65 or older and blind). Tax return preparation state and income taxes       Married dependents—Were you either age 65 or older or blind?     No. Tax return preparation state and income taxes You must file a return if any of the following apply. Tax return preparation state and income taxes       Your gross income was at least $5 and your spouse files a separate return and itemizes deductions. Tax return preparation state and income taxes Your unearned income was over $1,000. Tax return preparation state and income taxes Your earned income was over $6,100. Tax return preparation state and income taxes Your gross income was more than the larger of—       $1,000, or Your earned income (up to $5,750) plus $350. Tax return preparation state and income taxes       Yes. Tax return preparation state and income taxes You must file a return if any of the following apply. Tax return preparation state and income taxes       Your gross income was at least $5 and your spouse files a separate return and itemizes deductions. Tax return preparation state and income taxes Your unearned income was over $2,200 ($3,400 if 65 or older and blind), Your earned income was over $7,300 ($8,500 if 65 or older and blind), Your gross income was more than the larger of—       $2,200 ($3,400 if 65 or older and blind), or Your earned income (up to $5,750) plus $1,550 ($2,750 if 65 or older and blind). Tax return preparation state and income taxes       Example 1. Tax return preparation state and income taxes Joe is 20, single, not blind, and a full-time college student. Tax return preparation state and income taxes He does not provide more than half of his own support, and his parents claim an exemption for him on their income tax return. Tax return preparation state and income taxes He received $200 taxable interest income and earned $2,750 from a part-time job. Tax return preparation state and income taxes He does not have to file a tax return because his gross income of $2,950 ($200 interest plus $2,750 in wages) is not more than $3,100, the amount on line 5 of his filled-in Filing Requirement Worksheet for Most Dependents (shown next). Tax return preparation state and income taxes Filled-in Example 1 Filing Requirement Worksheet  for Most Dependents 1. Tax return preparation state and income taxes Enter dependent's earned income plus $350   $ 3,100 2. Tax return preparation state and income taxes Minimum amount   1,000 3. Tax return preparation state and income taxes Compare lines 1 and 2. Tax return preparation state and income taxes Enter the larger amount   3,100 4. Tax return preparation state and income taxes Maximum amount   6,100 5. Tax return preparation state and income taxes Compare lines 3 and 4. Tax return preparation state and income taxes Enter the smaller amount   3,100 6. Tax return preparation state and income taxes Enter the dependent's gross income. Tax return preparation state and income taxes If line 6 is more than line 5, the dependent must file an income tax return. Tax return preparation state and income taxes If the dependent is married and his or her spouse itemizes deductions on a separate return, the dependent must file an income tax return if line 6 is $5 or more. Tax return preparation state and income taxes   $ 2,950   Example 2. Tax return preparation state and income taxes The facts are the same as in Example 1 except that Joe had $600 taxable interest income. Tax return preparation state and income taxes He must file a tax return because his gross income of $3,350 ($600 interest plus $2,750 wages) is more than $3,100, the amount on line 5 of his filled-in worksheet (shown next). Tax return preparation state and income taxes Filled-in Example 2 Filing Requirement Worksheet for Most Dependents 1. Tax return preparation state and income taxes Enter dependent's earned income plus $350   $ 3,100 2. Tax return preparation state and income taxes Minimum amount   1,000 3. Tax return preparation state and income taxes Compare lines 1 and 2. Tax return preparation state and income taxes Enter the larger amount   3,100 4. Tax return preparation state and income taxes Maximum amount   6,100 5. Tax return preparation state and income taxes Compare lines 3 and 4. Tax return preparation state and income taxes Enter the smaller amount   3,100 6. Tax return preparation state and income taxes Enter the dependent's gross income. Tax return preparation state and income taxes If line 6 is more than line 5, the dependent must file an income tax return. Tax return preparation state and income taxes If the dependent is married and his or her spouse itemizes deductions on a separate return, the dependent must file an income tax return if line 6 is $5 or more. Tax return preparation state and income taxes   $ 3,350   Age 65 or older or blind. Tax return preparation state and income taxes A dependent who is age 65 or older or blind must file a return if his or her gross income is more than line 7 of the following worksheet. Tax return preparation state and income taxes Filing Requirement Worksheet  for Dependents Who Are Age 65 or Older or Blind 1. Tax return preparation state and income taxes Enter dependent's earned income plus $350     2. Tax return preparation state and income taxes Minimum amount   $1,000 3. Tax return preparation state and income taxes Compare lines 1 and 2. Tax return preparation state and income taxes Enter the larger amount     4. Tax return preparation state and income taxes Maximum amount   6,100 5. Tax return preparation state and income taxes Compare lines 3 and 4. Tax return preparation state and income taxes Enter the smaller amount     6. Tax return preparation state and income taxes Enter the amount from the following table that applies to the dependent       Marital Status Amount     Single         Either 65 or older or blind $1,500       65 or older and blind $3,000     Married         Either 65 or older or blind $1,200       65 or older and blind $2,400   7. Tax return preparation state and income taxes Add lines 5 and 6. Tax return preparation state and income taxes Enter the total     8. Tax return preparation state and income taxes Enter the dependent's gross income. Tax return preparation state and income taxes If line 8 is more than line 7, the dependent must file an income tax return. Tax return preparation state and income taxes If the dependent is married and his or her spouse itemizes deductions on a separate return, the dependent must file an income tax return if line 8 is $5 or more     Example 3. Tax return preparation state and income taxes The facts are the same as in Example 2 except that Joe is also blind. Tax return preparation state and income taxes He does not have to file a return because his gross income of $3,350 is not more than $4,600, the amount on line 7 of his filled-in Filing Requirement Worksheet for Dependents Who Are Age 65 or Older or Blind (shown next). Tax return preparation state and income taxes   Filled-in Example 3 Filing Requirement Worksheet  for Dependents Who Are Age 65 or Older or Blind 1. Tax return preparation state and income taxes Enter dependent's earned income plus $350   $3,100 2. Tax return preparation state and income taxes Minimum amount   1,000 3. Tax return preparation state and income taxes Compare lines 1 and 2. Tax return preparation state and income taxes Enter the larger amount   3,100 4. Tax return preparation state and income taxes Maximum amount   6,100 5. Tax return preparation state and income taxes Compare lines 3 and 4. Tax return preparation state and income taxes Enter the smaller amount   3,100 6. Tax return preparation state and income taxes Enter the amount from the following table that applies to the dependent   1,500   Marital Status Amount     Single         Either 65 or older or blind $1,500       65 or older and blind $3,000     Married         Either 65 or older or blind $1,200       65 or older and blind $2,400   7. Tax return preparation state and income taxes Add lines 5 and 6. Tax return preparation state and income taxes Enter the total   4,600 8. Tax return preparation state and income taxes Enter the dependent's gross income. Tax return preparation state and income taxes If line 8 is more than line 7, the dependent must file an income tax return. Tax return preparation state and income taxes If the dependent is married and his or her spouse itemizes deductions on a separate return, the dependent must file an income tax return if line 8 is $5 or more   $3,350 Other Filing Requirements Some dependents may have to file a tax return even if their income is less than the amount that would normally require them to file a return. Tax return preparation state and income taxes A dependent must file a tax return if he or she owes any other taxes, such as: Social security and Medicare taxes on tips not reported to his or her employer or on wages received from an employer who did not withhold these taxes, Uncollected social security and Medicare or railroad retirement taxes on tips reported to his or her employer or on group-term life insurance, Alternative minimum tax, Additional tax on a health savings account from Form 8889, Part III, Recapture taxes, such as the tax from recapture of an education credit, or Additional tax on a qualified plan, including an individual retirement arrangement (IRA), or other tax-favored account. Tax return preparation state and income taxes But if the dependent is filing a return only because of this tax, the dependent can file Form 5329 by itself. Tax return preparation state and income taxes A dependent must also file a tax return if he or she: Had wages of $108. Tax return preparation state and income taxes 28 or more from a church or qualified church-controlled organization that is exempt from employer social security and Medicare taxes, or Had net earnings from self-employment of at least $400. Tax return preparation state and income taxes Spouse itemizes. Tax return preparation state and income taxes   A dependent must file a return if the dependent's spouse itemizes deductions on a separate return and the dependent has $5 or more of gross income (earned and/or unearned). Tax return preparation state and income taxes Should a Return Be Filed Even If Not Required? Even if a dependent does not meet any of the filing requirements discussed earlier, he or she should file a tax return if either of the following applies. Tax return preparation state and income taxes Income tax was withheld from his or her income. Tax return preparation state and income taxes He or she qualifies for the earned income credit, additional child tax credit, health coverage tax credit, or refundable American opportunity education credit. Tax return preparation state and income taxes See the tax return instructions to find out who qualifies for these credits. Tax return preparation state and income taxes  By filing a return, the dependent can get a refund. Tax