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1040a 2012 Tax Return

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1040a 2012 Tax Return

1040a 2012 tax return 7. 1040a 2012 tax return   Interest Income Table of Contents Reminder Introduction Useful Items - You may want to see: General InformationSSN for joint account. 1040a 2012 tax return Custodian account for your child. 1040a 2012 tax return Penalty for failure to supply SSN. 1040a 2012 tax return Reporting backup withholding. 1040a 2012 tax return Savings account with parent as trustee. 1040a 2012 tax return Interest not reported on Form 1099-INT. 1040a 2012 tax return Nominees. 1040a 2012 tax return Incorrect amount. 1040a 2012 tax return Information reporting requirement. 1040a 2012 tax return Taxable InterestInterest subject to penalty for early withdrawal. 1040a 2012 tax return Money borrowed to invest in certificate of deposit. 1040a 2012 tax return U. 1040a 2012 tax return S. 1040a 2012 tax return Savings Bonds Education Savings Bond Program U. 1040a 2012 tax return S. 1040a 2012 tax return Treasury Bills, Notes, and Bonds Bonds Sold Between Interest Dates Insurance State or Local Government Obligations Original Issue Discount (OID) When To Report Interest IncomeConstructive receipt. 1040a 2012 tax return How To Report Interest IncomeSchedule B (Form 1040A or 1040). 1040a 2012 tax return Reporting tax-exempt interest. 1040a 2012 tax return U. 1040a 2012 tax return S. 1040a 2012 tax return savings bond interest previously reported. 1040a 2012 tax return Reminder Foreign-source income. 1040a 2012 tax return  If you are a U. 1040a 2012 tax return S. 1040a 2012 tax return citizen with interest income from sources outside the United States (foreign income), you must report that income on your tax return unless it is exempt by U. 1040a 2012 tax return S. 1040a 2012 tax return law. 1040a 2012 tax return This is true whether you reside inside or outside the United States and whether or not you receive a Form 1099 from the foreign payer. 1040a 2012 tax return Introduction This chapter discusses the following topics. 1040a 2012 tax return Different types of interest income. 1040a 2012 tax return What interest is taxable and what interest is nontaxable. 1040a 2012 tax return When to report interest income. 1040a 2012 tax return How to report interest income on your tax return. 1040a 2012 tax return In general, any interest you receive or that is credited to your account and can be withdrawn is taxable income. 1040a 2012 tax return Exceptions to this rule are discussed later in this chapter. 1040a 2012 tax return You may be able to deduct expenses you have in earning this income on Schedule A (Form 1040) if you itemize your deductions. 1040a 2012 tax return See Money borrowed to invest in certificate of deposit , later, and chapter 28. 1040a 2012 tax return Useful Items - You may want to see: Publication 537 Installment Sales 550 Investment Income and Expenses 1212 Guide to Original Issue Discount (OID) Instruments Form (and Instructions) Schedule B (Form 1040A or 1040) Interest and Ordinary Dividends 8815 Exclusion of Interest From Series EE and I U. 1040a 2012 tax return S. 1040a 2012 tax return Savings Bonds Issued After 1989 8818 Optional Form To Record Redemption of Series EE and I U. 1040a 2012 tax return S. 1040a 2012 tax return Savings Bonds Issued After 1989 General Information A few items of general interest are covered here. 1040a 2012 tax return Recordkeeping. 1040a 2012 tax return You should keep a list showing sources and interest amounts received during the year. 1040a 2012 tax return Also, keep the forms you receive showing your interest income (Forms 1099-INT, for example) as an important part of your records. 1040a 2012 tax return Tax on unearned income of certain children. 1040a 2012 tax return    Part of a child's 2013 unearned income may be taxed at the parent's tax rate. 1040a 2012 tax return If so, Form 8615, Tax for Certain Children Who Have Unearned Income, must be completed and attached to the child's tax return. 1040a 2012 tax return If not, Form 8615 is not required and the child's income is taxed at his or her own tax rate. 1040a 2012 tax return   Some parents can choose to include the child's interest and dividends on the parent's return. 1040a 2012 tax return If you can, use Form 8814, Parents' Election To Report Child's Interest and Dividends, for this purpose. 1040a 2012 tax return   For more information about the tax on unearned income of children and the parents' election, see chapter 31. 1040a 2012 tax return Beneficiary of an estate or trust. 1040a 2012 tax return   Interest you receive as a beneficiary of an estate or trust is generally taxable income. 1040a 2012 tax return You should receive a Schedule K-1 (Form 1041), Beneficiary's Share of Income, Deductions, Credits, etc. 1040a 2012 tax return , from the fiduciary. 1040a 2012 tax return Your copy of Schedule K-1 (Form 1041) and its instructions will tell you where to report the income on your Form 1040. 1040a 2012 tax return Social security number (SSN). 1040a 2012 tax return   You must give your name and SSN or individual tax identification number (ITIN) to any person required by federal tax law to make a return, statement, or other document that relates to you. 1040a 2012 tax return This includes payers of interest. 1040a 2012 tax return If you do not give your SSN or ITIN to the payer of interest, you may have to pay a penalty. 1040a 2012 tax return SSN for joint account. 1040a 2012 tax return   If the funds in a joint account belong to one person, list that person's name first on the account and give that person's SSN to the payer. 1040a 2012 tax return (For information on who owns the funds in a joint account, see Joint accounts , later. 1040a 2012 tax return ) If the joint account contains combined funds, give the SSN of the person whose name is listed first on the account. 1040a 2012 tax return This is because only one name and SSN can be shown on Form 1099. 1040a 2012 tax return   These rules apply both to joint ownership by a married couple and to joint ownership by other individuals. 1040a 2012 tax return For example, if you open a joint savings account with your child using funds belonging to the child, list the child's name first on the account and give the child's SSN. 1040a 2012 tax return Custodian account for your child. 1040a 2012 tax return   If your child is the actual owner of an account that is recorded in your name as custodian for the child, give the child's SSN to the payer. 1040a 2012 tax return For example, you must give your child's SSN to the payer of interest on an account owned by your child, even though the interest is paid to you as custodian. 1040a 2012 tax return Penalty for failure to supply SSN. 1040a 2012 tax return   If you do not give your SSN to the payer of interest, you may have to pay a penalty. 1040a 2012 tax return See Failure to supply SSN under Penalties in chapter 1. 1040a 2012 tax return Backup withholding also may apply. 1040a 2012 tax return Backup withholding. 1040a 2012 tax return   Your interest income is generally not subject to regular withholding. 1040a 2012 tax return However, it may be subject to backup withholding to ensure that income tax is collected on the income. 1040a 2012 tax return Under backup withholding, the payer of interest must withhold, as income tax, on the amount you are paid, applying the appropriate withholding rate. 1040a 2012 tax return   Backup withholding may also be required if the IRS has determined that you underreported your interest or dividend income. 1040a 2012 tax return For more information, see Backup Withholding in chapter 4. 1040a 2012 tax return Reporting backup withholding. 1040a 2012 tax return   If backup withholding is deducted from your interest income, the payer must give you a Form 1099-INT for the year indicating the amount withheld. 1040a 2012 tax return The Form 1099-INT will show any backup withholding as “Federal income tax withheld. 1040a 2012 tax return ” Joint accounts. 1040a 2012 tax return   If two or more persons hold property (such as a savings account or bond) as joint tenants, tenants by the entirety, or tenants in common, each person's share of any interest from the property is determined by local law. 1040a 2012 tax return Income from property given to a child. 1040a 2012 tax return   Property you give as a parent to your child under the Model Gifts of Securities to Minors Act, the Uniform Gifts to Minors Act, or any similar law becomes the child's property. 1040a 2012 tax return   Income from the property is taxable to the child, except that any part used to satisfy a legal obligation to support the child is taxable to the parent or guardian having that legal obligation. 1040a 2012 tax return Savings account with parent as trustee. 1040a 2012 tax return   Interest income from a savings account opened for a minor child, but placed in the name and subject to the order of the parents as trustees, is taxable to the child if, under the law of the state in which the child resides, both of the following are true. 1040a 2012 tax return The savings account legally belongs to the child. 1040a 2012 tax return The parents are not legally permitted to use any of the funds to support the child. 1040a 2012 tax return Form 1099-INT. 1040a 2012 tax return   Interest income is generally reported to you on Form 1099-INT, or a similar statement, by banks, savings and loans, and other payers of interest. 1040a 2012 tax return This form shows you the interest you received during the year. 1040a 2012 tax return Keep this form for your records. 1040a 2012 tax return You do not have to attach it to your tax return. 1040a 2012 tax return   Report on your tax return the total interest income you receive for the tax year. 1040a 2012 tax return Interest not reported on Form 1099-INT. 1040a 2012 tax return   Even if you do not receive Form 1099-INT, you must still report all of your interest income. 1040a 2012 tax return For example, you may receive distributive shares of interest from partnerships or S corporations. 1040a 2012 tax return This interest is reported to you on Schedule K-1 (Form 1065), Partner's Share of Income, Deduction, Credits, etc. 1040a 2012 tax return , or Schedule K-1 (Form 1120S), Shareholder's Share of Income, Deductions, Credits, etc. 1040a 2012 tax return Nominees. 1040a 2012 tax return   Generally, if someone receives interest as a nominee for you, that person must give you a Form 1099-INT showing the interest received on your behalf. 1040a 2012 tax return   If you receive a Form 1099-INT that includes amounts belonging to another person, see the discussion on nominee distributions under How To Report Interest Income in chapter 1 of Publication 550, or Schedule B (Form 1040A or 1040) instructions. 1040a 2012 tax return Incorrect amount. 1040a 2012 tax return   If you receive a Form 1099-INT that shows an incorrect amount (or other incorrect information), you should ask the issuer for a corrected form. 1040a 2012 tax return The new Form 1099-INT you receive will be marked “Corrected. 1040a 2012 tax return ” Form 1099-OID. 1040a 2012 tax return   Reportable interest income also may be shown on Form 1099-OID, Original Issue Discount. 1040a 2012 tax return For more information about amounts shown on this form, see Original Issue Discount (OID) , later in this chapter. 1040a 2012 tax return Exempt-interest dividends. 1040a 2012 tax return   Exempt-interest dividends you receive from a mutual fund or other regulated investment company, including those received from a qualified fund of funds in any tax year beginning after December 22, 2010, are not included in your taxable income. 1040a 2012 tax return (However, see Information reporting requirement , next. 1040a 2012 tax return ) Exempt-interest dividends should be shown in box 10 of Form 1099-DIV. 1040a 2012 tax return You do not reduce your basis for distributions that are exempt-interest dividends. 1040a 2012 tax return Information reporting requirement. 1040a 2012 tax return   Although exempt-interest dividends are not taxable, you must show them on your tax return if you have to file. 1040a 2012 tax return This is an information reporting requirement and does not change the exempt-interest dividends into taxable income. 1040a 2012 tax return Note. 1040a 2012 tax return Exempt-interest dividends paid from specified private activity bonds may be subject to the alternative minimum tax. 1040a 2012 tax return See Alternative Minimum Tax (AMT) in chapter 30 for more information. 1040a 2012 tax return Chapter 1 of Publication 550 contains a discussion on private activity bonds under State or Local Government Obligations. 1040a 2012 tax return Interest on VA dividends. 1040a 2012 tax return   Interest on insurance dividends left on deposit with the Department of Veterans Affairs (VA) is not taxable. 1040a 2012 tax return This includes interest paid on dividends on converted United States Government Life Insurance and on National Service Life Insurance policies. 1040a 2012 tax return Individual retirement arrangements (IRAs). 1040a 2012 tax return   Interest on a Roth IRA generally is not taxable. 1040a 2012 tax return Interest on a traditional IRA is tax deferred. 1040a 2012 tax return You generally do not include it in your income until you make withdrawals from the IRA. 1040a 2012 tax return See chapter 17. 1040a 2012 tax return Taxable Interest Taxable interest includes interest you receive from bank accounts, loans you make to others, and other sources. 1040a 2012 tax return The following are some sources of taxable interest. 1040a 2012 tax return Dividends that are actually interest. 1040a 2012 tax return   Certain distributions commonly called dividends are actually interest. 1040a 2012 tax return You must report as interest so-called “dividends” on deposits or on share accounts in: Cooperative banks, Credit unions, Domestic building and loan associations, Domestic savings and loan associations, Federal savings and loan associations, and Mutual savings banks. 1040a 2012 tax return  The “dividends” will be shown as interest income on Form 1099-INT. 1040a 2012 tax return Money market funds. 1040a 2012 tax return   Money market funds pay dividends and are offered by nonbank financial institutions, such as mutual funds and stock brokerage houses. 1040a 2012 tax return Generally, amounts you receive from money market funds should be reported as dividends, not as interest. 1040a 2012 tax return Certificates of deposit and other deferred interest accounts. 1040a 2012 tax return   If you open any of these accounts, interest may be paid at fixed intervals of 1 year or less during the term of the account. 1040a 2012 tax return You generally must include this interest in your income when you actually receive it or are entitled to receive it without paying a substantial penalty. 1040a 2012 tax return The same is true for accounts that mature in 1 year or less and pay interest in a single payment at maturity. 1040a 2012 tax return If interest is deferred for more than 1 year, see Original Issue Discount (OID) , later. 1040a 2012 tax return Interest subject to penalty for early withdrawal. 1040a 2012 tax return   If you withdraw funds from a deferred interest account before maturity, you may have to pay a penalty. 1040a 2012 tax return You must report the total amount of interest paid or credited to your account during the year, without subtracting the penalty. 1040a 2012 tax return See Penalty on early withdrawal of savings in chapter 1 of Publication 550 for more information on how to report the interest and deduct the penalty. 1040a 2012 tax return Money borrowed to invest in certificate of deposit. 1040a 2012 tax return   The interest you pay on money borrowed from a bank or savings institution to meet the minimum deposit required for a certificate of deposit from the institution and the interest you earn on the certificate are two separate items. 1040a 2012 tax return You must report the total interest you earn on the certificate in your income. 1040a 2012 tax return If you itemize deductions, you can deduct the interest you pay as investment interest, up to the amount of your net investment income. 1040a 2012 tax return See Interest Expenses in chapter 3 of Publication 550. 1040a 2012 tax return Example. 1040a 2012 tax return You deposited $5,000 with a bank and borrowed $5,000 from the bank to make up the $10,000 minimum deposit required to buy a 6-month certificate of deposit. 1040a 2012 tax return The certificate earned $575 at maturity in 2013, but you received only $265, which represented the $575 you earned minus $310 interest charged on your $5,000 loan. 1040a 2012 tax return The bank gives you a Form 1099-INT for 2013 showing the $575 interest you earned. 1040a 2012 tax return The bank also gives you a statement showing that you paid $310 interest for 2013. 1040a 2012 tax return You must include the $575 in your income. 1040a 2012 tax return If you itemize your deductions on Schedule A (Form 1040), you can deduct $310, subject to the net investment income limit. 1040a 2012 tax return Gift for opening account. 1040a 2012 tax return   If you receive noncash gifts or services for making deposits or for opening an account in a savings institution, you may have to report the value as interest. 1040a 2012 tax return   For deposits of less than $5,000, gifts or services valued at more than $10 must be reported as interest. 1040a 2012 tax return For deposits of $5,000 or more, gifts or services valued at more than $20 must be reported as interest. 1040a 2012 tax return The value is determined by the cost to the financial institution. 1040a 2012 tax return Example. 1040a 2012 tax return You open a savings account at your local bank and deposit $800. 1040a 2012 tax return The account earns $20 interest. 1040a 2012 tax return You also receive a $15 calculator. 1040a 2012 tax return If no other interest is credited to your account during the year, the Form 1099-INT you receive will show $35 interest for the year. 1040a 2012 tax return You must report $35 interest income on your tax return. 1040a 2012 tax return Interest on insurance dividends. 1040a 2012 tax return   Interest on insurance dividends left on deposit with an insurance company that can be withdrawn annually is taxable to you in the year it is credited to your account. 1040a 2012 tax return However, if you can withdraw it only on the anniversary date of the policy (or other specified date), the interest is taxable in the year that date occurs. 1040a 2012 tax return Prepaid insurance premiums. 1040a 2012 tax return   Any increase in the value of prepaid insurance premiums, advance premiums, or premium deposit funds is interest if it is applied to the payment of premiums due on insurance policies or made available for you to withdraw. 1040a 2012 tax return U. 1040a 2012 tax return S. 1040a 2012 tax return obligations. 1040a 2012 tax return   Interest on U. 1040a 2012 tax return S. 1040a 2012 tax return obligations, such as U. 1040a 2012 tax return S. 1040a 2012 tax return Treasury bills, notes, and bonds, issued by any agency or instrumentality of the United States is taxable for federal income tax purposes. 1040a 2012 tax return Interest on tax refunds. 1040a 2012 tax return   Interest you receive on tax refunds is taxable income. 1040a 2012 tax return Interest on condemnation award. 