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1040ez free online file 7. 1040ez free online file   Coverdell Education Savings Account (ESA) Table of Contents Introduction What Is a Coverdell ESAQualified Education Expenses ContributionsContribution Limits Additional Tax on Excess Contributions Rollovers and Other TransfersRollovers Changing the Designated Beneficiary Transfer Because of Divorce DistributionsTax-Free Distributions Taxable Distributions When Assets Must Be Distributed Introduction If your modified adjusted gross income (MAGI) is less than $110,000 ($220,000 if filing a joint return), you may be able to establish a Coverdell ESA to finance the qualified education expenses of a designated beneficiary. 1040ez free online file For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return. 1040ez free online file There is no limit on the number of separate Coverdell ESAs that can be established for a designated beneficiary. 1040ez free online file However, total contributions for the beneficiary in any year cannot be more than $2,000, no matter how many accounts have been established. 1040ez free online file See Contributions , later. 1040ez free online file This benefit applies not only to higher education expenses, but also to elementary and secondary education expenses. 1040ez free online file What is the tax benefit of the Coverdell ESA. 1040ez free online file   Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. 1040ez free online file   If, for a year, distributions from an account are not more than a designated beneficiary's qualified education expenses at an eligible educational institution, the beneficiary will not owe tax on the distributions. 1040ez free online file See Tax-Free Distributions , later. 1040ez free online file    Table 7-1 summarizes the main features of the Coverdell ESA. 1040ez free online file Table 7-1. 1040ez free online file Coverdell ESA at a Glance Do not rely on this table alone. 1040ez free online file It provides only general highlights. 1040ez free online file See the text for definitions of terms in bold type and for more complete explanations. 1040ez free online file Question Answer What is a Coverdell ESA? A savings account that is set up to pay the qualified education expenses of a designated beneficiary. 1040ez free online file Where can it be established? It can be opened in the United States at any bank or other IRS-approved entity that offers Coverdell ESAs. 1040ez free online file Who can have a Coverdell ESA? Any beneficiary who is under age 18 or is a special needs beneficiary. 1040ez free online file Who can contribute to a Coverdell ESA? Generally, any individual (including the beneficiary) whose modified adjusted gross income for the year is less than $110,000 ($220,000 in the case of a joint return). 1040ez free online file Are distributions tax free? Yes, if the distributions are not more than the beneficiary's adjusted qualified education expenses for the year. 1040ez free online file What Is a Coverdell ESA A Coverdell ESA is a trust or custodial account created or organized in the United States only for the purpose of paying the qualified education expenses of the Designated beneficiary (defined later) of the account. 1040ez free online file When the account is established, the designated beneficiary must be under age 18 or a special needs beneficiary. 1040ez free online file To be treated as a Coverdell ESA, the account must be designated as a Coverdell ESA when it is created. 1040ez free online file The document creating and governing the account must be in writing and must satisfy the following requirements. 1040ez free online file The trustee or custodian must be a bank or an entity approved by the IRS. 1040ez free online file The document must provide that the trustee or custodian can only accept a contribution that meets all of the following conditions. 1040ez free online file The contribution is in cash. 1040ez free online file The contribution is made before the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. 1040ez free online file The contribution would not result in total contributions for the year (not including rollover contributions) being more than $2,000. 1040ez free online file Money in the account cannot be invested in life insurance contracts. 1040ez free online file Money in the account cannot be combined with other property except in a common trust fund or common investment fund. 1040ez free online file The balance in the account generally must be distributed within 30 days after the earlier of the following events. 1040ez free online file The beneficiary reaches age 30, unless the beneficiary is a special needs beneficiary. 1040ez free online file The beneficiary's death. 1040ez free online file Qualified Education Expenses Generally, these are expenses required for the enrollment or attendance of the designated beneficiary at an eligible educational institution. 1040ez free online file For purposes of Coverdell ESAs, the expenses can be either qualified higher education expenses or qualified elementary and secondary education expenses. 1040ez free online file Designated beneficiary. 1040ez free online file   This is the individual named in the document creating the trust or custodial account to receive the benefit of the funds in the account. 1040ez free online file Contributions to a qualified tuition program (QTP). 1040ez free online file   A contribution to a QTP is a qualified education expense if the contribution is on behalf of the designated beneficiary of the Coverdell ESA. 1040ez free online file In the case of a change in beneficiary, this is a qualified expense only if the new beneficiary is a family member of that designated beneficiary. 1040ez free online file See chapter 8, Qualified Tuition Program . 1040ez free online file Eligible Educational Institution For purposes of Coverdell ESAs, an eligible educational institution can be either an eligible postsecondary school or an eligible elementary or secondary school. 1040ez free online file Eligible postsecondary school. 1040ez free online file   This is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. 1040ez free online file S. 1040ez free online file Department of Education. 1040ez free online file It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. 1040ez free online file The educational institution should be able to tell you if it is an eligible educational institution. 1040ez free online file   Certain educational institutions located outside the United States also participate in the U. 1040ez free online file S. 1040ez free online file Department of Education's Federal Student Aid (FSA) programs. 1040ez free online file Eligible elementary or secondary school. 1040ez free online file   This is any public, private, or religious school that provides elementary or secondary education (kindergarten through grade 12), as determined under state law. 1040ez free online file Qualified Higher Education Expenses These are expenses related to enrollment or attendance at an eligible postsecondary school. 1040ez free online file As shown in the following list, to be qualified, some of the expenses must be required by the school and some must be incurred by students who are enrolled at least half-time. 1040ez free online file The following expenses must be required for enrollment or attendance of a designated beneficiary at an eligible postsecondary school. 1040ez free online file Tuition and fees. 1040ez free online file Books, supplies, and equipment. 1040ez free online file Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible postsecondary school. 1040ez free online file Expenses for room and board must be incurred by students who are enrolled at least half-time (defined below). 1040ez free online file The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts. 1040ez free online file The allowance for room and board, as determined by the school, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student. 1040ez free online file The actual amount charged if the student is residing in housing owned or operated by the school. 1040ez free online file Half-time student. 1040ez free online file   A student is enrolled “at least half-time” if he or she is enrolled for at least half the full-time academic work load for the course of study the student is pursuing, as determined under the standards of the school where the student is enrolled. 1040ez free online file Qualified Elementary and Secondary Education Expenses These are expenses related to enrollment or attendance at an eligible elementary or secondary school. 1040ez free online file As shown in the following list, to be qualified, some of the expenses must be required or provided by the school. 1040ez free online file There are special rules for computer-related expenses. 1040ez free online file The following expenses must be incurred by a designated beneficiary in connection with enrollment or attendance at an eligible elementary or secondary school. 1040ez free online file Tuition and fees. 1040ez free online file Books, supplies, and equipment. 1040ez free online file Academic tutoring. 1040ez free online file Special needs services for a special needs beneficiary. 1040ez free online file The following expenses must be required or provided by an eligible elementary or secondary school in connection with attendance or enrollment at the school. 1040ez free online file Room and board. 1040ez free online file Uniforms. 1040ez free online file Transportation. 1040ez free online file Supplementary items and services (including extended day programs). 1040ez free online file The purchase of computer technology, equipment, or Internet access and related services is a qualified elementary and secondary education expense if it is to be used by the beneficiary and the beneficiary's family during any of the years the beneficiary is in elementary or secondary school. 1040ez free online file (This does not include expenses for computer software designed for sports, games, or hobbies unless the software is predominantly educational in nature. 1040ez free online file ) Contributions Any individual (including the designated beneficiary) can contribute to a Coverdell ESA if the individual's MAGI (defined later under Contribution Limits ) for the year is less than $110,000. 1040ez free online file For individuals filing joint returns, that amount is $220,000. 1040ez free online file Organizations, such as corporations and trusts, can also contribute to Coverdell ESAs. 1040ez free online file There is no requirement that an organization's income be below a certain level. 1040ez free online file Contributions must meet all of the following requirements. 1040ez free online file They must be in cash. 1040ez free online file They cannot be made after the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. 1040ez free online file They must be made by the due date of the contributor's tax return (not including extensions). 1040ez free online file Contributions can be made to one or several Coverdell ESAs for the same designated beneficiary provided that the total contributions are not more than the contribution limits (defined later) for a year. 1040ez free online file Contributions can be made, without penalty, to both a Coverdell ESA and a QTP in the same year for the same beneficiary. 1040ez free online file Table 7-2 summarizes many of the features of contributing to a Coverdell ESA. 1040ez free online file When contributions considered made. 1040ez free online file   Contributions made to a Coverdell ESA for the preceding tax year are considered to have been made on the last day of the preceding year. 1040ez free online file They must be made by the due date (not including extensions) for filing your return for the preceding year. 1040ez free online file   For example, if you make a contribution to a Coverdell ESA in February 2014, and you designate it as a contribution for 2013, you are considered to have made that contribution on December 31, 2013. 1040ez free online file Contribution Limits There are two yearly limits: One on the total amount that can be contributed for each designated beneficiary in any year, and One on the amount that any individual can contribute for any one designated beneficiary for a year. 1040ez free online file Limit for each designated beneficiary. 1040ez free online file   For 2013, the total of all contributions to all Coverdell ESAs set up for the benefit of any one designated beneficiary cannot be more than $2,000. 1040ez free online file This includes contributions (other than rollovers) to all the beneficiary's Coverdell ESAs from all sources. 1040ez free online file Rollovers are discussed under Rollovers and Other Transfers , later. 1040ez free online file Example. 1040ez free online file When Maria Luna was born in 2012, three separate Coverdell ESAs were set up for her, one by her parents, one by her grandfather, and one by her aunt. 1040ez free online file In 2013, the total of all contributions to Maria's three Coverdell ESAs cannot be more than $2,000. 1040ez free online file For example, if her grandfather contributed $2,000 to one of her Coverdell ESAs, no one else could contribute to any of her three accounts. 1040ez free online file Or, if her parents contributed $1,000 and her aunt $600, her grandfather or someone else could contribute no more than $400. 1040ez free online file These contributions could be put into any of Maria's Coverdell ESA accounts. 1040ez free online file Limit for each contributor. 1040ez free online file   Generally, you can contribute up to $2,000 for each designated beneficiary for 2013. 1040ez free online file This is the most you can contribute for the benefit of any one beneficiary for the year, regardless of the number of Coverdell ESAs set up for the beneficiary. 1040ez free online file Example. 1040ez free online file The facts are the same as in the previous example except that Maria Luna's older brother, Edgar, also has a Coverdell ESA. 1040ez free online file If their grandfather contributed $2,000 to Maria's Coverdell ESA in 2013, he could also contribute $2,000 to Edgar's Coverdell ESA. 1040ez free online file Reduced limit. 1040ez free online file   Your contribution limit may be reduced. 1040ez free online file If your MAGI (defined on this page) is between $95,000 and $110,000 (between $190,000 and $220,000 if filing a joint return), the $2,000 limit for each designated beneficiary is gradually reduced (see Figuring the limit , later). 1040ez free online file If your MAGI is $110,000 or more ($220,000 or more if filing a joint return), you cannot contribute to anyone's Coverdell ESA. 1040ez free online file Table 7-2. 1040ez free online file Coverdell ESA Contributions at a Glance Do not rely on this table alone. 1040ez free online file It provides only general highlights. 1040ez free online file See the text for more complete explanations. 1040ez free online file Question Answer Are contributions deductible? No. 1040ez free online file What is the annual contribution limit per designated beneficiary? $2,000 for each designated beneficiary. 1040ez free online file What if more than one Coverdell ESA has been opened for the same designated beneficiary? The annual contribution limit is $2,000 for each beneficiary, no matter how many Coverdell ESAs are set up for that beneficiary. 1040ez free online file What if more than one individual makes contributions for the same designated beneficiary? The annual contribution limit is $2,000 per beneficiary, no matter how many individuals contribute. 1040ez free online file Can contributions other than cash be made to a Coverdell ESA? No. 1040ez free online file When must contributions stop? No contributions can be made to a beneficiary's Coverdell ESA after he or she reaches age 18, unless the beneficiary is a special needs beneficiary. 1040ez free online file Modified adjusted gross income (MAGI). 1040ez free online file   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return. 1040ez free online file MAGI when using Form 1040A. 1040ez free online file   If you file Form 1040A, your MAGI is the AGI on line 22 of that form. 1040ez free online file MAGI when using Form 1040. 1040ez free online file   If you file Form 1040, your MAGI is the AGI on line 38 of that form, modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, and Exclusion of income by bona fide residents of Puerto Rico. 1040ez free online file MAGI when using Form 1040NR. 1040ez free online file   If you file Form 1040NR, your MAGI is the AGI on line 36 of that form. 1040ez free online file MAGI when using Form 1040NR-EZ. 1040ez free online file   If you file Form 1040NR-EZ, your MAGI is the AGI on line 10 of that form. 1040ez free online file   If you have any of these adjustments, you can use Worksheet 7-1. 1040ez free online file MAGI for a Coverdell ESA , later, to figure your MAGI for Form 1040. 