return preparation state and income taxes Responsibility for Child's Return Generally, a child is responsible for filing his or her own tax return and for paying any tax, penalties, or interest on that return. Tax return preparation state and income taxes If a child cannot file his or her own return for any reason, such as age, the child's parent, guardian, or other legally responsible person must file it for the child. Tax return preparation state and income taxes Signing the child's return. Tax return preparation state and income taxes   If the child cannot sign his or her return, a parent or guardian must sign the child's name followed by the words “By (signature), parent (or guardian) for minor child. Tax return preparation state and income taxes ” Authority of parent or guardian. Tax return preparation state and income taxes   A parent or guardian who signs a return on a child's behalf can deal with the IRS on all matters connected with the return. Tax return preparation state and income taxes   In general, a parent or guardian who does not sign the child's return can only provide information concerning the child's return and pay the child's tax. Tax return preparation state and income taxes That parent or guardian is not entitled to receive information from the IRS or legally bind the child to a tax liability arising from the return. Tax return preparation state and income taxes Third party designee. Tax return preparation state and income taxes   A child's parent or guardian who does not sign the child's return may be authorized, as a third party designee, to discuss the processing of the return with the IRS as well as provide information concerning the return. Tax return preparation state and income taxes The child or the person signing the return on the child's behalf must check the “Yes” box in the “Third Party Designee” area of the return and name the parent or guardian as the designee. Tax return preparation state and income taxes   If designated, a parent or guardian can respond to certain IRS notices and receive information about the processing of the return and the status of a refund or payment. Tax return preparation state and income taxes This designation does not authorize the parent or guardian to receive any refund check, bind the child to any tax liability, or otherwise represent the child before the IRS. Tax return preparation state and income taxes See the return instructions for more information. Tax return preparation state and income taxes Designated as representative. Tax return preparation state and income taxes   A parent or guardian who does not sign the child's return may be designated as the child's representative by the child or the person signing the return on the child's behalf. Tax return preparation state and income taxes Form 2848, Power of Attorney and Declaration of Representative, is used to designate a child's representative. Tax return preparation state and income taxes See Publication 947, Practice Before the IRS and Power of Attorney, for more information. Tax return preparation state and income taxes   If designated, a parent or guardian can receive information about the child's return but cannot legally bind the child to a tax liability unless authorized to do so by the law of the state in which the child lives. Tax return preparation state and income taxes IRS notice. Tax return preparation state and income taxes   If you or the child receives a notice from the IRS concerning the child's return or tax liability, you should immediately inform the IRS that the notice concerns a child. Tax return preparation state and income taxes The notice will show who to contact. Tax return preparation state and income taxes The IRS will try to resolve the matter with the parent(s) or guardian(s) of the child consistent with their authority. Tax return preparation state and income taxes Child's earnings. Tax return preparation state and income taxes   For federal income tax purposes, amounts a child earns by performing services are included in the gross income of the child and not the gross income of the parent. Tax return preparation state and income taxes This is true even if, under state law, the parent has the right to the earnings and may actually have received them. Tax return preparation state and income taxes If the child does not pay the tax due on this income, the parent may be liable for the tax. Tax return preparation state and income taxes Child's expenses. Tax return preparation state and income taxes   Deductions for payments that are made out of a child's earnings are the child's, even if the payments are made by the parent. Tax return preparation state and income taxes Example. Tax return preparation state and income taxes You made payments on your child's behalf that are deductible as a business expense and a charitable contribution. Tax return preparation state and income taxes You made the payments out of your child's earnings. Tax return preparation state and income taxes These items can be deducted only on the child's return. Tax return preparation state and income taxes Standard Deduction The standard deduction for an individual who can be claimed as a dependent on another person's tax return is generally limited to the larger of: $1,000, or The individual's earned income plus $350, but not more than the regular standard deduction (generally $6,100). Tax return preparation state and income taxes However, the standard deduction may be higher for a dependent who: Is 65 or older, or Is blind. Tax return preparation state and income taxes Certain dependents cannot claim any standard deduction. Tax return preparation state and income taxes See Standard Deduction of Zero , later. Tax return preparation state and income taxes Worksheet 1. Tax return preparation state and income taxes   Use Worksheet 1 to figure the dependent's standard deduction. Tax return preparation state and income taxes Worksheet 1. Tax return preparation state and income taxes Standard Deduction Worksheet for Dependents Use this worksheet only if someone else can claim you (or your spouse, if filing jointly) as a dependent. Tax return preparation state and income taxes If you were 65 or older and/or blind, check the correct number of boxes below. Tax return preparation state and income taxes Put the total number of boxes checked in box c and go to line 1. Tax return preparation state and income taxes a. Tax return preparation state and income taxes You 65 or older   Blind   b. Tax return preparation state and income taxes Your spouse, if claiming  spouse's exemption 65 or older   Blind   c. Tax return preparation state and income taxes Total boxes checked         1. Tax return preparation state and income taxes Enter your earned income (defined below) plus $350. Tax return preparation state and income taxes If none, enter -0-. Tax return preparation state and income taxes 1. Tax return preparation state and income taxes     2. Tax return preparation state and income taxes Minimum amount. Tax return preparation state and income taxes   2. Tax return preparation state and income taxes $1,000   3. Tax return preparation state and income taxes Compare lines 1 and 2. Tax return preparation state and income taxes Enter the larger of the two amounts here. Tax return preparation state and income taxes 3. Tax return preparation state and income taxes     4. Tax return preparation state and income taxes Enter on line 4 the amount shown below for your filing status. Tax return preparation state and income taxes       Single or Married filing separately—$6,100 Married filing jointly—$12,200 Head of household—$8,950 4. Tax return preparation state and income taxes     5. Tax return preparation state and income taxes Standard deduction. Tax return preparation state and income taxes         a. Tax return preparation state and income taxes Compare lines 3 and 4. Tax return preparation state and income taxes Enter the smaller amount here. Tax return preparation state and income taxes If under 65 and not blind, stop here. Tax return preparation state and income taxes This is your standard deduction. Tax return preparation state and income taxes Otherwise, go on to line 5b. Tax return preparation state and income taxes 5a. Tax return preparation state and income taxes     b. Tax return preparation state and income taxes If 65 or older or blind, multiply $1,500 ($1,200 if married) by the number in box c above. Tax return preparation state and income taxes Enter the result here. Tax return preparation state and income taxes 5b. Tax return preparation state and income taxes     c. Tax return preparation state and income taxes Add lines 5a and 5b. Tax return preparation state and income taxes This is your standard deduction for 2013. Tax return preparation state and income taxes 5c. Tax return preparation state and income taxes     Earned income includes wages, salaries, tips, professional fees, and other compensation received for personal services you performed. Tax return preparation state and income taxes It also includes any amount received as a scholarship that you must include in income. Tax return preparation state and income taxes   Example 1. Tax return preparation state and income taxes Michael is single, age 15, and not blind. Tax return preparation state and income taxes His parents can claim him as a dependent on their tax return. Tax return preparation state and income taxes He has taxable interest income of $800 and wages of $150. Tax return preparation state and income taxes He enters $500 (his earned income plus $350) on line 1 of Worksheet 1. Tax return preparation state and income taxes On line 3, he enters $1,000, the larger of $500 or $1,000. Tax return preparation state and income taxes Michael enters $6,100 on line 4. Tax return preparation state and income taxes On line 5a, he enters $1,000, the smaller of $1,000 or $6,100. Tax return preparation state and income taxes His standard deduction is $1,000. Tax return preparation state and income taxes Example 2. Tax return preparation state and income taxes Judy, a full-time student, is single, age 22, and not blind. Tax return preparation state and income taxes Her parents can claim her as a dependent on their tax return. Tax return preparation state and income taxes She has dividend income of $275 and wages of $2,500. Tax return preparation state and income taxes She enters $2,850 (her earned income plus $350) on line 1 of Worksheet 1. Tax return preparation state and income taxes On line 3, she enters $2,850, the larger of $2,850 or $1,000. Tax return preparation state and income taxes She enters $6,100 on line 4. Tax return preparation state and income taxes On line 5a, she enters $2,850 (the smaller of $2,850 or $6,100) as her standard deduction. Tax return preparation state and income taxes Example 3. Tax return preparation state and income taxes Amy, who is single, is claimed