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Taxact 1040ez

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Taxact 1040ez

Taxact 1040ez 8. Taxact 1040ez   Qualified Tuition Program (QTP) Table of Contents Introduction What Is a Qualified Tuition ProgramDesignated beneficiary. Taxact 1040ez Half-time student. Taxact 1040ez How Much Can You Contribute Are Distributions TaxableFiguring the Taxable Portion of a Distribution Additional Tax on Taxable Distributions Rollovers and Other TransfersRollovers Changing the Designated Beneficiary Introduction Qualified tuition programs (QTPs) are also called “529 plans. Taxact 1040ez ” States may establish and maintain programs that allow you to either prepay or contribute to an account for paying a student's qualified education expenses at a postsecondary institution. Taxact 1040ez Eligible educational institutions may establish and maintain programs that allow you to prepay a student's qualified education expenses. Taxact 1040ez If you prepay tuition, the student (designated beneficiary) will be entitled to a waiver or a payment of qualified education expenses. Taxact 1040ez You cannot deduct either payments or contributions to a QTP. Taxact 1040ez For information on a specific QTP, you will need to contact the state agency or eligible educational institution that established and maintains it. Taxact 1040ez What is the tax benefit of a QTP. Taxact 1040ez   No tax is due on a distribution from a QTP unless the amount distributed is greater than the beneficiary's adjusted qualified education expenses. Taxact 1040ez See Are Distributions Taxable , later, for more information. Taxact 1040ez    Even if a QTP is used to finance a student's education, the student or the student's parents still may be eligible to claim the American opportunity credit or the lifetime learning credit. Taxact 1040ez See Coordination With American Opportunity and Lifetime Learning Credits, later. Taxact 1040ez What Is a Qualified Tuition Program A qualified tuition program is a program set up to allow you to either prepay, or contribute to an account established for paying, a student's qualified education expenses at an eligible educational institution. Taxact 1040ez QTPs can be established and maintained by states (or agencies or instrumentalities of a state) and eligible educational institutions. Taxact 1040ez The program must meet certain requirements. Taxact 1040ez Your state government or the eligible educational institution in which you are interested can tell you whether or not they participate in a QTP. Taxact 1040ez Qualified education expenses. Taxact 1040ez   These are expenses related to enrollment or attendance at an Eligible educational institution (defined later). Taxact 1040ez As shown in the following list, to be qualified, some of the expenses must be required by the institution and some must be incurred by students who are enrolled at least half-time. Taxact 1040ez See Half-time student , later. Taxact 1040ez The following expenses must be required for enrollment or attendance of a Designated beneficiary (defined later) at an eligible educational institution. Taxact 1040ez Tuition and fees. Taxact 1040ez Books, supplies, and equipment. Taxact 1040ez Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible educational institution. Taxact 1040ez Expenses for room and board must be incurred by students who are enrolled at least half-time. Taxact 1040ez The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts. Taxact 1040ez The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student. Taxact 1040ez The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution. Taxact 1040ez You will need to contact the eligible educational institution for qualified room and board costs. Taxact 1040ez    For tax years after 2010, the purchase of computer technology or equipment is only a qualified education expense if the computer technology or equipment is required for enrollment or attendance at an eligible institution. Taxact 1040ez Designated beneficiary. Taxact 1040ez   The designated beneficiary is generally the student (or future student) for whom the QTP is intended to provide benefits. Taxact 1040ez The designated beneficiary can be changed after participation in the QTP begins. Taxact 1040ez If a state or local government or certain tax-exempt organizations purchase an interest in a QTP as part of a scholarship program, the designated beneficiary is the person who receives the interest as a scholarship. Taxact 1040ez Half-time student. Taxact 1040ez   A student is enrolled “at least half-time” if he or she is enrolled for at least half the full-time academic workload for the course of study the student is pursuing, as determined under the standards of the school where the student is enrolled. Taxact 1040ez Eligible educational institution. Taxact 1040ez   For purposes of a QTP, this is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Taxact 1040ez S. Taxact 1040ez Department of Education. Taxact 1040ez It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Taxact 1040ez The educational institution should be able to tell you if it is an eligible educational institution. Taxact 1040ez   Certain educational institutions located outside the United States also participate in the U. Taxact 1040ez S. Taxact 1040ez Department of Education's Federal Student Aid (FSA) programs. Taxact 1040ez   How Much