1040ez free online file Worksheet 7-1. 1040ez free online file MAGI for a Coverdell ESA 1. 1040ez free online file Enter your adjusted gross income  (Form 1040, line 38)   1. 1040ez free online file   2. 1040ez free online file Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)   2. 1040ez free online file       3. 1040ez free online file Enter your foreign housing deduction (Form 2555, line 50)   3. 1040ez free online file         4. 1040ez free online file Enter the amount of income from Puerto Rico you are excluding   4. 1040ez free online file       5. 1040ez free online file Enter the amount of income from American Samoa you are excluding (Form 4563, line 15)   5. 1040ez free online file       6. 1040ez free online file Add lines 2, 3, 4, and 5   6. 1040ez free online file   7. 1040ez free online file Add lines 1 and 6. 1040ez free online file This is your  modified adjusted gross income   7. 1040ez free online file   Figuring the limit. 1040ez free online file    To figure the limit on the amount you can contribute for each designated beneficiary, multiply $2,000 by a fraction. 1040ez free online file The numerator (top number) is your MAGI minus $95,000 ($190,000 if filing a joint return). 1040ez free online file The denominator (bottom number) is $15,000 ($30,000 if filing a joint return). 1040ez free online file Subtract the result from $2,000. 1040ez free online file This is the amount you can contribute for each beneficiary. 1040ez free online file You can use Worksheet 7-2. 1040ez free online file Coverdell ESA Contribution Limit to figure the limit on contributions. 1040ez free online file    Worksheet 7-2. 1040ez free online file Coverdell ESA Contribution Limit 1. 1040ez free online file Maximum contribution   1. 1040ez free online file $2,000 2. 1040ez free online file Enter your modified adjusted gross income (MAGI) for purposes of figuring the contribution limit to a Coverdell ESA (see definition or Worksheet 7-1, earlier)   2. 1040ez free online file   3. 1040ez free online file Enter $190,000 if married filing jointly; $95,000 for all other filers   3. 1040ez free online file   4. 1040ez free online file Subtract line 3 from line 2. 1040ez free online file If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. 1040ez free online file   5. 1040ez free online file Enter $30,000 if married filing jointly; $15,000 for all other filers   5. 1040ez free online file     Note. 1040ez free online file If the amount on line 4 is greater than or equal to the amount on line 5, stop here. 1040ez free online file You are not allowed to contribute to a Coverdell ESA for 2013. 1040ez free online file       6. 1040ez free online file Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. 1040ez free online file . 1040ez free online file 7. 1040ez free online file Multiply line 1 by line 6   7. 1040ez free online file   8. 1040ez free online file Subtract line 7 from line 1   8. 1040ez free online file   Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. 1040ez free online file Example. 1040ez free online file Paul, who is single, had a MAGI of $96,500 for 2013. 1040ez free online file Paul can contribute up to $1,800 in 2013 for each beneficiary, as shown in the illustrated Worksheet 7-2, Coverdell ESA Contribution Limit–Illustrated. 1040ez free online file Worksheet 7-2. 1040ez free online file Coverdell ESA Contribution Limit—Illustrated 1. 1040ez free online file Maximum contribution   1. 1040ez free online file $2,000 2. 1040ez free online file Enter your modified adjusted gross  income (MAGI) for purposes of figuring the contribution limit to a Coverdell ESA (see definition or Worksheet 7-1, earlier)   2. 1040ez free online file 96,500 3. 1040ez free online file Enter $190,000 if married filing jointly; $95,000 for all other filers   3. 1040ez free online file 95,000 4. 1040ez free online file Subtract line 3 from line 2. 1040ez free online file If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. 1040ez free online file 1,500 5. 1040ez free online file Enter $30,000 if married filing jointly; $15,000 for all other filers   5. 1040ez free online file 15,000   Note. 1040ez free online file If the amount on line 4 is greater than or equal to the amount on line 5,  stop here. 1040ez free online file You are not allowed to  contribute to a Coverdell ESA for 2013. 1040ez free online file       6. 1040ez free online file Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. 1040ez free online file . 1040ez free online file 100 7. 1040ez free online file Multiply line 1 by line 6   7. 1040ez free online file 200 8. 1040ez free online file Subtract line 7 from line 1   8. 1040ez free online file 1,800 Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. 1040ez free online file Additional Tax on Excess Contributions The beneficiary must pay a 6% excise tax each year on excess contributions that are in a Coverdell ESA at the end of the year. 1040ez free online file Excess contributions are the total of the following two amounts. 1040ez free online file Contributions to any designated beneficiary's Coverdell ESA for the year that are more than $2,000 (or, if less, the total of each contributor's limit for the year, as discussed earlier). 1040ez free online file Excess contributions for the preceding year, reduced by the total of the following two amounts: Distributions (other than those rolled over as discussed later) during the year, and The contribution limit for the current year minus the amount contributed for the current year. 1040ez free online file Exceptions. 1040ez free online file   The excise tax does not apply if excess contributions made during 2013 (and any earnings on them) are distributed before the first day of the sixth month of the following tax year (June 1, 2014, for a calendar year taxpayer). 1040ez free online file   However, you must include the distributed earnings in gross income for the year in which the excess contribution was made. 1040ez free online file You should receive Form 1099-Q, Payments From Qualified Education Programs, from each institution from which excess contributions were distributed. 1040ez free online file Box 2 of that form will show the amount of earnings on your excess contributions. 1040ez free online file Code “2” or “3” entered in the blank box below boxes 5 and 6 indicate the year in which the earnings are taxable. 1040ez free online file See Instructions for Recipient on the back of copy B of your Form 1099-Q. 1040ez free online file Enter the amount of earnings on line 21 of Form 1040 (or Form 1040NR) for the applicable tax year. 1040ez free online file For more information, see Taxable Distributions , later. 1040ez free online file   The excise tax does not apply to any rollover contribution. 1040ez free online file Note. 1040ez free online file Contributions made in one year for the preceding tax year are considered to have been made on the last day of the preceding year. 1040ez free online file Example. 1040ez free online file In 2012, Greta's parents and grandparents contributed a total of $2,300 to Greta's Coverdell ESA— an excess contribution of $300. 1040ez free online file Because Greta did not withdraw the excess before June 1, 2013, she had to pay an additional tax of $18 (6% × $300) when she filed her 2012 tax return. 1040ez free online file In 2013, excess contributions of $500 were made to Greta's account, however, she withdrew $250 from that account to use for qualified education expenses. 1040ez free online file Using the steps shown earlier under Additional Tax on Excess Contributions , Greta figures the excess contribution in her account at the end of 2013 as follows. 1040ez free online file (1)   $500 excess contributions made in 2013     + (2)   $300 excess contributions in ESA at end of 2012     − (2a)   $250 distribution during 2013         $550 excess at end of 2013   × 6%=$33           If Greta limits 2014 contributions to $1,450 ($2,000 maximum allowed − $550 excess contributions from 2013), she will not owe any additional tax in 2014 for excess contributions. 1040ez free online file Figuring and reporting the additional tax. 1040ez free online file   You figure this excise tax in Part V of Form 5329. 1040ez free online file Report the additional tax on Form 1040, line 58 (or Form 1040NR, line 56). 1040ez free online file Rollovers and Other Transfers Assets can be rolled over from one Coverdell ESA to another or the designated beneficiary can be changed. 1040ez free online file The beneficiary's interest can be transferred to a spouse or former spouse because of divorce. 1040ez free online file Rollovers Any amount distributed from a Coverdell ESA is not taxable if it is rolled over to another Coverdell ESA for the benefit of the same beneficiary or a member of the beneficiary's family (including the beneficiary's spouse) who is under age 30. 1040ez free online file This age limitation does not apply if the new beneficiary is a special needs beneficiary. 1040ez free online file An amount is rolled over if it is paid to another Coverdell ESA within 60 days after the date of the distribution. 1040ez free online file Do not report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040 or 1040NR. 1040ez free online file These are not taxable distributions. 1040ez free online file Members of the beneficiary's family. 1040ez free online file   For these purposes, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary. 1040ez free online file Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them. 1040ez free online file Brother, sister, stepbrother, or stepsister. 1040ez free online file Father or mother or ancestor of either. 1040ez free online file Stepfather or stepmother. 1040ez free online file Son or daughter of a brother or sister. 1040ez free online file Brother or sister of father or mother. 1040ez free online file Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. 1040ez free online file The spouse of any individual listed above. 1040ez free online file First cousin. 1040ez free online file Example. 1040ez free online file When Aaron graduated from college last year he had $5,000 left in his Coverdell ESA. 1040ez free online file He wanted to give this money to his younger sister, who was still in high school. 1040ez free online file In order to avoid paying tax on the distribution of the amount remaining in his account, Aaron contributed the same amount to his sister's Coverdell ESA within 60 days of the distribution. 1040ez free online file Only one rollover per Coverdell ESA is allowed during the 12-month period ending on the date of the payment or distribution. 1040ez free online file This rule does not apply to the rollover of a military death gratuity or payment from Servicemembers' Group Life Insurance (SGLI). 1040ez free online file Military death gratuity. 1040ez free online file   If you received a military death gratuity or a payment from Servicemembers' Group Life Insurance (SGLI), you may roll over all or part of the amount received to one or more Coverdell ESAs for the benefit of members of the beneficiary's family (see Members of the beneficiary's family , earlier). 1040ez free online file Such payments are made to an eligible survivor upon the death of a member of the armed forces. 1040ez free online file The contribution to a Coverdell ESA from survivor benefits received cannot be made later than 1 year after the date on which you receive the gratuity or SGLI payment. 1040ez free online file   This rollover contribution is not subject to (but is in addition to) the contribution limits discussed earlier under Contribution Limits . 1040ez free online file The amount you roll over cannot exceed the total survivor benefits you received, reduced by contributions from these benefits to a Roth IRA or other Coverdell ESAs. 1040ez free online file   The amount contributed from the survivor benefits is treated as part of your basis (cost) in the Coverdell ESA, and will not be taxed when distributed. 1040ez free online file See Distributions , later. 1040ez free online file The limit of one rollover per Coverdell ESA during a 12-month period does not apply to a military death gratuity or SGLI payment. 1040ez free online file Changing the Designated Beneficiary The designated beneficiary can be changed. 1040ez free online file See Members of the beneficiary's family , earlier. 1040ez free online file There are no tax consequences if, at the time of the change, the new beneficiary is under age 30 or is a special needs beneficiary. 1040ez free online file Example. 1040ez free online file Assume the same situation for Aaron as in the last example (see Rollovers , earlier). 1040ez free online file Instead of closing his Coverdell ESA and paying the distribution into his sister's Coverdell ESA, Aaron could have instructed the trustee of his account to simply change the name of the beneficiary on his account to that of his sister. 1040ez free online file Transfer Because of Divorce If a spouse or former spouse receives a Coverdell ESA under a divorce or separation instrument, it is not a taxable transfer. 1040ez free online file After the transfer, the spouse or former spouse treats the Coverdell ESA as his or her own. 1040ez free online file Example. 1040ez free online file In their divorce settlement, Peg received her ex-husband's Coverdell ESA. 1040ez free online file In this process, the account was transferred into her name. 1040ez free online file Peg now treats the funds in this Coverdell ESA as if she were the original owner. 1040ez free online file Distributions The designated beneficiary of a Coverdell ESA can take a distribution at any time. 1040ez free online file Whether the distributions are tax free depends, in part, on whether the distributions are equal to or less than the amount of Adjusted qualified education expenses (defined later) that the beneficiary has in the same tax year. 1040ez free online file See Table 7-3, Coverdell ESA Distributions at a Glance, for highlights. 1040ez free online file Table 7-3. 1040ez free online file Coverdell ESA Distributions at a Glance Do not rely on this table alone. 1040ez free online file It provides only general highlights. 1040ez free online file See the text for definitions of terms in bold type and for more complete explanations. 1040ez free online file Question Answer Is a distribution from a Coverdell ESA to pay for a designated beneficiary's qualified education expenses tax free? Generally, yes, to the extent the amount of the distribution is not more than the designated beneficiary's adjusted qualified education expenses. 1040ez free online file After the designated beneficiary completes his or her education at an eligible educational institution, can amounts remaining in the Coverdell ESA be distributed? Yes. 1040ez free online file Amounts must be distributed when the designated beneficiary reaches age 30, unless he or she is a special needs beneficiary. 1040ez free online file Also, certain transfers to members of the beneficiary's family are permitted. 1040ez free online file Does the designated beneficiary need to be enrolled for a minimum number of courses to take a tax-free distribution? No. 1040ez free online file Adjusted qualified education expenses. 1040ez free online file   To determine if total distributions for the year are more than the amount of qualified education expenses, reduce total qualified education expenses by any tax-free educational assistance. 1040ez free online file Tax-free educational assistance includes: The tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. 1040ez free online file The amount you get by subtracting tax-free educational assistance from your total qualified education expenses is your adjusted qualified education expenses. 1040ez free online file Tax-Free Distributions Generally, distributions are tax free if they are not more than the beneficiary's adjusted qualified education expenses for the year. 1040ez free online file Do not report tax-free distributions (including qualifying rollovers) on your tax return. 1040ez free online file Taxable Distributions A portion of the distributions is generally taxable to the beneficiary if the total distributions are more than the beneficiary's adjusted qualified education expenses for the year. 1040ez free online file Excess distribution. 1040ez free online file   This is the part of the total distribution that is more than the beneficiary's adjusted qualified education expenses for the year. 1040ez free online file Earnings and basis. 1040ez free online file   You will receive a Form 1099-Q for each of the Coverdell ESAs from which money was distributed in 2013. 1040ez free online file The amount of your gross distribution will be shown in box 1. 1040ez free online file For 2013, instead of dividing the gross distribution between your earnings (box 2) and your basis (already-taxed amount) (box 3), the payer or trustee may report the fair market value (account balance) of the Coverdell ESA as of December 31, 2013. 