as a dependent on her parents' tax return. Tax return preparation state and income taxes She is 18 years old and blind. Tax return preparation state and income taxes She has taxable interest income of $1,000 and wages of $2,000. Tax return preparation state and income taxes She enters $2,350 (her earned income plus $350) on line 1 of Worksheet 1. Tax return preparation state and income taxes She enters $2,350 (the larger of $2,350 or $1,000) on line 3, $6,100 on line 4, and $2,350 (the smaller of $2,350 or $6,100) on line 5a. Tax return preparation state and income taxes Because Amy is blind, she checks the box for blindness and enters “1” in box c at the top of Worksheet 1. Tax return preparation state and income taxes She enters $1,500 (the number in box c times $1,500) on line 5b. Tax return preparation state and income taxes Her standard deduction on line 5c is $3,850 ($2,350 + $1,500). Tax return preparation state and income taxes Standard Deduction of Zero The standard deduction for the following dependents is zero. Tax return preparation state and income taxes A married dependent filing a separate return whose spouse itemizes deductions. Tax return preparation state and income taxes A dependent who files a return for a period of less than 12 months due to a change in his or her annual accounting period. Tax return preparation state and income taxes A nonresident or dual-status alien dependent, unless the dependent is married to a U. Tax return preparation state and income taxes S. Tax return preparation state and income taxes citizen or resident alien at the end of the year and chooses to be treated as a U. Tax return preparation state and income taxes S. Tax return preparation state and income taxes resident for the year. Tax return preparation state and income taxes See Publication 519, U. Tax return preparation state and income taxes S. Tax return preparation state and income taxes Tax Guide for Aliens, for information on making this choice. Tax return preparation state and income taxes Example. Tax return preparation state and income taxes Jennifer, who is a dependent of her parents, is entitled to file a joint return with her husband. Tax return preparation state and income taxes However, her husband elects to file a separate return and itemize his deductions. Tax return preparation state and income taxes Because he itemizes, Jennifer's standard deduction on her return is zero. Tax return preparation state and income taxes She can, however, itemize any of her allowable deductions. Tax return preparation state and income taxes Dependent's Own Exemption A person who can be claimed as a dependent on another taxpayer's return cannot claim his or her own exemption. Tax return preparation state and income taxes This is true even if the other taxpayer does not actually claim the exemption. Tax return preparation state and income taxes Example. Tax return preparation state and income taxes James and Barbara can claim their child, Ben, as a dependent on their return. Tax return preparation state and income taxes Ben is a college student who works during the summer and must file a tax return. Tax return preparation state and income taxes Ben cannot claim his own exemption on his return. Tax return preparation state and income taxes This is true even if James and Barbara do not claim him as a dependent on their return. Tax return preparation state and income taxes Withholding From Wages Employers generally withhold federal income tax, social security tax, and Medicare tax from an employee's wages. Tax return preparation state and income taxes If the employee claims exemption from withholding on Form W-4, the employer will not withhold federal income tax. Tax return preparation state and income taxes The exemption from withholding does not apply to social security and Medicare taxes. Tax return preparation state and income taxes Conditions for exemption from withholding. Tax return preparation state and income taxes   An employee can claim exemption from withholding for 2014 only if he or she meets both of the following conditions. Tax return preparation state and income taxes For 2013, the employee had a right to a refund of all federal income tax withheld because he or she had no tax liability. Tax return preparation state and income taxes For 2014, the employee expects a refund of all federal income tax withheld because he or she expects to have no tax liability. Tax return preparation state and income taxes Dependents. Tax return preparation state and income taxes   An employee who is a dependent ordinarily cannot claim exemption from withholding if both of the following are true. Tax return preparation state and income taxes The employee's gross income will be more than $1,000, the minimum standard deduction for 2014. Tax return preparation state and income taxes The employee's unearned income will be more than $350. Tax return preparation state and income taxes Exceptions. Tax return preparation state and income taxes   An employee may be able to claim exemption from withholding even if the employee is a dependent, if the employee: Is age 65 or older, Is blind, or Will claim on his or her 2014 tax return: Adjustments to income, Tax credits, or Itemized deductions. Tax return preparation state and income taxes The above exceptions do not apply to supplemental wages greater than $1,000,000. Tax return preparation state and income taxes For more information, see Exemption From Withholding in chapter 1 of Publication 505. Tax return preparation state and income taxes Example. Tax return preparation state and income taxes Guy is 17 and a student. Tax return preparation state and income taxes During the summer he works part time at a grocery store. Tax return preparation state and income taxes He expects to earn about $1,200 this year. Tax return preparation state and income taxes He also worked at the store last summer and received a refund of all his withheld income tax because he did not have a tax liability. Tax return preparation state and income taxes The only other income he expects during the year is $375 interest on a savings account. Tax return preparation state and income taxes He expects that his parents will be able to claim him as a dependent on their tax return. Tax return preparation state and income taxes He is not blind and will not claim adjustments to income, itemized deductions, a higher standard deduction, or tax credits on his return. Tax return preparation state and income taxes Guy cannot claim exemption from withholding when he fills out Form W-4 because his parents will be able to claim him as a dependent, his gross income will be more than $1,000 (the minimum standard deduction amount) and his unearned income will be more than $350. Tax return preparation state and income taxes Claiming exemption from withholding. Tax return preparation state and income taxes    To claim exemption from withholding, an employee must enter “Exempt” in the space provided on Form W-4, line 7. Tax return preparation state and income taxes The employee must complete the rest of the form, as explained in the form instructions, and give it to his or her employer. Tax return preparation state and income taxes Renewing an exemption from withholding. Tax return preparation state and income taxes   An exemption from withholding is good for only one year. Tax return preparation state and income taxes An employee must file a new Form W-4 by February 15 each year to continue the exemption. Tax return preparation state and income taxes Part 2. Tax return preparation state and income taxes Tax on Unearned Income of Certain Children The two rules that follow may affect the tax on the unearned income of certain children. Tax return preparation state and income taxes If the child's interest and dividend income (including capital gain distributions) total less than $10,000, the child's parent may be able to choose to include that income on the parent's return rather than file a return for the child. Tax return preparation state and income taxes (See Parent's Election To Report Child's Interest and Dividends , later. Tax return preparation state and income taxes ) If the child's interest, dividends, and other unearned income total more than $2,000, part of that income may be taxed at the parent's tax rate instead of the child's tax rate. Tax return preparation state and income taxes (See Tax for Certain Children Who Have Unearned Income , later. Tax return preparation state and income taxes ) For these rules, the term “child” includes a legally adopted child and a stepchild. Tax return preparation state and income taxes These rules apply whether or not the child is a dependent. Tax return preparation state and income taxes These rules do not apply if neither of the child's parents were living at the end of the year. Tax return preparation state and income taxes Which Parent's Return To Use If a child's parents are married to each other and file a joint return, use the joint return to figure the tax on the child's unearned income. Tax return preparation state and income taxes The tax rate and other return information from that return are used to figure the child's tax as explained later under Tax for Certain Children Who Have Unearned Income . Tax return preparation state and income taxes Parents Who Do Not File a Joint Return For parents who do not file a joint return, the following discussions explain which parent's tax return must be used to figure the tax. Tax return preparation state and income taxes Only the parent whose tax return is used can make the election described under Parent's Election To Report Child's Interest and Dividends . Tax return preparation state and income taxes Parents are married. Tax return preparation state and income taxes   If the child's parents file separate returns, use the return of the parent with the greater taxable income. Tax return preparation state and income taxes Parents not living together. Tax return preparation state and income taxes   If the child's parents are married to each other but not living together, and the parent with whom the child lives (the custodial parent) is considered unmarried, use the return of the custodial parent. Tax return preparation state and income taxes If the custodial parent is not considered unmarried, use the return of the parent with the greater taxable income. Tax return preparation state and income taxes   For an explanation of when a married person living apart from his or her spouse is considered unmarried, see Head of Household in Publication 501. Tax return preparation state and income taxes Parents are divorced. Tax return preparation state and income taxes   If the child's parents are divorced or legally separated, and the parent who had custody of the child for the greater part of the year (the custodial parent) has not remarried, use the return of the custodial parent. Tax