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Where to file taxes for free 9. Where to file taxes for free   Rental Income and Expenses Table of Contents Introduction Useful Items - You may want to see: Rental Income Rental ExpensesVacant while listed for sale. Where to file taxes for free Repairs and Improvements Other Expenses Property Changed to Rental Use Renting Part of Property Not Rented for Profit Personal Use of Dwelling Unit (Including Vacation Home)Example. Where to file taxes for free Dividing Expenses Dwelling Unit Used as a Home Reporting Income and Deductions DepreciationChanging your accounting method to deduct unclaimed depreciation. Where to file taxes for free Limits on Rental LossesAt-Risk Rules Passive Activity Limits How To Report Rental Income and ExpensesSchedule E (Form 1040) Introduction This chapter discusses rental income and expenses. Where to file taxes for free It also covers the following topics. Where to file taxes for free Personal use of dwelling unit (including vacation home). Where to file taxes for free Depreciation. Where to file taxes for free Limits on rental losses. Where to file taxes for free How to report your rental income and expenses. Where to file taxes for free If you sell or otherwise dispose of your rental property, see Publication 544, Sales and Other Dispositions of Assets. Where to file taxes for free If you have a loss from damage to, or theft of, rental property, see Publication 547, Casualties, Disasters, and Thefts. Where to file taxes for free If you rent a condominium or a cooperative apartment, some special rules apply to you even though you receive the same tax treatment as other owners of rental property. Where to file taxes for free See Publication 527, Residential Rental Property, for more information. Where to file taxes for free Useful Items - You may want to see: Publication 527 Residential Rental Property 534 Depreciating Property Placed in Service Before 1987 535 Business Expenses 925 Passive Activity and At-Risk Rules 946 How To Depreciate Property Form (and Instructions) 4562 Depreciation and Amortization 6251 Alternative Minimum Tax—Individuals 8582 Passive Activity Loss Limitations Schedule E (Form 1040) Supplemental Income and Loss Rental Income In most cases, you must include in your gross income all amounts you receive as rent. Where to file taxes for free Rental income is any payment you receive for the use or occupation of property. Where to file taxes for free In addition to amounts you receive as normal rent payments, there are other amounts that may be rental income. Where to file taxes for free When to report. Where to file taxes for free   If you are a cash-basis taxpayer, you report rental income on your return for the year you actually or constructively receive it. Where to file taxes for free You are a cash-basis taxpayer if you report income in the year you receive it, regardless of when it was earned. Where to file taxes for free You constructively receive income when it is made available to you, for example, by being credited to your bank account. Where to file taxes for free   For more information about when you constructively receive income, see Accounting Methods in chapter 1. Where to file taxes for free Advance rent. Where to file taxes for free   Advance rent is any amount you receive before the period that it covers. Where to file taxes for free Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use. Where to file taxes for free Example. Where to file taxes for free You sign a 10-year lease to rent your property. Where to file taxes for free In the first year, you receive $5,000 for the first year's rent and $5,000 as rent for the last year of the lease. Where to file taxes for free You must include $10,000 in your income in the first year. Where to file taxes for free Canceling a lease. Where to file taxes for free   If your tenant pays you to cancel a lease, the amount you receive is rent. Where to file taxes for free Include the payment in your income in the year you receive it regardless of your method of accounting. Where to file taxes for free Expenses paid by tenant. Where to file taxes for free   If your tenant pays any of your expenses, the payments are rental income. Where to file taxes for free Because you must include this amount in income, you can deduct the expenses if they are deductible rental expenses. Where to file taxes for free See Rental Expenses , later, for more information. Where to file taxes for free Property or services. Where to file taxes for free   If you receive property or services, instead of money, as rent, include the fair market value of the property or services in your rental income. Where to file taxes for free   If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary. Where to file taxes for free Security deposits. Where to file taxes for free   Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. Where to file taxes for free But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year. Where to file taxes for free   If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Where to file taxes for free Include it in your income when you receive it. Where to file taxes for free Part interest. Where to file taxes for free   If you own a part interest in rental property, you must report your part of the rental income from the property. Where to file taxes for free Rental of property also used as your home. Where to file taxes for free   If you rent property that you also use as your home and you rent it less than 15 days during the tax year, do not include the rent you receive in your income and do not deduct rental expenses. Where to file taxes for free However, you can deduct on Schedule A (Form 1040) the interest, taxes, and casualty and theft losses that are allowed for nonrental property. Where to file taxes for free See Personal Use of Dwelling Unit (Including Vacation Home) , later. Where to file taxes for free Rental Expenses This part discusses expenses of renting property that you ordinarily can deduct from your rental income. Where to file taxes for free It includes information on the expenses you can deduct if you rent part of your property, or if you change your property to rental use. Where to file taxes for free Depreciation , which you can also deduct from your rental income, is discussed later. Where to file taxes for free Personal use of rental property. Where to file taxes for free   If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and personal use. Where to file taxes for free Also, your rental expense deductions may be limited. Where to file taxes for free See Personal Use of Dwelling Unit (Including Vacation Home) , later. Where to file taxes for free Part interest. Where to file taxes for free   If you own a part interest in rental property, you can deduct expenses that you paid according to your percentage of ownership. Where to file taxes for free When to deduct. Where to file taxes for free   If you are a cash-basis taxpayer, you generally deduct your rental expenses in the year you pay them. Where to file taxes for free Depreciation. Where to file taxes for free   You can begin to depreciate rental property when it is ready and available for rent. Where to file taxes for free See Placed-in-Service under When Does Depreciation Begin and End in chapter 2 of Publication 527. Where to file taxes for free Pre-rental expenses. Where to file taxes for free   You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent. Where to file taxes for free Uncollected rent. Where to file taxes for free   If you are a cash-basis taxpayer, do not deduct uncollected rent. Where to file taxes for free Because you have not included it in your income, it is not deductible. Where to file taxes for free Vacant rental property. Where to file taxes for free   If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. Where to file taxes for free However, you cannot deduct any loss of rental income for the period the property is vacant. Where to file taxes for free Vacant while listed for sale. Where to file taxes for free   If you sell property you held for rental purposes, you can deduct the ordinary and necessary expenses for managing, conserving, or maintaining the property until it is sold. Where to file taxes for free If the property is not held out and available for rent while listed for sale, the expenses are not deductible rental expenses. Where to file taxes for free Repairs and Improvements Generally, an expense for repairing or maintaining your rental property may be deducted if you are not required to capitalize the expense. Where to file taxes for free Improvements. Where to file taxes for free   You must capitalize any expense you pay to improve your rental property. Where to file taxes for free An expense is for an improvement if it results in a betterment to your property, restores your property, or adapts your property to a new or different use. Where to file taxes for free Betterments. Where to file taxes for free   Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property. Where to file taxes for free Restoration. Where to file taxes for free   Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition. Where to file taxes for free Adaptation. Where to file taxes for free   Expenses that may be for adaptation include expenses for altering your property to a use that is not consistent with the intended ordinary use of your property when you began renting the property. Where to file taxes for free Separate the costs of repairs and improvements, and keep accurate records. Where to file taxes for free You will need to know the cost of improvements when you sell or depreciate your property. Where to file taxes for free The expenses you capitalize for improving your property can generally be depreciated as if the improvement were separate property. Where to file taxes for free Other Expenses Other expenses you can deduct from your rental income include advertising, cleaning and maintenance, utilities, fire and liability insurance, taxes, interest, commissions for the collection of rent, ordinary and necessary travel and transportation, and other expenses, discussed next. Where to file taxes for free Insurance premiums paid in advance. Where to file taxes for free   If you pay an insurance premium for more than one year in advance, for each year of coverage you can deduct the part of the premium payment that will apply to that year. Where to file taxes for free You cannot deduct the total premium in the year you pay it. Where to file taxes for free Legal and