1040 Form For 2010
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1040 form for 2010 2. 1040 form for 2010 Estimated Tax for 2014 Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Who Does Not Have To Pay Estimated Tax Who Must Pay Estimated TaxGeneral Rule Married Taxpayers Special Rules Aliens Estates and Trusts How To Figure Estimated Tax2014 Estimated Tax Worksheet When To Pay Estimated TaxWhen To Start Farmers and Fishermen How To Figure Each PaymentRegular Installment Method Annualized Income Installment Method Estimated Tax Payments Not Required How To Pay Estimated TaxCredit an Overpayment Pay Online Pay by Phone Pay by Check or Money Order Using the Estimated Tax Payment Voucher Introduction Estimated tax is the method used to pay tax on income that is not subject to withholding. 1040 form for 2010 This includes income from self-employment, interest, dividends, alimony, rent, gains from the sale of assets, prizes, and awards. 1040 form for 2010 You also may have to pay estimated tax if the amount of income tax being withheld from your salary, pension, or other income is not enough. 1040 form for 2010 Estimated tax is used to pay both income tax and self-employment tax, as well as other taxes and amounts reported on your tax return. 1040 form for 2010 If you do not pay enough tax, either through withholding or estimated tax, or a combination of both, you may have to pay a penalty. 1040 form for 2010 If you do not pay enough by the due date of each payment period (see When To Pay Estimated Tax , later), you may be charged a penalty even if you are due a refund when you file your tax return. 1040 form for 2010 For information on when the penalty applies, see chapter 4. 1040 form for 2010 It would be helpful for you to have a copy of your 2013 tax return and an estimate of your 2014 income nearby while reading this chapter. 1040 form for 2010 Topics - This chapter discusses: Who must pay estimated tax, How to figure estimated tax (including illustrated examples), When to pay estimated tax, How to figure each payment, and How to pay estimated tax. 1040 form for 2010 Useful Items - You may want to see: Form (and Instructions) 1040-ES Estimated Tax for Individuals See chapter 5 for information about how to get this publication and form. 1040 form for 2010 Worksheets. 1040 form for 2010 You may need to use several of the blank worksheets included in this chapter. 1040 form for 2010 See Worksheets for Chapter 2, later, to locate what you need. 1040 form for 2010 Who Does Not Have To Pay Estimated Tax If you receive salaries and wages, you may be able to avoid paying estimated tax by asking your employer to take more tax out of your earnings. 1040 form for 2010 To do this, file a new Form W-4 with your employer. 1040 form for 2010 See chapter 1. 1040 form for 2010 Estimated tax not required. 1040 form for 2010 You do not have to pay estimated tax for 2014 if you meet all three of the following conditions. 1040 form for 2010 You had no tax liability for 2013. 1040 form for 2010 You were a U. 1040 form for 2010 S. 1040 form for 2010 citizen or resident alien for the whole year. 1040 form for 2010 Your 2013 tax year covered a 12-month period. 1040 form for 2010 You had no tax liability for 2013 if your total tax (defined later under Total tax for 2013—line 14b ) was zero or you did not have to file an income tax return. 1040 form for 2010 Please click here for the text description of the image. 1040 form for 2010 Figure 2-A: Do You Have To Pay Estimated Tax? Who Must Pay Estimated Tax If you owed additional tax for 2013, you may have to pay estimated tax for 2014. 1040 form for 2010 You can use the following general rule as a guide during the year to see if you will have enough withholding, or should increase your withholding or make estimated tax payments. 1040 form for 2010 General Rule In most cases, you must pay estimated tax for 2014 if both of the following apply. 1040 form for 2010 You expect to owe at least $1,000 in tax for 2014, after subtracting your withholding and refundable credits. 1040 form for 2010 You expect your withholding and refundable credits to be less than the smaller of: 90% of the tax to be shown on your 2014 tax return, or 100% of the tax shown on your 2013 tax return. 1040 form for 2010 Your 2013 tax return must cover all 12 months. 1040 form for 2010 Note. 1040 form for 2010 The percentages in (2a) or (2b) above may be different if you are a farmer, fisherman, or higher income taxpayer. 1040 form for 2010 See Special Rules , later. 1040 form for 2010 If the result from using the general rule above suggests that you will not have enough withholding, complete the 2014 Estimated Tax Worksheet for a more accurate calculation. 1040 form for 2010 Figure 2-A takes you through the general rule. 1040 form for 2010 You may find this helpful in determining if you must pay estimated tax. 1040 form for 2010 If all your income will be subject to income tax withholding, you probably do not need to pay estimated tax. 1040 form for 2010 Example 1. 1040 form for 2010 Jane Smart uses Figure 2-A and the following information to figure whether she should pay estimated tax for 2014. 1040 form for 2010 She files as head of household claiming her dependent son, takes the standard deduction, and expects no refundable credits for 2014. 1040 form for 2010 Expected adjusted gross income (AGI) for 2014 $82,800 AGI for 2013 $73,700 Total tax on 2013 return (Form 1040, line 61) $ 8,746 Total 2014 estimated tax (line 13c of the 2014 Estimated Tax Worksheet) $11,015 Tax expected to be withheld in 2014 $10,000 Jane's answer to Figure 2-A, box 1, is YES; she expects to owe at least $1,000 for 2014 after subtracting her withholding from her expected total tax ($11,015 − $10,000 = $1,015). 1040 form for 2010 Her answer to box 2a is YES; she expects her income tax withholding ($10,000) to be at least 90% of the tax to be shown on her 2014 return ($11,015 × 90% = $9,913. 1040 form for 2010 50). 1040 form for 2010 Jane does not need to pay estimated tax. 1040 form for 2010 Example 2. 1040 form for 2010 The facts are the same as in Example 1, except that Jane expects only $8,700 tax to be withheld in 2014. 1040 form for 2010 Because that is less than $9,913. 1040 form for 2010 50, her answer to box 2a is NO. 1040 form for 2010 Jane's answer to box 2b is also NO; she does not expect her income tax withholding ($8,700) to be at least 100% of the total tax shown on her 2013 return ($8,746). 1040 form for 2010 Jane must increase her withholding or pay estimated tax for 2014. 1040 form for 2010 Example 3. 1040 form for 2010 The facts are the same as in Example 2, except that the total tax shown on Jane's 2013 return was $8,600. 1040 form for 2010 Because she expects to have more than $8,600 withheld in 2014 ($8,700), her answer to box 2b is YES. 1040 form for 2010 Jane does not need to pay estimated tax for 2014. 1040 form for 2010 Married Taxpayers If you qualify to make joint estimated tax payments, apply the rules discussed here to your joint estimated income. 1040 form for 2010 You and your spouse can make joint estimated tax payments even if you are not living together. 1040 form for 2010 However, you and your spouse cannot make joint estimated tax payments if: You are legally separated under a decree of divorce or separate maintenance, You and your spouse have different tax years, Either spouse is a nonresident alien (unless that spouse elected to be treated as a resident alien for tax purposes). 1040 form for 2010 See Choosing Resident Alien Status in Publication 519, or Individuals of the same sex and opposite sex who are in registered domestic partnerships, civil unions, or other similar formal relationships that are not marriages under state law cannot make joint estimated tax payments. 1040 form for 2010 These individuals can take credit only for the estimated tax payments that he or she made. 1040 form for 2010 If you and your spouse cannot make joint estimated tax payments, apply these rules to your separate estimated income. 1040 form for 2010 Making joint or separate estimated tax payments will not affect your choice of filing a joint tax return or separate returns for 2014. 1040 form for 2010 2013 separate returns and 2014 joint return. 1040 form for 2010 If you plan to file a joint return with your spouse for 2014, but you filed separate returns for 2013, your 2013 tax is the total of the tax shown on your separate returns. 1040 form for 2010 You filed a separate return if you filed as single, head of household, or married filing separately. 1040 form for 2010 2013 joint return and 2014 separate returns. 1040 form for 2010 If you plan to file a separate return for 2014, but you filed a joint return for 2013, your 2013 tax is your share of the tax on the joint return. 1040 form for 2010 You file a separate return if you file as single, head of household, or married filing separately. 1040 form for 2010 To figure your share of the tax on a joint return, first figure the tax both you and your spouse would have paid had you filed separate returns for 2013 using the same filing status for 2014. 1040 form for 2010 Then multiply the tax on the joint return by the following fraction. 1040 form for 2010 The tax you would have paid had you filed a separate return The total tax you and your spouse would have paid had you filed separate returns Example. 1040 form for 2010 Joe and Heather filed a joint return for 2013 showing taxable income of $48,500 and a tax of $6,386. 1040 form for 2010 Of the $48,500 taxable income, $40,100 was Joe's and the rest was Heather's. 1040 form for 2010 For 2014, they plan to file married filing separately. 1040 form for 2010 Joe figures his share of the tax on the 2013 joint return as follows: Tax on $40,100 based on separate return $5,960 Tax on $8,400 based on separate return 843 Total $6,803 Joe's percentage of total ($5,960 ÷ $6,803) 87. 1040 form for 2010 6% Joe's share of tax on joint return ($6,386 × 87. 1040 form for 2010 6%) $5,594 Special Rules There are special rules for farmers, fishermen, and certain higher income taxpayers. 1040 form for 2010 Farmers and Fishermen If at least two-thirds of your gross income for 2013 or 2014 is from farming or fishing, substitute 662/3% for 90% in (2a) under General Rule , earlier. 1040 form for 2010 Gross income. 1040 form for 2010 Your gross income is all income you receive in the form of money, goods, property, and services that is not exempt from tax. 1040 form for 2010 To determine whether two-thirds of your gross income for 2013 was from farming or fishing, use as your gross income the total of the income (not loss) amounts. 1040 form for 2010 Joint returns. 1040 form for 2010 On a joint return, you must add your spouse's gross income to your gross income to determine if at least two-thirds of your total gross income is from farming or fishing. 1040 form for 2010 Gross income from farming. 1040 form for 2010 This is income from cultivating the soil or raising agricultural commodities. 1040 form for 2010 It includes the following amounts. 1040 form for 2010 Income from operating a stock, dairy, poultry, bee, fruit, or truck farm. 1040 form for 2010 Income from a plantation, ranch, nursery, range, orchard, or oyster bed. 1040 form for 2010 Crop shares for the use of your land. 1040 form for 2010 Gains from sales of draft, breeding, dairy, or sporting livestock. 1040 form for 2010 For 2013, gross income from farming is the total of the following amounts. 1040 form for 2010 Schedule F (Form 1040), Profit or Loss From Farming, line 9. 1040 form for 2010 Form 4835, Farm Rental Income and Expenses, line 7. 1040 form for 2010 Your share of the gross farming income from a partnership, S corporation, estate or trust, from: Schedule K-1 (Form 1065), Schedule K-1 (Form 1120S), or Schedule K-1 (Form 1041). 1040 form for 2010 Your gains from sales of draft, breeding, dairy, or sporting livestock shown on Form 4797, Sales of Business Property. 1040 form for 2010 Wages you receive as a farm employee and wages you receive from a farm corporation are not gross income from farming. 1040 form for 2010 Gross income from fishing. 1040 form for 2010 This is income from catching, taking, harvesting, cultivating, or farming any kind of fish, shellfish (for example, clams and mussels), crustaceans (for example, lobsters, crabs, and shrimp), sponges, seaweeds, or other aquatic forms of animal and vegetable life. 1040 form for 2010 Gross income from fishing includes the following amounts. 1040 form for 2010 Schedule C (Form 1040), Profit or Loss From Business. 1040 form for 2010 Income for services as an officer or crew member of a vessel while the vessel is engaged in fishing. 1040 form for 2010 Your share of the gross fishing income from a partnership, S corporation, estate or trust, from: Schedule K-1 (Form 1065), Schedule K-1 (Form 1120S), or Schedule K-1 (Form 1041). 1040 form for 2010 Certain taxable interest and punitive damage awards received in connection with the Exxon Valdez litigation. 1040 form for 2010 Income for services normally performed in connection with fishing. 1040 form for 2010 Services normally performed in connection with fishing include: Shore service as an officer or crew member of a vessel engaged in fishing, and Services that are necessary for the immediate preservation of the catch, such as cleaning, icing, and packing the catch. 1040 form for 2010 Higher Income Taxpayers If your AGI for 2013 was more than $150,000 ($75,000 if your filing status for 2014 is married filing a separate return), substitute 110% for 100% in (2b) under General Rule , earlier. 1040 form for 2010 For 2013, AGI is the amount shown on Form 1040, line 37; Form 1040A, line 21; and Form 1040EZ, line 4. 1040 form for 2010 Note. 1040 form for 2010 This rule does not apply to farmers and fishermen. 1040 form for 2010 Aliens Resident and nonresident aliens also may have to pay estimated tax. 1040 form for 2010 Resident aliens should follow the rules in this publication, unless noted otherwise. 1040 form for 2010 Nonresident aliens should get Form 1040-ES (NR), U. 1040 form for 2010 S. 1040 form for 2010 Estimated Tax for Nonresident Alien Individuals. 1040 form for 2010 You are an alien if you are not a citizen or national of the United States. 1040 form for 2010 You are a resident alien if you either have a green card or meet the substantial presence test. 1040 form for 2010 For more information about withholding, the substantial presence test, and Form 1040-ES (NR), see Publication 519. 1040 form for 2010 Estates and Trusts Estates and trusts also must pay estimated tax. 1040 form for 2010 However, estates (and certain grantor trusts that receive the residue of the decedent's estate under the decedent's will) are exempt from paying estimated tax for the first 2 years after the decedent's death. 1040 form for 2010 Estates and trusts must use Form 1041-ES, Estimated Income Tax for Estates and Trusts, to figure and pay estimated tax. 1040 form for 2010 How To Figure Estimated Tax To figure your estimated tax, you must figure your expected AGI, taxable income, taxes, deductions, and credits for the year. 1040 form for 2010 When figuring your 2014 estimated tax, it may be helpful to use your income, deductions, and credits for 2013 as a starting point. 1040 form for 2010 Use your 2013 federal tax return as a guide. 1040 form for 2010 You can use Form 1040-ES to figure your estimated tax. 1040 form for 2010 Nonresident aliens use Form 1040-ES (NR) to figure estimated tax. 1040 form for 2010 You must make adjustments both for changes in your own situation and for recent changes in the tax law. 1040 form for 2010 Some of these changes are discussed under What's New for 2014 , earlier. 1040 form for 2010 For information about these and other changes in the law, visit the IRS website at IRS. 1040 form for 2010 gov. 1040 form for 2010 The instructions for Form 1040-ES include a worksheet to help you figure your estimated tax. 1040 form for 2010 Keep the worksheet for your records. 1040 form for 2010 2014 Estimated Tax Worksheet Use Worksheet 2-1 to help guide you through the information about completing the 2014 Estimated Tax Worksheet. 1040 form for 2010 You can also find a copy of the worksheet in the Instructions for Form 1040-ES. 1040 form for 2010 Expected AGI—Line 1 Your expected AGI for 2014 (line 1) is your expected total income minus your expected adjustments to income. 1040 form for 2010 Total income. 1040 form for 2010 Include in your total income all the income you expect to receive during the year, even income that is subject to withholding. 1040 form for 2010 However, do not include income that is tax exempt. 1040 form for 2010 Total income includes all income and loss for 2014 that, if you had received it in 2013, would have been included on your 2013 tax return in the total on line 22 of Form 1040, line 15 of Form 1040A, or line 4 of Form 1040EZ. 1040 form for 2010 Social security and railroad retirement benefits. 1040 form for 2010 If you expect to receive social security or tier 1 railroad retirement benefits during 2014, use Worksheet 2-2 to figure the amount of expected taxable benefits you should include on line 1. 1040 form for 2010 Adjustments to income. 1040 form for 2010 Be sure to subtract from your expected total income all of the adjustments you expect to take on your 2014 tax return. 1040 form for 2010 Self-employed. 1040 form for 2010 If you expect to have income from self-employment, use Worksheet 2-3 to figure your expected self-employment tax and your allowable deduction for self-employment tax. 1040 form for 2010 Include the amount from Worksheet 2-3 in your expected adjustments to income. 1040 form for 2010 If you file a joint return and both you and your spouse have net earnings from self-employment, each of you must complete a separate worksheet. 1040 form for 2010 Expected Taxable Income— Lines 2–5 Reduce your expected AGI for 2014 (line 1) by either your expected itemized deductions or your standard deduction and by your exemptions (lines 2 through 5). 1040 form for 2010 Itemized deductions—line 2. 1040 form for 2010 If you expect to claim itemized deductions on your 2014 tax return, enter the estimated amount on line 2. 1040 form for 2010 Itemized deductions are the deductions that can be claimed on Schedule A (Form 1040). 1040 form for 2010 For 2014, your total itemized deductions may be reduced if your AGI is more than the amount shown next for your filing status. 1040 form for 2010 Single $254,200 Married filing jointly or qualifying widow(er) $305,050 Married filing separately $152,525 Head of household $279,650 If you expect your AGI to be more than this amount, use Worksheet 2-5 to figure the amount to enter on line 2. 1040 form for 2010 Standard deduction—line 2. 1040 form for 2010 If you expect to claim the standard deduction on your 2014 tax return, enter the amount on line 2. 1040 form for 2010 Use Worksheet 2-4 to figure your standard deduction. 1040 form for 2010 No standard deduction. 1040 form for 2010 The standard deduction for some individuals is zero. 1040 form for 2010 Your standard deduction will be zero if you: File a separate return and your spouse itemizes deductions, Are a dual-status alien, or File a return for a period of less than 12 months because you change your accounting period. 