1040ez free online file This will be shown in the blank box below boxes 5 and 6. 1040ez free online file   The amount contributed from survivor benefits (see Military death gratuity , earlier) is treated as part of your basis and will not be taxed when distributed. 1040ez free online file Figuring the Taxable Portion of a Distribution The taxable portion is the amount of the excess distribution that represents earnings that have accumulated tax free in the account. 1040ez free online file Figure the taxable portion for 2013 as shown in the following steps. 1040ez free online file Multiply the total amount distributed by a fraction. 1040ez free online file The numerator is the basis (contributions not previously distributed) at the end of 2012 plus total contributions for 2013 and the denominator is the value (balance) of the account at the end of 2013 plus the amount distributed during 2013. 1040ez free online file Subtract the amount figured in (1) from the total amount distributed during 2013. 1040ez free online file The result is the amount of earnings included in the distribution(s). 1040ez free online file Multiply the amount of earnings figured in (2) by a fraction. 1040ez free online file The numerator is the adjusted qualified education expenses paid during 2013 and the denominator is the total amount distributed during 2013. 1040ez free online file Subtract the amount figured in (3) from the amount figured in (2). 1040ez free online file The result is the amount the beneficiary must include in income. 1040ez free online file The taxable amount must be reported on Form 1040 or Form 1040NR, line 21. 1040ez free online file Example. 1040ez free online file You received an $850 distribution from your Coverdell ESA, to which $1,500 had been contributed before 2013. 1040ez free online file There were no contributions in 2013. 1040ez free online file This is your first distribution from the account, so your basis in the account on December 31, 2012, was $1,500. 1040ez free online file The value (balance) of your account on December 31, 2013, was $950. 1040ez free online file You had $700 of adjusted qualified education expenses (AQEE) for the year. 1040ez free online file Using the steps in Figuring the Taxable Portion of a Distribution , earlier, figure the taxable portion of your distribution as follows. 1040ez free online file   1. 1040ez free online file $850 (distribution) × $1,500 basis + $0 contributions  $950 value + $850 distribution       =$708 (basis portion of distribution)     2. 1040ez free online file $850 (distribution)−$708 (basis portion of distribution)     =$142 (earnings included in distribution)   3. 1040ez free online file $142 (earnings) × $700 AQEE  $850 distribution           =$117 (tax-free earnings)     4. 1040ez free online file $142 (earnings)−$117 (tax-free earnings)=$25 (taxable earnings)                 You must include $25 in income as distributed earnings not used for qualified education expenses. 1040ez free online file Report this amount on Form 1040, line 21, listing the type and amount of income on the dotted line. 1040ez free online file Worksheet 7-3, Coverdell ESA–Taxable Distributions and Basis , at the end of this chapter, can help you figure your adjusted qualified education expenses, how much of your distribution must be included in income, and the remaining basis in your Coverdell ESA(s). 1040ez free online file Coordination With American Opportunity and Lifetime Learning Credits The American opportunity or lifetime learning credit can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits. 1040ez free online file This means the beneficiary must reduce qualified higher education expenses by tax-free educational assistance, and then further reduce them by any expenses taken into account in determining an American opportunity or lifetime learning credit. 1040ez free online file Example. 1040ez free online file Derek Green had $5,800 of qualified higher education expenses for 2013, his first year in college. 1040ez free online file He paid his college expenses from the following sources. 1040ez free online file     Partial tuition scholarship (tax free) $1,500     Coverdell ESA distribution 1,000     Gift from parents 2,100     Earnings from part-time job 1,200           Of his $5,800 of qualified higher education expenses, $4,000 was tuition and related expenses that also qualified for an American opportunity credit. 1040ez free online file Derek's parents claimed a $2,500 American opportunity credit (based on $4,000 expenses) on their tax return. 1040ez free online file Before Derek can determine the taxable portion of his Coverdell ESA distribution, he must reduce his total qualified higher education expenses. 1040ez free online file     Total qualified higher education expenses $5,800     Minus: Tax-free educational assistance −1,500     Minus: Expenses taken into account in  figuring American opportunity credit − 4,000     Equals: Adjusted qualified higher education  expenses (AQHEE) $ 300           Since the adjusted qualified higher education expenses ($300) are less than the Coverdell ESA distribution ($1,000), part of the distribution will be taxable. 1040ez free online file The balance in Derek's account was $1,800 on December 31, 2013. 1040ez free online file Prior to 2013, $2,100 had been contributed to this account. 1040ez free online file Contributions for 2013 totaled $400. 1040ez free online file Using the four steps outlined earlier, Derek figures the taxable portion of his distribution as shown below. 1040ez free online file   1. 1040ez free online file $1,000 (distribution) × $2,100 basis + $400 contributions  $1,800 value + $1,000 distribution           =$893 (basis portion of distribution)     2. 1040ez free online file $1,000 (distribution)−$893 (basis portion of distribution)     = $107 (earnings included in distribution)   3. 1040ez free online file $107 (earnings) × $300 AQHEE  $1,000 distribution       =$32 (tax-free earnings)     4. 1040ez free online file $107 (earnings)−$32 (tax-free earnings)=$75 (taxable earnings)                 Derek must include $75 in income (Form 1040, line 21). 1040ez free online file This is the amount of distributed earnings not used for adjusted qualified higher education expenses. 1040ez free online file Coordination With Qualified Tuition Program (QTP) Distributions If a designated beneficiary receives distributions from both a Coverdell ESA and a QTP in the same year, and the total distribution is more than the beneficiary's adjusted qualified higher education expenses, those expenses must be allocated between the distribution from the Coverdell ESA and the distribution from the QTP before figuring how much of each distribution is taxable. 1040ez free online file The following two examples illustrate possible allocations. 1040ez free online file Example 1. 1040ez free online file In 2013, Beatrice graduated from high school and began her first semester of college. 1040ez free online file That year, she had $1,000 of qualified elementary and secondary education expenses (QESEE) for high school and $3,000 of qualified higher education expenses (QHEE) for college. 1040ez free online file To pay these expenses, Beatrice withdrew $800 from her Coverdell ESA and $4,200 from her QTP. 1040ez free online file No one claimed Beatrice as a dependent, nor was she eligible for an education credit. 1040ez free online file She did not receive any tax-free educational assistance in 2013. 1040ez free online file Beatrice must allocate her total qualified education expenses between the two distributions. 1040ez free online file Beatrice knows that tax-free treatment will be available if she applies her $800 Coverdell ESA distribution toward her $1,000 of qualified education expenses for high school. 1040ez free online file The qualified expenses are greater than the distribution, making the $800 Coverdell ESA distribution tax free. 1040ez free online file Next, Beatrice matches her $4,200 QTP distribution to her $3,000 of QHEE, and finds she has an excess QTP distribution of $1,200 ($4,200 QTP − $3,000 QHEE). 1040ez free online file She cannot use the extra $200 of high school expenses (from (1) above) against the QTP distribution because those expenses do not qualify a QTP for tax-free treatment. 1040ez free online file Finally, Beatrice figures the taxable and tax-free portions of her QTP distribution based on her $3,000 of QHEE. 1040ez free online file (See Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program for more information. 1040ez free online file ) Example 2. 1040ez free online file Assume the same facts as in Example 1 , except that Beatrice withdrew $1,800 from her Coverdell ESA and $3,200 from her QTP. 1040ez free online file In this case, she allocates her qualified education expenses as follows. 1040ez free online file Using the same reasoning as in Example 1, Beatrice matches $1,000 of her Coverdell ESA distribution to her $1,000 of QESEE—she has $800 of her distribution remaining. 1040ez free online file Because higher education expenses can also qualify a Coverdell ESA distribution for tax-free treatment, Beatrice allocates her $3,000 of QHEE between the remaining $800 Coverdell ESA and the $3,200 QTP distributions ($4,000 total). 1040ez free online file   $3,000 QHEE × $800 ESA distribution  $4,000 total distribution = $600 QHEE (ESA)     $3,000 QHEE × $3,200 QTP distribution  $4,000 total distribution = $2,400 QHEE (QTP)   Beatrice then figures the taxable part of her: Coverdell ESA distribution based on qualified education expenses of $1,600 ($1,000 QESEE + $600 QHEE). 1040ez free online file See Figuring the Taxable Portion of a Distribution , earlier, in this chapter. 1040ez free online file   QTP distribution based on her $2,400 of QHEE (see Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program). 1040ez free online file The above examples show two types of allocation between distributions from a Coverdell ESA and a QTP. 1040ez free online file However, you do not have to allocate your expenses in the same way. 1040ez free online file You can use any reasonable method. 1040ez free online file Losses on Coverdell ESA Investments If you have a loss on your investment in a Coverdell ESA, you may be able to deduct the loss on your income tax return. 1040ez free online file You can deduct the loss only when all amounts from that account have been distributed and the total distributions are less than your unrecovered basis. 1040ez free online file Your basis is the total amount of contributions to that Coverdell ESA. 1040ez free online file You claim the loss as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23 (Schedule A (Form 1040NR), line 9), subject to the 2%-of-adjusted-gross-income limit. 1040ez free online file If you have distributions from more than one Coverdell ESA account during a year, you must combine the information (amount of distribution, basis, etc. 1040ez free online file ) from all such accounts in order to determine your taxable earnings for the year. 1040ez free online file By doing this, the loss from one ESA account reduces the distributed earnings (if any) from any other ESA account. 1040ez free online file For examples of the calculation, see Losses on QTP Investments in chapter 8, Qualified Tuition Program. 1040ez free online file Additional Tax on Taxable Distributions Generally, if you receive a taxable distribution, you also must pay a 10% additional tax on the amount included in income. 1040ez free online file Exceptions. 1040ez free online file   The 10% additional tax does not apply to distributions: Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary. 1040ez free online file Made because the designated beneficiary is disabled. 1040ez free online file A person is considered to be disabled if he or she shows proof that he or she cannot do any substantial gainful activity because of his or her physical or mental condition. 1040ez free online file A physician must determine that his or her condition can be expected to result in death or to be of long-continued and indefinite duration. 1040ez free online file Included in income because the designated beneficiary received: A tax-free scholarship or fellowship (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), or Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. 1040ez free online file Made on account of the attendance of the designated beneficiary at a U. 1040ez free online file S. 1040ez free online file military academy (such as the USMA at West Point). 1040ez free online file This exception applies only to the extent that the amount of the distribution does not exceed the costs of advanced education (as defined in section 2005(d)(3) of title 10 of the U. 1040ez free online file S. 1040ez free online file Code) attributable to such attendance. 1040ez free online file Included in income only because the qualified education expenses were taken into account in determining the American opportunity or lifetime learning credit (see Coordination With American Opportunity and Lifetime Learning Credits , earlier). 1040ez free online file Made before June 1, 2014, of an excess 2013 contribution (and any earnings on it). 1040ez free online file The distributed earnings must be included in gross income for the year in which the excess contribution was made. 1040ez free online file Exception (3) applies only to the extent the distribution is not more than the scholarship, allowance, or payment. 1040ez free online file Figuring the additional tax. 1040ez free online file    Use Part II of Form 5329, to figure any additional tax. 1040ez free online file Report the amount on Form 1040, line 58, or Form 1040NR, line 56. 1040ez free online file When Assets Must Be Distributed Any assets remaining in a Coverdell ESA must be distributed when either one of the following two events occurs. 1040ez free online file The designated beneficiary reaches age 30. 1040ez free online file In this case, the remaining assets must be distributed within 30 days after the beneficiary reaches age 30. 1040ez free online file However, this rule does not apply if the beneficiary is a special needs beneficiary. 1040ez free online file The designated beneficiary dies before reaching age 30. 1040ez free online file In this case, the remaining assets must generally be distributed within 30 days after the date of death. 1040ez free online file Exception for Transfer to Surviving Spouse or Family Member If a Coverdell ESA is transferred to a surviving spouse or other family member as the result of the death of the designated beneficiary, the Coverdell ESA retains its status. 1040ez free online file (“Family member” was defined earlier under Rollovers . 1040ez free online file ) This means the spouse or other family member can treat the Coverdell ESA as his or her own and does not need to withdraw the assets until he or she reaches age 30. 1040ez free online file This age limitation does not apply if the new beneficiary is a special needs beneficiary. 1040ez free online file There are no tax consequences as a result of the transfer. 1040ez free online file How To Figure the Taxable Earnings When a total distribution is made because the designated beneficiary either reached age 30 or died, the earnings that accumulated tax free in the account must be included in taxable income. 1040ez free online file You determine these earnings as shown in the following two steps. 1040ez free online file Multiply the amount distributed by a fraction. 1040ez free online file The numerator is the basis (contributions not previously distributed) at the end of 2012 plus total contributions for 2013 and the denominator is the balance in the account at the end of 2013 plus the amount distributed during 2013. 1040ez free online file Subtract the amount figured in (1) from the total amount distributed during 2013. 1040ez free online file The result is the amount of earnings included in the distribution. 1040ez free online file For an example, see steps (1) and (2) of the Example under Figuring the Taxable Portion of a Distribution, earlier. 1040ez free online file The beneficiary or other person receiving the distribution must report this amount on Form 1040, line 21, or Form 1040NR, line 21, listing the type and amount of income on the dotted line. 1040ez free online file Worksheet 7-3 Instructions. 1040ez free online file Coverdell ESA—Taxable Distributions and Basis Line G. 1040ez free online file Enter the total distributions received from all Coverdell ESAs during 2013. 1040ez free online file Do not include amounts rolled over to another ESA within 60 days (only one rollover is allowed during any 12-month period). 1040ez free online file Also, do not include excess contributions that were distributed with the related earnings (or less any loss) before the first day of the sixth month of the tax year following the year for which the contributions were made. 1040ez free online file Line 2. 