1040a 2012 tax return   If the condemning authority pays you interest to compensate you for a delay in payment of an award, the interest is taxable. 1040a 2012 tax return Installment sale payments. 1040a 2012 tax return   If a contract for the sale or exchange of property provides for deferred payments, it also usually provides for interest payable with the deferred payments. 1040a 2012 tax return That interest is taxable when you receive it. 1040a 2012 tax return If little or no interest is provided for in a deferred payment contract, part of each payment may be treated as interest. 1040a 2012 tax return See Unstated Interest and Original Issue Discount in Publication 537, Installment Sales. 1040a 2012 tax return Interest on annuity contract. 1040a 2012 tax return   Accumulated interest on an annuity contract you sell before its maturity date is taxable. 1040a 2012 tax return Usurious interest. 1040a 2012 tax return   Usurious interest is interest charged at an illegal rate. 1040a 2012 tax return This is taxable as interest unless state law automatically changes it to a payment on the principal. 1040a 2012 tax return Interest income on frozen deposits. 1040a 2012 tax return   Exclude from your gross income interest on frozen deposits. 1040a 2012 tax return A deposit is frozen if, at the end of the year, you cannot withdraw any part of the deposit because: The financial institution is bankrupt or insolvent, or The state where the institution is located has placed limits on withdrawals because other financial institutions in the state are bankrupt or insolvent. 1040a 2012 tax return   The amount of interest you must exclude is the interest that was credited on the frozen deposits minus the sum of: The net amount you withdrew from these deposits during the year, and The amount you could have withdrawn as of the end of the year (not reduced by any penalty for premature withdrawals of a time deposit). 1040a 2012 tax return If you receive a Form 1099-INT for interest income on deposits that were frozen at the end of 2013, see Frozen deposits under How To Report Interest Income in chapter 1 of Publication 550, for information about reporting this interest income exclusion on your tax return. 1040a 2012 tax return   The interest you exclude is treated as credited to your account in the following year. 1040a 2012 tax return You must include it in income in the year you can withdraw it. 1040a 2012 tax return Example. 1040a 2012 tax return $100 of interest was credited on your frozen deposit during the year. 1040a 2012 tax return You withdrew $80 but could not withdraw any more as of the end of the year. 1040a 2012 tax return You must include $80 in your income and exclude $20 from your income for the year. 1040a 2012 tax return You must include the $20 in your income for the year you can withdraw it. 1040a 2012 tax return Bonds traded flat. 1040a 2012 tax return   If you buy a bond at a discount when interest has been defaulted or when the interest has accrued but has not been paid, the transaction is described as trading a bond flat. 1040a 2012 tax return The defaulted or unpaid interest is not income and is not taxable as interest if paid later. 1040a 2012 tax return When you receive a payment of that interest, it is a return of capital that reduces the remaining cost basis of your bond. 1040a 2012 tax return Interest that accrues after the date of purchase, however, is taxable interest income for the year it is received or accrued. 1040a 2012 tax return See Bonds Sold Between Interest Dates , later, for more information. 1040a 2012 tax return Below-market loans. 1040a 2012 tax return   In general, a below-market loan is a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. 1040a 2012 tax return See Below-Market Loans in chapter 1 of Publication 550 for more information. 1040a 2012 tax return U. 1040a 2012 tax return S. 1040a 2012 tax return Savings Bonds This section provides tax information on U. 1040a 2012 tax return S. 1040a 2012 tax return savings bonds. 1040a 2012 tax return It explains how to report the interest income on these bonds and how to treat transfers of these bonds. 1040a 2012 tax return For other information on U. 1040a 2012 tax return S. 1040a 2012 tax return savings bonds, write to:  For series EE and I paper savings bonds: Bureau of the Public Debt Division of Customer Assistance P. 1040a 2012 tax return O. 1040a 2012 tax return Box 7012 Parkersburg, WV 26106-7012  For series EE and I electronic bonds: Bureau of the Public Debt Division of Customer Assistance P. 1040a 2012 tax return O. 1040a 2012 tax return Box 7015 Parkersburg, WV 26106–7015  For series HH/H: Bureau of the Public Debt Division of Customer Assistance P. 1040a 2012 tax return O. 1040a 2012 tax return Box 2186 Parkersburg, WV 26106-2186 Or, on the Internet, visit: www. 1040a 2012 tax return treasurydirect. 1040a 2012 tax return gov/indiv/indiv. 1040a 2012 tax return htm. 1040a 2012 tax return Accrual method taxpayers. 1040a 2012 tax return   If you use an accrual method of accounting, you must report interest on U. 1040a 2012 tax return S. 1040a 2012 tax return savings bonds each year as it accrues. 1040a 2012 tax return You cannot postpone reporting interest until you receive it or until the bonds mature. 1040a 2012 tax return Accrual methods of accounting are explained in chapter 1 under Accounting Methods . 1040a 2012 tax return Cash method taxpayers. 1040a 2012 tax return   If you use the cash method of accounting, as most individual taxpayers do, you generally report the interest on U. 1040a 2012 tax return S. 1040a 2012 tax return savings bonds when you receive it. 1040a 2012 tax return The cash method of accounting is explained in chapter 1 under Accounting Methods. 1040a 2012 tax return But see Reporting options for cash method taxpayers , later. 1040a 2012 tax return Series HH bonds. 1040a 2012 tax return    These bonds were issued at face value. 1040a 2012 tax return Interest is paid twice a year by direct deposit to your bank account. 1040a 2012 tax return If you are a cash method taxpayer, you must report interest on these bonds as income in the year you receive it. 1040a 2012 tax return   Series HH bonds were first offered in 1980 and last offered in August 2004. 1040a 2012 tax return Before 1980, series H bonds were issued. 1040a 2012 tax return Series H bonds are treated the same as series HH bonds. 1040a 2012 tax return If you are a cash method taxpayer, you must report the interest when you receive it. 1040a 2012 tax return   Series H bonds have a maturity period of 30 years. 1040a 2012 tax return Series HH bonds mature in 20 years. 1040a 2012 tax return The last series H bonds matured in 2009. 1040a 2012 tax return Series EE and series I bonds. 1040a 2012 tax return   Interest on these bonds is payable when you redeem the bonds. 1040a 2012 tax return The difference between the purchase price and the redemption value is taxable interest. 1040a 2012 tax return Series EE bonds. 1040a 2012 tax return   Series EE bonds were first offered in January 1980 and have a maturity period of 30 years. 1040a 2012 tax return   Before July 1980, series E bonds were issued. 1040a 2012 tax return The original 10-year maturity period of series E bonds has been extended to 40 years for bonds issued before December 1965 and 30 years for bonds issued after November 1965. 1040a 2012 tax return Paper series EE and series E bonds are issued at a discount. 1040a 2012 tax return The face value is payable to you at maturity. 1040a 2012 tax return Electronic series EE bonds are issued at their face value. 1040a 2012 tax return The face value plus accrued interest is payable to you at maturity. 1040a 2012 tax return As of January 1, 2012, paper savings bonds were no longer sold at financial institutions. 1040a 2012 tax return   Owners of paper series EE bonds can convert them to electronic bonds. 1040a 2012 tax return These converted bonds do not retain the denomination listed on the paper certificate but are posted at their purchase price (with accrued interest). 1040a 2012 tax return Series I bonds. 1040a 2012 tax return   Series I bonds were first offered in 1998. 1040a 2012 tax return These are inflation-indexed bonds issued at their face amount with a maturity period of 30 years. 1040a 2012 tax return The face value plus all accrued interest is payable to you at maturity. 1040a 2012 tax return Reporting options for cash method taxpayers. 1040a 2012 tax return   If you use the cash method of reporting income, you can report the interest on series EE, series E, and series I bonds in either of the following ways. 1040a 2012 tax return Method 1. 1040a 2012 tax return Postpone reporting the interest until the earlier of the year you cash or dispose of the bonds or the year they mature. 1040a 2012 tax return (However, see Savings bonds traded , later. 1040a 2012 tax return )  Note. 1040a 2012 tax return Series EE bonds issued in 1983 matured in 2013. 1040a 2012 tax return If you have used method 1, you generally must report the interest on these bonds on your 2013 return. 1040a 2012 tax return The last series E bonds were issued in 1980 and matured in 2010. 1040a 2012 tax return If you used method 1, you generally should have reported the interest on these bonds on your 2010 return. 1040a 2012 tax return Method 2. 1040a 2012 tax return Choose to report the increase in redemption value as interest each year. 1040a 2012 tax return You must use the same method for all series EE, series E, and series I bonds you own. 1040a 2012 tax return If you do not choose method 2 by reporting the increase in redemption value as interest each year, you must use method 1. 1040a 2012 tax return    If you plan to cash your bonds in the same year you will pay for higher education expenses, you may want to use method 1 because you may be able to exclude the interest from your income. 1040a 2012 tax return To learn how, see Education Savings Bond Program, later. 1040a 2012 tax return Change from method 1. 1040a 2012 tax return   If you want to change your method of reporting the interest from method 1 to method 2, you can do so without permission from the IRS. 1040a 2012 tax return In the year of change you must report all interest accrued to date and not previously reported for all your bonds. 1040a 2012 tax return   Once you choose to report the interest each year, you must continue to do so for all series EE, series E, and series I bonds you own and for any you get later, unless you request permission to change, as explained next. 1040a 2012 tax return Change from method 2. 1040a 2012 tax return   To change from method 2 to method 1, you must request permission from the IRS. 1040a 2012 tax return Permission for the change is automatically granted if you send the IRS a statement that meets all the following requirements. 1040a 2012 tax return You have typed or printed the following number at the top: “131. 1040a 2012 tax return ” It includes your name and social security number under “131. 1040a 2012 tax return ” It includes the year of change (both the beginning and ending dates). 1040a 2012 tax return It identifies the savings bonds for which you are requesting this change. 1040a 2012 tax return It includes your agreement to: Report all interest on any bonds acquired during or after the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest, and Report all interest on the bonds acquired before the year of change when the interest is realized upon disposition, redemption, or final maturity, whichever is earliest, with the exception of the interest reported in prior tax years. 1040a 2012 tax return   You must attach this statement to your tax return for the year of change, which you must file by the due date (including extensions). 1040a 2012 tax return   You can have an automatic extension of 6 months from the due date of your return for the year of change (excluding extensions) to file the statement with an amended return. 1040a 2012 tax return On the statement, type or print “Filed pursuant to section 301. 1040a 2012 tax return 9100-2. 1040a 2012 tax return ” To get this extension, you must have filed your original return for the year of the change by the due date (including extensions). 1040a 2012 tax return    By the date you file the original statement with your return, you must also send a signed copy to the address below. 1040a 2012 tax return   Internal Revenue Service Attention: CC:IT&A (Automatic Rulings Branch) P. 1040a 2012 tax return O. 1040a 2012 tax return Box 7604 Benjamin Franklin Station Washington, DC 20044   If you use a private delivery service, send the signed copy to the address below. 1040a 2012 tax return   Internal Revenue Service Attention: CC:IT&A (Automatic Rulings Branch) Room 5336 1111 Constitution Avenue, NW  Washington, DC 20224   Instead of filing this statement, you can request permission to change from method 2 to method 1 by filing Form 3115, Application for Change in Accounting Method. 1040a 2012 tax return In that case, follow the form instructions for an automatic change. 1040a 2012 tax return No user fee is required. 1040a 2012 tax return Co-owners. 1040a 2012 tax return   If a U. 1040a 2012 tax return S. 1040a 2012 tax return savings bond is issued in the names of co-owners, such as you and your child or you and your spouse, interest on the bond is generally taxable to the co-owner who bought the bond. 1040a 2012 tax return One co-owner's funds used. 1040a 2012 tax return    If you used your funds to buy the bond, you must pay the tax on the interest. 1040a 2012 tax return This is true even if you let the other co-owner redeem the bond and keep all the proceeds. 1040a 2012 tax return Under these circumstances, the co-owner who redeemed the bond will receive a Form 1099-INT at the time of redemption and must provide you with another Form 1099-INT showing the amount of interest from the bond taxable to you. 1040a 2012 tax return The co-owner who redeemed the bond is a “nominee. 1040a 2012 tax return ” See Nominee distributions under How To Report Interest Income in chapter 1 of Publication 550 for more information about how a person who is a nominee reports interest income belonging to another person. 1040a 2012 tax return Both co-owners' funds used. 1040a 2012 tax return   If you and the other co-owner each contribute part of the bond's purchase price, the interest is generally taxable to each of you, in proportion to the amount each of you paid. 1040a 2012 tax return Community property. 1040a 2012 tax return   If you and your spouse live in a community property state and hold bonds as community property, one-half of the interest is considered received by each of you. 1040a 2012 tax return If you file separate returns, each of you generally must report one-half of the bond interest. 1040a 2012 tax return For more information about community property, see Publication 555. 1040a 2012 tax return Table 7-1. 1040a 2012 tax return   These rules are also shown in Table 7-1. 1040a 2012 tax return Ownership transferred. 1040a 2012 tax return   If you bought series E, series EE, or series I bonds entirely with your own funds and had them reissued in your co-owner's name or beneficiary's name alone, you must include in your gross income for the year of reissue all interest that you earned on these bonds and have not previously reported. 1040a 2012 tax return But, if the bonds were reissued in your name alone, you do not have to report the interest accrued at that time. 1040a 2012 tax return   This same rule applies when bonds (other than bonds held as community property) are transferred between spouses or incident to divorce. 1040a 2012 tax return Purchased jointly. 1040a 2012 tax return   If you and a co-owner each contributed funds to buy series E, series EE, or series I bonds jointly and later have the bonds reissued in the co-owner's name alone, you must include in your gross income for the year of reissue your share of all the interest earned on the bonds that you have not previously reported. 1040a 2012 tax return The former co-owner does not have to include in gross income at the time of reissue his or her share of the interest earned that was not reported before the transfer. 1040a 2012 tax return This interest, however, as well as all interest earned after the reissue, is income to the former co-owner. 1040a 2012 tax return   This income-reporting rule also applies when the bonds are reissued in the name of your former co-owner and a new co-owner. 1040a 2012 tax return But the new co-owner will report only his or her share of the interest earned after the transfer. 1040a 2012 tax return   If bonds that you and a co-owner bought jointly are reissued to each of you separately in the same proportion as your contribution to the purchase price, neither you nor your co-owner has to report at that time the interest earned before the bonds were reissued. 1040a 2012 tax return    Table 7-1. 1040a 2012 tax return Who Pays the Tax on U. 1040a 2012 tax return S. 1040a 2012 tax return Savings Bond Interest IF . 1040a 2012 tax return . 1040a 2012 tax return . 1040a 2012 tax return THEN the interest must be reported by . 1040a 2012 tax return . 1040a 2012 tax return . 1040a 2012 tax return you buy a bond in your name and the name of another person as co-owners, using only your own funds you. 1040a 2012 tax return you buy a bond in the name of another person, who is the sole owner of the bond the person for whom you bought the bond. 1040a 2012 tax return you and another person buy a bond as co-owners, each contributing part of the purchase price both you and the other co-owner, in proportion to the amount each paid for the bond. 1040a 2012 tax return you and your spouse, who live in a community property state, buy a bond that is community property you and your spouse. 1040a 2012 tax return If you file separate returns, both you and your spouse generally report one-half of the interest. 1040a 2012 tax return Example 1. 1040a 2012 tax return You and your spouse each spent an equal amount to buy a $1,000 series EE savings bond. 1040a 2012 tax return The bond was issued to you and your spouse as co-owners. 1040a 2012 tax return You both postpone reporting interest on the bond. 1040a 2012 tax return You later have the bond reissued as two $500 bonds, one in your name and one in your spouse's name. 1040a 2012 tax return At that time neither you nor your spouse has to report the interest earned to the date of reissue. 1040a 2012 tax return Example 2. 1040a 2012 tax return You bought a $1,000 series EE savings bond entirely with your own funds. 1040a 2012 tax return The bond was issued to you and your spouse as co-owners. 1040a 2012 tax return You both postpone reporting interest on the bond. 1040a 2012 tax return You later have the bond reissued as two $500 bonds, one in your name and one in your spouse's name. 1040a 2012 tax return You must report half the interest earned to the date of reissue. 1040a 2012 tax return Transfer to a trust. 1040a 2012 tax return   If you own series E, series EE, or series I bonds and transfer them to a trust, giving up all rights of ownership, you must include in your income for that year the interest earned to the date of transfer if you have not already reported it. 1040a 2012 tax return However, if you are considered the owner of the trust and if the increase in value both before and after the transfer continues to be taxable to you, you can continue to defer reporting the interest earned each year. 1040a 2012 tax return You must include the total interest in your income in the year you cash or dispose of the bonds or the year the bonds finally mature, whichever is earlier. 