1040 form for 2010 Exemptions—line 4. 1040 form for 2010 After you have subtracted either your expected itemized deductions or your standard deduction from your expected AGI, reduce the amount remaining by $3,950 for each exemption you expect to take on your 2014 tax return. 1040 form for 2010 If another person (such as your parent) can claim an exemption for you on his or her tax return, you cannot claim your own personal exemption. 1040 form for 2010 This is true even if the other person will not claim your exemption or the exemption will be reduced or eliminated under the phaseout rule. 1040 form for 2010 For 2014, your deduction for personal exemption is reduced if your AGI is more than the amount shown next for your filing status. 1040 form for 2010 Single $254,200 Married filing jointly or qualifying widow(er) $305,050 Married filing separately $152,525 Head of household $279,650 If you expect your AGI to be more than this amount, use Worksheet 2-6 to figure the amount to enter on line 4. 1040 form for 2010 Expected Taxes and Credits— Lines 6–13c After you have figured your expected taxable income (line 5), follow the steps next to figure your expected taxes, credits, and total tax for 2014. 1040 form for 2010 Most people will have entries for only a few of these steps. 1040 form for 2010 However, you should check every step to be sure you do not overlook anything. 1040 form for 2010 Step 1. 1040 form for 2010 Figure your expected income tax (line 6). 1040 form for 2010 Generally, you will use the 2014 Tax Rate Schedules, later, to figure your expected income tax. 1040 form for 2010 However, see below for situations where you must use a different method to compute your estimated tax. 1040 form for 2010 Tax on child's investment income. 1040 form for 2010 You must use a special method to figure tax on the income of the following children who have more than $2,000 of investment income. 1040 form for 2010 Children under age 18 at the end of 2014. 1040 form for 2010 The following children if their earned income is not more than half their support. 1040 form for 2010 Children age 18 at the end of 2014. 1040 form for 2010 Children who are full-time students over age 18 and under age 24 at the end of 2014. 1040 form for 2010 See Publication 929, Tax Rules for Children and Dependents. 1040 form for 2010 Although the ages and dollar amounts in the publication may be different in the 2014 revision, this reference will give you basic information for figuring the tax. 1040 form for 2010 Tax on net capital gain. 1040 form for 2010 The regular income tax rates for individuals do not apply to a net capital gain. 1040 form for 2010 Instead, your net capital gain is taxed at a lower maximum rate. 1040 form for 2010 The term “net capital gain” means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss. 1040 form for 2010 Tax on capital gain and qualified dividends. 1040 form for 2010 If the amount on line 1 includes a net capital gain or qualified dividends, use Worksheet 2-7 to figure your tax. 1040 form for 2010 Note. 1040 form for 2010 For 2014, your capital gains and dividends rate will depend on your income. 1040 form for 2010 Tax if excluding foreign earned income or excluding or deducting foreign housing. 1040 form for 2010 If you expect to claim the foreign earned income exclusion or the housing exclusion or deduction on Form 2555 or Form 2555-EZ, use Worksheet 2-8 to figure your estimated tax. 1040 form for 2010 Step 2. 1040 form for 2010 Total your expected taxes (line 8). 1040 form for 2010 Include on line 8 the sum of the following. 1040 form for 2010 Your tax on line 6. 1040 form for 2010 Your expected alternative minimum tax (AMT) from Form 6251, or included on Form 1040A. 1040 form for 2010 Your expected additional taxes from Form 8814, Parents' Election To Report Child's Interest and Dividends, and Form 4972, Tax on Lump-Sum Distributions. 1040 form for 2010 Any recapture of education credits. 1040 form for 2010 Step 3. 1040 form for 2010 Subtract your expected credits (line 9). 1040 form for 2010 If you are using your 2013 return as a guide and filed Form 1040, your total credits for 2013 were shown on line 54. 1040 form for 2010 If you filed Form 1040A, your total credits for 2013 were on line 34. 1040 form for 2010 If your credits on line 9 are more than your taxes on line 8, enter “-0-” on line 10 and go to Step 4. 1040 form for 2010 Step 4. 1040 form for 2010 Add your expected self-employment tax (line 11). 1040 form for 2010 You already should have figured your self-employment tax (see Self-employed under Expected AGI—Line 1, earlier). 1040 form for 2010 Step 5. 1040 form for 2010 Add your expected other taxes (line 12). 1040 form for 2010 Other taxes include the following. 1040 form for 2010 Additional tax on early distributions from: An IRA or other qualified retirement plan, A tax-sheltered annuity, or A modified endowment contract entered into after June 20, 1988. 1040 form for 2010 Household employment taxes if: You will have federal income tax withheld from wages, pensions, annuities, gambling winnings, or other income, or You would be required to make estimated tax payments even if you did not include household employment taxes when figuring your estimated tax. 1040 form for 2010 Amounts written on Form 1040 on the line for “other taxes” (line 60 on the 2013 Form 1040). 1040 form for 2010 But, do not include recapture of a federal mortgage subsidy; tax on excess golden parachute payments; look-back interest due under section 167(g) or 460(b) of the Internal Revenue Code; excise tax on insider stock compensation from an expatriated corporation; uncollected social security and Medicare tax or RRTA tax on tips or group-term life insurance; or additional tax on advance payments of health coverage tax credit when not eligible. 1040 form for 2010 Repayment of the first-time homebuyer credit. 1040 form for 2010 See Form 5405. 1040 form for 2010 Additional Medicare Tax. 1040 form for 2010 A 0. 1040 form for 2010 9% Additional Medicare Tax applies to your combined Medicare wages and self-employment income and/or your RRTA compensation that exceeds the amount listed in the following chart, based on your filing status. 1040 form for 2010 Filing Status Threshold Amount Married filing jointly $250,000 Married filing separately $125,000 Single $200,000 Head of household $200,000 Qualifying Widow(er) $200,000 Medicare wages and self-employment income are combined to determine if your income exceeds the threshold. 1040 form for 2010 A self-employment loss should not be considered for purposes of this tax. 1040 form for 2010 RRTA compensation should be separately compared to the threshold. 1040 form for 2010 Your employer is responsible for withholding the 0. 1040 form for 2010 9% Additional Medicare Tax on Medicare wages or RRTA compensation it pays to you in excess of $200,000 in 2014. 1040 form for 2010 You should consider this withholding, if applicable, in determining whether you need to make an estimated payment. 1040 form for 2010 For more information on Additional Medicare Tax, go to IRS. 1040 form for 2010 gov and enter “Additional Medicare Tax” in the search box. 1040 form for 2010 Net Investment Income Tax (NIIT). 1040 form for 2010 The NIIT is 3. 1040 form for 2010 8% of the lesser of your net investment income or the excess of your modified adjusted gross income over the amount listed in the following chart, based on your filing status. 1040 form for 2010 Filing Status Threshold Amount Married filing jointly $250,000 Married filing separately $125,000 Single $200,000 Head of household $200,000 Qualifying Widow(er) $250,000 For more information on Net Investment Income Tax, go to IRS. 1040 form for 2010 gov and enter “Net Investment Income Tax” in the search box. 1040 form for 2010 Step 6. 1040 form for 2010 Subtract your refundable credit (line 13b). 1040 form for 2010 To figure your expected fuel tax credit, do not include fuel tax for the first three quarters of the year that you expect to have refunded to you. 1040 form for 2010 The result of steps 1 through 6 is your total estimated tax for 2014 (line 13c). 1040 form for 2010 Required Annual Payment— Line 14c On lines 14a through 14c, figure the total amount you must pay for 2014, through withholding and estimated tax payments, to avoid paying a penalty. 1040 form for 2010 General rule. 1040 form for 2010 The total amount you must pay is the smaller of: 90% of your total expected tax for 2014, or 100% of the total tax shown on your 2013 return. 1040 form for 2010 Your 2013 tax return must cover all 12 months. 1040 form for 2010 Special rules. 1040 form for 2010 There are special rules for higher income taxpayers and for farmers and fishermen. 1040 form for 2010 Higher income taxpayers. 1040 form for 2010 If your AGI for 2013 was more than $150,000 ($75,000 if your filing status for 2014 is married filing separately), substitute 110% for 100% in (2) above. 1040 form for 2010 This rule does not apply to farmers and fishermen. 1040 form for 2010 For 2013, AGI is the amount shown on Form 1040, line 37; Form 1040A, line 21; and Form 1040EZ, line 4. 1040 form for 2010 Example. 1040 form for 2010 Jeremy Martin's total tax on his 2013 return was $42,581, and his expected tax for 2014 is $71,253. 1040 form for 2010 His 2013 AGI was $180,000. 1040 form for 2010 Because Jeremy had more than $150,000 of AGI in 2013, he figures his required annual payment as follows. 1040 form for 2010 He determines that 90% of his expected tax for 2014 is $64,128 (. 1040 form for 2010 90 × $71,253). 1040 form for 2010 Next, he determines that 110% of the tax shown on his 2013 return is $46,839 (1. 1040 form for 2010 10 x $42,581). 1040 form for 2010 Finally, he determines that his required annual payment is $46,839, the smaller of the two. 1040 form for 2010 Farmers and fishermen. 1040 form for 2010 If at least two-thirds of your gross income for 2013 or 2014 is from farming or fishing, your required annual payment is the smaller of: 662/3% (. 1040 form for 2010 6667) of your total tax for 2014, or 100% of the total tax shown on your 2013 return. 1040 form for 2010 (Your 2013 tax return must cover all 12 months. 1040 form for 2010 ) For definitions of “gross income from farming” and “gross income from fishing,” see Farmers and Fishermen , under Special Rules discussed earlier. 1040 form for 2010 Total tax for 2013—line 14b. 1040 form for 2010 Your 2013 total tax, if you filed Form 1040, is the amount on line 61 reduced by the following. 1040 form for 2010 Unreported social security and Medicare tax or RRTA tax from Forms 4137 or 8919 (line 57). 1040 form for 2010 The following amounts from Form 5329 included on line 58. 1040 form for 2010 Any tax on excess contributions to IRAs, Archer MSAs, Coverdell education savings accounts, and health savings accounts. 1040 form for 2010 Any tax on excess accumulations in qualified retirement plans. 1040 form for 2010 The following write-ins on line 60. 1040 form for 2010 Excise tax on excess golden parachute payments (identified as “EPP”). 1040 form for 2010 Excise tax on insider stock compensation from an expatriated corporation (identified as “ISC”). 1040 form for 2010 Look-back interest due under section 167(g) (identified as “From Form 8866”). 1040 form for 2010 Look-back interest due under section 460(b) (identified as “From Form 8697”). 1040 form for 2010 Recapture of federal mortgage subsidy (identified as “FMSR”). 1040 form for 2010 Additional tax on advance payments of health coverage tax credit when not eligible (identified as “HCTC”). 1040 form for 2010 Uncollected social security and Medicare tax or RRTA tax on tips or group-term life insurance (identified as “UT”). 1040 form for 2010 Any refundable credit amounts. 1040 form for 2010 If you filed Form 1040A, your 2013 total tax is the amount on line 35 reduced by any refundable credits. 1040 form for 2010 If you filed Form 1040EZ, your 2013 total tax is the amount on line 10 reduced by the amount on line 8a. 1040 form for 2010 Total Estimated Tax Payments Needed—Line 16a Use lines 15 and 16a to figure the total estimated tax you may be required to pay for 2014. 1040 form for 2010 Subtract your expected withholding from your required annual payment (line 14c). 1040 form for 2010 You usually must pay this difference in four equal installments. 1040 form for 2010 See When To Pay Estimated Tax and How To Figure Each Payment . 1040 form for 2010 You do not have to pay estimated tax if: Line 14c minus line 15 is zero or less, or Line 13c minus line 15 is less than $1,000. 1040 form for 2010 Withholding—line 15. 1040 form for 2010 Your expected withholding for 2014 (line 15) includes the income tax you expect to be withheld from all sources (wages, pensions and annuities, etc. 1040 form for 2010 ). 1040 form for 2010 It includes excess social security, and tier 1 railroad retirement tax you expect to be withheld from your wages and compensation. 1040 form for 2010 For this purpose, you will have excess social security or tier 1 railroad retirement tax withholding for 2014 only if your wages and compensation from two or more employers are more than $117,000. 1040 form for 2010 See Excess Social Security or Railroad Retirement Tax Withholding in chapter 3. 1040 form for 2010 It also includes Additional Medicare Tax you expect to be withheld from your wages or compensation. 1040 form for 2010 Your employer is responsible for withholding the 0. 1040 form for 2010 9% Additional Medicare Tax on Medicare wages or RRTA compensation it pays to you in excess of $200,000. 1040 form for 2010 When To Pay Estimated Tax For estimated tax purposes, the year is divided into four payment periods. 1040 form for 2010 Each period has a specific payment due date. 1040 form for 2010 If you do not pay enough tax by the due date of each of the payment periods, you may be charged a penalty even if you are due a refund when you file your income tax return. 1040 form for 2010 If a payment is mailed, the date of the U. 1040 form for 2010 S. 1040 form for 2010 postmark is considered the date of payment. 1040 form for 2010 The payment periods and due dates for estimated tax payments are shown next. 1040 form for 2010 For exceptions to the dates listed, see Saturday, Sunday, holiday rule below. 1040 form for 2010 For the period: Due date: Jan. 1040 form for 2010 11 – March 31 April 15 April 1 – May 31 June 16 June 1 – August 31 September 15 Sept. 1040 form for 2010 1 – Dec. 1040 form for 2010 31 January 15 next year2 1If your tax year does not begin on January 1, see Fiscal year taxpayers . 1040 form for 2010 2See January payment . 1040 form for 2010 Saturday, Sunday, holiday rule. 1040 form for 2010 If the due date for an estimated tax payment falls on a Saturday, Sunday, or legal holiday, the payment will be on time if you make it on the next day that is not a Saturday, Sunday, or a holiday. 1040 form for 2010 January payment. 1040 form for 2010 If you file your 2014 Form 1040 or Form 1040A by February 2, 2015, and pay the rest of the tax you owe, you do not need to make the payment due on January 15, 2015. 1040 form for 2010 Example. 1040 form for 2010 Janet Adams does not pay any estimated tax for 2014. 1040 form for 2010 She files her 2014 income tax return and pays the balance due shown on her return on January 26, 2015. 1040 form for 2010 Janet's estimated tax for the fourth payment period is considered to have been paid on time. 1040 form for 2010 However, she may owe a penalty for not making the first three estimated tax payments, if required. 1040 form for 2010 Any penalty for not making those payments will be figured up to January 26, 2015. 1040 form for 2010 Fiscal year taxpayers. 1040 form for 2010 If your tax year does not start on January 1, your payment due dates are: The 15th day of the 4th month of your fiscal year, The 15th day of the 6th month of your fiscal year, The 15th day of the 9th month of your fiscal year, and The 15th day of the 1st month after the end of your fiscal year. 1040 form for 2010 You do not have to make the last payment listed above if you file your income tax return by the last day of the first month after the end of your fiscal year and pay all the tax you owe with your return. 1040 form for 2010 When To Start You do not have to make estimated tax payments until you have income on which you will owe income tax. 1040 form for 2010 If you have income subject to estimated tax during the first payment period, you must make your first payment by the due date for the first payment period. 1040 form for 2010 You have several options when paying estimated taxes. 1040 form for 2010 You can: apply an overpayment from the previous tax year, pay all your estimated tax by the due date of your first payment, or pay it in installments. 1040 form for 2010 If you choose to pay in installments, make your first payment by the due date for the first payment period. 1040 form for 2010 Make your remaining installment payments by the due dates for the later periods. 1040 form for 2010 To avoid any estimated tax penalties, all installments must be paid by their due date and for the required amount. 1040 form for 2010 No income subject to estimated tax during first period. 1040 form for 2010 If you do not have income subject to estimated tax until a later payment period, you must make your first payment by the due date for that period. 1040 form for 2010 You can pay your entire estimated tax by the due date for that period or you can pay it in installments by the due date for that period and the due dates for the remaining periods. 1040 form for 2010 Table 2-1 shows the dates for making installment payments. 1040 form for 2010 Table 2-1. 1040 form for 2010 Due Dates for Estimated Tax Installment Payments If you first have income on which you must pay estimated tax: Make a payment by:* Make later installments by:* Before April 1 April 15 June 16 Sept. 1040 form for 2010 15 Jan. 1040 form for 2010 15 next year April 1–May 31 June 16 Sept. 1040 form for 2010 15 Jan. 1040 form for 2010 15 next year June 1–Aug. 1040 form for 2010 31 Sept. 1040 form for 2010 15 Jan. 1040 form for 2010 15 next year After Aug. 1040 form for 2010 31 Jan. 1040 form for 2010 15 next year (None) *See January payment and Saturday, Sunday, holiday rule . 1040 form for 2010 How much to pay to avoid penalty. 1040 form for 2010 To determine how much you should pay by each payment due date, see How To Figure Each Payment , later. 1040 form for 2010 Farmers and Fishermen If at least two-thirds of your gross income for 2013 or 2014 is from farming or fishing, you have only one payment due date for your 2014 estimated tax, January 15, 2015. 1040 form for 2010 The due dates for the first three payment periods, discussed under When To Pay Estimated Tax , earlier, do not apply to you. 1040 form for 2010 If you file your 2014 Form 1040 by March 2, 2015, and pay all the tax you owe at that time, you do not need to make an estimated tax payment. 1040 form for 2010 Fiscal year farmers and fishermen. 