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Www Irs Gov E Pay

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Www irs gov e pay 3. Www irs gov e pay   Ordinary or Capital Gain or Loss for Business Property Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Section 1231 Gains and LossesNonrecaptured section 1231 losses. Www irs gov e pay Depreciation RecaptureSection 1245 Property Section 1250 Property Installment Sales Gifts Transfers at Death Like-Kind Exchanges and Involuntary Conversions Multiple Properties Introduction When you dispose of business property, your taxable gain or loss is usually a section 1231 gain or loss. Www irs gov e pay Its treatment as ordinary or capital is determined under rules for section 1231 transactions. Www irs gov e pay When you dispose of depreciable property (section 1245 property or section 1250 property) at a gain, you may have to recognize all or part of the gain as ordinary income under the depreciation recapture rules. Www irs gov e pay Any remaining gain is a section 1231 gain. Www irs gov e pay Topics - This chapter discusses: Section 1231 gains and losses Depreciation recapture Useful Items - You may want to see: Publication 534 Depreciating Property Placed in Service Before 1987 537 Installment Sales 547 Casualties, Disasters and Thefts 551 Basis of Assets 946 How To Depreciate Property Form (and Instructions) 4797 Sales of Business Property See chapter 5 for information about getting publications and forms. Www irs gov e pay Section 1231 Gains and Losses Section 1231 gains and losses are the taxable gains and losses from section 1231 transactions (discussed below). Www irs gov e pay Their treatment as ordinary or capital depends on whether you have a net gain or a net loss from all your section 1231 transactions. Www irs gov e pay If you have a gain from a section 1231 transaction, first determine whether any of the gain is ordinary income under the depreciation recapture rules (explained later). Www irs gov e pay Do not take that gain into account as section 1231 gain. Www irs gov e pay Section 1231 transactions. Www irs gov e pay   The following transactions result in gain or loss subject to section 1231 treatment. Www irs gov e pay Sales or exchanges of real property or depreciable personal property. Www irs gov e pay This property must be used in a trade or business and held longer than 1 year. Www irs gov e pay Generally, property held for the production of rents or royalties is considered to be used in a trade or business. Www irs gov e pay Depreciable personal property includes amortizable section 197 intangibles (described in chapter 2 under Other Dispositions). Www irs gov e pay Sales or exchanges of leaseholds. Www irs gov e pay The leasehold must be used in a trade or business and held longer than 1 year. Www irs gov e pay Sales or exchanges of cattle and horses. Www irs gov e pay The cattle and horses must be held for draft, breeding, dairy, or sporting purposes and held for 2 years or longer. Www irs gov e pay Sales or exchanges of other livestock. Www irs gov e pay This livestock does not include poultry. Www irs gov e pay It must be held for draft, breeding, dairy, or sporting purposes and held for 1 year or longer. Www irs gov e pay Sales or exchanges of unharvested crops. Www irs gov e pay The crop and land must be sold, exchanged, or involuntarily converted at the same time and to the same person and the land must be held longer than 1 year. Www irs gov e pay You cannot keep any right or option to directly or indirectly reacquire the land (other than a right customarily incident to a mortgage or other security transaction). Www irs gov e pay Growing crops sold with a lease on the land, though sold to the same person in the same transaction, are not included. Www irs gov e pay Cutting of timber or disposal of timber, coal, or iron ore. Www irs gov e pay The cutting or disposal must be treated as a sale, as described in chapter 2 under Timber and Coal and Iron Ore. Www irs gov e pay Condemnations. Www irs gov e pay The condemned property must have been held longer than 1 year. Www irs gov e pay It must be business property or a capital asset held in connection with a trade or business or a transaction entered into for profit, such as investment property. Www irs gov e pay It cannot be property held for personal use. Www irs gov e pay Casualties and thefts. Www irs gov e pay The casualty or theft must have affected business property, property held for the production of rents and royalties, or investment property (such as notes and bonds). Www irs gov e pay You must have held the property longer than 1 year. Www irs gov e pay However, if your casualty or theft losses are more than your casualty or theft gains, neither the gains nor the losses are taken into account in the section 1231 computation. Www irs gov e pay For more information on casualties and thefts, see Publication 547. Www irs gov e pay Property for sale to customers. Www irs gov e pay   A sale, exchange, or involuntary conversion of property held mainly for sale to customers is not a section 1231 transaction. Www irs gov e pay If you will get back all, or nearly all, of your investment in the property by selling it rather than by using it up in your business, it is property held mainly for sale to customers. Www irs gov e pay Example. Www irs gov e pay You manufacture and sell steel cable, which you deliver on returnable reels that are depreciable property. Www irs gov e pay Customers make deposits on the reels, which you refund if the reels are returned within a year. Www irs gov e pay If they are not returned, you keep each deposit as the agreed-upon sales price. Www irs gov e pay Most reels are returned within the 1-year period. Www irs gov e pay You keep adequate records showing depreciation and other charges to the capitalized cost of the reels. Www irs gov e pay Under these conditions, the reels are not property held for sale to customers in the ordinary course of your business. Www irs gov e pay Any gain or loss resulting from their not being returned may be capital or ordinary, depending on your section 1231 transactions. Www irs gov e pay Copyrights. Www irs gov e pay    The sale of a copyright, a literary, musical, or artistic composition, or similar property is not a section 1231 transaction if your personal efforts created the property, or if you acquired the property in a way that entitled you to the basis of the previous owner whose personal efforts created it (for example, if you receive the property as a gift). Www irs gov e pay The sale of such property results in ordinary income and generally is reported in Part II of Form 4797. Www irs gov e pay Treatment as ordinary or capital. Www irs gov e pay   To determine the treatment of section 1231 gains and losses, combine all your section 1231 gains and losses for the year. Www irs gov e pay If you have a net section 1231 loss, it is ordinary loss. Www irs gov e pay If you have a net section 1231 gain, it is ordinary income up to the amount of your nonrecaptured section 1231 losses from previous years. Www irs gov e pay The rest, if any, is long-term capital gain. Www irs gov e pay Nonrecaptured section 1231 losses. Www irs gov e pay   Your nonrecaptured section 1231 losses are your net section 1231 losses for the previous 5 years that have not been applied against a net section 1231 gain. Www irs gov e pay Therefore, if in any of your five preceding tax years you had section 1231 losses, a net gain for the current year from the sale of section 1231 assets is ordinary gain to the extent of your prior losses. Www irs gov e pay These losses are applied against your net section 1231 gain beginning with the earliest loss in the 5-year period. Www irs gov e pay Example. Www irs gov e pay In 2013, Ben has a $2,000 net section 1231 gain. Www irs gov e pay To figure how much he has to report as ordinary income and long-term capital gain, he must first determine his section 1231 gains and losses from the previous 5-year period. Www irs gov e pay From 2008 through 2012 he had the following section 1231 gains and losses. Www irs gov e pay Year Amount 2008 -0- 2009 -0- 2010 ($2,500) 2011 -0- 2012 $1,800 Ben uses this information to figure how to report his net section 1231 gain for 2013 as shown below. Www irs gov e pay 1) Net section 1231 gain (2013) $2,000 2) Net section 1231 loss (2010) ($2,500)   3) Net section 1231 gain (2012) 1,800   4) Remaining net section 1231 loss from prior 5 years ($700)   5) Gain treated as  ordinary income $700 6) Gain treated as long-term  capital gain $1,300 Depreciation Recapture If you dispose of depreciable or amortizable property at a gain, you may have to treat all or part of the gain (even if otherwise nontaxable) as ordinary income. Www irs gov e pay To figure any gain that must be reported as ordinary income, you must keep permanent records of the facts necessary to figure the depreciation or amortization allowed or allowable on your property. Www irs gov e pay This includes the date and manner of acquisition, cost or other basis, depreciation or amortization, and all other adjustments that affect basis. Www irs gov e pay On property you acquired in a nontaxable exchange or as a gift, your records also must indicate the following information. Www irs gov e pay Whether the adjusted basis was figured using depreciation or amortization you claimed on other property. Www irs gov e pay Whether the adjusted basis was figured using depreciation or amortization another person claimed. Www irs gov e pay Corporate distributions. Www irs gov e pay   For information on property distributed by corporations, see Distributions to Shareholders in Publication 542, Corporations. Www irs gov e pay General asset accounts. Www irs gov e pay   Different rules apply to dispositions of property you depreciated using a general asset account. Www irs gov e pay For information on these rules, see Publication 946. Www irs gov e pay Section 1245 Property A gain on the disposition of section 1245 property is treated as ordinary income to the extent of depreciation allowed or allowable on the property. Www irs gov e pay See Gain Treated as Ordinary Income, later. Www irs gov e pay Any gain recognized that is more than the part that is ordinary income from depreciation is a section 1231 gain. Www irs gov e pay See Treatment as ordinary or capital under Section 1231 Gains and Losses, earlier. Www irs gov e pay Section 1245 property defined. Www irs gov e pay   Section 1245 property includes any property that is or has been subject to an allowance for depreciation or amortization and that is any of the following types of property. Www irs gov e pay Personal property (either tangible or intangible). Www irs gov e pay Other tangible property (except buildings and their structural components) used as any of the following. Www irs gov e pay See Buildings and structural components below. Www irs gov e pay An integral part of manufacturing, production, or extraction, or of furnishing transportation, communications, electricity, gas, water, or sewage disposal services. Www irs gov e pay A research facility in any of the activities in (a). Www irs gov e pay A facility in any of the activities in (a) for the bulk storage of fungible commodities (discussed on the next page). Www irs gov e pay That part of real property (not included in (2)) with an adjusted basis reduced by (but not limited to) the following. Www irs gov e pay Amortization of certified pollution control facilities. Www irs gov e pay The section 179 expense deduction. Www irs gov e pay Deduction for clean-fuel vehicles and certain refueling property. Www irs gov e pay Deduction for capital costs incurred in complying with Environmental Protection Agency sulfur regulations. Www irs gov e pay Deduction for certain qualified refinery property. Www irs gov e pay Deduction for qualified energy efficient commercial building property. Www irs gov e pay Amortization of railroad grading and tunnel bores, if in effect before the repeal by the Revenue Reconciliation Act of 1990. Www irs gov e pay (Repealed by Public Law 99-514, Tax Reform Act of 1986, section 242(a). Www irs gov e pay ) Certain expenditures for child care facilities if in effect before repeal by Public Law 101-58, Omnibus Budget Reconciliation Act of 1990, section 11801(a)(13) (except with regards to deductions made prior to November 5, 1990). Www irs gov e pay Expenditures to remove architectural and transportation barriers to the handicapped and elderly. Www irs gov e pay Deduction for qualified tertiary injectant expenses. Www irs gov e pay Certain reforestation expenditures. Www irs gov e pay Deduction for election to expense qualified advanced mine safety equipment property. Www irs gov e pay Single purpose agricultural (livestock) or horticultural structures. Www irs gov e pay Storage facilities (except buildings and their structural components) used in distributing petroleum or any primary product of petroleum. Www irs gov e pay Any railroad grading or tunnel bore. Www irs gov e pay Buildings and structural components. Www irs gov e pay   Section 1245 property does not include buildings and structural components. Www irs gov e pay The term building includes a house, barn, warehouse, or garage. Www irs gov e pay The term structural component includes walls, floors, windows, doors, central air conditioning systems, light fixtures, etc. Www irs gov e pay   Do not treat a structure that is essentially machinery or equipment as a building or structural component. Www irs gov e pay Also, do not treat a structure that houses property used as an integral part of an activity as a building or structural component if the structure's use is so closely related to the property's use that the structure can be expected to be replaced when the property it initially houses is replaced. Www irs gov e pay   The fact that the structure is specially designed to withstand the stress and other demands of the property and cannot be used economically for other purposes indicates it is closely related to the use of the property it houses. Www irs gov e pay Structures such as oil and gas storage tanks, grain storage bins, silos, fractionating towers, blast furnaces, basic oxygen furnaces, coke ovens, brick kilns, and coal tipples are not treated as buildings, but as section 1245 property. Www irs gov e pay Facility for bulk storage of fungible commodities. Www irs gov e pay   This term includes oil or gas storage tanks and grain storage bins. Www irs gov e pay Bulk storage means the storage of a commodity in a large mass before it is used. Www irs gov e pay For example, if a facility is used to store oranges that have been sorted and boxed, it is not used for bulk storage. Www irs gov e pay To be fungible, a commodity must be such that one part may be used in place of another. Www irs gov e pay   Stored materials that vary in composition, size, and weight are not fungible. Www irs gov e pay Materials are not fungible if one part cannot be used in place of another part and the materials cannot be estimated and replaced by simple reference to weight, measure, and number. Www irs gov e pay For example, the storage of different grades and forms of aluminum scrap is not storage of fungible commodities. Www irs gov e pay Gain Treated as Ordinary Income The gain treated as ordinary income on the sale, exchange, or involuntary conversion of section 1245 property, including a sale and leaseback transaction, is the lesser of the following amounts. Www irs gov e pay The depreciation and amortization allowed or allowable on the property. Www irs gov e pay The gain realized on the disposition (the amount realized from the disposition minus the adjusted basis of the property). Www irs gov e pay A limit on this amount for gain on like-kind exchanges and involuntary conversions is explained later. Www irs gov e pay For any other disposition of section 1245 property, ordinary income is the lesser of (1) earlier or the amount by which its fair market value is more than its adjusted basis. Www irs gov e pay See Gifts and Transfers at Death, later. Www irs gov e pay Use Part III of Form 4797 to figure the ordinary income part of the gain. Www irs gov e pay Depreciation taken on other property or taken by other taxpayers. Www irs gov e pay   Depreciation and amortization include the amounts you claimed on the section 1245 property as well as the following depreciation and amortization amounts. Www irs gov e pay Amounts you claimed on property you exchanged for, or converted to, your section 1245 property in a like-kind exchange or involuntary conversion. Www irs gov e pay Amounts a previous owner of the section 1245 property claimed if your basis is determined with reference to that person's adjusted basis (for example, the donor's depreciation deductions on property you received as a gift). Www irs gov e pay Depreciation and amortization. Www irs gov e pay   Depreciation and amortization that must be recaptured as ordinary income include (but are not limited to) the following items. Www irs gov e pay Ordinary depreciation deductions. Www irs gov e pay Any special depreciation allowance you claimed. Www irs gov e pay Amortization deductions for all the following costs. Www irs gov e pay Acquiring a lease. Www irs gov e pay Lessee improvements. Www irs gov e pay Certified pollution control facilities. Www irs gov e pay Certain reforestation expenses. Www irs gov e pay Section 197 intangibles. Www irs gov e pay Childcare facility expenses made before 1982, if in effect before the repeal of IRC 188. Www irs gov e pay Franchises, trademarks, and trade names acquired before August 11, 1993. Www irs gov e pay The section 179 deduction. Www irs gov e pay Deductions for all the following costs. Www irs gov e pay Removing barriers to the disabled and the elderly. Www irs gov e pay Tertiary injectant expenses. Www irs gov e pay