1040a 2012 tax return   The same rules apply to previously unreported interest on series EE or series E bonds if the transfer to a trust consisted of series HH or series H bonds you acquired in a trade for the series EE or series E bonds. 1040a 2012 tax return See Savings bonds traded , later. 1040a 2012 tax return Decedents. 1040a 2012 tax return   The manner of reporting interest income on series E, series EE, or series I bonds, after the death of the owner (decedent), depends on the accounting and income-reporting methods previously used by the decedent. 1040a 2012 tax return This is explained in chapter 1 of Publication 550. 1040a 2012 tax return Savings bonds traded. 1040a 2012 tax return   If you postponed reporting the interest on your series EE or series E bonds, you did not recognize taxable income when you traded the bonds for series HH or series H bonds, unless you received cash in the trade. 1040a 2012 tax return (You cannot trade series I bonds for series HH bonds. 1040a 2012 tax return After August 31, 2004, you cannot trade any other series of bonds for series HH bonds. 1040a 2012 tax return ) Any cash you received is income up to the amount of the interest earned on the bonds traded. 1040a 2012 tax return When your series HH or series H bonds mature, or if you dispose of them before maturity, you report as interest the difference between their redemption value and your cost. 1040a 2012 tax return Your cost is the sum of the amount you paid for the traded series EE or series E bonds plus any amount you had to pay at the time of the trade. 1040a 2012 tax return Example. 1040a 2012 tax return You traded series EE bonds (on which you postponed reporting the interest) for $2,500 in series HH bonds and $223 in cash. 1040a 2012 tax return You reported the $223 as taxable income on your tax return. 1040a 2012 tax return At the time of the trade, the series EE bonds had accrued interest of $523 and a redemption value of $2,723. 1040a 2012 tax return You hold the series HH bonds until maturity, when you receive $2,500. 1040a 2012 tax return You must report $300 as interest income in the year of maturity. 1040a 2012 tax return This is the difference between their redemption value, $2,500, and your cost, $2,200 (the amount you paid for the series EE bonds). 1040a 2012 tax return (It is also the difference between the accrued interest of $523 on the series EE bonds and the $223 cash received on the trade. 1040a 2012 tax return ) Choice to report interest in year of trade. 1040a 2012 tax return   You could have chosen to treat all of the previously unreported accrued interest on the series EE or series E bonds traded for series HH bonds as income in the year of the trade. 1040a 2012 tax return If you made this choice, it is treated as a change from method 1. 1040a 2012 tax return See Change from method 1 under Series EE and series I bonds, earlier. 1040a 2012 tax return Form 1099-INT for U. 1040a 2012 tax return S. 1040a 2012 tax return savings bonds interest. 1040a 2012 tax return   When you cash a bond, the bank or other payer that redeems it must give you a Form 1099-INT if the interest part of the payment you receive is $10 or more. 1040a 2012 tax return Box 3 of your Form 1099-INT should show the interest as the difference between the amount you received and the amount paid for the bond. 1040a 2012 tax return However, your Form 1099-INT may show more interest than you have to include on your income tax return. 1040a 2012 tax return For example, this may happen if any of the following are true. 1040a 2012 tax return You chose to report the increase in the redemption value of the bond each year. 1040a 2012 tax return The interest shown on your Form 1099-INT will not be reduced by amounts previously included in income. 1040a 2012 tax return You received the bond from a decedent. 1040a 2012 tax return The interest shown on your Form 1099-INT will not be reduced by any interest reported by the decedent before death, or on the decedent's final return, or by the estate on the estate's income tax return. 1040a 2012 tax return Ownership of the bond was transferred. 1040a 2012 tax return The interest shown on your Form 1099-INT will not be reduced by interest that accrued before the transfer. 1040a 2012 tax return You were named as a co-owner, and the other co-owner contributed funds to buy the bond. 1040a 2012 tax return The interest shown on your Form 1099-INT will not be reduced by the amount you received as nominee for the other co-owner. 1040a 2012 tax return (See Co-owners , earlier in this chapter, for more information about the reporting requirements. 1040a 2012 tax return ) You received the bond in a taxable distribution from a retirement or profit-sharing plan. 1040a 2012 tax return The interest shown on your Form 1099-INT will not be reduced by the interest portion of the amount taxable as a distribution from the plan and not taxable as interest. 1040a 2012 tax return (This amount is generally shown on Form 1099-R, Distributions From Pensions, Annuities, Retirement or Profit-Sharing Plans, IRAs, Insurance Contracts, etc. 1040a 2012 tax return , for the year of distribution. 1040a 2012 tax return )   For more information on including the correct amount of interest on your return, see How To Report Interest Income , later. 1040a 2012 tax return Publication 550 includes examples showing how to report these amounts. 1040a 2012 tax return    Interest on U. 1040a 2012 tax return S. 1040a 2012 tax return savings bonds is exempt from state and local taxes. 1040a 2012 tax return The Form 1099-INT you receive will indicate the amount that is for U. 1040a 2012 tax return S. 1040a 2012 tax return savings bond interest in box 3. 1040a 2012 tax return Education Savings Bond Program You may be able to exclude from income all or part of the interest you receive on the redemption of qualified U. 1040a 2012 tax return S. 1040a 2012 tax return savings bonds during the year if you pay qualified higher educational expenses during the same year. 1040a 2012 tax return This exclusion is known as the Education Savings Bond Program. 1040a 2012 tax return You do not qualify for this exclusion if your filing status is married filing separately. 1040a 2012 tax return Form 8815. 1040a 2012 tax return   Use Form 8815 to figure your exclusion. 1040a 2012 tax return Attach the form to your Form 1040 or Form 1040A. 1040a 2012 tax return Qualified U. 1040a 2012 tax return S. 1040a 2012 tax return savings bonds. 1040a 2012 tax return   A qualified U. 1040a 2012 tax return S. 1040a 2012 tax return savings bond is a series EE bond issued after 1989 or a series I bond. 1040a 2012 tax return The bond must be issued either in your name (sole owner) or in your and your spouse's names (co-owners). 1040a 2012 tax return You must be at least 24 years old before the bond's issue date. 1040a 2012 tax return For example, a bond bought by a parent and issued in the name of his or her child under age 24 does not qualify for the exclusion by the parent or child. 1040a 2012 tax return    The issue date of a bond may be earlier than the date the bond is purchased because the issue date assigned to a bond is the first day of the month in which it is purchased. 1040a 2012 tax return Beneficiary. 1040a 2012 tax return   You can designate any individual (including a child) as a beneficiary of the bond. 1040a 2012 tax return Verification by IRS. 1040a 2012 tax return   If you claim the exclusion, the IRS will check it by using bond redemption information from the Department of the Treasury. 1040a 2012 tax return Qualified expenses. 1040a 2012 tax return   Qualified higher educational expenses are tuition and fees required for you, your spouse, or your dependent (for whom you claim an exemption) to attend an eligible educational institution. 1040a 2012 tax return   Qualified expenses include any contribution you make to a qualified tuition program or to a Coverdell education savings account. 1040a 2012 tax return   Qualified expenses do not include expenses for room and board or for courses involving sports, games, or hobbies that are not part of a degree or certificate granting program. 1040a 2012 tax return Eligible educational institutions. 1040a 2012 tax return   These institutions include most public, private, and nonprofit universities, colleges, and vocational schools that are accredited and eligible to participate in student aid programs run by the U. 1040a 2012 tax return S. 1040a 2012 tax return Department of Education. 1040a 2012 tax return Reduction for certain benefits. 1040a 2012 tax return   You must reduce your qualified higher educational expenses by all of the following tax-free benefits. 1040a 2012 tax return Tax-free part of scholarships and fellowships (see Scholarships and fellowships in chapter 12). 1040a 2012 tax return Expenses used to figure the tax-free portion of distributions from a Coverdell ESA. 1040a 2012 tax return Expenses used to figure the tax-free portion of distributions from a qualified tuition program. 1040a 2012 tax return Any tax-free payments (other than gifts or inheritances) received for educational expenses, such as Veterans' educational assistance benefits, Qualified tuition reductions, or Employer-provided educational assistance. 1040a 2012 tax return Any expense used in figuring the American Opportunity and lifetime learning credits. 1040a 2012 tax return Amount excludable. 1040a 2012 tax return   If the total proceeds (interest and principal) from the qualified U. 1040a 2012 tax return S. 1040a 2012 tax return savings bonds you redeem during the year are not more than your adjusted qualified higher educational expenses for the year, you may be able to exclude all of the interest. 1040a 2012 tax return If the proceeds are more than the expenses, you may be able to exclude only part of the interest. 1040a 2012 tax return   To determine the excludable amount, multiply the interest part of the proceeds by a fraction. 1040a 2012 tax return The numerator of the fraction is the qualified higher educational expenses you paid during the year. 1040a 2012 tax return The denominator of the fraction is the total proceeds you received during the year. 1040a 2012 tax return Example. 1040a 2012 tax return In February 2013, Mark and Joan, a married couple, cashed a qualified series EE U. 1040a 2012 tax return S. 1040a 2012 tax return savings bond they bought in April 1997. 1040a 2012 tax return They received proceeds of $8,372 representing principal of $5,000 and interest of $3,372. 1040a 2012 tax return In 2013, they paid $4,000 of their daughter's college tuition. 1040a 2012 tax return They are not claiming an education credit for that amount, and their daughter does not have any tax-free educational assistance. 1040a 2012 tax return They can exclude $1,611 ($3,372 × ($4,000 ÷ $8,372)) of interest in 2013. 1040a 2012 tax return They must pay tax on the remaining $1,761 ($3,372 − $1,611) interest. 1040a 2012 tax return Modified adjusted gross income limit. 1040a 2012 tax return   The interest exclusion is limited if your modified adjusted gross income (modified AGI) is: $74,700 to $89,700 for taxpayers filing single or head of household, and $112,050 to $142,050 for married taxpayers filing jointly or for a qualifying widow(er) with dependent child. 1040a 2012 tax return You do not qualify for the interest exclusion if your modified AGI is equal to or more than the upper limit for your filing status. 1040a 2012 tax return   Modified AGI, for purposes of this exclusion, is adjusted gross income (Form 1040, line 37, or Form 1040A, line 21) figured before the interest exclusion, and modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion and deduction, Exclusion of income for bona fide residents of American Samoa, Exclusion for income from Puerto Rico, Exclusion for adoption benefits received under an employer's adoption assistance program, Deduction for tuition and fees, Deduction for student loan interest, and Deduction for domestic production activities. 1040a 2012 tax return   Use the Line 9 Worksheet in the Form 8815 instructions to figure your modified AGI. 1040a 2012 tax return If you claim any of the exclusion or deduction items listed above (except items 6, 7, and 8), add the amount of the exclusion or deduction (except items 6, 7, and 8) to the amount on line 5 of the worksheet, and enter the total on Form 8815, line 9, as your modified AGI. 1040a 2012 tax return   If you have investment interest expense incurred to earn royalties and other investment income, see Education Savings Bond Program in chapter 1 of Publication 550. 1040a 2012 tax return Recordkeeping. 1040a 2012 tax return If you claim the interest exclusion, you must keep a written record of the qualified U. 1040a 2012 tax return S. 1040a 2012 tax return savings bonds you redeem. 1040a 2012 tax return Your record must include the serial number, issue date, face value, and total redemption proceeds (principal and interest) of each bond. 1040a 2012 tax return You can use Form 8818 to record this information. 1040a 2012 tax return You should also keep bills, receipts, canceled checks, or other documentation that shows you paid qualified higher educational expenses during the year. 1040a 2012 tax return U. 1040a 2012 tax return S. 1040a 2012 tax return Treasury Bills, Notes, and Bonds Treasury bills, notes, and bonds are direct debts (obligations) of the U. 1040a 2012 tax return S. 1040a 2012 tax return Government. 1040a 2012 tax return Taxation of interest. 1040a 2012 tax return   Interest income from Treasury bills, notes, and bonds is subject to federal income tax but is exempt from all state and local income taxes. 1040a 2012 tax return You should receive Form 1099-INT showing the interest (in box 3) paid to you for the year. 1040a 2012 tax return   Payments of principal and interest generally will be credited to your designated checking or savings account by direct deposit through the TreasuryDirect® system. 1040a 2012 tax return Treasury bills. 1040a 2012 tax return   These bills generally have a 4-week, 13-week, 26-week, or 52-week maturity period. 1040a 2012 tax return They are generally issued at a discount in the amount of $100 and multiples of $100. 1040a 2012 tax return The difference between the discounted price you pay for the bills and the face value you receive at maturity is interest income. 1040a 2012 tax return Generally, you report this interest income when the bill is paid at maturity. 1040a 2012 tax return If you paid a premium for a bill (more than the face value), you generally report the premium as a section 171 deduction when the bill is paid at maturity. 1040a 2012 tax return Treasury notes and bonds. 1040a 2012 tax return   Treasury notes have maturity periods of more than 1 year, ranging up to 10 years. 1040a 2012 tax return Maturity periods for Treasury bonds are longer than 10 years. 1040a 2012 tax return Both generally are issued in denominations of $100 to $1 million and generally pay interest every 6 months. 1040a 2012 tax return Generally, you report this interest for the year paid. 1040a 2012 tax return For more information, see U. 1040a 2012 tax return S. 1040a 2012 tax return Treasury Bills, Notes, and Bonds in chapter 1 of Publication 550. 1040a 2012 tax return For other information on Treasury notes or bonds, write to:  Bureau of the Public Debt P. 1040a 2012 tax return O. 1040a 2012 tax return Box 7015 Parkersburg, WV 26106-7015 Or, on the Internet, visit: www. 1040a 2012 tax return treasurydirect. 1040a 2012 tax return gov/indiv/indiv. 1040a 2012 tax return htm. 1040a 2012 tax return For information on series EE, series I, and series HH savings bonds, see U. 1040a 2012 tax return S. 1040a 2012 tax return Savings Bonds , earlier. 1040a 2012 tax return Treasury inflation-protected securities (TIPS). 1040a 2012 tax return   These securities pay interest twice a year at a fixed rate, based on a principal amount adjusted to take into account inflation and deflation. 1040a 2012 tax return For the tax treatment of these securities, see Inflation-Indexed Debt Instruments under Original Issue Discount (OID), in Publication 550. 1040a 2012 tax return Bonds Sold Between Interest Dates If you sell a bond between interest payment dates, part of the sales price represents interest accrued to the date of sale. 1040a 2012 tax return You must report that part of the sales price as interest income for the year of sale. 1040a 2012 tax return If you buy a bond between interest payment dates, part of the purchase price represents interest accrued before the date of purchase. 1040a 2012 tax return When that interest is paid to you, treat it as a return of your capital investment, rather than interest income, by reducing your basis in the bond. 1040a 2012 tax return See Accrued interest on bonds under How To Report Interest Income in chapter 1 of Publication 550 for information on reporting the payment. 1040a 2012 tax return Insurance Life insurance proceeds paid to you as beneficiary of the insured person are usually not taxable. 1040a 2012 tax return But if you receive the proceeds in installments, you must usually report a part of each installment payment as interest income. 1040a 2012 tax return For more information about insurance proceeds received in installments, see Publication 525, Taxable and Nontaxable Income. 1040a 2012 tax return Annuity. 1040a 2012 tax return   If you buy an annuity with life insurance proceeds, the annuity payments you receive are taxed as pension and annuity income from a nonqualified plan, not as interest income. 1040a 2012 tax return See chapter 10 for information on pension and annuity income from nonqualified plans. 1040a 2012 tax return State or Local Government Obligations Interest on a bond used to finance government operations generally is not taxable if the bond is issued by a state, the District of Columbia, a possession of the United States, or any of their political subdivisions. 1040a 2012 tax return Bonds issued after 1982 (including tribal economic development bonds issued after February 17, 2009) by an Indian tribal government are treated as issued by a state. 1040a 2012 tax return Interest on these bonds is generally tax exempt if the bonds are part of an issue of which substantially all proceeds are to be used in the exercise of any essential government function. 1040a 2012 tax return For information on federally guaranteed bonds, mortgage revenue bonds, arbitrage bonds, private activity bonds, qualified tax credit bonds, and Build America bonds, see State or Local Government Obligations in chapter 1 of Publication 550. 1040a 2012 tax return Information reporting requirement. 1040a 2012 tax return   If you must file a tax return, you are required to show any tax-exempt interest you received on your return. 1040a 2012 tax return This is an information reporting requirement only. 1040a 2012 tax return It does not change tax-exempt interest to taxable interest. 1040a 2012 tax return Original Issue Discount (OID) Original issue discount (OID) is a form of interest. 1040a 2012 tax return You generally include OID in your income as it accrues over the term of the debt instrument, whether or not you receive any payments from the issuer. 1040a 2012 tax return A debt instrument generally has OID when the instrument is issued for a price that is less than its stated redemption price at maturity. 