Can You Contribute Contributions to a QTP on behalf of any beneficiary cannot be more than the amount necessary to provide for the qualified education expenses of the beneficiary. Taxact 1040ez There are no income restrictions on the individual contributors. Taxact 1040ez You can contribute to both a QTP and a Coverdell ESA in the same year for the same designated beneficiary. Taxact 1040ez   Are Distributions Taxable The part of a distribution representing the amount paid or contributed to a QTP does not have to be included in income. Taxact 1040ez This is a return of the investment in the plan. Taxact 1040ez The designated beneficiary generally does not have to include in income any earnings distributed from a QTP if the total distribution is less than or equal to adjusted qualified education expenses (defined under Figuring the Taxable Portion of a Distribution , later). Taxact 1040ez Earnings and return of investment. Taxact 1040ez    You will receive a Form 1099-Q, from each of the programs from which you received a QTP distribution in 2013. Taxact 1040ez The amount of your gross distribution (box 1) shown on each form will be divided between your earnings (box 2) and your basis, or return of investment (box 3). Taxact 1040ez Form 1099-Q should be sent to you by January 31, 2014. Taxact 1040ez Figuring the Taxable Portion of a Distribution To determine if total distributions for the year are more or less than the amount of qualified education expenses, you must compare the total of all QTP distributions for the tax year to the adjusted qualified education expenses. Taxact 1040ez Adjusted qualified education expenses. Taxact 1040ez   This amount is the total qualified education expenses reduced by any tax-free educational assistance. Taxact 1040ez Tax-free educational assistance includes: The tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Taxact 1040ez Taxable earnings. Taxact 1040ez   Use the following steps to figure the taxable part. Taxact 1040ez Multiply the total distributed earnings shown in box 2 of Form 1099-Q by a fraction. Taxact 1040ez The numerator is the adjusted qualified education expenses paid during the year and the denominator is the total amount distributed during the year. Taxact 1040ez Subtract the amount figured in (1) from the total distributed earnings. Taxact 1040ez The result is the amount the beneficiary must include in income. Taxact 1040ez Report it on Form 1040 or Form 1040NR, line 21. Taxact 1040ez Example 1. Taxact 1040ez In 2007, Sara Clarke's parents opened a savings account for her with a QTP maintained by their state government. Taxact 1040ez Over the years they contributed $18,000 to the account. Taxact 1040ez The total balance in the account was $27,000 on the date the distribution was made. Taxact 1040ez In the summer of 2013, Sara enrolled in college and had $8,300 of qualified education expenses for the rest of the year. Taxact 1040ez She paid her college expenses from the following sources. Taxact 1040ez   Gift from parents $1,600     Partial tuition scholarship (tax-free) 3,100     QTP distribution 5,300           Before Sara can determine the taxable part of her QTP distribution, she must reduce her total qualified education expenses by any tax-free educational assistance. Taxact 1040ez   Total qualified education expenses $8,300     Minus: Tax-free educational assistance −3,100     Equals: Adjusted qualified  education expenses (AQEE) $5,200   Since the remaining expenses ($5,200) are less than the QTP distribution, part of the earnings will be taxable. Taxact 1040ez Sara's Form 1099-Q shows that $950 of the QTP distribution is earnings. Taxact 1040ez Sara figures the taxable part of the distributed earnings as follows. Taxact 1040ez   1. Taxact 1040ez $950 (earnings) × $5,200 AQEE  $5,300 distribution           =$932 (tax-free earnings)     2. Taxact 1040ez $950 (earnings)−$932 (tax-free earnings)     =$18 (taxable earnings)  Sara must include $18 in income (Form 1040, line 21) as distributed QTP earnings not used for adjusted qualified education expenses. Taxact 1040ez Coordination With American Opportunity and Lifetime Learning Credits An American opportunity or lifetime learning credit (education credit) can be claimed in the same year the beneficiary takes a tax-free distribution from a QTP, as long as the same expenses are not used for both benefits. Taxact 1040ez This means that after the beneficiary reduces qualified education expenses by tax-free educational assistance, he or she must further reduce them by the expenses taken into account in determining the credit. Taxact 1040ez Example 2. Taxact 1040ez Assume the same facts as in Example 1 , except that Sara's parents claimed an American opportunity credit of $2,500 (based on $4,000 expenses). Taxact 1040ez   Total qualified education expenses $8,300     Minus: Tax-free educational assistance −3,100     Minus: Expenses taken into account  in figuring American opportunity credit −4,000     Equals: Adjusted qualified  education expenses (AQEE) $1,200           The taxable part of the distribution is figured as follows. Taxact 1040ez   1. Taxact 1040ez $950 (earnings) × $1,200 AQEE  $5,300 distribution           =$215 (tax-free earnings)     2. Taxact 1040ez $950 (earnings)−$215 (tax-free earnings)     =$735 (taxable earnings)       Sara must include $735 in income (Form 1040, line 21). Taxact 1040ez This represents