1040 form for 2010 If you are a farmer or fisherman, but your tax year does not start on January 1, you can either: Pay all your estimated tax by the 15th day after the end of your tax year, or File your return and pay all the tax you owe by the 1st day of the 3rd month after the end of your tax year. 1040 form for 2010 How To Figure Each Payment After you have figured your total estimated tax, figure how much you must pay by the due date of each payment period. 1040 form for 2010 You should pay enough by each due date to avoid a penalty for that period. 1040 form for 2010 If you do not pay enough during any payment period, you may be charged a penalty even if you are due a refund when you file your tax return. 1040 form for 2010 The penalty is discussed in chapter 4. 1040 form for 2010 Regular Installment Method If your first estimated tax payment is due April 15, 2014, you can figure your required payment for each period by dividing your annual estimated tax due (line 16a of the 2014 Estimated Tax Worksheet (Worksheet 2-1)) by 4. 1040 form for 2010 Enter this amount on line 17. 1040 form for 2010 However, use this method only if your income is basically the same throughout the year. 1040 form for 2010 Change in estimated tax. 1040 form for 2010 After you make an estimated tax payment, changes in your income, adjustments, deductions, credits, or exemptions may make it necessary for you to refigure your estimated tax. 1040 form for 2010 Pay the unpaid balance of your amended estimated tax by the next payment due date after the change or in installments by that date and the due dates for the remaining payment periods. 1040 form for 2010 If you do not receive your income evenly throughout the year, your required estimated tax payments may not be the same for each period. 1040 form for 2010 See Annualized Income Installment Method . 1040 form for 2010 Amended estimated tax. 1040 form for 2010 If you refigure your estimated tax during the year, or if your first estimated tax payment is due after April 15, 2014, figure your required payment for each remaining payment period using Worksheet 2-14. 1040 form for 2010 Example. 1040 form for 2010 Early in 2014, Mira Roberts figures that her estimated tax due is $1,800. 1040 form for 2010 She makes estimated tax payments on April 15 and June 16 of $450 each ($1,800 ÷ 4). 1040 form for 2010 On July 10, she sells investment property at a gain. 1040 form for 2010 Her refigured estimated tax is $4,100. 1040 form for 2010 Her required estimated tax payment for the third payment period is $2,175, as shown in her filled-in Worksheet 2-14. 1040 form for 2010 If Mira's estimated tax does not change again, her required estimated tax payment for the fourth payment period will be $1,025. 1040 form for 2010 Worksheet 2-14. 1040 form for 2010 Amended Estimated Tax Worksheet—Illustrated 1. 1040 form for 2010 Amended total estimated tax due 1. 1040 form for 2010 $4,100 2. 1040 form for 2010 Multiply line 1 by: 50% (. 1040 form for 2010 50) if next payment is due June 16, 2014 75% (. 1040 form for 2010 75) if next payment is due September 15, 2014 100% (1. 1040 form for 2010 00) if next payment is due January 15, 2015 2. 1040 form for 2010 3,075 3. 1040 form for 2010 Estimated tax payments for all previous periods 3. 1040 form for 2010 900 4. 1040 form for 2010 Next required payment: Subtract line 3 from line 2 and enter the result (but not less than zero) here and on your payment voucher for your next required payment 4. 1040 form for 2010 $2,175 Note. 1040 form for 2010 If the payment on line 4 is due January 15, 2015, stop here. 1040 form for 2010 Otherwise, go to line 5. 1040 form for 2010 5. 1040 form for 2010 Add lines 3 and 4 5. 1040 form for 2010 3,075 6. 1040 form for 2010 Subtract line 5 from line 1 and enter the result (but not less than zero) 6. 1040 form for 2010 1,025 7. 1040 form for 2010 Each following required payment: If the payment on line 4 is due June 16, 2014, enter one-half of the amount on line 6 here and on the payment vouchers for your payments due September 15, 2014, and January 15, 2015. 1040 form for 2010 If the amount on line 4 is due September 15, 2014, enter the amount from line 6 here and on the payment voucher for your payment due January 15, 2015 7. 1040 form for 2010 $1,025 Worksheet 2-14. 1040 form for 2010 Amended Estimated Tax Worksheet—Blank 1. 1040 form for 2010 Amended total estimated tax due 1. 1040 form for 2010 2. 1040 form for 2010 Multiply line 1 by: 50% (. 1040 form for 2010 50) if next payment is due June 16, 2014 75% (. 1040 form for 2010 75) if next payment is due September 15, 2014 100% (1. 1040 form for 2010 00) if next payment is due January 15, 2015 2. 1040 form for 2010 3. 1040 form for 2010 Estimated tax payments for all previous periods 3. 1040 form for 2010 4. 1040 form for 2010 Next required payment: Subtract line 3 from line 2 and enter the result (but not less than zero) here and on your payment voucher for your next required payment 4. 1040 form for 2010 Note. 1040 form for 2010 If the payment on line 4 is due January 15, 2015, stop here. 1040 form for 2010 Otherwise, go to line 5. 1040 form for 2010 5. 1040 form for 2010 Add lines 3 and 4 5. 1040 form for 2010 6. 1040 form for 2010 Subtract line 5 from line 1 and enter the result (but not less than zero) 6. 1040 form for 2010 7. 1040 form for 2010 Each following required payment: If the payment on line 4 is due June 16, 2014, enter one-half of the amount on line 6 here and on the payment vouchers for your payments due September 15, 2014, and January 15, 2015. 1040 form for 2010 If the amount on line 4 is due September 15, 2014, enter the amount from line 6 here and on the payment voucher for your payment due January 15, 2015 7. 1040 form for 2010 Underpayment penalty. 1040 form for 2010 The penalty is figured separately for each payment period. 1040 form for 2010 If you figure your payments using the regular installment method and later refigure your payments because of an increase in income, you may be charged a penalty for underpayment of estimated tax for the period(s) before you changed your payments. 1040 form for 2010 To see how you may be able to avoid or reduce this penalty, see Annualized Income Installment Method (Schedule AI) in chapter 4. 1040 form for 2010 Annualized Income Installment Method If you do not receive your income evenly throughout the year (for example, your income from a repair shop you operate is much larger in the summer than it is during the rest of the year), your required estimated tax payment for one or more periods may be less than the amount figured using the regular installment method. 1040 form for 2010 The annualized income installment method annualizes your tax at the end of each period based on a reasonable estimate of your income, deductions, and other items relating to events that occurred from the beginning of the tax year through the end of the period. 1040 form for 2010 To see whether you can pay less for any period, complete the 2014 Annualized Estimated Tax Worksheet (Worksheet 2-9). 1040 form for 2010 You first must complete the 2014 Estimated Tax Worksheet (Worksheet 2-1) through line 16b. 1040 form for 2010 Use the result you figure on line 32 of Worksheet 2-9 to make your estimated tax payments and complete your payment vouchers. 1040 form for 2010 Note. 1040 form for 2010 If you use the annualized income installment method to figure your estimated tax payments, you must file Form 2210 with your 2014 tax return. 1040 form for 2010 See Annualized Income Installment Method (Schedule AI) in chapter 4 for more information. 1040 form for 2010 Instructions for the 2014 Annualized Estimated Tax Worksheet (Worksheet 2-9) Use Worksheet 2-9 to help you follow these instructions. 1040 form for 2010 The purpose of this worksheet is to determine your estimated tax liability as your income accumulates throughout the year, rather than dividing your entire year's estimated tax liability by four as if your income was earned equally throughout the year. 1040 form for 2010 The top of the worksheet shows the dates for each payment period. 1040 form for 2010 The periods build; that is, each period includes all previous periods. 1040 form for 2010 After the end of each payment period, complete the corresponding worksheet column to figure the payment due for that period. 1040 form for 2010 Line 1. 1040 form for 2010 Enter your AGI for the period. 1040 form for 2010 This is your gross income for the period, including your share of partnership or S corporation income or loss, minus your adjustments to income for that period. 1040 form for 2010 See Expected AGI—Line 1 , earlier. 1040 form for 2010 Self-employment income. 1040 form for 2010 If you had self-employment income, first complete Section B of this worksheet. 1040 form for 2010 Use the amounts on line 43 when figuring your expected AGI to enter in each column of Section A, line 1. 1040 form for 2010 Line 4. 1040 form for 2010 Be sure to consider all deduction limits figured on Schedule A (Form 1040), such as reducing your medical expenses by 10% (7. 1040 form for 2010 5% if either you or your spouse was born before January 2, 1950) or reducing certain miscellaneous deductions by 2% of your AGI. 1040 form for 2010 Figure your deduction limits using your expected AGI in the corresponding column of line 1 (2014 Annualized Estimated Tax Worksheet (Worksheet 2-9)). 1040 form for 2010 Line 6. 1040 form for 2010 Multiply line 4 by line 5 and enter the result on line 6 unless line 3 is more than $305,050 if married filing jointly or qualifying widow(er), $279,650 if head of household, $254,200 if single, or $152,525 if married filing separately. 1040 form for 2010 In that case, use Worksheet 2-10 to figure the amount to enter on line 6. 1040 form for 2010 Complete Worksheet 2–10 for each period, as necessary. 1040 form for 2010 Line 7. 1040 form for 2010 If you will not itemize your deductions, use Worksheet 2-4 to figure your standard deduction. 1040 form for 2010 Line 10. 1040 form for 2010 Multiply $3,950 by your total expected exemptions and enter the result on line 10 unless line 3 is more than $305,050 if married filing jointly or qualifying widow(er), $279,650 if head of household, $254,200 if single, or $152,525 if married filing separately. 1040 form for 2010 In that case, use Worksheet 2-11 to figure the amount to enter on line 10. 1040 form for 2010 Line 12. 1040 form for 2010 Generally, you will use the Tax Rate Schedules to figure the tax on your annualized income. 1040 form for 2010 However, see below for situations where you must use a different method to compute your estimated tax. 1040 form for 2010 Tax on child's investment income. 1040 form for 2010 You must use a special method to figure tax on the income of the following children who have more than $2,000 of investment income. 1040 form for 2010 Children under age 18 at the end of 2014. 1040 form for 2010 The following children if their earned income is not more than half their support. 1040 form for 2010 Children age 18 at the end of 2014. 1040 form for 2010 Children who are full-time students over age 18 and under age 24 at the end of 2014. 1040 form for 2010 See Publication 929. 1040 form for 2010 Tax on net capital gain. 1040 form for 2010 The regular income tax rates for individuals do not apply to a net capital gain. 1040 form for 2010 Instead, your net capital gain is taxed at a lower maximum rate. 1040 form for 2010 The term “net capital gain” means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss. 1040 form for 2010 Tax on qualified dividends and capital gains. 1040 form for 2010 For 2014, your capital gain and dividends rate will depend on your income. 1040 form for 2010 Tax on capital gain or qualified dividends. 1040 form for 2010 If the amount on line 1 includes a net capital gain or qualified dividends, use Worksheet 2-12 to figure the amount to enter on line 12. 1040 form for 2010 Tax if excluding foreign earned income or excluding or deducting foreign housing. 1040 form for 2010 If you expect to claim the foreign earned income exclusion or the housing exclusion or deduction on Form 2555 or Form 2555-EZ, use Worksheet 2-13 to figure the amount to enter on line 12. 1040 form for 2010 Line 13. 1040 form for 2010 If you file Form 1040, add the tax from Forms 8814, 4972, and 6251 for the period. 1040 form for 2010 If you file Form 1040A, add the amount from the Alternative Minimum Tax Worksheet found in the instructions. 1040 form for 2010 Also include any recapture of an education credit for each period. 1040 form for 2010 You may owe this tax if you claimed an education credit in an earlier year and you received either tax-free educational assistance or a refund of qualifying expenses for the same student after filing your 2013 return. 1040 form for 2010 Use the 2013 forms or worksheets to see if you will owe any of the taxes discussed above. 1040 form for 2010 Figure the tax based on your income and deductions during the period shown in the column headings. 1040 form for 2010 Multiply this amount by the annualization amounts shown for each column on line 2 of the 2014 Annualized Estimated Tax Worksheet (Worksheet 2-9). 1040 form for 2010 Enter the result on line 13 of this worksheet. 1040 form for 2010 Line 15. 1040 form for 2010 Include all the nonrefundable credits you expect to claim because of events that will occur during the period. 1040 form for 2010 Note. 1040 form for 2010 When figuring your credits for each period, annualize any item of income or deduction to figure each credit. 1040 form for 2010 For example, if you need to use your AGI to figure a credit, use line 3 of Worksheet 2-9 to figure the credit for each column. 1040 form for 2010 Line 18. 1040 form for 2010 Add your expected other taxes. 1040 form for 2010 Other taxes include the following. 1040 form for 2010 Additional tax on early distributions from: An IRA or other qualified retirement plan, A tax-sheltered annuity, or A modified endowment contract entered into after June 20, 1988. 1040 form for 2010 Household employment taxes if: You will have federal income tax withheld from wages, pensions, annuities, gambling winnings, or other income, or You would be required to make estimated tax payments even if you did not include household employment taxes when figuring your estimated tax. 1040 form for 2010 Amounts on Form 1040 written on the line for “other taxes” (line 60 on the 2013 Form 1040). 1040 form for 2010 But do not include recapture of a federal mortgage subsidy; tax on excess golden parachute payments; look-back interest due under section 167(g) or 460(b) of the Internal Revenue Code; excise tax on insider stock compensation from an expatriated corporation; uncollected social security, Medicare, or RRTA tax on tips or group-term life insurance; or additional tax on advance payments of health coverage tax credit when not eligible. 1040 form for 2010 Repayment of the first-time homebuyer credit if the home will cease to be your main home in 2014. 1040 form for 2010 See Form 5405 for exceptions. 1040 form for 2010 Additional Medicare Tax. 1040 form for 2010 A 0. 1040 form for 2010 9% Additional Medicare Tax applies to your combined Medicare wages and self-employment income and/or your RRTA compensation that exceeds the amount listed in the following chart, based on your filing status. 1040 form for 2010 Filing Status Threshold Amount Married filing jointly $250,000 Married filing separately $125,000 Single $200,000 Head of household $200,000 Qualifying Widow(er) $200,000 Medicare wages and self-employment income are combined to determine if your income exceeds the threshold. 1040 form for 2010 A self-employment loss should not be considered for purposes of this tax. 1040 form for 2010 RRTA compensation should be separately compared to the threshold. 1040 form for 2010 Your employer is responsible for withholding the 0. 1040 form for 2010 9% Additional Medicare Tax on Medicare wages or RRTA compensation it pays you in excess of $200,000 in 2014. 1040 form for 2010 You should consider this withholding, if applicable, in determining whether you need to make an estimated payment. 1040 form for 2010 For more information on Additional Medicare Tax, go to IRS. 1040 form for 2010 gov and enter “Additional Medicare Tax” in the search box. 1040 form for 2010 Net Investment Income Tax (NIIT). 1040 form for 2010 The NIIT is 3. 1040 form for 2010 8% of the lesser of your net investment income or the excess of your modified adjusted gross income over a specified threshold amount. 1040 form for 2010 Threshold amounts: Filing Status Threshold Amount Married filing jointly $250,000 Married filing separately $125,000 Single $200,000 Head of household $200,000 Qualifying Widow(er) $250,000 For more information on Net Investment Income Tax, go to IRS. 1040 form for 2010 gov and enter “Net Investment Income Tax” in the search box. 1040 form for 2010 Line 20. 1040 form for 2010 Include all the refundable credits (other than withholding credits) you can claim because of events that occurred during the period. 1040 form for 2010 Note. 1040 form for 2010 When figuring your refundable credits for each period, annualize any item of income or deduction used to figure each credit. 1040 form for 2010 Line 29. 1040 form for 2010 If line 28 is smaller than line 25 and you are not certain of the estimate of your 2014 tax, you can avoid a penalty by entering the amount from line 25 on line 29. 1040 form for 2010 Line 31. 1040 form for 2010 For each period, include estimated tax payments made and any excess social security and railroad retirement tax. 1040 form for 2010 Also include estimated federal income tax withholding. 1040 form for 2010 One-fourth of your estimated withholding is considered withheld on the due date of each payment period. 1040 form for 2010 To figure the amount to include on line 31 for each period, multiply your total expected withholding for 2014 by: 25% (. 1040 form for 2010 25) for the first period, 50% (. 1040 form for 2010 50) for the second period, 75% (. 1040 form for 2010 75) for the third period, and 100% (1. 1040 form for 2010 00) for the fourth period. 1040 form for 2010 However, you may choose to include your withholding according to the actual dates on which the amounts will be withheld. 1040 form for 2010 For each period, include withholding made from the beginning of the period up to and including the payment due date. 1040 form for 2010 You can make this choice separately for the taxes withheld from your wages and all other withholding. 1040 form for 2010 For an explanation of what to include in withholding, see Total Estimated Tax Payments Needed—Line 16a , earlier. 1040 form for 2010 Nonresident aliens. 1040 form for 2010 If you will file Form 1040NR and you do not receive wages as an employee subject to U. 1040 form for 2010 S. 1040 form for 2010 income tax withholding, the instructions for the worksheet are modified as follows. 1040 form for 2010 Skip column (a). 1040 form for 2010 On line 1, enter your income for the period that is effectively connected with a U. 1040 form for 2010 S. 1040 form for 2010 trade or business. 1040 form for 2010 On line 21, increase your entry by the amount determined by multiplying your income for the period that is not effectively connected with a U. 1040 form for 2010 S. 1040 form for 2010 trade or business by the following. 1040 form for 2010 72% for column (b). 1040 form for 2010 45% for column (c). 