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2012 Tax Form

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2012 Tax Form

2012 tax form 8. 2012 tax form   Gains and Losses Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Sales and ExchangesDetermining Gain or Loss Like-Kind Exchanges Transfer to Spouse Ordinary or Capital Gain or LossCapital Assets Noncapital Assets Hedging (Commodity Futures) Livestock Converted Wetland and Highly Erodible Cropland Timber Sale of a Farm Foreclosure or Repossession Abandonment Introduction This chapter explains how to figure, and report on your tax return, your gain or loss on the disposition of your property or debt and whether such gain or loss is ordinary or capital. 2012 tax form Ordinary gain is taxed at the same rates as wages and interest income while capital gain is generally taxed at lower rates. 2012 tax form Dispositions discussed in this chapter include sales, exchanges, foreclosures, repossessions, canceled debts, hedging transactions, and elections to treat cutting of timber as a sale or exchange. 2012 tax form Topics - This chapter discusses: Sales and exchanges Ordinary or capital gain or loss Useful Items - You may want to see: Publication 334 Tax Guide for Small Business 523 Selling Your Home 544 Sales and Other Dispositions of Assets 550 Investment Income and Expenses 908 Bankruptcy Tax Guide Form (and Instructions) 982 Reduction of Tax Attributes Due to Discharge of Indebtedness (and Section 1082 Basis Adjustment) Sch D (Form 1040) Capital Gains and Losses Sch F (Form 1040) Profit or Loss From Farming 1099-A Acquisition or Abandonment of Secured Property 1099-C Cancellation of Debt 4797 Sales of Business Property 8949 Sales and Other Dispositions of Capital Assets See chapter 16 for information about getting publications and forms. 2012 tax form Sales and Exchanges If you sell, exchange, or otherwise dispose of your property, you usually have a gain or a loss. 2012 tax form This section explains certain rules for determining whether any gain you have is taxable, and whether any loss you have is deductible. 2012 tax form A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. 2012 tax form An exchange is a transfer of property for other property or services. 2012 tax form Determining Gain or Loss You usually realize a gain or loss when you sell or exchange property. 2012 tax form If the amount you realize from a sale or exchange of property is more than its adjusted basis, you will have a gain. 2012 tax form If the adjusted basis of the property is more than the amount you realize, you will have a loss. 2012 tax form Basis and adjusted basis. 2012 tax form   The basis of property you buy is usually its cost. 2012 tax form The adjusted basis of property is basis plus certain additions and minus certain deductions. 2012 tax form See chapter 6 for more information about basis and adjusted basis. 2012 tax form Amount realized. 2012 tax form   The amount you realize from a sale or exchange is the total of all money you receive plus the fair market value (FMV) (defined in chapter 6) of all property or services you receive. 2012 tax form The amount you realize also includes any of your liabilities assumed by the buyer and any liabilities to which the property you transferred is subject, such as real estate taxes or a mortgage. 2012 tax form   If the liabilities relate to an exchange of multiple properties, see Multiple Property Exchanges in chapter 1 of Publication 544. 2012 tax form Amount recognized. 2012 tax form   Your gain or loss realized from a sale or exchange of certain property is usually a recognized gain or loss for tax purposes. 2012 tax form A recognized gain is a gain you must include in gross income and report on your income tax return. 2012 tax form A recognized loss is a loss you deduct from gross income. 2012 tax form However, your gain or loss realized from the exchange of certain property may not be recognized for tax purposes. 2012 tax form See Like-Kind Exchanges next. 2012 tax form Also, a loss from the disposition of property held for personal use is not deductible. 2012 tax form Like-Kind Exchanges Certain exchanges of property are not taxable. 2012 tax form This means any gain from the exchange is not recognized, and any loss cannot be deducted. 2012 tax form Your gain or loss will not be recognized until you sell or otherwise dispose of the property you receive. 2012 tax form The exchange of property for the same kind of property is the most common type of nontaxable exchange. 2012 tax form To qualify for treatment as a like-kind exchange, the property traded and the property received must be both of the following. 2012 tax form Qualifying property. 2012 tax form Like-kind property. 2012 tax form These two requirements are discussed later. 2012 tax form Multiple-party transactions. 2012 tax form   The like-kind exchange rules also apply to property exchanges that involve three and four-party transactions. 2012 tax form Any part of these multiple-party transactions can qualify as a like-kind exchange if it meets all the requirements described in this section. 2012 tax form Receipt of title from third party. 2012 tax form   If you receive property in a like-kind exchange and the other party who transfers the property to you does not give you the title, but a third party does, you can still treat this transaction as a like-kind exchange if it meets all the requirements. 2012 tax form Basis of property received. 2012 tax form   If you receive property in a like-kind exchange, the basis of the property will be the same as the basis of the property you gave up. 2012 tax form See chapter 6 for more information. 2012 tax form Money paid. 2012 tax form   If, in addition to giving up like-kind property, you pay money in a like-kind exchange, you still have no recognized gain or loss. 2012 tax form The basis of the property received is the basis of the property given up, increased by the money paid. 2012 tax form Example. 2012 tax form You traded an old tractor with an adjusted basis of $15,000 for a new one. 2012 tax form The new tractor costs $300,000. 2012 tax form You were allowed $80,000 for the old tractor and paid $220,000 cash. 2012 tax form You have no recognized gain or loss on the transaction regardless of the adjusted basis of your old tractor and the basis of the new tractor is $235,000, the adjusted basis of the old tractor plus the cash paid ($15,000 + $220,000). 2012 tax form If you had sold the old tractor to a third party for $80,000 and bought a new one, you would have a recognized gain or loss on the sale of your old tractor equal to the difference between the amount realized and the adjusted basis of the old tractor. 2012 tax form In this case, the taxable gain would be $65,000 ($80,000 − $15,000) and the basis of the new tractor would be $300,000. 2012 tax form Reporting the exchange. 2012 tax form   Report the exchange of like-kind property, even though no gain or loss is recognized, on Form 8824, Like-Kind Exchanges. 2012 tax form The Instructions for Form 8824 explain how to report the details of the exchange. 2012 tax form   If you have any recognized gain because you received money or unlike property, report it on Schedule D (Form 1040) or Form 4797, whichever applies. 2012 tax form You may also have to report the recognized gain as ordinary income because of depreciation recapture on Form 4797. 2012 tax form See chapter 9 for more information. 2012 tax form Qualifying property. 2012 tax form   In a like-kind exchange, both the property you give up and the property you receive must be held by you for investment or for productive use in your trade or business. 2012 tax form Machinery, buildings, land, trucks, breeding livestock, rental houses, and certain mutual ditch, reservoir, or irrigation company stock are examples of property that may qualify. 2012 tax form Nonqualifying property. 2012 tax form   The rules for like-kind exchanges do not apply to exchanges of the following property. 2012 tax form Property you use for personal purposes, such as your home and family car. 2012 tax form Stock in trade or other property held primarily for sale, such as crops and produce. 2012 tax form Stocks, bonds, or notes. 2012 tax form However, see Qualifying property above. 2012 tax form Other securities or evidences of indebtedness, such as accounts receivable. 2012 tax form Partnership interests. 2012 tax form However, you may have a nontaxable exchange under other rules. 2012 tax form See Other Nontaxable Exchanges in chapter 1 of Publication 544. 2012 tax form Like-kind property. 2012 tax form   To qualify as a nontaxable exchange, the properties exchanged must be of like kind. 2012 tax form Like-kind properties are properties of the same nature or character, even if they differ in grade or quality. 2012 tax form Generally, real property exchanged for real property qualifies as an exchange of like-kind property. 2012 tax form For example, an exchange of city property for farm property or improved property for unimproved property is a like-kind exchange. 2012 tax form   An exchange of a tractor for a new tractor is an exchange of like-kind property, and so is an exchange of timber land for crop acreage. 2012 tax form An exchange of a tractor for acreage, however, is not an exchange of like-kind property. 2012 tax form The exchange of livestock of one sex for livestock of the other sex is not a like-kind exchange. 2012 tax form For example, the exchange of a bull for a cow is not a like-kind exchange. 2012 tax form An exchange of the assets of a business for the assets of a similar business cannot be treated as an exchange of one property for another property. 2012 tax form    Note. 2012 tax form Whether you engaged in a like-kind exchange depends on an analysis of each asset involved in the exchange. 2012 tax form Personal property. 2012 tax form   Depreciable tangible personal property can be either like kind or like class to qualify for nontaxable exchange treatment. 2012 tax form Like-class properties are depreciable tangible personal properties within the same General Asset Class or Product Class. 2012 tax form Property classified in any General Asset Class may not be classified within a Product Class. 2012 tax form Assets that are not in the same class will qualify as like-kind property if they are of the same nature or character. 