Depreciable clean-fuel vehicles and refueling property (minus the amount of any recaptured deduction). Www irs gov e pay Environmental cleanup costs. Www irs gov e pay Certain reforestation expenses. Www irs gov e pay Qualified disaster expenses. Www irs gov e pay Any basis reduction for the investment credit (minus any basis increase for credit recapture). Www irs gov e pay Any basis reduction for the qualified electric vehicle credit (minus any basis increase for credit recapture). Www irs gov e pay Example. Www irs gov e pay You file your returns on a calendar year basis. Www irs gov e pay In February 2011, you bought and placed in service for 100% use in your business a light-duty truck (5-year property) that cost $10,000. Www irs gov e pay You used the half-year convention and your MACRS deductions for the truck were $2,000 in 2011 and $3,200 in 2012. Www irs gov e pay You did not take the section 179 deduction. Www irs gov e pay You sold the truck in May 2013 for $7,000. Www irs gov e pay The MACRS deduction in 2013, the year of sale, is $960 (½ of $1,920). Www irs gov e pay Figure the gain treated as ordinary income as follows. Www irs gov e pay 1) Amount realized $7,000 2) Cost (February 2011) $10,000   3) Depreciation allowed or allowable (MACRS deductions: $2,000 + $3,200 + $960) 6,160   4) Adjusted basis (subtract line 3 from line 2) $3,840 5) Gain realized (subtract line 4 from line 1) $3,160 6) Gain treated as ordinary income (lesser of line 3 or line 5) $3,160 Depreciation on other tangible property. Www irs gov e pay   You must take into account depreciation during periods when the property was not used as an integral part of an activity or did not constitute a research or storage facility, as described earlier under Section 1245 property. Www irs gov e pay   For example, if depreciation deductions taken on certain storage facilities amounted to $10,000, of which $6,000 is from the periods before their use in a prescribed business activity, you must use the entire $10,000 in determining ordinary income from depreciation. Www irs gov e pay Depreciation allowed or allowable. Www irs gov e pay   The greater of the depreciation allowed or allowable is generally the amount to use in figuring the part of gain to report as ordinary income. Www irs gov e pay However, if in prior years, you have consistently taken proper deductions under one method, the amount allowed for your prior years will not be increased even though a greater amount would have been allowed under another proper method. Www irs gov e pay If you did not take any deduction at all for depreciation, your adjustments to basis for depreciation allowable are figured by using the straight line method. Www irs gov e pay   This treatment applies only when figuring what part of gain is treated as ordinary income under the rules for section 1245 depreciation recapture. Www irs gov e pay Multiple asset accounts. Www irs gov e pay   In figuring ordinary income from depreciation, you can treat any number of units of section 1245 property in a single depreciation account as one item if the total ordinary income from depreciation figured by using this method is not less than it would be if depreciation on each unit were figured separately. Www irs gov e pay Example. Www irs gov e pay In one transaction you sold 50 machines, 25 trucks, and certain other property that is not section 1245 property. Www irs gov e pay All of the depreciation was recorded in a single depreciation account. Www irs gov e pay After dividing the total received among the various assets sold, you figured that each unit of section 1245 property was sold at a gain. Www irs gov e pay You can figure the ordinary income from depreciation as if the 50 machines and 25 trucks were one item. Www irs gov e pay However, if five of the trucks had been sold at a loss, only the 50 machines and 20 of the trucks could be treated as one item in determining the ordinary income from depreciation. Www irs gov e pay Normal retirement. Www irs gov e pay   The normal retirement of section 1245 property in multiple asset accounts does not require recognition of gain as ordinary income from depreciation if your method of accounting for asset retirements does not require recognition of that gain. Www irs gov e pay Section 1250 Property Gain on the disposition of section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable on the property. Www irs gov e pay To determine the additional depreciation on section 1250 property, see Additional Depreciation, below. Www irs gov e pay Section 1250 property defined. Www irs gov e pay   This includes all real property that is subject to an allowance for depreciation and that is not and never has been section 1245 property. Www irs gov e pay It includes a leasehold of land or section 1250 property subject to an allowance for depreciation. Www irs gov e pay A fee simple interest in land is not included because it is not depreciable. Www irs gov e pay   If your section 1250 property becomes section 1245 property because you change its use, you can never again treat it as section 1250 property. Www irs gov e pay Additional Depreciation If you hold section 1250 property longer than 1 year, the additional depreciation is the actual depreciation adjustments that are more than the depreciation figured using the straight line method. Www irs gov e pay For a list of items treated as depreciation adjustments, see Depreciation and amortization under Gain Treated as Ordinary Income, earlier. Www irs gov e pay For the treatment of unrecaptured section 1250 gain, see Capital Gains Tax Rate, later. Www irs gov e pay If you hold section 1250 property for 1 year or less, all the depreciation is additional depreciation. Www irs gov e pay You will not have additional depreciation if any of the following conditions apply to the property disposed of. Www irs gov e pay You figured depreciation for the property using the straight line method or any other method that does not result in depreciation that is more than the amount figured by the straight line method; you held the property longer than 1 year; and, if the property was qualified property, you made a timely election not to claim any special depreciation allowance. Www irs gov e pay In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction for property placed in service before January 1, 2010. Www irs gov e pay The property was residential low-income rental property you held for 162/3 years or longer. Www irs gov e pay For low-income rental housing on which the special 60-month depreciation for rehabilitation expenses was allowed, the 162/3 years start when the rehabilitated property is placed in service. Www irs gov e pay You chose the alternate ACRS method for the property, which was a type of 15-, 18-, or 19-year real property covered by the section 1250 rules. Www irs gov e pay The property was residential rental property or nonresidential real property placed in service after 1986 (or after July 31, 1986, if the choice to use MACRS was made); you held it longer than 1 year; and, if the property was qualified property, you made a timely election not to claim any special depreciation allowance. Www irs gov e pay These properties are depreciated using the straight line method. Www irs gov e pay In addition, if the property was in a renewal community, you must not have elected to claim a commercial revitalization deduction. Www irs gov e pay Depreciation taken by other taxpayers or on other property. Www irs gov e pay   Additional depreciation includes all depreciation adjustments to the basis of section 1250 property whether allowed to you or another person (as carryover basis property). Www irs gov e pay Example. Www irs gov e pay Larry Johnson gives his son section 1250 property on which he took $2,000 in depreciation deductions, of which $500 is additional depreciation. Www irs gov e pay Immediately after the gift, the son's adjusted basis in the property is the same as his father's and reflects the $500 additional depreciation. Www irs gov e pay On January 1 of the next year, after taking depreciation deductions of $1,000 on the property, of which $200 is additional depreciation, the son sells the property. Www irs gov e pay At the time of sale, the additional depreciation is $700 ($500 allowed the father plus $200 allowed the son). Www irs gov e pay Depreciation allowed or allowable. Www irs gov e pay   The greater of depreciation allowed or allowable (to any person who held the property if the depreciation was used in figuring its adjusted basis in your hands) generally is the amount to use in figuring the part of the gain to be reported as ordinary income. Www irs gov e pay If you can show that the deduction allowed for any tax year was less than the amount allowable, the lesser figure will be the depreciation adjustment for figuring additional depreciation. Www irs gov e pay Retired or demolished property. Www irs gov e pay   The adjustments reflected in adjusted basis generally do not include deductions for depreciation on retired or demolished parts of section 1250 property unless these deductions are reflected in the basis of replacement property that is section 1250 property. Www irs gov e pay Example. Www irs gov e pay A wing of your building is totally destroyed by fire. Www irs gov e pay The depreciation adjustments figured in the adjusted basis of the building after the wing is destroyed do not include any deductions for depreciation on the destroyed wing unless it is replaced and the adjustments for depreciation on it are reflected in the basis of the replacement property. Www irs gov e pay Figuring straight line depreciation. Www irs gov e pay   The useful life and salvage value you would have used to figure straight line depreciation are the same as those used under the depreciation method you actually used. Www irs gov e pay If you did not use a useful life under the depreciation method actually used (such as with the units-of-production method) or if you did not take salvage value into account (such as with the declining balance method), the useful life or salvage value for figuring what would have been the straight line depreciation is the useful life and salvage value you would have used under the straight line method. Www irs gov e pay   Salvage value and useful life are not used for the ACRS method of depreciation. Www irs gov e pay Figure straight line depreciation for ACRS real property by using its 15-, 18-, or 19-year recovery period as the property's useful life. Www irs gov e pay   The straight line method is applied without any basis reduction for the investment credit. Www irs gov e pay Property held by lessee. Www irs gov e pay   If a lessee makes a leasehold improvement, the lease period for figuring what would have been the straight line depreciation adjustments includes all renewal periods. Www irs gov e pay This inclusion of the renewal periods cannot extend the lease period taken into account to a period that is longer than the remaining useful life of the improvement. Www irs gov e pay The same rule applies to the cost of acquiring a lease. Www irs gov e pay   The term renewal period means any period for which the lease may be renewed, extended, or continued under an option exercisable by the lessee. Www irs gov e pay However, the inclusion of renewal periods cannot extend the lease by more than two-thirds of the period that was the basis on which the actual depreciation adjustments were allowed. Www irs gov e pay Applicable Percentage The applicable percentage used to figure the ordinary income because of additional depreciation depends on whether the real property you disposed of is nonresidential real property, residential rental property, or low-income housing. Www irs gov e pay The percentages for these types of real property are as follows. Www irs gov e pay Nonresidential real property. Www irs gov e pay   For real property that is not residential rental property, the applicable percentage for periods after 1969 is 100%. Www irs gov e pay For periods before 1970, the percentage is zero and no ordinary income because of additional depreciation before 1970 will result from its disposition. Www irs gov e pay Residential rental property. Www irs gov e pay   For residential rental property (80% or more of the gross income is from dwelling units) other than low-income housing, the applicable percentage for periods after 1975 is 100%. Www irs gov e pay The percentage for periods before 1976 is zero. Www irs gov e pay Therefore, no ordinary income because of additional depreciation before 1976 will result from a disposition of residential rental property. Www irs gov e pay Low-income housing. Www irs gov e pay    Low-income housing includes all the following types of residential rental property. Www irs gov e pay Federally assisted housing projects if the mortgage is insured under section 221(d)(3) or 236 of the National Housing Act or housing financed or assisted by direct loan or tax abatement under similar provisions of state or local laws. Www irs gov e pay Low-income rental housing for which a depreciation deduction for rehabilitation expenses was allowed. Www irs gov e pay Low-income rental housing held for occupancy by families or individuals eligible to receive subsidies under section 8 of the United States Housing Act of 1937, as amended, or under provisions of state or local laws that authorize similar subsidies for low-income families. Www irs gov e pay Housing financed or assisted by direct loan or insured under Title V of the Housing Act of 1949. Www irs gov e pay   The applicable percentage for low-income housing is 100% minus 1% for each full month the property was held over 100 full months. Www irs gov e pay If you have held low-income housing at least 16 years and 8 months, the percentage is zero and no ordinary income will result from its disposition. Www irs gov e pay Foreclosure. Www irs gov e pay   If low-income housing is disposed of because of foreclosure or similar proceedings, the monthly applicable percentage reduction is figured as if you disposed of the property on the starting date of the proceedings. Www irs gov e pay Example. Www irs gov e pay On June 1, 2001, you acquired low-income housing property. Www irs gov e pay On April 3, 2012 (130 months after the property was acquired), foreclosure proceedings were started on the property and on December 3, 2013 (150 months after the property was acquired), the property was disposed of as a result of the foreclosure proceedings. Www irs gov e pay The property qualifies for a reduced applicable percentage because it was held more than 100 full months. Www irs gov e pay The applicable percentage reduction is 30% (130 months minus 100 months) rather than 50% (150 months minus 100 months) because it does not apply after April 3, 2012, the starting date of the foreclosure proceedings. Www irs gov e pay Therefore, 70% of the additional depreciation is treated as ordinary income. Www irs gov e pay Holding period. Www irs gov e pay   The holding period used to figure the applicable percentage for low-income housing generally starts on the day after you acquired it. Www irs gov e pay For example, if you bought low-income housing on January 1, 1997, the holding period starts on January 2, 1997. Www irs gov e pay If you sold it on January 2, 2013, the holding period is exactly 192 full months. Www irs gov e pay The applicable percentage for additional depreciation is 8%, or 100% minus 1% for each full month the property was held over 100 full months. Www irs gov e pay Holding period for constructed, reconstructed, or erected property. Www irs gov e pay   The holding period used to figure the applicable percentage for low-income housing you constructed, reconstructed, or erected starts on the first day of the month it is placed in service in a trade or business, in an activity for the production of income, or in a personal activity. Www irs gov e pay Property acquired by gift or received in a tax-free transfer. Www irs gov e pay   For low-income housing you acquired by gift or in a tax-free transfer the basis of which is figured by reference to the basis in the hands of the transferor, the holding period for the applicable percentage includes the holding period of the transferor. Www irs gov e pay   If the adjusted basis of the property in your hands just after acquiring it is more than its adjusted basis to the transferor just before transferring it, the holding period of the difference is figured as if it were a separate improvement. Www irs gov e pay See Low-Income Housing With Two or More Elements, next. Www irs gov e pay Low-Income Housing With Two or More Elements If you dispose of low-income housing property that has two or more separate elements, the applicable percentage used to figure ordinary income because of additional depreciation may be different for each element. Www irs gov e pay The gain to be reported as ordinary income is the sum of the ordinary income figured for each element. Www irs gov e pay The following are the types of separate elements. Www irs gov e pay A separate improvement (defined below). Www irs gov e pay The basic section 1250 property plus improvements not qualifying as separate improvements. Www irs gov e pay The units placed in service at different times before all the section 1250 property is finished. Www irs gov e pay For example, this happens when a taxpayer builds an apartment building of 100 units and places 30 units in service (available for renting) on January 4, 2011, 50 on July 18, 2011, and the remaining 20 on January 18, 2012. Www irs gov e pay As a result, the apartment house consists of three separate elements. Www irs gov e pay The 36-month test for separate improvements. Www irs gov e pay   A separate improvement is any improvement (qualifying under The 1-year test, below) added to the capital account of the property, but only if the total of the