1040 form for 2010 30% for column (d). 1040 form for 2010 However, if you can use a treaty rate lower than 30%, use the percentages determined by multiplying your treaty rate by 2. 1040 form for 2010 4, 1. 1040 form for 2010 5, and 1, respectively. 1040 form for 2010 On line 26, enter one-half of the amount from line 16c of the Form 1040-ES (NR) 2014 Estimated Tax Worksheet in column (b), and one-fourth in columns (c) and (d) of Worksheet 2-9. 1040 form for 2010 On lines 24 and 27, skip column (b). 1040 form for 2010 On line 31, if you do not use the actual withholding method, include one-half of your total expected withholding in column (b) and one-fourth in columns (c) and (d). 1040 form for 2010 See Publication 519 for more information. 1040 form for 2010 Estimated Tax Payments Not Required You do not have to pay estimated tax if your withholding in each payment period is at least as much as: One-fourth of your required annual payment, or Your required annualized income installment for that period. 1040 form for 2010 You also do not have to pay estimated tax if you will pay enough through withholding to keep the amount you will owe with your return under $1,000. 1040 form for 2010 How To Pay Estimated Tax There are several ways to pay estimated tax. 1040 form for 2010 Credit an overpayment on your 2013 return to your 2014 estimated tax. 1040 form for 2010 Pay by direct transfer from your bank account, or pay by credit or debit card using a pay-by-phone system or the Internet. 1040 form for 2010 Send in your payment (check or money order) with a payment voucher from Form 1040-ES. 1040 form for 2010 Credit an Overpayment If you show an overpayment of tax after completing your Form 1040 or Form 1040A for 2013, you can apply part or all of it to your estimated tax for 2014. 1040 form for 2010 On Form 1040, or Form 1040A, enter the amount you want credited to your estimated tax rather than refunded. 1040 form for 2010 Take the amount you have credited into account when figuring your estimated tax payments. 1040 form for 2010 If you timely file your 2013 return, treat the credit as a payment made on April 15, 2014. 1040 form for 2010 If you are a beneficiary of an estate or trust, and the trustee elects to credit 2014 trust payments of estimated tax to you, you can treat the amount credited as paid by you on January 15, 2015. 1040 form for 2010 If you choose to have an overpayment of tax credited to your estimated tax, you cannot have any of that amount refunded to you until you file your tax return for the following year. 1040 form for 2010 You also cannot use that overpayment in any other way. 1040 form for 2010 Example. 1040 form for 2010 When Kathleen finished filling out her 2013 tax return, she saw that she had overpaid her taxes by $750. 1040 form for 2010 Kathleen knew she would owe additional tax in 2014. 1040 form for 2010 She credited $600 of the overpayment to her 2014 estimated tax and had the remaining $150 refunded to her. 1040 form for 2010 In September, she amended her 2013 return by filing Form 1040X, Amended U. 1040 form for 2010 S. 1040 form for 2010 Individual Income Tax Return. 1040 form for 2010 It turned out that she owed $250 more in tax than she had thought. 1040 form for 2010 This reduced her 2013 overpayment from $750 to $500. 1040 form for 2010 Because the $750 had already been applied to her 2014 estimated tax or refunded to her, the IRS billed her for the additional $250 she owed, plus penalties and interest. 1040 form for 2010 Kathleen could not use any of the $600 she had credited to her 2014 estimated tax to pay this bill. 1040 form for 2010 Pay Online Paying online is convenient and secure and helps make sure we get your payments on time. 1040 form for 2010 You can make your estimated tax payments online when you e-file or at any time during the year. 1040 form for 2010 You can pay using either of the following electronic payment methods. 1040 form for 2010 Direct transfer from your bank account. 1040 form for 2010 Credit or debit card. 1040 form for 2010 To pay your taxes online or for more information, go to www. 1040 form for 2010 irs. 1040 form for 2010 gov/e-pay. 1040 form for 2010 Pay by Phone Paying by phone is another safe and secure method of paying electronically. 1040 form for 2010 Use one of the following methods. 1040 form for 2010 Direct transfer from your bank account. 1040 form for 2010 Credit or debit card. 1040 form for 2010 To pay by direct transfer from your bank account, call EFTPS Customer Service at 1-800-555-4477 (English), 1-800-244-4829 (Espanol), or TTY/TDD 1-800-733-4829. 1040 form for 2010 To pay using a credit or debit card, you can call one of the following service providers. 1040 form for 2010 There is a convenience fee charged by these providers that varies by provider, card type, and payment amount. 1040 form for 2010 WorldPay 1-888-9-PAY-TAXTM (1-888-972-9829) www. 1040 form for 2010 payUSAtax. 1040 form for 2010 com Official Payments Corporation 1-888-UPAY-TAXTM (1-888-872-9829) www. 1040 form for 2010 officialpayments. 1040 form for 2010 com Link2GOV Corporation 1-888-PAY-1040TM (1-888-729-1040) www. 1040 form for 2010 PAY1040. 1040 form for 2010 com For the latest details on how to pay by phone, go to www. 1040 form for 2010 irs. 1040 form for 2010 gov/e-pay. 1040 form for 2010 Pay by Check or Money Order Using the Estimated Tax Payment Voucher Each payment of estimated tax by check or money order must be accompanied by a payment voucher from Form 1040-ES. 1040 form for 2010 If you use your own envelopes (and not the window envelope that comes with the 1040-ES package), make sure you mail your payment vouchers to the address shown in the Form 1040-ES instructions for the place where you live. 1040 form for 2010 Do not use the address shown in the Form 1040 or Form 1040A instructions. 1040 form for 2010 If you did not pay estimated tax last year, get a copy of Form 1040-ES from the IRS (see chapter 5). 1040 form for 2010 Follow the instructions to make sure you use the vouchers correctly. 1040 form for 2010 Joint estimated tax payments. 1040 form for 2010 If you file a joint return and are making joint estimated tax payments, enter the names and social security numbers on the payment voucher in the same order as they will appear on the joint return. 1040 form for 2010 Change of address. 1040 form for 2010 You must notify the IRS if you are making estimated tax payments and you changed your address during the year. 1040 form for 2010 Complete Form 8822, Change of Address, and mail it to the address shown in the instructions for that form. 1040 form for 2010 Worksheets for Chapter 2 Use the following worksheets and tables to figure your correct estimated tax. 1040 form for 2010 IF you need. 1040 form for 2010 . 1040 form for 2010 . 1040 form for 2010 THEN use. 1040 form for 2010 . 1040 form for 2010 . 1040 form for 2010 2014 Tax Rate Schedules the 2014 Estimated Tax Worksheet Worksheet 2-1 to estimate your taxable social security and railroad retirement benefits—line 1 of ES Worksheet (or Annualized ES Worksheet (Worksheet 2-9)) Worksheet 2-2 to estimate your self-employment (SE) tax and your deduction for SE tax—lines 1 and 11 of ES Worksheet (lines 1 and 17 of Annualized ES Worksheet (Worksheet 2-9)) Worksheet 2-3 to estimate your standard deduction—line 2 of ES Worksheet (line 7 of Annualized ES Worksheet (Worksheet 2-9)) Worksheet 2-4 to reduce your itemized deductions because your estimated AGI is more than $152,525—line 2 of ES Worksheet Worksheet 2-5 to reduce your exemption amount because your estimated AGI is more than $152,525—line 4 of ES Worksheet Worksheet 2-6 to estimate your income tax if line 1 of your ES Worksheet includes a net capital gain or qualified dividends—line 6 of ES Worksheet Worksheet 2-7 to estimate your income tax if you expect to claim a foreign earned income exclusion or foreign housing exclusion or deduction on Form 2555 or Form 2555-EZ—line 6 of ES Worksheet Worksheet 2-8 the 2014 Annualized Estimated Tax Worksheet (Annualized ES Worksheet) Worksheet 2-9 to reduce your itemized deductions because your estimated annualized AGI is more than $152,525—line 6 of Annualized ES Worksheet Worksheet 2-10 to reduce your exemption amount because your estimated annualized AGI is more than $152,525—line 10 of Annualized ES Worksheet Worksheet 2-11 to estimate your income tax if line 1 of your Annualized ES Worksheet includes a net capital gain or qualified dividends—line 12 of Annualized ES Worksheet Worksheet 2-12 to estimate your income tax if you expect to claim a foreign earned income exclusion or foreign housing exclusion or deduction on Form 2555 or Form 2555-EZ—line 12 of Annualized ES Worksheet Worksheet 2-13 to refigure (amend) your estimated tax during the year Worksheet 2-14 2014 Tax Rate Schedules Do not use these Tax Rate Schedules to figure your 2013 taxes. 1040 form for 2010 Use them only to figure your 2014 estimated taxes. 1040 form for 2010 Schedule X—Use if your 2014 filing status is Single Schedule Z—Use if your 2014 filing status is Head of household If line 5 is: The tax is: If line 5 is: The tax is: Over— But not over— of the amount over— Over— But not over— of the amount over— $0 $9,075 10. 1040 form for 2010 0% $0 $0 $12,950 10. 1040 form for 2010 0% $0 9,075 36,900 $907. 1040 form for 2010 50 + 15. 1040 form for 2010 0% 9,075 12,950 49,400 $1,295. 1040 form for 2010 00 + 15. 1040 form for 2010 0% 12,950 36,900 89,350 5,081. 1040 form for 2010 25 + 25. 1040 form for 2010 0% 36,900 49,400 127,550 6,762. 1040 form for 2010 50 + 25. 1040 form for 2010 0% 49,400 89,350 186,350 18,193. 1040 form for 2010 75 + 28. 1040 form for 2010 0% 89,350 127,550 206,600 26,300. 1040 form for 2010 00 + 28. 1040 form for 2010 0% 127,550 186,350 405,100 45,353. 1040 form for 2010 75 + 33. 1040 form for 2010 0% 186,350 206,600 405,100 48,434. 1040 form for 2010 00 + 33. 1040 form for 2010 0% 206,600 405,100 406,750 117,541. 1040 form for 2010 25 + 35. 1040 form for 2010 0% 405,100 405,100 432,200 113,939. 1040 form for 2010 00 + 35. 1040 form for 2010 0% 405,100 406,750 - - - - - - 118,118. 1040 form for 2010 75 + 39. 1040 form for 2010 6% 406,750 432,200 - - - - - - 123,424. 1040 form for 2010 00 + 39. 1040 form for 2010 6% 432,200 Schedule Y-1—Use if your 2014 filing status is Married filing jointly or Qualifying widow(er) Schedule Y-2—Use if your 2014 filing status is Married filing separately If line 5 is: The tax is: If line 5 is: The tax is: Over— But not over— of the amount over— Over— But not over— of the amount over— $0 $18,150 10. 1040 form for 2010 0% $0 $0 $9,075 10. 1040 form for 2010 0% $0 18,150 73,800 $1,815. 1040 form for 2010 00 + 15. 1040 form for 2010 0% 18,150 9,075 36,900 $907. 1040 form for 2010 50 + 15. 1040 form for 2010 0% 9,075 73,800 148,850 10,162. 1040 form for 2010 50 + 25. 1040 form for 2010 0% 73,800 36,900 74,425 5,081. 1040 form for 2010 25 + 25. 1040 form for 2010 0% 36,900 148,850 226,850 28,925. 1040 form for 2010 00 + 28. 1040 form for 2010 0% 148,850 74,425 113,425 14,462. 1040 form for 2010 50 + 28. 1040 form for 2010 0% 74,425 226,850 405,100 50,765. 1040 form for 2010 00 + 33. 1040 form for 2010 0% 226,850 113,425 202,550 25,382. 1040 form for 2010 50 + 33. 1040 form for 2010 0% 113,425 405,100 457,600 109,587. 1040 form for 2010 50 + 35. 1040 form for 2010 0% 405,100 202,550 228,800 54,793. 1040 form for 2010 75 + 35. 1040 form for 2010 0% 202,550 457,600 - - - - - - 127,962. 1040 form for 2010 50 + 39. 1040 form for 2010 6% 457,600 228,800 - - - - - - 63,981. 1040 form for 2010 25 + 39. 1040 form for 2010 6% 228,800 Worksheet 2-1. 1040 form for 2010 2014 Estimated Tax Worksheet When this worksheet refers you to instructions, you can find those instructions in the Instructions for 2014 Form 1040-ES. 1040 form for 2010 1 Adjusted gross income you expect in 2014 (see instructions) 1 2 If you plan to itemize deductions, enter the estimated total of your itemized deductions. 1040 form for 2010 Caution: If line 1 is over $152,525, your deduction may be reduced. 1040 form for 2010 See Worksheet 2-5. 1040 form for 2010 If you do not plan to itemize deductions, enter your standard deduction. 1040 form for 2010 2 3 Subtract line 2 from line 1 3 4 Exemptions. 1040 form for 2010 Multiply $3,950 by the number of personal exemptions. 1040 form for 2010 Caution: If line 1 is over $152,525, the amount of your personal exemptions may be limited. 1040 form for 2010 See Worksheet 2-6. 1040 form for 2010 4 5 Subtract line 4 from line 3 5 6 Tax. 1040 form for 2010 Figure your tax on the amount on line 5 by using the 2014 Tax Rate Schedules Caution: If you will have qualified dividends or a net capital gain, or expect to exclude or deduct foreign earned income or housing, see Worksheets 2-7 and 2-8 to figure the tax 6 7 Alternative minimum tax from Form 6251 or included on Form 1040A, line 28 7 8 Add lines 6 and 7. 1040 form for 2010 Add to this amount any other taxes you expect to include in the total on Form 1040, line 44 8 9 Credits (see instructions). 1040 form for 2010 Do not include any income tax withholding on this line 9 10 Subtract line 9 from line 8. 1040 form for 2010 If zero or less, enter -0- 10 11 Self-employment tax (see instructions) 11 12 Other taxes including, if applicable, Additional Medicare Tax and/or NIIT (see instructions) 12 13a Add lines 10 through 12 13a b Earned income credit, additional child tax credit, fuel tax credit, and refundable American opportunity credit 13b c Total 2014 estimated tax. 1040 form for 2010 Subtract line 13b from line 13a. 1040 form for 2010 If zero or less, enter -0- ▶ 13c 14a Multiply line 13c by 90% (662/3% for farmers and fishermen) 14a b Required annual payment based on prior year's tax (see instructions) 14b c Required annual payment to avoid a penalty. 1040 form for 2010 Enter the smaller of line 14a or 14b ▶ 14c Caution: Generally, if you do not prepay (through income tax withholding and estimated tax payments) at least the amount on line 14c, you may owe a penalty for not paying enough estimated tax. 1040 form for 2010 To avoid a penalty, make sure your estimate on line 13c is as accurate as possible. 1040 form for 2010 Even if you pay the required annual payment, you may still owe tax when you file your return. 1040 form for 2010 If you prefer, you can pay the amount shown on line 13c. 1040 form for 2010 15 Income tax withheld and estimated to be withheld during 2014 (including income tax withholding on pensions, annuities, certain deferred income, etc. 1040 form for 2010 ) 15 16a Subtract line 15 from line 14c 16a Is the result zero or less? □ Yes. 1040 form for 2010 Stop here. 1040 form for 2010 You are not required to make estimated tax payments. 1040 form for 2010 □ No. 1040 form for 2010 Go to line 16b. 1040 form for 2010 b Subtract line 15 from line 13c 16b Is the result less than $1,000? □ Yes. 1040 form for 2010 Stop here. 1040 form for 2010 You are not required to make estimated tax payments. 1040 form for 2010 □ No. 1040 form for 2010 Go to line 17 to figure your required payment. 1040 form for 2010 17 If the first payment you are required to make is due April 15, 2014, enter ¼ of line 16a (minus any 2013 overpayment that you are applying to this installment) here, and on your estimated tax payment voucher(s) if you are paying by check or money order 17 Worksheet 2-2. 1040 form for 2010 2014 Estimated Tax Worksheet—Line 1 Estimated Taxable Social Security and Railroad Retirement Benefits Note. 1040 form for 2010 If you are using this worksheet to estimate your taxable social security or railroad retirement benefits for Worksheet 2-9, 2014 Annualized Estimated Tax Worksheet, multiply the expected amount of benefits for each period by the annualization amount shown on Worksheet 2-9, line 2, for the same period before entering it on line 1 below. 1040 form for 2010 1. 1040 form for 2010 Enter your expected social security and railroad retirement benefits 1. 1040 form for 2010 2. 1040 form for 2010 Enter one-half of line 1 2. 1040 form for 2010 3. 1040 form for 2010 Enter your expected total income. 1040 form for 2010 Do not include any social security and railroad retirement benefits, nontaxable interest income, nontaxable IRA distributions, or nontaxable pension distributions 3. 1040 form for 2010 4. 1040 form for 2010 Enter your expected nontaxable interest income 4. 1040 form for 2010 5. 1040 form for 2010 Enter (as a positive amount) the total of any expected exclusions or deductions for: U. 1040 form for 2010 S. 1040 form for 2010 savings bond interest used for higher education expenses (Form 8815) Employer-provided adoption benefits (Form 8839) Foreign earned income or housing (Form 2555 or 2555-EZ) Income by bona fide residents of American Samoa (Form 4563) or Puerto Rico 5. 1040 form for 2010 6. 1040 form for 2010 Add lines 2, 3, 4, and 5 6. 1040 form for 2010 7. 1040 form for 2010 Enter your expected adjustments to income. 1040 form for 2010 Do not include any student loan interest deduction 7. 1040 form for 2010 8. 1040 form for 2010 Subtract line 7 from line 6. 1040 form for 2010 If zero or less, stop here. 1040 form for 2010 Note. 1040 form for 2010 Do not include any social security or railroad retirement benefits in the amount on line 1 of your 2014 Estimated Tax Worksheet (Worksheet 2-1) (or Annualized Estimated Tax Worksheet (Worksheet 2-9)) 8. 1040 form for 2010 9. 1040 form for 2010 Enter $25,000 ($32,000 if you expect to file married filing jointly; $0 if you expect to file married filing separately and expect to live with your spouse at any time during the year) 9. 1040 form for 2010 10. 1040 form for 2010 Subtract line 9 from line 8. 1040 form for 2010 If zero or less, stop here. 1040 form for 2010 Note. 1040 form for 2010 Do not include any social security or railroad retirement benefits in the amount on line 1 of your Worksheet 2-1 (or Annualized Estimated Tax Worksheet (Worksheet 2-9)) 10. 1040 form for 2010 11. 1040 form for 2010 Enter $9,000 ($12,000 if you expect to file married filing jointly; $0 if you expect to file married filing separately and expect to live with your spouse at any time during the year) 11. 1040 form for 2010 12. 1040 form for 2010 Subtract line 11 from line 10. 1040 form for 2010 If zero or less, enter -0- 12. 1040 form for 2010 13. 1040 form for 2010 Enter the smaller of line 10 or line 11 13. 1040 form for 2010 14. 1040 form for 2010 Enter one-half of line 13 14. 1040 form for 2010 15
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SOI Tax Stats - Exempt Organizations' Unrelated Business Income (UBI) Tax Statistics
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Snapshot of Unrelated Business Income Tax Statistics
Because tax-exempt organizations generally operate for charitable or other beneficial purposes, most income that they receive is exempt from tax under the Internal Revenue Code. Tax-exempt organizations are permitted to engage in income-producing activities that are considered to be unrelated to their exempt purposes. However, income from these activities may be taxable. This study measures income, deductions, and tax imposed on tax-exempt corporate and trust entities' unrelated business income. Data are compiled from Form 990-T, Exempt Organization Business Income Tax Return.