2012 tax form General Asset Classes. 2012 tax form   General Asset Classes describe the types of property frequently used in many businesses. 2012 tax form They include, but are not limited to, the following property. 2012 tax form Office furniture, fixtures, and equipment (asset class 00. 2012 tax form 11). 2012 tax form Information systems, such as computers and peripheral equipment (asset class 00. 2012 tax form 12). 2012 tax form Data handling equipment except computers (asset class 00. 2012 tax form 13). 2012 tax form Automobiles and taxis (asset class 00. 2012 tax form 22). 2012 tax form Light general purpose trucks (asset class 00. 2012 tax form 241). 2012 tax form Heavy general purpose trucks (asset class 00. 2012 tax form 242). 2012 tax form Tractor units for use over-the-road (asset class 00. 2012 tax form 26). 2012 tax form Trailers and trailer-mounted containers (asset class 00. 2012 tax form 27). 2012 tax form Industrial steam and electric generation and/or distribution systems (asset class 00. 2012 tax form 4). 2012 tax form Product Classes. 2012 tax form   Product Classes include property listed in a 6-digit product class in sectors 31 through 33 of the North American Industry Classification System (NAICS) of the Executive Office of the President, Office of Management and Budget, United States, (NAICS Manual). 2012 tax form The latest version of the manual can be accessed at www. 2012 tax form census. 2012 tax form gov/eos/www/naics/. 2012 tax form Copies of the printed manual may be purchased from the National Technical Information Service (NTIS) at  www. 2012 tax form ntis. 2012 tax form gov/products/naics. 2012 tax form aspx or by calling 1-800-553-NTIS (1-800-553-6847) or (703) 605-6000. 2012 tax form A CD-ROM version with search and retrieval software is also available from NTIS. 2012 tax form    NAICS class 333111, Farm Machinery and Equipment Manufacturing, includes most machinery and equipment used in a farming business. 2012 tax form Partially nontaxable exchange. 2012 tax form   If, in addition to like-kind property, you receive money or unlike property in an exchange on which you realize gain, you have a partially nontaxable exchange. 2012 tax form You are taxed on the gain you realize, but only to the extent of the money and the FMV of the unlike property you receive. 2012 tax form A loss is not deductible. 2012 tax form Example 1. 2012 tax form You trade farmland that cost $30,000 for $10,000 cash and other land to be used in farming with a FMV of $50,000. 2012 tax form You have a realized gain of $30,000 ($50,000 FMV of new land + $10,000 cash − $30,000 basis of old farmland = $30,000 realized gain). 2012 tax form However, only $10,000, the cash received, is recognized (included in income). 2012 tax form Example 2. 2012 tax form Assume the same facts as in Example 1, except that, instead of money, you received a tractor with a FMV of $10,000. 2012 tax form Your recognized gain is still limited to $10,000, the value of the tractor (the unlike property). 2012 tax form Example 3. 2012 tax form Assume in Example 1 that the FMV of the land you received was only $15,000. 2012 tax form Your $5,000 loss is not recognized. 2012 tax form Unlike property given up. 2012 tax form   If, in addition to like-kind property, you give up unlike property, you must recognize gain or loss on the unlike property you give up. 2012 tax form The gain or loss is the difference between the FMV of the unlike property and the adjusted basis of the unlike property. 2012 tax form Like-kind exchanges between related persons. 2012 tax form   Special rules apply to like-kind exchanges between related persons. 2012 tax form These rules affect both direct and indirect exchanges. 2012 tax form Under these rules, if either person disposes of the property within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. 2012 tax form The gain or loss on the original exchange must be recognized as of the date of the later disposition. 2012 tax form The 2-year holding period begins on the date of the last transfer of property that was part of the like-kind exchange. 2012 tax form Related persons. 2012 tax form   Under these rules, related persons include, for example, you and a member of your family (spouse, brother, sister, parent, child, etc. 2012 tax form ), you and a corporation in which you have more than 50% ownership, you and a partnership in which you directly or indirectly own more than a 50% interest of the capital or profits, and two partnerships in which you directly or indirectly own more than 50% of the capital interests or profits. 2012 tax form   For the complete list of related persons, see Related persons in chapter 2 of Publication 544. 2012 tax form Example. 2012 tax form You used a grey pickup truck in your farming business. 2012 tax form Your sister used a red pickup truck in her landscaping business. 2012 tax form In December 2012, you exchanged your grey pickup truck, plus $200, for your sister's red pickup truck. 2012 tax form At that time, the FMV of the grey pickup truck was $7,000 and its adjusted basis was $6,000. 2012 tax form The FMV of the red pickup truck was $7,200 and its adjusted basis was $1,000. 2012 tax form You realized a gain of $1,000 (the $7,200 FMV of the red pickup truck, minus the grey pickup truck's $6,000 adjusted basis, minus the $200 you paid). 2012 tax form Your sister realized a gain of $6,200 (the $7,000 FMV of the grey pickup truck plus the $200 you paid, minus the $1,000 adjusted basis of the red pickup truck). 2012 tax form However, because this was a like-kind exchange, you recognized no gain. 2012 tax form Your basis in the red pickup truck was $6,200 (the $6,000 adjusted basis of the grey pickup truck plus the $200 you paid). 2012 tax form She recognized gain only to the extent of the money she received, $200. 2012 tax form Her basis in the grey pickup truck was $1,000 (the $1,000 adjusted basis of the red pickup truck minus the $200 received, plus the $200 gain recognized). 2012 tax form In 2013, you sold the red pickup truck to a third party for $7,000. 2012 tax form Because you sold it within 2 years after the exchange, the exchange is disqualified from nonrecognition treatment. 2012 tax form On your tax return for 2013, you must report your $1,000 gain on the 2012 exchange. 2012 tax form You also report a loss on the sale as $200 (the adjusted basis of the red pickup truck, $7,200 (its $6,200 basis plus the $1,000 gain recognized), minus the $7,000 realized from the sale). 2012 tax form In addition, your sister must report on her tax return for 2013 the $6,000 balance of her gain on the 2012 exchange. 2012 tax form Her adjusted basis in the grey pickup truck is increased to $7,000 (its $1,000 basis plus the $6,000 gain recognized). 2012 tax form Exceptions to the rules for related persons. 2012 tax form   The following property dispositions are excluded from these rules. 2012 tax form Dispositions due to the death of either related person. 2012 tax form Involuntary conversions. 2012 tax form Dispositions where it is established to the satisfaction of the IRS that neither the exchange nor the disposition has, as a main purpose, the avoidance of federal income tax. 2012 tax form Multiple property exchanges. 2012 tax form   Under the like-kind exchange rules, you must generally make a property-by-property comparison to figure your recognized gain and the basis of the property you receive in the exchange. 2012 tax form However, for exchanges of multiple properties, you do not make a property-by-property comparison if you do either of the following. 2012 tax form Transfer and receive properties in two or more exchange groups. 2012 tax form Transfer or receive more than one property within a single exchange group. 2012 tax form   For more information, see Multiple Property Exchanges in chapter 1 of Publication 544. 2012 tax form Deferred exchange. 2012 tax form   A deferred exchange for like-kind property may qualify for nonrecognition of gain or loss. 2012 tax form A deferred exchange is an exchange in which you transfer property you use in business or hold for investment and later receive like-kind property you will use in business or hold for investment. 2012 tax form The property you receive is replacement property. 2012 tax form The transaction must be an exchange of property for property rather than a transfer of property for money used to buy replacement property. 2012 tax form In addition, the replacement property will not be treated as like-kind property unless certain identification and receipt requirements are met. 2012 tax form   For more information see Deferred Exchanges in chapter 1 of Publication 544. 2012 tax form Transfer to Spouse No gain or loss is recognized on a transfer of property from an individual to (or in trust for the benefit of) a spouse, or a former spouse if incident to divorce. 2012 tax form This rule does not apply if the recipient is a nonresident alien. 2012 tax form Nor does this rule apply to a transfer in trust to the extent the liabilities assumed and the liabilities on the property are more than the property's adjusted basis. 2012 tax form Any transfer of property to a spouse or former spouse on which gain or loss is not recognized is not considered a sale or exchange. 2012 tax form The recipient's basis in the property will be the same as the adjusted basis of the giver immediately before the transfer. 2012 tax form This carryover basis rule applies whether the adjusted basis of the transferred property is less than, equal to, or greater than either its FMV at the time of transfer or any consideration paid by the recipient. 2012 tax form This rule applies for determining loss as well as gain. 2012 tax form Any gain recognized on a transfer in trust increases the basis. 2012 tax form For more information on transfers of property incident to divorce, see Property Settlements in Publication 504, Divorced or Separated Individuals. 2012 tax form Ordinary or Capital Gain or Loss Generally, you will have a capital gain or loss if you sell or exchange a capital asset (defined below). 2012 tax form You may also have a capital gain if your section 1231 transactions result in a net gain. 2012 tax form See Section 1231 Gains and Losses in  chapter 9. 2012 tax form To figure your net capital gain or loss, you must classify your gains and losses as either ordinary or capital (and your capital gains or losses as either short-term or long-term). 