improvements during the 36-month period ending on the last day of any tax year is more than the greatest of the following amounts. Www irs gov e pay Twenty-five percent of the adjusted basis of the property at the start of the first day of the 36-month period, or the first day of the holding period of the property, whichever is later. Www irs gov e pay Ten percent of the unadjusted basis (adjusted basis plus depreciation and amortization adjustments) of the property at the start of the period determined in (1). Www irs gov e pay $5,000. Www irs gov e pay The 1-year test. Www irs gov e pay   An addition to the capital account for any tax year (including a short tax year) is treated as an improvement only if the sum of all additions for the year is more than the greater of $2,000 or 1% of the unadjusted basis of the property. Www irs gov e pay The unadjusted basis is figured as of the start of that tax year or the holding period of the property, whichever is later. Www irs gov e pay In applying the 36-month test, improvements in any one of the 3 years are omitted entirely if the total improvements in that year do not qualify under the 1-year test. Www irs gov e pay Example. Www irs gov e pay The unadjusted basis of a calendar year taxpayer's property was $300,000 on January 1 of this year. Www irs gov e pay During the year, the taxpayer made improvements A, B, and C, which cost $1,000, $600, and $700, respectively. Www irs gov e pay The sum of the improvements, $2,300, is less than 1% of the unadjusted basis ($3,000), so the improvements do not satisfy the 1-year test and are not treated as improvements for the 36-month test. Www irs gov e pay However, if improvement C had cost $1,500, the sum of these improvements would have been $3,100. Www irs gov e pay Then, it would be necessary to apply the 36-month test to figure if the improvements must be treated as separate improvements. Www irs gov e pay Addition to the capital account. Www irs gov e pay   Any addition to the capital account made after the initial acquisition or completion of the property by you or any person who held the property during a period included in your holding period is to be considered when figuring the total amount of separate improvements. Www irs gov e pay   The addition to the capital account of depreciable real property is the gross addition not reduced by amounts attributable to replaced property. Www irs gov e pay For example, if a roof with an adjusted basis of $20,000 is replaced by a new roof costing $50,000, the improvement is the gross addition to the account, $50,000, and not the net addition of $30,000. Www irs gov e pay The $20,000 adjusted basis of the old roof is no longer reflected in the basis of the property. Www irs gov e pay The status of an addition to the capital account is not affected by whether it is treated as a separate property for determining depreciation deductions. Www irs gov e pay   Whether an expense is treated as an addition to the capital account may depend on the final disposition of the entire property. Www irs gov e pay If the expense item property and the basic property are sold in two separate transactions, the entire section 1250 property is treated as consisting of two distinct properties. Www irs gov e pay Unadjusted basis. Www irs gov e pay   In figuring the unadjusted basis as of a certain date, include the actual cost of all previous additions to the capital account plus those that did not qualify as separate improvements. Www irs gov e pay However, the cost of components retired before that date is not included in the unadjusted basis. Www irs gov e pay Holding period. Www irs gov e pay   Use the following guidelines for figuring the applicable percentage for property with two or more elements. Www irs gov e pay The holding period of a separate element placed in service before the entire section 1250 property is finished starts on the first day of the month that the separate element is placed in service. Www irs gov e pay The holding period for each separate improvement qualifying as a separate element starts on the day after the improvement is acquired or, for improvements constructed, reconstructed, or erected, the first day of the month that the improvement is placed in service. Www irs gov e pay The holding period for each improvement not qualifying as a separate element takes the holding period of the basic property. Www irs gov e pay   If an improvement by itself does not meet the 1-year test (greater of $2,000 or 1% of the unadjusted basis), but it does qualify as a separate improvement that is a separate element (when grouped with other improvements made during the tax year), determine the start of its holding period as follows. Www irs gov e pay Use the first day of a calendar month that is closest to the middle of the tax year. Www irs gov e pay If there are two first days of a month that are equally close to the middle of the year, use the earlier date. Www irs gov e pay Figuring ordinary income attributable to each separate element. Www irs gov e pay   Figure ordinary income attributable to each separate element as follows. Www irs gov e pay   Step 1. Www irs gov e pay Divide the element's additional depreciation after 1975 by the sum of all the elements' additional depreciation after 1975 to determine the percentage used in Step 2. Www irs gov e pay   Step 2. Www irs gov e pay Multiply the percentage figured in Step 1 by the lesser of the additional depreciation after 1975 for the entire property or the gain from disposition of the entire property (the difference between the fair market value or amount realized and the adjusted basis). Www irs gov e pay   Step 3. Www irs gov e pay Multiply the result in Step 2 by the applicable percentage for the element. Www irs gov e pay Example. Www irs gov e pay You sold at a gain of $25,000 low-income housing property subject to the ordinary income rules of section 1250. Www irs gov e pay The property consisted of four elements (W, X, Y, and Z). Www irs gov e pay Step 1. Www irs gov e pay The additional depreciation for each element is: W-$12,000; X-None; Y-$6,000; and Z-$6,000. Www irs gov e pay The sum of the additional depreciation for all the elements is $24,000. Www irs gov e pay Step 2. Www irs gov e pay The depreciation deducted on element X was $4,000 less than it would have been under the straight line method. Www irs gov e pay Additional depreciation on the property as a whole is $20,000 ($24,000 − $4,000). Www irs gov e pay $20,000 is lower than the $25,000 gain on the sale, so $20,000 is used in Step 2. Www irs gov e pay Step 3. Www irs gov e pay The applicable percentages to be used in Step 3 for the elements are: W-68%; X-85%; Y-92%; and Z-100%. Www irs gov e pay From these facts, the sum of the ordinary income for each element is figured as follows. Www irs gov e pay   Step 1 Step 2 Step 3 Ordinary Income W . Www irs gov e pay 50 $10,000 68% $ 6,800 X -0- -0- 85% -0- Y . Www irs gov e pay 25 5,000 92% 4,600 Z . Www irs gov e pay 25 5,000 100% 5,000 Sum of ordinary income of separate elements $16,400 Gain Treated as Ordinary Income To find what part of the gain from the disposition of section 1250 property is treated as ordinary income, follow these steps. Www irs gov e pay In a sale, exchange, or involuntary conversion of the property, figure the amount realized that is more than the adjusted basis of the property. Www irs gov e pay In any other disposition of the property, figure the fair market value that is more than the adjusted basis. Www irs gov e pay Figure the additional depreciation for the periods after 1975. Www irs gov e pay Multiply the lesser of (1) or (2) by the applicable percentage, discussed earlier under Applicable Percentage. Www irs gov e pay Stop here if this is residential rental property or if (2) is equal to or more than (1). Www irs gov e pay This is the gain treated as ordinary income because of additional depreciation. Www irs gov e pay Subtract (2) from (1). Www irs gov e pay Figure the additional depreciation for periods after 1969 but before 1976. Www irs gov e pay Add the lesser of (4) or (5) to the result in (3). Www irs gov e pay This is the gain treated as ordinary income because of additional depreciation. Www irs gov e pay A limit on the amount treated as ordinary income for gain on like-kind exchanges and involuntary conversions is explained later. Www irs gov e pay Use Form 4797, Part III, to figure the ordinary income part of the gain. Www irs gov e pay Corporations. Www irs gov e pay   Corporations, other than S corporations, must recognize an additional amount as ordinary income on the sale or other disposition of section 1250 property. Www irs gov e pay The additional amount treated as ordinary income is 20% of the excess of the amount that would have been ordinary income if the property were section 1245 property over the amount treated as ordinary income under section 1250. Www irs gov e pay Report this additional ordinary income on Form 4797, Part III, line 26 (f). Www irs gov e pay Installment Sales If you report the sale of property under the installment method, any depreciation recapture under section 1245 or 1250 is taxable as ordinary income in the year of sale. Www irs gov e pay This applies even if no payments are received in that year. Www irs gov e pay If the gain is more than the depreciation recapture income, report the rest of the gain using the rules of the installment method. Www irs gov e pay For this purpose, include the recapture income in your installment sale basis to determine your gross profit on the installment sale. Www irs gov e pay If you dispose of more than one asset in a single transaction, you must figure the gain on each asset separately so that it may be properly reported. Www irs gov e pay To do this, allocate the selling price and the payments you receive in the year of sale to each asset. Www irs gov e pay Report any depreciation recapture income in the year of sale before using the installment method for any remaining gain. Www irs gov e pay For a detailed discussion of installment sales, see Publication 537. Www irs gov e pay Gifts If you make a gift of depreciable personal property or real property, you do not have to report income on the transaction. Www irs gov e pay However, if the person who receives it (donee) sells or otherwise disposes of the property in a disposition subject to recapture, the donee must take into account the depreciation you deducted in figuring the gain to be reported as ordinary income. Www irs gov e pay For low-income housing, the donee must take into account the donor's holding period to figure the applicable percentage. Www irs gov e pay See Applicable Percentage and its discussion Holding period under Section 1250 Property, earlier. Www irs gov e pay Part gift and part sale or exchange. Www irs gov e pay   If you transfer depreciable personal property or real property for less than its fair market value in a transaction considered to be partly a gift and partly a sale or exchange and you have a gain because the amount realized is more than your adjusted basis, you must report ordinary income (up to the amount of gain) to recapture depreciation. Www irs gov e pay If the depreciation (additional depreciation, if section 1250 property) is more than the gain, the balance is carried over to the transferee to be taken into account on any later disposition of the property. Www irs gov e pay However, see Bargain sale to charity, later. Www irs gov e pay Example. Www irs gov e pay You transferred depreciable personal property to your son for $20,000. Www irs gov e pay When transferred, the property had an adjusted basis to you of $10,000 and a fair market value of $40,000. Www irs gov e pay You took depreciation of $30,000. Www irs gov e pay You are considered to have made a gift of $20,000, the difference between the $40,000 fair market value and the $20,000 sale price to your son. Www irs gov e pay You have a taxable gain on the transfer of $10,000 ($20,000 sale price minus $10,000 adjusted basis) that must be reported as ordinary income from depreciation. Www irs gov e pay You report $10,000 of your $30,000 depreciation as ordinary income on the transfer of the property, so the remaining $20,000 depreciation is carried over to your son for him to take into account on any later disposition of the property. Www irs gov e pay Gift to charitable organization. Www irs gov e pay   If you give property to a charitable organization, you figure your deduction for your charitable contribution by reducing the fair market value of the property by the ordinary income and short-term capital gain that would have resulted had you sold the property at its fair market value at the time of the contribution. Www irs gov e pay Thus, your deduction for depreciable real or personal property given to a charitable organization does not include the potential ordinary gain from depreciation. Www irs gov e pay   You also may have to reduce the fair market value of the contributed property by the long-term capital gain (including any section 1231 gain) that would have resulted had the property been sold. Www irs gov e pay For more information, see Giving Property That Has Increased in Value in Publication 526. Www irs gov e pay Bargain sale to charity. Www irs gov e pay   If you transfer section 1245 or section 1250 property to a charitable organization for less than its fair market value and a deduction for the contribution part of the transfer is allowable, your ordinary income from depreciation is figured under different rules. Www irs gov e pay First, figure the ordinary income as if you had sold the property at its fair market value. Www irs gov e pay Then, allocate that amount between the sale and the contribution parts of the transfer in the same proportion that you allocated your adjusted basis in the property to figure your gain. Www irs gov e pay See Bargain Sale under Gain or Loss From Sales and Exchanges in chapter 1. Www irs gov e pay Report as ordinary income the lesser of the ordinary income allocated to the sale or your gain from the sale. Www irs gov e pay Example. Www irs gov e pay You sold section 1245 property in a bargain sale to a charitable organization and are allowed a deduction for your contribution. Www irs gov e pay Your gain on the sale was $1,200, figured by allocating 20% of your adjusted basis in the property to the part sold. Www irs gov e pay If you had sold the property at its fair market value, your ordinary income would have been $5,000. Www irs gov e pay Your ordinary income is $1,000 ($5,000 × 20%) and your section 1231 gain is $200 ($1,200 – $1,000). Www irs gov e pay Transfers at Death When a taxpayer dies, no gain is reported on depreciable personal property or real property transferred to his or her estate or beneficiary. Www irs gov e pay For information on the tax liability of a decedent, see Publication 559, Survivors, Executors, and Administrators. Www irs gov e pay However, if the decedent disposed of the property while alive and, because of his or her method of accounting or for any other reason, the gain from the disposition is reportable by the estate or beneficiary, it must be reported in the same way the decedent would have had to report it if he or she were still alive. Www irs gov e pay Ordinary income due to depreciation must be reported on a transfer from an executor, administrator, or trustee to an heir, beneficiary, or other individual if the transfer is a sale or exchange on which gain is realized. Www irs gov e pay Example 1. Www irs gov e pay Janet Smith owned depreciable property that, upon her death, was inherited by her son. Www irs gov e pay No ordinary income from depreciation is reportable on the transfer, even though the value used for estate tax purposes is more than the adjusted basis of the property to Janet when she died. Www irs gov e pay However, if she sold the property before her death and realized a gain and if, because of her method of accounting, the proceeds from the sale are income in respect of a decedent reportable by her son, he must report ordinary income from depreciation. Www irs gov e pay Example 2. Www irs gov e pay The trustee of a trust created by a will transfers depreciable property to a beneficiary in satisfaction of a specific bequest of $10,000. Www irs gov e pay If the property had a value of $9,000 at the date used for estate tax valuation purposes, the $1,000 increase in value to the date of distribution is a gain realized by the trust. Www irs gov e pay Ordinary income from depreciation must be reported by the trust on the transfer. Www irs gov e pay Like-Kind Exchanges and Involuntary Conversions A like-kind exchange of your depreciable property or an involuntary conversion of the property into similar or related property will not result in your having to report ordinary income from depreciation unless money or property other than like-kind, similar, or related property is also received in the transaction. Www irs gov e pay For information on like-kind exchanges and involuntary conversions, see chapter 1. Www irs gov e pay Depreciable personal property. Www irs gov e pay   If you have a gain from either a like-kind exchange or an involuntary conversion of your depreciable personal property, the amount to be reported as ordinary income from depreciation is the amount figured under the rules explained earlier (see Section 1245 Property), limited to the sum of the following amounts. Www irs gov e pay The gain that must be included in income under the rules for like-kind exchanges or involuntary conversions. Www irs gov e pay The fair market value of the like-kind, similar, or related property other than depreciable personal property acquired in the transaction. Www irs gov e pay Example 1. Www irs gov e pay You bought a new machine for $4,300 cash plus your old machine for which you were allowed a $1,360 trade-in. Www irs gov e pay