other professional fees. Where to file taxes for free   You can deduct, as a rental expense, legal and other professional expenses, such as tax return preparation fees you paid to prepare Schedule E (Form 1040), Part I. Where to file taxes for free For example, on your 2013 Schedule E, you can deduct fees paid in 2013 to prepare your 2012 Schedule E, Part I. Where to file taxes for free You can also deduct, as a rental expense, any expense (other than federal taxes and penalties) you paid to resolve a tax underpayment related to your rental activities. Where to file taxes for free Local benefit taxes. Where to file taxes for free   In most cases, you cannot deduct charges for local benefits that increase the value of your property, such as charges for putting in streets, sidewalks, or water and sewer systems. Where to file taxes for free These charges are nondepreciable capital expenditures, and must be added to the basis of your property. Where to file taxes for free However, you can deduct local benefit taxes that are for maintaining, repairing, or paying interest charges for the benefits. Where to file taxes for free Local transportation expenses. Where to file taxes for free    You may be able to deduct your ordinary and necessary local transportation expenses if you incur them to collect rental income or to manage, conserve, or maintain your rental property. Where to file taxes for free However, transportation expenses incurred to travel between your home and a rental property generally constitute nondeductible commuting costs unless you use your home as your principal place of business. Where to file taxes for free See Publication 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business. Where to file taxes for free   Generally, if you use your personal car, pickup truck, or light van for rental activities, you can deduct the expenses using one of two methods: actual expenses or the standard mileage rate. Where to file taxes for free For 2013, the standard mileage rate for business use is 56. Where to file taxes for free 5 cents per mile. Where to file taxes for free For more information, see chapter 26. Where to file taxes for free    To deduct car expenses under either method, you must keep records that follow the rules in chapter 26. Where to file taxes for free In addition, you must complete Form 4562, Part V, and attach it to your tax return. Where to file taxes for free Rental of equipment. Where to file taxes for free   You can deduct the rent you pay for equipment that you use for rental purposes. Where to file taxes for free However, in some cases, lease contracts are actually purchase contracts. Where to file taxes for free If so, you cannot deduct these payments. Where to file taxes for free You can recover the cost of purchased equipment through depreciation. Where to file taxes for free Rental of property. Where to file taxes for free   You can deduct the rent you pay for property that you use for rental purposes. Where to file taxes for free If you buy a leasehold for rental purposes, you can deduct an equal part of the cost each year over the term of the lease. Where to file taxes for free Travel expenses. Where to file taxes for free   You can deduct the ordinary and necessary expenses of traveling away from home if the primary purpose of the trip is to collect rental income or to manage, conserve, or maintain your rental property. Where to file taxes for free You must properly allocate your expenses between rental and nonrental activities. Where to file taxes for free You cannot deduct the cost of traveling away from home if the primary purpose of the trip was to improve your property. Where to file taxes for free You recover the cost of improvements by taking depreciation. Where to file taxes for free For information on travel expenses, see chapter 26. Where to file taxes for free    To deduct travel expenses, you must keep records that follow the rules in chapter 26. Where to file taxes for free   See Rental Expenses in Publication 527 for more information. Where to file taxes for free Property Changed to Rental Use If you change your home or other property (or a part of it) to rental use at any time other than the beginning of your tax year, you must divide yearly expenses, such as taxes and insurance, between rental use and personal use. Where to file taxes for free You can deduct as rental expenses only the part of the expense that is for the part of the year the property was used or held for rental purposes. Where to file taxes for free You cannot deduct depreciation or insurance for the part of the year the property was held for personal use. Where to file taxes for free However, you can include the home mortgage interest, qualified mortgage insurance premiums, and real estate tax expenses for the part of the year the property was held for personal use as an itemized deduction on Schedule A (Form 1040). Where to file taxes for free Example. Where to file taxes for free Your tax year is the calendar year. Where to file taxes for free You moved from your home in May and started renting it out on June 1. Where to file taxes for free You can deduct as rental expenses seven-twelfths of your yearly expenses, such as taxes and insurance. Where to file taxes for free Starting with June, you can deduct as rental expenses the amounts you pay for items generally billed monthly, such as utilities. Where to file taxes for free Renting Part of Property If you rent part of your property, you must divide certain expenses between the part of the property used for rental purposes and the part of the property used for personal purposes, as though you actually had two separate pieces of property. Where to file taxes for free You can deduct the expenses related to the part of the property used for rental purposes, such as home mortgage interest, qualified mortgage insurance premiums, and real estate taxes, as rental expenses on Schedule E (Form 1040). Where to file taxes for free You can also deduct as rental expenses a portion of other expenses that normally are nondeductible personal expenses, such as expenses for electricity or painting the outside of your house. Where to file taxes for free There is no change in the types of expenses deductible for the personal-use part of your property. Where to file taxes for free Generally, these expenses may be deducted only if you itemize your deductions on Schedule A (Form 1040). Where to file taxes for free You cannot deduct any part of the cost of the first phone line even if your tenants have unlimited use of it. Where to file taxes for free You do not have to divide the expenses that belong only to the rental part of your property. Where to file taxes for free For example, if you paint a room that you rent, or if you pay premiums for liability insurance in connection with renting a room in your home, your entire cost is a rental expense. Where to file taxes for free If you install a second phone line strictly for your tenants' use, all of the cost of the second line is deductible as a rental expense. Where to file taxes for free You can deduct depreciation, discussed later, on the part of the house used for rental purposes as well as on the furniture and equipment you use for rental purposes. Where to file taxes for free How to divide expenses. Where to file taxes for free   If an expense is for both rental use and personal use, such as mortgage interest or heat for the entire house, you must divide the expense between the rental use and the personal use. Where to file taxes for free You can use any reasonable method for dividing the expense. Where to file taxes for free It may be reasonable to divide the cost of some items (for example, water) based on the number of people using them. Where to file taxes for free The two most common methods for dividing an expense are based on (1) the number of rooms in your home, and (2) the square footage of your home. Where to file taxes for free Not Rented for Profit If you do not rent your property to make a profit, you can deduct your rental expenses only up to the amount of your rental income. Where to file taxes for free You cannot deduct a loss or carry forward to the next year any rental expenses that are more than your rental income for the year. Where to file taxes for free For more information about the rules for an activity not engaged in for profit, see Not-for-Profit Activities in chapter 1 of Publication 535. Where to file taxes for free Where to report. Where to file taxes for free   Report your not-for-profit rental income on Form 1040, line 21. Where to file taxes for free For example, you can include your mortgage interest and any qualified mortgage insurance premiums (if you use the property as your main home or second home), real estate taxes, and casualty losses on the appropriate lines of Schedule A (Form 1040) if you itemize your deductions. Where to file taxes for free   If you itemize your deductions, claim your other rental expenses, subject to the rules explained in chapter 1 of Publication 535, as miscellaneous itemized deductions on Form 1040, Schedule A, line 23. Where to file taxes for free You can deduct these expenses only if they, together with certain other miscellaneous itemized deductions, total more than 2% of your adjusted gross income. Where to file taxes for free Personal Use of Dwelling Unit (Including Vacation Home) If you have any personal use of a dwelling unit (including a vacation home) that you rent, you must divide your expenses between rental use and personal use. Where to file taxes for free In general, your rental expenses will be no more than your total expenses multiplied by a fraction; the denominator of which is the total number of days the dwelling unit is used and the numerator of which is the total number of days actually rented at a fair rental price. Where to file taxes for free Only your rental expenses may be deducted on Schedule E (Form 1040). Where to file taxes for free Some of your personal expenses may be deductible if you itemize your deductions on Schedule A (Form 1040). Where to file taxes for free You must also determine if the dwelling unit is considered a home. Where to file taxes for free The amount of rental expenses that you can deduct may be limited if the dwelling unit is considered a home. Where to file taxes for free Whether a dwelling unit is considered a home depends on how many days during the year are considered to be days of personal use. Where to file taxes for free There is a special rule if you used the dwelling unit as a home and