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For selected tax returns, including the Form 990-T, IRS's Office of Research produces annual forecasts of the number of returns that will be filed in future years.
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Page Last Reviewed or Updated: 27-Feb-2014
The 1040 Form For 2010
1040 form for 2010 Publication 537 - Main Content Table of Contents What Is an Installment Sale?Special rule. 1040 form for 2010 General RulesFiguring Installment Sale Income Reporting Installment Sale Income Other RulesElecting Out of the Installment Method Payments Received or Considered Received Escrow Account Depreciation Recapture Income Sale to a Related Person Like-Kind Exchange Contingent Payment Sale Single Sale of Several Assets Sale of a Business Unstated Interest and Original Issue Discount (OID) Disposition of an Installment Obligation Repossession Interest on Deferred Tax Reporting an Installment SaleRelated person. 1040 form for 2010 Several assets. 1040 form for 2010 Special situations. 1040 form for 2010 Schedule D (Form 1040). 1040 form for 2010 Form 4797. 1040 form for 2010 How To Get Tax Help What Is an Installment Sale? An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. 1040 form for 2010 The rules for installment sales do not apply if you elect not to use the installment method (see Electing Out of the Installment Method under Other Rules, later) or the transaction is one for which the installment method may not apply. 1040 form for 2010 The installment sales method cannot be used for the following. 1040 form for 2010 Sale of inventory. 1040 form for 2010 The regular sale of inventory of personal property does not qualify as an installment sale even if you receive a payment after the year of sale. 1040 form for 2010 See Sale of a Business under Other Rules, later. 1040 form for 2010 Dealer sales. 1040 form for 2010 Sales of personal property by a person who regularly sells or otherwise disposes of the same type of personal property on the installment plan are not installment sales. 1040 form for 2010 This rule also applies to real property held for sale to customers in the ordinary course of a trade or business. 1040 form for 2010 However, the rule does not apply to an installment sale of property used or produced in farming. 1040 form for 2010 Special rule. 1040 form for 2010 Dealers of time-shares and residential lots can treat certain sales as installment sales and report them under the installment method if they elect to pay a special interest charge. 1040 form for 2010 For more information, see section 453(l). 1040 form for 2010 Stock or securities. 1040 form for 2010 You cannot use the installment method to report gain from the sale of stock or securities traded on an established securities market. 1040 form for 2010 You must report the entire gain on the sale in the year in which the trade date falls. 1040 form for 2010 Installment obligation. 1040 form for 2010 The buyer's obligation to make future payments to you can be in the form of a deed of trust, note, land contract, mortgage, or other evidence of the buyer's debt to you. 1040 form for 2010 General Rules If a sale qualifies as an installment sale, the gain must be reported under the installment method unless you elect out of using the installment method. 1040 form for 2010 See Electing Out of the Installment Method under Other Rules, later, for information on recognizing the entire gain in the year of sale. 1040 form for 2010 Sale at a loss. 1040 form for 2010 If your sale results in a loss, you cannot use the installment method. 1040 form for 2010 If the loss is on an installment sale of business or investment property, you can deduct it only in the tax year of sale. 1040 form for 2010 Unstated interest. 1040 form for 2010 If your sale calls for payments in a later year and the sales contract provides for little or no interest, you may have to figure unstated interest, even if you have a loss. 1040 form for 2010 See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. 1040 form for 2010 Figuring Installment Sale Income You can use the following discussions or Form 6252 to help you determine gross profit, contract price, gross profit percentage, and installment sale income. 1040 form for 2010 Each payment on an installment sale usually consists of the following three parts. 1040 form for 2010 Interest income. 1040 form for 2010 Return of your adjusted basis in the property. 1040 form for 2010 Gain on the sale. 1040 form for 2010 In each year you receive a payment, you must include in income both the interest part and the part that is your gain on the sale. 1040 form for 2010 You do not include in income the part that is the return of your basis in the property. 1040 form for 2010 Basis is the amount of your investment in the property for installment sale purposes. 1040 form for 2010 Interest Income You must report interest as ordinary income. 1040 form for 2010 Interest is generally not included in a down payment. 1040 form for 2010 However, you may have to treat part of each later payment as interest, even if it is not called interest in your agreement with the buyer. 1040 form for 2010 Interest provided in the agreement is called stated interest. 1040 form for 2010 If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. 1040 form for 2010 See Unstated Interest and Original Issue Discount (OID) under Other Rules, later. 1040 form for 2010 Adjusted Basis and Installment Sale Income (Gain on Sale) After you have determined how much of each payment to treat as interest, you treat the rest of each payment as if it were made up of two parts. 1040 form for 2010 A tax-free return of your adjusted basis in the property, and Your gain (referred to as installment sale income on Form 6252). 1040 form for 2010 Figuring adjusted basis for installment sale purposes. 1040 form for 2010 You can use Worksheet A to figure your adjusted basis in the property for installment sale purposes. 1040 form for 2010 When you have completed the worksheet, you will also have determined the gross profit percentage necessary to figure your installment sale income (gain) for this year. 1040 form for 2010 Worksheet A. 1040 form for 2010 Figuring Adjusted Basis and Gross Profit Percentage 1. 1040 form for 2010 Enter the selling price for the property 2. 1040 form for 2010 Enter your adjusted basis for the property 3. 1040 form for 2010 Enter your selling expenses 4. 1040 form for 2010 Enter any depreciation recapture 5. 1040 form for 2010 Add lines 2, 3, and 4. 1040 form for 2010 This is your adjusted basis for installment sale purposes 6. 1040 form for 2010 Subtract line 5 from line 1. 1040 form for 2010 If zero or less, enter -0-. 1040 form for 2010 This is your gross profit If the amount entered on line 6 is zero, stop here. 1040 form for 2010 You cannot use the installment method. 1040 form for 2010 7. 1040 form for 2010 Enter the contract price for the property 8. 1040 form for 2010 Divide line 6 by line 7. 1040 form for 2010 This is your gross profit percentage Selling price. 1040 form for 2010 The selling price is the total cost of the property to the buyer and includes any of the following. 1040 form for 2010 Any money you are to receive. 1040 form for 2010 The fair market value (FMV) of any property you are to receive (FMV is discussed in Property Used As a Payment under Other Rules, later). 1040 form for 2010 Any existing mortgage or other debt the buyer pays, assumes, or takes (a note, mortgage, or any other liability, such as a lien, accrued interest, or taxes you owe on the property). 1040 form for 2010 Any of your selling expenses the buyer pays. 1040 form for 2010 Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue discount. 1040 form for 2010 Adjusted basis for installment sale purposes. 1040 form for 2010 Your adjusted basis is the total of the following three items. 1040 form for 2010 Adjusted basis. 1040 form for 2010 Selling expenses. 1040 form for 2010 Depreciation recapture. 1040 form for 2010 Adjusted basis. 1040 form for 2010 Basis is your investment in the property for installment sale purposes. 1040 form for 2010 The way you figure basis depends on how you acquire the property. 1040 form for 2010 The basis of property you buy is generally its cost. 1040 form for 2010 The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. 1040 form for 2010 While you own property, various events may change your original basis. 1040 form for 2010 Some events, such as adding rooms or making permanent improvements, increase basis. 1040 form for 2010 Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. 1040 form for 2010 The result is adjusted basis. 1040 form for 2010 For more information on how to figure basis and adjusted basis, see Publication 551. 1040 form for 2010 For more information regarding your basis in property you inherited from someone who died in 2010 and whose executor filed Form 8939, Allocation of Increase In Basis for Property Acquired From a Decedent, see Publication 4895. 1040 form for 2010 Selling expenses. 1040 form for 2010 Selling expenses relate to the sale of the property. 1040 form for 2010 They include commissions, attorney fees, and any other expenses paid on the sale. 1040 form for 2010 Selling expenses are added to the basis of the sold property. 1040 form for 2010 Depreciation recapture. 1040 form for 2010 If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income. 1040 form for 2010 See Depreciation Recapture Income under Other Rules, later. 1040 form for 2010 Gross profit. 1040 form for 2010 Gross profit is the total gain you report on the installment method. 1040 form for 2010 To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. 1040 form for 2010 If the property you sold was your home, subtract from the gross profit any gain you can exclude. 1040 form for 2010 See Sale of Your Home , later, under Reporting Installment Sale Income. 1040 form for 2010 Contract price. 1040 form for 2010 Contract price equals: The selling price, minus The mortgages, debts, and other liabilities assumed or taken by the buyer, plus The amount by which the mortgages, debts, and other liabilities assumed or taken by the buyer exceed your adjusted basis for installment sale purposes. 1040 form for 2010 Gross profit percentage. 1040 form for 2010 A certain percentage of each payment (after subtracting interest) is reported as installment sale income. 1040 form for 2010 This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price. 1040 form for 2010 The gross profit percentage generally remains the same for each payment you receive. 1040 form for 2010 However, see the Example under Selling Price Reduced, later, for a situation where the gross profit percentage changes. 1040 form for 2010 Example. 1040 form for 2010 You sell property at a contract price of $6,000 and your gross profit is $1,500. 1040 form for 2010 Your gross profit percentage is 25% ($1,500 ÷ $6,000). 1040 form for 2010 After subtracting interest, you report 25% of each payment, including the down payment, as installment sale income from the sale for the tax year you receive the payment. 1040 form for 2010 The remainder (balance) of each payment is the tax-free return of your adjusted basis. 1040 form for 2010 Amount to report as installment sale income. 1040 form for 2010 Multiply the payments you receive each year (less interest) by the gross profit percentage. 1040 form for 2010 The result is your installment sale income for the tax year. 1040 form for 2010 In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. 1040 form for 2010 A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. 1040 form for 2010 For a detailed discussion, see Payments Received or Considered Received under Other Rules, later. 1040 form for 2010 Selling Price Reduced If the selling price is reduced at a later date, the gross profit on the sale also will change. 1040 form for 2010 You then must refigure the gross profit percentage for the remaining payments. 1040 form for 2010 Refigure your gross profit using Worksheet B. 1040 form for 2010 You will spread any remaining gain over future installments. 1040 form for 2010 Worksheet B. 1040 form for 2010 New Gross Profit Percentage — Selling Price Reduced 1. 1040 form for 2010 Enter the reduced selling price for the property 2. 1040 form for 2010 Enter your adjusted basis for the property 3. 1040 form for 2010 Enter your selling expenses 4. 1040 form for 2010 Enter any depreciation recapture 5. 1040 form for 2010 Add lines 2, 3, and 4. 1040 form for 2010 6. 1040 form for 2010 Subtract line 5 from line 1. 1040 form for 2010 This is your adjusted gross profit 7. 1040 form for 2010 Enter any installment sale income reported in prior year(s) 8. 1040 form for 2010 Subtract line 7 from line 6 9. 1040 form for 2010 Future installments 10. 1040 form for 2010 Divide line 8 by line 9. 1040 form for 2010 This is your new gross profit percentage* * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. 1040 form for 2010 Example. 1040 form for 2010 In 2011, you sold land with a basis of $40,000 for $100,000. 1040 form for 2010 Your gross profit was $60,000. 1040 form for 2010 You received a $20,000 down payment and the buyer's note for $80,000. 1040 form for 2010 The note provides for four annual payments of $20,000 each, plus 8% interest, beginning in 2012. 1040 form for 2010 Your gross profit percentage is 60%. 1040 form for 2010 You reported a gain of $12,000 on each payment received in 2011 and 2012. 1040 form for 2010 In 2013, you and the buyer agreed to reduce the purchase price to $85,000 and payments during 2013, 2014, and 2015 are reduced to $15,000 for each year. 1040 form for 2010 The new gross profit percentage, 46. 1040 form for 2010 67%, is figured on Example—Worksheet B. 1040 form for 2010 You will report a gain of $7,000 (46. 1040 form for 2010 67% of $15,000) on each of the $15,000 installments due in 2013, 2014, and 2015. 1040 form for 2010 Example — Worksheet B. 1040 form for 2010 New Gross Profit Percentage — Selling Price Reduced 1. 1040 form for 2010 Enter the reduced selling price for the property 85,000 2. 1040 form for 2010 Enter your adjusted basis for the property 40,000 3. 1040 form for 2010 Enter your selling expenses -0- 4. 1040 form for 2010 Enter any depreciation recapture -0- 5. 1040 form for 2010 Add lines 2, 3, and 4. 1040 form for 2010 40,000 6. 1040 form for 2010 Subtract line 5 from line 1. 1040 form for 2010 This is your adjusted gross profit 45,000 7. 1040 form for 2010 Enter any installment sale income reported in prior year(s) 24,000 8. 1040 form for 2010 Subtract line 7 from line 6 21,000 9. 1040 form for 2010 Future installments 45,000 10. 1040 form for 2010 Divide line 8 by line 9. 1040 form for 2010 This is your new gross profit percentage* 46. 1040 form for 2010 67% * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. 1040 form for 2010 Reporting Installment Sale Income Generally, you will use Form 6252 to report installment sale income from casual sales of real or personal property during the tax year. 1040 form for 2010 You also will have to report the installment sale income on Schedule D (Form 1040), Capital Gains and Losses, or Form 4797, or both. 1040 form for 2010 See Schedule D (Form 1040) and Form 4797 , later. 1040 form for 2010 If the property was your main home, you may be able to exclude part or all of the gain. 1040 form for 2010 See Sale of Your Home , later. 1040 form for 2010 Form 6252 Use Form 6252 to report an installment sale in the year it takes place and to report payments received, or considered received because of related party resales, in later years. 1040 form for 2010 Attach it to your tax return for each year. 1040 form for 2010 Form 6252 will help you determine the gross profit, contract price, gross profit percentage, and installment sale income. 1040 form for 2010 Which parts to complete. 1040 form for 2010 Which part to complete depends on whether you are filing the form for the year of sale or a later year. 1040 form for 2010 Year of sale. 1040 form for 2010 Complete lines 1 through 4, Part I, and Part II. 1040 form for 2010 If you sold property to a related party during the year, also complete Part III. 1040 form for 2010 Later years. 1040 form for 2010 Complete lines 1 through 4 and Part II for any year in which you receive a payment from an installment sale. 1040 form for 2010 If you sold a marketable security to a related party after May 14, 1980, and before January 1, 1987, complete Form 6252 for each year of the installment agreement, even if you did not receive a payment. 1040 form for 2010 (After December 31, 1986, the installment method is not available for the sale of marketable securities. 1040 form for 2010 ) Complete lines 1 through 4 and Part II for any year in which you receive a payment from the sale. 1040 form for 2010 Complete Part III unless you received the final payment during the tax year. 1040 form for 2010 If you sold property other than a marketable security to a related party after May 14, 1980, complete Form 6252 for the year of sale and for 2 years after the year of sale, even if you did not receive a payment. 1040 form for 2010 Complete lines 1 through 4 and Part II for any year during this 2-year period in which you receive a payment from the sale. 1040 form for 2010 Complete Part III for the 2 years after the year of sale unless you received the final payment during the tax year. 1040 form for 2010 Schedule D (Form 1040) Enter the gain figured on Form 6252 (line 26) for personal-use property (capital assets) on Schedule D (Form 1040), as a short-term gain (line 4) or long-term gain (line 11). 1040 form for 2010 If your gain from the installment sale qualifies for long-term capital gain treatment in the year of sale, it will continue to qualify in later tax years. 1040 form for 2010 Your gain is long-term if you owned the property for more than 1 year when you sold it. 1040 form for 2010 Form 4797 An installment sale of property used in your business or that earns rent or royalty income may result in a capital gain, an ordinary gain, or both. 1040 form for 2010 All or part of any gain from the disposition of the property may be ordinary gain from depreciation recapture. 1040 form for 2010 For trade or business property held for more than 1 year, enter the amount from line 26 of Form 6252 on Form 4797, line 4. 1040 form for 2010 If the property was held 1 year or less or you have an ordinary gain from the sale of a noncapital asset (even if the holding period is more than 1 year), enter this amount on Form 4797, line 10, and write “From Form 6252. 