1040a 2012 tax return OID is the difference between the stated redemption price at maturity and the issue price. 1040a 2012 tax return All debt instruments that pay no interest before maturity are presumed to be issued at a discount. 1040a 2012 tax return Zero coupon bonds are one example of these instruments. 1040a 2012 tax return The OID accrual rules generally do not apply to short-term obligations (those with a fixed maturity date of 1 year or less from date of issue). 1040a 2012 tax return See Discount on Short-Term Obligations in chapter 1 of Publication 550. 1040a 2012 tax return De minimis OID. 1040a 2012 tax return   You can treat the discount as zero if it is less than one-fourth of 1% (. 1040a 2012 tax return 0025) of the stated redemption price at maturity multiplied by the number of full years from the date of original issue to maturity. 1040a 2012 tax return This small discount is known as “de minimis” OID. 1040a 2012 tax return Example 1. 1040a 2012 tax return You bought a 10-year bond with a stated redemption price at maturity of $1,000, issued at $980 with OID of $20. 1040a 2012 tax return One-fourth of 1% of $1,000 (stated redemption price) times 10 (the number of full years from the date of original issue to maturity) equals $25. 1040a 2012 tax return Because the $20 discount is less than $25, the OID is treated as zero. 1040a 2012 tax return (If you hold the bond at maturity, you will recognize $20 ($1,000 − $980) of capital gain. 1040a 2012 tax return ) Example 2. 1040a 2012 tax return The facts are the same as in Example 1, except that the bond was issued at $950. 1040a 2012 tax return The OID is $50. 1040a 2012 tax return Because the $50 discount is more than the $25 figured in Example 1, you must include the OID in income as it accrues over the term of the bond. 1040a 2012 tax return Debt instrument bought after original issue. 1040a 2012 tax return   If you buy a debt instrument with de minimis OID at a premium, the discount is not includible in income. 1040a 2012 tax return If you buy a debt instrument with de minimis OID at a discount, the discount is reported under the market discount rules. 1040a 2012 tax return See Market Discount Bonds in chapter 1 of Publication 550. 1040a 2012 tax return Exceptions to reporting OID. 1040a 2012 tax return   The OID rules discussed in this chapter do not apply to the following debt instruments. 1040a 2012 tax return Tax-exempt obligations. 1040a 2012 tax return (However, see Stripped tax-exempt obligations under Stripped Bonds and Coupons in chapter 1 of Publication 550). 1040a 2012 tax return U. 1040a 2012 tax return S. 1040a 2012 tax return savings bonds. 1040a 2012 tax return Short-term debt instruments (those with a fixed maturity date of not more than 1 year from the date of issue). 1040a 2012 tax return Obligations issued by an individual before March 2, 1984. 1040a 2012 tax return Loans between individuals if all the following are true. 1040a 2012 tax return The lender is not in the business of lending money. 1040a 2012 tax return The amount of the loan, plus the amount of any outstanding prior loans between the same individuals, is $10,000 or less. 1040a 2012 tax return Avoiding any federal tax is not one of the principal purposes of the loan. 1040a 2012 tax return Form 1099-OID. 1040a 2012 tax return   The issuer of the debt instrument (or your broker if you held the instrument through a broker) should give you Form 1099-OID, or a similar statement, if the total OID for the calendar year is $10 or more. 1040a 2012 tax return Form 1099-OID will show, in box 1, the amount of OID for the part of the year that you held the bond. 1040a 2012 tax return It also will show, in box 2, the stated interest you must include in your income. 1040a 2012 tax return A copy of Form 1099-OID will be sent to the IRS. 1040a 2012 tax return Do not file your copy with your return. 1040a 2012 tax return Keep it for your records. 1040a 2012 tax return   In most cases, you must report the entire amount in boxes 1 and 2 of Form 1099-OID as interest income. 1040a 2012 tax return But see Refiguring OID shown on Form 1099-OID, later in this discussion, for more information. 1040a 2012 tax return Form 1099-OID not received. 1040a 2012 tax return   If you had OID for the year but did not receive a Form 1099-OID, you can find tables on IRS. 1040a 2012 tax return gov that list total OID on certain debt instruments and have information that will help you figure OID. 1040a 2012 tax return For the latest OID tables, go to www. 1040a 2012 tax return irs. 1040a 2012 tax return gov and enter “OID tables” in the Search box. 1040a 2012 tax return If your debt instrument is not listed, consult the issuer for further information about the accrued OID for the year. 1040a 2012 tax return Nominee. 1040a 2012 tax return   If someone else is the holder of record (the registered owner) of an OID instrument belonging to you and receives a Form 1099-OID on your behalf, that person must give you a Form 1099-OID. 1040a 2012 tax return Refiguring OID shown on Form 1099-OID. 1040a 2012 tax return   You must refigure the OID shown in box 1 or box 8 of Form 1099-OID if either of the following apply. 1040a 2012 tax return You bought the debt instrument after its original issue and paid a premium or an acquisition premium. 1040a 2012 tax return The debt instrument is a stripped bond or a stripped coupon (including certain zero coupon instruments). 1040a 2012 tax return For information about figuring the correct amount of OID to include in your income, see Figuring OID on Long-Term Debt Instruments in Publication 1212. 1040a 2012 tax return Refiguring periodic interest shown on Form 1099-OID. 1040a 2012 tax return   If you disposed of a debt instrument or acquired it from another holder during the year, see Bonds Sold Between Interest Dates , earlier, for information about the treatment of periodic interest that may be shown in box 2 of Form 1099-OID for that instrument. 1040a 2012 tax return Certificates of deposit (CDs). 1040a 2012 tax return   If you buy a CD with a maturity of more than 1 year, you must include in income each year a part of the total interest due and report it in the same manner as other OID. 1040a 2012 tax return   This also applies to similar deposit arrangements with banks, building and loan associations, etc. 1040a 2012 tax return , including: Time deposits, Bonus plans, Savings certificates, Deferred income certificates, Bonus savings certificates, and Growth savings certificates. 1040a 2012 tax return Bearer CDs. 1040a 2012 tax return   CDs issued after 1982 generally must be in registered form. 1040a 2012 tax return Bearer CDs are CDs not in registered form. 1040a 2012 tax return They are not issued in the depositor's name and are transferable from one individual to another. 1040a 2012 tax return   Banks must provide the IRS and the person redeeming a bearer CD with a Form 1099-INT. 1040a 2012 tax return More information. 1040a 2012 tax return   See chapter 1 of Publication 550 for more information about OID and related topics, such as market discount bonds. 1040a 2012 tax return When To Report Interest Income When to report your interest income depends on whether you use the cash method or an accrual method to report income. 1040a 2012 tax return Cash method. 1040a 2012 tax return   Most individual taxpayers use the cash method. 1040a 2012 tax return If you use this method, you generally report your interest income in the year in which you actually or constructively receive it. 1040a 2012 tax return However, there are special rules for reporting the discount on certain debt instruments. 1040a 2012 tax return See U. 1040a 2012 tax return S. 1040a 2012 tax return Savings Bonds and Original Issue Discount (OID) , earlier. 1040a 2012 tax return Example. 1040a 2012 tax return On September 1, 2011, you loaned another individual $2,000 at 12%, compounded annually. 1040a 2012 tax return You are not in the business of lending money. 1040a 2012 tax return The note stated that principal and interest would be due on August 31, 2013. 1040a 2012 tax return In 2013, you received $2,508. 1040a 2012 tax return 80 ($2,000 principal and $508. 1040a 2012 tax return 80 interest). 1040a 2012 tax return If you use the cash method, you must include in income on your 2013 return the $508. 1040a 2012 tax return 80 interest you received in that year. 1040a 2012 tax return Constructive receipt. 1040a 2012 tax return   You constructively receive income when it is credited to your account or made available to you. 1040a 2012 tax return You do not need to have physical possession of it. 1040a 2012 tax return For example, you are considered to receive interest, dividends, or other earnings on any deposit or account in a bank, savings and loan, or similar financial institution, or interest on life insurance policy dividends left to accumulate, when they are credited to your account and subject to your withdrawal. 1040a 2012 tax return This is true even if they are not yet entered in your passbook. 1040a 2012 tax return   You constructively receive income on the deposit or account even if you must: Make withdrawals in multiples of even amounts, Give a notice to withdraw before making the withdrawal, Withdraw all or part of the account to withdraw the earnings, or Pay a penalty on early withdrawals, unless the interest you are to receive on an early withdrawal or redemption is substantially less than the interest payable at maturity. 1040a 2012 tax return Accrual method. 1040a 2012 tax return   If you use an accrual method, you report your interest income when you earn it, whether or not you have received it. 1040a 2012 tax return Interest is earned over the term of the debt instrument. 1040a 2012 tax return Example. 1040a 2012 tax return If, in the previous example, you use an accrual method, you must include the interest in your income as you earn it. 1040a 2012 tax return You would report the interest as follows: 2011, $80; 2012, $249. 1040a 2012 tax return 60; and 2013, $179. 1040a 2012 tax return 20. 1040a 2012 tax return Coupon bonds. 1040a 2012 tax return   Interest on coupon bonds is taxable in the year the coupon becomes due and payable. 1040a 2012 tax return It does not matter when you mail the coupon for payment. 1040a 2012 tax return How To Report Interest Income Generally, you report all your taxable interest income on Form 1040, line 8a; Form 1040A, line 8a; or Form 1040EZ, line 2. 1040a 2012 tax return You cannot use Form 1040EZ if your taxable interest income is more than $1,500. 1040a 2012 tax return Instead, you must use Form 1040A or Form 1040. 1040a 2012 tax return Form 1040A. 1040a 2012 tax return   You must complete Schedule B (Form 1040A or 1040), Part I, if you file Form 1040A and any of the following are true. 1040a 2012 tax return Your taxable interest income is more than $1,500. 1040a 2012 tax return You are claiming the interest exclusion under the Education Savings Bond Program (discussed earlier). 1040a 2012 tax return You received interest from a seller-financed mortgage, and the buyer used the property as a home. 1040a 2012 tax return You received a Form 1099-INT for U. 1040a 2012 tax return S. 1040a 2012 tax return savings bond interest that includes amounts you reported before 2013. 1040a 2012 tax return You received, as a nominee, interest that actually belongs to someone else. 1040a 2012 tax return You received a Form 1099-INT for interest on frozen deposits. 1040a 2012 tax return You are reporting OID in an amount less than the amount shown on Form 1099-OID. 1040a 2012 tax return You received a Form 1099-INT for interest on a bond you bought between interest payment dates. 1040a 2012 tax return You acquired taxable bonds after 1987 and choose to reduce interest income from the bonds by any amortizable bond premium (see Bond Premium Amortization in chapter 3 of Publication 550). 1040a 2012 tax return List each payer's name and the amount of interest income received from each payer on line 1. 1040a 2012 tax return If you received a Form 1099-INT or Form 1099-OID from a brokerage firm, list the brokerage firm as the payer. 1040a 2012 tax return   You cannot use Form 1040A if you must use Form 1040, as described next. 1040a 2012 tax return Form 1040. 1040a 2012 tax return   You must use Form 1040 instead of Form 1040A or Form 1040EZ if: You forfeited interest income because of the early withdrawal of a time deposit; You acquired taxable bonds after 1987, you choose to reduce interest income from the bonds by any amortizable bond premium, and you are deducting the excess of bond premium amortization for the accrual period over the qualified stated interest for the period (see Bond Premium Amortization in chapter 3 of Publication 550); or You received tax-exempt interest from private activity bonds issued after August 7, 1986. 1040a 2012 tax return Schedule B (Form 1040A or 1040). 1040a 2012 tax return   You must complete Schedule B (Form 1040A or 1040), Part I, if you file Form 1040 and any of the following apply. 1040a 2012 tax return Your taxable interest income is more than $1,500. 1040a 2012 tax return You are claiming the interest exclusion under the Education Savings Bond Program (discussed earlier). 1040a 2012 tax return You received interest from a seller-financed mortgage, and the buyer used the property as a home. 1040a 2012 tax return You received a Form 1099-INT for U. 1040a 2012 tax return S. 1040a 2012 tax return savings bond interest that includes amounts you reported before 2013. 1040a 2012 tax return You received, as a nominee, interest that actually belongs to someone else. 1040a 2012 tax return You received a Form 1099-INT for interest on frozen deposits. 1040a 2012 tax return You received a Form 1099-INT for interest on a bond you bought between interest payment dates. 1040a 2012 tax return You are reporting OID in an amount less than the amount shown on Form 1099-OID. 1040a 2012 tax return Statement (2) in the preceding list under Form 1040 is true. 1040a 2012 tax return In Part I, line 1, list each payer's name and the amount received from each. 1040a 2012 tax return If you received a Form 1099-INT or Form 1099-OID from a brokerage firm, list the brokerage firm as the payer. 1040a 2012 tax return Reporting tax-exempt interest. 1040a 2012 tax return   Total your tax-exempt interest (such as interest or accrued OID on certain state and municipal bonds, including tax-exempt interest on zero coupon municipal bonds) and exempt-interest dividends from a mutual fund as shown on Form 1099-INT, box 8, and on Form 1099-DIV, box 10. 1040a 2012 tax return Add these amounts to any other tax-exempt interest you received. 1040a 2012 tax return Report the total on line 8b of Form 1040A or 1040. 1040a 2012 tax return   If you file Form 1040EZ, enter “TEI” and the amount in the space to the left of line 2. 1040a 2012 tax return Do not add tax-exempt interest in the total on Form 1040EZ, line 2. 1040a 2012 tax return   Form 1099-INT, box 9, and Form 1099-DIV, box 11, show the tax-exempt interest subject to the alternative minimum tax on Form 6251. 1040a 2012 tax return These amounts are already included in the amounts on Form 1099-INT, box 8, and Form 1099-DIV, box 10. 1040a 2012 tax return Do not add the amounts in Form 1099-INT, box 9 and Form 1099-DIV, box 11 to, or subtract them from, the amounts on Form 1099-INT, box 8, and Form 1099-DIV, box 10. 1040a 2012 tax return    Do not report interest from an individual retirement account (IRA) as tax-exempt interest. 1040a 2012 tax return Form 1099-INT. 1040a 2012 tax return   Your taxable interest income, except for interest from U. 1040a 2012 tax return S. 1040a 2012 tax return savings bonds and Treasury obligations, is shown in box 1 of Form 1099-INT. 1040a 2012 tax return Add this amount to any other taxable interest income you received. 1040a 2012 tax return You must report all of your taxable interest income even if you do not receive a Form 1099-INT. 1040a 2012 tax return Generally, contact your financial institution if you do not receive a Form 1099-INT by February 15. 1040a 2012 tax return Your identifying number may be truncated on any paper Form 1099-INT you receive. 1040a 2012 tax return   If you forfeited interest income because of the early withdrawal of a time deposit, the deductible amount will be shown on Form 1099-INT in box 2. 1040a 2012 tax return See Penalty on early withdrawal of savings in chapter 1 of Publication 550. 1040a 2012 tax return   Box 3 of Form 1099-INT shows the interest income you received from U. 1040a 2012 tax return S. 1040a 2012 tax return savings bonds, Treasury bills, Treasury notes, and Treasury bonds. 1040a 2012 tax return Add the amount shown in box 3 to any other taxable interest income you received, unless part of the amount in box 3 was previously included in your interest income. 1040a 2012 tax return If part of the amount shown in box 3 was previously included in your interest income, see U. 1040a 2012 tax return S. 1040a 2012 tax return savings bond interest previously reported , later. 1040a 2012 tax return   Box 4 of Form 1099-INT will contain an amount if you were subject to backup withholding. 1040a 2012 tax return Report the amount from box 4 on Form 1040EZ, line 7; on Form 1040A, line 36; or Form 1040, line 62 (federal income tax withheld). 1040a 2012 tax return   Box 5 of Form 1099-INT shows investment expenses you may be able to deduct as an itemized deduction. 1040a 2012 tax return See chapter 28 for more information about investment expenses. 1040a 2012 tax return   If there are entries in boxes 6 and 7 of Form 1099-INT, you must file Form 1040. 1040a 2012 tax return You may be able to take a credit for the amount shown in box 6 unless you deduct this amount on line 8 of Schedule A (Form 1040). 1040a 2012 tax return To take the credit, you may have to file Form 1116, Foreign Tax Credit. 1040a 2012 tax return For more information, see Publication 514, Foreign Tax Credit for Individuals. 1040a 2012 tax return U. 1040a 2012 tax return S. 1040a 2012 tax return savings bond interest previously reported. 1040a 2012 tax return   If you received a Form 1099-INT for U. 1040a 2012 tax return S. 1040a 2012 tax return savings bond interest, the form may show interest you do not have to report. 1040a 2012 tax return See Form 1099-INT for U. 1040a 2012 tax return S. 1040a 2012 tax return savings bonds interest , earlier, under U. 1040a 2012 tax return S. 1040a 2012 tax return Savings Bonds. 1040a 2012 tax return   On Schedule B (Form 1040A or 1040), Part I, line 1, report all the interest shown on your Form 1099-INT. 1040a 2012 tax return Then follow these steps. 1040a 2012 tax return Several lines above line 2, enter a subtotal of all interest listed on line 1. 1040a 2012 tax return Below the subtotal enter “U. 1040a 2012 tax return S. 1040a 2012 tax return Savings Bond Interest Previously Reported” and enter amounts previously reported or interest accrued before you received the bond. 1040a 2012 tax return Subtract these amounts from the subtotal and enter the result on line 2. 1040a 2012 tax return More information. 1040a 2012 tax return   For more information about how to report interest income, see chapter 1 of Publication 550 or the instructions for the form you must file. 1040a 2012 tax return Prev  Up  Next   Home   More Online Publications
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Understanding Your CP114 Notice