distributed earnings not used for adjusted qualified education expenses. Taxact 1040ez Coordination With Coverdell ESA Distributions If a designated beneficiary receives distributions from both a QTP and a Coverdell ESA in the same year, and the total of these distributions is more than the beneficiary's adjusted qualified higher education expenses, the expenses must be allocated between the distributions. Taxact 1040ez For purposes of this allocation, disregard any qualified elementary and secondary education expenses. Taxact 1040ez Example 3. Taxact 1040ez Assume the same facts as in Example 2 , except that instead of receiving a $5,300 distribution from her QTP, Sara received $4,600 from that account and $700 from her Coverdell ESA. Taxact 1040ez In this case, Sara must allocate her $1,200 of adjusted qualified higher education expenses (AQHEE) between the two distributions. Taxact 1040ez   $1,200 AQHEE × $700 ESA distribution  $5,300 total distribution = $158 AQHEE (ESA)     $1,200 AQHEE × $4,600 QTP distribution  $5,300 total distribution = $1,042 AQHEE (QTP)   Sara then figures the taxable portion of her Coverdell ESA distribution based on qualified higher education expenses of $158, and the taxable portion of her QTP distribution based on the other $1,042. Taxact 1040ez Note. Taxact 1040ez If you are required to allocate your expenses between Coverdell ESA and QTP distributions, and you have adjusted qualified elementary and secondary education expenses, see the examples in chapter 7, Coverdell Education Savings Account under Coordination With Qualified Tuition Program (QTP) Distributions . Taxact 1040ez Coordination With Tuition and Fees Deduction. Taxact 1040ez   A tuition and fees deduction can be claimed in the same year the beneficiary takes a tax-free distribution from a QTP, as long as the same expenses are not used for both benefits. Taxact 1040ez Losses on QTP Investments If you have a loss on your investment in a QTP account, you may be able to take the loss on your income tax return. Taxact 1040ez You can take the loss only when all amounts from that account have been distributed and the total distributions are less than your unrecovered basis. Taxact 1040ez Your basis is the total amount of contributions to that QTP account. Taxact 1040ez You claim the loss as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23 (Schedule A (Form 1040NR), line 9), subject to the 2%-of-adjusted-gross-income limit. Taxact 1040ez If you have distributions from more than one QTP account during a year, you must combine the information (amount of distribution, basis, etc. Taxact 1040ez ) from all such accounts in order to determine your taxable earnings for the year. Taxact 1040ez By doing this, the loss from one QTP account reduces the distributed earnings (if any) from any other QTP accounts. Taxact 1040ez Example 1. Taxact 1040ez In 2013, Taylor received a final distribution of $1,000 from QTP #1. Taxact 1040ez His unrecovered basis in that account before the distribution was $3,000. Taxact 1040ez If Taylor itemizes his deductions, he can claim the $2,000 loss on Schedule A (Form 1040). Taxact 1040ez Example 2. Taxact 1040ez Assume the same facts as in Example 1 , except that Taylor also had a distribution of $9,000 from QTP #2, giving him total distributions for 2013 of $10,000. Taxact 1040ez His total basis in these distributions was $4,500 ($3,000 for QTP #1 and $1,500 for QTP #2). Taxact 1040ez Taylor's adjusted qualified education expenses for 2013 totaled $6,000. Taxact 1040ez In order to figure his taxable earnings, Taylor combines the two accounts and determines his taxable earnings as follows. Taxact 1040ez   1. Taxact 1040ez $10,000 (total distribution)−$4,500 (basis portion of distribution)     = $5,500 (earnings included in distribution)   2. Taxact 1040ez $5,500 (earnings) x $6,000 AQEE  $10,000 distribution           =$3,300 (tax-free earnings)     3. Taxact 1040ez $5,500 (earnings)−$3,300 (tax-free earnings)     =$2,200 (taxable earnings)                 Taylor must include $2,200 in income on Form 1040, line 21. Taxact 1040ez Because Taylor's accounts must be combined, he cannot deduct his $2,000 loss (QTP #1) on Schedule A (Form 1040). Taxact 1040ez Instead, the $2,000 loss reduces the total earnings that were distributed, thereby reducing his taxable earnings. Taxact 1040ez Additional Tax on Taxable Distributions Generally, if you receive a taxable distribution, you also must pay a 10% additional tax on the amount included in income. Taxact 1040ez Exceptions. Taxact 1040ez   The 10% additional tax does not apply to distributions: Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary. Taxact 1040ez Made because the designated beneficiary is disabled. Taxact 1040ez A person is considered to be disabled if he or she shows proof that he or she cannot do any substantial gainful activity because of his or her physical or mental condition. Taxact 1040ez A physician must determine that his or her condition can be expected to result in death or to be of long-continued and indefinite duration. Taxact 1040ez Included in income because the designated beneficiary received: A tax-free scholarship or fellowship (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), or Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Taxact 1040ez Made on account of the attendance of the designated beneficiary at a U. Taxact 1040ez S. Taxact 