2012 tax form Your net capital gains may be taxed at a lower tax rate than ordinary income. 2012 tax form See Capital Gains Tax Rates , later. 2012 tax form Your deduction for a net capital loss may be limited. 2012 tax form See Treatment of Capital Losses , later. 2012 tax form Capital Assets Almost everything you own and use for personal purposes or investment is a capital asset. 2012 tax form The following items are examples of capital assets. 2012 tax form A home owned and occupied by you and your family. 2012 tax form Household furnishings. 2012 tax form A car used for pleasure. 2012 tax form If your car is used both for pleasure and for farm business, it is partly a capital asset and partly a noncapital asset, defined later. 2012 tax form Stocks and bonds. 2012 tax form However, there are special rules for gains on qualified small business stock. 2012 tax form For more information on this subject, see Gains on Qualified Small Business Stock and Losses on Section 1244 (Small Business) Stock in chapter 4 of Publication 550. 2012 tax form Personal-use property. 2012 tax form   Gain from a sale or exchange of personal-use property is a capital gain and is taxable. 2012 tax form Loss from the sale or exchange of personal-use property is not deductible. 2012 tax form You can deduct a loss relating to personal-use property only if it results from a casualty or theft. 2012 tax form For information on casualties and thefts, see chapter 11. 2012 tax form Long and Short Term Where you report a capital gain or loss depends on how long you own the asset before you sell or exchange it. 2012 tax form The time you own an asset before disposing of it is the holding period. 2012 tax form If you hold a capital asset 1 year or less, the gain or loss resulting from its disposition is short term. 2012 tax form Report it in Part I of Schedule D (Form 1040). 2012 tax form If you hold a capital asset longer than 1 year, the gain or loss resulting from its disposition is long term. 2012 tax form Report it in Part II of Schedule D (Form 1040). 2012 tax form Holding period. 2012 tax form   To figure if you held property longer than 1 year, start counting on the day after the day you acquired the property. 2012 tax form The day you disposed of the property is part of your holding period. 2012 tax form Example. 2012 tax form If you bought an asset on June 19, 2012, you should start counting on June 20, 2012. 2012 tax form If you sold the asset on June 19, 2013, your holding period is not longer than 1 year, but if you sold it on June 20, 2013, your holding period is longer than 1 year. 2012 tax form Inherited property. 2012 tax form   If you inherit property, you are considered to have held the property longer than 1 year, regardless of how long you actually held it. 2012 tax form This rule does not apply to livestock used in a farm business. 2012 tax form See Holding period under Livestock , later. 2012 tax form Nonbusiness bad debt. 2012 tax form   A nonbusiness bad debt is a short-term capital loss, deductible in the year the debt becomes worthless. 2012 tax form See chapter 4 of Publication 550. 2012 tax form Nontaxable exchange. 2012 tax form   If you acquire an asset in exchange for another asset and your basis for the new asset is figured, in whole or in part, by using your basis in the old property, the holding period of the new property includes the holding period of the old property. 2012 tax form That is, it begins on the same day as your holding period for the old property. 2012 tax form Gift. 2012 tax form   If you receive a gift of property and your basis in it is figured using the donor's basis, your holding period includes the donor's holding period. 2012 tax form Real property. 2012 tax form   To figure how long you held real property, start counting on the day after you received title to it or, if earlier, on the day after you took possession of it and assumed the burdens and privileges of ownership. 2012 tax form   However, taking possession of real property under an option agreement is not enough to start the holding period. 2012 tax form The holding period cannot start until there is an actual contract of sale. 2012 tax form The holding period of the seller cannot end before that time. 2012 tax form Figuring Net Gain or Loss The totals for short-term capital gains and losses and the totals for long-term capital gains and losses must be figured separately. 2012 tax form Net short-term capital gain or loss. 2012 tax form   Combine your short-term capital gains and losses. 2012 tax form Do this by adding all of your short-term capital gains. 2012 tax form Then add all of your short-term capital losses. 2012 tax form Subtract the lesser total from the greater. 2012 tax form The difference is your net short-term capital gain or loss. 2012 tax form Net long-term capital gain or loss. 2012 tax form   Follow the same steps to combine your long-term capital gains and losses. 2012 tax form The result is your net long-term capital gain or loss. 2012 tax form Net gain. 2012 tax form   If the total of your capital gains is more than the total of your capital losses, the difference is taxable. 2012 tax form However, part of your gain (but not more than your net capital gain) may be taxed at a lower rate than the rate of tax on your ordinary income. 2012 tax form See Capital Gains Tax Rates , later. 2012 tax form Net loss. 2012 tax form   If the total of your capital losses is more than the total of your capital gains, the difference is deductible. 2012 tax form But there are limits on how much loss you can deduct and when you can deduct it. 2012 tax form See Treatment of Capital Losses next. 2012 tax form Treatment of Capital Losses If your capital losses are more than your capital gains, you must claim the difference even if you do not have ordinary income to offset it. 2012 tax form For taxpayers other than corporations, the yearly limit on the capital loss you can deduct is $3,000 ($1,500 if you are married and file a separate return). 2012 tax form If your other income is low, you may not be able to use the full $3,000. 2012 tax form The part of the $3,000 you cannot use becomes part of your capital loss carryover (discussed next). 2012 tax form Capital loss carryover. 2012 tax form   Generally, you have a capital loss carryover if either of the following situations applies to you. 2012 tax form Your net loss on Schedule D (Form 1040), is more than the yearly limit. 2012 tax form Your taxable income without your deduction for exemptions is less than zero. 2012 tax form If either of these situations applies to you for 2013, see Capital Losses under Reporting Capital Gains and Losses in chapter 4 of Publication 550 to figure the amount you can carry over to 2014. 2012 tax form    To figure your capital loss carryover from 2013 to 2014, you will need a copy of your 2013 Form 1040 and Schedule D (Form 1040). 2012 tax form Capital Gains Tax Rates The tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income. 2012 tax form These lower rates are called the maximum capital gains rates. 2012 tax form The term “net capital gain” means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss. 2012 tax form See Schedule D (Form 1040) and the Instructions for Schedule D (Form 1040). 2012 tax form Also see Publication 550. 2012 tax form Noncapital Assets Noncapital assets include property such as inventory and depreciable property used in a trade or business. 2012 tax form A list of properties that are not capital assets is provided in the Instructions for Schedule D (Form 1040). 2012 tax form Property held for sale in the ordinary course of your farm business. 2012 tax form   Property you hold mainly for sale to customers, such as livestock, poultry, livestock products, and crops, is a noncapital asset. 2012 tax form Gain or loss from sales or other dispositions of this property is reported on Schedule F (Form 1040) (not on Schedule D (Form 1040) or Form 4797). 2012 tax form The treatment of this property is discussed in chapter 3. 2012 tax form Land and depreciable properties. 2012 tax form   Land and depreciable property you use in farming are not capital assets. 2012 tax form Noncapital assets also include livestock held for draft, breeding, dairy, or sporting purposes. 2012 tax form However, your gains and losses from sales and exchanges of your farmland and depreciable properties must be considered together with certain other transactions to determine whether the gains and losses are treated as capital or ordinary gains and losses. 2012 tax form The sales of these business assets are reported on Form 4797. 2012 tax form See chapter 9 for more information. 2012 tax form Hedging (Commodity Futures) Hedging transactions are transactions that you enter into in the normal course of business primarily to manage the risk of interest rate or price changes, or currency fluctuations, with respect to borrowings, ordinary property, or ordinary obligations. 2012 tax form Ordinary property or obligations are those that cannot produce capital gain or loss if sold or exchanged. 2012 tax form A commodity futures contract is a standardized, exchange-traded contract for the sale or purchase of a fixed amount of a commodity at a future date for a fixed price. 2012 tax form The holder of an option on a futures contract has the right (but not the obligation) for a specified period of time to enter into a futures contract to buy or sell at a particular price. 2012 tax form A forward contract is generally similar to a futures contract except that the terms are not standardized and the contract is not exchange traded. 2012 tax form Businesses may enter into commodity futures contracts or forward contracts and may acquire options on commodity futures contracts as either of the following. 2012 tax form Hedging transactions. 2012 tax form Transactions that are not hedging transactions. 2012 tax form Futures transactions with exchange-traded commodity futures contracts that are not hedging transactions, generally, result in capital gain or loss and are subject to the mark-to-market rules discussed in Publication 550. 2012 tax form There is a limit on the amount of capital losses you can deduct each year. 2012 tax form Hedging transactions are not subject to the mark-to-market rules. 