The old machine cost you $5,000 two years ago. Www irs gov e pay You took depreciation deductions of $3,950. Www irs gov e pay Even though you deducted depreciation of $3,950, the $310 gain ($1,360 trade-in allowance minus $1,050 adjusted basis) is not reported because it is postponed under the rules for like-kind exchanges and you received only depreciable personal property in the exchange. Www irs gov e pay Example 2. Www irs gov e pay You bought office machinery for $1,500 two years ago and deducted $780 depreciation. Www irs gov e pay This year a fire destroyed the machinery and you received $1,200 from your fire insurance, realizing a gain of $480 ($1,200 − $720 adjusted basis). Www irs gov e pay You choose to postpone reporting gain, but replacement machinery cost you only $1,000. Www irs gov e pay Your taxable gain under the rules for involuntary conversions is limited to the remaining $200 insurance payment. Www irs gov e pay All your replacement property is depreciable personal property, so your ordinary income from depreciation is limited to $200. Www irs gov e pay Example 3. Www irs gov e pay A fire destroyed office machinery you bought for $116,000. Www irs gov e pay The depreciation deductions were $91,640 and the machinery had an adjusted basis of $24,360. Www irs gov e pay You received a $117,000 insurance payment, realizing a gain of $92,640. Www irs gov e pay You immediately spent $105,000 of the insurance payment for replacement machinery and $9,000 for stock that qualifies as replacement property and you choose to postpone reporting the gain. Www irs gov e pay $114,000 of the $117,000 insurance payment was used to buy replacement property, so the gain that must be included in income under the rules for involuntary conversions is the part not spent, or $3,000. Www irs gov e pay The part of the insurance payment ($9,000) used to buy the nondepreciable property (the stock) also must be included in figuring the gain from depreciation. Www irs gov e pay The amount you must report as ordinary income on the transaction is $12,000, figured as follows. Www irs gov e pay 1) Gain realized on the transaction ($92,640) limited to depreciation ($91,640) $91,640 2) Gain includible in income (amount not spent) 3,000     Plus: fair market value of property other than depreciable personal property (the stock) 9,000 12,000 Amount reportable as ordinary income (lesser of (1) or (2)) $12,000   If, instead of buying $9,000 in stock, you bought $9,000 worth of depreciable personal property similar or related in use to the destroyed property, you would only report $3,000 as ordinary income. Www irs gov e pay Depreciable real property. Www irs gov e pay   If you have a gain from either a like-kind exchange or involuntary conversion of your depreciable real property, ordinary income from additional depreciation is figured under the rules explained earlier (see Section 1250 Property), limited to the greater of the following amounts. Www irs gov e pay The gain that must be reported under the rules for like-kind exchanges or involuntary conversions plus the fair market value of stock bought as replacement property in acquiring control of a corporation. Www irs gov e pay The gain you would have had to report as ordinary income from additional depreciation had the transaction been a cash sale minus the cost (or fair market value in an exchange) of the depreciable real property acquired. Www irs gov e pay   The ordinary income not reported for the year of the disposition is carried over to the depreciable real property acquired in the like-kind exchange or involuntary conversion as additional depreciation from the property disposed of. Www irs gov e pay Further, to figure the applicable percentage of additional depreciation to be treated as ordinary income, the holding period starts over for the new property. Www irs gov e pay Example. Www irs gov e pay The state paid you $116,000 when it condemned your depreciable real property for public use. Www irs gov e pay You bought other real property similar in use to the property condemned for $110,000 ($15,000 for depreciable real property and $95,000 for land). Www irs gov e pay You also bought stock for $5,000 to get control of a corporation owning property similar in use to the property condemned. Www irs gov e pay You choose to postpone reporting the gain. Www irs gov e pay If the transaction had been a sale for cash only, under the rules described earlier, $20,000 would have been reportable as ordinary income because of additional depreciation. Www irs gov e pay The ordinary income to be reported is $6,000, which is the greater of the following amounts. Www irs gov e pay The gain that must be reported under the rules for involuntary conversions, $1,000 ($116,000 − $115,000) plus the fair market value of stock bought as qualified replacement property, $5,000, for a total of $6,000. Www irs gov e pay The gain you would have had to report as ordinary income from additional depreciation ($20,000) had this transaction been a cash sale minus the cost of the depreciable real property bought ($15,000), or $5,000. Www irs gov e pay   The ordinary income not reported, $14,000 ($20,000 − $6,000), is carried over to the depreciable real property you bought as additional depreciation. Www irs gov e pay Basis of property acquired. Www irs gov e pay   If the ordinary income you have to report because of additional depreciation is limited, the total basis of the property you acquired is its fair market value (its cost, if bought to replace property involuntarily converted into money) minus the gain postponed. Www irs gov e pay   If you acquired more than one item of property, allocate the total basis among the properties in proportion to their fair market value (their cost, in an involuntary conversion into money). Www irs gov e pay However, if you acquired both depreciable real property and other property, allocate the total basis as follows. Www irs gov e pay Subtract the ordinary income because of additional depreciation that you do not have to report from the fair market value (or cost) of the depreciable real property acquired. Www irs gov e pay Add the fair market value (or cost) of the other property acquired to the result in (1). Www irs gov e pay Divide the result in (1) by the result in (2). Www irs gov e pay Multiply the total basis by the result in (3). Www irs gov e pay This is the basis of the depreciable real property acquired. Www irs gov e pay If you acquired more than one item of depreciable real property, allocate this basis amount among the properties in proportion to their fair market value (or cost). Www irs gov e pay Subtract the result in (4) from the total basis. Www irs gov e pay This is the basis of the other property acquired. Www irs gov e pay If you acquired more than one item of other property, allocate this basis amount among the properties in proportion to their fair market value (or cost). Www irs gov e pay Example 1. Www irs gov e pay In 1988, low-income housing property that you acquired and placed in service in 1983 was destroyed by fire and you received a $90,000 insurance payment. Www irs gov e pay The property's adjusted basis was $38,400, with additional depreciation of $14,932. Www irs gov e pay On December 1, 1988, you used the insurance payment to acquire and place in service replacement low-income housing property. Www irs gov e pay Your realized gain from the involuntary conversion was $51,600 ($90,000 − $38,400). Www irs gov e pay You chose to postpone reporting the gain under the involuntary conversion rules. Www irs gov e pay Under the rules for depreciation recapture on real property, the ordinary gain was $14,932, but you did not have to report any of it because of the limit for involuntary conversions. Www irs gov e pay The basis of the replacement low-income housing property was its $90,000 cost minus the $51,600 gain you postponed, or $38,400. Www irs gov e pay The $14,932 ordinary gain you did not report is treated as additional depreciation on the replacement property. Www irs gov e pay If you sold the property in 2013, your holding period for figuring the applicable percentage of additional depreciation to report as ordinary income will have begun December 2, 1988, the day after you acquired the property. Www irs gov e pay Example 2. Www irs gov e pay John Adams received a $90,000 fire insurance payment for depreciable real property (office building) with an adjusted basis of $30,000. Www irs gov e pay He uses the whole payment to buy property similar in use, spending $42,000 for depreciable real property and $48,000 for land. Www irs gov e pay He chooses to postpone reporting the $60,000 gain realized on the involuntary conversion. Www irs gov e pay Of this gain, $10,000 is ordinary income from additional depreciation but is not reported because of the limit for involuntary conversions of depreciable real property. Www irs gov e pay The basis of the property bought is $30,000 ($90,000 − $60,000), allocated as follows. Www irs gov e pay The $42,000 cost of depreciable real property minus $10,000 ordinary income not reported is $32,000. Www irs gov e pay The $48,000 cost of other property (land) plus the $32,000 figured in (1) is $80,000. Www irs gov e pay The $32,000 figured in (1) divided by the $80,000 figured in (2) is 0. Www irs gov e pay 4. Www irs gov e pay The basis of the depreciable real property is $12,000. Www irs gov e pay This is the $30,000 total basis multiplied by the 0. Www irs gov e pay 4 figured in (3). Www irs gov e pay The basis of the other property (land) is $18,000. Www irs gov e pay This is the $30,000 total basis minus the $12,000 figured in (4). Www irs gov e pay The ordinary income that is not reported ($10,000) is carried over as additional depreciation to the depreciable real property that was bought and may be taxed as ordinary income on a later disposition. Www irs gov e pay Multiple Properties If you dispose of depreciable property and other property in one transaction and realize a gain, you must allocate the amount realized between the two types of property in proportion to their respective fair market values to figure the part of your gain to be reported as ordinary income from depreciation. Www irs gov e pay Different rules may apply to the allocation of the amount realized on the sale of a business that includes a group of assets. Www irs gov e pay See chapter 2. Www irs gov e pay In general, if a buyer and seller have adverse interests as to the allocation of the amount realized between the depreciable property and other property, any arm's length agreement between them will establish the allocation. Www irs gov e pay In the absence of an agreement, the allocation should be made by taking into account the appropriate facts and circumstances. Www irs gov e pay These include, but are not limited to, a comparison between the depreciable property and all the other property being disposed of in the transaction. Www irs gov e pay The comparison should take into account all the following facts and circumstances. Www irs gov e pay The original cost and reproduction cost of construction, erection, or production. Www irs gov e pay The remaining economic useful life. Www irs gov e pay The state of obsolescence. Www irs gov e pay The anticipated expenditures required to maintain, renovate, or modernize the properties. Www irs gov e pay Like-kind exchanges and involuntary conversions. Www irs gov e pay   If you dispose of and acquire depreciable personal property and other property (other than depreciable real property) in a like-kind exchange or involuntary conversion, the amount realized is allocated in the following way. Www irs gov e pay The amount allocated to the depreciable personal property disposed of is treated as consisting of, first, the fair market value of the depreciable personal property acquired and, second (to the extent of any remaining balance), the fair market value of the other property acquired. Www irs gov e pay The amount allocated to the other property disposed of is treated as consisting of the fair market value of all property acquired that has not already been taken into account. Www irs gov e pay   If you dispose of and acquire depreciable real property and other property in a like-kind exchange or involuntary conversion, the amount realized is allocated in the following way. Www irs gov e pay The amount allocated to each of the three types of property (depreciable real property, depreciable personal property, or other property) disposed of is treated as consisting of, first, the fair market value of that type of property acquired and, second (to the extent of any remaining balance), any excess fair market value of the other types of property acquired. Www irs gov e pay If the excess fair market value is more than the remaining balance of the amount realized and is from both of the other two types of property, you can apply the unallocated amount in any manner you choose. Www irs gov e pay Example. Www irs gov e pay A fire destroyed your property with a total fair market value of $50,000. Www irs gov e pay It consisted of machinery worth $30,000 and nondepreciable property worth $20,000. Www irs gov e pay You received an insurance payment of $40,000 and immediately used it with $10,000 of your own funds (for a total of $50,000) to buy machinery with a fair market value of $15,000 and nondepreciable property with a fair market value of $35,000. Www irs gov e pay The adjusted basis of the destroyed machinery was $5,000 and your depreciation on it was $35,000. Www irs gov e pay You choose to postpone reporting your gain from the involuntary conversion. Www irs gov e pay You must report $9,000 as ordinary income from depreciation arising from this transaction, figured as follows. Www irs gov e pay The $40,000 insurance payment must be allocated between the machinery and the other property destroyed in proportion to the fair market value of each. Www irs gov e pay The amount allocated to the machinery is 30,000/50,000 × $40,000, or $24,000. Www irs gov e pay The amount allocated to the other property is 20,000/50,000 × $40,000, or $16,000. Www irs gov e pay Your gain on the involuntary conversion of the machinery is $24,000 minus $5,000 adjusted basis, or $19,000. Www irs gov e pay The $24,000 allocated to the machinery disposed of is treated as consisting of the $15,000 fair market value of the replacement machinery bought and $9,000 of the fair market value of other property bought in the transaction. Www irs gov e pay All $16,000 allocated to the other property disposed of is treated as consisting of the fair market value of the other property that was bought. Www irs gov e pay Your potential ordinary income from depreciation is $19,000, the gain on the machinery, because it is less than the $35,000 depreciation. Www irs gov e pay However, the amount you must report as ordinary income is limited to the $9,000 included in the amount realized for the machinery that represents the fair market value of property other than the depreciable property you bought. 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The Www Irs Gov E Pay

Www irs gov e pay 7. Www irs gov e pay   Interest Income Table of Contents Reminder Introduction Useful Items - You may want to see: General InformationSSN for joint account. Www irs gov e pay Custodian account for your child. Www irs gov e pay Penalty for failure to supply SSN. Www irs gov e pay Reporting backup withholding. Www irs gov e pay Savings account with parent as trustee. Www irs gov e pay Interest not reported on Form 1099-INT. Www irs gov e pay Nominees. Www irs gov e pay Incorrect amount. Www irs gov e pay Information reporting requirement. Www irs gov e pay Taxable InterestInterest subject to penalty for early withdrawal. Www irs gov e pay Money borrowed to invest in certificate of deposit. Www irs gov e pay U. Www irs gov e pay S. Www irs gov e pay Savings Bonds Education Savings Bond Program U. Www irs gov e pay S. Www irs gov e pay Treasury Bills, Notes, and Bonds Bonds Sold Between Interest Dates Insurance State or Local Government Obligations Original Issue Discount (OID) When To Report Interest IncomeConstructive receipt. Www irs gov e pay How To Report Interest IncomeSchedule B (Form 1040A or 1040). Www irs gov e pay Reporting tax-exempt interest. Www irs gov e pay U. Www irs gov e pay S. Www irs gov e pay savings bond interest previously reported. Www irs gov e pay Reminder Foreign-source income. Www irs gov e pay  If you are a U. Www irs gov e pay S. Www irs gov e pay citizen with interest income from sources outside the United States (foreign income), you must report that income on your tax return unless it is exempt by U. Www irs gov e pay S. Www irs gov e pay law. Www irs gov e pay This is true whether you reside inside or outside the United States and whether or not you receive a Form 1099 from the foreign payer. Www irs gov e pay Introduction This chapter discusses the following topics. Www irs gov e pay Different types of interest income. Www irs gov e pay What interest is taxable and what interest is nontaxable. Www irs gov e pay When to report interest income. Www irs gov e pay How to report interest income on your tax return. Www irs gov e pay In general, any interest you receive or that is credited to your account and can be withdrawn is taxable income. Www irs gov e pay Exceptions to this rule are discussed later in this chapter. Www irs gov e pay You may be able to deduct expenses you have in earning this income on Schedule A (Form 1040) if you itemize your deductions. Www irs gov e pay See Money borrowed to invest in certificate of deposit , later, and chapter 28. Www irs gov e pay Useful Items - You may want to see: Publication 537 Installment Sales 550 Investment Income and Expenses 1212 Guide to Original Issue Discount (OID) Instruments Form (and Instructions) Schedule B (Form 1040A or 