1040 form for 2010 ” Sale of Your Home If you sell your home, you may be able to exclude all or part of the gain on the sale. 1040 form for 2010 See Publication 523 for information about excluding the gain. 1040 form for 2010 If the sale is an installment sale, any gain you exclude is not included in gross profit when figuring your gross profit percentage. 1040 form for 2010 Seller-financed mortgage. 1040 form for 2010 If you finance the sale of your home to an individual, both you and the buyer may have to follow special reporting procedures. 1040 form for 2010 When you report interest income received from a buyer who uses the property as a personal residence, write the buyer's name, address, and social security number (SSN) on line 1 of Schedule B (Form 1040A or 1040), Interest and Ordinary Dividends. 1040 form for 2010 When deducting the mortgage interest, the buyer must write your name, address, and SSN on line 11 of Schedule A (Form 1040), Itemized Deductions. 1040 form for 2010 If either person fails to include the other person's SSN, a $50 penalty will be assessed. 1040 form for 2010 Other Rules The rules discussed in this part of the publication apply only in certain circumstances or to certain types of property. 1040 form for 2010 The following topics are discussed. 1040 form for 2010 Electing out of the installment method. 1040 form for 2010 Payments received or considered received. 1040 form for 2010 Escrow account. 1040 form for 2010 Depreciation recapture income. 1040 form for 2010 Sale to a related person. 1040 form for 2010 Like-kind exchange. 1040 form for 2010 Contingent payment sale. 1040 form for 2010 Single sale of several assets. 1040 form for 2010 Sale of a business. 1040 form for 2010 Unstated interest and original issue discount. 1040 form for 2010 Disposition of an installment obligation. 1040 form for 2010 Repossession. 1040 form for 2010 Interest on deferred tax. 1040 form for 2010 Electing Out of the Installment Method If you elect not to use the installment method, you generally report the entire gain in the year of sale, even though you do not receive all the sale proceeds in that year. 1040 form for 2010 To figure the amount of gain to report, use the fair market value (FMV) of the buyer's installment obligation that represents the buyer's debt to you. 1040 form for 2010 Notes, mortgages, and land contracts are examples of obligations that are included at FMV. 1040 form for 2010 You must figure the FMV of the buyer's installment obligation, whether or not you would actually be able to sell it. 1040 form for 2010 If you use the cash method of accounting, the FMV of the obligation will never be considered to be less than the FMV of the property sold (minus any other consideration received). 1040 form for 2010 Example. 1040 form for 2010 You sold a parcel of land for $50,000. 1040 form for 2010 You received a $10,000 down payment and will receive the balance over the next 10 years at $4,000 a year, plus 8% interest. 1040 form for 2010 The buyer gave you a note for $40,000. 1040 form for 2010 The note had an FMV of $40,000. 1040 form for 2010 You paid a commission of 6%, or $3,000, to a broker for negotiating the sale. 1040 form for 2010 The land cost $25,000, and you owned it for more than one year. 1040 form for 2010 You decide to elect out of the installment method and report the entire gain in the year of sale. 1040 form for 2010 Gain realized: Selling price $50,000 Minus: Property's adj. 1040 form for 2010 basis $25,000 Commission 3,000 28,000 Gain realized $22,000 Gain recognized in year of sale: Cash $10,000 Market value of note 40,000 Total realized in year of sale $50,000 Minus: Property's adj. 1040 form for 2010 basis $25,000 Commission 3,000 28,000 Gain recognized $22,000 The recognized gain of $22,000 is long-term capital gain. 1040 form for 2010 You include the entire gain in income in the year of sale, so you do not include in income any principal payments you receive in later tax years. 1040 form for 2010 The interest on the note is ordinary income and is reported as interest income each year. 1040 form for 2010 How to elect out. 1040 form for 2010 To make this election, do not report your sale on Form 6252. 1040 form for 2010 Instead, report it on Form 8949, Sales and Other Dispositions of Capital Assets, Form 4797, or both. 1040 form for 2010 When to elect out. 1040 form for 2010 Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. 1040 form for 2010 Automatic six-month extension. 1040 form for 2010 If you timely file your tax return without making the election, you still can make the election by filing an amended return within 6 months of the due date of your return (excluding extensions). 1040 form for 2010 Write “Filed pursuant to section 301. 1040 form for 2010 9100-2” at the top of the amended return and file it where the original return was filed. 1040 form for 2010 Revoking the election. 1040 form for 2010 Once made, the election can be revoked only with IRS approval. 1040 form for 2010 A revocation is retroactive. 1040 form for 2010 You will not be allowed to revoke the election if either of the following applies. 1040 form for 2010 One of the purposes is to avoid federal income tax. 1040 form for 2010 The tax year in which any payment was received has closed. 1040 form for 2010 Payments Received or Considered Received You must figure your gain each year on the payments you receive, or are treated as receiving, from an installment sale. 1040 form for 2010 In certain situations, you are considered to have received a payment, even though the buyer does not pay you directly. 1040 form for 2010 These situations occur when the buyer assumes or pays any of your debts, such as a loan, or pays any of your expenses, such as a sales commission. 1040 form for 2010 However, as discussed later, the buyer's assumption of your debt is treated as a recovery of your basis rather than as a payment in many cases. 1040 form for 2010 Buyer Pays Seller's Expenses If the buyer pays any of your expenses related to the sale of your property, it is considered a payment to you in the year of sale. 1040 form for 2010 Include these expenses in the selling and contract prices when figuring the gross profit percentage. 1040 form for 2010 Buyer Assumes Mortgage If the buyer assumes or pays off your mortgage, or otherwise takes the property subject to the mortgage, the following rules apply. 1040 form for 2010 Mortgage not more than basis. 1040 form for 2010 If the buyer assumes a mortgage that is not more than your installment sale basis in the property, it is not considered a payment to you. 1040 form for 2010 It is considered a recovery of your basis. 1040 form for 2010 The contract price is the selling price minus the mortgage. 1040 form for 2010 Example. 1040 form for 2010 You sell property with an adjusted basis of $19,000. 1040 form for 2010 You have selling expenses of $1,000. 1040 form for 2010 The buyer assumes your existing mortgage of $15,000 and agrees to pay you $10,000 (a cash down payment of $2,000 and $2,000 (plus 12% interest) in each of the next 4 years). 1040 form for 2010 The selling price is $25,000 ($15,000 + $10,000). 1040 form for 2010 Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). 1040 form for 2010 The contract price is $10,000 ($25,000 − $15,000 mortgage). 1040 form for 2010 Your gross profit percentage is 50% ($5,000 ÷ $10,000). 1040 form for 2010 You report half of each $2,000 payment received as gain from the sale. 1040 form for 2010 You also report all interest you receive as ordinary income. 1040 form for 2010 Mortgage more than basis. 1040 form for 2010 If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. 1040 form for 2010 The part of the mortgage greater than your basis is treated as a payment received in the year of sale. 1040 form for 2010 To figure the contract price, subtract the mortgage from the selling price. 1040 form for 2010 This is the total amount (other than interest) you will receive directly from the buyer. 1040 form for 2010 Add to this amount the payment you are considered to have received (the difference between the mortgage and your installment sale basis). 1040 form for 2010 The contract price is then the same as your gross profit from the sale. 1040 form for 2010 If the mortgage the buyer assumes is equal to or more than your installment sale basis, the gross profit percentage always will be 100%. 1040 form for 2010 Example. 1040 form for 2010 The selling price for your property is $9,000. 1040 form for 2010 The buyer will pay you $1,000 annually (plus 8% interest) over the next 3 years and assume an existing mortgage of $6,000. 1040 form for 2010 Your adjusted basis in the property is $4,400. 1040 form for 2010 You have selling expenses of $600, for a total installment sale basis of $5,000. 1040 form for 2010 The part of the mortgage that is more than your installment sale basis is $1,000 ($6,000 − $5,000). 1040 form for 2010 This amount is included in the contract price and treated as a payment received in the year of sale. 1040 form for 2010 The contract price is $4,000: Selling price $9,000 Minus: Mortgage (6,000) Amount actually received $3,000 Add difference: Mortgage $6,000 Minus: Installment sale basis 5,000 1,000 Contract price $4,000 Your gross profit on the sale is also $4,000: Selling price $9,000 Minus: Installment sale basis (5,000) Gross profit $4,000 Your gross profit percentage is 100%. 1040 form for 2010 Report 100% of each payment (less interest) as gain from the sale. 1040 form for 2010 Treat the $1,000 difference between the mortgage and your installment sale basis as a payment and report 100% of it as gain in the year of sale. 1040 form for 2010 Mortgage Canceled If the buyer of your property is the person who holds the mortgage on it, your debt is canceled, not assumed. 1040 form for 2010 You are considered to receive a payment equal to the outstanding canceled debt. 1040 form for 2010 Example. 1040 form for 2010 Mary Jones loaned you $45,000 in 2009 in exchange for a note and a mortgage in a tract of land you owned. 1040 form for 2010 On April 4, 2013, she bought the land for $70,000. 1040 form for 2010 At that time, $30,000 of her loan to you was outstanding. 1040 form for 2010 She agreed to forgive this $30,000 debt and to pay you $20,000 (plus interest) on August 1, 2013, and $20,000 on August 1, 2014. 1040 form for 2010 She did not assume an existing mortgage. 1040 form for 2010 She canceled the $30,000 debt you owed her. 1040 form for 2010 You are considered to have received a $30,000 payment at the time of the sale. 1040 form for 2010 Buyer Assumes Other Debts If the buyer assumes any other debts, such as a loan or back taxes, it may be considered a payment to you in the year of sale. 1040 form for 2010 If the buyer assumes the debt instead of paying it off, only part of it may have to be treated as a payment. 1040 form for 2010 Compare the debt to your installment sale basis in the property being sold. 1040 form for 2010 If the debt is less than your installment sale basis, none of it is treated as a payment. 1040 form for 2010 If it is more, only the difference is treated as a payment. 1040 form for 2010 If the buyer assumes more than one debt, any part of the total that is more than your installment sale basis is considered a payment. 1040 form for 2010 These rules are the same as the rules discussed earlier under Buyer Assumes Mortgage . 1040 form for 2010 However, they apply only to the following types of debt the buyer assumes. 1040 form for 2010 Those acquired from ownership of the property you are selling, such as a mortgage, lien, overdue interest, or back taxes. 1040 form for 2010 Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased. 1040 form for 2010 If the buyer assumes any other type of debt, such as a personal loan or your legal fees relating to the sale, it is treated as if the buyer had paid off the debt at the time of the sale. 1040 form for 2010 The value of the assumed debt is then considered a payment to you in the year of sale. 1040 form for 2010 Property Used As a Payment If you receive property other than money from the buyer, it is still considered a payment in the year received. 1040 form for 2010 However, see Like-Kind Exchange , later. 1040 form for 2010 Generally, the amount of the payment is the property's FMV on the date you receive it. 1040 form for 2010 Exception. 1040 form for 2010 If the property the buyer gives you is payable on demand or readily tradable, the amount you should consider as payment in the year received is: The FMV of the property on the date you receive it if you use the cash method of accounting, The face amount of the obligation on the date you receive it if you use the accrual method of accounting, or The stated redemption price at maturity less any original issue discount (OID) or, if there is no OID, the stated redemption price at maturity appropriately discounted to reflect total unstated interest. 1040 form for 2010 See Unstated Interest and Original Issue Discount (OID) , later. 1040 form for 2010 Debt not payable on demand. 1040 form for 2010 Any evidence of debt you receive from the buyer not payable on demand is not considered a payment. 1040 form for 2010 This is true even if the debt is guaranteed by a third party, including a government agency. 1040 form for 2010 Fair market value (FMV). 1040 form for 2010 This is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of all the necessary facts. 1040 form for 2010 Third-party note. 1040 form for 2010 If the property the buyer gives you is a third-party note (or other obligation of a third party), you are considered to have received a payment equal to the note's FMV. 1040 form for 2010 Because the FMV of the note is itself a payment on your installment sale, any payments you later receive from the third party are not considered payments on the sale. 1040 form for 2010 The excess of the note's face value over its FMV is interest. 1040 form for 2010 Exclude this interest in determining the selling price of the property. 1040 form for 2010 However, see Exception under Property Used As a Payment, earlier. 1040 form for 2010 Example. 1040 form for 2010 You sold real estate in an installment sale. 1040 form for 2010 As part of the down payment, the buyer assigned to you a $50,000, 8% interest third-party note. 1040 form for 2010 The FMV of the third-party note at the time of the sale was $30,000. 1040 form for 2010 This amount, not $50,000, is a payment to you in the year of sale. 1040 form for 2010 The third-party note had an FMV equal to 60% of its face value ($30,000 ÷ $50,000), so 60% of each principal payment you receive on this note is a nontaxable return of capital. 1040 form for 2010 The remaining 40% is interest taxed as ordinary income. 1040 form for 2010 Bond. 1040 form for 2010 A bond or other evidence of debt you receive from the buyer that is payable on demand or readily tradable in an established securities market is treated as a payment in the year you receive it. 1040 form for 2010 For more information on the amount you should treat as a payment, see Exception under Property Used As a Payment, earlier. 1040 form for 2010 If you receive a government or corporate bond for a sale before October 22, 2004, and the bond has interest coupons attached or can be readily traded in an established securities market, you are considered to have received payment equal to the bond's FMV. 1040 form for 2010 However, see Exception under Property Used As a Payment, earlier. 1040 form for 2010 Buyer's note. 1040 form for 2010 The buyer's note (unless payable on demand) is not considered payment on the sale. 1040 form for 2010 However, its full face value is included when figuring the selling price and the contract price. 1040 form for 2010 Payments you receive on the note are used to figure your gain in the year received. 1040 form for 2010 Installment Obligation Used as Security (Pledge Rule) If you use an installment obligation to secure any debt, the net proceeds from the debt may be treated as a payment on the installment obligation. 1040 form for 2010 This is known as the pledge rule, and it applies if the selling price of the property is over $150,000. 1040 form for 2010 It does not apply to the following dispositions. 1040 form for 2010 Sales of property used or produced in farming. 1040 form for 2010 Sales of personal-use property. 1040 form for 2010 Qualifying sales of time-shares and residential lots. 1040 form for 2010 The net debt proceeds are the gross debt minus the direct expenses of getting the debt. 1040 form for 2010 The amount treated as a payment is considered received on the later of the following dates. 1040 form for 2010 The date the debt becomes secured. 1040 form for 2010 The date you receive the debt proceeds. 1040 form for 2010 A debt is secured by an installment obligation to the extent that payment of principal or interest on the debt is directly secured (under the terms of the loan or any underlying arrangement) by any interest in the installment obligation. 1040 form for 2010 For sales after December 16, 1999, payment on a debt is treated as directly secured by an interest in an installment obligation to the extent an arrangement allows you to satisfy all or part of the debt with the installment obligation. 1040 form for 2010 Limit. 1040 form for 2010 The net debt proceeds treated as a payment on the pledged installment obligation cannot be more than the excess of item (1) over item (2), below. 1040 form for 2010 The total contract price on the installment sale. 1040 form for 2010 Any payments received on the installment obligation before the date the net debt proceeds are treated as a payment. 1040 form for 2010 Installment payments. 1040 form for 2010 The pledge rule accelerates the reporting of the installment obligation payments. 1040 form for 2010 Do not report payments received on the obligation after it has been pledged until the payments received exceed the amount reported under the pledge rule. 1040 form for 2010 Exception. 1040 form for 2010 The pledge rule does not apply to pledges made after December 17, 1987, to refinance a debt under the following circumstances. 1040 form for 2010 The debt was outstanding on December 17, 1987. 1040 form for 2010 The debt was secured by that installment sale obligation on that date and at all times thereafter until the refinancing occurred. 1040 form for 2010 A refinancing as a result of the creditor's calling of the debt is treated as a continuation of the original debt so long as a person other than the creditor or a person related to the creditor provides the refinancing. 1040 form for 2010 This exception applies only to refinancing that does not exceed the principal of the original debt immediately before the refinancing. 1040 form for 2010 Any excess is treated as a payment on the installment obligation. 