2012 tax form If, as a farmer-producer, to protect yourself from the risk of unfavorable price fluctuations, you enter into commodity forward contracts, futures contracts, or options on futures contracts and the contracts cover an amount of the commodity within your range of production, the transactions are generally considered hedging transactions. 2012 tax form They can take place at any time you have the commodity under production, have it on hand for sale, or reasonably expect to have it on hand. 2012 tax form The gain or loss on the termination of these hedges is generally ordinary gain or loss. 2012 tax form Farmers who file their income tax returns on the cash method report any profit or loss on the hedging transaction on Schedule F, line 8. 2012 tax form Gains or losses from hedging transactions that hedge supplies of a type regularly used or consumed in the ordinary course of your trade or business may be ordinary gains or losses. 2012 tax form Examples include fuel and feed. 2012 tax form If you have numerous transactions in the commodity futures market during the year, you must be able to show which transactions are hedging transactions. 2012 tax form Clearly identify a hedging transaction on your books and records before the end of the day you entered into the transaction. 2012 tax form It may be helpful to have separate brokerage accounts for your hedging and speculation transactions. 2012 tax form Retain the identification of each hedging transaction with your books and records. 2012 tax form Also, identify the item(s) or aggregate risk that is being hedged in your records. 2012 tax form Although the identification of the hedging transaction must be made before the end of the day it was entered into, you have 35 days after entering into the transaction to identify the hedged item(s) or risk. 2012 tax form For more information on the tax treatment of futures and options contracts, see Commodity Futures and Section 1256 Contracts Marked to Market in Publication 550. 2012 tax form Accounting methods for hedging transactions. 2012 tax form   The accounting method you use for a hedging transaction must clearly reflect income. 2012 tax form This means that your accounting method must reasonably match the timing of income, deduction, gain, or loss from a hedging transaction with the timing of income, deduction, gain, or loss from the item or items being hedged. 2012 tax form There are requirements and limits on the method you can use for certain hedging transactions. 2012 tax form See Regulations section 1. 2012 tax form 446-4(e) for those requirements and limits. 2012 tax form   Hedging transactions must be accounted for under the rules stated above unless the transaction is subject to mark-to-market accounting under section 475 or you use an accounting method other than the following methods. 2012 tax form Cash method. 2012 tax form Farm-price method. 2012 tax form Unit-livestock-price method. 2012 tax form   Once you adopt a method, you must apply it consistently and must have IRS approval before changing it. 2012 tax form   Your books and records must describe the accounting method used for each type of hedging transaction. 2012 tax form They must also contain any additional identification necessary to verify the application of the accounting method you used for the transaction. 2012 tax form You must make the additional identification no more than 35 days after entering into the hedging transaction. 2012 tax form Example of a hedging transaction. 2012 tax form   You file your income tax returns on the cash method. 2012 tax form On July 2 you anticipate a yield of 50,000 bushels of corn this year. 2012 tax form The December futures price is $5. 2012 tax form 75 a bushel, but there are indications that by harvest time the price will drop. 2012 tax form To protect yourself against a drop in the price, you enter into the following hedging transaction. 2012 tax form You sell ten December futures contracts of 5,000 bushels each for a total of 50,000 bushels of corn at $5. 2012 tax form 75 a bushel. 2012 tax form   The price did not drop as anticipated but rose to $6 a bushel. 2012 tax form In November, you sell your crop at a local elevator for $6 a bushel. 2012 tax form You also close out your futures position by buying ten December contracts for $6 a bushel. 2012 tax form You paid a broker's commission of $1,400 ($70 per contract) for the complete in and out position in the futures market. 2012 tax form   The result is that the price of corn rose 25 cents a bushel and the actual selling price is $6 a bushel. 2012 tax form Your loss on the hedge is 25 cents a bushel. 2012 tax form In effect, the net selling price of your corn is $5. 2012 tax form 75 a bushel. 2012 tax form   Report the results of your futures transactions and your sale of corn separately on Schedule F. 2012 tax form See the instructions for the 2013 Schedule F (Form 1040). 2012 tax form   The loss on your futures transactions is $13,900, figured as follows. 2012 tax form July 2 - Sold December corn futures (50,000 bu. 2012 tax form @$5. 2012 tax form 75) $287,500 November 6 - Bought December corn futures (50,000 bu. 2012 tax form @$6 plus $1,400 broker's commission) 301,400 Futures loss ($13,900) This loss is reported as a negative figure on Schedule F, Part I, line 8, as other income. 2012 tax form   The proceeds from your corn sale at the local elevator are $300,000 (50,000 bu. 2012 tax form × $6). 2012 tax form Report it on Schedule F, Part I, line 2, as income from sales of products you raised. 2012 tax form   Assume you were right and the price went down 25 cents a bushel. 2012 tax form In effect, you would still net $5. 2012 tax form 75 a bushel, figured as follows. 2012 tax form Sold cash corn, per bushel $5. 2012 tax form 50 Gain on hedge, per bushel . 2012 tax form 25 Net price, per bushel $5. 2012 tax form 75       The gain on your futures transactions would have been $11,100, figured as follows. 2012 tax form July 2 - Sold December corn futures (50,000 bu. 2012 tax form @$5. 2012 tax form 75) $287,500 November 6 - Bought December corn futures (50,000 bu. 2012 tax form @$5. 2012 tax form 50 plus $1,400 broker's commission) 276,400 Futures gain $11,100 The $11,100 is reported on Schedule F, Part I, line 8, as other income. 2012 tax form   The proceeds from the sale of your corn at the local elevator, $275,000, are reported on Schedule F, Part I, line 2, as income from sales of products you raised. 2012 tax form Livestock This part discusses the sale or exchange of livestock used in your farm business. 2012 tax form Gain or loss from the sale or exchange of this livestock may qualify as a section 1231 gain or loss. 2012 tax form However, any part of the gain that is ordinary income from the recapture of depreciation is not included as section 1231 gain. 2012 tax form See chapter 9 for more information on section 1231 gains and losses and the recapture of depreciation under section 1245. 2012 tax form The rules discussed here do not apply to the sale of livestock held primarily for sale to customers. 2012 tax form The sale of this livestock is reported on Schedule F. 2012 tax form See chapter 3. 2012 tax form Also, special rules apply to sales or exchanges caused by weather-related conditions. 2012 tax form See chapter 3. 2012 tax form Holding period. 2012 tax form   The sale or exchange of livestock used in your farm business (defined below) qualifies as a section 1231 transaction if you held the livestock for 12 months or more (24 months or more for horses and cattle). 2012 tax form Livestock. 2012 tax form   For section 1231 transactions, livestock includes cattle, hogs, horses, mules, donkeys, sheep, goats, fur-bearing animals, and other mammals. 2012 tax form Also, for section 1231 transactions, livestock does not include chickens, turkeys, pigeons, geese, emus, ostriches, rheas, or other birds, fish, frogs, reptiles, etc. 2012 tax form Livestock used in farm business. 2012 tax form   If livestock is held primarily for draft, breeding, dairy, or sporting purposes, it is used in your farm business. 2012 tax form The purpose for which an animal is held ordinarily is determined by a farmer's actual use of the animal. 2012 tax form An animal is not held for draft, breeding, dairy, or sporting purposes merely because it is suitable for that purpose, or because it is held for sale to other persons for use by them for that purpose. 2012 tax form However, a draft, breeding, or sporting purpose may be present if an animal is disposed of within a reasonable time after it is prevented from its intended use or made undesirable as a result of an accident, disease, drought, or unfitness of the animal. 2012 tax form Example 1. 2012 tax form You discover an animal that you intend to use for breeding purposes is sterile. 2012 tax form You dispose of it within a reasonable time. 2012 tax form This animal was held for breeding purposes. 2012 tax form Example 2. 2012 tax form You retire and sell your entire herd, including young animals that you would have used for breeding or dairy purposes had you remained in business. 2012 tax form These young animals were held for breeding or dairy purposes. 2012 tax form Also, if you sell young animals to reduce your breeding or dairy herd because of drought, these animals are treated as having been held for breeding or dairy purposes. 2012 tax form See Sales Caused by Weather-Related Conditions in chapter 3. 2012 tax form Example 3. 2012 tax form You are in the business of raising hogs for slaughter. 2012 tax form Customarily, before selling your sows, you obtain a single litter of pigs that you will raise for sale. 2012 tax form You sell the brood sows after obtaining the litter. 2012 tax form Even though you hold these brood sows for ultimate sale to customers in the ordinary course of your business, they are considered to be held for breeding purposes. 2012 tax form Example 4. 2012 tax form You are in the business of raising registered cattle for sale to others for use as breeding cattle. 2012 tax form The business practice is to breed the cattle before sale to establish their fitness as registered breeding cattle. 2012 tax form Your use of the young cattle for breeding purposes is ordinary and necessary for selling them as registered breeding cattle. 2012 tax form Such use does not demonstrate that you are holding the cattle for breeding purposes. 