1040) Interest and Ordinary Dividends 8815 Exclusion of Interest From Series EE and I U. Www irs gov e pay S. Www irs gov e pay Savings Bonds Issued After 1989 8818 Optional Form To Record Redemption of Series EE and I U. Www irs gov e pay S. Www irs gov e pay Savings Bonds Issued After 1989 General Information A few items of general interest are covered here. Www irs gov e pay Recordkeeping. Www irs gov e pay You should keep a list showing sources and interest amounts received during the year. Www irs gov e pay Also, keep the forms you receive showing your interest income (Forms 1099-INT, for example) as an important part of your records. Www irs gov e pay Tax on unearned income of certain children. Www irs gov e pay    Part of a child's 2013 unearned income may be taxed at the parent's tax rate. Www irs gov e pay If so, Form 8615, Tax for Certain Children Who Have Unearned Income, must be completed and attached to the child's tax return. Www irs gov e pay If not, Form 8615 is not required and the child's income is taxed at his or her own tax rate. Www irs gov e pay   Some parents can choose to include the child's interest and dividends on the parent's return. Www irs gov e pay If you can, use Form 8814, Parents' Election To Report Child's Interest and Dividends, for this purpose. Www irs gov e pay   For more information about the tax on unearned income of children and the parents' election, see chapter 31. Www irs gov e pay Beneficiary of an estate or trust. Www irs gov e pay   Interest you receive as a beneficiary of an estate or trust is generally taxable income. Www irs gov e pay You should receive a Schedule K-1 (Form 1041), Beneficiary's Share of Income, Deductions, Credits, etc. Www irs gov e pay , from the fiduciary. Www irs gov e pay Your copy of Schedule K-1 (Form 1041) and its instructions will tell you where to report the income on your Form 1040. Www irs gov e pay Social security number (SSN). Www irs gov e pay   You must give your name and SSN or individual tax identification number (ITIN) to any person required by federal tax law to make a return, statement, or other document that relates to you. Www irs gov e pay This includes payers of interest. Www irs gov e pay If you do not give your SSN or ITIN to the payer of interest, you may have to pay a penalty. Www irs gov e pay SSN for joint account. Www irs gov e pay   If the funds in a joint account belong to one person, list that person's name first on the account and give that person's SSN to the payer. Www irs gov e pay (For information on who owns the funds in a joint account, see Joint accounts , later. Www irs gov e pay ) If the joint account contains combined funds, give the SSN of the person whose name is listed first on the account. Www irs gov e pay This is because only one name and SSN can be shown on Form 1099. Www irs gov e pay   These rules apply both to joint ownership by a married couple and to joint ownership by other individuals. Www irs gov e pay For example, if you open a joint savings account with your child using funds belonging to the child, list the child's name first on the account and give the child's SSN. Www irs gov e pay Custodian account for your child. Www irs gov e pay   If your child is the actual owner of an account that is recorded in your name as custodian for the child, give the child's SSN to the payer. Www irs gov e pay For example, you must give your child's SSN to the payer of interest on an account owned by your child, even though the interest is paid to you as custodian. Www irs gov e pay Penalty for failure to supply SSN. Www irs gov e pay   If you do not give your SSN to the payer of interest, you may have to pay a penalty. Www irs gov e pay See Failure to supply SSN under Penalties in chapter 1. Www irs gov e pay Backup withholding also may apply. Www irs gov e pay Backup withholding. Www irs gov e pay   Your interest income is generally not subject to regular withholding. Www irs gov e pay However, it may be subject to backup withholding to ensure that income tax is collected on the income. Www irs gov e pay Under backup withholding, the payer of interest must withhold, as income tax, on the amount you are paid, applying the appropriate withholding rate. Www irs gov e pay   Backup withholding may also be required if the IRS has determined that you underreported your interest or dividend income. Www irs gov e pay For more information, see Backup Withholding in chapter 4. Www irs gov e pay Reporting backup withholding. Www irs gov e pay   If backup withholding is deducted from your interest income, the payer must give you a Form 1099-INT for the year indicating the amount withheld. Www irs gov e pay The Form 1099-INT will show any backup withholding as “Federal income tax withheld. Www irs gov e pay ” Joint accounts. Www irs gov e pay   If two or more persons hold property (such as a savings account or bond) as joint tenants, tenants by the entirety, or tenants in common, each person's share of any interest from the property is determined by local law. Www irs gov e pay Income from property given to a child. Www irs gov e pay   Property you give as a parent to your child under the Model Gifts of Securities to Minors Act, the Uniform Gifts to Minors Act, or any similar law becomes the child's property. Www irs gov e pay   Income from the property is taxable to the child, except that any part used to satisfy a legal obligation to support the child is taxable to the parent or guardian having that legal obligation. Www irs gov e pay Savings account with parent as trustee. Www irs gov e pay   Interest income from a savings account opened for a minor child, but placed in the name and subject to the order of the parents as trustees, is taxable to the child if, under the law of the state in which the child resides, both of the following are true. Www irs gov e pay The savings account legally belongs to the child. Www irs gov e pay The parents are not legally permitted to use any of the funds to support the child. Www irs gov e pay Form 1099-INT. Www irs gov e pay   Interest income is generally reported to you on Form 1099-INT, or a similar statement, by banks, savings and loans, and other payers of interest. Www irs gov e pay This form shows you the interest you received during the year. Www irs gov e pay Keep this form for your records. Www irs gov e pay You do not have to attach it to your tax return. Www irs gov e pay   Report on your tax return the total interest income you receive for the tax year. Www irs gov e pay Interest not reported on Form 1099-INT. Www irs gov e pay   Even if you do not receive Form 1099-INT, you must still report all of your interest income. Www irs gov e pay For example, you may receive distributive shares of interest from partnerships or S corporations. Www irs gov e pay This interest is reported to you on Schedule K-1 (Form 1065), Partner's Share of Income, Deduction, Credits, etc. Www irs gov e pay , or Schedule K-1 (Form 1120S), Shareholder's Share of Income, Deductions, Credits, etc. Www irs gov e pay Nominees. Www irs gov e pay   Generally, if someone receives interest as a nominee for you, that person must give you a Form 1099-INT showing the interest received on your behalf. Www irs gov e pay   If you receive a Form 1099-INT that includes amounts belonging to another person, see the discussion on nominee distributions under How To Report Interest Income in chapter 1 of Publication 550, or Schedule B (Form 1040A or 1040) instructions. Www irs gov e pay Incorrect amount. Www irs gov e pay   If you receive a Form 1099-INT that shows an incorrect amount (or other incorrect information), you should ask the issuer for a corrected form. Www irs gov e pay The new Form 1099-INT you receive will be marked “Corrected. Www irs gov e pay ” Form 1099-OID. Www irs gov e pay   Reportable interest income also may be shown on Form 1099-OID, Original Issue Discount. Www irs gov e pay For more information about amounts shown on this form, see Original Issue Discount (OID) , later in this chapter. Www irs gov e pay Exempt-interest dividends. Www irs gov e pay   Exempt-interest dividends you receive from a mutual fund or other regulated investment company, including those received from a qualified fund of funds in any tax year beginning after December 22, 2010, are not included in your taxable income. Www irs gov e pay (However, see Information reporting requirement , next. Www irs gov e pay ) Exempt-interest dividends should be shown in box 10 of Form 1099-DIV. Www irs gov e pay You do not reduce your basis for distributions that are exempt-interest dividends. Www irs gov e pay Information reporting requirement. Www irs gov e pay   Although exempt-interest dividends are not taxable, you must show them on your tax return if you have to file. Www irs gov e pay This is an information reporting requirement and does not change the exempt-interest dividends into taxable income. Www irs gov e pay Note. Www irs gov e pay Exempt-interest dividends paid from specified private activity bonds may be subject to the alternative minimum tax. Www irs gov e pay See Alternative Minimum Tax (AMT) in chapter 30 for more information. Www irs gov e pay Chapter 1 of Publication 550 contains a discussion on private activity bonds under State or Local Government Obligations. Www irs gov e pay Interest on VA dividends. Www irs gov e pay   Interest on insurance dividends left on deposit with the Department of Veterans Affairs (VA) is not taxable. Www irs gov e pay This includes interest paid on dividends on converted United States Government Life Insurance and on National Service Life Insurance policies. Www irs gov e pay Individual retirement arrangements (IRAs). Www irs gov e pay   Interest on a Roth IRA generally is not taxable. Www irs gov e pay Interest on a traditional IRA is tax deferred. Www irs gov e pay You generally do not include it in your income until you make withdrawals from the IRA. Www irs gov e pay See chapter 17. Www irs gov e pay Taxable Interest Taxable interest includes interest you receive from bank accounts, loans you make to others, and other sources. Www irs gov e pay The following are some sources of taxable interest. Www irs gov e pay Dividends that are actually interest. Www irs gov e pay   Certain distributions commonly called dividends are actually interest. Www irs gov e pay You must report as interest so-called “dividends” on deposits or on share accounts in: Cooperative banks, Credit unions, Domestic building and loan associations, Domestic savings and loan associations, Federal savings and loan associations, and Mutual savings banks. Www irs gov e pay  The “dividends” will be shown as interest income on Form 1099-INT. Www irs gov e pay Money market funds. Www irs gov e pay   Money market funds pay dividends and are offered by nonbank financial institutions, such as mutual funds and stock brokerage houses. Www irs gov e pay Generally, amounts you receive from money market funds should be reported as dividends, not as interest. Www irs gov e pay Certificates of deposit and other deferred interest accounts. Www irs gov e pay   If you open any of these accounts, interest may be paid at fixed intervals of 1 year or less during the term of the account. Www irs gov e pay You generally must include this interest in your income when you actually receive it or are entitled to receive it without paying a substantial penalty. Www irs gov e pay The same is true for accounts that mature in 1 year or less and pay interest in a single payment at maturity. Www irs gov e pay If interest is deferred for more than 1 year, see Original Issue Discount (OID) , later. Www irs gov e pay Interest subject to penalty for early withdrawal. Www irs gov e pay   If you withdraw funds from a deferred interest account before maturity, you may have to pay a penalty. Www irs gov e pay You must report the total amount of interest paid or credited to your account during the year, without subtracting the penalty. Www irs gov e pay See Penalty on early withdrawal of savings in chapter 1 of Publication 550 for more information on how to report the interest and deduct the penalty. Www irs gov e pay Money borrowed to invest in certificate of deposit. Www irs gov e pay   The interest you pay on money borrowed from a bank or savings institution to meet the minimum deposit required for a certificate of deposit from the institution and the interest you earn on the certificate are two separate items. Www irs gov e pay You must report the total interest you earn on the certificate in your income. Www irs gov e pay If you itemize deductions, you can deduct the interest you pay as investment interest, up to the amount of your net investment income. Www irs gov e pay See Interest Expenses in chapter 3 of Publication 550. Www irs gov e pay Example. Www irs gov e pay You deposited $5,000 with a bank and borrowed $5,000 from the bank to make up the $10,000 minimum deposit required to buy a 6-month certificate of deposit. Www irs gov e pay The certificate earned $575 at maturity in 2013, but you received only $265, which represented the $575 you earned minus $310 interest charged on your $5,000 loan. Www irs gov e pay The bank gives you a Form 1099-INT for 2013 showing the $575 interest you earned. Www irs gov e pay The bank also gives you a statement showing that you paid $310 interest for 2013. Www irs gov e pay You must include the $575 in your income. Www irs gov e pay If you itemize your deductions on Schedule A (Form 1040), you can deduct $310, subject to the net investment income limit. Www irs gov e pay Gift for opening account. Www irs gov e pay   If you receive noncash gifts or services for making deposits or for opening an account in a savings institution, you may have to report the value as interest. Www irs gov e pay   For deposits of less than $5,000, gifts or services valued at more than $10 must be reported as interest. Www irs gov e pay For deposits of $5,000 or more, gifts or services valued at more than $20 must be reported as interest. Www irs gov e pay The value is determined by the cost to the financial institution. Www irs gov e pay Example. Www irs gov e pay You open a savings account at your local bank and deposit $800. Www irs gov e pay The account earns $20 interest. Www irs gov e pay You also receive a $15 calculator. Www irs gov e pay If no other interest is credited to your account during the year, the Form 1099-INT you receive will show $35 interest for the year. Www irs gov e pay You must report $35 interest income on your tax return. Www irs gov e pay Interest on insurance dividends. Www irs gov e pay   Interest on insurance dividends left on deposit with an insurance company that can be withdrawn annually is taxable to you in the year it is credited to your account. Www irs gov e pay However, if you can withdraw it only on the anniversary date of the policy (or other specified date), the interest is taxable in the year that date occurs. Www irs gov e pay Prepaid insurance premiums. Www irs gov e pay   Any increase in the value of prepaid insurance premiums, advance premiums, or premium deposit funds is interest if it is applied to the payment of premiums due on insurance policies or made available for you to withdraw. Www irs gov e pay U. Www irs gov e pay S. Www irs gov e pay obligations. Www irs gov e pay   Interest on U. Www irs gov e pay S. Www irs gov e pay obligations, such as U. Www irs gov e pay S. Www irs gov e pay Treasury bills, notes, and bonds, issued by any agency or instrumentality of the United States is taxable for federal income tax purposes. Www irs gov e pay Interest on tax refunds. Www irs gov e pay   Interest you receive on tax refunds is taxable income. Www irs gov e pay Interest on condemnation award. Www irs gov e pay   If the condemning authority pays you interest to compensate you for a delay in payment of an award, the interest is taxable. Www irs gov e pay Installment sale payments. Www irs gov e pay   If a contract for the sale or exchange of property provides for deferred payments, it also usually provides for interest payable with the deferred payments. Www irs gov e pay That interest is taxable when you receive it. Www irs gov e pay If little or no interest is provided for in a deferred payment contract, part of each payment may be treated as interest. Www irs gov e pay See Unstated Interest and Original Issue Discount in Publication 537, Installment Sales. Www irs gov e pay Interest on annuity contract. Www irs gov e pay   Accumulated interest on an annuity contract you sell before its maturity date is taxable. Www irs gov e pay Usurious interest. Www irs gov e pay   Usurious interest is interest charged at an illegal rate. Www irs gov e pay This is taxable as interest unless state law automatically changes it to a payment on the principal. Www irs gov e pay Interest income on frozen deposits. Www irs gov e pay   Exclude from your gross income interest on frozen deposits. Www irs gov e pay A deposit is frozen if, at the end of the year, you cannot withdraw any part of the deposit because: The financial institution is bankrupt or insolvent, or The state where the institution is located has placed limits on withdrawals because other financial institutions in the state are bankrupt or insolvent. Www irs gov e pay   The amount of interest you must exclude is the interest that was credited on the frozen deposits minus the sum of: The net amount you withdrew from these deposits during the year, and The amount you could have withdrawn as of the end of the year (not reduced by any penalty for premature withdrawals of a time deposit). Www irs gov e pay If you receive a Form 1099-INT for interest income on deposits that were frozen at the end of 2013, see Frozen deposits under How To Report Interest Income in chapter 1 of Publication 550, for information about reporting this interest income exclusion on your tax return. Www irs gov e pay   The interest you exclude