you rented it for less than 15 days during the year. Where to file taxes for free Dwelling unit. Where to file taxes for free   A dwelling unit includes a house, apartment, condominium, mobile home, boat, vacation home, or similar property. Where to file taxes for free It also includes all structures or other property belonging to the dwelling unit. Where to file taxes for free A dwelling unit has basic living accommodations, such as sleeping space, a toilet, and cooking facilities. Where to file taxes for free   A dwelling unit does not include property used solely as a hotel, motel, inn, or similar establishment. Where to file taxes for free Property is used solely as a hotel, motel, inn, or similar establishment if it is regularly available for occupancy by paying customers and is not used by an owner as a home during the year. Where to file taxes for free Example. Where to file taxes for free   You rent a room in your home that is always available for short-term occupancy by paying customers. Where to file taxes for free You do not use the room yourself, and you allow only paying customers to use the room. Where to file taxes for free The room is used solely as a hotel, motel, inn, or similar establishment and is not a dwelling unit. Where to file taxes for free Dividing Expenses If you use a dwelling unit for both rental and personal purposes, divide your expenses between the rental use and the personal use based on the number of days used for each purpose. Where to file taxes for free When dividing your expenses, follow these rules. Where to file taxes for free Any day that the unit is rented at a fair rental price is a day of rental use even if you used the unit for personal purposes that day. Where to file taxes for free This rule does not apply when determining whether you used the unit as a home. Where to file taxes for free Any day that the unit is available for rent but not actually rented is not a day of rental use. Where to file taxes for free Example. Where to file taxes for free Your beach cottage was available for rent from June 1 through August 31 (92 days). Where to file taxes for free During that time, except for the first week in August (7 days) when you were unable to find a renter, you rented the cottage at a fair rental price. Where to file taxes for free The person who rented the cottage for July allowed you to use it over the weekend (2 days) without any reduction in or refund of rent. Where to file taxes for free Your family also used the cottage during the last 2 weeks of May (14 days). Where to file taxes for free The cottage was not used at all before May 17 or after August 31. Where to file taxes for free You figure the part of the cottage expenses to treat as rental expenses as follows. Where to file taxes for free The cottage was used for rental a total of 85 days (92 − 7). Where to file taxes for free The days it was available for rent but not rented (7 days) are not days of rental use. Where to file taxes for free The July weekend (2 days) you used it is rental use because you received a fair rental price for the weekend. Where to file taxes for free You used the cottage for personal purposes for 14 days (the last 2 weeks in May). Where to file taxes for free The total use of the cottage was 99 days (14 days personal use + 85 days rental use). Where to file taxes for free Your rental expenses are 85/99 (86%) of the cottage expenses. Where to file taxes for free Note. Where to file taxes for free When determining whether you used the cottage as a home, the July weekend (2 days) you used it is considered personal use even though you received a fair rental price for the weekend. Where to file taxes for free Therefore, you had 16 days of personal use and 83 days of rental use for this purpose. Where to file taxes for free Because you used the cottage for personal purposes more than 14 days and more than 10% of the days of rental use (8 days), you used it as a home. Where to file taxes for free If you have a net loss, you may not be able to deduct all of the rental expenses. Where to file taxes for free See Dwelling Unit Used as a Home, next. Where to file taxes for free Dwelling Unit Used as a Home If you use a dwelling unit for both rental and personal purposes, the tax treatment of the rental expenses you figured earlier under Dividing Expenses and rental income depends on whether you are considered to be using the dwelling unit as a home. Where to file taxes for free You use a dwelling unit as a home during the tax year if you use it for personal purposes more than the greater of: 14 days, or 10% of the total days it is rented to others at a fair rental price. Where to file taxes for free See What is a day of personal use , later. Where to file taxes for free Fair rental price. Where to file taxes for free   A fair rental price for your property generally is the amount of rent that a person who is not related to you would be willing to pay. Where to file taxes for free The rent you charge is not a fair rental price if it is substantially less than the rents charged for other properties that are similar to your property in your area. Where to file taxes for free   If a dwelling unit is used for personal purposes on a day it is rented at a fair rental price, do not count that day as a day of rental use in applying (2) above. Where to file taxes for free Instead, count it as a day of personal use in applying both (1) and (2) above. Where to file taxes for free What is a day of personal use?   A day of personal use of a dwelling unit is any day that the unit is used by any of the following persons. Where to file taxes for free You or any other person who has an interest in the unit, unless you rent it to another owner as his or her main home under a shared equity financing agreement (defined later). Where to file taxes for free However, see Days used as a main home before or after renting , later. Where to file taxes for free A member of your family or a member of the family of any other person who owns an interest in the unit, unless the family member uses the dwelling unit as his or her main home and pays a fair rental price. Where to file taxes for free Family includes only your spouse, brothers and sisters, half-brothers and half-sisters, ancestors (parents, grandparents, etc. Where to file taxes for free ), and lineal descendants (children, grandchildren, etc. Where to file taxes for free ). Where to file taxes for free Anyone under an arrangement that lets you use some other dwelling unit. Where to file taxes for free Anyone at less than a fair rental price. Where to file taxes for free Main home. Where to file taxes for free   If the other person or member of the family in (1) or (2) above has more than one home, his or her main home is ordinarily the one he or she lived in most of the time. Where to file taxes for free Shared equity financing agreement. Where to file taxes for free   This is an agreement under which two or more persons acquire undivided interests for more than 50 years in an entire dwelling unit, including the land, and one or more of the co-owners is entitled to occupy the unit as his or her main home upon payment of rent to the other co-owner or owners. Where to file taxes for free Donation of use of property. Where to file taxes for free   You use a dwelling unit for personal purposes if: You donate the use of the unit to a charitable organization, The organization sells the use of the unit at a fund-raising event, and The “purchaser” uses the unit. Where to file taxes for free Examples. Where to file taxes for free   The following examples show how to determine days of personal use. Where to file taxes for free Example 1. Where to file taxes for free You and your neighbor are co-owners of a condominium at the beach. Where to file taxes for free Last year, you rented the unit to vacationers whenever possible. Where to file taxes for free The unit was not used as a main home by anyone. Where to file taxes for free Your neighbor used the unit for 2 weeks last year; you did not use it at all. Where to file taxes for free Because your neighbor has an interest in the unit, both of you are considered to have used the unit for personal purposes during those 2 weeks. Where to file taxes for free Example 2. Where to file taxes for free You and your neighbors are co-owners of a house under a shared equity financing agreement. Where to file taxes for free Your neighbors live in the house and pay you a fair rental price. Where to file taxes for free Even though your neighbors have an interest in the house, the days your neighbors live there are not counted as days of personal use by you. Where to file taxes for free This is because your neighbors rent the house as their main home under a shared equity financing agreement. Where to file taxes for free Example 3. Where to file taxes for free You own a rental property that you rent to your son. Where to file taxes for free Your son does not own any interest in this property. Where to file taxes for free He uses it as his main home and pays you a fair rental price. Where to file taxes for free Your son's use of the property is not personal use by you because your son is using it as his main home, he owns no interest in the property, and he is paying you a fair rental price. Where to file taxes for free Example 4. Where to file taxes for free You rent your beach house to Joshua. Where to file taxes for free Joshua rents his cabin in the mountains to you. Where to file taxes for free You each pay a fair rental price. Where to file taxes for free You are using your house for personal purposes on the days that Joshua uses it because your house is used by Joshua under an arrangement that allows you to use his house. Where to file taxes for free Days used for repairs and maintenance. Where to file taxes for free   Any day that you spend working substantially full time repairing and maintaining (not improving) your property is not counted as a day of personal use. Where to file taxes for free Do not count such a day as a day of personal use even if family members use the property for recreational purposes on the same day. Where to file taxes for free Days used as a main home before or after renting. Where to file taxes for free   For purposes of determining whether a dwelling unit was used as a home, you may not have to count days you used the property as your main home before or after renting it or offering it for rent as days of personal use. Where to file taxes for free Do not count them as days of personal use if: You rented or