We made changes to your excise tax return because we believe there was a miscalculation. As a result of these changes, there is an overpayment on your account.


What you need to do

  • Read your notice carefully — it explains the changes to your tax account.
  • Compare the figures on the notice with your excise tax return.
  • If you disagree with our change(s), contact us within 10 days of the date of your notice.
  • If you agree with our change(s), correct the copy of your excise tax return that you kept for your records.
  • You should receive a refund of any amount overpaid shortly if you haven’t already and you owe no additional amounts we are required to collect. No action is required of you.

You may want to

  • Download copies of the following materials (if they weren’t included with your notice).

 


Answers to Common Questions

Q. How can I find out what caused my tax return to change?

A. Please contact us at the number listed on your notice for specific information about your tax return.

Q. What should I do if I disagree with the changes you made?

A. If you disagree, contact us at the toll free number listed on the top right corner of your notice or respond in writing within 10 days of the date of the notice. If your response provides us with additional information that justifies a reversal of the change, we’ll reverse the change we made to your account. If you agree with the change, update your records. No further action is required.

Q. Will I receive a refund of the amount overpaid?

A. Yes, provided you owe no other outstanding liabilities which we are required to collect and the amount to be refunded is $1 or more.

 


Tips for next year

Consider filing your excise taxes electronically. Filing online can help you to avoid mistakes and find credits and deductions for which you may qualify. Learn more about e-file.

Page Last Reviewed or Updated: 23-Jan-2014

How to get help

  • Call the 1-800 number listed on the top right corner of your notice.
  • Authorize someone (e.g., accountant) to contact the IRS on your behalf using Form 2848.
  • See if you qualify for help from a Low Income Taxpayer Clinic.
     