1040ez military academy (such as the USNA at Annapolis). Taxact 1040ez This exception applies only to the extent that the amount of the distribution does not exceed the costs of advanced education (as defined in section 2005(d)(3) of title 10 of the U. Taxact 1040ez S. Taxact 1040ez Code) attributable to such attendance. Taxact 1040ez Included in income only because the qualified education expenses were taken into account in determining the American opportunity or lifetime learning credit (see Coordination With American Opportunity and Lifetime Learning Credits , earlier. Taxact 1040ez ) Exception (3) applies only to the extent the distribution is not more than the scholarship, allowance, or payment. Taxact 1040ez Figuring the additional tax. Taxact 1040ez    Use Part II of Form 5329, to figure any additional tax. Taxact 1040ez Report the amount on Form 1040, line 58, or Form 1040NR, line 56. Taxact 1040ez Rollovers and Other Transfers Assets can be rolled over or transferred from one QTP to another. Taxact 1040ez In addition, the designated beneficiary can be changed without transferring accounts. Taxact 1040ez Rollovers Any amount distributed from a QTP is not taxable if it is rolled over to another QTP for the benefit of the same beneficiary or for the benefit of a member of the beneficiary's family (including the beneficiary's spouse). Taxact 1040ez An amount is rolled over if it is paid to another QTP within 60 days after the date of the distribution. Taxact 1040ez Do not report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040 or 1040NR. Taxact 1040ez These are not taxable distributions. Taxact 1040ez Members of the beneficiary's family. Taxact 1040ez   For these purposes, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary. Taxact 1040ez Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them. Taxact 1040ez Brother, sister, stepbrother, or stepsister. Taxact 1040ez Father or mother or ancestor of either. Taxact 1040ez Stepfather or stepmother. Taxact 1040ez Son or daughter of a brother or sister. Taxact 1040ez Brother or sister of father or mother. Taxact 1040ez Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. Taxact 1040ez The spouse of any individual listed above. Taxact 1040ez First cousin. Taxact 1040ez Example. Taxact 1040ez When Aaron graduated from college last year he had $5,000 left in his QTP. Taxact 1040ez He wanted to give this money to his younger brother, who was in junior high school. Taxact 1040ez In order to avoid paying tax on the distribution of the amount remaining in his account, Aaron contributed the same amount to his brother's QTP within 60 days of the distribution. Taxact 1040ez If the rollover is to another QTP for the same beneficiary, only one rollover is allowed within 12 months of a previous transfer to any QTP for that designated beneficiary. Taxact 1040ez Changing the Designated Beneficiary There are no income tax consequences if the designated beneficiary of an account is changed to a member of the beneficiary's family. Taxact 1040ez See Members of the beneficiary's family , earlier. Taxact 1040ez Example. Taxact 1040ez Assume the same situation as in the last example. Taxact 1040ez Instead of closing his QTP and paying the distribution into his brother's QTP, Aaron could have instructed the trustee of his account to simply change the name of the beneficiary on his account to that of his brother. 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The Taxact 1040ez

Taxact 1040ez 3. Taxact 1040ez   Reporting Rental Income, Expenses, and Losses Table of Contents Which Forms To UseSchedule E (Form 1040) Schedule C (Form 1040), Profit or Loss From Business Qualified Joint Venture Limits on Rental LossesAt-Risk Rules Passive Activity Limits Casualties and Thefts Example Figuring the net income or loss for a residential rental activity may involve more than just listing the income and deductions on Schedule E (Form 1040). Taxact 1040ez There are activities which do not qualify to use Schedule E, such as when the activity is not engaged in to make a profit or when you provide substantial services in conjunction with the property. Taxact 1040ez There are also the limitations which may need to be applied if you have a net loss on Schedule E. Taxact 1040ez There are two: (1) the limitation based on the amount of investment you have at risk in your rental activity, and (2) the special limits imposed on passive activities. Taxact 1040ez You may also have a gain or loss related to your rental property from a casualty or theft. Taxact 1040ez This is considered separately from the income and expense information you report on Schedule E. Taxact 1040ez Which Forms To Use The basic form for reporting residential rental income and expenses is Schedule E (Form 1040). Taxact 1040ez However, do not use that schedule to report a not-for-profit activity. Taxact 1040ez See Not Rented for Profit , in chapter 4. Taxact 1040ez There are also other rental situations in which forms other than Schedule E would be used. Taxact 1040ez Schedule E (Form 1040) If you rent buildings, rooms, or apartments, and provide basic services such as heat and light, trash collection, etc. Taxact 1040ez , you normally report your rental income and expenses on Schedule E, Part I. Taxact 1040ez List your total income, expenses, and depreciation for each rental property. Taxact 1040ez Be sure to enter the number of fair rental