is treated as credited to your account in the following year. Www irs gov e pay You must include it in income in the year you can withdraw it. Www irs gov e pay Example. Www irs gov e pay $100 of interest was credited on your frozen deposit during the year. Www irs gov e pay You withdrew $80 but could not withdraw any more as of the end of the year. Www irs gov e pay You must include $80 in your income and exclude $20 from your income for the year. Www irs gov e pay You must include the $20 in your income for the year you can withdraw it. Www irs gov e pay Bonds traded flat. Www irs gov e pay   If you buy a bond at a discount when interest has been defaulted or when the interest has accrued but has not been paid, the transaction is described as trading a bond flat. Www irs gov e pay The defaulted or unpaid interest is not income and is not taxable as interest if paid later. Www irs gov e pay When you receive a payment of that interest, it is a return of capital that reduces the remaining cost basis of your bond. Www irs gov e pay Interest that accrues after the date of purchase, however, is taxable interest income for the year it is received or accrued. Www irs gov e pay See Bonds Sold Between Interest Dates , later, for more information. Www irs gov e pay Below-market loans. Www irs gov e pay   In general, a below-market loan is a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. Www irs gov e pay See Below-Market Loans in chapter 1 of Publication 550 for more information. Www irs gov e pay U. Www irs gov e pay S. Www irs gov e pay Savings Bonds This section provides tax information on U. Www irs gov e pay S. Www irs gov e pay savings bonds. Www irs gov e pay It explains how to report the interest income on these bonds and how to treat transfers of these bonds. Www irs gov e pay For other information on U. Www irs gov e pay S. Www irs gov e pay savings bonds, write to:  For series EE and I paper savings bonds: Bureau of the Public Debt Division of Customer Assistance P. Www irs gov e pay O. Www irs gov e pay Box 7012 Parkersburg, WV 26106-7012  For series EE and I electronic bonds: Bureau of the Public Debt Division of Customer Assistance P. Www irs gov e pay O. Www irs gov e pay Box 7015 Parkersburg, WV 26106–7015  For series HH/H: Bureau of the Public Debt Division of Customer Assistance P. Www irs gov e pay O. Www irs gov e pay Box 2186 Parkersburg, WV 26106-2186 Or, on the Internet, visit: www. Www irs gov e pay treasurydirect. Www irs gov e pay gov/indiv/indiv. Www irs gov e pay htm. Www irs gov e pay Accrual method taxpayers. Www irs gov e pay   If you use an accrual method of accounting, you must report interest on U. Www irs gov e pay S. Www irs gov e pay savings bonds each year as it accrues. Www irs gov e pay You cannot postpone reporting interest until you receive it or until the bonds mature. Www irs gov e pay Accrual methods of accounting are explained in chapter 1 under Accounting Methods . Www irs gov e pay Cash method taxpayers. Www irs gov e pay   If you use the cash method of accounting, as most individual taxpayers do, you generally report the interest on U. Www irs gov e pay S. Www irs gov e pay savings bonds when you receive it. Www irs gov e pay The cash method of accounting is explained in chapter 1 under Accounting Methods. Www irs gov e pay But see Reporting options for cash method taxpayers , later. Www irs gov e pay Series HH bonds. Www irs gov e pay    These bonds were issued at face value. Www irs gov e pay Interest is paid twice a year by direct deposit to your bank account. Www irs gov e pay If you are a cash method taxpayer, you must report interest on these bonds as income in the year you receive it. Www irs gov e pay   Series HH bonds were first offered in 1980 and last offered in August 2004. Www irs gov e pay Before 1980, series H bonds were issued. Www irs gov e pay Series H bonds are treated the same as series HH bonds. Www irs gov e pay If you are a cash method taxpayer, you must report the interest when you receive it. Www irs gov e pay   Series H bonds have a maturity period of 30 years. Www irs gov e pay Series HH bonds mature in 20 years. Www irs gov e pay The last series H bonds matured in 2009. Www irs gov e pay Series EE and series I bonds. Www irs gov e pay   Interest on these bonds is payable when you redeem the bonds. Www irs gov e pay The difference between the purchase price and the redemption value is taxable interest. Www irs gov e pay Series EE bonds. Www irs gov e pay   Series EE bonds were first offered in January 1980 and have a maturity period of 30 years. Www irs gov e pay   Before July 1980, series E bonds were issued. Www irs gov e pay The original 10-year maturity period of series E bonds has been extended to 40 years for bonds issued before December 1965 and 30 years for bonds issued after November 1965. Www irs gov e pay Paper series EE and series E bonds are issued at a discount. Www irs gov e pay The face value is payable to you at maturity. Www irs gov e pay Electronic series EE bonds are issued at their face value. Www irs gov e pay The face value plus accrued interest is payable to you at maturity. Www irs gov e pay As of January 1, 2012, paper savings bonds were no longer sold at financial institutions. Www irs gov e pay   Owners of paper series EE bonds can convert them to electronic bonds. Www irs gov e pay These converted bonds do not retain the denomination listed on the paper certificate but are posted at their purchase price (with accrued interest). Www irs gov e pay Series I bonds. Www irs gov e pay   Series I bonds were first offered in 1998. Www irs gov e pay These are inflation-indexed bonds issued at their face amount with a maturity period of 30 years. Www irs gov e pay The face value plus all accrued interest is payable to you at maturity. Www irs gov e pay Reporting options for cash method taxpayers. Www irs gov e pay   If you use the cash method of reporting income, you can report the interest on series EE, series E, and series I bonds in either of the following ways. Www irs gov e pay Method 1. Www irs gov e pay Postpone reporting the interest until the earlier of the year you cash or dispose of the bonds or the year they mature. Www irs gov e pay (However, see Savings bonds traded , later. Www irs gov e pay )  Note. Www irs gov e pay Series EE bonds issued in 1983 matured in 2013. Www irs gov e pay If you have used method 1, you generally must report the interest on these bonds on your 2013 return. Www irs gov e pay The last series E bonds were issued in 1980 and matured in 2010. Www irs gov e pay If you used method 1, you generally should have reported the interest on these bonds on your 2010 return. Www irs gov e pay Method 2. Www irs gov e pay Choose to report the increase in redemption value as interest each year. Www irs gov e pay You must use the same method for all series EE, series E, and series I bonds you own. Www irs gov e pay If you do not choose method 2 by reporting the increase in redemption value as interest each year, you must use method 1. Www irs gov e pay    If you plan to cash your bonds in the same year you will pay for higher education expenses, you may want to use method 1 because you may be able to exclude the interest from your income. Www irs gov e pay To learn how, see Education Savings Bond Program, later. Www irs gov e pay Change from method 1. Www irs gov e pay   If you want to change your method of reporting the interest from method 1 to method 2, you can do so without permission from the IRS. Www irs gov e pay In the year of change you must report all interest accrued to date and not previously reported for all your bonds. Www irs gov e pay   Once you choose to report the interest each year, you must continue to do so for all series EE, series E, and series I bonds you own and for any you get later, unless you request permission to change, as explained next. Www irs gov e pay Change from method 2. Www irs gov e pay   To change from method 2 to method 1, you must request permission from the IRS. Www irs gov e pay Permission for the change is automatically granted if you send the IRS a statement that meets all the following requirements. Www irs gov e pay You have typed or printed the following number at the top: “131. Www irs gov e pay ” It includes your name and social security number under “131. Www irs gov e pay ” It includes the year of change (both the beginning and ending dates). Www irs gov e pay It identifies the savings bonds for which you are requesting this change. Www irs gov e pay It includes your agreement to: Report all interest on any bonds acquired during or after the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest, and Report all interest on the bonds acquired before the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest, with the exception of the interest reported in prior tax years. Www irs gov e pay   You must attach this statement to your tax return for the year of change, which you must file by the due date (including extensions). Www irs gov e pay   You can have an automatic extension of 6 months from the due date of your return for the year of change (excluding extensions) to file the statement with an amended return. Www irs gov e pay On the statement, type or print “Filed pursuant to section 301. Www irs gov e pay 9100-2. Www irs gov e pay ” To get this extension, you must have filed your original return for the year of the change by the due date (including extensions). Www irs gov e pay    By the date you file the original statement with your return, you must also send a signed copy to the address below. Www irs gov e pay   Internal Revenue Service Attention: CC:IT&A (Automatic Rulings Branch) P. Www irs gov e pay O. Www irs gov e pay Box 7604 Benjamin Franklin Station Washington, DC 20044   If you use a private delivery service, send the signed copy to the address below. Www irs gov e pay   Internal Revenue Service Attention: CC:IT&A (Automatic Rulings Branch) Room 5336 1111 Constitution Avenue, NW  Washington, DC 20224   Instead of filing this statement, you can request permission to change from method 2 to method 1 by filing Form 3115, Application for Change in Accounting Method. Www irs gov e pay In that case, follow the form instructions for an automatic change. Www irs gov e pay No user fee is required. Www irs gov e pay Co-owners. Www irs gov e pay   If a U. Www irs gov e pay S. Www irs gov e pay savings bond is issued in the names of co-owners, such as you and your child or you and your spouse, interest on the bond is generally taxable to the co-owner who bought the bond. Www irs gov e pay One co-owner's funds used. Www irs gov e pay    If you used your funds to buy the bond, you must pay the tax on the interest. Www irs gov e pay This is true even if you let the other co-owner redeem the bond and keep all the proceeds. Www irs gov e pay Under these circumstances, the co-owner who redeemed the bond will receive a Form 1099-INT at the time of redemption and must provide you with another Form 1099-INT showing the amount of interest from the bond taxable to you. Www irs gov e pay The co-owner who redeemed the bond is a “nominee. Www irs gov e pay ” See Nominee distributions under How To Report Interest Income in chapter 1 of Publication 550 for more information about how a person who is a nominee reports interest income belonging to another person. Www irs gov e pay Both co-owners' funds used. Www irs gov e pay   If you and the other co-owner each contribute part of the bond's purchase price, the interest is generally taxable to each of you, in proportion to the amount each of you paid. Www irs gov e pay Community property. Www irs gov e pay   If you and your spouse live in a community property state and hold bonds as community property, one-half of the interest is considered received by each of you. Www irs gov e pay If you file separate returns, each of you generally must report one-half of the bond interest. Www irs gov e pay For more information about community property, see Publication 555. Www irs gov e pay Table 7-1. Www irs gov e pay   These rules are also shown in Table 7-1. Www irs gov e pay Ownership transferred. Www irs gov e pay   If you bought series E, series EE, or series I bonds entirely with your own funds and had them reissued in your co-owner's name or beneficiary's name alone, you must include in your gross income for the year of reissue all interest that you earned on these bonds and have not previously reported. Www irs gov e pay But, if the bonds were reissued in your name alone, you do not have to report the interest accrued at that time. Www irs gov e pay   This same rule applies when bonds (other than bonds held as community property) are transferred between spouses or incident to divorce. Www irs gov e pay Purchased jointly. Www irs gov e pay   If you and a co-owner each contributed funds to buy series E, series EE, or series I bonds jointly and later have the bonds reissued in the co-owner's name alone, you must include in your gross income for the year of reissue your share of all the interest earned on the bonds that you have not previously reported. Www irs gov e pay The former co-owner does not have to include in gross income at the time of reissue his or her share of the interest earned that was not reported before the transfer. Www irs gov e pay This interest, however, as well as all interest earned after the reissue, is income to the former co-owner. Www irs gov e pay   This income-reporting rule also applies when the bonds are reissued in the name of your former co-owner and a new co-owner. Www irs gov e pay But the new co-owner will report only his or her share of the interest earned after the transfer. Www irs gov e pay   If bonds that you and a co-owner bought jointly are reissued to each of you separately in the same proportion as your contribution to the purchase price, neither you nor your co-owner has to report at that time the interest earned before the bonds were reissued. Www irs gov e pay    Table 7-1. Www irs gov e pay Who Pays the Tax on U. Www irs gov e pay S. Www irs gov e pay Savings Bond Interest IF . Www irs gov e pay . Www irs gov e pay . Www irs gov e pay THEN the interest must be reported by . Www irs gov e pay . Www irs gov e pay . Www irs gov e pay you buy a bond in your name and the name of another person as co-owners, using only your own funds you. Www irs gov e pay you buy a bond in the name of another person, who is the sole owner of the bond the person for whom you bought the bond. Www irs gov e pay you and another person buy a bond as co-owners, each contributing part of the purchase price both you and the other co-owner, in proportion to the amount each paid for the bond. Www irs gov e pay you and your spouse, who live in a community property state, buy a bond that is community property you and your spouse. Www irs gov e pay If you file separate returns, both you and your spouse generally report one-half of the interest. Www irs gov e pay Example 1. Www irs gov e pay You and your spouse each spent an equal amount to buy a $1,000 series EE savings bond. Www irs gov e pay The bond was issued to you and your spouse as co-owners. Www irs gov e pay You both postpone reporting interest on the bond. Www irs gov e pay You later have the bond reissued as two $500 bonds, one in your name and one in your spouse's name. Www irs gov e pay At that time neither you nor your spouse has to report the interest earned to the date of reissue. Www irs gov e pay Example 2. Www irs gov e pay You bought a $1,000 series EE savings bond entirely with your own funds. Www irs gov e pay The bond was issued to you and your spouse as co-owners. Www irs gov e pay You both postpone reporting interest on the bond. Www irs gov e pay You later have the bond reissued as two $500 bonds, one in your name and one in your spouse's name. Www irs gov e pay You must report half the interest earned to the date of reissue. Www irs gov e pay Transfer to a trust. Www irs gov e pay   If you own series E, series EE, or series I bonds and transfer them to a trust, giving up all rights of ownership, you must include in your income for that year the interest earned to the date of transfer if you have not already reported it. Www irs gov e pay However, if you are considered the owner of the trust and if the increase in value both before and after the transfer continues to be taxable to you, you can continue to defer reporting the interest earned each year. Www irs gov e pay You must include the total interest in your income in the year you cash or dispose of the bonds or the year the bonds finally mature, whichever is earlier. Www irs gov e pay   The same rules apply to previously unreported interest on series EE or series E bonds if the transfer to a trust consisted of series HH or series H bonds you acquired in a trade for the series EE or series E bonds. Www irs gov e pay See Savings bonds traded , later. Www irs gov e pay Decedents. Www irs gov e pay   The manner of reporting interest income on series E, series EE, or series I bonds, after the death of the owner (decedent), depends on the accounting and income-reporting methods previously used by the decedent. Www irs gov e pay This is explained in chapter 1 of Publication 550. Www irs gov e pay Savings bonds traded. Www irs gov e pay   If you postponed reporting the interest on your series EE or series E bonds, you did not recognize taxable income when you traded the bonds for series HH or series H bonds, unless you received cash in the trade. Www irs gov e pay (You cannot trade series I bonds for series HH bonds. Www irs gov e pay After August 31, 2004, you cannot trade any other series of bonds for series HH bonds. Www irs gov e pay ) Any cash you received is income up to the amount of the interest earned on the bonds traded. Www irs gov e pay When your series HH or series H bonds mature, or if you dispose of them before maturity, you report as interest