tried to rent the property for 12 or more consecutive months. Where to file taxes for free You rented or tried to rent the property for a period of less than 12 consecutive months and the period ended because you sold or exchanged the property. Where to file taxes for free However, this special rule does not apply when dividing expenses between rental and personal use. Where to file taxes for free Examples. Where to file taxes for free   The following examples show how to determine whether you used your rental property as a home. Where to file taxes for free Example 1. Where to file taxes for free You converted the basement of your home into an apartment with a bedroom, a bathroom, and a small kitchen. Where to file taxes for free You rented the basement apartment at a fair rental price to college students during the regular school year. Where to file taxes for free You rented to them on a 9-month lease (273 days). Where to file taxes for free You figured 10% of the total days rented to others at a fair rental price is 27 days. Where to file taxes for free During June (30 days), your brothers stayed with you and lived in the basement apartment rent free. Where to file taxes for free Your basement apartment was used as a home because you used it for personal purposes for 30 days. Where to file taxes for free Rent-free use by your brothers is considered personal use. Where to file taxes for free Your personal use (30 days) is more than the greater of 14 days or 10% of the total days it was rented (27 days). Where to file taxes for free Example 2. Where to file taxes for free You rented the guest bedroom in your home at a fair rental price during the local college's homecoming, commencement, and football weekends (a total of 27 days). Where to file taxes for free Your sister-in-law stayed in the room, rent free, for the last 3 weeks (21 days) in July. Where to file taxes for free You figured 10% of the total days rented to others at a fair rental price is 3 days. Where to file taxes for free The room was used as a home because you used it for personal purposes for 21 days. Where to file taxes for free That is more than the greater of 14 days or 10% of the 27 days it was rented (3 days). Where to file taxes for free Example 3. Where to file taxes for free You own a condominium apartment in a resort area. Where to file taxes for free You rented it at a fair rental price for a total of 170 days during the year. Where to file taxes for free For 12 of those days, the tenant was not able to use the apartment and allowed you to use it even though you did not refund any of the rent. Where to file taxes for free Your family actually used the apartment for 10 of those days. Where to file taxes for free Therefore, the apartment is treated as having been rented for 160 (170 − 10) days. Where to file taxes for free You figured 10% of the total days rented to others at a fair rental price is 16 days. Where to file taxes for free Your family also used the apartment for 7 other days during the year. Where to file taxes for free You used the apartment as a home because you used it for personal purposes for 17 days. Where to file taxes for free That is more than the greater of 14 days or 10% of the 160 days it was rented (16 days). Where to file taxes for free Minimal rental use. Where to file taxes for free   If you use the dwelling unit as a home and you rent it less than 15 days during the year, that period is not treated as rental activity. Where to file taxes for free See Used as a home but rented less than 15 days , later, for more information. Where to file taxes for free Limit on deductions. Where to file taxes for free   Renting a dwelling unit that is considered a home is not a passive activity. Where to file taxes for free Instead, if your rental expenses are more than your rental income, some or all of the excess expenses cannot be used to offset income from other sources. Where to file taxes for free The excess expenses that cannot be used to offset income from other sources are carried forward to the next year and treated as rental expenses for the same property. Where to file taxes for free Any expenses carried forward to the next year will be subject to any limits that apply for that year. Where to file taxes for free This limitation will apply to expenses carried forward to another year even if you do not use the property as your home for that subsequent year. Where to file taxes for free   To figure your deductible rental expenses for this year and any carryover to next year, use Worksheet 9-1. Where to file taxes for free Reporting Income and Deductions Property not used for personal purposes. Where to file taxes for free   If you do not use a dwelling unit for personal purposes, see How To Report Rental Income and Expenses , later, for how to report your rental income and expenses. Where to file taxes for free Property used for personal purposes. Where to file taxes for free   If you do use a dwelling unit for personal purposes, then how you report your rental income and expenses depends on whether you used the dwelling unit as a home. Where to file taxes for free Not used as a home. Where to file taxes for free   If you use a dwelling unit for personal purposes, but not as a home, report all the rental income in your income. Where to file taxes for free Since you used the dwelling unit for personal purposes, you must divide your expenses between the rental use and the personal use as described earlier in Dividing Expenses . Where to file taxes for free The expenses for personal use are not deductible as rental expenses. Where to file taxes for free   Your deductible rental expenses can be more than your gross rental income; however, see Limits on Rental Losses , later. Where to file taxes for free Used as a home but rented less than 15 days. Where to file taxes for free   If you use a dwelling unit as a home and you rent it less than 15 days during the year, its primary function is not considered to be rental and it should not be reported on Schedule E (Form 1040). Where to file taxes for free You are not required to report the rental income and rental expenses from this activity. Where to file taxes for free The expenses, including qualified mortgage interest, property taxes, and any qualified casualty loss will be reported as normally allowed on Schedule A (Form 1040). Where to file taxes for free See the Instructions for Schedule A (Form 1040) for more information on deducting these expenses. Where to file taxes for free Used as a home and rented 15 days or more. Where to file taxes for free   If you use a dwelling unit as a home and rent it 15 days or more during the year, include all your rental income in your income. Where to file taxes for free Since you used the dwelling unit for personal purposes, you must divide your expenses between the rental use and the personal use as described earlier in Dividing Expenses . Where to file taxes for free The expenses for personal use are not deductible as rental expenses. Where to file taxes for free   If you had a net profit from renting the dwelling unit for the year (that is, if your rental income is more than the total of your rental expenses, including depreciation), deduct all of your rental expenses. Where to file taxes for free You do not need to use Worksheet 9-1. Where to file taxes for free   However, if you had a net loss from renting the dwelling unit for the year, your deduction for certain rental expenses is limited. Where to file taxes for free To figure your deductible rental expenses and any carryover to next year, use Worksheet 9-1. Where to file taxes for free Depreciation You recover the cost of income-producing property through yearly tax deductions. Where to file taxes for free You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return. Where to file taxes for free Three factors determine how much depreciation you can deduct each year: (1) your basis in the property, (2) the recovery period for the property, and (3) the depreciation method used. Where to file taxes for free You cannot simply deduct your mortgage or principal payments, or the cost of furniture, fixtures, and equipment, as an expense. Where to file taxes for free You can deduct depreciation only on the part of your property used for rental purposes. Where to file taxes for free Depreciation reduces your basis for figuring gain or loss on a later sale or exchange. Where to file taxes for free You may have to use Form 4562 to figure and report your depreciation. Where to file taxes for free See How To Report Rental Income and Expenses , later. Where to file taxes for free Alternative minimum tax (AMT). Where to file taxes for free    If you use accelerated depreciation, you may be subject to the AMT. Where to file taxes for free Accelerated depreciation allows you to deduct more depreciation earlier in the recovery period than you could deduct using a straight line method (same deduction each year). Where to file taxes for free Claiming the correct amount of depreciation. Where to file taxes for free   You should claim the correct amount of depreciation each tax year. Where to file taxes for free If you did not claim all the depreciation you were entitled to deduct, you must still reduce your basis in the property by the full amount of depreciation that you could have deducted. Where to file taxes for free   If you deducted an incorrect amount of depreciation for property in any year, you may be able to make a correction by filing Form 1040X, Amended U. Where to file taxes for free S Individual Income Tax Return. Where to file taxes for free If you are not allowed to make the correction on an amended return, you can change your accounting method to claim the correct amount of depreciation. Where to file taxes for free See Claiming the correct amount of depreciation in chapter 2 of Publication 527 for more information. Where to file taxes for free Changing your accounting method to deduct unclaimed depreciation. Where to file taxes for free   To change your accounting method, you generally must file Form 3115, Application for Change in Accounting Method, to get the consent of the IRS. Where to file taxes for free In some instances, that consent is automatic. Where to file taxes for free For more information, see chapter 1 of Publication 946. Where to file taxes for free Land. Where to file taxes for free   You cannot depreciate the cost of land because land generally does not wear out, become obsolete, or get used up. Where to file taxes for free The costs of clearing, grading, planting, and