and personal use days on line 2. Taxact 1040ez If you have more than three rental or royalty properties, complete and attach as many Schedules E as are needed to list the properties. Taxact 1040ez Complete lines 1 and 2 for each property. Taxact 1040ez However, fill in lines 23a through 26 on only one Schedule E. Taxact 1040ez On Schedule E, page 1, line 18, enter the depreciation you are claiming for each property. Taxact 1040ez To find out if you need to attach Form 4562, see Form 4562 , later. Taxact 1040ez If you have a loss from your rental real estate activity, you also may need to complete one or both of the following forms. Taxact 1040ez Form 6198, At-Risk Limitations. Taxact 1040ez See At-Risk Rules , later. Taxact 1040ez Also see Publication 925. Taxact 1040ez Form 8582, Passive Activity Loss Limitations. Taxact 1040ez See Passive Activity Limits , later. Taxact 1040ez Page 2 of Schedule E is used to report income or loss from partnerships, S corporations, estates, trusts, and real estate mortgage investment conduits. Taxact 1040ez If you need to use page 2 of Schedule E, be sure to use page 2 of the same Schedule E you used to enter your rental activity on page 1. Taxact 1040ez Also, include the amount from line 26 (Part I) in the “Total income or (loss)” on line 41 (Part V). Taxact 1040ez Form 4562. Taxact 1040ez   You must complete and attach Form 4562 for rental activities only if you are claiming: Depreciation, including the special depreciation allowance, on property placed in service during 2013; Depreciation on listed property (such as a car), regardless of when it was placed in service; or Any other car expenses, including the standard mileage rate or lease expenses. Taxact 1040ez Otherwise, figure your depreciation on your own worksheet. Taxact 1040ez You do not have to attach these computations to your return, but you should keep them in your records for future reference. Taxact 1040ez   See Publication 946 for information on preparing Form 4562. Taxact 1040ez Schedule C (Form 1040), Profit or Loss From Business Generally, Schedule C is used when you provide substantial services in conjunction with the property or the rental is part of a trade or business as a real estate dealer. Taxact 1040ez Providing substantial services. Taxact 1040ez   If you provide substantial services that are primarily for your tenant's convenience, such as regular cleaning, changing linen, or maid service, you report your rental income and expenses on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business. Taxact 1040ez Use Form 1065, U. Taxact 1040ez S. Taxact 1040ez Return of Partnership Income, if your rental activity is a partnership (including a partnership with your spouse unless it is a qualified joint venture). Taxact 1040ez Substantial services do not include the furnishing of heat and light, cleaning of public areas, trash collection, etc. Taxact 1040ez For information, see Publication 334, Tax Guide for Small Business. Taxact 1040ez Also, you may have to pay self-employment tax on your rental income using Schedule SE (Form 1040), Self-Employment Tax. Taxact 1040ez For a discussion of “substantial services,” see Real Estate Rents in Publication 334, chapter 5. Taxact 1040ez Qualified Joint Venture If you and your spouse each materially participate (see Material participation under Passive Activity Limits, later) as the only members of a jointly owned and operated real estate business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership. Taxact 1040ez This election, in most cases, will not increase the total tax owed on the joint return, but it does give each of you credit for social security earnings on which retirement benefits are based and for Medicare coverage if your rental income is subject to self-employment tax. Taxact 1040ez If you make this election, you must report rental real estate income on Schedule E (or Schedule C if you provide substantial services). Taxact 1040ez You will not be required to file Form 1065 for any year the election is in effect. Taxact 1040ez Rental real estate income generally is not included in net earnings from self-employment subject to self-employment tax and generally is subject to the passive activity limits. Taxact 1040ez If you and your spouse filed a Form 1065 for the year prior to the election, the partnership terminates at the end of the tax year immediately preceding the year the election takes effect. Taxact 1040ez For more information on qualified joint ventures, go to IRS. Taxact 1040ez gov and enter “qualified joint venture” in the search box. Taxact 1040ez Limits on Rental Losses If you have a loss from your rental real estate activity, two sets of rules may limit the amount of loss you can deduct. Taxact 1040ez You must consider these rules in the order shown below. Taxact 1040ez Both are discussed in this section. Taxact 1040ez At-risk rules. Taxact 1040ez These rules are applied first if there is investment in your rental real estate activity for which you are not at risk. Taxact 1040ez This applies only if the real property was placed in service after 1986. Taxact 1040ez Passive activity limits. Taxact 1040ez Generally, rental real estate activities are considered passive activities and losses are not deductible unless you have income from other passive activities to offset them. Taxact 1040ez However, there are exceptions. Taxact 1040ez At-Risk Rules You may