the difference between their redemption value and your cost. Www irs gov e pay Your cost is the sum of the amount you paid for the traded series EE or series E bonds plus any amount you had to pay at the time of the trade. Www irs gov e pay Example. Www irs gov e pay You traded series EE bonds (on which you postponed reporting the interest) for $2,500 in series HH bonds and $223 in cash. Www irs gov e pay You reported the $223 as taxable income on your tax return. Www irs gov e pay At the time of the trade, the series EE bonds had accrued interest of $523 and a redemption value of $2,723. Www irs gov e pay You hold the series HH bonds until maturity, when you receive $2,500. Www irs gov e pay You must report $300 as interest income in the year of maturity. Www irs gov e pay This is the difference between their redemption value, $2,500, and your cost, $2,200 (the amount you paid for the series EE bonds). Www irs gov e pay (It is also the difference between the accrued interest of $523 on the series EE bonds and the $223 cash received on the trade. Www irs gov e pay ) Choice to report interest in year of trade. Www irs gov e pay   You could have chosen to treat all of the previously unreported accrued interest on the series EE or series E bonds traded for series HH bonds as income in the year of the trade. Www irs gov e pay If you made this choice, it is treated as a change from method 1. Www irs gov e pay See Change from method 1 under Series EE and series I bonds, earlier. Www irs gov e pay Form 1099-INT for U. Www irs gov e pay S. Www irs gov e pay savings bonds interest. Www irs gov e pay   When you cash a bond, the bank or other payer that redeems it must give you a Form 1099-INT if the interest part of the payment you receive is $10 or more. Www irs gov e pay Box 3 of your Form 1099-INT should show the interest as the difference between the amount you received and the amount paid for the bond. Www irs gov e pay However, your Form 1099-INT may show more interest than you have to include on your income tax return. Www irs gov e pay For example, this may happen if any of the following are true. Www irs gov e pay You chose to report the increase in the redemption value of the bond each year. Www irs gov e pay The interest shown on your Form 1099-INT will not be reduced by amounts previously included in income. Www irs gov e pay You received the bond from a decedent. Www irs gov e pay The interest shown on your Form 1099-INT will not be reduced by any interest reported by the decedent before death, or on the decedent's final return, or by the estate on the estate's income tax return. Www irs gov e pay Ownership of the bond was transferred. Www irs gov e pay The interest shown on your Form 1099-INT will not be reduced by interest that accrued before the transfer. Www irs gov e pay You were named as a co-owner, and the other co-owner contributed funds to buy the bond. Www irs gov e pay The interest shown on your Form 1099-INT will not be reduced by the amount you received as nominee for the other co-owner. Www irs gov e pay (See Co-owners , earlier in this chapter, for more information about the reporting requirements. Www irs gov e pay ) You received the bond in a taxable distribution from a retirement or profit-sharing plan. Www irs gov e pay The interest shown on your Form 1099-INT will not be reduced by the interest portion of the amount taxable as a distribution from the plan and not taxable as interest. Www irs gov e pay (This amount is generally shown on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. Www irs gov e pay , for the year of distribution. Www irs gov e pay )   For more information on including the correct amount of interest on your return, see How To Report Interest Income , later. Www irs gov e pay Publication 550 includes examples showing how to report these amounts. Www irs gov e pay    Interest on U. Www irs gov e pay S. Www irs gov e pay savings bonds is exempt from state and local taxes. Www irs gov e pay The Form 1099-INT you receive will indicate the amount that is for U. Www irs gov e pay S. Www irs gov e pay savings bond interest in box 3. Www irs gov e pay Education Savings Bond Program You may be able to exclude from income all or part of the interest you receive on the redemption of qualified U. Www irs gov e pay S. Www irs gov e pay savings bonds during the year if you pay qualified higher educational expenses during the same year. Www irs gov e pay This exclusion is known as the Education Savings Bond Program. Www irs gov e pay You do not qualify for this exclusion if your filing status is married filing separately. Www irs gov e pay Form 8815. Www irs gov e pay   Use Form 8815 to figure your exclusion. Www irs gov e pay Attach the form to your Form 1040 or Form 1040A. Www irs gov e pay Qualified U. Www irs gov e pay S. Www irs gov e pay savings bonds. Www irs gov e pay   A qualified U. Www irs gov e pay S. Www irs gov e pay savings bond is a series EE bond issued after 1989 or a series I bond. Www irs gov e pay The bond must be issued either in your name (sole owner) or in your and your spouse's names (co-owners). Www irs gov e pay You must be at least 24 years old before the bond's issue date. Www irs gov e pay For example, a bond bought by a parent and issued in the name of his or her child under age 24 does not qualify for the exclusion by the parent or child. Www irs gov e pay    The issue date of a bond may be earlier than the date the bond is purchased because the issue date assigned to a bond is the first day of the month in which it is purchased. Www irs gov e pay Beneficiary. Www irs gov e pay   You can designate any individual (including a child) as a beneficiary of the bond. Www irs gov e pay Verification by IRS. Www irs gov e pay   If you claim the exclusion, the IRS will check it by using bond redemption information from the Department of the Treasury. Www irs gov e pay Qualified expenses. Www irs gov e pay   Qualified higher educational expenses are tuition and fees required for you, your spouse, or your dependent (for whom you claim an exemption) to attend an eligible educational institution. Www irs gov e pay   Qualified expenses include any contribution you make to a qualified tuition program or to a Coverdell education savings account. Www irs gov e pay   Qualified expenses do not include expenses for room and board or for courses involving sports, games, or hobbies that are not part of a degree or certificate granting program. Www irs gov e pay Eligible educational institutions. Www irs gov e pay   These institutions include most public, private, and nonprofit universities, colleges, and vocational schools that are accredited and eligible to participate in student aid programs run by the U. Www irs gov e pay S. Www irs gov e pay Department of Education. Www irs gov e pay Reduction for certain benefits. Www irs gov e pay   You must reduce your qualified higher educational expenses by all of the following tax-free benefits. Www irs gov e pay Tax-free part of scholarships and fellowships (see Scholarships and fellowships in chapter 12). Www irs gov e pay Expenses used to figure the tax-free portion of distributions from a Coverdell ESA. Www irs gov e pay Expenses used to figure the tax-free portion of distributions from a qualified tuition program. Www irs gov e pay Any tax-free payments (other than gifts or inheritances) received for educational expenses, such as Veterans' educational assistance benefits, Qualified tuition reductions, or Employer-provided educational assistance. Www irs gov e pay Any expense used in figuring the American Opportunity and lifetime learning credits. Www irs gov e pay Amount excludable. Www irs gov e pay   If the total proceeds (interest and principal) from the qualified U. Www irs gov e pay S. Www irs gov e pay savings bonds you redeem during the year are not more than your adjusted qualified higher educational expenses for the year, you may be able to exclude all of the interest. Www irs gov e pay If the proceeds are more than the expenses, you may be able to exclude only part of the interest. Www irs gov e pay   To determine the excludable amount, multiply the interest part of the proceeds by a fraction. Www irs gov e pay The numerator of the fraction is the qualified higher educational expenses you paid during the year. Www irs gov e pay The denominator of the fraction is the total proceeds you received during the year. Www irs gov e pay Example. Www irs gov e pay In February 2013, Mark and Joan, a married couple, cashed a qualified series EE U. Www irs gov e pay S. Www irs gov e pay savings bond they bought in April 1997. Www irs gov e pay They received proceeds of $8,372 representing principal of $5,000 and interest of $3,372. Www irs gov e pay In 2013, they paid $4,000 of their daughter's college tuition. Www irs gov e pay They are not claiming an education credit for that amount, and their daughter does not have any tax-free educational assistance. Www irs gov e pay They can exclude $1,611 ($3,372 × ($4,000 ÷ $8,372)) of interest in 2013. Www irs gov e pay They must pay tax on the remaining $1,761 ($3,372 − $1,611) interest. Www irs gov e pay Modified adjusted gross income limit. Www irs gov e pay   The interest exclusion is limited if your modified adjusted gross income (modified AGI) is: $74,700 to $89,700 for taxpayers filing single or head of household, and $112,050 to $142,050 for married taxpayers filing jointly or for a qualifying widow(er) with dependent child. Www irs gov e pay You do not qualify for the interest exclusion if your modified AGI is equal to or more than the upper limit for your filing status. Www irs gov e pay   Modified AGI, for purposes of this exclusion, is adjusted gross income (Form 1040, line 37, or Form 1040A, line 21) figured before the interest exclusion, and modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion and deduction, Exclusion of income for bona fide residents of American Samoa, Exclusion for income from Puerto Rico, Exclusion for adoption benefits received under an employer's adoption assistance program, Deduction for tuition and fees, Deduction for student loan interest, and Deduction for domestic production activities. Www irs gov e pay   Use the Line 9 Worksheet in the Form 8815 instructions to figure your modified AGI. Www irs gov e pay If you claim any of the exclusion or deduction items listed above (except items 6, 7, and 8), add the amount of the exclusion or deduction (except items 6, 7, and 8) to the amount on line 5 of the worksheet, and enter the total on Form 8815, line 9, as your modified AGI. Www irs gov e pay   If you have investment interest expense incurred to earn royalties and other investment income, see Education Savings Bond Program in chapter 1 of Publication 550. Www irs gov e pay Recordkeeping. Www irs gov e pay If you claim the interest exclusion, you must keep a written record of the qualified U. Www irs gov e pay S. Www irs gov e pay savings bonds you redeem. Www irs gov e pay Your record must include the serial number, issue date, face value, and total redemption proceeds (principal and interest) of each bond. Www irs gov e pay You can use Form 8818 to record this information. Www irs gov e pay You should also keep bills, receipts, canceled checks, or other documentation that shows you paid qualified higher educational expenses during the year. Www irs gov e pay U. Www irs gov e pay S. Www irs gov e pay Treasury Bills, Notes, and Bonds Treasury bills, notes, and bonds are direct debts (obligations) of the U. Www irs gov e pay S. Www irs gov e pay Government. Www irs gov e pay Taxation of interest. Www irs gov e pay   Interest income from Treasury bills, notes, and bonds is subject to federal income tax but is exempt from all state and local income taxes. Www irs gov e pay You should receive Form 1099-INT showing the interest (in box 3) paid to you for the year. Www irs gov e pay   Payments of principal and interest generally will be credited to your designated checking or savings account by direct deposit through the TreasuryDirect® system. Www irs gov e pay Treasury bills. Www irs gov e pay   These bills generally have a 4-week, 13-week, 26-week, or 52-week maturity period. Www irs gov e pay They are generally issued at a discount in the amount of $100 and multiples of $100. Www irs gov e pay The difference between the discounted price you pay for the bills and the face value you receive at maturity is interest income. Www irs gov e pay Generally, you report this interest income when the bill is paid at maturity. Www irs gov e pay If you paid a premium for a bill (more than the face value), you generally report the premium as a section 171 deduction when the bill is paid at maturity. Www irs gov e pay Treasury notes and bonds. Www irs gov e pay   Treasury notes have maturity periods of more than 1 year, ranging up to 10 years. Www irs gov e pay Maturity periods for Treasury bonds are longer than 10 years. Www irs gov e pay Both generally are issued in denominations of $100 to $1 million and generally pay interest every 6 months. Www irs gov e pay Generally, you report this interest for the year paid. Www irs gov e pay For more information, see U. Www irs gov e pay S. Www irs gov e pay Treasury Bills, Notes, and Bonds in chapter 1 of Publication 550. Www irs gov e pay For other information on Treasury notes or bonds, write to:  Bureau of the Public Debt P. Www irs gov e pay O. Www irs gov e pay Box 7015 Parkersburg, WV 26106-7015 Or, on the Internet, visit: www. Www irs gov e pay treasurydirect. Www irs gov e pay gov/indiv/indiv. Www irs gov e pay htm. Www irs gov e pay For information on series EE, series I, and series HH savings bonds, see U. Www irs gov e pay S. Www irs gov e pay Savings Bonds , earlier. Www irs gov e pay Treasury inflation-protected securities (TIPS). Www irs gov e pay   These securities pay interest twice a year at a fixed rate, based on a principal amount adjusted to take into account inflation and deflation. Www irs gov e pay For the tax treatment of these securities, see Inflation-Indexed Debt Instruments under Original Issue Discount (OID), in Publication 550. Www irs gov e pay Bonds Sold Between Interest Dates If you sell a bond between interest payment dates, part of the sales price represents interest accrued to the date of sale. Www irs gov e pay You must report that part of the sales price as interest income for the year of sale. Www irs gov e pay If you buy a bond between interest payment dates, part of the purchase price represents interest accrued before the date of purchase. Www irs gov e pay When that interest is paid to you, treat it as a return of your capital investment, rather than interest income, by reducing your basis in the bond. Www irs gov e pay See Accrued interest on bonds under How To Report Interest Income in chapter 1 of Publication 550 for information on reporting the payment. Www irs gov e pay Insurance Life insurance proceeds paid to you as beneficiary of the insured person are usually not taxable. Www irs gov e pay But if you receive the proceeds in installments, you must usually report a part of each installment payment as interest income. Www irs gov e pay For more information about insurance proceeds received in installments, see Publication 525, Taxable and Nontaxable Income. Www irs gov e pay Annuity. Www irs gov e pay   If you buy an annuity with life insurance proceeds, the annuity payments you receive are taxed as pension and annuity income from a nonqualified plan, not as interest income. Www irs gov e pay See chapter 10 for information on pension and annuity income from nonqualified plans. Www irs gov e pay State or Local Government Obligations Interest on a bond used to finance government operations generally is not taxable if the bond is issued by a state, the District of Columbia, a possession of the United States, or any of their political subdivisions. Www irs gov e pay Bonds issued after 1982 (including tribal economic development bonds issued after February 17, 2009) by an Indian tribal government are treated as issued by a state. Www irs gov e pay Interest on these bonds is generally tax exempt if the bonds are part of an issue of which substantially all proceeds are to be used in the exercise of any essential government function. Www irs gov e pay For information on federally guaranteed bonds, mortgage revenue bonds, arbitrage bonds, private activity bonds, qualified tax credit bonds, and Build America bonds, see State or Local Government Obligations in chapter 1 of Publication 550. Www irs gov e pay Information reporting requirement. Www irs gov e pay   If you must file a tax return, you are required to show any tax-exempt interest you received on your return. Www irs gov e pay This is an information reporting requirement only. Www irs gov e pay It does not change tax-exempt interest to taxable interest. Www irs gov e pay Original Issue Discount (OID) Original issue discount (OID) is a form of interest. Www irs gov e pay You generally include OID in your income as it accrues over the term of the debt instrument, whether or not you receive any payments from the issuer. Www irs gov e pay A debt instrument generally has OID when the instrument is issued for a price that is less than its stated redemption price at maturity. Www irs gov e pay OID is the difference between the stated redemption price at maturity and the issue price. Www irs gov e pay All debt instruments that pay no interest before maturity are presumed to be issued at a discount. Www irs gov e pay Zero coupon bonds are one example of these instruments. Www irs gov e pay The OID accrual rules generally do not apply to short-term obligations (those with a fixed maturity date of 1 year or less from date of issue). Www irs gov e pay See Discount on Short-Term Obligations in chapter 1 of Publication 550. Www irs gov e pay De minimis OID. Www irs gov e pay   You can treat the discount as