The 1040a 2012 Tax Return

1040a 2012 tax return Publication 587 - Main Content Table of Contents Qualifying for a DeductionExclusive Use Regular Use Trade or Business Use Principal Place of Business Place To Meet Patients, Clients, or Customers Separate Structure Figuring the DeductionUsing Actual Expenses Using the Simplified Method Daycare Facility Standard meal and snack rates. 1040a 2012 tax return Sale or Exchange of Your HomeGain on Sale Depreciation Basis Adjustment Reporting the Sale More Information Business Furniture and EquipmentListed Property Property Bought for Business Use Personal Property Converted to Business Use Recordkeeping Where To DeductSelf-Employed Persons Employees Partners How To Get Tax HelpLow Income Taxpayer Clinics Worksheet To Figure the Deduction for Business Use of Your HomeInstructions for the Worksheet Worksheets To Figure the Deduction for Business Use of Your Home (Simplified Method) Instructions for the Simplified Method Worksheet Instructions for the Daycare Facility Worksheet Instructions for the Area Adjustment Worksheet Qualifying for a Deduction Generally, you cannot deduct items related to your home, such as mortgage interest, real estate taxes, utilities, maintenance, rent, depreciation, or property insurance, as business expenses. 1040a 2012 tax return However, you may be able to deduct expenses related to the business use of part of your home if you meet specific requirements. 1040a 2012 tax return Even then, the deductible amount of these types of expenses may be limited. 1040a 2012 tax return Use this section and Figure A, later, to decide if you can deduct expenses for the business use of your home. 1040a 2012 tax return To qualify to deduct expenses for business use of your home, you must use part of your home: Exclusively and regularly as your principal place of business (defined later), Exclusively and regularly as a place where you meet or deal with patients, clients, or customers in the normal course of your trade or business, In the case of a separate structure which is not attached to your home, in connection with your trade or business, On a regular basis for certain storage use (see Storage of inventory or product samples , later), For rental use (see Publication 527), or As a daycare facility (see Daycare Facility , later). 1040a 2012 tax return Additional tests for employee use. 1040a 2012 tax return   If you are an employee and you use a part of your home for business, you may qualify for a deduction for its business use. 1040a 2012 tax return You must meet the tests discussed earlier plus: Your business use must be for the convenience of your employer, and You must not rent any part of your home to your employer and use the rented portion to perform services as an employee for that employer. 1040a 2012 tax return If the use of the home office is merely appropriate and helpful, you cannot deduct expenses for the business use of your home. 1040a 2012 tax return Exclusive Use To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. 1040a 2012 tax return The area used for business can be a room or other separately identifiable space. 1040a 2012 tax return The space does not need to be marked off by a permanent partition. 1040a 2012 tax return You do not meet the requirements of the exclusive use test if you use the area in question both for business and for personal purposes. 1040a 2012 tax return Example. 1040a 2012 tax return You are an attorney and use a den in your home to write legal briefs and prepare clients' tax returns. 1040a 2012 tax return Your family also uses the den for recreation. 1040a 2012 tax return The den is not used exclusively in your trade or business, so you cannot claim a deduction for the business use of the den. 1040a 2012 tax return Exceptions to Exclusive Use You do not have to meet the exclusive use test if either of the following applies. 1040a 2012 tax return You use part of your home for the storage of inventory or product samples (discussed next). 1040a 2012 tax return You use part of your home as a daycare facility, discussed later under Daycare Facility . 1040a 2012 tax return Note. 1040a 2012 tax return With the exception of these two uses, any portion of the home used for business purposes must meet the exclusive use test. 1040a 2012 tax return Storage of inventory or product samples. 1040a 2012 tax return    If you use part of your home for storage of inventory or product samples, you can deduct expenses for the business use of your home without meeting the exclusive use test. 1040a 2012 tax return However, you must meet all the following tests. 1040a 2012 tax return You sell products at wholesale or retail as your trade or business. 1040a 2012 tax return You keep the inventory or product samples in your home for use in your trade or business. 1040a 2012 tax return Your home is the only fixed location of your trade or business. 1040a 2012 tax return You use the storage space on a regular basis. 1040a 2012 tax return The space you use is a separately identifiable space suitable for storage. 1040a 2012 tax return Example. 1040a 2012 tax return Your home is the only fixed location of your business of selling mechanics' tools at retail. 1040a 2012 tax return You regularly use half of your basement for storage of inventory and product samples. 1040a 2012 tax return You sometimes use the area for personal purposes. 1040a 2012 tax return The expenses for the storage space are deductible even though you do not use this part of your basement exclusively for business. 1040a 2012 tax return Regular Use To qualify under the regular use test, you must use a specific area of your home for business on a regular basis. 1040a 2012 tax return Incidental or occasional business use is not regular use. 1040a 2012 tax return You must consider all facts and circumstances in determining whether your use is on a regular basis. 1040a 2012 tax return Trade or Business Use To qualify under the trade-or-business-use test, you must use part of your home in connection with a trade or business. 1040a 2012 tax return If you use your home for a profit-seeking activity that is not a trade or business, you cannot take a deduction for its business use. 1040a 2012 tax return Example. 1040a 2012 tax return You use part of your home exclusively and regularly to read financial periodicals and reports, clip bond coupons, and carry out similar activities related to your own investments. 1040a 2012 tax return You do not make investments as a broker or dealer. 1040a 2012 tax return So, your activities are not part of a trade or business and you cannot take a deduction for the business use of your home. 1040a 2012 tax return Principal Place of Business You can have more than one business location, including your home, for a single trade or business. 1040a 2012 tax return To qualify to deduct the expenses for the business use of your home under the principal place of business test, your home must be your principal place of business for that trade or business. 1040a 2012 tax return To determine whether your home is your principal place of business, you must consider: The relative importance of the activities performed at each place where you conduct business, and The amount of time spent at each place where you conduct business. 1040a 2012 tax return Your home office will qualify as your principal place of business if you meet the following requirements. 1040a 2012 tax return You use it exclusively and regularly for administrative or management activities of your trade or business. 1040a 2012 tax return You have no other fixed location where you conduct substantial administrative or management activities of your trade or business. 1040a 2012 tax return If, after considering your business locations, your home cannot be identified as your principal place of business, you cannot deduct home office expenses. 1040a 2012 tax return However, see the later discussions under Place To Meet Patients, Clients, or Customers and Separate Structure for other ways to qualify to deduct home office expenses. 1040a 2012 tax return Administrative or management activities. 1040a 2012 tax return   There are many activities that are administrative or managerial in nature. 1040a 2012 tax return The following are a few examples. 1040a 2012 tax return Billing customers, clients, or patients. 1040a 2012 tax return Keeping books and records. 1040a 2012 tax return Ordering supplies. 1040a 2012 tax return Setting up appointments. 1040a 2012 tax return Forwarding orders or writing reports. 1040a 2012 tax return Administrative or management activities performed at other locations. 1040a 2012 tax return   The following activities performed by you or others will not disqualify your home office from being your principal place of business. 1040a 2012 tax return You have others conduct your administrative or management activities at locations other than your home. 1040a 2012 tax return (For example, another company does your billing from its place of business. 1040a 2012 tax return ) You conduct administrative or management activities at places that are not fixed locations of your business, such as in a car or a hotel room. 1040a 2012 tax return You occasionally conduct minimal administrative or management activities at a fixed location outside your home. 1040a 2012 tax return You conduct substantial nonadministrative or nonmanagement business activities at a fixed location outside your home. 1040a 2012 tax return (For example, you meet with or provide services to customers, clients, or patients at a fixed location of the business outside your home. 1040a 2012 tax return ) You have suitable space to conduct administrative or management activities outside your home, but choose to use your home office for those activities instead. 1040a 2012 tax return Please click here for the text description of the image. 1040a 2012 tax return Can you deduct business use of the home expenses? Example 1. 1040a 2012 tax return John is a self-employed plumber. 1040a 2012 tax return Most of John's time is spent at customers' homes and offices installing and repairing plumbing. 1040a 2012 tax return He has a small office in his home that he uses exclusively and regularly for the administrative or management activities of his business, such as phoning customers, ordering supplies, and keeping his books. 1040a 2012 tax return John writes up estimates and records of work completed at his customers' premises. 1040a 2012 tax return He does not conduct any substantial administrative or management activities at any fixed location other than his home office. 1040a 2012 tax return John does not do his own billing. 1040a 2012 tax return He uses a local bookkeeping service to bill his customers. 1040a 2012 tax return John's home office qualifies as his principal place of business for deducting expenses for its use. 1040a 2012 tax return He uses the home office for the administrative or managerial activities of his plumbing business and he has no other fixed location where he conducts these administrative or managerial activities. 1040a 2012 tax return His choice to have his billing done by another company does not disqualify his home office from being his principal place of business. 1040a 2012 tax return He meets all the qualifications, including principal place of business, so he can deduct expenses (subject to certain limitations, explained later) for the business use of his home. 1040a 2012 tax return Example 2. 1040a 2012 tax return Pamela is a self-employed sales representative for several different product lines. 1040a 2012 tax return She has an office in her home that she uses exclusively and regularly to set up appointments and write up orders and other reports for the companies whose products she sells. 1040a 2012 tax return She occasionally writes up orders and sets up appointments from her hotel room when she is away on business overnight. 1040a 2012 tax return Pamela's business is selling products to customers at various locations throughout her territory. 1040a 2012 tax return To make these sales, she regularly visits customers to explain the available products and take orders. 1040a 2012 tax return Pamela's home office qualifies as her principal place of business for deducting expenses for its use. 1040a 2012 tax return She conducts administrative or management activities there and she has no other fixed location where she conducts substantial administrative or management activities. 1040a 2012 tax return The fact that she conducts some administrative or management activities in her hotel room (not a fixed location) does not disqualify her home office from being her principal place of business. 1040a 2012 tax return She meets all the qualifications, including principal place of business, so she can deduct expenses (subject to certain limitations, explained later) for the business use of her home. 1040a 2012 tax return Example 3. 1040a 2012 tax return Paul is a self-employed anesthesiologist. 1040a 2012 tax return He spends the majority of his time administering anesthesia and postoperative care in three local hospitals. 1040a 2012 tax return One of the hospitals provides him with a small shared office where he could conduct administrative or management activities. 1040a 2012 tax return Paul very rarely uses the office the hospital provides. 1040a 2012 tax return He uses a room in his home that he has converted to an office. 1040a 2012 tax return He uses this room exclusively and regularly to conduct all the following activities. 1040a 2012 tax return Contacting patients, surgeons, and hospitals regarding scheduling. 1040a 2012 tax return Preparing for treatments and presentations. 1040a 2012 tax return Maintaining billing records and patient logs. 1040a 2012 tax return Satisfying continuing medical education requirements. 1040a 2012 tax return Reading medical journals and books. 1040a 2012 tax return Paul's home office qualifies as his principal place of business for deducting expenses for its use. 1040a 2012 tax return He conducts administrative or management activities for his business as an anesthesiologist there and he has no other fixed location where he conducts substantial administrative or management activities for this business. 1040a 2012 tax return His choice to use his home office instead of the one provided by the hospital does not disqualify his home office from being his principal place of business. 1040a 2012 tax return His performance of substantial nonadministrative or nonmanagement activities at fixed locations outside his home also does not disqualify his home office from being his principal place of business. 1040a 2012 tax return He meets all the qualifications, including principal place of business, so he can deduct expenses (subject to certain limitations, explained later) for the business use of his home. 1040a 2012 tax return Example 4. 1040a 2012 tax return Kathleen is employed as a teacher. 1040a 2012 tax return She is required to teach and meet with students at the school and to grade papers and tests. 1040a 2012 tax return The school provides her with a small office where she can work on her lesson plans, grade papers and tests, and meet with parents and students. 1040a 2012 tax return The school does not require her to work at home. 1040a 2012 tax return Kathleen prefers to use the office she has set up in her home and does not use the one provided by the school. 1040a 2012 tax return She uses this home office exclusively and regularly for the administrative duties of her teaching job. 1040a 2012 tax return Kathleen must meet the convenience-of-the-employer test, even if her home qualifies as her principal place of business for deducting expenses for its use. 1040a 2012 tax return Her employer provides her with an office and does not require her to work at home, so she does not meet the convenience-of-the-employer test and cannot claim a deduction for the business use of her home. 1040a 2012 tax return More Than One Trade or Business The same home office can be the principal place of business for two or more separate business activities. 1040a 2012 tax return Whether your home office is the principal place of business for more than one business activity must be determined separately for each of your trade or business activities. 1040a 2012 tax return You must use the home office exclusively and regularly for one or more of the following purposes. 1040a 2012 tax return As the principal place of business for one or more of your trades or businesses. 1040a 2012 tax return As a place to meet or deal with patients, clients, or customers in the normal course of one or more of your trades or businesses. 1040a 2012 tax return If your home office is a separate structure, in connection with one or more of your trades or businesses. 1040a 2012 tax return You can use your home office for more than one business activity, but you cannot use it for any nonbusiness (i. 1040a 2012 tax return e. 1040a 2012 tax return , personal) activities. 1040a 2012 tax return If you are an employee, any use of the home office in connection with your employment must be for the convenience of your employer. 1040a 2012 tax return See Rental to employer , later, if you rent part of your home to your employer. 1040a 2012 tax return Example. 1040a 2012 tax return Tracy White is employed as a teacher. 1040a 2012 tax return Her principal place of work is the school, which provides her office space to do her school work. 1040a 2012 tax return She also has a mail order jewelry business. 1040a 2012 tax return All her work in the jewelry business is done in her home office and the office is used exclusively for that business. 1040a 2012 tax return If she meets all the other tests, she can deduct expenses for the business use of her home for the jewelry business. 1040a 2012 tax return If Tracy also uses the office for work related to her teaching, she must meet the exclusive use test for both businesses to qualify for the deduction. 1040a 2012 tax return As an employee, Tracy must also meet the convenience-of-the-employer test to qualify for the deduction. 1040a 2012 tax return She does not meet this test for her work as a teacher, so she cannot claim a deduction for the business use of her home for either activity. 1040a 2012 tax return Place To Meet Patients, Clients, or Customers If you meet or deal with patients, clients, or customers in your home in the normal course of your business, even though you also carry on business at another location, you can deduct your expenses for the part of your home used exclusively and regularly for business if you meet both the following tests. 1040a 2012 tax return You physically meet with patients, clients, or customers on your premises. 1040a 2012 tax return Their use of your home is substantial and integral to the conduct of your business. 1040a 2012 tax return Doctors, dentists, attorneys, and other professionals who maintain offices in their homes generally will meet this requirement. 1040a 2012 tax return Using your home for occasional meetings and telephone calls will not qualify you to deduct expenses for the business use of your home. 1040a 2012 tax return The part of your home you use exclusively and regularly to meet patients, clients, or customers does not have to be your principal place of business. 1040a 2012 tax return Example. 1040a 2012 tax return June Quill, a self-employed attorney, works 3 days a week in her city office. 1040a 2012 tax return She works 2 days a week in her home office used only for business. 1040a 2012 tax return She regularly meets clients there. 1040a 2012 tax return Her home office qualifies for a business deduction because she meets clients there in the normal course of her business. 1040a 2012 tax return Separate Structure You can deduct expenses for a separate free-standing structure, such as a studio, workshop, garage, or barn, if you use it exclusively and regularly for your business. 1040a 2012 tax return The structure does not have to be your principal place of business or a place where you meet patients, clients, or customers. 1040a 2012 tax return Example. 1040a 2012 tax return John Berry operates a floral shop in town. 1040a 2012 tax return He grows the plants for his shop in a greenhouse behind his home. 1040a 2012 tax return He uses the greenhouse exclusively and regularly in his business, so he can deduct the expenses for its use, subject to certain limitations, explained later. 1040a 2012 tax return Figuring the Deduction After you determine that you meet the tests under Qualifying for a Deduction , you can begin to figure how much you can deduct. 1040a 2012 tax return When figuring the amount you can deduct for the business use of your home, you will use either your actual expenses or a simplified method. 1040a 2012 tax return Electing to use the simplified method. 1040a 2012 tax return   The simplified method is an alternative to the calculation, allocation, and substantiation of actual expenses. 1040a 2012 tax return You choose whether or not to figure your deduction using the simplified method each taxable year. 1040a 2012 tax return See Using the Simplified Method , later. 1040a 2012 tax return Rental to employer. 1040a 2012 tax return   If you rent part of your home to your employer and you use the rented part in performing services for your employer as an employee, your deduction for the business use of your home is limited. 1040a 2012 tax return You can deduct mortgage interest, qualified mortgage insurance premiums, real estate taxes, and personal casualty losses for the rented part, subject to any limitations. 1040a 2012 tax return However, you cannot deduct otherwise allowable trade or business expenses, business casualty losses, or depreciation related to the use of your home (or use the simplified method as an alternative to deducting these actual expenses) in performing services for your employer. 1040a 2012 tax return Using Actual Expenses If you do not or cannot elect to use the simplified method for a home, you will figure your deduction for that home using your actual expenses. 1040a 2012 tax return You will also need to figure the percentage of your home used for business and the limit on the deduction. 1040a 2012 tax return If you are an employee or a partner, or you use your home in your farming business and you file Schedule F (Form 1040), you can use the Worksheet To Figure the Deduction for Business Use of Your Home, near the end of this publication, to help you figure your deduction. 1040a 2012 tax return If you use your home in a trade or business and you file Schedule C (Form 1040), you will use Form 8829 to figure your deduction. 1040a 2012 tax return Part-year use. 1040a 2012 tax return   You cannot deduct expenses for the business use of your home incurred during any part of the year you did not use your home for business purposes. 1040a 2012 tax return For example, if you begin using part of your home for business on July 1, and you meet all the tests from that date until the end of the year, consider only your expenses for the last half of the year in figuring your allowable deduction. 1040a 2012 tax return Expenses related to tax-exempt income. 1040a 2012 tax return   Generally, you cannot deduct expenses that are related to tax-exempt allowances. 1040a 2012 tax return However, if you receive a tax-exempt parsonage allowance or a tax-exempt military allowance, your expenses for mortgage interest and real estate taxes are deductible under the normal rules. 1040a 2012 tax return No deduction is allowed for other expenses related to the tax-exempt allowance. 1040a 2012 tax return   If your housing is provided free of charge and the value of the housing is tax exempt, you cannot deduct the rental value of any portion of the housing. 1040a 2012 tax return Actual Expenses You must divide the expenses of operating your home between personal and business use. 1040a 2012 tax return The part of a home operating expense you can use to figure your deduction depends on both of the following. 1040a 2012 tax return Whether the expense is direct, indirect, or unrelated. 1040a 2012 tax return The percentage of your home used for business. 1040a 2012 tax return Table 1, next, describes the types of expenses you may have and the extent to which they are deductible. 1040a 2012 tax return Table 1. 1040a 2012 tax return Types of Expenses  Expense  Description  Deductibility Direct Expenses only for  the business part  of your home. 1040a 2012 tax return Deductible in full. 1040a 2012 tax return *   Examples:  Painting or repairs  only in the area  used for business. 1040a 2012 tax return Exception: May be only partially  deductible in a daycare facility. 1040a 2012 tax return See Daycare Facility , later. 1040a 2012 tax return Indirect Expenses for  keeping up and running your  entire home. 1040a 2012 tax return Deductible based on the percentage of your home used for business. 1040a 2012 tax return *   Examples:  Insurance, utilities, and  general repairs. 1040a 2012 tax return   Unrelated Expenses only for  the parts of your  home not used  for business. 1040a 2012 tax return Not deductible. 1040a 2012 tax return   Examples:  Lawn care or painting  a room not used  for business. 1040a 2012 tax return   *Subject to the deduction limit, discussed later. 1040a 2012 tax return Form 8829 and the Worksheet To Figure the Deduction for Business Use of Your Home have separate columns for direct and indirect expenses. 1040a 2012 tax return Certain expenses are deductible whether or not you use your home for business. 1040a 2012 tax return If you qualify to deduct business use of the home expenses, use the business percentage of these expenses to figure your total business use of the home deduction. 1040a 2012 tax return These expenses include the following. 1040a 2012 tax return Real estate taxes. 1040a 2012 tax return Qualified mortgage insurance premiums. 1040a 2012 tax return Deductible mortgage interest. 1040a 2012 tax return Casualty losses. 1040a 2012 tax return Other expenses are deductible only if you use your home for business. 1040a 2012 tax return You can use the business percentage of these expenses to figure your total business use of the home deduction. 