1040ez free online file Your basis (amount already taxed) in this Coverdell ESA as of December 31, 2012, is the total of:   •All contributions to this Coverdell ESA before 2013 •Minus the tax-free portion of any distributions from this Coverdell ESA before 2013. 1040ez free online file   If your last distribution from this Coverdell ESA was before 2013, you must start with the basis in your account as of the end of the last year in which you took a distribution. 1040ez free online file For years before 2002, you can find that amount on the last line of the worksheet in the Instructions for Form 8606, Nondeductible IRAs, that you completed for that year. 1040ez free online file For years after 2001, you can find that amount by using the ending basis from the worksheet in Publication 970 for that year. 1040ez free online file You can determine your basis in this Coverdell ESA as of December 31, 2012, by adding to the basis as of the end of that year any contributions made to that account after the year of the distribution and before 2013. 1040ez free online file Line 4. 1040ez free online file Enter the total distributions received from this Coverdell ESA in 2013. 1040ez free online file Do not include amounts rolled over to another Coverdell ESA within 60 days (only one rollover is allowed during any 12-month period). 1040ez free online file   Also, do not include excess contributions that were distributed with the related earnings (or less any loss) before the first day of the sixth month of the tax year following the year of the contributions. 1040ez free online file Line 7. 1040ez free online file Enter the total value of this Coverdell ESA as of December 31, 2013, plus any outstanding rollovers contributed to the account after 2012, but before the end of the 60-day rollover period. 1040ez free online file A statement should be sent to you by January 31, 2014, for this Coverdell ESA showing the value on December 31, 2013. 1040ez free online file   A rollover is a tax-free withdrawal from one Coverdell ESA that is contributed to another Coverdell ESA. 1040ez free online file An outstanding rollover is any amount withdrawn within 60 days before the end of 2013 (November 2 through December 31) that was rolled over after December 31, 2013, but within the 60-day rollover period. 1040ez free online file Worksheet 7-3. 1040ez free online file Coverdell ESA—Taxable Distributions and Basis How to complete this worksheet. 1040ez free online file • • • Complete Part I, lines A through H, on only one worksheet. 1040ez free online file  Complete a separate Part II, lines 1 through 15, for each of your Coverdell ESAs. 1040ez free online file  Complete Part III, the Summary (line 16), on only one worksheet. 1040ez free online file Part I. 1040ez free online file Qualified Education Expenses (Complete for total expenses)       A. 1040ez free online file Enter your total qualified education expenses for 2013   A. 1040ez free online file   B. 1040ez free online file Enter those qualified education expenses paid for with tax-free educational assistance (for example, tax-free scholarships, veterans' educational benefits, Pell grants, employer-provided educational assistance)   B. 1040ez free online file         C. 1040ez free online file Enter those qualified higher education expenses deducted on Schedule C or C-EZ (Form 1040). 1040ez free online file Schedule F (Form 1040), or as a miscellaneous itemized deduction on Schedule A (Form 1040 or 1040NR)   C. 1040ez free online file         D. 1040ez free online file Enter those qualified higher education expenses on which  an American opportunity or lifetime learning credit was based   D. 1040ez free online file         E. 1040ez free online file Add lines B, C, and D   D. 1040ez free online file   F. 1040ez free online file Subtract line E from line A. 1040ez free online file This is your adjusted qualified education expense for 2013   E. 1040ez free online file   G. 1040ez free online file Enter your total distributions from all Coverdell ESAs during 2013. 1040ez free online file Do not include rollovers  or the return of excess contributions (see instructions)   F. 1040ez free online file   H. 1040ez free online file Divide line F by line G. 1040ez free online file Enter the result as a decimal (rounded to at least 3 places). 1040ez free online file If the  result is 1. 1040ez free online file 000 or more, enter 1. 1040ez free online file 000   G. 1040ez free online file . 1040ez free online file Part II. 1040ez free online file Taxable Distributions and Basis (Complete separately for each account) 1. 1040ez free online file Enter the amount contributed to this Coverdell ESA for 2013, including contributions made for 2013 from January 1, 2014, through April 15, 2014. 1040ez free online file Do not include rollovers or the return of excess contributions   1. 1040ez free online file   2. 1040ez free online file Enter your basis in this Coverdell ESA as of December 31, 2012 (see instructions)   2. 1040ez free online file   3. 1040ez free online file Add lines 1 and 2   3. 1040ez free online file   4. 1040ez free online file Enter the total distributions from this Coverdell ESA during 2013. 1040ez free online file Do not include rollovers  or the return of excess contributions (see instructions)   4. 1040ez free online file   5. 1040ez free online file Multiply line 4 by line H. 1040ez free online file This is the amount of adjusted qualified  education expense attributable to this Coverdell ESA   5. 1040ez free online file         6. 1040ez free online file Subtract line 5 from line 4   6. 1040ez free online file         7. 1040ez free online file Enter the total value of this Coverdell ESA as of December 31, 2013,  plus any outstanding rollovers (see instructions)   7. 1040ez free online file         8. 1040ez free online file Add lines 4 and 7   8. 1040ez free online file         9. 1040ez free online file Divide line 3 by line 8. 1040ez free online file Enter the result as a decimal (rounded to  at least 3 places). 1040ez free online file If the result is 1. 1040ez free online file 000 or more, enter 1. 1040ez free online file 000   9. 1040ez free online file . 1040ez free online file       10. 1040ez free online file Multiply line 4 by line 9. 1040ez free online file This is the amount of basis allocated to your  distributions, and is tax free   10. 1040ez free online file     Note. 1040ez free online file If line 6 is zero, skip lines 11 through 13, enter -0- on line 14, and go to line 15. 1040ez free online file       11. 1040ez free online file Subtract line 10 from line 4   11. 1040ez free online file   12. 1040ez free online file Divide line 5 by line 4. 1040ez free online file Enter the result as a decimal (rounded to  at least 3 places). 1040ez free online file If the result is 1. 1040ez free online file 000 or more, enter 1. 1040ez free online file 000   12. 1040ez free online file . 1040ez free online file       13. 1040ez free online file Multiply line 11 by line 12. 1040ez free online file This is the amount of qualified education  expenses allocated to your distributions, and is tax free   13. 1040ez free online file   14. 1040ez free online file Subtract line 13 from line 11. 1040ez free online file This is the portion of the distributions from this  Coverdell ESA in 2013 that you must include in income   14. 1040ez free online file   15. 1040ez free online file Subtract line 10 from line 3. 1040ez free online file This is your basis in this Coverdell ESA as of December 31, 2013   15. 1040ez free online file   Part III. 1040ez free online file Summary (Complete only once)       16. 1040ez free online file Taxable amount. 1040ez free online file Add together all amounts on line 14 for all your Coverdell ESAs. 1040ez free online file Enter here  and include on Form 1040, line 21, or Form 1040NR, line 21, listing the type and amount of income on the dotted line   16. 1040ez free online file   Prev  Up  Next   Home   More Online Publications
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1040ez free online file Publication 551 - Main Content Table of Contents Cost BasisStocks and Bonds Real Property Business Assets Allocating the Basis Adjusted BasisIncreases to Basis Decreases to Basis Adjustments to Basis Example Basis Other Than CostProperty Received for Services Taxable Exchanges Nontaxable Exchanges Property Transferred From a Spouse Property Received as a Gift Inherited Property Property Changed to Business or Rental Use How To Get Tax HelpLow Income Taxpayer Clinics (LITCs). 1040ez free online file Cost Basis The basis of property you buy is usually its cost. 1040ez free online file The cost is the amount you pay in cash, debt obligations, other property, or services. 1040ez free online file Your cost also includes amounts you pay for the following items. 1040ez free online file Sales tax, Freight, Installation and testing, Excise taxes, Legal and accounting fees (when they must be capitalized), Revenue stamps, Recording fees, and Real estate taxes (if assumed for the seller). 1040ez free online file  You may also have to capitalize (add to basis) certain other costs related to buying or producing property. 1040ez free online file Loans with low or no interest. 1040ez free online file   If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price, minus the amount considered to be unstated interest. 1040ez free online file You generally have unstated interest if your interest rate is less than the applicable federal rate. 1040ez free online file For more information, see Unstated Interest and Original Issue Discount in Publication 537. 1040ez free online file Purchase of a business. 1040ez free online file   When you purchase a trade or business, you generally purchase all assets used in the business operations, such as land, buildings, and machinery. 1040ez free online file Allocate the price among the various assets, including any section 197 intangibles. 1040ez free online file See Allocating the Basis, later. 1040ez free online file Stocks and Bonds The basis of stocks or bonds you buy is generally the purchase price plus any costs of purchase, such as commissions and recording or transfer fees. 1040ez free online file If you get stocks or bonds other than by purchase, your basis is usually determined by the fair market value (FMV) or the previous owner's adjusted basis of the stock. 1040ez free online file You must adjust the basis of stocks for certain events that occur after purchase. 1040ez free online file See Stocks and Bonds in chapter 4 of Publication 550 for more information on the basis of stock. 1040ez free online file Identifying stock or bonds sold. 1040ez free online file   If you can adequately identify the shares of stock or the bonds you sold, their basis is the cost or other basis of the particular shares of stock or bonds. 1040ez free online file If you buy and sell securities at various times in varying quantities and you cannot adequately identify the shares you sell, the basis of the securities you sell is the basis of the securities you acquired first. 1040ez free online file For more information about identifying securities you sell, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550. 1040ez free online file Mutual fund shares. 1040ez free online file   If you sell mutual fund shares acquired at different times and prices, you can choose to use an average basis. 1040ez free online file For more information, see Publication 550. 1040ez free online file Real Property Real property, also called real estate, is land and generally anything built on or attached to it. 1040ez free online file If you buy real property, certain fees and other expenses become part of your cost basis in the property. 1040ez free online file Real estate taxes. 1040ez free online file   If you pay real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis. 1040ez free online file You cannot deduct them as taxes. 1040ez free online file   If you reimburse the seller for taxes the seller paid for you, you can usually deduct that amount as an expense in the year of purchase. 1040ez free online file Do not include that amount in the basis of the property. 1040ez free online file If you did not reimburse the seller, you must reduce your basis by the amount of those taxes. 1040ez free online file Settlement costs. 1040ez free online file   Your basis includes the settlement fees and closing costs for buying property. 1040ez free online file You cannot include in your basis the fees and costs for getting a loan on property. 1040ez free online file A fee for buying property is a cost that must be paid even if you bought the property for cash. 1040ez free online file   The following items are some of the settlement fees or closing costs you can include in the basis of your property. 1040ez free online file Abstract fees (abstract of title fees); Charges for installing utility services; Legal fees (including title search and preparation of the sales contract and deed); Recording fees; Surveys; Transfer taxes; Owner's title insurance; and Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. 1040ez free online file   Settlement costs do not include amounts placed in escrow for the future payment of items such as taxes and insurance. 1040ez free online file   The following items are some settlement fees and closing costs you cannot include in the basis of the property. 1040ez free online file Casualty insurance premiums. 1040ez free online file Rent for occupancy of the property before closing. 1040ez free online file Charges for utilities or other services related to occupancy of the property before closing. 1040ez free online file Charges connected with getting a loan. 1040ez free online file The following are examples of these charges. 1040ez free online file Points (discount points, loan origination fees). 1040ez free online file Mortgage insurance premiums. 1040ez free online file Loan assumption fees. 1040ez free online file Cost of a credit report. 1040ez free online file Fees for an appraisal required by a lender. 1040ez free online file Fees for refinancing a mortgage. 1040ez free online file If these costs relate to business property, items (1) through (3) are deductible as business expenses. 1040ez free online file Items (4) and (5) must be capitalized as costs of getting a loan and can be deducted over the period of the loan. 1040ez free online file Points. 1040ez free online file   If you pay points to obtain a loan (including a mortgage, second mortgage, line of credit, or a home equity loan), do not add the points to the basis of the related property. 1040ez free online file Generally, you deduct the points over the term of the loan. 1040ez free online file For more information on how to deduct points, see Points in chapter 4 of Publication 535. 1040ez free online file Points on home mortgage. 1040ez free online file   Special rules may apply to points you and the seller pay when you obtain a mortgage to purchase your main home. 1040ez free online file If certain requirements are met, you can deduct the points in full for the year in which they are paid. 1040ez free online file Reduce the basis of your home by any seller-paid points. 1040ez free online file For more information, see Points in Publication 936, Home Mortgage Interest Deduction. 1040ez free online file Assumption of mortgage. 1040ez free online file   If you buy property and assume (or buy subject to) an existing mortgage on the property, your basis includes the amount you pay for the property plus the amount to be paid on the mortgage. 1040ez free online file Example. 1040ez free online file If you buy a building for $20,000 cash and assume a mortgage of $80,000 on it, your basis is $100,000. 1040ez free online file Constructing assets. 1040ez free online file   If you build property or have assets built for you, your expenses for this construction are part of your basis. 1040ez free online file Some of these expenses include the following costs. 1040ez free online file Land, Labor and materials, Architect's fees, Building permit charges, Payments to contractors, Payments for rental equipment, and Inspection fees. 1040ez free online file In addition, if you own a business and use your employees, material, and equipment to build an asset, do not deduct the following expenses. 1040ez free online file You must include them in the asset's basis. 1040ez free online file Employee wages paid for the construction work, reduced by any employment credits allowed; Depreciation on equipment you own while it is used in the construction; Operating and maintenance costs for equipment used in the construction; and The cost of business supplies and materials used in the construction. 1040ez free online file    Do not include the value of your own labor, or any other labor you did not pay for, in the basis of any property you construct. 