1040 form for 2010 Escrow Account In some cases, the sales agreement or a later agreement may call for the buyer to establish an irrevocable escrow account from which the remaining installment payments (including interest) are to be made. 1040 form for 2010 These sales cannot be reported on the installment method. 1040 form for 2010 The buyer's obligation is paid in full when the balance of the purchase price is deposited into the escrow account. 1040 form for 2010 When an escrow account is established, you no longer rely on the buyer for the rest of the payments, but on the escrow arrangement. 1040 form for 2010 Example. 1040 form for 2010 You sell property for $100,000. 1040 form for 2010 The sales agreement calls for a down payment of $10,000 and payment of $15,000 in each of the next 6 years to be made from an irrevocable escrow account containing the balance of the purchase price plus interest. 1040 form for 2010 You cannot report the sale on the installment method because the full purchase price is considered received in the year of sale. 1040 form for 2010 You report the entire gain in the year of sale. 1040 form for 2010 Escrow established in a later year. 1040 form for 2010 If you make an installment sale and in a later year an irrevocable escrow account is established to pay the remaining installments plus interest, the amount placed in the escrow account represents payment of the balance of the installment obligation. 1040 form for 2010 Substantial restriction. 1040 form for 2010 If an escrow arrangement imposes a substantial restriction on your right to receive the sale proceeds, the sale can be reported on the installment method, provided it otherwise qualifies. 1040 form for 2010 For an escrow arrangement to impose a substantial restriction, it must serve a bona fide purpose of the buyer, that is, a real and definite restriction placed on the seller or a specific economic benefit conferred on the buyer. 1040 form for 2010 Depreciation Recapture Income If you sell property for which you claimed or could have claimed a depreciation deduction, you must report any depreciation recapture income in the year of sale, whether or not an installment payment was received that year. 1040 form for 2010 Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. 1040 form for 2010 Report the recapture income in Part II of Form 4797 as ordinary income in the year of sale. 1040 form for 2010 The recapture income is also included in Part I of Form 6252. 1040 form for 2010 However, the gain equal to the recapture income is reported in full in the year of the sale. 1040 form for 2010 Only the gain greater than the recapture income is reported on the installment method. 1040 form for 2010 For more information on depreciation recapture, see chapter 3 in Publication 544. 1040 form for 2010 The recapture income reported in the year of sale is included in your installment sale basis in determining your gross profit on the installment sale. 1040 form for 2010 Determining gross profit is discussed under General Rules , earlier. 1040 form for 2010 Sale to a Related Person If you sell depreciable property to a related person and the sale is an installment sale, you may not be able to report the sale using the installment method. 1040 form for 2010 If you sell property to a related person and the related person disposes of the property before you receive all payments with respect to the sale, you may have to treat the amount realized by the related person as received by you when the related person disposes of the property. 1040 form for 2010 These rules are explained under Sale of Depreciable Property and under Sale and Later Disposition , later. 1040 form for 2010 Sale of Depreciable Property If you sell depreciable property to certain related persons, you generally cannot report the sale using the installment method. 1040 form for 2010 Instead, all payments to be received are considered received in the year of sale. 1040 form for 2010 However, see Exception , below. 1040 form for 2010 Depreciable property for this rule is any property the purchaser can depreciate. 1040 form for 2010 Payments to be received include the total of all noncontingent payments and the FMV of any payments contingent as to amount. 1040 form for 2010 In the case of contingent payments for which the FMV cannot be reasonably determined, your basis in the property is recovered proportionately. 1040 form for 2010 The purchaser cannot increase the basis of the property acquired in the sale before the seller includes a like amount in income. 1040 form for 2010 Exception. 1040 form for 2010 You can use the installment method to report a sale of depreciable property to a related person if no significant tax deferral benefit will be derived from the sale. 1040 form for 2010 You must show to the satisfaction of the IRS that avoidance of federal income tax was not one of the principal purposes of the sale. 1040 form for 2010 Related person. 1040 form for 2010 Related persons include the following. 1040 form for 2010 A person and all controlled entities with respect to that person. 1040 form for 2010 A taxpayer and any trust in which such taxpayer (or his spouse) is a beneficiary, unless that beneficiary's interest in the trust is a remote contingent interest. 1040 form for 2010 Except in the case of a sale or exchange in satisfaction of a pecuniary bequest, an executor of an estate and a beneficiary of that estate. 1040 form for 2010 Two or more partnerships in which the same person owns, directly or indirectly, more than 50% of the capital interests or the profits interests. 1040 form for 2010 For information about which entities are controlled entities, see section 1239(c). 1040 form for 2010 Sale and Later Disposition Generally, a special rule applies if you sell or exchange property to a related person on the installment method (first disposition) who then sells, exchanges, or gives away the property (second disposition) under the following circumstances. 1040 form for 2010 The related person makes the second disposition before making all payments on the first disposition. 1040 form for 2010 The related person disposes of the property within 2 years of the first disposition. 1040 form for 2010 This rule does not apply if the property involved is marketable securities. 1040 form for 2010 Under this rule, you treat part or all of the amount the related person realizes (or the FMV if the disposed property is not sold or exchanged) from the second disposition as if you received it at the time of the second disposition. 1040 form for 2010 See Exception , later. 1040 form for 2010 Related person. 1040 form for 2010 Related persons include the following. 1040 form for 2010 Members of a family, including only brothers and sisters (either whole or half), husband and wife, ancestors, and lineal descendants. 1040 form for 2010 A partnership or estate and a partner or beneficiary. 1040 form for 2010 A trust (other than a section 401(a) employees trust) and a beneficiary. 1040 form for 2010 A trust and an owner of the trust. 1040 form for 2010 Two corporations that are members of the same controlled group as defined in section 267(f). 1040 form for 2010 The fiduciaries of two different trusts, and the fiduciary and beneficiary of two different trusts, if the same person is the grantor of both trusts. 1040 form for 2010 A tax-exempt educational or charitable organization and a person (if an individual, including members of the individual's family) who directly or indirectly controls such an organization. 1040 form for 2010 An individual and a corporation when the individual owns, directly or indirectly, more than 50% of the value of the outstanding stock of the corporation. 1040 form for 2010 A fiduciary of a trust and a corporation when the trust or the grantor of the trust owns, directly or indirectly, more than 50% in value of the outstanding stock of the corporation. 1040 form for 2010 The grantor and fiduciary, and the fiduciary and beneficiary, of any trust. 1040 form for 2010 Any two S corporations if the same persons own more than 50% in value of the outstanding stock of each corporation. 1040 form for 2010 An S corporation and a corporation that is not an S corporation if the same persons own more than 50% in value of the outstanding stock of each corporation. 1040 form for 2010 A corporation and a partnership if the same persons own more than 50% in value of the outstanding stock of the corporation and more than 50% of the capital or profits interest in the partnership. 1040 form for 2010 An executor and a beneficiary of an estate unless the sale is in satisfaction of a pecuniary bequest. 1040 form for 2010 Example 1. 1040 form for 2010 In 2012, Harvey Green sold farm land to his son Bob for $500,000, which was to be paid in five equal payments over 5 years, plus adequate stated interest on the balance due. 1040 form for 2010 His installment sale basis for the farm land was $250,000 and the property was not subject to any outstanding liens or mortgages. 1040 form for 2010 His gross profit percentage is 50% (gross profit of $250,000 ÷ contract price of $500,000). 1040 form for 2010 He received $100,000 in 2012 and included $50,000 in income for that year ($100,000 × 0. 1040 form for 2010 50). 1040 form for 2010 Bob made no improvements to the property and sold it to Alfalfa Inc. 1040 form for 2010 , in 2013 for $600,000 after making the payment for that year. 1040 form for 2010 The amount realized from the second disposition is $600,000. 1040 form for 2010 Harvey figures his installment sale income for 2013 as follows: Lesser of: 1) Amount realized on second disposition, or 2) Contract price on first disposition $500,000 Subtract: Sum of payments from Bob in 2012 and 2013 - 200,000 Amount treated as received because of second disposition $300,000 Add: Payment from Bob in 2013 + 100,000 Total payments received and treated as received for 2013 $400,000 Multiply by gross profit % × . 1040 form for 2010 50 Installment sale income for 2013 $200,000 Harvey will not include in his installment sale income any principal payments he receives on the installment obligation for 2014, 2015, and 2016 because he has already reported the total payments of $500,000 from the first disposition ($100,000 in 2012 and $400,000 in 2013). 1040 form for 2010 Example 2. 1040 form for 2010 Assume the facts are the same as Example 1 except that Bob sells the property for only $400,000. 1040 form for 2010 The gain for 2013 is figured as follows: Lesser of: 1) Amount realized on second disposition, or 2) Contract price on first disposition $400,000 Subtract: Sum of payments from Bob in 2012 and 2013 − 200,000 Amount treated as received because of second disposition $200,000 Add: Payment from Bob in 2013 + 100,000 Total payments received and treated as received for 2013 $300,000 Multiply by gross profit % × . 1040 form for 2010 50 Installment sale income for 2013 $150,000 Harvey receives a $100,000 payment in 2014 and another in 2015. 1040 form for 2010 They are not taxed because he treated the $200,000 from the disposition in 2013 as a payment received and paid tax on the installment sale income. 1040 form for 2010 In 2016, he receives the final $100,000 payment. 1040 form for 2010 He figures the installment sale income he must recognize in 2016 as follows: Total payments from the first disposition received by the end of 2016 $500,000 Minus the sum of: Payment from 2012 $100,000 Payment from 2013 100,000 Amount treated as received in 2013 200,000 Total on which gain was previously recognized − 400,000 Payment on which gain is recognized for 2016 $100,000 Multiply by gross profit % × . 1040 form for 2010 50 Installment sale income for 2016 $ 50,000 Exception. 1040 form for 2010 This rule does not apply to a second disposition, and any later transfer, if you can show to the satisfaction of the IRS that neither the first disposition (to the related person) nor the second disposition had as one of its principal purposes the avoidance of federal income tax. 1040 form for 2010 Generally, an involuntary second disposition will qualify under the nontax avoidance exception, such as when a creditor of the related person forecloses on the property or the related person declares bankruptcy. 1040 form for 2010 The nontax avoidance exception also applies to a second disposition that is also an installment sale if the terms of payment under the installment resale are substantially equal to or longer than those for the first installment sale. 1040 form for 2010 However, the exception does not apply if the resale terms permit significant deferral of recognition of gain from the first sale. 1040 form for 2010 In addition, any sale or exchange of stock to the issuing corporation is not treated as a first disposition. 1040 form for 2010 An involuntary conversion is not treated as a second disposition if the first disposition occurred before the threat of conversion. 1040 form for 2010 A transfer after the death of the person making the first disposition or the related person's death, whichever is earlier, is not treated as a second disposition. 1040 form for 2010 Like-Kind Exchange If you trade business or investment property solely for the same kind of property to be held as business or investment property, you can postpone reporting the gain. 1040 form for 2010 These trades are known as like-kind exchanges. 1040 form for 2010 The property you receive in a like-kind exchange is treated as if it were a continuation of the property you gave up. 1040 form for 2010 You do not have to report any part of your gain if you receive only like-kind property. 1040 form for 2010 However, if you also receive money or other property (boot) in the exchange, you must report your gain to the extent of the money and the FMV of the other property received. 1040 form for 2010 For more information on like-kind exchanges, see Like-Kind Exchanges in chapter 1 of Publication 544. 1040 form for 2010 Installment payments. 1040 form for 2010 If, in addition to like-kind property, you receive an installment obligation in the exchange, the following rules apply to determine the installment sale income each year. 1040 form for 2010 The contract price is reduced by the FMV of the like-kind property received in the trade. 1040 form for 2010 The gross profit is reduced by any gain on the trade that can be postponed. 1040 form for 2010 Like-kind property received in the trade is not considered payment on the installment obligation. 1040 form for 2010 Example. 1040 form for 2010 In 2013, George Brown trades personal property with an installment sale basis of $400,000 for like-kind property having an FMV of $200,000. 1040 form for 2010 He also receives an installment note for $800,000 in the trade. 1040 form for 2010 Under the terms of the note, he is to receive $100,000 (plus interest) in 2014 and the balance of $700,000 (plus interest) in 2015. 1040 form for 2010 George's selling price is $1,000,000 ($800,000 installment note + $200,000 FMV of like-kind property received). 1040 form for 2010 His gross profit is $600,000 ($1,000,000 − $400,000 installment sale basis). 1040 form for 2010 The contract price is $800,000 ($1,000,000 − $200,000). 1040 form for 2010 The gross profit percentage is 75% ($600,000 ÷ $800,000). 1040 form for 2010 He reports no gain in 2013 because the like-kind property he receives is not treated as a payment for figuring gain. 1040 form for 2010 He reports $75,000 gain for 2014 (75% of $100,000 payment received) and $525,000 gain for 2015 (75% of $700,000 payment received). 1040 form for 2010 Deferred exchanges. 1040 form for 2010 A deferred exchange is one in which you transfer property you use in business or hold for investment and receive like-kind property later that you will use in business or hold for investment. 1040 form for 2010 Under this type of exchange, the person receiving your property may be required to place funds in an escrow account or trust. 1040 form for 2010 If certain rules are met, these funds will not be considered a payment until you have the right to receive the funds or, if earlier, the end of the exchange period. 1040 form for 2010 See Regulations section 1. 1040 form for 2010 1031(k)-1(j)(2) for these rules. 1040 form for 2010 Contingent Payment Sale A contingent payment sale is one in which the total selling price cannot be determined by the end of the tax year of sale. 1040 form for 2010 This happens, for example, if you sell your business and the selling price includes a percentage of its profits in future years. 1040 form for 2010 If the selling price cannot be determined by the end of the tax year, you must use different rules to figure the contract price and the gross profit percentage than those you use for an installment sale with a fixed selling price. 1040 form for 2010 For rules on using the installment method for a contingent payment sale, see Regulations section 15a. 1040 form for 2010 453-1(c). 1040 form for 2010 Single Sale of Several Assets If you sell different types of assets in a single sale, you must identify each asset to determine whether you can use the installment method to report the sale of that asset. 1040 form for 2010 You also have to allocate part of the selling price to each asset. 1040 form for 2010 If you sell assets that constitute a trade or business, see Sale of a Business , later. 1040 form for 2010 Unless an allocation of the selling price has been agreed to by both parties in an arm's-length transaction, you must allocate the selling price to an asset based on its FMV. 1040 form for 2010 If the buyer assumes a debt, or takes the property subject to a debt, you must reduce the FMV of the property by the debt. 1040 form for 2010 This becomes the net FMV. 1040 form for 2010 A sale of separate and unrelated assets of the same type under a single contract is reported as one transaction for the installment method. 1040 form for 2010 However, if an asset is sold at a loss, its disposition cannot be reported on the installment method. 1040 form for 2010 It must be reported separately. 1040 form for 2010 The remaining assets sold at a gain are reported together. 1040 form for 2010 Example. 1040 form for 2010 You sold three separate and unrelated parcels of real property (A, B, and C) under a single contract calling for a total selling price of $130,000. 1040 form for 2010 The total selling price consisted of a cash payment of $20,000, the buyer's assumption of a $30,000 mortgage on parcel B, and an installment obligation of $80,000 payable in eight annual installments, plus interest at 8% a year. 1040 form for 2010 Your installment sale basis for each parcel was $15,000. 1040 form for 2010 Your net gain was $85,000 ($130,000 − $45,000). 1040 form for 2010 You report the gain on the installment method. 