landscaping are usually all part of the cost of land and cannot be depreciated. Where to file taxes for free More information. Where to file taxes for free   See Publication 527 for more information about depreciating rental property and see Publication 946 for more information about depreciation. Where to file taxes for free 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. Where to file taxes for free You must consider these rules in the order shown below. Where to file taxes for free At-risk rules. Where to file taxes for free These rules are applied first if there is investment in your rental real estate activity for which you are not at risk. Where to file taxes for free This applies only if the real property was placed in service after 1986. Where to file taxes for free Passive activity limits. Where to file taxes for free 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. Where to file taxes for free However, there are exceptions. Where to file taxes for free 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. Where to file taxes for free Losses from holding real property (other than mineral property) placed in service before 1987 are not subject to the at-risk rules. Where to file taxes for free 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. Where to file taxes for free 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. Where to file taxes for free See Publication 925 for more information. Where to file taxes for free Passive Activity Limits In most cases, all rental real estate activities (except those of certain real estate professionals, discussed later) are passive activities. Where to file taxes for free 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. Where to file taxes for free Limits on passive activity deductions and credits. Where to file taxes for free    Deductions or losses from passive activities are limited. Where to file taxes for free You generally cannot offset income, other than passive income, with losses from passive activities. Where to file taxes for free Nor can you offset taxes on income, other than passive income, with credits resulting from passive activities. Where to file taxes for free Any excess loss or credit is carried forward to the next tax year. Where to file taxes for free   For a detailed discussion of these rules, see Publication 925. Where to file taxes for free    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. Where to file taxes for free Real estate professionals. Where to file taxes for free   Rental activities in which you materially participated during the year are not passive activities if, for that year, you were a real estate professional. Where to file taxes for free For a detailed discussion of the requirements, see Publication 527. Where to file taxes for free For a detailed discussion of material participation, see Publication 925. Where to file taxes for free 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. Where to file taxes for free Instead, follow the rules explained in Personal Use of Dwelling Unit (Including Vacation Home), earlier. Where to file taxes for free Exception for Rental Real Estate Activities 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. Where to file taxes for free This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities. Where to file taxes for free 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. Where to file taxes for free Active participation. Where to file taxes for free   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. Where to file taxes for free Management decisions that may count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions. Where to file taxes for free Maximum special allowance. Where to file taxes for free   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. Where to file taxes for free   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. Where to file taxes for free 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. Where to file taxes for free   Generally, if your MAGI is $150,000 or more ($75,000 or more if you are married filing separately), there is no special allowance. Where to file taxes for free More information. Where to file taxes for free   See Publication 925 for more information on the passive loss limits, including information on the treatment of unused disallowed passive losses and credits and the treatment of gains and losses realized on the disposition of a passive activity. Where to file taxes for free How To Report Rental Income and Expenses The basic form for reporting residential rental income and expenses is Schedule E (Form 1040). Where to file taxes for free However, do not use that schedule to report a not-for-profit activity. Where to file taxes for free See Not Rented for Profit, earlier. Where to file taxes for free Providing substantial services. Where to file taxes for free   If you provide substantial services that are primarily for your tenant's convenience, such as regular cleaning, changing linen, or maid service, 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 (Sole Proprietorship). Where to file taxes for free Substantial services do not include the furnishing of heat and light, cleaning of public areas, trash collection, etc. Where to file taxes for free For information, see Publication 334, Tax Guide for Small Business. Where to file taxes for free You also may have to pay self-employment tax on your rental income using Schedule SE (Form 1040), Self-Employment Tax. Where to file taxes for free   Use Form 1065, U. Where to file taxes for free S. Where to file taxes for free Return of Partnership Income, if your rental activity is a partnership (including a partnership with your spouse unless it is a qualified joint venture). Where to file taxes for free Qualified joint venture. Where to file taxes for free   If you and your spouse each materially participate 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. Where to file taxes for free 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. Where to file taxes for free For more information, see Publication 527. Where to file taxes for free Form 1098, Mortgage Interest Statement. Where to file taxes for free    If you paid $600 or more of mortgage interest on your rental property to any one person, you should receive a Form 1098, or similar statement showing the interest you paid for the year. Where to file taxes for free If you and at least one other person (other than your spouse if you file a joint return) were liable for, and paid interest on the mortgage, and the other person received the Form 1098, report your share of the interest on Schedule E (Form 1040), line 13. Where to file taxes for free Attach a statement to your return showing the name and address of the other person. Where to file taxes for free In the left margin of Schedule E, next to line 13, enter “See attached. Where to file taxes for free ” Schedule E (Form 1040) If you rent buildings, rooms, or apartments, and provide basic services such as heat and light, trash collection, etc. Where to file taxes for free , you normally report your rental income and expenses on Schedule E, Part I. Where to file taxes for free List your total income, expenses, and depreciation for each rental property. Where to file taxes for free Be sure to enter the number of fair rental and personal use days on line 2. Where to file taxes for free If you have more than three rental or royalty properties, complete and attach as many Schedules E as are needed to list the properties. Where to file taxes for free Complete lines 1 and 2 for each property. Where to file taxes for free However, fill in lines 23a through 26 on only one Schedule E. Where to file taxes for free On Schedule E, page 1, line 18, enter the depreciation you are claiming for each property. Where to file taxes for free To find out if you need to attach Form 4562, see Form 4562, in chapter 3 of Publication 527. Where to file taxes for free If you have a loss from your rental real estate activity, you also may need to complete one or both of the following forms. Where to file taxes for free Form 6198, At-Risk Limitations. Where to file taxes for free See At-Risk Rules , earlier. Where to file taxes for free Also see Publication 925. Where to file taxes for free Form 8582, Passive Activity Loss Limitations. Where to file taxes for free See Passive Activity Limits , earlier. Where to file taxes for free Page 2 of Schedule E is used to report income or loss from partnerships, S corporations, estates, trusts, and real estate mortgage investment conduits. Where to file taxes for free 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. Where to file taxes for free Also, include the amount from line 26 (Part I) in the “Total income or (loss)” on line 41 (Part V). Where to file taxes for free Worksheet 9-1. Where to file taxes for free Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home Use this worksheet only if you answer “yes” to all of the following questions. Where to file taxes for free Did you use the dwelling unit as a home this year? (See Dwelling Unit Used as a Home . Where to file taxes for free ) Did you rent the dwelling unit at a fair rental price 15 days or more this year? Is the total of your rental expenses and depreciation more than your rental income? PART I. Where to file taxes for free Rental Use Percentage A. Where to file taxes for free Total days available for rent at fair rental price A. Where to file taxes for free       B. Where to file taxes for free Total days available for rent (line A) but not rented B. Where to file taxes for free       C. Where to file taxes for free Total days of rental use. Where to file taxes for free Subtract line B from line A C. Where to file taxes for free       D. Where to file taxes for free Total days of personal use (including days rented at less than fair rental price) D. Where to file taxes for free       E. Where to file taxes for free Total days of rental and personal use. Where to file taxes for free Add lines C and D E. Where to file taxes for free       F. Where to file taxes for free Percentage of expenses allowed for rental. Where to file taxes for free Divide line C by line E     F. Where to file taxes for free   PART II. Where to file taxes for free Allowable Rental Expenses 1. Where to file taxes for free Enter rents received 1. Where to file taxes for free   2a. Where to file taxes for free Enter the rental portion of deductible home mortgage interest and qualified mortgage insurance premiums (see instructions) 2a. Where to file taxes for free       