1040a 2012 tax return These expenses generally include (but are not limited to) the following. 1040a 2012 tax return Depreciation (covered under Depreciating Your Home , later). 1040a 2012 tax return Insurance. 1040a 2012 tax return Rent paid for the use of property you do not own but use in your trade or business. 1040a 2012 tax return Repairs. 1040a 2012 tax return Security system. 1040a 2012 tax return Utilities and services. 1040a 2012 tax return Real estate taxes. 1040a 2012 tax return   To figure the business part of your real estate taxes, multiply the real estate taxes paid by the percentage of your home used for business. 1040a 2012 tax return   For more information on the deduction for real estate taxes, see Publication 530, Tax Information for Homeowners. 1040a 2012 tax return Deductible mortgage interest. 1040a 2012 tax return   To figure the business part of your deductible mortgage interest, multiply this interest by the percentage of your home used for business. 1040a 2012 tax return You can include interest on a second mortgage in this computation. 1040a 2012 tax return If your total mortgage debt is more than $1,000,000 or your home equity debt is more than $100,000, your deduction may be limited. 1040a 2012 tax return For more information on what interest is deductible, see Publication 936, Home Mortgage Interest Deduction. 1040a 2012 tax return Qualified mortgage insurance premiums. 1040a 2012 tax return   To figure the business part of your qualified mortgage insurance premiums, multiply the premiums by the percentage of your home used for business. 1040a 2012 tax return You can include premiums for insurance on a second mortgage in this computation. 1040a 2012 tax return If your adjusted gross income is more than $100,000 ($50,000 if your filing status is married filing separately), your deduction may be limited. 1040a 2012 tax return For more information, see Publication 936, and Line 13 in the Instructions for Schedule A (Form 1040). 1040a 2012 tax return Casualty losses. 1040a 2012 tax return    If you have a casualty loss on your home that you use for business, treat the casualty loss as a direct expense, an indirect expense, or an unrelated expense, depending on the property affected. 1040a 2012 tax return A direct expense is the loss on the portion of the property you use only in your business. 1040a 2012 tax return Use the entire loss to figure the business use of the home deduction. 1040a 2012 tax return An indirect expense is the loss on property you use for both business and personal purposes. 1040a 2012 tax return Use only the business portion to figure the deduction. 1040a 2012 tax return An unrelated expense is the loss on property you do not use in your business. 1040a 2012 tax return Do not use any of the loss to figure the deduction. 1040a 2012 tax return Example. 1040a 2012 tax return You meet the rules to take a deduction for an office in your home that is 10% of the total area of your house. 1040a 2012 tax return A storm damages your roof. 1040a 2012 tax return This is an indirect expense as the roof is part of the whole house and is considered to be used both for business and personal purposes. 1040a 2012 tax return You would complete Form 4684, Casualties and Thefts, to report your loss. 1040a 2012 tax return You complete both section A (Personal Use Property) and section B (Business and Income-Producing Property) as your home is used both for business and personal purposes. 1040a 2012 tax return Since you use 90% of your home for personal purposes, use 90% of the cost or adjusted basis of your home, insurance or other reimbursement, and fair market value, both before and after the storm, to figure the amounts to enter on lines 2, 3, 5, and 6 of Form 4684. 1040a 2012 tax return Since you use 10% of your home for business purposes, use 10% of the cost or adjusted basis of your home, insurance or other reimbursement, and fair market value, both before and after the storm, to figure the amounts to enter on lines 20, 21, 23, and 24 of Form 4684. 1040a 2012 tax return Forms and worksheets to use. 1040a 2012 tax return   If you are filing Schedule C (Form 1040), get Form 8829 and follow the instructions for casualty losses. 1040a 2012 tax return If you are an employee or a partner, or you file Schedule F (Form 1040), use the Worksheet To Figure the Deduction for Business Use of Your Home, near the end of this publication. 1040a 2012 tax return You will also need to get Form 4684. 1040a 2012 tax return More information. 1040a 2012 tax return   For more information on casualty losses, see Publication 547, Casualties, Disasters, and Thefts. 1040a 2012 tax return Insurance. 1040a 2012 tax return   You can deduct the cost of insurance that covers the business part of your home. 1040a 2012 tax return However, if your insurance premium gives you coverage for a period that extends past the end of your tax year, you can deduct only the business percentage of the part of the premium that gives you coverage for your tax year. 1040a 2012 tax return You can deduct the business percentage of the part that applies to the following year in that year. 1040a 2012 tax return Rent. 1040a 2012 tax return   If you rent the home you occupy and meet the requirements for business use of the home, you can deduct part of the rent you pay. 1040a 2012 tax return To figure your deduction, multiply your rent payments by the percentage of your home used for business. 1040a 2012 tax return   If you own your home, you cannot deduct the fair rental value of your home. 1040a 2012 tax return However, see Depreciating Your Home , later. 1040a 2012 tax return Repairs. 1040a 2012 tax return   The cost of repairs that relate to your business, including labor (other than your own labor), is a deductible expense. 1040a 2012 tax return For example, a furnace repair benefits the entire home. 1040a 2012 tax return If you use 10% of your home for business, you can deduct 10% of the cost of the furnace repair. 1040a 2012 tax return   Repairs keep your home in good working order over its useful life. 1040a 2012 tax return Examples of common repairs are patching walls and floors, painting, wallpapering, repairing roofs and gutters, and mending leaks. 1040a 2012 tax return However, repairs are sometimes treated as a permanent improvement and are not deductible. 1040a 2012 tax return See Permanent improvements , later, under Depreciating Your Home. 1040a 2012 tax return Security system. 1040a 2012 tax return   If you install a security system that protects all the doors and windows in your home, you can deduct the business part of the expenses you incur to maintain and monitor the system. 1040a 2012 tax return You also can take a depreciation deduction for the part of the cost of the security system relating to the business use of your home. 1040a 2012 tax return Utilities and services. 1040a 2012 tax return   Expenses for utilities and services, such as electricity, gas, trash removal, and cleaning services, are primarily personal expenses. 1040a 2012 tax return However, if you use part of your home for business, you can deduct the business part of these expenses. 1040a 2012 tax return Generally, the business percentage for utilities is the same as the percentage of your home used for business. 1040a 2012 tax return Telephone. 1040a 2012 tax return   The basic local telephone service charge, including taxes, for the first telephone line into your home (i. 1040a 2012 tax return e. 1040a 2012 tax return , landline) is a nondeductible personal expense. 1040a 2012 tax return However, charges for business long-distance phone calls on that line, as well as the cost of a second line into your home used exclusively for business, are deductible business expenses. 1040a 2012 tax return Do not include these expenses as a cost of using your home for business. 1040a 2012 tax return Deduct these charges separately on the appropriate form or schedule. 1040a 2012 tax return For example, if you file Schedule C (Form 1040), deduct these expenses on line 25, Utilities (instead of line 30, Expenses for business use of your home). 1040a 2012 tax return Depreciating Your Home If you own your home and qualify to deduct expenses for its business use, you can claim a deduction for depreciation. 1040a 2012 tax return Depreciation is an allowance for the wear and tear on the part of your home used for business. 1040a 2012 tax return You cannot depreciate the cost or value of the land. 1040a 2012 tax return You recover its cost when you sell or otherwise dispose of the property. 1040a 2012 tax return Before you figure your depreciation deduction, you need to know the following information. 1040a 2012 tax return The month and year you started using your home for business. 1040a 2012 tax return The adjusted basis and fair market value of your home (excluding land) at the time you began using it for business. 1040a 2012 tax return The cost of any improvements before and after you began using the property for business. 1040a 2012 tax return The percentage of your home used for business. 1040a 2012 tax return See Business Percentage , later. 1040a 2012 tax return Adjusted basis defined. 1040a 2012 tax return   The adjusted basis of your home is generally its cost, plus the cost of any permanent improvements you made to it, minus any casualty losses or depreciation deducted in earlier tax years. 1040a 2012 tax return For a discussion of adjusted basis, see Publication 551. 1040a 2012 tax return Permanent improvements. 1040a 2012 tax return   A permanent improvement increases the value of property, adds to its life, or gives it a new or different use. 1040a 2012 tax return Examples of improvements are replacing electric wiring or plumbing, adding a new roof or addition, paneling, or remodeling. 1040a 2012 tax return    You must carefully distinguish between repairs and improvements. 1040a 2012 tax return See Repairs , earlier, under Actual Expenses. 1040a 2012 tax return You also must keep accurate records of these expenses. 1040a 2012 tax return These records will help you decide whether an expense is a deductible or a capital (added to the basis) expense. 1040a 2012 tax return However, if you make repairs as part of an extensive remodeling or restoration of your home, the entire job is an improvement. 1040a 2012 tax return Example. 1040a 2012 tax return You buy an older home and fix up two rooms as a beauty salon. 1040a 2012 tax return You patch the plaster on the ceilings and walls, paint, repair the floor, install an outside door, and install new wiring, plumbing, and other equipment. 1040a 2012 tax return Normally, the patching, painting, and floor work are repairs and the other expenses are permanent improvements. 1040a 2012 tax return However, because the work gives your property a new use, the entire remodeling job is a permanent improvement and its cost is added to the basis of the property. 1040a 2012 tax return You cannot deduct any portion of it as a repair expense. 1040a 2012 tax return Adjusting for depreciation deducted in earlier years. 1040a 2012 tax return   Decrease the basis of your property by the depreciation you deducted, or could have deducted, on your tax returns under the method of depreciation you properly selected. 1040a 2012 tax return If you deducted less depreciation than you could have under the method you selected, decrease the basis by the amount you could have deducted under that method. 1040a 2012 tax return If you did not deduct any depreciation, decrease the basis by the amount you could have deducted. 1040a 2012 tax return   If you deducted more depreciation than you should have, decrease your basis by the amount you should have deducted, plus the part of the excess depreciation you deducted that actually decreased your tax liability for any year. 1040a 2012 tax return   If you deducted the incorrect amount of depreciation, see Publication 946. 1040a 2012 tax return Fair market value defined. 1040a 2012 tax return   The fair market value of your home is the price at which the property would change hands between a buyer and a seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts. 1040a 2012 tax return Sales of similar property, on or about the date you begin using your home for business, may be helpful in determining the property's fair market value. 1040a 2012 tax return Figuring the depreciation deduction for the current year. 1040a 2012 tax return   If you began using your home for business before 2013, continue to use the same depreciation method you used in past tax years. 1040a 2012 tax return   If you began using your home for business for the first time in 2013, depreciate the business part as nonresidential real property under the modified accelerated cost recovery system (MACRS). 1040a 2012 tax return Under MACRS, nonresidential real property is depreciated using the straight line method over 39 years. 1040a 2012 tax return For more information on MACRS and other methods of depreciation, see Publication 946. 1040a 2012 tax return   To figure the depreciation deduction, you must first figure the part of the cost of your home that can be depreciated (depreciable basis). 1040a 2012 tax return The depreciable basis is figured by multiplying the percentage of your home used for business by the smaller of the following. 1040a 2012 tax return The adjusted basis of your home (excluding land) on the date you began using your home for business. 1040a 2012 tax return The fair market value of your home (excluding land) on the date you began using your home for business. 1040a 2012 tax return Depreciation table. 1040a 2012 tax return   If 2013 was the first year you used your home for business, you can figure your 2013 depreciation for the business part of your home by using the appropriate percentage from the following table. 1040a 2012 tax return Table 2. 1040a 2012 tax return MACRS Percentage Table for 39-Year Nonresidential Real Property Month First Used for Business Percentage To Use 1 2. 1040a 2012 tax return 461% 2 2. 1040a 2012 tax return 247% 3 2. 1040a 2012 tax return 033% 4 1. 1040a 2012 tax return 819% 5 1. 1040a 2012 tax return 605% 6 1. 1040a 2012 tax return 391% 7 1. 1040a 2012 tax return 177% 8 0. 1040a 2012 tax return 963% 9 0. 1040a 2012 tax return 749% 10 0. 1040a 2012 tax return 535% 11 0. 1040a 2012 tax return 321% 12 0. 1040a 2012 tax return 107%   Multiply the depreciable basis of the business part of your home by the percentage from the table for the first month you use your home for business. 1040a 2012 tax return See Publication 946 for the percentages for the remaining tax years of the recovery period. 1040a 2012 tax return Example. 1040a 2012 tax return In May, George Miller began to use one room in his home exclusively and regularly to meet clients. 1040a 2012 tax return This room is 8% of the square footage of his home. 1040a 2012 tax return He bought the home in 2003 for $125,000. 1040a 2012 tax return He determined from his property tax records that his adjusted basis in the house (exclusive of land) is $115,000. 1040a 2012 tax return In May, the house had a fair market value of $165,000. 1040a 2012 tax return He multiplies his adjusted basis of $115,000 (which is less than the fair market value) by 8%. 1040a 2012 tax return The result is $9,200, his depreciable basis for the business part of the house. 1040a 2012 tax return George files his return based on the calendar year. 1040a 2012 tax return May is the 5th month of his tax year. 1040a 2012 tax return He multiplies his depreciable basis of $9,200 by 1. 1040a 2012 tax return 605% (. 1040a 2012 tax return 01605), the percentage from the table for the 5th month. 1040a 2012 tax return His depreciation deduction is $147. 1040a 2012 tax return 66. 1040a 2012 tax return Depreciating permanent improvements. 1040a 2012 tax return   Add the costs of permanent improvements made before you began using your home for business to the basis of your property. 1040a 2012 tax return Depreciate these costs as part of the cost of your home as explained earlier. 1040a 2012 tax return The costs of improvements made after you begin using your home for business (that affect the business part of your home, such as a new roof) are depreciated separately. 1040a 2012 tax return Multiply the cost of the improvement by the business-use percentage and depreciate the result over the recovery period that would apply to your home if you began using it for business at the same time as the improvement. 1040a 2012 tax return For improvements made this year, the recovery period is 39 years. 1040a 2012 tax return For the percentage to use for the first year, see Table 2, earlier. 1040a 2012 tax return For more information on recovery periods, see Publication 946. 1040a 2012 tax return Business Percentage To find the business percentage, compare the size of the part of your home that you use for business to your whole house. 1040a 2012 tax return Use the resulting percentage to figure the business part of the expenses for operating your entire home. 1040a 2012 tax return You can use any reasonable method to determine the business percentage. 1040a 2012 tax return The following are two commonly used methods for figuring the percentage. 1040a 2012 tax return Divide the area (length multiplied by the width) used for business by the total area of your home. 1040a 2012 tax return If the rooms in your home are all about the same size, you can divide the number of rooms used for business by the total number of rooms in your home. 1040a 2012 tax return Example 1. 1040a 2012 tax return Your office is 240 square feet (12 feet × 20 feet). 1040a 2012 tax return Your home is 1,200 square feet. 1040a 2012 tax return Your office is 20% (240 ÷ 1,200) of the total area of your home. 1040a 2012 tax return Your business percentage is 20%. 1040a 2012 tax return Example 2. 1040a 2012 tax return You use one room in your home for business. 1040a 2012 tax return Your home has 10 rooms, all about equal size. 1040a 2012 tax return Your office is 10% (1 ÷ 10) of the total area of your home. 1040a 2012 tax return Your business percentage is 10%. 1040a 2012 tax return Use lines 1-7 of Form 8829, or lines 1-3 on the Worksheet To Figure the Deduction for Business Use of Your Home (near the end of this publication) to figure your business percentage. 1040a 2012 tax return Deduction Limit If your gross income from the business use of your home equals or exceeds your total business expenses (including depreciation), you can deduct all your business expenses related to the use of your home. 1040a 2012 tax return If your gross income from the business use of your home is less than your total business expenses, your deduction for certain expenses for the business use of your home is limited. 1040a 2012 tax return Your deduction of otherwise nondeductible expenses, such as insurance, utilities, and depreciation of your home (with depreciation of your home taken last), that are allocable to the business, is limited to the gross income from the business use of your home minus the sum of the following. 1040a 2012 tax return The business part of expenses you could deduct even if you did not use your home for business (such as mortgage interest, real estate taxes, and casualty and theft losses that are allowable as itemized deductions on Schedule A (Form 1040)). 1040a 2012 tax return These expenses are discussed in detail under Actual Expenses , earlier. 1040a 2012 tax return The business expenses that relate to the business activity in the home (for example, business phone, supplies, and depreciation on equipment), but not to the use of the home itself. 1040a 2012 tax return If you are self-employed, do not include in (2) above your deduction for one-half of your self-employment tax. 1040a 2012 tax return Carryover of unallowed expenses. 1040a 2012 tax return   If your deductions are greater than the current year's limit, you can carry over the excess to the next year in which you use actual expenses. 1040a 2012 tax return They are subject to the deduction limit for that year, whether or not you live in the same home during that year. 1040a 2012 tax return Figuring the deduction limit and carryover. 1040a 2012 tax return   If you are an employee or a partner, or you file Schedule F (Form 1040), use the Worksheet To Figure the Deduction for Business Use of Your Home, near the end of this publication. 1040a 2012 tax return If you file Schedule C (Form 1040), figure your deduction limit and carryover on Form 8829. 1040a 2012 tax return Example. 1040a 2012 tax return You meet the requirements for deducting expenses for the business use of your home. 1040a 2012 tax return You use 20% of your home for business. 1040a 2012 tax return In 2013, your business expenses and the expenses for the business use of your home are deducted from your gross income in the following order. 1040a 2012 tax return    Gross income from business $6,000 Minus:   Deductible mortgage interest and real estate taxes (20%) 3,000 Business expenses not related to the use of your home (100%) (business phone, supplies, and depreciation on equipment) 2,000 Deduction limit $1,000 Minus other expenses allocable to business use of home:   Maintenance, insurance, and utilities (20%) 800 Depreciation allowed (20% = $1,600 allowable, but subject to balance of deduction limit) 200 Other expenses up to the deduction limit $1,000 Depreciation carryover to 2014 ($1,600 − $200) (subject to deduction limit in 2014) $1,400   You can deduct all of the business part of your deductible mortgage interest and real estate taxes ($3,000). 1040a 2012 tax return You also can deduct all of your business expenses not related to the use of your home ($2,000). 1040a 2012 tax return Additionally, you can deduct all of the business part of your expenses for maintenance, insurance, and utilities, because the total ($800) is less than the $1,000 deduction limit. 1040a 2012 tax return Your deduction for depreciation for the business use of your home is limited to $200 ($1,000 minus $800) because of the deduction limit. 1040a 2012 tax return You can carry over the $1,400 balance and add it to your depreciation for 2014, subject to your deduction limit in 2014. 1040a 2012 tax return More than one place of business. 1040a 2012 tax return   If part of the gross income from your trade or business is from the business use of part of your home and part is from a place other than your home, you must determine the part of your gross income from the business use of your home before you figure the deduction limit. 1040a 2012 tax return In making this determination, consider the time you spend at each location, the business investment in each location, and any other relevant facts and circumstances. 1040a 2012 tax return If your home office qualifies as your principal place of business, you can deduct your daily transportation costs between your home and another work location in the same trade or business. 1040a 2012 tax return For more information on transportation costs, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. 1040a 2012 tax return Using the Simplified Method The simplified method is an alternative to the calculation, allocation, and substantiation of actual expenses. 1040a 2012 tax return In most cases, you will figure your deduction by multiplying $5, the prescribed rate, by the area of your home used for a qualified business use. 1040a 2012 tax return The area you use to figure your deduction is limited to 300 square feet. 1040a 2012 tax return See Simplified Amount , later, for information about figuring the amount of the deduction. 1040a 2012 tax return For more information about the simplified method, see Revenue Procedure 2013-13, 2013-06 I. 1040a 2012 tax return R. 1040a 2012 tax return B. 1040a 2012 tax return 478, available at www. 1040a 2012 tax return irs. 1040a 2012 tax return gov/irb/2013-06_IRB/ar09. 1040a 2012 tax return html. 1040a 2012 tax return Actual expenses and depreciation of your home. 1040a 2012 tax return   If you elect to use the simplified method, you cannot deduct any actual expenses for the business except for business expenses that are not related to the use of the home. 1040a 2012 tax return You also cannot deduct any depreciation (including any additional first-year depreciation) or section 179 expense for the portion of the home that is used for a qualified business use. 1040a 2012 tax return The depreciation deduction allowable for that portion of the home is deemed to be zero for a year you use the simplified method. 1040a 2012 tax return If you figure your deduction for business use of the home using actual expenses in a subsequent year, you will have to use the appropriate optional depreciation table for MACRS to figure your depreciation. 1040a 2012 tax return More information. 1040a 2012 tax return   For more information about claiming depreciation in a subsequent year, see Revenue Procedure 2013-13, 2013-06 I. 1040a 2012 tax return R. 1040a 2012 tax return B. 1040a 2012 tax return 478, available at www. 1040a 2012 tax return irs. 1040a 2012 tax return gov/irb/2013-06_IRB/ar09. 1040a 2012 tax return html. 1040a 2012 tax return See Publication 946 for the optional depreciation tables Although you cannot deduct any depreciation or section 179 expense for the portion of your home used for a qualified business use, you may still claim depreciation or the section 179 expense deduction on other assets used in the business (for example, furniture and equipment). 1040a 2012 tax return Expenses deductible without regard to business use. 1040a 2012 tax return   When using the simplified method, treat as personal expenses those business expenses related to the use of the home that are deductible without regard to whether there is a qualified business use of the home. 1040a 2012 tax return These expenses include mortgage interest, real estate taxes, and casualty losses, subject to any limitations. 1040a 2012 tax return See Where To Deduct , later. 1040a 2012 tax return If you also rent part of your home, you must still allocate these expenses between rental use and personal use (for this purpose, personal use includes business use reported using the simplified method). 