return preparation state and income taxes Custodial parent remarried. Tax return preparation state and income taxes   If the custodial parent has remarried, the stepparent (rather than the noncustodial parent) is treated as the child's other parent. Tax return preparation state and income taxes Therefore, if the custodial parent and the stepparent file a joint return, use that joint return. Tax return preparation state and income taxes Do not use the return of the noncustodial parent. Tax return preparation state and income taxes   If the custodial parent and the stepparent are married, but file separate returns, use the return of the one with the greater taxable income. Tax return preparation state and income taxes If the custodial parent and the stepparent are married but not living together, the earlier discussion under Parents not living together applies. Tax return preparation state and income taxes Parents never married. Tax return preparation state and income taxes   If a child's parents have never been married to each other, but lived together all year, use the return of the parent with the greater taxable income. Tax return preparation state and income taxes If the parents did not live together all year, the rules explained earlier under Parents are divorced apply. Tax return preparation state and income taxes Widowed parent remarried. Tax return preparation state and income taxes   If a widow or widower remarries, the new spouse is treated as the child's other parent. Tax return preparation state and income taxes The rules explained earlier under Custodial parent remarried apply. Tax return preparation state and income taxes Parent's Election To Report Child's Interest and Dividends You may be able to elect to include your child's interest and dividend income (including capital gain distributions) on your tax return. Tax return preparation state and income taxes If you do, your child will not have to file a return. Tax return preparation state and income taxes You can make this election only if all the following conditions are met. Tax return preparation state and income taxes Your child was under age 19 (or under age 24 if a full-time student) at the end of the year. Tax return preparation state and income taxes Your child had income only from interest and dividends (including capital gain distributions and Alaska Permanent Fund dividends). Tax return preparation state and income taxes The child's gross income was less than $10,000. Tax return preparation state and income taxes The child is required to file a return unless you make this election. Tax return preparation state and income taxes The child does not file a joint return for the year. Tax return preparation state and income taxes No estimated tax payment was made for the year, and no overpayment from the previous year (or from any amended return) was applied to this year under your child's name and social security number. Tax return preparation state and income taxes No federal income tax was withheld from your child's income under the backup withholding rules. Tax return preparation state and income taxes You are the parent whose return must be used when applying the special tax rules for children. Tax return preparation state and income taxes (See Which Parent's Return To Use , earlier. Tax return preparation state and income taxes ) These conditions are also shown in Figure 1. Tax return preparation state and income taxes Certain January 1 birthdays. Tax return preparation state and income taxes   A child born on January 1, 1995, is considered to be age 19 at the end of 2013. Tax return preparation state and income taxes You cannot make this election for such a child unless the child was a full-time student. Tax return preparation state and income taxes   A child born on January 1, 1990, is considered to be age 24 at the end of 2013. Tax return preparation state and income taxes You cannot make this election for such a child. Tax return preparation state and income taxes How to make the election. Tax return preparation state and income taxes    Make the election by attaching Form 8814 to your Form 1040 or Form 1040NR. Tax return preparation state and income taxes (If you make this election, you cannot file Form 1040A or Form 1040EZ. Tax return preparation state and income taxes ) Attach a separate Form 8814 for each child for whom you make the election. Tax return preparation state and income taxes You can make the election for one or more children and not for others. Tax return preparation state and income taxes Effect of Making the Election The federal income tax on your child's income may be more if you make the Form 8814 election. Tax return preparation state and income taxes Rate may be higher. Tax return preparation state and income taxes   If your child received qualified dividends or capital gain distributions, you may pay up to $100 more tax if you make this election instead of filing a separate tax return for the child. Tax return preparation state and income taxes This is because the tax rate on the child's income between $1,000 and $2,000 is 10% if you make this election. Tax return preparation state and income taxes However, if you file a separate return for the child, the tax rate may be as low as 0% (zero percent) because of the preferential tax rates for qualified dividends and capital gain distributions. Tax return preparation state and income taxes Deductions you cannot take. Tax return preparation state and income taxes   By making the Form 8814 election, you cannot take any of the following deductions that the child would be entitled to on his or her return. Tax return preparation state and income taxes The additional standard deduction if the child is blind. Tax return preparation state and income taxes The deduction for a penalty on an early withdrawal of your child's savings. Tax return preparation state and income taxes Itemized deductions (such as your child's investment expenses or charitable contributions). Tax return preparation state and income taxes Figure 1. Tax return preparation state and income taxes Can You Include Your Child's Income On Your Tax Return? Please click here for the text description of the image. Tax return preparation state and income taxes Figure 1. Tax return preparation state and income taxes Can You Include Your Child's Income On Your Tax Return? Deductible investment interest. Tax return preparation state and income taxes   If you use Form 8814, your child's unearned income is considered your unearned income. Tax return preparation state and income taxes To figure the limit on your deductible investment interest, add the child's unearned income to yours. Tax return preparation state and income taxes However, if your child received qualified dividends, capital gain distributions, or Alaska Permanent Fund dividends, see chapter 3 of Publication 550 for information about how to figure the limit. Tax return preparation state and income taxes Alternative minimum tax. Tax return preparation state and income taxes    If your child received tax-exempt interest (or exempt-interest dividends paid by a regulated investment company) from certain private activity bonds, you must determine if that interest is a tax preference item for alternative minimum tax (AMT) purposes. Tax return preparation state and income taxes If it is, you must include it with your own tax preference items when figuring your AMT. Tax return preparation state and income taxes See Form 6251, Alternative Minimum Tax—Individuals, and its instructions for details. Tax return preparation state and income taxes Reduced deductions or credits. Tax return preparation state and income taxes   If you use Form 8814, your increased adjusted gross income may reduce certain deductions or credits on your return, including the following. Tax return preparation state and income taxes Deduction for contributions to a traditional individual retirement arrangement (IRA). Tax return preparation state and income taxes Deduction for student loan interest. Tax return preparation state and income taxes Itemized deductions for medical expenses, casualty and theft losses, and certain miscellaneous expenses. Tax return preparation state and income taxes Credit for child and dependent care expenses. Tax return preparation state and income taxes Child tax credit. Tax return preparation state and income taxes Education tax credits. Tax return preparation state and income taxes Earned income credit. Tax return preparation state and income taxes Penalty for underpayment of estimated tax. Tax return preparation state and income taxes   If you make this election for 2013 and did not have enough tax withheld or pay enough estimated tax to cover the tax you owe, you may be subject to a penalty. Tax return preparation state and income taxes If you plan to make this election for 2014, you may need to increase your federal income tax withholding or your estimated tax payments to avoid the penalty. Tax return preparation state and income taxes Get Publication 505 for more information. Tax return preparation state and income taxes Figuring Child's Income Use Form 8814, Part I, to figure your child's interest and dividend income to report on your return. Tax return preparation state and income taxes Only the amount over $2,000 is added to your income. Tax return preparation state and income taxes The amount over $2,000 is shown on Form 8814, line 6. Tax return preparation state and income taxes Unless the child's income includes qualified dividends or capital gain distributions (discussed next), the same amount is shown on Form 8814, line 12. Tax return preparation state and income taxes Include the amount from Form 8814, line 12, on Form 1040 or Form 1040NR, line 21. Tax return preparation state and income taxes If you file more than one Form 8814, include the total amounts from line 12 of all your Forms 8814 on Form 1040 or Form 1040NR, line 21. Tax return preparation state and income taxes On the dotted line next to line 21, enter “Form 8814” and the total of the Form 8814, line 12 amounts. Tax return preparation state and income taxes Note. Tax return preparation state and income taxes The tax on the first $2,000 is figured on Form 8814, Part II. Tax return preparation state and income taxes See Figuring Additional Tax , later. Tax return preparation state and income taxes Qualified dividends. Tax return preparation state and income taxes   Enter on Form 8814, line 2a, any ordinary dividends your child received. Tax return preparation state and income taxes This amount may include qualified dividends. Tax return preparation state and income taxes Qualified dividends are those dividends reported on Form 1040, line 9b, or Form 1040NR, line 10b, and are eligible for lower tax rates that apply to a net capital gain. Tax return preparation state and income taxes For detailed information about qualified