zero if it is less than one-fourth of 1% (. Www irs gov e pay 0025) of the stated redemption price at maturity multiplied by the number of full years from the date of original issue to maturity. Www irs gov e pay This small discount is known as “de minimis” OID. Www irs gov e pay Example 1. Www irs gov e pay You bought a 10-year bond with a stated redemption price at maturity of $1,000, issued at $980 with OID of $20. Www irs gov e pay One-fourth of 1% of $1,000 (stated redemption price) times 10 (the number of full years from the date of original issue to maturity) equals $25. Www irs gov e pay Because the $20 discount is less than $25, the OID is treated as zero. Www irs gov e pay (If you hold the bond at maturity, you will recognize $20 ($1,000 − $980) of capital gain. Www irs gov e pay ) Example 2. Www irs gov e pay The facts are the same as in Example 1, except that the bond was issued at $950. Www irs gov e pay The OID is $50. Www irs gov e pay Because the $50 discount is more than the $25 figured in Example 1, you must include the OID in income as it accrues over the term of the bond. Www irs gov e pay Debt instrument bought after original issue. Www irs gov e pay   If you buy a debt instrument with de minimis OID at a premium, the discount is not includible in income. Www irs gov e pay If you buy a debt instrument with de minimis OID at a discount, the discount is reported under the market discount rules. Www irs gov e pay See Market Discount Bonds in chapter 1 of Publication 550. Www irs gov e pay Exceptions to reporting OID. Www irs gov e pay   The OID rules discussed in this chapter do not apply to the following debt instruments. Www irs gov e pay Tax-exempt obligations. Www irs gov e pay (However, see Stripped tax-exempt obligations under Stripped Bonds and Coupons in chapter 1 of Publication 550). Www irs gov e pay U. Www irs gov e pay S. Www irs gov e pay savings bonds. Www irs gov e pay Short-term debt instruments (those with a fixed maturity date of not more than 1 year from the date of issue). Www irs gov e pay Obligations issued by an individual before March 2, 1984. Www irs gov e pay Loans between individuals if all the following are true. Www irs gov e pay The lender is not in the business of lending money. Www irs gov e pay The amount of the loan, plus the amount of any outstanding prior loans between the same individuals, is $10,000 or less. Www irs gov e pay Avoiding any federal tax is not one of the principal purposes of the loan. Www irs gov e pay Form 1099-OID. Www irs gov e pay   The issuer of the debt instrument (or your broker if you held the instrument through a broker) should give you Form 1099-OID, or a similar statement, if the total OID for the calendar year is $10 or more. Www irs gov e pay Form 1099-OID will show, in box 1, the amount of OID for the part of the year that you held the bond. Www irs gov e pay It also will show, in box 2, the stated interest you must include in your income. Www irs gov e pay A copy of Form 1099-OID will be sent to the IRS. Www irs gov e pay Do not file your copy with your return. Www irs gov e pay Keep it for your records. Www irs gov e pay   In most cases, you must report the entire amount in boxes 1 and 2 of Form 1099-OID as interest income. Www irs gov e pay But see Refiguring OID shown on Form 1099-OID, later in this discussion, for more information. Www irs gov e pay Form 1099-OID not received. Www irs gov e pay   If you had OID for the year but did not receive a Form 1099-OID, you can find tables on IRS. Www irs gov e pay gov that list total OID on certain debt instruments and have information that will help you figure OID. Www irs gov e pay For the latest OID tables, go to www. Www irs gov e pay irs. Www irs gov e pay gov and enter “OID tables” in the Search box. Www irs gov e pay If your debt instrument is not listed, consult the issuer for further information about the accrued OID for the year. Www irs gov e pay Nominee. Www irs gov e pay   If someone else is the holder of record (the registered owner) of an OID instrument belonging to you and receives a Form 1099-OID on your behalf, that person must give you a Form 1099-OID. Www irs gov e pay Refiguring OID shown on Form 1099-OID. Www irs gov e pay   You must refigure the OID shown in box 1 or box 8 of Form 1099-OID if either of the following apply. Www irs gov e pay You bought the debt instrument after its original issue and paid a premium or an acquisition premium. Www irs gov e pay The debt instrument is a stripped bond or a stripped coupon (including certain zero coupon instruments). Www irs gov e pay For information about figuring the correct amount of OID to include in your income, see Figuring OID on Long-Term Debt Instruments in Publication 1212. Www irs gov e pay Refiguring periodic interest shown on Form 1099-OID. Www irs gov e pay   If you disposed of a debt instrument or acquired it from another holder during the year, see Bonds Sold Between Interest Dates , earlier, for information about the treatment of periodic interest that may be shown in box 2 of Form 1099-OID for that instrument. Www irs gov e pay Certificates of deposit (CDs). Www irs gov e pay   If you buy a CD with a maturity of more than 1 year, you must include in income each year a part of the total interest due and report it in the same manner as other OID. Www irs gov e pay   This also applies to similar deposit arrangements with banks, building and loan associations, etc. Www irs gov e pay , including: Time deposits, Bonus plans, Savings certificates, Deferred income certificates, Bonus savings certificates, and Growth savings certificates. Www irs gov e pay Bearer CDs. Www irs gov e pay   CDs issued after 1982 generally must be in registered form. Www irs gov e pay Bearer CDs are CDs not in registered form. Www irs gov e pay They are not issued in the depositor's name and are transferable from one individual to another. Www irs gov e pay   Banks must provide the IRS and the person redeeming a bearer CD with a Form 1099-INT. Www irs gov e pay More information. Www irs gov e pay   See chapter 1 of Publication 550 for more information about OID and related topics, such as market discount bonds. Www irs gov e pay When To Report Interest Income When to report your interest income depends on whether you use the cash method or an accrual method to report income. Www irs gov e pay Cash method. Www irs gov e pay   Most individual taxpayers use the cash method. Www irs gov e pay If you use this method, you generally report your interest income in the year in which you actually or constructively receive it. Www irs gov e pay However, there are special rules for reporting the discount on certain debt instruments. Www irs gov e pay See U. Www irs gov e pay S. Www irs gov e pay Savings Bonds and Original Issue Discount (OID) , earlier. Www irs gov e pay Example. Www irs gov e pay On September 1, 2011, you loaned another individual $2,000 at 12%, compounded annually. Www irs gov e pay You are not in the business of lending money. Www irs gov e pay The note stated that principal and interest would be due on August 31, 2013. Www irs gov e pay In 2013, you received $2,508. Www irs gov e pay 80 ($2,000 principal and $508. Www irs gov e pay 80 interest). Www irs gov e pay If you use the cash method, you must include in income on your 2013 return the $508. Www irs gov e pay 80 interest you received in that year. Www irs gov e pay Constructive receipt. Www irs gov e pay   You constructively receive income when it is credited to your account or made available to you. Www irs gov e pay You do not need to have physical possession of it. Www irs gov e pay For example, you are considered to receive interest, dividends, or other earnings on any deposit or account in a bank, savings and loan, or similar financial institution, or interest on life insurance policy dividends left to accumulate, when they are credited to your account and subject to your withdrawal. Www irs gov e pay This is true even if they are not yet entered in your passbook. Www irs gov e pay   You constructively receive income on the deposit or account even if you must: Make withdrawals in multiples of even amounts, Give a notice to withdraw before making the withdrawal, Withdraw all or part of the account to withdraw the earnings, or Pay a penalty on early withdrawals, unless the interest you are to receive on an early withdrawal or redemption is substantially less than the interest payable at maturity. Www irs gov e pay Accrual method. Www irs gov e pay   If you use an accrual method, you report your interest income when you earn it, whether or not you have received it. Www irs gov e pay Interest is earned over the term of the debt instrument. Www irs gov e pay Example. Www irs gov e pay If, in the previous example, you use an accrual method, you must include the interest in your income as you earn it. Www irs gov e pay You would report the interest as follows: 2011, $80; 2012, $249. Www irs gov e pay 60; and 2013, $179. Www irs gov e pay 20. Www irs gov e pay Coupon bonds. Www irs gov e pay   Interest on coupon bonds is taxable in the year the coupon becomes due and payable. Www irs gov e pay It does not matter when you mail the coupon for payment. Www irs gov e pay How To Report Interest Income Generally, you report all your taxable interest income on Form 1040, line 8a; Form 1040A, line 8a; or Form 1040EZ, line 2. Www irs gov e pay You cannot use Form 1040EZ if your taxable interest income is more than $1,500. Www irs gov e pay Instead, you must use Form 1040A or Form 1040. Www irs gov e pay Form 1040A. Www irs gov e pay   You must complete Schedule B (Form 1040A or 1040), Part I, if you file Form 1040A and any of the following are true. Www irs gov e pay Your taxable interest income is more than $1,500. Www irs gov e pay You are claiming the interest exclusion under the Education Savings Bond Program (discussed earlier). Www irs gov e pay You received interest from a seller-financed mortgage, and the buyer used the property as a home. Www irs gov e pay You received a Form 1099-INT for U. Www irs gov e pay S. Www irs gov e pay savings bond interest that includes amounts you reported before 2013. Www irs gov e pay You received, as a nominee, interest that actually belongs to someone else. Www irs gov e pay You received a Form 1099-INT for interest on frozen deposits. Www irs gov e pay You are reporting OID in an amount less than the amount shown on Form 1099-OID. Www irs gov e pay You received a Form 1099-INT for interest on a bond you bought between interest payment dates. Www irs gov e pay You acquired taxable bonds after 1987 and choose to reduce interest income from the bonds by any amortizable bond premium (see Bond Premium Amortization in chapter 3 of Publication 550). Www irs gov e pay List each payer's name and the amount of interest income received from each payer on line 1. Www irs gov e pay If you received a Form 1099-INT or Form 1099-OID from a brokerage firm, list the brokerage firm as the payer. Www irs gov e pay   You cannot use Form 1040A if you must use Form 1040, as described next. Www irs gov e pay Form 1040. Www irs gov e pay   You must use Form 1040 instead of Form 1040A or Form 1040EZ if: You forfeited interest income because of the early withdrawal of a time deposit; You acquired taxable bonds after 1987, you choose to reduce interest income from the bonds by any amortizable bond premium, and you are deducting the excess of bond premium amortization for the accrual period over the qualified stated interest for the period (see Bond Premium Amortization in chapter 3 of Publication 550); or You received tax-exempt interest from private activity bonds issued after August 7, 1986. Www irs gov e pay Schedule B (Form 1040A or 1040). Www irs gov e pay   You must complete Schedule B (Form 1040A or 1040), Part I, if you file Form 1040 and any of the following apply. Www irs gov e pay Your taxable interest income is more than $1,500. Www irs gov e pay You are claiming the interest exclusion under the Education Savings Bond Program (discussed earlier). Www irs gov e pay You received interest from a seller-financed mortgage, and the buyer used the property as a home. Www irs gov e pay You received a Form 1099-INT for U. Www irs gov e pay S. Www irs gov e pay savings bond interest that includes amounts you reported before 2013. Www irs gov e pay You received, as a nominee, interest that actually belongs to someone else. Www irs gov e pay You received a Form 1099-INT for interest on frozen deposits. Www irs gov e pay You received a Form 1099-INT for interest on a bond you bought between interest payment dates. Www irs gov e pay You are reporting OID in an amount less than the amount shown on Form 1099-OID. Www irs gov e pay Statement (2) in the preceding list under Form 1040 is true. Www irs gov e pay In Part I, line 1, list each payer's name and the amount received from each. Www irs gov e pay If you received a Form 1099-INT or Form 1099-OID from a brokerage firm, list the brokerage firm as the payer. Www irs gov e pay Reporting tax-exempt interest. Www irs gov e pay   Total your tax-exempt interest (such as interest or accrued OID on certain state and municipal bonds, including tax-exempt interest on zero coupon municipal bonds) and exempt-interest dividends from a mutual fund as shown on Form 1099-INT, box 8, and on Form 1099-DIV, box 10. Www irs gov e pay Add these amounts to any other tax-exempt interest you received. Www irs gov e pay Report the total on line 8b of Form 1040A or 1040. Www irs gov e pay   If you file Form 1040EZ, enter “TEI” and the amount in the space to the left of line 2. Www irs gov e pay Do not add tax-exempt interest in the total on Form 1040EZ, line 2. Www irs gov e pay   Form 1099-INT, box 9, and Form 1099-DIV, box 11, show the tax-exempt interest subject to the alternative minimum tax on Form 6251. Www irs gov e pay These amounts are already included in the amounts on Form 1099-INT, box 8, and Form 1099-DIV, box 10. Www irs gov e pay Do not add the amounts in Form 1099-INT, box 9 and Form 1099-DIV, box 11 to, or subtract them from, the amounts on Form 1099-INT, box 8, and Form 1099-DIV, box 10. Www irs gov e pay    Do not report interest from an individual retirement account (IRA) as tax-exempt interest. Www irs gov e pay Form 1099-INT. Www irs gov e pay   Your taxable interest income, except for interest from U. Www irs gov e pay S. Www irs gov e pay savings bonds and Treasury obligations, is shown in box 1 of Form 1099-INT. Www irs gov e pay Add this amount to any other taxable interest income you received. Www irs gov e pay You must report all of your taxable interest income even if you do not receive a Form 1099-INT. Www irs gov e pay Generally, contact your financial institution if you do not receive a Form 1099-INT by February 15. Www irs gov e pay Your identifying number may be truncated on any paper Form 1099-INT you receive. Www irs gov e pay   If you forfeited interest income because of the early withdrawal of a time deposit, the deductible amount will be shown on Form 1099-INT in box 2. Www irs gov e pay See Penalty on early withdrawal of savings in chapter 1 of Publication 550. Www irs gov e pay   Box 3 of Form 1099-INT shows the interest income you received from U. Www irs gov e pay S. Www irs gov e pay savings bonds, Treasury bills, Treasury notes, and Treasury bonds. Www irs gov e pay Add the amount shown in box 3 to any other taxable interest income you received, unless part of the amount in box 3 was previously included in your interest income. Www irs gov e pay If part of the amount shown in box 3 was previously included in your interest income, see U. Www irs gov e pay S. Www irs gov e pay savings bond interest previously reported , later. Www irs gov e pay   Box 4 of Form 1099-INT will contain an amount if you were subject to backup withholding. Www irs gov e pay Report the amount from box 4 on Form 1040EZ, line 7; on Form 1040A, line 36; or Form 1040, line 62 (federal income tax withheld). Www irs gov e pay   Box 5 of Form 1099-INT shows investment expenses you may be able to deduct as an itemized deduction. Www irs gov e pay See chapter 28 for more information about investment expenses. Www irs gov e pay   If there are entries in boxes 6 and 7 of Form 1099-INT, you must file Form 1040. Www irs gov e pay You may be able to take a credit for the amount shown in box 6 unless you deduct this amount on line 8 of Schedule A (Form 1040). Www irs gov e pay To take the credit, you may have to file Form 1116, Foreign Tax Credit. Www irs gov e pay For more information, see Publication 514, Foreign Tax Credit for Individuals. Www irs gov e pay U. Www irs gov e pay S. Www irs gov e pay savings bond interest previously reported. Www irs gov e pay   If you received a Form 1099-INT for U. Www irs gov e pay S. Www irs gov e pay savings bond interest, the form may show interest you do not have to report. Www irs gov e pay See Form 1099-INT for U. Www irs gov e pay S. Www irs gov e pay savings bonds interest , earlier, under U. Www irs gov e pay S. Www irs gov e pay Savings Bonds. Www irs gov e pay   On Schedule B (Form 1040A or 1040), Part I, line 1, report all the interest shown on your Form 1099-INT. Www irs gov e pay Then follow these steps. Www irs gov e pay Several lines above line 2, enter a subtotal of all interest listed on line 1. Www irs gov e pay Below the subtotal enter “U. Www irs gov e pay S. Www irs gov e pay Savings Bond Interest Previously Reported” and enter amounts previously reported or interest accrued before you received the bond. Www irs gov e pay Subtract these amounts from the subtotal and enter the result on line 2. Www irs gov e pay More information. Www irs gov e pay   For more information about how to report interest income, see chapter 1 of Publication 550 or the instructions for the form you must file. Www irs gov e pay Prev  Up  Next   Home   More Online Publications