1040ez free online file Business Assets If you purchase property to use in your business, your basis is usually its actual cost to you. 1040ez free online file If you construct, create, or otherwise produce property, you must capitalize the costs as your basis. 1040ez free online file In certain circumstances, you may be subject to the uniform capitalization rules, next. 1040ez free online file Uniform Capitalization Rules The uniform capitalization rules specify the costs you add to basis in certain circumstances. 1040ez free online file Activities subject to the rules. 1040ez free online file   You must use the uniform capitalization rules if you do any of the following in your trade or business or activity carried on for profit. 1040ez free online file Produce real or tangible personal property for use in the business or activity, Produce real or tangible personal property for sale to customers, or Acquire property for resale. 1040ez free online file However, this rule does not apply to personal property if your average annual gross receipts for the 3 previous tax years are $10 million or less. 1040ez free online file   You produce property if you construct, build, install, manufacture, develop, improve, create, raise, or grow the property. 1040ez free online file Treat property produced for you under a contract as produced by you up to the amount you pay or costs you otherwise incur for the property. 1040ez free online file Tangible personal property includes films, sound recordings, video tapes, books, or similar property. 1040ez free online file    Under the uniform capitalization rules, you must capitalize all direct costs and an allocable part of most indirect costs you incur due to your production or resale activities. 1040ez free online file To capitalize means to include certain expenses in the basis of property you produce or in your inventory costs rather than deduct them as a current expense. 1040ez free online file You recover these costs through deductions for depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. 1040ez free online file   Any cost you cannot use to figure your taxable income for any tax year is not subject to the uniform capitalization rules. 1040ez free online file Example. 1040ez free online file If you incur a business meal expense for which your deduction would be limited to 50% of the cost of the meal, that amount is subject to the uniform capitalization rules. 1040ez free online file The nondeductible part of the cost is not subject to the uniform capitalization rules. 1040ez free online file More information. 1040ez free online file   For more information about these rules, see the regulations under section 263A of the Internal Revenue Code and Publication 538, Accounting Periods and Methods. 1040ez free online file Exceptions. 1040ez free online file   The following are not subject to the uniform capitalization rules. 1040ez free online file Property you produce that you do not use in your trade, business, or activity conducted for profit; Qualified creative expenses you pay or incur as a free-lance (self-employed) writer, photographer, or artist that are otherwise deductible on your tax return; Property you produce under a long-term contract, except for certain home construction contracts; Research and experimental expenses deductible under section 174 of the Internal Revenue Code; and Costs for personal property acquired for resale if your (or your predecessor's) average annual gross receipts for the 3 previous tax years do not exceed $10 million. 1040ez free online file For other exceptions to the uniform capitalization rules, see section 1. 1040ez free online file 263A-1(b) of the regulations. 1040ez free online file   For information on the special rules that apply to costs incurred in the business of farming, see chapter 6 of Publication 225, Farmer's Tax Guide. 1040ez free online file Intangible Assets Intangible assets include goodwill, patents, copyrights, trademarks, trade names, and franchises. 1040ez free online file The basis of an intangible asset is usually the cost to buy or create it. 1040ez free online file If you acquire multiple assets, for example a going business for a lump sum, see Allocating the Basis below to figure the basis of the individual assets. 1040ez free online file The basis of certain intangibles can be amortized. 1040ez free online file See chapter 8 of Publication 535 for information on the amortization of these costs. 1040ez free online file Patents. 1040ez free online file   The basis of a patent you get for an invention is the cost of development, such as research and experimental expenditures, drawings, working models, and attorneys' and governmental fees. 1040ez free online file If you deduct the research and experimental expenditures as current business expenses, you cannot include them in the basis of the patent. 1040ez free online file The value of the inventor's time spent on an invention is not part of the basis. 1040ez free online file Copyrights. 1040ez free online file   If you are an author, the basis of a copyright will usually be the cost of getting the copyright plus copyright fees, attorneys' fees, clerical assistance, and the cost of plates that remain in your possession. 1040ez free online file Do not include the value of your time as the author, or any other person's time you did not pay for. 1040ez free online file Franchises, trademarks, and trade names. 1040ez free online file   If you buy a franchise, trademark, or trade name, the basis is its cost, unless you can deduct your payments as a business expense. 1040ez free online file Allocating the Basis If you buy multiple assets for a lump sum, allocate the amount you pay among the assets you receive. 1040ez free online file You must make this allocation to figure your basis for depreciation and gain or loss on a later disposition of any of these assets. 1040ez free online file See Trade or Business Acquired below. 1040ez free online file Group of Assets Acquired If you buy multiple assets for a lump sum, you and the seller may agree to a specific allocation of the purchase price among the assets in the sales contract. 1040ez free online file If this allocation is based on the value of each asset and you and the seller have adverse tax interests, the allocation generally will be accepted. 1040ez free online file However, see Trade or Business Acquired, next. 1040ez free online file Trade or Business Acquired If you acquire a trade or business, allocate the consideration paid to the various assets acquired. 1040ez free online file Generally, reduce the consideration paid by any cash and general deposit accounts (including checking and savings accounts) received. 1040ez free online file Allocate the remaining consideration to the other business assets received in proportion to (but not more than) their fair market value in the following order. 1040ez free online file Certificates of deposit, U. 1040ez free online file S. 1040ez free online file Government securities, foreign currency, and actively traded personal property, including stock and securities. 1040ez free online file Accounts receivable, other debt instruments, and assets you mark to market at least annually for federal income tax purposes. 1040ez free online file Property of a kind that would properly be included in inventory if on hand at the end of the tax year or property held primarily for sale to customers in the ordinary course of business. 1040ez free online file All other assets except section 197 intangibles, goodwill, and going concern value. 1040ez free online file Section 197 intangibles except goodwill and going concern value. 1040ez free online file Goodwill and going concern value (whether or not they qualify as section 197 intangibles). 1040ez free online file Agreement. 1040ez free online file   The buyer and seller may enter into a written agreement as to the allocation of any consideration or the fair market value (FMV) of any of the assets. 1040ez free online file This agreement is binding on both parties unless the IRS determines the amounts are not appropriate. 1040ez free online file Reporting requirement. 1040ez free online file   Both the buyer and seller involved in the sale of business assets must report to the IRS the allocation of the sales price among section 197 intangibles and the other business assets. 1040ez free online file Use Form 8594 to provide this information. 1040ez free online file The buyer and seller should each attach Form 8594 to their federal income tax return for the year in which the sale occurred. 1040ez free online file More information. 1040ez free online file   See Sale of a Business in chapter 2 of Publication 544 for more information. 1040ez free online file Land and Buildings If you buy buildings and the land on which they stand for a lump sum, allocate the basis of the property among the land and the buildings so you can figure the depreciation allowable on the buildings. 1040ez free online file Figure the basis of each asset by multiplying the lump sum by a fraction. 1040ez free online file The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. 1040ez free online file If you are not certain of the FMV of the land and buildings, you can allocate the basis based on their assessed values for real estate tax purposes. 1040ez free online file Demolition of building. 1040ez free online file   Add demolition costs and other losses incurred for the demolition of any building to the basis of the land on which the demolished building was located. 1040ez free online file Do not claim the costs as a current deduction. 1040ez free online file Modification of building. 1040ez free online file   A modification of a building will not be treated as a demolition if the following conditions are satisfied. 1040ez free online file 75 percent or more of the existing external walls of the building are retained in place as internal or external walls, and 75 percent or more of the existing internal structural framework of the building is retained in place. 1040ez free online file   If the building is a certified historic structure, the modification must also be part of a certified rehabilitation. 1040ez free online file   If these conditions are met, add the costs of the modifications to the basis of the building. 1040ez free online file Subdivided lots. 1040ez free online file   If you buy a tract of land and subdivide it, you must determine the basis of each lot. 1040ez free online file This is necessary because you must figure the gain or loss on the sale of each individual lot. 1040ez free online file As a result, you do not recover your entire cost in the tract until you have sold all of the lots. 1040ez free online file   To determine the basis of an individual lot, multiply the total cost of the tract by a fraction. 1040ez free online file The numerator is the FMV of the lot and the denominator is the FMV of the entire tract. 1040ez free online file Future improvement costs. 1040ez free online file   If you are a developer and sell subdivided lots before the development work is completed, you can (with IRS consent) include in the basis of the properties sold an allocation of the estimated future cost for common improvements. 1040ez free online file See Revenue Procedure 92–29 for more information, including an explanation of the procedures for getting consent from the IRS. 1040ez free online file Use of erroneous cost basis. 1040ez free online file   If you made a mistake in figuring the cost basis of subdivided lots sold in previous years, you cannot correct the mistake for years for which the statute of limitations (generally 3 tax years) has expired. 1040ez free online file Figure the basis of any remaining lots by allocating the correct original cost basis of the entire tract among the original lots. 1040ez free online file Example. 1040ez free online file You bought a tract of land to which you assigned a cost of $15,000. 1040ez free online file You subdivided the land into 15 building lots of equal size and equitably divided your basis so that each lot had a basis of $1,000. 1040ez free online file You treated the sale of each lot as a separate transaction and figured gain or loss separately on each sale. 1040ez free online file Several years later you determine that your original basis in the tract was $22,500 and not $15,000. 1040ez free online file You sold eight lots using $8,000 of basis in years for which the statute of limitations has expired. 1040ez free online file You now can take $1,500 of basis into account for figuring gain or loss only on the sale of each of the remaining seven lots ($22,500 basis divided among all 15 lots). 1040ez free online file You cannot refigure the basis of the eight lots sold in tax years barred by the statute of limitations. 1040ez free online file Adjusted Basis Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments to the basis of the property. 1040ez free online file The result of these adjustments to the basis is the adjusted basis. 1040ez free online file Increases to Basis Increase the basis of any property by all items properly added to a capital account. 1040ez free online file These include the cost of any improvements having a useful life of more than 1 year. 1040ez free online file Rehabilitation expenses also increase basis. 1040ez free online file However, you must subtract any rehabilitation credit allowed for these expenses before you add them to your basis. 1040ez free online file If you have to recapture any of the credit, increase your basis by the recaptured amount. 1040ez free online file If you make additions or improvements to business property, keep separate accounts for them. 1040ez free online file Also, you must depreciate the basis of each according to the depreciation rules that would apply to the underlying property if you had placed it in service at the same time you placed the addition or improvement in service. 1040ez free online file For more information, see Publication 946. 1040ez free online file The following items increase the basis of property. 1040ez free online file The cost of extending utility service lines to the property; Impact fees; Legal fees, such as the cost of defending and perfecting title; Legal fees for obtaining a decrease in an assessment levied against property to pay for local improvements; Zoning costs; and The capitalized value of a redeemable ground rent. 1040ez free online file Assessments for Local Improvements Increase the basis of property by assessments for items such as paving roads and building ditches that increase the value of the property assessed. 1040ez free online file Do not deduct them as taxes. 1040ez free online file However, you can deduct as taxes charges for maintenance, repairs, or interest charges related to the improvements. 1040ez free online file Example. 1040ez free online file Your city changes the street in front of your store into an enclosed pedestrian mall and assesses you and other affected landowners for the cost of the conversion. 1040ez free online file Add the assessment to your property's basis. 1040ez free online file In this example, the assessment is a depreciable asset. 1040ez free online file Deducting vs. 1040ez free online file Capitalizing Costs Do not add to your basis costs you can deduct as current expenses. 1040ez free online file For example, amounts paid for incidental repairs or maintenance that are deductible as business expenses cannot be added to basis. 1040ez free online file However, you can choose either to deduct or to capitalize certain other costs. 1040ez free online file If you capitalize these costs, include them in your basis. 1040ez free online file If you deduct them, do not include them in your basis. 1040ez free online file See Uniform Capitalization Rules earlier. 1040ez free online file The costs you can choose to deduct or to capitalize include the following. 1040ez free online file Carrying charges, such as interest and taxes, that you pay to own property, except carrying charges that must be capitalized under the uniform capitalization rules; Research and experimentation costs; Intangible drilling and development costs for oil, gas, and geothermal wells; Exploration costs for new mineral deposits; Mining development costs for a new mineral deposit; Costs of establishing, maintaining, or increasing the circulation of a newspaper or other periodical; and Costs of removing architectural and transportation barriers to people with disabilities and the elderly. 1040ez free online file If you claim the disabled access credit, you must reduce the amount you deduct or capitalize by the amount of the credit. 1040ez free online file For more information about deducting or capitalizing costs, see chapter 7 in Publication 535. 1040ez free online file Table 1. 