dividends, see Publication 550. Tax return preparation state and income taxes   If your child received qualified dividends, the amount of these dividends that is added to your income must be reported on Form 1040, lines 9a and 9b, or Form 1040NR, lines 10a and 10b. Tax return preparation state and income taxes You do not include these dividends on Form 8814, line 12, or on line 21 of Form 1040 or Form 1040NR. Tax return preparation state and income taxes   Enter the child's qualified dividends on Form 8814, line 2b. Tax return preparation state and income taxes But do not include this amount on Form 1040, lines 9a and 9b, or Form 1040NR, lines 10a and 10b. Tax return preparation state and income taxes Instead, include the amount from Form 8814, line 9, on Form 1040, lines 9a and 9b, or Form 1040NR, lines 10a and 10b. Tax return preparation state and income taxes (The amount on Form 8814, line 9, may be less than the amount on Form 8814, line 2b, because lines 7 through 12 of the form divide the $2,000 base amount on Form 8814, line 5, between the child's qualified dividends, capital gain distributions, and other interest and dividend income, reducing each of those amounts. Tax return preparation state and income taxes ) Capital gain distributions. Tax return preparation state and income taxes   Enter on Form 8814, line 3, any capital gain distributions your child received. Tax return preparation state and income taxes The amount of these distributions that is added to your income must be reported on Schedule D (Form 1040), line 13, or, if you are not required to file Schedule D, on Form 1040, line 13, or Form 1040NR, line 14. Tax return preparation state and income taxes You do not include it on Form 8814, line 12, or on line 21 of Form 1040 or Form 1040NR. Tax return preparation state and income taxes   Include the amount from Form 8814, line 10, on Schedule D, line 13; Form 1040, line 13; or Form 1040NR, line 14, whichever applies. Tax return preparation state and income taxes (The amount on Form 8814, line 10, may be less than the amount on Form 8814, line 3, because lines 7 through 12 of the form divide the $2,000 base amount on Form 8814, line 5, between the child's qualified dividends, capital gain distributions, and other interest and dividend income, reducing each of those amounts. Tax return preparation state and income taxes ) Collectibles (28% rate) gain. Tax return preparation state and income taxes    If any of the child's capital gain distributions are reported on Form 1099-DIV as collectibles (28% rate) gain, you must determine how much to also include on line 4 of the 28% Rate Gain Worksheet, in the instructions for Schedule D, line 18. Tax return preparation state and income taxes Multiply the child's capital gain distribution included on Schedule D, line 13, by a fraction. Tax return preparation state and income taxes The numerator is the part of the child's total capital gain distribution that is collectibles (28% rate) gain. Tax return preparation state and income taxes The denominator is the child's total capital gain distribution. Tax return preparation state and income taxes Enter the result on line 4 of the 28% Rate Gain Worksheet. Tax return preparation state and income taxes Unrecaptured section 1250 gain. Tax return preparation state and income taxes   If any of the child's capital gain distributions are reported on Form 1099-DIV as unrecaptured section 1250 gain, you must determine how much to include on line 11 of the Unrecaptured Section 1250 Gain Worksheet in the instructions for Schedule D, line 19. Tax return preparation state and income taxes Multiply the child's capital gain distribution included on Schedule D, line 13, by a fraction. Tax return preparation state and income taxes The numerator is the part of the child's total capital gain distribution that is unrecaptured section 1250 gain. Tax return preparation state and income taxes The denominator is the child's total capital gain distribution. Tax return preparation state and income taxes Enter the result on the Unrecaptured Section 1250 Gain Worksheet, line 11. Tax return preparation state and income taxes Section 1202 gain. Tax return preparation state and income taxes   If any of the child's capital gain distributions are reported as section 1202 gain (gain on qualified small business stock) on Form 1099-DIV, part or all of that gain may be eligible for the section 1202 exclusion. Tax return preparation state and income taxes (For information about the exclusion, see chapter 4 of Publication 550. Tax return preparation state and income taxes ) To figure that part, multiply the child's capital gain distribution included on Schedule D, line 13, by a fraction. Tax return preparation state and income taxes The numerator is the part of the child's total capital gain distribution that is section 1202 gain. Tax return preparation state and income taxes The denominator is the child's total capital gain distribution. Tax return preparation state and income taxes Your section 1202 exclusion is generally 50% of the result, but may be subject to a limit. Tax return preparation state and income taxes In some cases, the exclusion is more than 50%. Tax return preparation state and income taxes See the instructions for Schedule D for details and information on how to report the exclusion amount. Tax return preparation state and income taxes Example. Tax return preparation state and income taxes Fred is 6 years old. Tax return preparation state and income taxes In 2013, he received dividend income of $2,100, which included $1,575 of ordinary dividends and a $525 capital gain distribution from a mutual fund. Tax return preparation state and income taxes (None of the distributions were reported on Form 1099-DIV as unrecaptured section 1250 gain, section 1202 gain, or collectibles (28% rate) gain. Tax return preparation state and income taxes ) All of the ordinary dividends are qualified dividends. Tax return preparation state and income taxes He has no other income and is not subject to backup withholding. Tax return preparation state and income taxes No estimated tax payments were made under his name and social security number. Tax return preparation state and income taxes Fred's parents elect to include Fred's income on their tax return instead of filing a return for him. Tax return preparation state and income taxes They figure the amount to report on Form 1040, lines 9a and 9b, the amount to report on their Schedule D, line 13, and the amount to report on Form 1040, line 21, as follows. Tax return preparation state and income taxes They leave lines 1a and 1b of Form 8814 blank because Fred does not have any interest income. Tax return preparation state and income taxes They enter his ordinary dividends of $1,575 on lines 2a and 2b because all of Fred's ordinary dividends are qualified dividends. Tax return preparation state and income taxes They enter the amount of Fred's capital gain distributions, $525, on line 3. Tax return preparation state and income taxes Next, they add the amounts on lines 1a, 2a, and 3 and enter the result, $2,100, on line 4. Tax return preparation state and income taxes They subtract the base amount on line 5, $2,000, from the amount on line 4, $2,100, and enter the result, $100, on line 6. Tax return preparation state and income taxes This is the total amount from Form 8814 to be reported on their return. Tax return preparation state and income taxes Next, they figure how much of this amount is qualified dividends and how much is capital gain distributions. Tax return preparation state and income taxes They divide the amount on line 2b, $1,575, by the amount on line 4, $2,100. Tax return preparation state and income taxes They enter the result, . Tax return preparation state and income taxes 75, on line 7. Tax return preparation state and income taxes They divide the amount on line 3, $525, by the amount on line 4, $2,100. Tax return preparation state and income taxes They enter the result, . Tax return preparation state and income taxes 25, on line 8. Tax return preparation state and income taxes They multiply the amount on line 6, $100, by the decimal on line 7, . Tax return preparation state and income taxes 75, and enter the result, $75, on line 9. Tax return preparation state and income taxes They multiply the amount on line 6, $100, by the decimal on line 8, . Tax return preparation state and income taxes 25, and enter the result, $25, on line 10. Tax return preparation state and income taxes They include the amount from line 9, $75, on lines 9a and 9b of their Form 1040 and enter “Form 8814 – $75” on the dotted lines next to lines 9a and 9b. Tax return preparation state and income taxes They include the amount from line 10, $25, on line 13 of their Schedule D (Form 1040) and enter “Form 8814 – $25” on the dotted line next to Schedule D, line 13. Tax return preparation state and income taxes They enter $100 ($75 + $25) on line 11 and -0- ($100 – $100) on line 12. Tax return preparation state and income taxes Because the amount on line 12 is -0-, they do not include any amount from Form 8814 on their Form 1040, line 21. Tax return preparation state and income taxes Figuring Additional Tax Use Form 8814, Part II, to figure the tax on the $2,000 of your child's interest and dividends that you do not include in your income. Tax return preparation state and income taxes This tax is added to the tax figured on your income. Tax return preparation state and income taxes This additional tax is the smaller of: 10% x (your child's gross income − $1,000), or $100. Tax return preparation state and income taxes Include the amount from line 15 of all your Forms 8814 in the total on Form 1040, line 44, or Form 1040NR, line 42. Tax return preparation state and income taxes Check box a on Form 1040, line 44, or Form 1040NR, line 42. Tax return preparation state and income taxes Tax for Certain Children Who Have Unearned Income If a child's interest, dividends, and other unearned income total more than $2,000, part of that income may be taxed at the parent's tax rate instead of the child's tax rate. Tax return preparation state and income taxes If the parent does not or cannot choose to include the child's income on the parent's return, use Form 8615 to figure the child's tax. Tax return preparation state and income taxes Attach the completed form to the child's Form 1040, Form 1040A, or Form 1040NR. Tax return preparation state and income taxes When Form 8615 must be filed. Tax return preparation state and income taxes   Form 8615 must be filed for a child if all of the following statements are true. Tax return preparation state and income taxes The child's unearned income was more than $2,000. Tax return preparation state and income taxes The child is required to file a return for 2013. Tax return preparation state and income taxes The child either: Was under age 