2012 tax form However, those cattle you held as additions or replacements to your own breeding herd to produce calves are considered to be held for breeding purposes, even though they may not actually have produced calves. 2012 tax form The same applies to hog and sheep breeders. 2012 tax form Example 5. 2012 tax form You breed, raise, and train horses for racing purposes. 2012 tax form Every year you cull horses from your racing stable. 2012 tax form In 2013, you decided that to prevent your racing stable from getting too large to be effectively operated, you must cull six horses that had been raced at public tracks in 2012. 2012 tax form These horses are all considered held for sporting purposes. 2012 tax form Figuring gain or loss on the cash method. 2012 tax form   Farmers or ranchers who use the cash method of accounting figure their gain or loss on the sale of livestock used in their farming business as follows. 2012 tax form Raised livestock. 2012 tax form   Gain on the sale of raised livestock is generally the gross sales price reduced by any expenses of the sale. 2012 tax form Expenses of sale include sales commissions, freight or hauling from farm to commission company, and other similar expenses. 2012 tax form The basis of the animal sold is zero if the costs of raising it were deducted during the years the animal was being raised. 2012 tax form However, see Uniform Capitalization Rules in chapter 6. 2012 tax form Purchased livestock. 2012 tax form   The gross sales price minus your adjusted basis and any expenses of sale is the gain or loss. 2012 tax form Example. 2012 tax form A farmer sold a breeding cow on January 8, 2013, for $1,250. 2012 tax form Expenses of the sale were $125. 2012 tax form The cow was bought July 2, 2009, for $1,300. 2012 tax form Depreciation (not less than the amount allowable) was $867. 2012 tax form Gross sales price $1,250 Cost (basis) $1,300   Minus: Depreciation deduction 867   Unrecovered cost (adjusted basis) $ 433   Expense of sale 125 558 Gain realized $ 692 Converted Wetland and Highly Erodible Cropland Special rules apply to dispositions of land converted to farming use after March 1, 1986. 2012 tax form Any gain realized on the disposition of converted wetland or highly erodible cropland is treated as ordinary income. 2012 tax form Any loss on the disposition of such property is treated as a long-term capital loss. 2012 tax form Converted wetland. 2012 tax form   This is generally land that was drained or filled to make the production of agricultural commodities possible. 2012 tax form It includes converted wetland held by the person who originally converted it or held by any other person who used the converted wetland at any time after conversion for farming. 2012 tax form   A wetland (before conversion) is land that meets all the following conditions. 2012 tax form It is mostly soil that, in its undrained condition, is saturated, flooded, or ponded long enough during a growing season to develop an oxygen-deficient state that supports the growth and regeneration of plants growing in water. 2012 tax form It is saturated by surface or groundwater at a frequency and duration sufficient to support mostly plants that are adapted for life in saturated soil. 2012 tax form It supports, under normal circumstances, mostly plants that grow in saturated soil. 2012 tax form Highly erodible cropland. 2012 tax form   This is cropland subject to erosion that you used at any time for farming purposes other than grazing animals. 2012 tax form Generally, highly erodible cropland is land currently classified by the Department of Agriculture as Class IV, VI, VII, or VIII under its classification system. 2012 tax form Highly erodible cropland also includes land that would have an excessive average annual erosion rate in relation to the soil loss tolerance level, as determined by the Department of Agriculture. 2012 tax form Successor. 2012 tax form   Converted wetland or highly erodible cropland is also land held by any person whose basis in the land is figured by reference to the adjusted basis of a person in whose hands the property was converted wetland or highly erodible cropland. 2012 tax form Timber Standing timber you held as investment property is a capital asset. 2012 tax form Gain or loss from its sale is capital gain or loss reported on Form 8949 and Schedule D (Form 1040), as applicable. 2012 tax form If you held the timber primarily for sale to customers, it is not a capital asset. 2012 tax form Gain or loss on its sale is ordinary business income or loss. 2012 tax form It is reported on Schedule F, line 1 (purchased timber) or line 2 (raised timber). 2012 tax form See the Instructions for Schedule F (Form 1040). 2012 tax form Farmers who cut timber on their land and sell it as logs, firewood, or pulpwood usually have no cost or other basis for that timber. 2012 tax form Amounts realized from these sales, and the expenses incurred in cutting, hauling, etc. 2012 tax form , are ordinary farm income and expenses reported on Schedule F. 2012 tax form Different rules apply if you owned the timber longer than 1 year and elect to treat timber cutting as a sale or exchange or you enter into a cutting contract, discussed below. 2012 tax form Timber considered cut. 2012 tax form   Timber is considered cut on the date when, in the ordinary course of business, the quantity of felled timber is first definitely determined. 2012 tax form This is true whether the timber is cut under contract or whether you cut it yourself. 2012 tax form Christmas trees. 2012 tax form   Evergreen trees, such as Christmas trees, that are more than 6 years old when severed from their roots and sold for ornamental purposes are included in the term timber. 2012 tax form They qualify for both rules discussed below. 2012 tax form Election to treat cutting as a sale or exchange. 2012 tax form   Under the general rule, the cutting of timber results in no gain or loss. 2012 tax form It is not until a sale or exchange occurs that gain or loss is realized. 2012 tax form But if you owned or had a contractual right to cut timber, you can elect to treat the cutting of timber as a section 1231 transaction in the year it is cut. 2012 tax form Even though the cut timber is not actually sold or exchanged, you report your gain or loss on the cutting for the year the timber is cut. 2012 tax form Any later sale results in ordinary business income or loss. 2012 tax form See the example below. 2012 tax form   To elect this treatment, you must: Own or hold a contractual right to cut the timber for a period of more than 1 year before it is cut, and Cut the timber for sale or use in your trade or business. 2012 tax form Making the election. 2012 tax form   You make the election on your return for the year the cutting takes place by including in income the gain or loss on the cutting and including a computation of your gain or loss. 2012 tax form You do not have to make the election in the first year you cut the timber. 2012 tax form You can make it in any year to which the election would apply. 2012 tax form If the timber is partnership property, the election is made on the partnership return. 2012 tax form This election cannot be made on an amended return. 2012 tax form   Once you have made the election, it remains in effect for all later years unless you revoke it. 2012 tax form Election under section 631(a) may be revoked. 2012 tax form   If you previously elected for any tax year ending before October 23, 2004, to treat the cutting of timber as a sale or exchange under section 631(a), you may revoke this election without the consent of the IRS for any tax year ending after October 22, 2004. 2012 tax form The prior election (and revocation) is disregarded for purposes of making a subsequent election. 2012 tax form See Form T (Timber), Forest Activities Schedule, for more information. 2012 tax form Gain or loss. 2012 tax form   Your gain or loss on the cutting of standing timber is the difference between its adjusted basis for depletion and its FMV on the first day of your tax year in which it is cut. 2012 tax form   Your adjusted basis for depletion of cut timber is based on the number of units (board feet, log scale, or other units) of timber cut during the tax year and considered to be sold or exchanged. 2012 tax form Your adjusted basis for depletion is also based on the depletion unit of timber in the account used for the cut timber, and should be figured in the same manner as shown in section 611 and Regulations section 1. 2012 tax form 611-3. 2012 tax form   Depletion of timber is discussed in chapter 7. 2012 tax form Example. 2012 tax form   In April 2013, you owned 4,000 MBF (1,000 board feet) of standing timber longer than 1 year. 2012 tax form It had an adjusted basis for depletion of $40 per MBF. 2012 tax form You are a calendar year taxpayer. 2012 tax form On January 1, 2013, the timber had a FMV of $350 per MBF. 2012 tax form It was cut in April for sale. 2012 tax form On your 2013 tax return, you elect to treat the cutting of the timber as a sale or exchange. 2012 tax form You report the difference between the FMV and your adjusted basis for depletion as a gain. 2012 tax form This amount is reported on Form 4797 along with your other section 1231 gains and losses to figure whether it is treated as a capital gain or as ordinary gain. 2012 tax form You figure your gain as follows. 2012 tax form FMV of timber January 1, 2013 $1,400,000 Minus: Adjusted basis for depletion 160,000 Section 1231 gain $1,240,000   The FMV becomes your basis in the cut timber, and a later sale of the cut timber, including any by-product or tree tops, will result in ordinary business income or loss. 2012 tax form Outright sales of timber. 2012 tax form   Outright sales of timber by landowners qualify for capital gains treatment using rules similar to the rules for certain disposal of timber under a contract with retained economic interest (defined later). 2012 tax form However, for outright sales, the date of disposal is not deemed to be the date the timber is cut because the landowner can elect to treat the payment date as the date of disposal (see Date of disposal below). 2012 tax form Cutting contract. 2012 tax form   You must treat the disposal of standing timber under a cutting contract as a section 1231 transaction if all the following apply to you. 2012 tax form You are the owner of the timber. 