b. Where to file taxes for free Enter the rental portion of real estate taxes b. Where to file taxes for free       c. Where to file taxes for free Enter the rental portion of deductible casualty and theft losses (see instructions) c. Where to file taxes for free       d. Where to file taxes for free Enter direct rental expenses (see instructions) d. Where to file taxes for free       e. Where to file taxes for free Fully deductible rental expenses. Where to file taxes for free Add lines 2a–2d. Where to file taxes for free Enter here and  on the appropriate lines on Schedule E (see instructions) 2e. Where to file taxes for free   3. Where to file taxes for free Subtract line 2e from line 1. Where to file taxes for free If zero or less, enter -0- 3. Where to file taxes for free   4a. Where to file taxes for free Enter the rental portion of expenses directly related to operating or maintaining  the dwelling unit (such as repairs, insurance, and utilities) 4a. Where to file taxes for free       b. Where to file taxes for free Enter the rental portion of excess mortgage interest and qualified mortgage insurance premiums (see instructions) b. Where to file taxes for free       c. Where to file taxes for free Carryover of operating expenses from 2012 worksheet c. Where to file taxes for free       d. Where to file taxes for free Add lines 4a–4c d. Where to file taxes for free       e. Where to file taxes for free Allowable expenses. Where to file taxes for free Enter the smaller of line 3 or line 4d (see instructions) 4e. Where to file taxes for free   5. Where to file taxes for free Subtract line 4e from line 3. Where to file taxes for free If zero or less, enter -0- 5. Where to file taxes for free   6a. Where to file taxes for free Enter the rental portion of excess casualty and theft losses (see instructions) 6a. Where to file taxes for free       b. Where to file taxes for free Enter the rental portion of depreciation of the dwelling unit b. Where to file taxes for free       c. Where to file taxes for free Carryover of excess casualty losses and depreciation from 2012 worksheet c. Where to file taxes for free       d. Where to file taxes for free Add lines 6a–6c d. Where to file taxes for free       e. Where to file taxes for free Allowable excess casualty and theft losses and depreciation. Where to file taxes for free Enter the smaller of  line 5 or line 6d (see instructions) 6e. Where to file taxes for free   PART III. Where to file taxes for free Carryover of Unallowed Expenses to Next Year 7a. Where to file taxes for free Operating expenses to be carried over to next year. Where to file taxes for free Subtract line 4e from line 4d 7a. Where to file taxes for free   b. Where to file taxes for free Excess casualty and theft losses and depreciation to be carried over to next year. Where to file taxes for free  Subtract line 6e from line 6d b. Where to file taxes for free   Worksheet 9-1 Instructions. Where to file taxes for free Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home Caution. Where to file taxes for free Use the percentage determined in Part I, line F, to figure the rental portions to enter on lines 2a–2c, 4a–4b, and 6a–6b of  Part II. Where to file taxes for free Line 2a. Where to file taxes for free Figure the mortgage interest on the dwelling unit that you could deduct on Schedule A as if you had not rented the unit. Where to file taxes for free Do not include interest on a loan that did not benefit the dwelling unit. Where to file taxes for free For example, do not include interest on a home equity loan used to pay off credit cards or other personal loans, buy a car, or pay college tuition. Where to file taxes for free Include interest on a loan used to buy, build, or improve the dwelling unit, or to refinance such a loan. Where to file taxes for free Include the rental portion of this interest in the total you enter on line 2a of the worksheet. Where to file taxes for free   Figure the qualified mortgage insurance premiums on the dwelling unit that you could deduct on line 13 of Schedule A as if you had not rented the unit. Where to file taxes for free See the Schedule A instructions. Where to file taxes for free However, figure your adjusted gross income (Form 1040, line 38) without your rental income and expenses from the dwelling unit. Where to file taxes for free See Line 4b to deduct the part of the qualified mortgage insurance premiums not allowed because of the adjusted gross income limit. Where to file taxes for free Include the rental portion of the amount from Schedule A, line 13, in the total you enter on line 2a of the worksheet. Where to file taxes for free   Note. Where to file taxes for free Do not file this Schedule A or use it to figure the amount to deduct on line 13 of that schedule. Where to file taxes for free Instead, figure the personal portion on a separate Schedule A. Where to file taxes for free If you have deducted mortgage interest or qualified mortgage insurance premiums on the dwelling unit on other forms, such as Schedule C or F, remember to reduce your Schedule A deduction by that amount. Where to file taxes for free           Line 2c. Where to file taxes for free Figure the casualty and theft losses related to the dwelling unit that you could deduct on Schedule A as if you had not rented the dwelling unit. Where to file taxes for free To do this, complete Section A of Form 4684, Casualties and Thefts, treating the losses as personal losses. Where to file taxes for free If any of the loss is due to a federally declared disaster, see the Instructions for Form 4684. Where to file taxes for free On Form 4684, line 17, enter 10% of your adjusted gross income figured without your rental income and expenses from the dwelling unit. Where to file taxes for free Enter the rental portion of the result from Form 4684, line 18, on line 2c of this worksheet. Where to file taxes for free   Note. Where to file taxes for free Do not file this Form 4684 or use it to figure your personal losses on Schedule A. Where to file taxes for free Instead, figure the personal portion on a separate Form 4684. Where to file taxes for free           Line 2d. Where to file taxes for free Enter the total of your rental expenses that are directly related only to the rental activity. Where to file taxes for free These include interest on loans used for rental activities other than to buy, build, or improve the dwelling unit. Where to file taxes for free Also include rental agency fees, advertising, office supplies, and depreciation on office equipment used in your rental activity. Where to file taxes for free           Line 2e. Where to file taxes for free You can deduct the amounts on lines 2a, 2b, 2c, and 2d as rental expenses on Schedule E even if your rental expenses are more than your rental income. Where to file taxes for free Enter the amounts on lines 2a, 2b, 2c, and 2d on the appropriate lines of Schedule E. Where to file taxes for free           Line 4b. Where to file taxes for free On line 2a, you entered the rental portion of the mortgage interest and qualified mortgage insurance premiums you could deduct on Schedule A if you had not rented the dwelling unit. Where to file taxes for free If you had additional mortgage interest and qualified mortgage insurance premiums that would not be deductible on Schedule A because of limits imposed on them, enter on line 4b of this worksheet the rental portion of those excess amounts. Where to file taxes for free Do not include interest on a loan that did not benefit the dwelling unit (as explained in the line 2a instructions). Where to file taxes for free           Line 4e. Where to file taxes for free You can deduct the amounts on lines 4a, 4b, and 4c as rental expenses on Schedule E only to the extent they are not more than the amount on line 4e. Where to file taxes for free *           Line 6a. Where to file taxes for free To find the rental portion of excess casualty and theft losses, use the Form 4684 you prepared for line 2c of this worksheet. Where to file taxes for free   A. Where to file taxes for free Enter the amount from Form 4684, line 10       B. Where to file taxes for free Enter the rental portion of line A       C. Where to file taxes for free Enter the amount from line 2c of this worksheet       D. Where to file taxes for free Subtract line C from line B. Where to file taxes for free Enter the result here and on line 6a of this worksheet               Line 6e. Where to file taxes for free You can deduct the amounts on lines 6a, 6b, and 6c as rental expenses on Schedule E only to the extent they are not more than the amount on line 6e. Where to file taxes for free * *Allocating the limited deduction. Where to file taxes for free If you cannot deduct all of the amount on line 4d or 6d this year, you can allocate the allowable deduction in any way you wish among the expenses included on line 4d or 6d. Where to file taxes for free Enter the amount you allocate to each expense on the appropriate line of Schedule E, Part I. Where to file taxes for free Prev  Up  Next   Home   More Online Publications
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The Where To File Taxes For Free