18 at the end of the year, Was age 18 at the end of the year and did not have earned income that was more than half of his or her support, or Was over age 18 and under age 24 at the end of the year, was a full-time student, and did not have earned income that was more than half of his or her support. Tax return preparation state and income taxes At least one of the child's parents was alive at the end of 2013. Tax return preparation state and income taxes The child does not file a joint return for 2013. Tax return preparation state and income taxes These conditions are also shown in Figure 2. Tax return preparation state and income taxes Certain January 1 birthdays. Tax return preparation state and income taxes   Use the following chart to determine whether certain children with January 1 birthdays meet condition 3 under When Form 8615 must be filed. Tax return preparation state and income taxes IF a child was born on. Tax return preparation state and income taxes . Tax return preparation state and income taxes . Tax return preparation state and income taxes THEN, at the end of 2013, the child is considered to be. Tax return preparation state and income taxes . Tax return preparation state and income taxes . Tax return preparation state and income taxes January 1, 1996 18* January 1, 1995 19** January 1, 1990 24*** *This child is not under age 18. Tax return preparation state and income taxes The child meets condition 3 only if the child did not have earned income that was more than half of the child's support. Tax return preparation state and income taxes  **This child meets condition 3 only if the child was a full-time student who did not have earned income that was more than half of the child's support. Tax return preparation state and income taxes  ***Do not use Form 8615 for this child. Tax return preparation state and income taxes Figure 2. Tax return preparation state and income taxes Do You Have To Use Form 8615 To Figure Your Child's Tax? Please click here for the text description of the image. Tax return preparation state and income taxes Figure 2. Tax return preparation state and income taxes Do You Have To Use Form 8615 To Figure Your Child's Tax? Providing Parental Information (Form 8615, Lines A–C) On Form 8615, lines A and B, enter the parent's name and social security number. Tax return preparation state and income taxes (If the parents filed a joint return, enter the name and social security number listed first on the joint return. Tax return preparation state and income taxes ) On line C, check the box for the parent's filing status. Tax return preparation state and income taxes See Which Parent's Return To Use, earlier, for information on which parent's return information must be used on Form 8615. Tax return preparation state and income taxes Parent with different tax year. Tax return preparation state and income taxes   If the parent and the child do not have the same tax year, complete Form 8615 using the information on the parent's return for the tax year that ends in the child's tax year. Tax return preparation state and income taxes Example. Tax return preparation state and income taxes Kimberly must use her mother's tax and taxable income to complete her Form 8615 for calendar year 2013 (January 1 – December 31). Tax return preparation state and income taxes Kimberly's mother files her tax return on a fiscal year basis (July 1 – June 30). Tax return preparation state and income taxes Kimberly must use the information on her mother's return for the tax year ending June 30, 2013, to complete her 2013 Form 8615. Tax return preparation state and income taxes Parent's return information not known timely. Tax return preparation state and income taxes   If the information needed from the parent's return is not known by the time the child's return is due (usually April 15), you can file the return using estimates. Tax return preparation state and income taxes   You can use any reasonable estimate. Tax return preparation state and income taxes This includes using information from last year's return. Tax return preparation state and income taxes If you use an estimated amount on Form 8615, enter “Estimated” on the line next to the amount. Tax return preparation state and income taxes   When you get the correct information, file an amended return on Form 1040X, Amended U. Tax return preparation state and income taxes S. Tax return preparation state and income taxes Individual Income Tax Return. Tax return preparation state and income taxes Extension of time to file. Tax return preparation state and income taxes   Instead of using estimates, you can get an automatic 6-month extension of time to file if, by the date your return is due, you file Form 4868, Application for Automatic Extension of Time To File U. Tax return preparation state and income taxes S. Tax return preparation state and income taxes Individual Income Tax Return. Tax return preparation state and income taxes See the instructions for Form 4868 for details. Tax return preparation state and income taxes    An extension of time to file is not an extension of time to pay. Tax return preparation state and income taxes You must make an accurate estimate of the tax for 2013. Tax return preparation state and income taxes If you do not pay the full amount due by the regular due date, the child will owe interest and may also be charged penalties. Tax return preparation state and income taxes See Form 4868 and its instructions. Tax return preparation state and income taxes Parent's return information not available. Tax return preparation state and income taxes   If a child cannot get the required information about his or her parent's tax return, the child (or the child's legal representative) can request the necessary information from the Internal Revenue Service (IRS). Tax return preparation state and income taxes How to request. Tax return preparation state and income taxes   After the end of the tax year, send a signed, written request for the information to the Internal Revenue Service Center where the parent's return will be filed. Tax return preparation state and income taxes (The IRS cannot process a request received before the end of the tax year. Tax return preparation state and income taxes )    You should also consider getting an extension of time to file the child's return, because there may be a delay in getting the requested information. Tax return preparation state and income taxes   The request must contain all of the following. Tax return preparation state and income taxes A statement that you are making the request to comply with section 1(g) of the Internal Revenue Code and that you have tried to get the information from the parent. Tax return preparation state and income taxes Proof of the child's age (for example, a copy of the child's birth certificate). Tax return preparation state and income taxes Evidence the child has more than $2,000 of unearned income (for example, a copy of the child's prior year tax return or copies of Forms 1099 for the current year). Tax return preparation state and income taxes The name, address, social security number (if known), and filing status (if known) of the parent whose information is to be shown on Form 8615. Tax return preparation state and income taxes    A child's legal representative making the request should include a copy of his or her Power of Attorney, such as Form 2848, or proof of legal guardianship. Tax return preparation state and income taxes Step 1. Tax return preparation state and income taxes Figuring the Child's Net Unearned Income (Form 8615, Part I) The first step in figuring a child's tax using Form 8615 is to figure the child's net unearned income. Tax return preparation state and income taxes To do that, use Form 8615, Part I. Tax return preparation state and income taxes Line 1 (Unearned Income) If the child had no earned income, enter on this line the adjusted gross income shown on the child's return. Tax return preparation state and income taxes Adjusted gross income is shown on Form 1040, line 38; Form 1040A, line 22; or Form 1040NR, line 37. Tax return preparation state and income taxes Form 1040EZ and Form 1040NR-EZ cannot be used if Form 8615 must be filed. Tax return preparation state and income taxes If the child had earned income, figure the amount to enter on Form 8615, line 1, by using the worksheet in the instructions for the form. Tax return preparation state and income taxes However, use the following worksheet if: the child has excluded any foreign earned income, deducted a loss from self-employment, or has a net operating loss from another year. Tax return preparation state and income taxes Alternate Worksheet for Form 8615, Line 1 A. Tax return preparation state and income taxes Enter the amount from the child's Form 1040, line 22, or Form 1040NR, line 23   B. Tax return preparation state and income taxes Enter the total of any net loss  from self-employment, any net operating loss deduction, any foreign earned income exclusion, and any foreign housing exclusion from the child's Form 1040 or Form 1040NR. Tax return preparation state and income taxes Enter this total as a positive number (greater than zero)   C. Tax return preparation state and income taxes Add line A and line B and  enter the total   D. Tax return preparation state and income taxes Enter the child's earned income plus any amount from the child's Form 1040, line 30, or the child's Form 1040NR, line 30     Generally, the child's earned income is the total of the amounts reported on Form 1040, lines 7, 12, and 18 (if line 12 or 18 is a loss, use zero) or Form 1040NR, lines 8, 13, and 19 (if line 13 or 19 is a loss, use zero)   E. Tax return preparation state and income taxes Subtract line D from line C. Tax return preparation state and income taxes Enter the result here and on Form 8615, line 1   Unearned income defined. Tax return preparation state and income taxes   Unearned income is generally all income other than salaries, wages, and other amounts received as pay for work actually performed. Tax return preparation state and income taxes It includes taxable interest, dividends, capital gains (including capital gain distributions), the taxable part of social security and pension payments, certain distributions from trusts, and unemployment compensation. Tax return preparation state and income taxes Unearned income includes amounts produced by assets the child obtained with earned income (such as interest on a savings account into which the child deposited wages). Tax return preparation state and income taxes Nontaxable income. Tax return preparation state and income taxes   For this purpose, unearned income includes only amounts the child must include in gross income. Tax return preparation state and income taxes Nontaxable unearned income, such as tax-exempt interest and the nontaxable part of social security and pension