2012 tax form You held the timber longer than 1 year before its disposal. 2012 tax form You kept an economic interest in the timber. 2012 tax form   You have kept an economic interest in standing timber if, under the cutting contract, the expected return on your investment is conditioned on the cutting of the timber. 2012 tax form   The difference between the amount realized from the disposal of the timber and its adjusted basis for depletion is treated as gain or loss on its sale. 2012 tax form Include this amount on Form 4797 along with your other section 1231 gains or losses. 2012 tax form Date of disposal. 2012 tax form   The date of disposal is the date the timber is cut. 2012 tax form However, for outright sales by landowners or if you receive payment under the contract before the timber is cut, you can elect to treat the date of payment as the date of disposal. 2012 tax form   This election applies only to figure the holding period of the timber. 2012 tax form It has no effect on the time for reporting gain or loss (generally when the timber is sold or exchanged). 2012 tax form   To make this election, attach a statement to the tax return filed by the due date (including extensions) for the year payment is received. 2012 tax form The statement must identify the advance payments subject to the election and the contract under which they were made. 2012 tax form   If you timely filed your return for the year you received payment without making the election, you can still make the election by filing an amended return within 6 months after the due date for that year's return (excluding extensions). 2012 tax form Attach the statement to the amended return and write “Filed pursuant to section 301. 2012 tax form 9100-2” at the top of the statement. 2012 tax form File the amended return at the same address the original return was filed. 2012 tax form Owner. 2012 tax form   An owner is any person who owns an interest in the timber, including a sublessor and the holder of a contract to cut the timber. 2012 tax form You own an interest in timber if you have the right to cut it for sale on your own account or for use in your business. 2012 tax form Tree stumps. 2012 tax form   Tree stumps are a capital asset if they are on land held by an investor who is not in the timber or stump business as a buyer, seller, or processor. 2012 tax form Gain from the sale of stumps sold in one lot by such a holder is taxed as a capital gain. 2012 tax form However, tree stumps held by timber operators after the saleable standing timber was cut and removed from the land are considered by-products. 2012 tax form Gain from the sale of stumps in lots or tonnage by such operators is taxed as ordinary income. 2012 tax form   See Form T (Timber) and its separate instructions for more information about dispositions of timber. 2012 tax form Sale of a Farm The sale of your farm will usually involve the sale of both nonbusiness property (your home) and business property (the land and buildings used in the farm operation and perhaps machinery and livestock). 2012 tax form If you have a gain from the sale, you may be allowed to exclude the gain on your home. 2012 tax form For more information, see Publication 523, Selling Your Home. 2012 tax form The gain on the sale of your business property is taxable. 2012 tax form A loss on the sale of your business property to an unrelated person is deducted as an ordinary loss. 2012 tax form Your taxable gain or loss on the sale of property used in your farm business is taxed under the rules for section 1231 transactions. 2012 tax form See chapter 9. 2012 tax form Losses from personal-use property, other than casualty or theft losses, are not deductible. 2012 tax form If you receive payments for your farm in installments, your gain is taxed over the period of years the payments are received, unless you elect not to use the installment method of reporting the gain. 2012 tax form See chapter 10 for information about installment sales. 2012 tax form When you sell your farm, the gain or loss on each asset is figured separately. 2012 tax form The tax treatment of gain or loss on the sale of each asset is determined by the classification of the asset. 2012 tax form Each of the assets sold must be classified as one of the following. 2012 tax form Capital asset held 1 year or less. 2012 tax form Capital asset held longer than 1 year. 2012 tax form Property (including real estate) used in your business and held 1 year or less (including draft, breeding, dairy, and sporting animals held less than the holding periods discussed earlier under Livestock ). 2012 tax form Property (including real estate) used in your business and held longer than 1 year (including only draft, breeding, dairy, and sporting animals held for the holding periods discussed earlier). 2012 tax form Property held primarily for sale or which is of the kind that would be included in inventory if on hand at the end of your tax year. 2012 tax form Allocation of consideration paid for a farm. 2012 tax form   The sale of a farm for a lump sum is considered a sale of each individual asset rather than a single asset. 2012 tax form The residual method is required only if the group of assets sold constitutes a trade or business. 2012 tax form This method determines gain or loss from the transfer of each asset. 2012 tax form It also determines the buyer's basis in the business assets. 2012 tax form For more information, see Sale of a Business in chapter 2 of Publication 544. 2012 tax form Property used in farm operation. 2012 tax form   The rules for excluding the gain on the sale of your home, described later under Sale of your home , do not apply to the property used for your farming business. 2012 tax form Recognized gains and losses on business property must be reported on your return for the year of the sale. 2012 tax form If the property was held longer than 1 year, it may qualify for section 1231 treatment (see chapter 9). 2012 tax form Example. 2012 tax form You sell your farm, including your main home, which you have owned since December 2001. 2012 tax form You realize gain on the sale as follows. 2012 tax form   Farm   Farm   With Home Without   Home Only Home Selling price $382,000 $158,000 $224,000 Cost (or other basis) 240,000 110,000 130,000 Gain $142,000 $48,000 $94,000 You must report the $94,000 gain from the sale of the property used in your farm business. 2012 tax form All or a part of that gain may have to be reported as ordinary income from the recapture of depreciation or soil and water conservation expenses. 2012 tax form Treat the balance as section 1231 gain. 2012 tax form The $48,000 gain from the sale of your home is not taxable as long as you meet the requirements explained later under Sale of your home . 2012 tax form Partial sale. 2012 tax form   If you sell only part of your farm, you must report any recognized gain or loss on the sale of that part on your tax return for the year of the sale. 2012 tax form You cannot wait until you have sold enough of the farm to recover its entire cost before reporting gain or loss. 2012 tax form For a detailed discussion on installment sales, see Publication 544. 2012 tax form Adjusted basis of the part sold. 2012 tax form   This is the properly allocated part of your original cost or other basis of the entire farm plus or minus necessary adjustments for improvements, depreciation, etc. 2012 tax form , on the part sold. 2012 tax form If your home is on the farm, you must properly adjust the basis to exclude those costs from your farm asset costs, as discussed below under Sale of your home . 2012 tax form Example. 2012 tax form You bought a 600-acre farm for $700,000. 2012 tax form The farm included land and buildings. 2012 tax form The purchase contract designated $600,000 of the purchase price to the land. 2012 tax form You later sold 60 acres of land on which you had installed a fence. 2012 tax form Your adjusted basis for the part of your farm sold is $60,000 (1/10 of $600,000), plus any unrecovered cost (cost not depreciated) of the fence on the 60 acres at the time of sale. 2012 tax form Use this amount to determine your gain or loss on the sale of the 60 acres. 2012 tax form Assessed values for local property taxes. 2012 tax form   If you paid a flat sum for the entire farm and no other facts are available for properly allocating your original cost or other basis between the land and the buildings, you can use the assessed values for local property taxes for the year of purchase to allocate the costs. 2012 tax form Example. 2012 tax form Assume that in the preceding example there was no breakdown of the $700,000 purchase price between land and buildings. 2012 tax form However, in the year of purchase, local taxes on the entire property were based on assessed valuations of $420,000 for land and $140,000 for improvements, or a total of $560,000. 2012 tax form The assessed valuation of the land is 3/4 (75%) of the total assessed valuation. 2012 tax form Multiply the $700,000 total purchase price by 75% to figure basis of $525,000 for the 600 acres of land. 2012 tax form The unadjusted basis of the 60 acres you sold would then be $52,500 (1/10 of $525,000). 2012 tax form Sale of your home. 2012 tax form   Your home is a capital asset and not property used in the trade or business of farming. 2012 tax form If you sell a farm that includes a house you and your family occupy, you must determine the part of the selling price and the part of the cost or other basis allocable to your home. 2012 tax form Your home includes the immediate surroundings and outbuildings relating to it that are not used for business purposes. 2012 tax form   If you use part of your home for business, you must make an appropriate adjustment to the basis for depreciation allowed or allowable. 2012 tax form For more information on basis, see chapter 6. 2012 tax form More information. 2012 tax form   For more information on selling your home, see Publication 523. 2012 tax form Gain from condemnation. 2012 tax form   If you have a gain from a condemnation or sale under threat of condemnation, you may use the preceding rules for excluding the gain, rather than the rules discussed under Postponing Gain in chapter 11. 2012 tax form However, any gain that cannot be excluded (because it is more than the limit) may be postponed under the rules discussed under Postponing Gain in chapter 11. 