1040ez free online file Examples of Increases and Decreases to Basis Increases to Basis Decreases to Basis Capital improvements:   Putting an addition on your home   Replacing an entire roof  Paving your driveway  Installing central air conditioning Rewiring your home Exclusion from income of subsidies for energy conservation measures  Casualty or theft loss deductions and insurance reimbursements  Vehicle credits Assessments for local improvements: Water connections Sidewalks Roads Section 179 deduction  Casualty losses: Restoring damaged property Depreciation  Nontaxable corporate distributions Legal fees:  Cost of defending and perfecting a title   Zoning costs   Decreases to Basis The following are some items that reduce the basis of property. 1040ez free online file Section 179 deduction; Nontaxable corporate distributions; Deductions previously allowed (or allowable) for amortization, depreciation, and depletion; Exclusion of subsidies for energy conservation measures; Vehicle credits; Residential energy credits; Postponed gain from sale of home; Investment credit (part or all) taken; Casualty and theft losses and insurance reimbursement; Certain canceled debt excluded from income; Rebates from a manufacturer or seller; Easements; Gas-guzzler tax; Adoption tax benefits; and Credit for employer-provided child care. 1040ez free online file Some of these items are discussed next. 1040ez free online file Casualties and Thefts If you have a casualty or theft loss, decrease the basis in your property by any insurance or other reimbursement and by any deductible loss not covered by insurance. 1040ez free online file You must increase your basis in the property by the amount you spend on repairs that substantially prolong the life of the property, increase its value, or adapt it to a different use. 1040ez free online file To make this determination, compare the repaired property to the property before the casualty. 1040ez free online file For more information on casualty and theft losses, see Publication 547, Casualties, Disasters, and Thefts. 1040ez free online file Easements The amount you receive for granting an easement is generally considered to be a sale of an interest in real property. 1040ez free online file It reduces the basis of the affected part of the property. 1040ez free online file If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain. 1040ez free online file Vehicle Credits Unless you elect not to claim the qualified plug-in electric vehicle credit, the alternative motor vehicle credit, or the qualified plug-in electric drive motor vehicle credit, you may have to reduce the basis of each qualified vehicle by certain amounts reported. 1040ez free online file For more information, see Form 8834, Qualified Plug-in Electric and Electric Vehicle Credit; Form 8910, Alternative Motor Vehicle Credit; Form 8936, Qualified Plug-in Electric Drive Motor Vehicle Credit;and the related instructions. 1040ez free online file Gas-Guzzler Tax Decrease the basis in your car by the gas-guzzler (fuel economy) tax if you begin using the car within 1 year of the date of its first sale for ultimate use. 1040ez free online file This rule also applies to someone who later buys the car and begins using it not more than 1 year after the original sale for ultimate use. 1040ez free online file If the car is imported, the one-year period begins on the date of entry or withdrawal of the car from the warehouse if that date is later than the date of the first sale for ultimate use. 1040ez free online file Section 179 Deduction If you take the section 179 deduction for all or part of the cost of qualifying business property, decrease the basis of the property by the deduction. 1040ez free online file For more information about the section 179 deduction, see Publication 946. 1040ez free online file Exclusion of Subsidies for Energy Conservation Measures You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of any energy conservation measure for a dwelling unit. 1040ez free online file Reduce the basis of the property for which you received the subsidy by the excluded amount. 1040ez free online file For more information on this subsidy, see Publication 525. 1040ez free online file Depreciation Decrease the basis of property by the depreciation you deducted, or could have deducted, on your tax returns under the method of depreciation you chose. 1040ez free online file If you took less depreciation than you could have under the method chosen, decrease the basis by the amount you could have taken under that method. 1040ez free online file If you did not take a depreciation deduction, reduce the basis by the full amount of the depreciation you could have taken. 1040ez free online file Unless a timely election is made not to deduct the special depreciation allowance for property placed in service after September 10, 2001, decrease the property's basis by the special depreciation allowance you deducted or could have deducted. 1040ez free online file If you deducted more depreciation than you should have, decrease your basis by the amount equal to the depreciation you should have deducted plus the part of the excess depreciation you deducted that actually reduced your tax liability for the year. 1040ez free online file In decreasing your basis for depreciation, take into account the amount deducted on your tax returns as depreciation and any depreciation capitalized under the uniform capitalization rules. 1040ez free online file For information on figuring depreciation, see Publication 946. 1040ez free online file If you are claiming depreciation on a business vehicle, see Publication 463. 1040ez free online file If the car is not used more than 50% for business during the tax year, you may have to recapture excess depreciation. 1040ez free online file Include the excess depreciation in your gross income and add it to your basis in the property. 1040ez free online file For information on the computation of excess depreciation, see chapter 4 in Publication 463. 1040ez free online file Canceled Debt Excluded From Income If a debt you owe is canceled or forgiven, other than as a gift or bequest, you generally must include the canceled amount in your gross income for tax purposes. 1040ez free online file A debt includes any indebtedness for which you are liable or which attaches to property you hold. 1040ez free online file You can exclude canceled debt from income in the following situations. 1040ez free online file Debt canceled in a bankruptcy case or when you are insolvent, Qualified farm debt, and Qualified real property business debt (provided you are not a C corporation). 1040ez free online file If you exclude from income canceled debt under situation (1) or (2), you may have to reduce the basis of your depreciable and nondepreciable property. 1040ez free online file However, in situation (3), you must reduce the basis of your depreciable property by the excluded amount. 1040ez free online file For more information about canceled debt in a bankruptcy case or during insolvency, see Publication 908, Bankruptcy Tax Guide. 1040ez free online file For more information about canceled debt that is qualified farm debt, see chapter 3 in Publication 225. 1040ez free online file For more information about qualified real property business debt, see chapter 5 in Publication 334, Tax Guide for Small Business. 1040ez free online file Postponed Gain From Sale of Home If you postponed gain from the sale of your main home before May 7, 1997, you must reduce the basis of your new home by the postponed gain. 1040ez free online file For more information on the rules for the sale of a home, see Publication 523. 1040ez free online file Adoption Tax Benefits If you claim an adoption credit for the cost of improvements you added to the basis of your home, decrease the basis of your home by the credit allowed. 1040ez free online file This also applies to amounts you received under an employer's adoption assistance program and excluded from income. 1040ez free online file For more information Form 8839, Qualified Adoption Expenses. 1040ez free online file Employer-Provided Child Care If you are an employer, you can claim the employer-provided child care credit on amounts you paid or incurred to acquire, construct, rehabilitate, or expand property used as part of your qualified child care facility. 1040ez free online file You must reduce your basis in that property by the credit claimed. 1040ez free online file For more information, see Form 8882, Credit for Employer-Provided Child Care Facilities and Services. 1040ez free online file Adjustments to Basis Example In January 2005, you paid $80,000 for real property to be used as a factory. 1040ez free online file You also paid commissions of $2,000 and title search and legal fees of $600. 1040ez free online file You allocated the total cost of $82,600 between the land and the building—$10,325 for the land and $72,275 for the building. 1040ez free online file Immediately you spent $20,000 in remodeling the building before you placed it in service. 1040ez free online file You were allowed depreciation of $14,526 for the years 2005 through 2009. 1040ez free online file In 2008 you had a $5,000 casualty loss from a that was not covered by insurance on the building. 1040ez free online file You claimed a deduction for this loss. 1040ez free online file You spent $5,500 to repair the damages and extend the useful life of the building. 1040ez free online file The adjusted basis of the building on January 1, 2010, is figured as follows: Original cost of building including fees and commissions $72,275 Adjustments to basis:     Add:         Improvements 20,000   Repair of damages 5,500       $97,775 Subtract:       Depreciation $14,526     Deducted casualty loss 5,000 19,526 Adjusted basis on January 1, 2010 $78,249 The basis of the land, $10,325, remains unchanged. 1040ez free online file It is not affected by any of the above adjustments. 1040ez free online file Basis Other Than Cost There are many times when you cannot use cost as basis. 1040ez free online file In these cases, the fair market value or the adjusted basis of property may be used. 1040ez free online file Adjusted basis is discussed earlier. 1040ez free online file Fair market value (FMV). 1040ez free online file   FMV is the price at which 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. 1040ez free online file Sales of similar property on or about the same date may be helpful in figuring the property's FMV. 1040ez free online file Property Received for Services If you receive property for services, include the property's FMV in income. 1040ez free online file The amount you include in income becomes your basis. 1040ez free online file If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary. 1040ez free online file Bargain Purchases A bargain purchase is a purchase of an item for less than its FMV. 1040ez free online file If, as compensation for services, you purchase goods or other property at less than FMV, include the difference between the purchase price and the property's FMV in your income. 1040ez free online file Your basis in the property is its FMV (your purchase price plus the amount you include in income). 1040ez free online file If the difference between your purchase price and the FMV represents a qualified employee discount, do not include the difference in income. 1040ez free online file However, your basis in the property is still its FMV. 1040ez free online file See Employee Discounts in Publication 15-B. 1040ez free online file Restricted Property If you receive property for your services and the property is subject to certain restrictions, your basis in the property is its FMV when it becomes substantially vested unless you make the election discussed later. 1040ez free online file Property becomes substantially vested when your rights in the property or the rights of any person to whom you transfer the property are not subject to a substantial risk of forfeiture. 1040ez free online file There is substantial risk of forfeiture when the rights to full enjoyment of the property depend on the future performance of substantial services by any person. 1040ez free online file When the property becomes substantially vested, include the FMV, less any amount you paid for the property, in income. 1040ez free online file Example. 1040ez free online file Your employer gives you stock for services performed under the condition that you will have to return the stock unless you complete 5 years of service. 1040ez free online file The stock is under a substantial risk of forfeiture and is not substantially vested when you receive it. 1040ez free online file You do not report any income until you have completed the 5 years of service that satisfy the condition. 1040ez free online file Fair market value. 1040ez free online file   Figure the FMV of property you received without considering any restriction except one that by its terms will never end. 1040ez free online file Example. 1040ez free online file You received stock from your employer for services you performed. 1040ez free online file If you want to sell the stock while you are still employed, you must sell the stock to your employer at book value. 1040ez free online file At your retirement or death, you or your estate must offer to sell the stock to your employer at its book value. 1040ez free online file This is a restriction that by its terms will never end and you must consider it when you figure the FMV. 1040ez free online file Election. 1040ez free online file   You can choose to include in your gross income the FMV of the property at the time of transfer, less any amount you paid for it. 1040ez free online file If you make this choice, the substantially vested rules do not apply. 1040ez free online file Your basis is the amount you paid plus the amount you included in income. 1040ez free online file   See the discussion of Restricted Property in Publication 525 for more information. 1040ez free online file Taxable Exchanges A taxable exchange is one in which the gain is taxable or the loss is deductible. 1040ez free online file A taxable gain or deductible loss is also known as a recognized gain or loss. 1040ez free online file If you receive property in exchange for other property in a taxable exchange, the basis of property you receive is usually its FMV at the time of the exchange. 1040ez free online file A taxable exchange occurs when you receive cash or property not similar or related in use to the property exchanged. 1040ez free online file Example. 1040ez free online file You trade a tract of farm land with an adjusted basis of $3,000 for a tractor that has an FMV of $6,000. 1040ez free online file You must report a taxable gain of $3,000 for the land. 1040ez free online file The tractor has a basis of $6,000. 1040ez free online file Involuntary Conversions If you receive property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, you can figure the basis of the replacement property you receive using the basis of the converted property. 1040ez free online file Similar or related property. 1040ez free online file   If you receive replacement property similar or related in service or use to the converted property, the replacement property's basis is the old property's basis on the date of the conversion. 1040ez free online file However, make the following adjustments. 1040ez free online file Decrease the basis by the following. 1040ez free online file Any loss you recognize on the conversion, and Any money you receive that you do not spend on similar property. 1040ez free online file Increase the basis by the following. 1040ez free online file Any gain you recognize on the conversion, and Any cost of acquiring the replacement property. 1040ez free online file Money or property not similar or related. 1040ez free online file   If you receive money or property not similar or related in service or use to the converted property, and you buy replacement property similar or related in service or use to the converted property, the basis of the new property is its cost decreased by the gain not recognized on the conversion. 1040ez free online file Example. 1040ez free online file The state condemned your property. 1040ez free online file The property had an adjusted basis of $26,000 and the state paid you $31,000 for it. 1040ez free online file You realized a gain of $5,000 ($31,000 − $26,000). 1040ez free online file You bought replacement property similar in use to the converted property for $29,000. 1040ez free online file You recognize a gain of $2,000 ($31,000 − $29,000), the unspent part of the payment from the state. 1040ez free online file Your gain not recognized is $3,000, the difference between the $5,000 realized gain and the $2,000 recognized gain. 1040ez free online file The basis of the new property is figured as follows: Cost of replacement property $29,000 Minus: Gain not recognized 3,000 Basis of the replacement property $26,000 Allocating the basis. 