be subject to the at-risk rules if you have: A loss from an activity carried on as a trade or business or for the production of income, and Amounts invested in the activity for which you are not fully at risk. Taxact 1040ez Losses from holding real property (other than mineral property) placed in service before 1987 are not subject to the at-risk rules. Taxact 1040ez In most cases, any loss from an activity subject to the at-risk rules is allowed only to the extent of the total amount you have at risk in the activity at the end of the tax year. Taxact 1040ez You are considered at risk in an activity to the extent of cash and the adjusted basis of other property you contributed to the activity and certain amounts borrowed for use in the activity. Taxact 1040ez Any loss that is disallowed because of the at-risk limits is treated as a deduction from the same activity in the next tax year. Taxact 1040ez See Publication 925 for a discussion of the at-risk rules. Taxact 1040ez Form 6198. Taxact 1040ez   If you are subject to the at-risk rules, file Form 6198, At-Risk Limitations, with your tax return. Taxact 1040ez Passive Activity Limits In most cases, all rental real estate activities (except those of certain real estate professionals, discussed later) are passive activities. Taxact 1040ez For this purpose, a rental activity is an activity from which you receive income mainly for the use of tangible property, rather than for services. Taxact 1040ez For a discussion of activities that are not considered rental activities, see Rental Activities in Publication 925. Taxact 1040ez Deductions or losses from passive activities are limited. Taxact 1040ez You generally cannot offset income, other than passive income, with losses from passive activities. Taxact 1040ez Nor can you offset taxes on income, other than passive income, with credits resulting from passive activities. Taxact 1040ez Any excess loss or credit is carried forward to the next tax year. Taxact 1040ez Exceptions to the rules for figuring passive activity limits for personal use of a dwelling unit and for rental real estate with active participation are discussed later. Taxact 1040ez For a detailed discussion of these rules, see Publication 925. Taxact 1040ez Real estate professionals. Taxact 1040ez   If you are a real estate professional, complete line 43 of Schedule E. Taxact 1040ez      You qualify as a real estate professional for the tax year if you meet both of the following requirements. Taxact 1040ez More than half of the personal services you perform in all trades or businesses during the tax year are performed in real property trades or businesses in which you materially participate. Taxact 1040ez You perform more than 750 hours of services during the tax year in real property trades or businesses in which you materially participate. Taxact 1040ez If you qualify as a real estate professional, rental real estate activities in which you materially participated are not passive activities. Taxact 1040ez For purposes of determining whether you materially participated in your rental real estate activities, each interest in rental real estate is a separate activity unless you elect to treat all your interests in rental real estate as one activity. Taxact 1040ez   Do not count personal services you perform as an employee in real property trades or businesses unless you are a 5% owner of your employer. Taxact 1040ez You are a 5% owner if you own (or are considered to own) more than 5% of your employer's outstanding stock, or capital or profits interest. Taxact 1040ez   Do not count your spouse's personal services to determine whether you met the requirements listed earlier to qualify as a real estate professional. Taxact 1040ez However, you can count your spouse's participation in an activity in determining if you materially participated. Taxact 1040ez Real property trades or businesses. Taxact 1040ez   A real property trade or business is a trade or business that does any of the following with real property. Taxact 1040ez Develops or redevelops it. Taxact 1040ez Constructs or reconstructs it. Taxact 1040ez Acquires it. Taxact 1040ez Converts it. Taxact 1040ez Rents or leases it. Taxact 1040ez Operates or manages it. Taxact 1040ez Brokers it. Taxact 1040ez Choice to treat all interests as one activity. Taxact 1040ez   If you were a real estate professional and had more than one rental real estate interest during the year, you can choose to treat all the interests as one activity. Taxact 1040ez You can make this choice for any year that you qualify as a real estate professional. Taxact 1040ez If you forgo making the choice for one year, you can still make it for a later year. Taxact 1040ez   If you make the choice, it is binding for the tax year you make it and for any later year that you are a real estate professional. Taxact 1040ez This is true even if you are not a real estate professional in any intervening year. Taxact 1040ez (For that year, the exception for real estate professionals will not apply in determining whether your activity is subject to the passive activity rules. Taxact 1040ez )   See the Instructions for Schedule E for information about making this choice. Taxact 1040ez Material participation. Taxact 1040ez   Generally, you materially participated in an activity for the tax year if you were involved in its operations on a regular, continuous, and substantial