2012 tax form Foreclosure or Repossession If you do not make payments you owe on a loan secured by property, the lender may foreclose on the loan or repossess the property. 2012 tax form The foreclosure or repossession is treated as a sale or exchange from which you may realize gain or loss. 2012 tax form This is true even if you voluntarily return the property to the lender. 2012 tax form You may also realize ordinary income from cancellation of debt if the loan balance is more than the FMV of the property. 2012 tax form Buyer's (borrower's) gain or loss. 2012 tax form   You figure and report gain or loss from a foreclosure or repossession in the same way as gain or loss from a sale or exchange. 2012 tax form The gain or loss is the difference between your adjusted basis in the transferred property and the amount realized. 2012 tax form See Determining Gain or Loss , earlier. 2012 tax form Worksheet 8-1. 2012 tax form Worksheet for Foreclosures andRepossessions Part 1. 2012 tax form Use Part 1 to figure your ordinary income from the cancellation of debt upon foreclosure or repossession. 2012 tax form Complete this part only if you were personally liable for the debt. 2012 tax form Otherwise, go to Part 2. 2012 tax form   1. 2012 tax form Enter the amount of outstanding debt immediately before the transfer of property reduced by any amount for which you remain personally liable after the transfer of property   2. 2012 tax form Enter the Fair Market Value of the transferred property   3. 2012 tax form Ordinary income from cancellation of debt upon foreclosure or repossession. 2012 tax form * Subtract line 2 from line 1. 2012 tax form If zero or less, enter -0-   Part 2. 2012 tax form Figure your gain or loss from foreclosure or repossession. 2012 tax form   4. 2012 tax form If you completed Part 1, enter the smaller of line 1 or line 2. 2012 tax form If you did not complete Part 1, enter the outstanding debt immediately before the transfer of property   5. 2012 tax form Enter any proceeds you received from the foreclosure sale   6. 2012 tax form Add lines 4 and 5   7. 2012 tax form Enter the adjusted basis of the transferred property   8. 2012 tax form Gain or loss from foreclosure or repossession. 2012 tax form Subtract line 7  from line 6   * The income may not be taxable. 2012 tax form See Cancellation of debt . 2012 tax form    You can use Worksheet 8-1 to figure your gain or loss from a foreclosure or repossession. 2012 tax form Amount realized on a nonrecourse debt. 2012 tax form   If you are not personally liable for repaying the debt (nonrecourse debt) secured by the transferred property, the amount you realize includes the full amount of the debt canceled by the transfer. 2012 tax form The full canceled debt is included in the amount realized even if the fair market value of the property is less than the canceled debt. 2012 tax form Example 1. 2012 tax form Ann paid $200,000 for land used in her farming business. 2012 tax form She paid $15,000 down and borrowed the remaining $185,000 from a bank. 2012 tax form Ann is not personally liable for the loan (nonrecourse debt), but pledges the land as security. 2012 tax form The bank foreclosed on the loan 2 years after Ann stopped making payments. 2012 tax form When the bank foreclosed, the balance due on the loan was $180,000 and the FMV of the land was $170,000. 2012 tax form The amount Ann realized on the foreclosure was $180,000, the debt canceled by the foreclosure. 2012 tax form She figures her gain or loss on Form 4797, Part I, by comparing the amount realized ($180,000) with her adjusted basis ($200,000). 2012 tax form She has a $20,000 deductible loss. 2012 tax form Example 2. 2012 tax form Assume the same facts as in Example 1 except the FMV of the land was $210,000. 2012 tax form The result is the same. 2012 tax form The amount Ann realized on the foreclosure is $180,000, the debt canceled by the foreclosure. 2012 tax form Because her adjusted basis is $200,000, she has a deductible loss of $20,000, which she reports on Form 4797, Part I. 2012 tax form Amount realized on a recourse debt. 2012 tax form   If you are personally liable for the debt (recourse debt), the amount realized on the foreclosure or repossession includes the lesser of: The outstanding debt immediately before the transfer reduced by any amount for which you remain personally liable immediately after the transfer, or The fair market value of the transferred property. 2012 tax form   You are treated as receiving ordinary income from the canceled debt for the part of the debt that is more than the fair market value. 2012 tax form The amount realized does not include the canceled debt that is your income from cancellation of debt. 2012 tax form See Cancellation of debt , later. 2012 tax form Example 3. 2012 tax form Assume the same facts as in Example 1 above except Ann is personally liable for the loan (recourse debt). 2012 tax form In this case, the amount she realizes is $170,000. 2012 tax form This is the canceled debt ($180,000) up to the FMV of the land ($170,000). 2012 tax form Ann figures her gain or loss on the foreclosure by comparing the amount realized ($170,000) with her adjusted basis ($200,000). 2012 tax form She has a $30,000 deductible loss, which she figures on Form 4797, Part I. 2012 tax form She is also treated as receiving ordinary income from cancellation of debt. 2012 tax form That income is $10,000 ($180,000 − $170,000). 2012 tax form This is the part of the canceled debt not included in the amount realized. 2012 tax form She reports this as other income on Schedule F, line 8. 2012 tax form Seller's (lender's) gain or loss on repossession. 2012 tax form   If you finance a buyer's purchase of property and later acquire an interest in it through foreclosure or repossession, you may have a gain or loss on the acquisition. 2012 tax form For more information, see Repossession in Publication 537, Installment Sales. 2012 tax form Cancellation of debt. 2012 tax form   If property that is repossessed or foreclosed upon secures a debt for which you are personally liable (recourse debt), you generally must report as ordinary income the amount by which the canceled debt is more than the FMV of the property. 2012 tax form This income is separate from any gain or loss realized from the foreclosure or repossession. 2012 tax form Report the income from cancellation of a business debt on Schedule F, line 8. 2012 tax form Report the income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. 2012 tax form    You can use Worksheet 8-1 to figure your income from cancellation of debt. 2012 tax form   However, income from cancellation of debt is not taxed if any of the following apply. 2012 tax form The cancellation is intended as a gift. 2012 tax form The debt is qualified farm debt (see chapter 3). 2012 tax form The debt is qualified real property business debt (see chapter 5 of Publication 334). 2012 tax form You are insolvent or bankrupt (see  chapter 3). 2012 tax form The debt is qualified principal residence indebtedness (see chapter 3). 2012 tax form   Use Form 982 to report the income exclusion. 2012 tax form Abandonment The abandonment of property is a disposition of property. 2012 tax form You abandon property when you voluntarily and permanently give up possession and use of the property with the intention of ending your ownership, but without passing it on to anyone else. 2012 tax form Business or investment property. 2012 tax form   Loss from abandonment of business or investment property is deductible as a loss. 2012 tax form Loss from abandonment of business or investment property that is not treated as a sale or exchange generally is an ordinary loss. 2012 tax form If your adjusted basis is more than the amount you realize (if any), then you have a loss. 2012 tax form If the amount you realize (if any) is more than your adjusted basis, then you have a gain. 2012 tax form This rule also applies to leasehold improvements the lessor made for the lessee. 2012 tax form However, if the property is foreclosed on or repossessed in lieu of abandonment, gain or loss is figured as discussed earlier under Foreclosure or Repossession . 2012 tax form   If the abandoned property is secured by debt, special rules apply. 2012 tax form The tax consequences of abandonment of property that secures a debt depend on whether you are personally liable for the debt (recourse debt) or were not personally liable for the debt (nonrecourse debt). 2012 tax form For more information, see chapter 3 of Publication 4681, Canceled Debts, Foreclosures, Repossessions, and Abandonments (for Individuals). 2012 tax form The abandonment loss is deducted in the tax year in which the loss is sustained. 2012 tax form Report the loss on Form 4797, Part II, line 10. 2012 tax form Personal-use property. 2012 tax form   You cannot deduct any loss from abandonment of your home or other property held for personal use. 2012 tax form Canceled debt. 2012 tax form   If the abandoned property secures a debt for which you are personally liable and the debt is canceled, you will realize ordinary income equal to the canceled debt. 2012 tax form This income is separate from any loss realized from abandonment of the property. 2012 tax form Report income from cancellation of a debt related to a business or rental activity as business or rental income. 2012 tax form Report income from cancellation of a nonbusiness debt as miscellaneous income on Form 1040. 2012 tax form   However, income from cancellation of debt is not taxed in certain circumstances. 2012 tax form See Cancellation of debt earlier under Foreclosure or Repossession . 2012 tax form Forms 1099-A and 1099-C. 2012 tax form   A lender who acquires an interest in your property in a foreclosure, repossession, or abandonment should send you Form 1099-A showing the information you need to figure your loss from the foreclosure, repossession, or abandonment. 2012 tax form However, if the lender cancels part of your debt and the lender must file Form 1099-C, the lender may include the information about the foreclosure, repossession, or abandonment on that form instead of Form 1099-A. 2012 tax form The lender must file Form 1099-C and send you a copy if the canceled debt is $600 or more and the lender is a financial institution, credit union, federal government agency, or any organization that has a significant trade or business of lending money. 2012 tax form For foreclosures, repossessions, abandonments of property, and debt cancellations occurring in 2013, these forms should be sent to you by January 31, 2014. 2012 tax form Prev  Up  Next   Home   More Online Publications