1040ez free online file   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. 1040ez free online file Example. 1040ez free online file The state in the previous example condemned your unimproved real property and the replacement property you bought was improved real property with both land and buildings. 1040ez free online file Allocate the replacement property's $26,000 basis between land and buildings based on their respective costs. 1040ez free online file More information. 1040ez free online file   For more information about condemnations, see Involuntary Conversions in Publication 544. 1040ez free online file For more information about casualty and theft losses, see Publication 547. 1040ez free online file Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. 1040ez free online file If you receive property in a nontaxable exchange, its basis is usually the same as the basis of the property you transferred. 1040ez free online file A nontaxable gain or loss is also known as an unrecognized gain or loss. 1040ez free online file Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. 1040ez free online file To qualify as a like-kind exchange, you must hold for business or investment purposes both the property you transfer and the property you receive. 1040ez free online file There must also be an exchange of like-kind property. 1040ez free online file For more information, see Like-Kind Exchanges in Publication 544. 1040ez free online file The basis of the property you receive is the same as the basis of the property you gave up. 1040ez free online file Example. 1040ez free online file You exchange real estate (adjusted basis $50,000, FMV $80,000) held for investment for other real estate (FMV $80,000) held for investment. 1040ez free online file Your basis in the new property is the same as the basis of the old ($50,000). 1040ez free online file Exchange expenses. 1040ez free online file   Exchange expenses are generally the closing costs you pay. 1040ez free online file They include such items as brokerage commissions, attorney fees, deed preparation fees, etc. 1040ez free online file Add them to the basis of the like-kind property received. 1040ez free online file Property plus cash. 1040ez free online file   If you trade property in a like-kind exchange and also pay money, the basis of the property received is the basis of the property you gave up increased by the money you paid. 1040ez free online file Example. 1040ez free online file You trade in a truck (adjusted basis $3,000) for another truck (FMV $7,500) and pay $4,000. 1040ez free online file Your basis in the new truck is $7,000 (the $3,000 basis of the old truck plus the $4,000 paid). 1040ez free online file Special rules for related persons. 1040ez free online file   If a like-kind exchange takes place directly or indirectly between related persons and either party disposes of the property within 2 years after the exchange, the exchange no longer qualifies for like-kind exchange treatment. 1040ez free online file Each person must report any gain or loss not recognized on the original exchange. 1040ez free online file Each person reports it on the tax return filed for the year in which the later disposition occurs. 1040ez free online file If this rule applies, the basis of the property received in the original exchange will be its fair market value. 1040ez free online file   These rules generally do not apply to the following kinds of property dispositions. 1040ez free online file Dispositions due to the death of either related person, Involuntary conversions, and Dispositions in which neither the original exchange nor the subsequent disposition had as a main purpose the avoidance of federal income tax. 1040ez free online file Related persons. 1040ez free online file   Generally, related persons are ancestors, lineal descendants, brothers and sisters (whole or half), and a spouse. 1040ez free online file   For other related persons (for example, two corporations, an individual and a corporation, a grantor and fiduciary, etc. 1040ez free online file ), see Nondeductible Loss in chapter 2 of Publication 544. 1040ez free online file Exchange of business property. 1040ez free online file   Exchanging the assets of one business for the assets of another business is a multiple property exchange. 1040ez free online file For information on figuring basis, see Multiple Property Exchanges in chapter 1 of Publication 544. 1040ez free online file Partially Nontaxable Exchange A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like property. 1040ez free online file The basis of the property you receive is the same as the basis of the property you gave up, with the following adjustments. 1040ez free online file Decrease the basis by the following amounts. 1040ez free online file Any money you receive, and Any loss you recognize on the exchange. 1040ez free online file Increase the basis by the following amounts. 1040ez free online file Any additional costs you incur, and Any gain you recognize on the exchange. 1040ez free online file If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. 1040ez free online file Example. 1040ez free online file You traded a truck (adjusted basis $6,000) for a new truck (FMV $5,200) and $1,000 cash. 1040ez free online file You realized a gain of $200 ($6,200 − $6,000). 1040ez free online file This is the FMV of the truck received plus the cash minus the adjusted basis of the truck you traded ($5,200 + $1,000 – $6,000). 1040ez free online file You include all the gain in income (recognized gain) because the gain is less than the cash received. 1040ez free online file Your basis in the new truck is: Adjusted basis of old truck $6,000 Minus: Cash received (adjustment 1(a)) 1,000   $5,000 Plus: Gain recognized (adjustment 2(b)) 200 Basis of new truck $5,200 Allocation of basis. 1040ez free online file   Allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. 1040ez free online file The rest is the basis of the like property. 1040ez free online file Example. 1040ez free online file You had an adjusted basis of $15,000 in real estate you held for investment. 1040ez free online file You exchanged it for other real estate to be held for investment with an FMV of $12,500, a truck with an FMV of $3,000, and $1,000 cash. 1040ez free online file The truck is unlike property. 1040ez free online file You realized a gain of $1,500 ($16,500 − $15,000). 1040ez free online file This is the FMV of the real estate received plus the FMV of the truck received plus the cash minus the adjusted basis of the real estate you traded ($12,500 + $3,000 + $1,000 – $15,000). 1040ez free online file You include in income (recognize) all $1,500 of the gain because it is less than the FMV of the unlike property plus the cash received. 1040ez free online file Your basis in the properties you received is figured as follows. 1040ez free online file Adjusted basis of real estate transferred $15,000 Minus: Cash received (adjustment 1(a)) 1,000   $14,000 Plus: Gain recognized (adjustment 2(b)) 1,500 Total basis of properties received $15,500 Allocate the total basis of $15,500 first to the unlike property — the truck ($3,000). 1040ez free online file This is the truck's FMV. 1040ez free online file The rest ($12,500) is the basis of the real estate. 1040ez free online file Sale and Purchase If you sell property and buy similar property in two mutually dependent transactions, you may have to treat the sale and purchase as a single nontaxable exchange. 1040ez free online file Example. 1040ez free online file You are a salesperson and you use one of your cars 100% for business. 1040ez free online file You have used this car in your sales activities for 2 years and have depreciated it. 1040ez free online file Your adjusted basis in the car is $22,600 and its FMV is $23,100. 1040ez free online file You are interested in a new car, which sells for $28,000. 1040ez free online file If you trade your old car and pay $4,900 for the new one, your basis for depreciation for the new car would be $27,500 ($4,900 plus the $22,600 basis of your old car). 1040ez free online file However, you want a higher basis for depreciating the new car, so you agree to pay the dealer $28,000 for the new car if he will pay you $23,100 for your old car. 1040ez free online file Because the two transactions are dependent on each other, you are treated as having exchanged your old car for the new one and paid $4,900 ($28,000 − $23,100). 1040ez free online file Your basis for depreciating the new car is $27,500, the same as if you traded the old car. 1040ez free online file Partial Business Use of Property If you have property used partly for business and partly for personal use, and you exchange it in a nontaxable exchange for property to be used wholly or partly in your business, the basis of the property you receive is figured as if you had exchanged two properties. 1040ez free online file The first is an exchange of like-kind property. 1040ez free online file The second is personal-use property on which gain is recognized and loss is not recognized. 1040ez free online file First, figure your adjusted basis in the property as if you transferred two separate properties. 1040ez free online file Figure the adjusted basis of each part of the property by taking into account any adjustments to basis. 1040ez free online file Deduct the depreciation you took or could have taken from the adjusted basis of the business part. 1040ez free online file Then figure the amount realized for your property and allocate it to the business and nonbusiness parts of the property. 1040ez free online file The business part of the property is permitted to be exchanged tax free. 1040ez free online file However, you must recognize any gain from the exchange of the nonbusiness part. 1040ez free online file You are deemed to have received, in exchange for the nonbusiness part, an amount equal to its FMV on the date of the exchange. 1040ez free online file The basis of the property you acquired is the total basis of the property transferred (adjusted to the date of the exchange), increased by any gain recognized on the nonbusiness part. 1040ez free online file If the nonbusiness part of the property transferred is your main home, you may qualify to exclude from income all or part of the gain on that part. 1040ez free online file For more information, see Publication 523. 1040ez free online file Trade of car used partly in business. 1040ez free online file   If you trade in a car you used partly in your business for another car you will use in your business, your basis for depreciation of the new car is not the same as your basis for figuring a gain or loss on its sale. 1040ez free online file   For information on figuring your basis for depreciation, see Publication 463. 1040ez free online file Property Transferred From a Spouse The basis of property transferred to you or transferred in trust for your benefit by your spouse (or former spouse if the transfer is incident to divorce), is the same as your spouse's adjusted basis. 1040ez free online file However, adjust your basis for any gain recognized by your spouse or former spouse on property transferred in trust. 1040ez free online file This rule applies only to a transfer of property in trust in which the liabilities assumed, plus the liabilities to which the property is subject, are more than the adjusted basis of the property transferred. 1040ez free online file If the property transferred to you is a series E, series EE, or series I United States savings bond, the transferor must include in income the interest accrued to the date of transfer. 1040ez free online file Your basis in the bond immediately after the transfer is equal to the transferor's basis increased by the interest income includible in the transferor's income. 1040ez free online file For more information on these bonds, see Publication 550. 1040ez free online file At the time of the transfer, the transferor must give you the records necessary to determine the adjusted basis and holding period of the property as of the date of transfer. 1040ez free online file For more information, see Publication 504, Divorced or Separated Individuals. 1040ez free online file Property Received as a Gift To figure the basis of property you receive as a gift, you must know its adjusted basis (defined earlier) to the donor just before it was given to you, its FMV at the time it was given to you, and any gift tax paid on it. 1040ez free online file FMV Less Than Donor's Adjusted Basis If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. 1040ez free online file Your basis for figuring gain is the same as the donor's adjusted basis plus or minus any required adjustment to basis while you held the property. 1040ez free online file Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustment to basis while you held the property (see Adjusted Basis earlier). 1040ez free online file If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and have a gain, you have neither gain nor loss on the sale or disposition of the property. 1040ez free online file Example. 1040ez free online file You received an acre of land as a gift. 1040ez free online file At the time of the gift, the land had an FMV of $8,000. 1040ez free online file The donor's adjusted basis was $10,000. 1040ez free online file After you received the land, no events occurred to increase or decrease your basis. 1040ez free online file If you sell the land for $12,000, you will have a $2,000 gain because you must use the donor's adjusted basis ($10,000) at the time of the gift as your basis to figure gain. 1040ez free online file If you sell the land for $7,000, you will have a $1,000 loss because you must use the FMV ($8,000) at the time of the gift as your basis to figure a loss. 1040ez free online file If the sales price is between $8,000 and $10,000, you have neither gain nor loss. 1040ez free online file For instance, if the sales price was $9,000 and you tried to figure a gain using the donor's adjusted basis ($10,000), you would get a $1,000 loss. 1040ez free online file If you then tried to figure a loss using the FMV ($8,000), you would get a $1,000 gain. 1040ez free online file Business property. 1040ez free online file   If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deduction is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property. 1040ez free online file FMV Equal to or More Than Donor's Adjusted Basis If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis at the time you received the gift. 1040ez free online file Increase your basis by all or part of any gift tax paid, depending on the date of the gift. 1040ez free online file Also, for figuring gain or loss from a sale or other disposition of the property, or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis by any required adjustments to basis while you held the property. 1040ez free online file See Adjusted Basis earlier. 1040ez free online file Gift received before 1977. 1040ez free online file   If you received a gift before 1977, increase your basis in the gift (the donor's adjusted basis) by any gift tax paid on it. 1040ez free online file However, do not increase your basis above the FMV of the gift at the time it was given to you. 1040ez free online file Example 1. 1040ez free online file You were given a house in 1976 with an FMV of $21,000. 1040ez free online file The donor's adjusted basis was $20,000. 1040ez free online file The donor paid a gift tax of $500. 1040ez free online file Your basis is $20,500, the donor's adjusted basis plus the gift tax paid. 1040ez free online file Example 2. 1040ez free online file If, in Example 1, the gift tax paid had been $1,500, your basis would be $21,000. 1040ez free online file This is the donor's adjusted basis plus the gift tax paid, limited to the FMV of the house at the time you received the gift. 1040ez free online file Gift received after 1976. 1040ez free online file   If you received a gift after 1976, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it that is due to the net increase in value of the gift. 1040ez free online file Figure the increase by multiplying the gift tax paid by a fraction. 1040ez free online file The numerator of the fraction is the net increase in value of the gift and the denominator is the amount of the gift. 1040ez free online file   The net increase in value of the gift is the FMV of the gift less the donor's adjusted basis. 1040ez free online file The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. 1040ez free online file For information on the gift tax, see Publication 950, Introduction to Estate and Gift Taxes. 1040ez free online file Example. 1040ez free online file In 2010, you received a gift of property from your mother that had an FMV of $50,000. 1040ez free online file Her adjusted basis was $20,000. 