payments, is not included. Tax return preparation state and income taxes Capital loss. Tax return preparation state and income taxes   A child's capital losses are taken into account in figuring the child's unearned income. Tax return preparation state and income taxes Capital losses are first applied against capital gains. Tax return preparation state and income taxes If the capital losses are more than the capital gains, the difference (up to $3,000) is subtracted from the child's interest, dividends, and other unearned income. Tax return preparation state and income taxes Any difference over $3,000 is carried to the next year. Tax return preparation state and income taxes Income from property received as a gift. Tax return preparation state and income taxes   A child's unearned income includes all income produced by property belonging to the child. Tax return preparation state and income taxes This is true even if the property was transferred to the child, regardless of when the property was transferred or purchased or who transferred it. Tax return preparation state and income taxes   A child's unearned income includes income produced by property given as a gift to the child. Tax return preparation state and income taxes This includes gifts to the child from grandparents or any other person and gifts made under the Uniform Gift to Minors Act. Tax return preparation state and income taxes Example. Tax return preparation state and income taxes Amanda Black, age 13, received the following income. Tax return preparation state and income taxes Dividends—$800 Wages—$2,100 Taxable interest—$1,200 Tax-exempt interest—$100 Capital gains—$300 Capital losses—($200) The dividends were qualified dividends on stock given to her by her grandparents. Tax return preparation state and income taxes Amanda's unearned income is $2,100. Tax return preparation state and income taxes This is the total of the dividends ($800), taxable interest ($1,200), and capital gains reduced by capital losses ($300 − $200 = $100). Tax return preparation state and income taxes Her wages are earned (not unearned) income because they are received for work actually performed. Tax return preparation state and income taxes Her tax-exempt interest is not included because it is nontaxable. Tax return preparation state and income taxes Trust income. Tax return preparation state and income taxes   If a child is the beneficiary of a trust, distributions of taxable interest, dividends, capital gains, and other unearned income from the trust are unearned income to the child. Tax return preparation state and income taxes   However, taxable distributions from a qualified disability trust are considered earned income for the purposes of completing Form 8615. Tax return preparation state and income taxes See the Form 8615 instructions for details. Tax return preparation state and income taxes Adjustment to income. Tax return preparation state and income taxes   In figuring the amount to enter on line 1, the child's unearned income is reduced by any penalty on the early withdrawal of savings. Tax return preparation state and income taxes Line 2 (Deductions) If the child does not itemize deductions on Schedule A (Form 1040 or Form 1040NR), enter $2,000 on line 2. Tax return preparation state and income taxes If the child itemizes deductions, enter on line 2 the larger of: $1,000 plus the portion of the child's itemized deductions on Schedule A (Form 1040), line 29 (or Schedule A (Form 1040NR), line 15), that are directly connected with the production of the unearned income entered on line 1, or $2,000. Tax return preparation state and income taxes Directly connected. Tax return preparation state and income taxes   Itemized deductions are directly connected with the production of unearned income if they are for expenses paid to produce or collect taxable income or to manage, conserve, or maintain property held for producing income. Tax return preparation state and income taxes These expenses include custodian fees and service charges, service fees to collect taxable interest and dividends, and certain investment counsel fees. Tax return preparation state and income taxes    These expenses are added to certain other miscellaneous itemized deductions on Schedule A (Form 1040). Tax return preparation state and income taxes Only the amount greater than 2% of the child's adjusted gross income can be deducted. Tax return preparation state and income taxes See Publication 529, Miscellaneous Deductions, for more information. Tax return preparation state and income taxes Example 1. Tax return preparation state and income taxes Roger, age 12, has unearned income of $8,000, no other income, no adjustments to income, and itemized deductions of $300 (net of the 2%-of-adjusted-gross-income limit) that are directly connected with his unearned income. Tax return preparation state and income taxes His adjusted gross income is $8,000, which is entered on Form 1040, line 38, and on Form 8615, line 1. Tax return preparation state and income taxes Roger enters $2,000 on line 2 because that is more than the total of $1,000 plus his directly-connected itemized deductions of $300. Tax return preparation state and income taxes Example 2. Tax return preparation state and income taxes Eleanor, age 8, has unearned income of $16,000 and an early withdrawal penalty of $100. Tax return preparation state and income taxes She has no other income. Tax return preparation state and income taxes She has itemized deductions of $1,050 (net of the 2%-of-adjusted-gross-income limit) that are directly connected with the production of her unearned income. Tax return preparation state and income taxes Her adjusted gross income, entered on line 1, is $15,900 ($16,000 − $100). Tax return preparation state and income taxes The amount on line 2 is $2,050. Tax return preparation state and income taxes This is the larger of: $1,000 plus the $1,050 of directly connected itemized deductions, or $2,000. Tax return preparation state and income taxes Line 3 Subtract line 2 from line 1 and enter the result on this line. Tax return preparation state and income taxes If zero or less, do not complete the rest of the form. Tax return preparation state and income taxes However, you must still attach Form 8615 to the child's tax return. Tax return preparation state and income taxes Figure the tax on the child's taxable income in the normal manner. Tax return preparation state and income taxes Line 4 (Child's Taxable Income) Enter on line 4 the child's taxable income from Form 1040, line 43; Form 1040A, line 27; or Form 1040NR, line 41. Tax return preparation state and income taxes Child files Form 2555 or 2555-EZ. Tax return preparation state and income taxes   If the child files Form 2555 or 2555-EZ to claim the foreign earned income exclusion, housing exclusion, or housing deduction, the Foreign Earned Income Tax Worksheet (in the Form 1040 instructions) is used to figure the child's tax. Tax return preparation state and income taxes Enter the amount from line 3 of the Foreign Earned Income Tax Worksheet as the child's taxable income on Form 8615, line 4. Tax return preparation state and income taxes Line 5 (Net Unearned Income) A child's net unearned income cannot be more than his or her taxable income. Tax return preparation state and income taxes Enter on Form 8615, line 5, the smaller of line 3 or line 4. Tax return preparation state and income taxes This is the child's net unearned income. Tax return preparation state and income taxes If zero or less, do not complete the rest of the form. Tax return preparation state and income taxes However, you must still attach Form 8615 to the child's tax return. Tax return preparation state and income taxes Figure the tax on the child's taxable income in the normal manner. Tax return preparation state and income taxes Step 2. Tax return preparation state and income taxes Figuring a Tentative Tax at the Parent's Tax Rate (Form 8615, Part II) The next step in completing Form 8615 is to figure a tentative tax on the child's net unearned income at the parent's tax rate. Tax return preparation state and income taxes The tentative tax at the parent's tax rate is the difference between the tax on the parent's taxable income figured with the child's net unearned income (plus the net unearned income of any other child whose Form 8615 includes the tax return information of that parent) and the tax figured without it. Tax return preparation state and income taxes When figuring the tentative tax at the parent's tax rate on Form 8615, do not refigure any of the exclusions, deductions, or credits on the parent's return because of the child's net unearned income. Tax return preparation state and income taxes For example, do not refigure the medical expense deduction. Tax return preparation state and income taxes Figure the tentative tax on Form 8615, lines 6 through 13. Tax return preparation state and income taxes Line 6 (Parent's Taxable Income) Enter on line 6 the amount from the parent's Form 1040, line 43; Form 1040A, line 27; Form 1040EZ, line 6; Form 1040NR, line 41; or Form 1040NR-EZ, line 14. Tax return preparation state and income taxes If the parent's taxable income is zero or less, enter zero on line 6. Tax return preparation state and income taxes Parent files Form 2555 or 2555-EZ. Tax return preparation state and income taxes   If the parent files Form 2555 or 2555-EZ to claim the foreign earned income exclusion, housing exclusion, or housing deduction, the Foreign Earned Income Tax Worksheet in the Form 1040 instructions is used to figure the parent's tax. Tax return preparation state and income taxes Enter the amount from line 3 of the Foreign Earned Income Tax Worksheet as the parent's taxable income, on line 6 of Form 8615. Tax return preparation state and income taxes Line 7 (Net Unearned Income of Other Children) If the tax return information of the parent is also used on any other child's Form 8615, enter on line 7 the total of the amounts from line 5 of all the other children's Forms 8615. Tax return preparation state and income taxes Do not include the amount from line 5 of the Form 8615 being completed. Tax return preparation state and income taxes (The term “other child” means any other child whose Form 8615 uses the tax information of the parent identified on Lines A and B of Form 8615. Tax return preparation state and income taxes ) Example. Tax return preparation state and income taxes Paul and Jane Persimmon have three children, Sharon, Jerry, and Mike, who must attach Form 8615 to their tax returns. Tax return preparation state and income taxes The children's net unearned income amounts on line 5 of their Forms 8615 are: Sharon—$800 Jerry—$600 Mike—$1,000 Line 7 of Sharon's Form 8615 will show $1,600, the total of the amounts on line 5 of Jerry's and Mike's Forms 8615. Tax return preparation state and