Where to file taxes for free 1. Where to file taxes for free   Scholarships, Fellowships, Grants, and Tuition Reductions Table of Contents Reminder Introduction Scholarships and FellowshipsTax-Free Scholarships and Fellowships Taxable Scholarships and Fellowships Reporting Scholarships and Fellowships Other Types of Educational AssistanceFulbright Grants Pell Grants and Other Title IV Need-Based Education Grants Payment to Service Academy Cadets Veterans' Benefits Qualified Tuition Reduction Reminder Individual retirement arrangements (IRAs). Where to file taxes for free  You can set up and make contributions to an IRA if you receive taxable compensation. Where to file taxes for free Under this rule, a taxable scholarship or fellowship is compensation only if it is shown in box 1 of your Form W-2, Wage and Tax Statement. Where to file taxes for free For more information about IRAs, see Publication 590. Where to file taxes for free Introduction This chapter discusses the income tax treatment of various types of educational assistance you may receive if you are studying, teaching, or researching in the United States. Where to file taxes for free The educational assistance can be for a primary or secondary school, a college or university, or a vocational school. Where to file taxes for free Included are discussions of: Scholarships, Fellowships, Need-based education grants, such as a Pell Grant, and Qualified tuition reductions. Where to file taxes for free Many types of educational assistance are tax free if they meet the requirements discussed here. Where to file taxes for free Special rules apply to U. Where to file taxes for free S. Where to file taxes for free citizens and resident aliens who have received scholarships or fellowships for studying, teaching, or researching abroad. Where to file taxes for free For information about these rules, see Publication 54, Tax Guide for U. Where to file taxes for free S. Where to file taxes for free Citizens and Resident Aliens Abroad. Where to file taxes for free Scholarships and Fellowships A scholarship is generally an amount paid or allowed to, or for the benefit of, a student (whether an undergraduate or a graduate) at an educational institution to aid in the pursuit of his or her studies. Where to file taxes for free A fellowship is generally an amount paid for the benefit of an individual to aid in the pursuit of study or research. Where to file taxes for free Amount of scholarship or fellowship. Where to file taxes for free   The amount of a scholarship or fellowship includes the following: The value of contributed services and accommodations. Where to file taxes for free This includes such services and accommodations as room (lodging), board (meals), laundry service, and similar services or accommodations that are received by an individual as a part of a scholarship or fellowship. Where to file taxes for free The amount of tuition, matriculation, and other fees that are paid or remitted to the student to aid the student in pursuing study or research. Where to file taxes for free Any amount received in the nature of a family allowance as a part of a scholarship or fellowship. Where to file taxes for free Tax-Free Scholarships and Fellowships A scholarship or fellowship is tax free (excludable from gross income) only if you are a candidate for a degree at an eligible educational institution. Where to file taxes for free A scholarship or fellowship is tax free only to the extent: It does not exceed your expenses; It is not designated or earmarked for other purposes (such as room and board), and does not require (by its terms) that it cannot be used for qualified education expenses; and It does not represent payment for teaching, research, or other services required as a condition for receiving the scholarship. Where to file taxes for free (But for exceptions, see Payment for services,later. Where to file taxes for free Use Worksheet 1–1 to figure the amount of a scholarship or fellowship you can exclude from gross income. Where to file taxes for free Candidate for a degree. Where to file taxes for free   You are a candidate for a degree if you: Attend a primary or secondary school or are pursuing a degree at a college or university, or Attend an educational institution that: Provides a program that is acceptable for full credit toward a bachelor's or higher degree, or offers a program of training to prepare students for gainful employment in a recognized occupation; and Is authorized under federal or state law to provide such a program and is accredited by a nationally recognized accreditation agency. Where to file taxes for free Eligible educational institution. Where to file taxes for free   An eligible educational institution is one whose primary function is the presentation of formal instruction and that normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities. Where to file taxes for free Qualified education expenses. Where to file taxes for free   For purposes of tax-free scholarships and fellowships, these are expenses for: Tuition and fees required to enroll at or attend an eligible educational institution, and Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. Where to file taxes for free These items must be required of all students in your course of instruction. Where to file taxes for free Expenses that do not qualify. Where to file taxes for free   Qualified education expenses do not include the cost of: Room and board, Travel, Research, Clerical help, or Equipment and other expenses that are not required for enrollment in or attendance at an eligible educational institution. Where to file taxes for free Payment for services. Where to file taxes for free   Generally, you cannot exclude from your gross income the part of any scholarship or fellowship that represents payment for teaching, research, or other services required as a condition for receiving the scholarship. Where to file taxes for free This applies even if all candidates for a degree must perform the services to receive the degree. Where to file taxes for free (See exceptions next. Where to file taxes for free ) Exceptions. Where to file taxes for free   You do not have to treat as payment for services the part of any scholarship or fellowship that represents payment for teaching, research, or other services if you receive the amount under: The National Health Service Corps Scholarship Program, or The Armed Forces Health Professions Scholarship and Financial Assistance Program. Where to file taxes for free Example 1. Where to file taxes for free You received a scholarship of $2,500. Where to file taxes for free The scholarship was not received under either of the exceptions mentioned above. Where to file taxes for free As a condition for receiving the scholarship, you must serve as a part-time teaching assistant. Where to file taxes for free Of the $2,500 scholarship, $1,000 represents payment for teaching. Where to file taxes for free The provider of your scholarship gives you a Form W-2 showing $1,000 as income. Where to file taxes for free Your qualified education expenses were at least $1,500. Where to file taxes for free Assuming that all other conditions are met, $1,500 of your scholarship is tax free. Where to file taxes for free The $1,000 you received for teaching is taxable. Where to file taxes for free Example 2. Where to file taxes for free You are a candidate for a degree at a medical school. Where to file taxes for free You receive a scholarship (not under either of the exceptions mentioned above) for your medical education and training. Where to file taxes for free The terms of your scholarship require you to perform future services. Where to file taxes for free A substantial penalty applies if you do not comply. Where to file taxes for free The entire amount of your grant is taxable as payment for services in the year it is received. Where to file taxes for free Athletic Scholarships An athletic scholarship is tax free only if and to the extent it meets the requirements discussed later. Where to file taxes for free Worksheet 1-1. Where to file taxes for free    You can use Worksheet 1-1, Taxable Scholarship and Fellowship Income , later, to figure the tax-free and taxable parts of your athletic scholarship. Where to file taxes for free    Worksheet 1-1. Where to file taxes for free Taxable Scholarship and Fellowship Income 1. Where to file taxes for free Enter the total amount of any scholarship or fellowship for 2013. Where to file taxes for free See Amount of scholarship or fellowship, earlier. Where to file taxes for free 1. Where to file taxes for free       If you are a degree candidate at an eligible educational institution, go to line 2. Where to file taxes for free If you are not a degree candidate at an eligible educational institution, stop here. Where to file taxes for free The entire amount is taxable. Where to file taxes for free For information on how to report this amount on your tax return, see Reporting Scholarships and Fellowships , earlier, in this chapter. Where to file taxes for free       2. Where to file taxes for free Enter the amount from line 1 that was for teaching, research, or any other services required as a condition for receiving the scholarship. Where to file taxes for free (Do not include amounts received for these items under the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program. Where to file taxes for free ) 2. Where to file taxes for free     3. Where to file taxes for free Subtract line 2 from line 1 3. Where to file taxes for free     4. Where to file taxes for free Enter the amount from line 3 that your scholarship or fellowship required you to use for other than qualified education expenses 4. Where to file taxes for free     5. Where to file taxes for free Subtract line 4 from line 3 5. Where to file taxes for free     6. Where to file taxes for free Enter the amount of your qualified education expenses 6. Where to file taxes for free     7. Where to file taxes for free Enter the smaller of line 5 or line 6. Where to file taxes for free This amount is the most you can exclude from your gross income (the tax-free part of the scholarship or fellowship) 7. Where to file taxes for free     8. Where to file taxes for free Subtract line 7 from line 5 8. Where to file taxes for free     9. Where to file taxes for free Taxable part. Where to file taxes for free Add lines 2, 4, and 8. Where to file taxes for free See Reporting Scholarships and Fellowships , earlier, for how to report this amount on your tax return 9. Where to file taxes for free     Taxable Scholarships and Fellowships If and to the extent your scholarship or fellowship does not meet the requirements described earlier, it is taxable and must be included in gross income. Where to file taxes for free You can use Worksheet 1–1, Taxable Scholarship and Fellowship Income, later, to figure the tax-free and taxable parts of your scholarship or fellowship. Where to file taxes for free Reporting Scholarships and Fellowships Whether you must report your scholarship or fellowship depends on whether you must file a return and whether any part of your scholarship or fellowship is taxable. Where to file taxes for free If your only income is a completely tax-free scholarship or fellowship, you do not have to file a tax return and no reporting is necessary. Where to file taxes for free If all or part of your scholarship or fellowship is taxable and you are required to file a tax return, report the taxable amount as explained below. Where to file taxes for free You must report the taxable amount whether or not you received a Form W-2. Where to file taxes for free If you receive an incorrect Form W-2, ask the payer for a corrected one. Where to file taxes for free For information on whether you must file a return, see Publication 501, Exemptions, Standard Deduction, and Filing Information, or your income tax form instructions. Where