1040ez free online file The amount of the gift for gift tax purposes was $37,000 ($50,000 minus the $13,000 annual exclusion). 1040ez free online file She paid a gift tax of $9,000. 1040ez free online file Your basis, $27,290, is figured as follows: Fair market value $50,000 Minus: Adjusted basis 20,000 Net increase in value $30,000 Gift tax paid $9,000 Multiplied by ($30,000 ÷ $37,000) . 1040ez free online file 81 Gift tax due to net increase in value $7,290 Adjusted basis of property to your mother 20,000 Your basis in the property $27,290 Inherited Property Special rules apply to property acquired from a decedent who died in 2010. 1040ez free online file See Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, for details. 1040ez free online file If you inherited property from a decedent who died before 2010, your basis in property you inherit from a decedent is generally one of the following. 1040ez free online file The FMV of the property at the date of the individual's death. 1040ez free online file The FMV on the alternate valuation date if the personal representative for the estate chooses to use alternate valuation. 1040ez free online file For information on the alternate valuation date, see the Instructions for Form 706. 1040ez free online file The value under the special-use valuation method for real property used in farming or a closely held business if chosen for estate tax purposes. 1040ez free online file This method is discussed later. 1040ez free online file The decedent's adjusted basis in land to the extent of the value excluded from the decedent's taxable estate as a qualified conservation easement. 1040ez free online file For information on a qualified conservation easement, see the Instructions for Form 706. 1040ez free online file If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. 1040ez free online file For more information, see the Instructions for Form 706. 1040ez free online file Appreciated property. 1040ez free online file   The above rule does not apply to appreciated property you receive from a decedent if you or your spouse originally gave the property to the decedent within 1 year before the decedent's death. 1040ez free online file Your basis in this property is the same as the decedent's adjusted basis in the property immediately before his or her death, rather than its FMV. 1040ez free online file Appreciated property is any property whose FMV on the day it was given to the decedent is more than its adjusted basis. 1040ez free online file Community Property In community property states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), husband and wife are each usually considered to own half the community property. 1040ez free online file When either spouse dies, the total value of the community property, even the part belonging to the surviving spouse, generally becomes the basis of the entire property. 1040ez free online file For this rule to apply, at least half the value of the community property interest must be includable in the decedent's gross estate, whether or not the estate must file a return. 1040ez free online file For example, you and your spouse owned community property that had a basis of $80,000. 1040ez free online file When your spouse died, half the FMV of the community interest was includible in your spouse's estate. 1040ez free online file The FMV of the community interest was $100,000. 1040ez free online file The basis of your half of the property after the death of your spouse is $50,000 (half of the $100,000 FMV). 1040ez free online file The basis of the other half to your spouse's heirs is also $50,000. 1040ez free online file For more information on community property, see Publication 555, Community Property. 1040ez free online file Property Held by Surviving Tenant The following example explains the rule for the basis of property held by a surviving tenant in joint tenancy or tenancy by the entirety. 1040ez free online file Example. 1040ez free online file John and Jim owned, as joint tenants with right of survivorship, business property they purchased for $30,000. 1040ez free online file John furnished two-thirds of the purchase price and Jim furnished one-third. 1040ez free online file Depreciation deductions allowed before John's death were $12,000. 1040ez free online file Under local law, each had a half interest in the income from the property. 1040ez free online file At the date of John's death, the property had an FMV of $60,000, two-thirds of which is includable in John's estate. 1040ez free online file Jim figures his basis in the property at the date of John's death as follows: Interest Jim bought with his own funds—1/3 of $30,000 cost $10,000   Interest Jim received on John's death—2/3 of $60,000 FMV 40,000 $50,000 Minus: ½ of $12,000 depreciation before John's death 6,000 Jim's basis at the date of John's death $44,000 If Jim had not contributed any part of the purchase price, his basis at the date of John's death would be $54,000. 1040ez free online file This is figured by subtracting from the $60,000 FMV, the $6,000 depreciation allocated to Jim's half interest before the date of death. 1040ez free online file If under local law Jim had no interest in the income from the property and he contributed no part of the purchase price, his basis at John's death would be $60,000, the FMV of the property. 1040ez free online file Qualified Joint Interest Include one-half of the value of a qualified joint interest in the decedent's gross estate. 1040ez free online file It does not matter how much each spouse contributed to the purchase price. 1040ez free online file Also, it does not matter which spouse dies first. 1040ez free online file A qualified joint interest is any interest in property held by husband and wife as either of the following. 1040ez free online file Tenants by the entirety, or Joint tenants with right of survivorship if husband and wife are the only joint tenants. 1040ez free online file Basis. 1040ez free online file   As the surviving spouse, your basis in property you owned with your spouse as a qualified joint interest is the cost of your half of the property with certain adjustments. 1040ez free online file Decrease the cost by any deductions allowed to you for depreciation and depletion. 1040ez free online file Increase the reduced cost by your basis in the half you inherited. 1040ez free online file Farm or Closely Held Business Under certain conditions, when a person dies the executor or personal representative of that person's estate can choose to value the qualified real property on other than its FMV. 1040ez free online file If so, the executor or personal representative values the qualified real property based on its use as a farm or its use in a closely held business. 1040ez free online file If the executor or personal representative chooses this method of valuation for estate tax purposes, that value is the basis of the property for the heirs. 1040ez free online file Qualified heirs should be able to get the necessary value from the executor or personal representative of the estate. 1040ez free online file Special-use valuation. 1040ez free online file   If you are a qualified heir who received special-use valuation property, your basis in the property is the estate's or trust's basis in that property immediately before the distribution. 1040ez free online file Increase your basis by any gain recognized by the estate or trust because of post-death appreciation. 1040ez free online file Post-death appreciation is the property's FMV on the date of distribution minus the property's FMV either on the date of the individual's death or the alternate valuation date. 1040ez free online file Figure all FMVs without regard to the special-use valuation. 1040ez free online file   You can elect to increase your basis in special-use valuation property if it becomes subject to the additional estate tax. 1040ez free online file This tax is assessed if, within 10 years after the death of the decedent, you transfer the property to a person who is not a member of your family or the property stops being used as a farm or in a closely held business. 1040ez free online file   To increase your basis in the property, you must make an irrevocable election and pay interest on the additional estate tax figured from the date 9 months after the decedent's death until the date of the payment of the additional estate tax. 1040ez free online file If you meet these requirements, increase your basis in the property to its FMV on the date of the decedent's death or the alternate valuation date. 1040ez free online file The increase in your basis is considered to have occurred immediately before the event that results in the additional estate tax. 1040ez free online file   You make the election by filing with Form 706-A a statement that does all of the following. 1040ez free online file Contains your name, address, and taxpayer identification number and those of the estate; Identifies the election as an election under section 1016(c) of the Internal Revenue Code; Specifies the property for which the election is made; and Provides any additional information required by the Instructions for Form 706-A. 1040ez free online file   For more information, see the Instructions for Form 706 and the Instructions for Form 706-A. 1040ez free online file Property Changed to Business or Rental Use If you hold property for personal use and then change it to business use or use it to produce rent, you must figure its basis for depreciation. 1040ez free online file An example of changing property held for personal use to business use would be renting out your former main home. 1040ez free online file Basis for depreciation. 1040ez free online file   The basis for depreciation is the lesser of the following amounts. 1040ez free online file The FMV of the property on the date of the change, or Your adjusted basis on the date of the change. 1040ez free online file Example. 1040ez free online file Several years ago you paid $160,000 to have your home built on a lot that cost $25,000. 1040ez free online file You paid $20,000 for permanent improvements to the house and claimed a $2,000 casualty loss deduction for damage to the house before changing the property to rental use last year. 1040ez free online file Because land is not depreciable, you include only the cost of the house when figuring the basis for depreciation. 1040ez free online file Your adjusted basis in the house when you changed its use was $178,000 ($160,000 + $20,000 − $2,000). 1040ez free online file On the same date, your property had an FMV of $180,000, of which $15,000 was for the land and $165,000 was for the house. 1040ez free online file The basis for figuring depreciation on the house is its FMV on the date of change ($165,000) because it is less than your adjusted basis ($178,000). 1040ez free online file Sale of property. 1040ez free online file   If you later sell or dispose of property changed to business or rental use, the basis of the property you use will depend on whether you are figuring gain or loss. 1040ez free online file Gain. 1040ez free online file   The basis for figuring a gain is your adjusted basis when you sell the property. 1040ez free online file Example. 1040ez free online file Assume the same facts as in the previous example except that you sell the property at a gain after being allowed depreciation deductions of $37,500. 1040ez free online file Your adjusted basis for figuring gain is $165,500 ($178,000 + $25,000 (land) − $37,500). 1040ez free online file Loss. 1040ez free online file   Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. 1040ez free online file Then adjust this amount for the period after the change in the property's use, as discussed earlier under Adjusted Basis, to arrive at a basis for loss. 1040ez free online file Example. 1040ez free online file Assume the same facts as in the previous example, except that you sell the property at a loss after being allowed depreciation deductions of $37,500. 1040ez free online file In this case, you would start with the FMV on the date of the change to rental use ($180,000) because it is less than the adjusted basis of $203,000 ($178,000 + $25,000) on that date. 1040ez free online file Reduce that amount ($180,000) by the depreciation deductions to arrive at a basis for loss of $142,500 ($180,000 − $37,500). 1040ez free online file How To Get Tax Help You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get more information from the IRS in several ways. 1040ez free online file By selecting the method that is best for you, you will have quick and easy access to tax help. 1040ez free online file Contacting your Taxpayer Advocate. 1040ez free online file   The Taxpayer Advocate Service (TAS) is an independent organization within the IRS. 1040ez free online file We help taxpayers who are experiencing economic harm, such as not being able to provide necessities like housing, transportation, or food; taxpayers who are seeking help in resolving tax problems with the IRS; and those who believe that an IRS system or procedure is not working as it should. 1040ez free online file Here are seven things every taxpayer should know about TAS. 1040ez free online file TAS is your voice at the IRS. 1040ez free online file Our service is free, confidential, and tailored to meet your needs. 1040ez free online file You may be eligible for our help if you have tried to resolve your tax problem through normal IRS channels and have gotten nowhere, or you believe an IRS procedure just isn't working as it should. 1040ez free online file We help taxpayers whose problems are causing financial difficulty or significant cost, including the cost of professional representation. 1040ez free online file This includes businesses as well as individuals. 1040ez free online file Our employees know the IRS and how to navigate it. 1040ez free online file If you qualify for our help, we'll assign your case to an advocate who will listen to your problem, help you understand what needs to be done to resolve it, and stay with you every step of the way until your problem is resolved. 1040ez free online file We have at least one local taxpayer advocate in every state, the District of Columbia, and Puerto Rico. 1040ez free online file You can call your local advocate, whose number is in your phone book, in Publication 1546, Taxpayer Advocate Service—Your Voice at the IRS, and on our website at www. 1040ez free online file irs. 1040ez free online file gov/advocate. 1040ez free online file You can also call our toll-free line at 1-877-777-4778 or TTY/TDD 1-800-829-4059. 1040ez free online file You can learn about your rights and responsibilities as a taxpayer by visiting our online tax toolkit at www. 1040ez free online file taxtoolkit. 1040ez free online file irs. 1040ez free online file gov. 1040ez free online file You can get updates on hot tax topics by visiting our YouTube channel at www. 1040ez free online file youtube. 1040ez free online file com/tasnta and our Facebook page at www. 1040ez free online file facebook. 1040ez free online file com/YourVoiceAtIRS, or by following our tweets at www. 1040ez free online file twitter. 1040ez free online file com/YourVoiceAtIRS. 1040ez free online file Low Income Taxpayer Clinics (LITCs). 1040ez free online file   The Low Income Taxpayer Clinic program serves individuals who have a problem with the IRS and whose income is below a certain level. 1040ez free online file LITCs are independent from the IRS. 1040ez free online file Most LITCs can provide representation before the IRS or in court on audits, tax collection disputes, and other issues for free or a small fee. 1040ez free online file If an individual's native language is not English, some clinics can provide multilingual information about taxpayer rights and responsibilities. 1040ez free online file For more information, see Publication 4134, Low Income Taxpayer Clinic List. 1040ez free online file This publication is available at IRS. 1040ez free online file gov, by calling 1-800-TAX-FORM (1-800-829-3676), or at your local IRS office. 1040ez free online file Free tax services. 1040ez free online file   Publication 910, IRS Guide to Free Tax Services, is your guide to IRS services and resources. 1040ez free online file Learn about free tax information from the IRS, including publications, services, and education and assistance programs. 1040ez free online file The publication also has an index of over 100 TeleTax topics (recorded tax information) you can listen to on the telephone. 1040ez free online file The majority of the information and services listed in this publication are available to you free of charge. 1040ez free online file If there is a fee associated with a resource or service, it is listed in the publication. 1040ez free online file   Accessible versions of IRS published products are available on request in a variety of alternative formats for people with d