income taxes Line 7 of Jerry's Form 8615 will show $1,800 ($800 + $1,000). Tax return preparation state and income taxes Line 7 of Mike's Form 8615 will show $1,400 ($800 + $600). Tax return preparation state and income taxes Other children's information not available. Tax return preparation state and income taxes   If the net unearned income of the other children is not available when the return is due, either file the return using estimates or get an extension of time to file. Tax return preparation state and income taxes Estimates and extensions are discussed earlier under Providing Parental Information (Form 8615, Lines A–C) . Tax return preparation state and income taxes Line 8 (Parent's Taxable Income Plus Children's Net Unearned Income) Enter on this line the total of lines 5, 6, and 7. Tax return preparation state and income taxes You must determine the amount of net capital gain and qualified dividends included on this line before completing Form 8615, line 9. Tax return preparation state and income taxes Net capital gain. Tax return preparation state and income taxes   Net capital gain is the smaller of the gain, if any, on Schedule D (Form 1040), line 15, or the gain, if any, on Schedule D, line 16. Tax return preparation state and income taxes If Schedule D is not required, it is the amount on Form 1040, line 13; Form 1040A, line 10; or Form 1040NR, line 14. Tax return preparation state and income taxes Qualified dividends. Tax return preparation state and income taxes   Qualified dividends are those dividends reported on line 9b of Form 1040 or Form 1040A, or line 10b of Form 1040NR. Tax return preparation state and income taxes Net capital gain and qualified dividends on line 8. Tax return preparation state and income taxes   If neither the child, nor the parent, nor any other child has net capital gain, the net capital gain on line 8 is zero. Tax return preparation state and income taxes   If neither the child, nor the parent, nor any other child has qualified dividends, the amount of qualified dividends on line 8 is zero. Tax return preparation state and income taxes   If the child, parent, or any other child has net capital gain, figure the amount of net capital gain included on line 8 by adding together the net capital gain amounts included on lines 5, 6, and 7 of Form 8615. Tax return preparation state and income taxes   If the child, parent, or any other child has qualified dividends, figure the amount of qualified dividends included on line 8 by adding together the qualified dividend amounts included on lines 5, 6, and 7. Tax return preparation state and income taxes   Use the instructions for Form 8615, line 8, including the appropriate Line 5 Worksheet, to find these amounts. Tax return preparation state and income taxes See the instructions for Form 8615 for more details. Tax return preparation state and income taxes Note. Tax return preparation state and income taxes The amount of any net capital gain or qualified dividends is not separately reported on line 8. Tax return preparation state and income taxes It is  needed, however, when figuring the tax on line 9. Tax return preparation state and income taxes Line 9 (Tax on Parent's Taxable Income Plus Children's Net Unearned Income) Figure the tax on the amount on line 8 using the Tax Table, the Tax Computation Worksheet, the Qualified Dividends and Capital Gain Tax Worksheet (in the Form 1040, 1040A, or 1040NR instructions), the Schedule D Tax Worksheet (in the Schedule D instructions), or Schedule J (Form 1040), as follows. Tax return preparation state and income taxes If line 8 does not include any net capital gain or qualified dividends, use the Tax Table or Tax Computation Worksheet to figure this tax. Tax return preparation state and income taxes But if Schedule J, Income Averaging for Farmers and Fishermen, is used to figure the tax on the parent's return, use it to figure this tax. Tax return preparation state and income taxes If line 8 includes any net capital gain or qualified dividends, use the Qualified Dividends and Capital Gain Tax Worksheet to figure this tax. Tax return preparation state and income taxes For details, see the instructions for Form 8615, line 9. Tax return preparation state and income taxes However, if the child, parent, or any other child has 28% rate gain or unrecaptured section 1250 gain, use the Schedule D Tax Worksheet. Tax return preparation state and income taxes But if Schedule J is used to figure the tax on the parent's return, use it to figure this tax. Tax return preparation state and income taxes Child files Form 2555 or 2555-EZ. Tax return preparation state and income taxes   If line 8 includes any net capital gain or qualified dividends and the child, or any other child filing Form 8615, also files Form 2555 or 2555-EZ, use Using the Schedule D Tax Worksheet for line 9 tax, next, to figure the line 9 tax. Tax return preparation state and income taxes Using the Schedule D Tax Worksheet for line 9 tax. Tax return preparation state and income taxes    Use the Schedule D Tax Worksheet (in the Schedule D instructions) to figure the line 9 tax on Form 8615 if the child, parent, or any other child has unrecaptured section 1250 gain or 28% rate gain. Tax return preparation state and income taxes If you must use the Schedule D Tax Worksheet, first complete any Schedule D and any actual Schedule D Tax Worksheet required for the child, parent, or any other child. Tax return preparation state and income taxes Then figure the line 9 tax using another Schedule D Tax Worksheet. Tax return preparation state and income taxes (Do not attach this Schedule D Tax Worksheet to the child's return. Tax return preparation state and income taxes )   Complete this Schedule D Tax Worksheet as follows. Tax return preparation state and income taxes On line 1, enter the amount from Form 8615, line 8. Tax return preparation state and income taxes On line 2, enter the qualified dividends included on Form 8615, line 8. Tax return preparation state and income taxes (See the earlier discussion for line 8. Tax return preparation state and income taxes ) On line 3, enter the total of the amounts, if any, on line 4g of all Forms 4952 filed by the child, parent, or any other child. Tax return preparation state and income taxes On line 4, enter the total of the amounts, if any, on line 4e of all Forms 4952 filed by the child, parent, or any other child. Tax return preparation state and income taxes If applicable, include instead the smaller amount entered on the dotted line next to line 4e. Tax return preparation state and income taxes On lines 5 and 6, follow the worksheet instructions. Tax return preparation state and income taxes On line 7, enter the net capital gain included on Form 8615, line 8. Tax return preparation state and income taxes (See the earlier discussion for line 8. Tax return preparation state and income taxes ) On lines 8 through 10, follow the worksheet instructions. Tax return preparation state and income taxes On line 11, enter zero if neither the child, nor the parent, nor any other child has unrecaptured section 1250 gain (Schedule D, line 19) or 28% rate gain (Schedule D, line 18). Tax return preparation state and income taxes Otherwise, enter the amount of unrecaptured section 1250 gain and 28% rate gain included in the net capital gain on line 8 of Form 8615. Tax return preparation state and income taxes Figure these amounts as explained later under Figuring unrecaptured section 1250 gain (line 11) and Figuring 28% rate gain (line 11). Tax return preparation state and income taxes If the Foreign Earned Income Tax Worksheet was used to figure the parent's tax or the tax of any child, go to step 10 below. Tax return preparation state and income taxes Otherwise, skip steps 10, 11, and 12 below, and go to step 13. Tax return preparation state and income taxes Determine whether there is a line 8 capital gain excess as follows. Tax return preparation state and income taxes Add the amounts on line 2 of all Foreign Earned Income Tax Worksheets completed by the parent or any child for whom Form 8615 is filed. Tax return preparation state and income taxes (But for each child do not add more than the excess, if any, of the amount on line 5 of the child's Form 8615 over the child's taxable income on Form 1040, line 43; Form 1040A, line 27; or Form 1040NR, line 41. Tax return preparation state and income taxes ) Subtract (a) from the amount on line 1 of this Schedule D Tax Worksheet. Tax return preparation state and income taxes Subtract (b) from the amount on line 10 of this Schedule D Tax Worksheet. Tax return preparation state and income taxes If the result is more than zero, that amount is the line 8 capital gain excess. Tax return preparation state and income taxes If the result is zero or less, there is no line 8 capital gain excess. Tax return preparation state and income taxes If there is no line 8 capital gain excess, skip step 12 below and go to step 13. Tax return preparation state and income taxes If there is a line 8 capital gain excess, complete a second Schedule D Tax Worksheet as instructed above and in step 13, but in its entirety and with the following additional modifications. Tax return preparation state and income taxes (These modifications are to be made only for purposes of filling out this additional Schedule D Tax Worksheet. Tax return preparation state and income taxes ) Reduce the amount you would otherwise enter on line 9 (but not below zero) by the line 8 capital gain excess. Tax return preparation state and income taxes Reduce the amount you would otherwise enter on line 6 (but not below zero) by any of the line 8 capital gain excess not used in (a) above. Tax return preparation state and income taxes If the child, parent, or any other child has 28% rate gain, reduce the amount you would otherwise enter on line 8 of Worksheet 1 for Line 11 of the Schedule D Tax Worksheet – 28% Rate Gain (Line 9 Tax), shown later, (but not below zero) by the line 8 capital gain excess, and refigure the amount on line 11 of this Schedule D Tax Worksheet. Tax return preparation state and income taxes If the child, parent, or any other child has unrecaptured section 1250 gain, reduce the amount you would otherwise enter on line 8 of Worksheet 2 for Line 11 of the Schedule D Tax Worksheet – Unrecaptured Section 1250 Gain (Line 9 Tax) (but not below zero) by the line 8 capital gain excess not used in 12(c), and refigure the amount on line 11 of this Schedule D Tax Worksheet. Tax return preparation state and income taxes Complete lines 12 through 45 following the worksheet instructions. Tax return preparation state and income taxes Use the parent's filing status to complete lines 15, 42, and 44. Tax return preparation state and income taxes Enter the amount from line 45 of this Schedule D Tax Worksheet on Form 8615, line 9, and check the box on that line