to file taxes for free How To Report How you report any taxable scholarship or fellowship income depends on which return you file. Where to file taxes for free Form 1040EZ. Where to file taxes for free   If you file Form 1040EZ, include the taxable amount in the total on line 1. Where to file taxes for free If the taxable amount was not reported on Form W-2, also enter “SCH” and the taxable amount in the space to the left of line 1. Where to file taxes for free Form 1040A. Where to file taxes for free   If you file Form 1040A, include the taxable amount in the total on line 7. Where to file taxes for free If the taxable amount was not reported on Form W-2, also enter “SCH” and the taxable amount in the space to the left of line 7. Where to file taxes for free Form 1040. Where to file taxes for free   If you file Form 1040, include the taxable amount in the total on line 7. Where to file taxes for free If the taxable amount was not reported on Form W-2, also enter “SCH” and the taxable amount on the dotted line next to line 7. Where to file taxes for free Schedule SE (Form 1040). Where to file taxes for free   To determine your net earnings from self-employment, include amounts you receive under a scholarship as pay for your services that are reported to you on Form 1099-MISC, Miscellaneous Income. Where to file taxes for free If your net earnings are $400 or more, you must pay self-employment tax. Where to file taxes for free Use Schedule SE, Self-Employment Tax, to figure this tax. Where to file taxes for free Form 1040NR. Where to file taxes for free   If you file Form 1040NR, report the taxable amount on line 12. Where to file taxes for free Generally, you must report the amount shown in box 2 of Form(s) 1042-S, Foreign Person's U. Where to file taxes for free S. Where to file taxes for free Source Income Subject to Withholding. Where to file taxes for free See the Instructions for Form 1040NR for more information. Where to file taxes for free Form 1040NR-EZ. Where to file taxes for free   If you file Form 1040NR-EZ, report the taxable amount on line 5. Where to file taxes for free Generally, you must report the amount shown in box 2 of Form(s) 1042-S. Where to file taxes for free See the Instructions for Form 1040NR-EZ for more information. Where to file taxes for free Other Types of Educational Assistance The following discussions deal with other common types of educational assistance. Where to file taxes for free Fulbright Grants A Fulbright grant is generally treated as a scholarship or fellowship in figuring how much of the grant is tax free. Where to file taxes for free Pell Grants and Other Title IV Need-Based Education Grants These need-based grants are treated as scholarships for purposes of determining their tax treatment. Where to file taxes for free They are tax free to the extent used for qualified education expenses during the period for which a grant is awarded. Where to file taxes for free Payment to Service Academy Cadets An appointment to a United States military academy is not a scholarship or fellowship. Where to file taxes for free Payment you receive as a cadet or midshipman at an armed services academy is pay for personal services and will be reported to you in box 1 of Form W-2. Where to file taxes for free Include this pay in your income in the year you receive it unless one of the exceptions, discussed earlier under Payment for services , applies. Where to file taxes for free Veterans' Benefits Payments you receive for education, training, or subsistence under any law administered by the Department of Veterans Affairs (VA) are tax free. Where to file taxes for free Do not include these payments as income on your federal tax return. Where to file taxes for free If you qualify for one or more of the education benefits discussed in chapters 2 through 12, you may have to reduce the amount of education expenses qualifying for a specific benefit by part or all of your VA payments. Where to file taxes for free This applies only to the part of your VA payments that is required to be used for education expenses. Where to file taxes for free You may want to visit the Veteran's Administration website at www. Where to file taxes for free gibill. Where to file taxes for free va. Where to file taxes for free gov for specific information about the various VA benefits for education. Where to file taxes for free Example. Where to file taxes for free You have returned to college and are receiving two education benefits under the latest GI Bill: (1) a $1,534 monthly basic housing allowance (BHA) that is directly deposited to your checking account, and (2) $3,840 paid directly to your college for tuition. Where to file taxes for free Neither of these benefits is taxable and you do not report them on your tax return. Where to file taxes for free You also want to claim an American opportunity credit on your return. Where to file taxes for free You paid $5,000 in qualified education expenses (see chapter 2, American Opportunity Credit , later). Where to file taxes for free To figure the amount of credit, you must first subtract the $3,840 from your qualified education expenses because this payment under the GI Bill was required to be used for education expenses. Where to file taxes for free You do not subtract any amount of the BHA because it was paid to you and its use was not restricted. Where to file taxes for free Qualified Tuition Reduction If you are allowed to study tuition free or for a reduced rate of tuition, you may not have to pay tax on this benefit. Where to file taxes for free This is called a “tuition reduction. Where to file taxes for free ” You do not have to include a qualified tuition reduction in your income. Where to file taxes for free A tuition reduction is qualified only if you receive it from, and use it at, an eligible educational institution. Where to file taxes for free You do not have to use the tuition reduction at the eligible educational institution from which you received it. Where to file taxes for free In other words, if you work for an eligible educational institution and the institution arranges for you to take courses at another eligible educational institution without paying any tuition, you may not have to include the value of the free courses in your income. Where to file taxes for free The rules for determining if a tuition reduction is qualified, and therefore tax free, are different if the education provided is below the graduate level or is graduate education. Where to file taxes for free You must include in your income any tuition reduction you receive that is payment for your services. Where to file taxes for free Eligible educational institution. Where to file taxes for free   An eligible educational institution is one that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities. Where to file taxes for free Officers, owners, and highly compensated employees. Where to file taxes for free   Qualified tuition reductions apply to officers, owners, or highly compensated employees only if benefits are available to employees on a nondiscriminatory basis. Where to file taxes for free This means that the tuition reduction benefits must be available on substantially the same basis to each member of a group of employees. Where to file taxes for free The group must be defined under a reasonable classification set up by the employer. Where to file taxes for free The classification must not discriminate in favor of owners, officers, or highly compensated employees. Where to file taxes for free Payment for services. Where to file taxes for free   Generally, you must include in income the part of any qualified tuition reduction that represents payment for teaching, research, or other services by the student required as a condition of receiving the qualified tuition reduction. Where to file taxes for free This applies even if all candidates for a degree must perform the services to receive the degree. Where to file taxes for free (See below for exceptions. Where to file taxes for free ) Exceptions. Where to file taxes for free   You do not have to include in income the part of any scholarship or fellowship that represents payment for teaching, research, or other services if you receive the amount under: The National Health Service Corps Scholarship Program, or The Armed Forces Health Professions Scholarship and Financial Assistance Program. Where to file taxes for free Education Below the Graduate Level If you receive a tuition reduction for education below the graduate level (including primary, secondary, or high school), it is a qualified tuition reduction, and therefore tax free, only if your relationship to the educational institution providing the benefit is described below. Where to file taxes for free You are an employee of the eligible educational institution. Where to file taxes for free You were an employee of the eligible educational institution, but you retired or left on disability. Where to file taxes for free You are a widow or widower of an individual who died while an employee of the eligible educational institution or who retired or left on disability. Where to file taxes for free You are the dependent child or spouse of an individual described in (1) through (3), above. Where to file taxes for free Child of deceased parents. Where to file taxes for free   For purposes of the qualified tuition reduction, a child is a dependent child if the child is under age 25 and both parents have died. Where to file taxes for free Child of divorced parents. Where to file taxes for free   For purposes of the qualified tuition reduction, a dependent child of divorced parents is treated as the dependent of both parents. Where to file taxes for free Graduate Education A tuition reduction you receive for graduate education is qualified, and therefore tax free, if both of the following requirements are met. Where to file taxes for free It is provided by an eligible educational institution. Where to file taxes for free You are a graduate student who performs teaching or research activities for the educational institution. Where to file taxes for free You must include in income any other tuition reductions for graduate education that you receive. Where to file taxes for free How To Report Any tuition reduction that is taxable should be included as wages in box 1 of your Form W-2. Where to file taxes for free Report the amount from Form W-2, box 1, on line 7 (Form 1040 or Form 1040A) or line 1 (Form 1040EZ). Where to file taxes for free Prev  Up  Next   Home   More Online Publications