basis during the year. Taxact 1040ez For details, see Publication 925 or the Instructions for Schedule C. Taxact 1040ez Participating spouse. Taxact 1040ez   If you are married, determine whether you materially participated in an activity by also counting any participation in the activity by your spouse during the year. Taxact 1040ez Do this even if your spouse owns no interest in the activity or files a separate return for the year. Taxact 1040ez Form 8582. Taxact 1040ez    You may have to complete Form 8582 to figure the amount of any passive activity loss for the current tax year for all activities and the amount of the passive activity loss allowed on your tax return. Taxact 1040ez See Form 8582 not required , later in this chapter, to determine if you must complete Form 8582. Taxact 1040ez   If you are required to complete Form 8582 and are also subject to the at-risk rules, include the amount from Form 6198, line 21 (deductible loss) in column (b) of Form 8582, Worksheet 1 or 3, as required. Taxact 1040ez Exception for Personal Use of Dwelling Unit If you used the rental property as a home during the year, any income, deductions, gain, or loss allocable to such use shall not be taken into account for purposes of the passive activity loss limitation. Taxact 1040ez Instead, follow the rules explained in chapter 5, Personal Use of Dwelling Unit (Including Vacation Home). Taxact 1040ez Exception for Rental Real Estate With Active Participation If you or your spouse actively participated in a passive rental real estate activity, you may be able to deduct up to $25,000 of loss from the activity from your nonpassive income. Taxact 1040ez This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities. Taxact 1040ez Similarly, you may be able to offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception. Taxact 1040ez Example. Taxact 1040ez Jane is single and has $40,000 in wages, $2,000 of passive income from a limited partnership, and $3,500 of passive loss from a rental real estate activity in which she actively participated. Taxact 1040ez $2,000 of Jane's $3,500 loss offsets her passive income. Taxact 1040ez The remaining $1,500 loss can be deducted from her $40,000 wages. Taxact 1040ez The special allowance is not available if you were married, lived with your spouse at any time during the year, and are filing a separate return. Taxact 1040ez Active participation. Taxact 1040ez   You actively participated in a rental real estate activity if you (and your spouse) owned at least 10% of the rental property and you made management decisions or arranged for others to provide services (such as repairs) in a significant and bona fide sense. Taxact 1040ez Management decisions that may count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and other similar decisions. Taxact 1040ez Example. Taxact 1040ez Mike is single and had the following income and losses during the tax year:   Salary $42,300     Dividends 300     Interest 1,400     Rental loss (4,000)   The rental loss was from the rental of a house Mike owned. Taxact 1040ez Mike had advertised and rented the house to the current tenant himself. Taxact 1040ez He also collected the rents, which usually came by mail. Taxact 1040ez All repairs were either made or contracted out by Mike. Taxact 1040ez Although the rental loss is from a passive activity, because Mike actively participated in the rental property management he can use the entire $4,000 loss to offset his other income. Taxact 1040ez Maximum special allowance. Taxact 1040ez   The maximum special allowance is: $25,000 for single individuals and married individuals filing a joint return for the tax year, $12,500 for married individuals who file separate returns for the tax year and lived apart from their spouses at all times during the tax year, and $25,000 for a qualifying estate reduced by the special allowance for which the surviving spouse qualified. Taxact 1040ez   If your modified adjusted gross income (MAGI) is $100,000 or less ($50,000 or less if married filing separately), you can deduct your loss up to the amount specified above. Taxact 1040ez If your MAGI is more than $100,000 (more than $50,000 if married filing separately), your special allowance is limited to 50% of the difference between $150,000 ($75,000 if married filing separately) and your MAGI. Taxact 1040ez   Generally, if your MAGI is $150,000 or more ($75,000 or more if you are married filing separately), there is no special allowance. Taxact 1040ez Modified adjusted gross income (MAGI). Taxact 1040ez   This is your adjusted gross income from Form 1040, U. Taxact 1040ez S. Taxact 1040ez Individual Income Tax Return, line 38, or Form 1040NR, U. Taxact 1040ez S. Taxact 1040ez Nonresident Alien Income Tax Return, line 37, figured without taking into account: The taxable amount of social security or equivalent tier 1 railroad retirement benefits, The deductible contributions to traditional individual retirement accounts (IRAs) and section 501(c)(18) pension plans, The exclusion from income of interest from Series EE and I U. Taxact 1040ez S. Taxact 1040ez savings bonds used to pay higher educational expenses, The exclusion of amounts received under an employer's adoption assistance program, Any passive activity income or loss included on Form 8582, Any rental real estate loss allowed to real estate professionals, Any overall loss from a publicly traded