1040 form for 2010 The sales contract did not allocate the selling price or the cash payment received in the year of sale among the individual parcels. 1040 form for 2010 The FMV of parcels A, B, and C were $60,000, $60,000, and $10,000, respectively. 1040 form for 2010 The installment sale basis for parcel C was more than its FMV, so it was sold at a loss and must be treated separately. 1040 form for 2010 You must allocate the total selling price and the amounts received in the year of sale between parcel C and the remaining parcels. 1040 form for 2010 Of the total $130,000 selling price, you must allocate $120,000 to parcels A and B together and $10,000 to parcel C. 1040 form for 2010 You should allocate the cash payment of $20,000 received in the year of sale and the note receivable on the basis of their proportionate net FMV. 1040 form for 2010 The allocation is figured as follows: Parcels A and B Parcel C FMV $120,000 $10,000 Minus: Mortgage assumed 30,000 -0- Net FMV $ 90,000 $10,000 Proportionate net FMV: Percentage of total 90% 10% Payments in year of sale: $20,000 × 90% $18,000 $20,000 × 10% $2,000 Excess of parcel B mortgage over installment sale basis 15,000 -0- Allocation of payments received (or considered received) in year of sale $ 33,000 $ 2,000 You cannot report the sale of parcel C on the installment method because the sale results in a loss. 1040 form for 2010 You report this loss of $5,000 ($10,000 selling price − $15,000 installment sale basis) in the year of sale. 1040 form for 2010 However, if parcel C was held for personal use, the loss is not deductible. 1040 form for 2010 You allocate the installment obligation of $80,000 to the properties sold based on their proportionate net FMVs (90% to parcels A and B, 10% to parcel C). 1040 form for 2010 Sale of a Business The installment sale of an entire business for one overall price under a single contract is not the sale of a single asset. 1040 form for 2010 Allocation of Selling Price To determine whether any of the gain on the sale of the business can be reported on the installment method, you must allocate the total selling price and the payments received in the year of sale between each of the following classes of assets. 1040 form for 2010 Assets sold at a loss. 1040 form for 2010 Real and personal property eligible for the installment method. 1040 form for 2010 Real and personal property ineligible for the installment method, including: Inventory, Dealer property, and Stocks and securities. 1040 form for 2010 Inventory. 1040 form for 2010 The sale of inventories of personal property cannot be reported on the installment method. 1040 form for 2010 All gain or loss on their sale must be reported in the year of sale, even if you receive payment in later years. 1040 form for 2010 If inventory items are included in an installment sale, you may have an agreement stating which payments are for inventory and which are for the other assets being sold. 1040 form for 2010 If you do not, each payment must be allocated between the inventory and the other assets sold. 1040 form for 2010 Report the amount you receive (or will receive) on the sale of inventory items as ordinary business income. 1040 form for 2010 Use your basis in the inventory to figure the cost of goods sold. 1040 form for 2010 Deduct the part of the selling expenses allocated to inventory as an ordinary business expense. 1040 form for 2010 Residual method. 1040 form for 2010 Except for assets exchanged under the like-kind exchange rules, both the buyer and seller of a business must use the residual method to allocate the sale price to each business asset sold. 1040 form for 2010 This method determines gain or loss from the transfer of each asset and the buyer's basis in the assets. 1040 form for 2010 The residual method must be used for any transfer of a group of assets that constitutes a trade or business and for which the buyer's basis is determined only by the amount paid for the assets. 1040 form for 2010 This applies to both direct and indirect transfers, such as the sale of a business or the sale of a partnership interest in which the basis of the buyer's share of the partnership assets is adjusted for the amount paid under section 743(b). 1040 form for 2010 A group of assets constitutes a trade or business if goodwill or going concern value could, under any circumstances, attach to the assets or if the use of the assets would constitute an active trade or business under section 355. 1040 form for 2010 The residual method provides for the consideration to be reduced first by cash and general deposit accounts (including checking and savings accounts but excluding certificates of deposit). 1040 form for 2010 The consideration remaining after this reduction must be allocated among the various business assets in a certain order. 1040 form for 2010 For asset acquisitions occurring after March 15, 2001, make the allocation among the following assets in proportion to (but not more than) their fair market value on the purchase date in the following order. 1040 form for 2010 Certificates of deposit, U. 1040 form for 2010 S. 1040 form for 2010 Government securities, foreign currency, and actively traded personal property, including stock and securities. 1040 form for 2010 Accounts receivable, other debt instruments, and assets that you mark to market at least annually for federal income tax purposes. 1040 form for 2010 However, see Regulations section 1. 1040 form for 2010 338-6(b)(2)(iii) for exceptions that apply to debt instruments issued by persons related to a target corporation, contingent debt instruments, and debt instruments convertible into stock or other property. 1040 form for 2010 Property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held by the taxpayer primarily for sale to customers in the ordinary course of business. 1040 form for 2010 All other assets except section 197 intangibles. 1040 form for 2010 Section 197 intangibles except goodwill and going concern value. 1040 form for 2010 Goodwill and going concern value (whether or not they qualify as section 197 intangibles). 1040 form for 2010 If an asset described in (1) through (6) is includible in more than one category, include it in the lower number category. 1040 form for 2010 For example, if an asset is described in both (4) and (6), include it in (4). 1040 form for 2010 Agreement. 1040 form for 2010 The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value of any of the assets. 1040 form for 2010 This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. 1040 form for 2010 Reporting requirement. 1040 form for 2010 Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. 1040 form for 2010 Use Form 8594, Asset Acquisition Statement Under Section 1060, to provide this information. 1040 form for 2010 The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. 1040 form for 2010 Sale of Partnership Interest A partner who sells a partnership interest at a gain may be able to report the sale on the installment method. 1040 form for 2010 The sale of a partnership interest is treated as the sale of a single capital asset. 1040 form for 2010 The part of any gain or loss from unrealized receivables or inventory items will be treated as ordinary income. 1040 form for 2010 (The term “unrealized receivables” includes depreciation recapture income, discussed earlier. 1040 form for 2010 ) The gain allocated to the unrealized receivables and the inventory cannot be reported under the installment method. 1040 form for 2010 The gain allocated to the other assets can be reported under the installment method. 1040 form for 2010 For more information on the treatment of unrealized receivables and inventory, see Publication 541. 1040 form for 2010 Example — Sale of a Business On June 4, 2013, you sold the machine shop you had operated since 2005. 1040 form for 2010 You received a $100,000 down payment and the buyer's note for $120,000. 1040 form for 2010 The note payments are $15,000 each, plus 10% interest, due every July 1 and January 1, beginning in 2014. 1040 form for 2010 The total selling price is $220,000. 1040 form for 2010 Your selling expenses are $11,000. 1040 form for 2010 The selling expenses are divided among all the assets sold, including inventory. 1040 form for 2010 Your selling expense for each asset is 5% of the asset's selling price ($11,000 selling expense ÷ $220,000 total selling price). 1040 form for 2010 The FMV, adjusted basis, and depreciation claimed on each asset sold are as follows: Depre- ciation Adj. 1040 form for 2010 Asset FMV Claimed Basis Inventory $ 10,000 -0- $ 8,000 Land 42,000 -0- 15,000 Building 48,000 $9,000 36,000 Machine A 71,000 27,200 63,800 Machine B 24,000 12,960 22,040 Truck 6,500 18,624 5,376 $201,500 $67,784 $150,216 Under the residual method, you allocate the selling price to each of the assets based on their FMV ($201,500). 1040 form for 2010 The remaining $18,500 ($220,000 - $201,500) is allocated to your section 197 intangible, goodwill. 1040 form for 2010 The assets included in the sale, their selling prices based on their FMVs, the selling expense allocated to each asset, the adjusted basis, and the gain for each asset are shown in the following chart. 1040 form for 2010 Sale Price Sale Exp. 1040 form for 2010 Adj. 1040 form for 2010 Basis Gain Inventory $ 10,000 $ 500 $ 8,000 $ 1,500 Land 42,000 2,100 15,000 24,900 Building 48,000 2,400 36,000 9,600 Mch. 1040 form for 2010 A 71,000 3,550 63,800 3,650 Mch. 1040 form for 2010 B 24,000 1,200 22,040 760 Truck 6,500 325 5,376 799 Goodwill 18,500 925 -0- 17,575 $220,000 $11,000 $150,216 $58,784 The building was acquired in 2005, the year the business began, and it is section 1250 property. 1040 form for 2010 There is no depreciation recapture income because the building was depreciated using the straight line method. 1040 form for 2010 All gain on the truck, machine A, and machine B is depreciation recapture income since it is the lesser of the depreciation claimed or the gain on the sale. 1040 form for 2010 Figure depreciation recapture in Part III of Form 4797. 1040 form for 2010 The total depreciation recapture income reported in Part II of Form 4797 is $5,209. 1040 form for 2010 This consists of $3,650 on machine A, $799 on the truck, and $760 on machine B (the gain on each item because it was less than the depreciation claimed). 1040 form for 2010 These gains are reported in full in the year of sale and are not included in the installment sale computation. 1040 form for 2010 Of the $220,000 total selling price, the $10,000 for inventory assets cannot be reported using the installment method. 1040 form for 2010 The selling prices of the truck and machines are also removed from the total selling price because gain on these items is reported in full in the year of sale. 1040 form for 2010 The selling price equals the contract price for the installment sale ($108,500). 1040 form for 2010 The assets included in the installment sale, their selling price, and their installment sale bases are shown in the following chart. 1040 form for 2010 Selling Price Install- ment Sale Basis Gross Profit Land $ 42,000 $17,100 $24,900 Building 48,000 38,400 9,600 Goodwill 18,500 925 17,575 Total $108,500 $56,425 $52,075 The gross profit percentage (gross profit ÷ contract price) for the installment sale is 48% ($52,075 ÷ $108,500). 1040 form for 2010 The gross profit percentage for each asset is figured as follows: Percentage Land— $24,900 ÷ $108,500 22. 1040 form for 2010 95 Building— $9,600 ÷ $108,500 8. 1040 form for 2010 85 Goodwill— $17,575 ÷ $108,500 16. 1040 form for 2010 20 Total 48. 1040 form for 2010 00 The sale includes assets sold on the installment method and assets for which the gain is reported in full in the year of sale, so payments must be allocated between the installment part of the sale and the part reported in the year of sale. 1040 form for 2010 The selling price for the installment sale is $108,500. 1040 form for 2010 This is 49. 1040 form for 2010 3% of the total selling price of $220,000 ($108,500 ÷ $220,000). 1040 form for 2010 The selling price of assets not reported on the installment method is $111,500. 1040 form for 2010 This is 50. 1040 form for 2010 7% ($111,500 ÷ $220,000) of the total selling price. 1040 form for 2010 Multiply principal payments by 49. 1040 form for 2010 3% to determine the part of the payment for the installment sale. 1040 form for 2010 The balance, 50. 1040 form for 2010 7%, is for the part reported in the year of the sale. 1040 form for 2010 The gain on the sale of the inventory, machines, and truck is reported in full in the year of sale. 1040 form for 2010 When you receive principal payments in later years, no part of the payment for the sale of these assets is included in gross income. 1040 form for 2010 Only the part for the installment sale (49. 1040 form for 2010 3%) is used in the installment sale computation. 1040 form for 2010 The only payment received in 2013 is the down payment of $100,000. 1040 form for 2010 The part of the payment for the installment sale is $49,300 ($100,000 × 49. 1040 form for 2010 3%). 1040 form for 2010 This amount is used in the installment sale computation. 1040 form for 2010 Installment income for 2013. 1040 form for 2010 Your installment income for each asset is the gross profit percentage for that asset times $49,300, the installment income received in 2013. 1040 form for 2010 Income Land—22. 1040 form for 2010 95% of $49,300 $11,314 Building—8. 1040 form for 2010 85% of $49,300 4,363 Goodwill—16. 1040 form for 2010 2% of $49,300 7,987 Total installment income for 2013 $23,664 Installment income after 2013. 1040 form for 2010 You figure installment income for years after 2013 by applying the same gross profit percentages to 49. 1040 form for 2010 3% of the total payments you receive on the buyer's note during the year. 1040 form for 2010 Unstated Interest and Original Issue Discount (OID) An installment sale contract may provide that each deferred payment on the sale will include interest or that there will be an interest payment in addition to the principal payment. 1040 form for 2010 Interest provided in the contract is called stated interest. 1040 form for 2010 If an installment sale contract does not provide for adequate stated interest, part of the stated principal amount of the contract may be recharacterized as interest. 1040 form for 2010 If section 483 applies to the contract, this interest is called unstated interest. 1040 form for 2010 If section 1274 applies to the contract, this interest is called original issue discount (OID). 1040 form for 2010 An installment sale contract does not provide for adequate stated interest if the stated interest rate is lower than the test rate (defined later). 1040 form for 2010 Treatment of unstated interest and OID. 1040 form for 2010 Generally, if a buyer gives a debt in consideration for personal use property, the unstated interest rules do not apply. 1040 form for 2010 As a result, the buyer cannot deduct the unstated interest. 1040 form for 2010 The seller must report the unstated interest as income. 1040 form for 2010 Personal-use property is any property in which substantially all of its use by the buyer is not in connection with a trade or business or an investment activity. 1040 form for 2010 If the debt is subject to the section 483 rules and is also subject to the below-market loan rules, such as a gift loan, compensation-related loan, or corporation-shareholder loan, then both parties are subject to the below-market loan rules rather than the unstated interest rules. 1040 form for 2010 Rules for the seller. 1040 form for 2010 If either section 1274 or section 483 applies to the installment sale contract, you must treat part of the installment sale price as interest, even though interest is not called for in the sales agreement. 1040 form for 2010 If either section applies, you must reduce the stated selling price of the property and increase your interest income by this unstated interest. 1040 form for 2010 Include the unstated interest in income based on your regular method of accounting. 1040 form for 2010 Include OID in income over the term of the contract. 1040 form for 2010 The OID includible in income each year is based on the constant yield method described in section 1272. 1040 form for 2010 (In some cases, the OID on an installment sale contract also may include all or part of the stated interest, especially if the stated interest is not paid at least annually. 1040 form for 2010 ) If you do not use the installment method to report the sale, report the entire gain under your method of accounting in the year of sale. 1040 form for 2010 Reduce the selling price by any stated principal treated as interest to determine the gain. 1040 form for 2010 Report unstated interest or OID on your tax return, in addition to stated interest. 1040 form for 2010 Rules for the buyer. 1040 form for 2010 Any part of the stated selling price of an installment sale contract treated by the buyer as interest reduces the buyer's basis in the property and increases the buyer's interest expense. 1040 form for 2010 These rules do not apply to personal-use property (for example, property not used in a trade or business). 1040 form for 2010 Adequate stated interest. 1040 form for 2010 An installment sale contract generally provides for adequate stated interest if the contract's stated principal amount is at least equal to the sum of the present values of all principal and interest payments called for under the contract. 1040 form for 2010 The present value of a payment is determined based on the test rate of interest, defined next. 1040 form for 2010 (If section 483 applies to the contract, payments due within six months after the sale are taken into account at face value. 1040 form for 2010 ) In general, an installment sale contract provides for adequate stated interest if the stated interest rate (based on an appropriate compounding period) is at least equal to the test rate of interest. 1040 form for 2010 Test rate of interest. 1040 form for 2010 The test rate of interest for a contract is the 3-month rate. 1040 form for 2010 The 3-month rate is the lower of the following applicable federal rates (AFRs). 1040 form for 2010 The lowest AFR (based on the appropriate compounding period) in effect during the 3-month period ending with the first month in which there is a binding written contract that substantially provides the terms under which the sale or exchange is ultimately completed. 1040 form for 2010 The lowest AFR (based on the appropriate compounding period) in effect during the 3-month period ending with the month in which the sale or exchange occurs. 1040 form for 2010 Applicable federal rate (AFR). 1040 form for 2010 The AFR depends on the month the binding