1040a 2012 tax return No deduction of carryover of actual expenses. 1040a 2012 tax return   If you used actual expenses to figure your deduction for business use of the home in a prior year and your deduction was limited, you cannot deduct the disallowed amount carried over from the prior year during a year you figure your deduction using the simplified method. 1040a 2012 tax return Instead, you will continue to carry over the disallowed amount to the next year that you use actual expenses to figure your deduction. 1040a 2012 tax return Electing the Simplified Method You choose whether or not to figure your deduction using the simplified method each taxable year. 1040a 2012 tax return Make the election for a home by using the simplified method to figure the deduction for the qualified business use of that home on a timely filed, original federal income tax return. 1040a 2012 tax return An election for a taxable year, once made, is irrevocable. 1040a 2012 tax return A change from using the simplified method in one year to actual expenses in a succeeding taxable year, or vice-versa, is not a change in method of accounting and does not require the consent of the Commissioner. 1040a 2012 tax return Shared use. 1040a 2012 tax return   If you share your home with someone else who also uses the home in a business that qualifies for this deduction, each of you make your own election. 1040a 2012 tax return More than one qualified business use. 1040a 2012 tax return   If you conduct more than one business that qualifies for this deduction in your home, your election to use the simplified method applies to all your qualified business uses of that home. 1040a 2012 tax return More than one home. 1040a 2012 tax return   If you used more than one home during the year (for example, you moved during the year), you can elect to use the simplified method for only one of the homes. 1040a 2012 tax return You must figure the deduction for any other home using actual expenses. 1040a 2012 tax return Simplified Amount Your deduction for the qualified business use of a home is the sum of each amount you figure for a separate qualified business use of your home. 1040a 2012 tax return To figure your deduction for the business use of a home using the simplified method, you will need to know the following information for each qualified business use of the home. 1040a 2012 tax return The allowable area of your home used in conducting the business. 1040a 2012 tax return If you did not conduct the business for the entire year in the home or the area changed during the year, you will need to know the allowable area you used and the number of days you conducted the business for each month. 1040a 2012 tax return The gross income from the business use of your home. 1040a 2012 tax return The amount of the business expenses that are not related to the use of your home. 1040a 2012 tax return If the qualified business use is for a daycare facility that uses space in your home on a regular (but not exclusive) basis, you will also need to know the percentage of time that part of your home is used for daycare. 1040a 2012 tax return To figure the amount you can deduct for qualified business use of your home using the simplified method, follow these 3 steps. 1040a 2012 tax return Multiply the allowable area by $5 (or less than $5 if the qualified business use is for a daycare that uses space in your home on a regular, but not exclusive, basis). 1040a 2012 tax return See Allowable area and Space used regularly for daycare , later. 1040a 2012 tax return Subtract the expenses from the business that are not related to the use of the home from the gross income related to the business use of the home. 1040a 2012 tax return If these expenses are greater than the gross income from the business use of the home, then you cannot take a deduction for this business use of the home. 1040a 2012 tax return See Gross income limitation , later. 1040a 2012 tax return Take the smaller of the amounts from (1) and (2). 1040a 2012 tax return This is the amount you can deduct for this qualified business use of your home using the simplified method. 1040a 2012 tax return If you are an employee or a partner, or you use your home in your farming business and file Schedule F (Form 1040), you can use the Simplified Method Worksheet, near the end of this publication, to help you figure your deduction. 1040a 2012 tax return If you use your home in a trade or business and you file Schedule C (Form 1040), you will use the Simplified Method Worksheet in your Instructions for Schedule C to figure your deduction. 1040a 2012 tax return Allowable area. 1040a 2012 tax return   In most cases, the allowable area is the smaller of the actual area (in square feet) of your home used in conducting the business and 300 square feet. 1040a 2012 tax return Your allowable area may be smaller if you conducted the business as a qualified joint venture with your spouse, the area used by the business was shared with another qualified business use, you used the home for the business for only part of the year, or the area used by the business changed during the year. 1040a 2012 tax return You can use the Area Adjustment Worksheet (for simplified method), near the end of this publication, to help you figure your allowable area for a qualified business use. 1040a 2012 tax return Area used by a qualified joint venture. 1040a 2012 tax return   If the qualified business use of the home is also a qualified joint venture, you and your spouse will figure the deduction for the business use separately. 1040a 2012 tax return Split the actual area used in conducting business between you and your spouse in the same manner you split your other tax attributes. 1040a 2012 tax return Then, each spouse will figure the allowable area separately. 1040a 2012 tax return For more information about qualified joint ventures, see Qualified Joint Venture in the Instructions for Schedule C. 1040a 2012 tax return Shared use. 1040a 2012 tax return   If you share your home with someone else who uses the home to conduct business that also qualifies for this deduction, you may not include the same square feet to figure your deduction as the other person. 1040a 2012 tax return You must allocate the shared space between you and the other person in a reasonable manner. 1040a 2012 tax return Example. 1040a 2012 tax return Kristin and Lindsey are roommates. 1040a 2012 tax return Kristin uses 300 square feet of their home for a qualified business use. 1040a 2012 tax return Lindsey uses 200 square feet of their home for a separate qualified business use. 1040a 2012 tax return The qualified business uses share 100 square feet. 1040a 2012 tax return In addition to the portion that they do not share, Kristin and Lindsey can both claim 50 of the 100 square feet or divide the 100 square feet between them in any reasonable manner. 1040a 2012 tax return If divided evenly, Kristin could claim 250 square feet using the simplified method and Lindsey could claim 150 square feet. 1040a 2012 tax return More than one qualified business use. 1040a 2012 tax return   If you conduct more than one business qualifying for the deduction, you are limited to a maximum of 300 square feet for all of the businesses. 1040a 2012 tax return Allocate the actual square footage used (up to the maximum of 300 square feet) among your qualified business uses in a reasonable manner. 1040a 2012 tax return However, do not allocate more square feet to a qualified business use than you actually use for that business. 1040a 2012 tax return Rental use. 1040a 2012 tax return   The simplified method does not apply to rental use. 1040a 2012 tax return A rental use that qualifies for the deduction must be figured using actual expenses. 1040a 2012 tax return If the rental use and a qualified business use share the same area, you will have to allocate the actual area used between the two uses. 1040a 2012 tax return You cannot use the same area to figure a deduction for the qualified business use as you are using to figure the deduction for the rental use. 1040a 2012 tax return Part-year use or area changes. 1040a 2012 tax return   If your qualified business use was for a portion of the taxable year (for example, a seasonal business or a business that begins during the taxable year) or you changed the square footage of your qualified business use, your deduction is limited to the average monthly allowable square footage. 1040a 2012 tax return You calculate the average monthly allowable square footage by adding the amount of allowable square feet you used in each month and dividing the sum by 12. 1040a 2012 tax return When determining the average monthly allowable square footage, you cannot take more than 300 square feet into account for any one month. 1040a 2012 tax return Additionally, if your qualified business use was less than 15 days in a month, you must use -0- for that month. 1040a 2012 tax return Example 1. 1040a 2012 tax return Andy files his federal income tax return on a calendar year basis. 1040a 2012 tax return On July 20, he began using 420 square feet of his home for a qualified business use. 1040a 2012 tax return He continued to use the 420 square feet until the end of the year. 1040a 2012 tax return His average monthly allowable square footage is 125 square feet, which is figured using 300 square feet for each month August through December divided by the number of months in the taxable year ((0 + 0 + 0 + 0 + 0 + 0 + 0 + 300 + 300 + 300 + 300 + 300)/12). 1040a 2012 tax return Example 2. 1040a 2012 tax return Amy files her federal income tax return on a calendar year basis. 1040a 2012 tax return On April 20, she began using 100 square feet of her home for a qualified business use. 1040a 2012 tax return On August 5, she expanded the area of her qualified use to 330 square feet. 1040a 2012 tax return Amy continued to use the 330 square feet until the end of the year. 1040a 2012 tax return Her average monthly allowable square footage is 150 square feet, which is figured using 100 square feet for May through July and 300 square feet for August through December divided by the number of months in the taxable year ((0 + 0 + 0 + 0 + 100 + 100 +100 + 300 + 300 + 300 + 300 + 300)/12). 1040a 2012 tax return Gross income limitation. 1040a 2012 tax return   Your deduction for business use of the home is limited to an amount equal to the gross income derived from the qualified business use of the home reduced by the business deductions that are unrelated to the use of your home. 1040a 2012 tax return If the business deductions that are unrelated to the use of your home are greater than the gross income derived from the qualified business use of your home, then you cannot take a deduction for this qualified business use of your home. 1040a 2012 tax return Business expenses not related to use of the home. 1040a 2012 tax return   These expenses relate to the business activity in the home, but not to the use of the home itself. 1040a 2012 tax return You can still deduct business expenses that are unrelated to the use of the home. 1040a 2012 tax return See Where To Deduct , later. 1040a 2012 tax return Examples of business expenses that are unrelated to the use of the home are advertising, wages, supplies, dues, and depreciation for equipment. 1040a 2012 tax return Space used regularly for daycare. 1040a 2012 tax return   If you do not use the area of your home exclusively for daycare, you must reduce the prescribed rate (maximum $5 per square foot) before figuring your deduction. 1040a 2012 tax return The reduced rate will equal the prescribed rate times a fraction. 1040a 2012 tax return The numerator of the fraction is the number of hours that the space was used during the year for daycare and the denominator is the total number of hours during the year that the space was available for all uses. 1040a 2012 tax return You can use the Daycare Facility Worksheet (for simplified method), near the end of this publication, to help you figure the reduced rate. 1040a 2012 tax return    If you used at least 300 square feet for daycare regularly and exclusively during the year, then you do not need to reduce the prescribed rate or complete the Daycare Facility Worksheet. 1040a 2012 tax return Daycare Facility If you use space in your home on a regular basis for providing daycare, you may be able to claim a deduction for that part of your home even if you use the same space for nonbusiness purposes. 1040a 2012 tax return To qualify for this exception to the exclusive use rule, you must meet both of the following requirements. 1040a 2012 tax return You must be in the trade or business of providing daycare for children, persons age 65 or older, or persons who are physically or mentally unable to care for themselves. 1040a 2012 tax return You must have applied for, been granted, or be exempt from having, a license, certification, registration, or approval as a daycare center or as a family or group daycare home under state law. 1040a 2012 tax return You do not meet this requirement if your application was rejected or your license or other authorization was revoked. 1040a 2012 tax return Figuring the deduction. 1040a 2012 tax return   If you elect to use the simplified method for your home, figure your deduction as described earlier in Using the Simplified Method under Figuring the Deduction. 1040a 2012 tax return    If you are figuring your deduction using actual expenses and you regularly use part of your home for daycare, figure what part is used for daycare, as explained in Business Percentage , earlier, under Figuring the Deduction. 1040a 2012 tax return If you also use that part exclusively for daycare, deduct all the allocable expenses, subject to the deduction limit, as explained earlier. 1040a 2012 tax return   If the use of part of your home as a daycare facility is regular, but not exclusive, you must figure the percentage of time that part of your home is used for daycare. 1040a 2012 tax return A room that is available for use throughout each business day and that you regularly use in your business is considered to be used for daycare throughout each business day. 1040a 2012 tax return You do not have to keep records to show the specific hours the area was used for business. 1040a 2012 tax return You can use the area occasionally for personal reasons. 1040a 2012 tax return However, a room you use only occasionally for business does not qualify for the deduction. 1040a 2012 tax return To find the percentage of time you actually use your home for business, compare the total time used for business to the total time that part of your home can be used for all purposes. 1040a 2012 tax return You can compare the hours of business use in a week with the number of hours in a week (168). 1040a 2012 tax return Or you can compare the hours of business use for the year with the number of hours in the year (8,760 in 2013). 1040a 2012 tax return If you started or stopped using your home for daycare in 2013, you must prorate the number of hours based on the number of days the home was available for daycare. 1040a 2012 tax return Example 1. 1040a 2012 tax return Mary Lake used her basement to operate a daycare business for children. 1040a 2012 tax return She figures the business percentage of the basement as follows. 1040a 2012 tax return Square footage of the basement Square footage of her home = 1,600 3,200 = 50%           She used the basement for daycare an average of 12 hours a day, 5 days a week, for 50 weeks a year. 1040a 2012 tax return During the other 12 hours a day, the family could use the basement. 1040a 2012 tax return She figures the percentage of time the basement was used for daycare as follows. 1040a 2012 tax return Number of hours used for daycare (12 x 5 x 50) Total number of hours in the year (24 x 365) = 3,000 8,760 = 34. 1040a 2012 tax return 25%           Mary can deduct 34. 1040a 2012 tax return 25% of any direct expenses for the basement. 1040a 2012 tax return However, because her indirect expenses are for the entire house, she can deduct only 17. 1040a 2012 tax return 13% of the indirect expenses. 1040a 2012 tax return She figures the percentage for her indirect expenses as follows. 1040a 2012 tax return Business percentage of the basement 50% Multiplied by: Percentage of time used for daycare × 34. 1040a 2012 tax return 25% Percentage for indirect expenses 17. 1040a 2012 tax return 13% Mary completes Form 8829, Part I, figuring the percentage of her home used for business, including the percentage of time the basement was used. 1040a 2012 tax return In Part II, Mary figures her deductible expenses. 1040a 2012 tax return She uses the following information to complete Part II. 1040a 2012 tax return Gross income from her daycare business $50,000 Expenses not related to the business use of the home $25,000 Tentative profit $25,000 Rent $8,400 Utilities $850 Painting the basement $500 Mary enters her tentative profit, $25,000, on line 8. 1040a 2012 tax return (This figure is the same as the amount on line 29 of her Schedule C (Form 1040). 1040a 2012 tax return ) The expenses she paid for rent and utilities relate to her entire home. 1040a 2012 tax return Therefore, she enters the amount paid for rent on line 18, column (b), and the amount paid for utilities on line 20, column (b). 1040a 2012 tax return She shows the total of these expenses on line 22, column (b). 1040a 2012 tax return For line 23, she multiplies the amount on line 22, column (b) by the percentage on line 7 and enters the result, $1,585. 1040a 2012 tax return Mary paid $500 to have the basement painted. 1040a 2012 tax return The painting is a direct expense. 1040a 2012 tax return However, because she did not use the basement exclusively for daycare, she must multiply $500 by the percentage of time the basement was used for daycare (34. 1040a 2012 tax return 25% – line 6). 1040a 2012 tax return She enters $171 (34. 1040a 2012 tax return 25% × $500) on line 19, column (a). 1040a 2012 tax return She adds line 22, column (a), and line 23 and enters $1,756 ($171 + $1,585) on line 25. 1040a 2012 tax return This is less than her deduction limit (line 15), so she can deduct the entire amount. 1040a 2012 tax return She follows the instructions to complete the rest of Part II and enters $1,756 on lines 33 and 35. 1040a 2012 tax return She then carries the $1,756 to line 30 of her Schedule C (Form 1040). 1040a 2012 tax return Example 2. 1040a 2012 tax return Assume the same facts as in Example 1 except that Mary also has another room that was available each business day for children to take naps in. 1040a 2012 tax return Although she did not keep a record of the number of hours the room was actually used for naps, it was used for part of each business day. 1040a 2012 tax return Since the room was available for business use during regular operating hours each business day and was used regularly in the business, it is considered used for daycare throughout each business day. 1040a 2012 tax return The basement and room are 60% of the total area of her home. 1040a 2012 tax return In figuring her expenses, 34. 1040a 2012 tax return 25% of any direct expenses for the basement and room are deductible. 1040a 2012 tax return In addition, 20. 1040a 2012 tax return 55% (34. 1040a 2012 tax return 25% × 60%) of her indirect expenses are deductible. 1040a 2012 tax return Example 3. 1040a 2012 tax return Assume the same facts as in Example 1 except that Mary stopped using her home for a daycare facility on June 24, 2013. 1040a 2012 tax return She used the basement for daycare an average of 12 hours a day, 5 days a week, but for only 25 weeks of the year. 1040a 2012 tax return During the other 12 hours a day, the family could still use the basement. 1040a 2012 tax return She figures the percentage of time the basement was used for business as follows. 1040a 2012 tax return Number of hours used for daycare (12 x 5 x 25) Total number of hours during period used (24 x 175) = 1,500 4,200 = 35. 1040a 2012 tax return 71%           Mary can deduct 35. 1040a 2012 tax return 71% of any direct expenses for the basement. 1040a 2012 tax return However, because her indirect expenses are for the entire house, she can deduct only 17. 1040a 2012 tax return 86% of the indirect expenses. 1040a 2012 tax return She figures the percentage for her indirect expenses as follows. 1040a 2012 tax return Business percentage of the basement 50% Multiplied by: Percentage of time used for daycare × 35. 1040a 2012 tax return 71% Percentage for indirect expenses 17. 1040a 2012 tax return 86% Meals. 1040a 2012 tax return   If you provide food for your daycare recipients, do not include the expense as a cost of using your home for business. 1040a 2012 tax return Claim it as a separate deduction on your Schedule C (Form 1040). 1040a 2012 tax return You can never deduct the cost of food consumed by you or your family. 1040a 2012 tax return You can deduct as a business expense 100% of the actual cost of food consumed by your daycare recipients (see Standard meal and snack rates , later, for an optional method for eligible children) and generally only 50% of the cost of food consumed by your employees. 1040a 2012 tax return However, you can deduct 100% of the cost of food consumed by your employees if its value can be excluded from their wages as a de minimis fringe benefit. 1040a 2012 tax return For more information on meals that meet these requirements, see Meals in chapter 2 of Publication 15-B, Employer's Tax Guide to Fringe Benefits. 1040a 2012 tax return   If you deduct the actual cost of food for your daycare business, keep a separate record (with receipts) of your family's food costs. 1040a 2012 tax return   Reimbursements you receive from a sponsor under the Child and Adult Care Food Program of the Department of Agriculture are taxable only to the extent they exceed your expenses for food for eligible children. 1040a 2012 tax return If your reimbursements are more than your expenses for food, show the difference as income in Part I of Schedule C (Form 1040). 1040a 2012 tax return If your food expenses are greater than the reimbursements, show the difference as an expense in Part V of Schedule C (Form 1040). 1040a 2012 tax return Do not include payments or expenses for your own children if they are eligible for the program. 1040a 2012 tax return Follow this procedure even if you receive a Form 1099-MISC, Miscellaneous Income, reporting a payment from the sponsor. 1040a 2012 tax return Standard meal and snack rates. 1040a 2012 tax return   If you qualify as a family daycare provider, you can use the standard meal and snack rates, instead of actual costs, to compute the deductible cost of meals and snacks provided to eligible children. 1040a 2012 tax return For these purposes: A family daycare provider is a person engaged in the business of providing family daycare. 1040a 2012 tax return Family daycare is childcare provided to eligible children in the home of the family daycare provider. 1040a 2012 tax return The care must be non-medical, not involve a transfer of legal custody, and generally last less than 24 hours each day. 1040a 2012 tax return Eligible children are minor children receiving family daycare in the home of the family daycare provider. 1040a 2012 tax return Eligible children do not include children who are full-time or part-time residents in the home where the childcare is provided or children whose parents or guardians are residents of the same home. 1040a 2012 tax return Eligible children do not include children who receive daycare services for personal reasons of the provider. 1040a 2012 tax return For example, if a provider provides daycare services for a relative as a favor to that relative, that child is not an eligible child. 1040a 2012 tax return   You can compute the deductible cost of each meal and snack you actually purchased and served to an eligible child during the time period you provided family daycare using the standard meal and snack rates shown in Table 3, later. 1040a 2012 tax return You can use the standard meal and snack rates for a maximum of one breakfast, one lunch, one dinner, and three snacks per eligible child per day. 1040a 2012 tax return If you receive reimbursement for a particular meal or snack, you can deduct only the portion of the applicable standard meal or snack rate that is more than the amount of the reimbursement. 1040a 2012 tax return   You can use either the standard meal and snack rates or actual costs to calculate the deductible cost of food provided to eligible children in the family daycare for any particular tax year. 1040a 2012 tax return If you choose to use the standard meal and snack rates for a particular tax year, you must use the rates for all your deductible food costs for eligible children during that tax year. 1040a 2012 tax return However, if you use the standard meal and snack rates in any tax year, you can use actual costs to compute the deductible cost of food in any other tax year. 1040a 2012 tax return   If you use the standard meal and snack rates, you must maintain records to substantiate the computation of the total amount deducted for the cost of food provided to eligible children. 1040a 2012 tax return The records kept should include the name of each child, dates and hours of attendance in the daycare, and the type and quantity of meals and snacks served. 1040a 2012 tax return This information can be recorded in a log similar to the one shown in Exhibit A, near the end of this publication. 1040a 2012 tax return   The standard meal and snack rates include beverages, but do not include non-food supplies used for food preparation, service, or storage, such as containers, paper products, or utensils. 1040a 2012 tax return These expenses can be claimed as a separate deduction on your Schedule C (Form 1040). 1040a 2012 tax return     Table 3. 1040a 2012 tax return Standard Meal and Snack Rates1 Location of Family Daycare Provider Breakfast Lunch Dinner Snack States other than Alaska an