partnership (see Publicly Traded Partnerships (PTPs) in the Instructions for Form 8582), The deduction allowed for one-half of self-employment tax, The deduction allowed for interest paid on student loans, The deduction for qualified tuition and related fees, and The domestic production activities deduction (see the Instructions for Form 8903). Taxact 1040ez Form 8582 not required. Taxact 1040ez   Do not complete Form 8582 if you meet all of the following conditions. Taxact 1040ez Your only passive activities were rental real estate activities in which you actively participated. Taxact 1040ez Your overall net loss from these activities is $25,000 or less ($12,500 or less if married filing separately and you lived apart from your spouse all year). Taxact 1040ez If married filing separately, you lived apart from your spouse all year. Taxact 1040ez You have no prior year unallowed losses from these (or any other passive) activities. Taxact 1040ez You have no current or prior year unallowed credits from passive activities. Taxact 1040ez Your MAGI is $100,000 or less ($50,000 or less if married filing separately and you lived apart from your spouse all year). Taxact 1040ez You do not hold any interest in a rental real estate activity as a limited partner or as a beneficiary of an estate or a trust. Taxact 1040ez   If you meet all of the conditions listed above, your rental real estate activities are not limited by the passive activity rules and you do not have to complete Form 8582. Taxact 1040ez On lines 23a through 23e of your Schedule E, enter the applicable amounts. Taxact 1040ez Casualties and Thefts As a result of a casualty or theft, you may have a loss related to your rental property. Taxact 1040ez You may be able to deduct the loss on your income tax return. Taxact 1040ez Casualty. Taxact 1040ez   This is the damage, destruction, or loss of property resulting from an identifiable event that is sudden, unexpected, or unusual. Taxact 1040ez Such events include a storm, fire, or earthquake. Taxact 1040ez Theft. Taxact 1040ez   This is defined as the unlawful taking and removing of your money or property with the intent to deprive you of it. Taxact 1040ez Gain from casualty or theft. Taxact 1040ez   It is also possible to have a gain from a casualty or theft if you receive money, including insurance, that is more than your adjusted basis in the property. Taxact 1040ez Generally, you must report this gain. Taxact 1040ez However, under certain circumstances, you may defer paying tax by choosing to postpone reporting the gain. Taxact 1040ez To do this, you generally must buy replacement property within 2 years after the close of the first tax year in which any part of your gain is realized. Taxact 1040ez In certain circumstances, the replacement period can be greater than 2 years; see Replacement Period in Publication 547 for more information. Taxact 1040ez The cost of the replacement property must be equal to or more than the net insurance or other payment you received. Taxact 1040ez More information. Taxact 1040ez   For information on business and nonbusiness casualty and theft losses, see Publication 547. Taxact 1040ez How to report. Taxact 1040ez    If you had a casualty or theft that involved property used in your rental activity, figure the net gain or loss in Section B of Form 4684, Casualties and Thefts. Taxact 1040ez Follow the Instructions for Form 4684 for where to carry your net gain or loss. Taxact 1040ez Example In February 2008, Marie Pfister bought a rental house for $135,000 (house $120,000 and land $15,000) and immediately began renting it out. Taxact 1040ez In 2013, she rented it all 12 months for a monthly rental fee of $1,125. Taxact 1040ez In addition to her rental income of $13,500 (12 x $1,125), Marie had the following expenses. Taxact 1040ez Mortgage interest $8,000 Fire insurance (1-year policy) 250 Miscellaneous repairs 400 Real estate taxes imposed and paid 500 Maintenance 200 Marie depreciates the residential rental property under MACRS GDS. Taxact 1040ez This means using the straight line method over a recovery period of 27. Taxact 1040ez 5 years. Taxact 1040ez She uses Table 2-2d to find her depreciation percentage. Taxact 1040ez Because she placed the property in service in February 2008, she continues to use that row of Table 2-2d. Taxact 1040ez For year 6, the rate is 3. Taxact 1040ez 636%. Taxact 1040ez Marie figures her net rental income or loss for the house as follows: Total rental income received  ($1,125 × 12) $13,500 Minus: Expenses     Mortgage interest $8,000   Fire insurance 250   Miscellaneous repairs 400   Real estate taxes 500   Maintenance 200   Total expenses 9,350 Balance $4,150 Minus: Depreciation ($120,000 x 3. Taxact 1040ez 636%) 4,363 Net rental (loss) for house ($213)       Marie had a net loss for the year. Taxact 1040ez Because she actively participated in her passive rental real estate activity and her loss was less than $25,000, she can deduct the loss on her return. Taxact 1040ez Marie also meets all of the requirements for not having to file Form 8582. Taxact 1040ez She uses Schedule E, Part I, to report her rental income and expenses. Taxact 1040ez She enters her income, expenses, and depreciation for the house in the column for Property A and enters her loss on line 22. Taxact 1040ez Form 4562 is not required. Taxact 1040ez Prev  Up  Next   Home   More Online Publications