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The 2012 Tax Form

2012 tax form 2. 2012 tax form   Roth IRAs Table of Contents What's New for 2013 What's New for 2014 Reminders Introduction What Is a Roth IRA? When Can a Roth IRA Be Opened? Can You Contribute to a Roth IRA?How Much Can Be Contributed? When Can You Make Contributions? What if You Contribute Too Much? Can You Move Amounts Into a Roth IRA?Conversions Rollover From Employer's Plan Into a Roth IRA Military Death Gratuities and Servicemembers' Group Life Insurance (SGLI) Payments Rollover From a Roth IRA Rollover of Exxon Valdez Settlement Income Rollover of Airline Payments Are Distributions Taxable?What Are Qualified Distributions? Additional Tax on Early Distributions Ordering Rules for Distributions How Do You Figure the Taxable Part? Must You Withdraw or Use Assets?Minimum distributions. 2012 tax form Recognizing Losses on Investments Distributions After Owner's Death What's New for 2013 Roth IRA contribution limit. 2012 tax form  If contributions on your behalf are made only to Roth IRAs, your contribution limit for 2013 will generally be the lesser of: $5,500, or Your taxable compensation for the year. 2012 tax form If you were age 50 or older before 2014 and contributions on your behalf were made only to Roth IRAs, your contribution limit for 2013 will generally be the lesser of: $6,500, or Your taxable compensation for the year. 2012 tax form However, if your modified adjusted gross income (AGI) is above a certain amount, your contribution limit may be reduced. 2012 tax form For more information, see How Much Can Be Contributed? under Can You Contribute to a Roth IRA? in this chapter. 2012 tax form Modified AGI limit for Roth IRA contributions increased. 2012 tax form  For 2013, your Roth IRA contribution limit is reduced (phased out) in the following situations. 2012 tax form Your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $178,000. 2012 tax form You cannot make a Roth IRA contribution if your modified AGI is $188,000 or more. 2012 tax form Your filing status is single, head of household, or married filing separately and you did not live with your spouse at any time in 2013 and your modified AGI is at least $112,000. 2012 tax form You cannot make a Roth IRA contribution if your modified AGI is $127,000 or more. 2012 tax form Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than -0-. 2012 tax form You cannot make a Roth IRA contribution if your modified AGI is $10,000 or more. 2012 tax form See Can You Contribute to a Roth IRA? in this chapter. 2012 tax form Net Investment Income Tax. 2012 tax form  For purposes of the Net Investment Income Tax (NIIT), net investment income does not include distributions from a qualified retirement plan (for example, 401(a), 403(a), 403(b), 457(b) plans, and IRAs). 2012 tax form However, these distributions are taken into account when determining the modified adjusted gross income threshold. 2012 tax form Distributions from a nonqualified retirement plan are included in net investment income. 2012 tax form See Form 8960, Net Investment Income Tax—Individuals, Estates, and Trusts, and its instructions for more information. 2012 tax form What's New for 2014 Modified AGI limit for Roth IRA contributions increased. 2012 tax form  For 2014, your Roth IRA contribution limit is reduced (phased out) in the following situations. 2012 tax form Your filing status is married filing jointly or qualifying widow(er) and your modified AGI is at least $181,000. 2012 tax form You cannot make a Roth IRA contribution if your modified AGI is $191,000 or more. 2012 tax form Your filing status is single, head of household, or married filing separately and you did not live with your spouse at any time in 2014 and your modified AGI is at least $114,000. 2012 tax form You cannot make a Roth IRA contribution if your modified AGI is $129,000 or more. 2012 tax form Your filing status is married filing separately, you lived with your spouse at any time during the year, and your modified AGI is more than -0-. 2012 tax form You cannot make a Roth IRA contribution if your modified AGI is $10,000 or more. 2012 tax form Reminders Deemed IRAs. 2012 tax form  For plan years beginning after 2002, a qualified employer plan (retirement plan) can maintain a separate account or annuity under the plan (a deemed IRA) to receive voluntary employee contributions. 2012 tax form If the separate account or annuity otherwise meets the requirements of an IRA, it will be subject only to IRA rules. 2012 tax form An employee's account can be treated as a traditional IRA or a Roth IRA. 2012 tax form For this purpose, a “qualified employer plan” includes: A qualified pension, profit-sharing, or stock bonus plan (section 401(a) plan), A qualified employee annuity plan (section 403(a) plan), A tax-sheltered annuity plan (section 403(b) plan), and A deferred compensation plan (section 457 plan) maintained by a state, a political subdivision of a state, or an agency or instrumentality of a state or political subdivision of a state. 2012 tax form Designated Roth accounts. 2012 tax form  Designated Roth accounts are separate accounts under 401(k), 403(b), or 457(b) plans that accept elective deferrals that are referred to as Roth contributions. 2012 tax form These elective deferrals are included in your income, but qualified distributions from these accounts are not included in your income. 2012 tax form Designated Roth accounts are not IRAs and should not be confused with Roth IRAs. 2012 tax form Contributions, up to their respective limits, can be made to Roth IRAs and designated Roth accounts according to your eligibility to participate. 2012 tax form A contribution to one does not impact your eligibility to contribute to the other. 2012 tax form See Publication 575, for more information on designated Roth accounts. 2012 tax form Introduction Regardless of your age, you may be able to establish and make nondeductible contributions to an individual retirement plan called a Roth IRA. 2012 tax form Contributions not reported. 2012 tax form   You do not report Roth IRA contributions on your return. 2012 tax form What Is a Roth IRA? A Roth IRA is an individual retirement plan that, except as explained in this chapter, is subject to the rules that apply to a traditional IRA (defined next). 2012 tax form It can be either an account or an annuity. 2012 tax form Individual retirement accounts and annuities are described in chapter 1 under How Can a Traditional IRA Be Opened. 2012 tax form To be a Roth IRA, the account or annuity must be designated as a Roth IRA when it is opened. 2012 tax form A deemed IRA can be a Roth IRA, but neither a SEP IRA nor a SIMPLE IRA can be designated as a Roth IRA. 2012 tax form Unlike a traditional IRA, you cannot deduct contributions to a Roth IRA. 2012 tax form But, if you satisfy the requirements, qualified distributions (discussed later) are tax free. 2012 tax form Contributions can be made to your Roth IRA after you reach age 70½ and you can leave amounts in your Roth IRA as long as you live. 2012 tax form Traditional IRA. 2012 tax form   A traditional IRA is any IRA that is not a Roth IRA or SIMPLE IRA. 2012 tax form Traditional IRAs are discussed in chapter 1. 2012 tax form When Can a Roth IRA Be Opened? You can open a Roth IRA at any time. 2012 tax form However, the time for making contributions for any year is limited. 2012 tax form See When Can You Make Contributions , later under Can You Contribute to a Roth IRA. 2012 tax form Can You Contribute to a Roth IRA? Generally, you can contribute to a Roth IRA if you have taxable compensation (defined later) and your modified AGI (defined later) is less than: $188,000 for married filing jointly or qualifying widow(er), $127,000 for single, head of household, or married filing separately and you did not live with your spouse at any time during the year, and $10,000 for married filing separately and you lived with your spouse at any time during the year. 2012 tax form You may be able to claim a credit for contributions to your Roth IRA. 2012 tax form For more information, see chapter 4. 2012 tax form Is there an age limit for contributions?   Contributions can be made to your Roth IRA regardless of your age. 2012 tax form Can you contribute to a Roth IRA for your spouse?   You can contribute to a Roth IRA for your spouse provided the contributions satisfy the Kay Bailey Hutchison Spousal IRA limit discussed in chapter 1 under How Much Can Be Contributed, you file jointly, and your modified AGI is less than $188,000. 2012 tax form Compensation. 2012 tax form   Compensation includes wages, salaries, tips, professional fees, bonuses, and other amounts received for providing personal services. 2012 tax form It also includes commissions, self-employment income, nontaxable combat pay, military differential pay, and taxable alimony and separate maintenance payments. 2012 tax form For more information, see What Is Compensation? under Who Can Open a Traditional IRA? in chapter 1. 2012 tax form Modified AGI. 2012 tax form   Your modified AGI for Roth IRA purposes is your adjusted gross income (AGI) as shown on your return with some adjustments. 2012 tax form Use Worksheet 2-1 , later, to determine your modified AGI. 2012 tax form    Do not subtract conversion income when figuring your other AGI-based phaseouts and taxable income, such as your deduction for medical and dental expenses. 2012 tax form Subtract them from AGI only for the purpose of figuring your modified AGI for Roth IRA purposes. 2012 tax form How Much Can Be Contributed? The contribution limit for Roth IRAs generally depends on whether contributions are made only to Roth IRAs or to both traditional IRAs and Roth IRAs. 2012 tax form Worksheet 2-1. 2012 tax form Modified Adjusted Gross Income for Roth IRA Purposes Use this worksheet to figure your modified adjusted gross income for Roth IRA purposes. 2012 tax form 1. 2012 tax form Enter your adjusted gross income from Form 1040, line 38; Form 1040A, line 22; or Form 1040NR, line 37 1. 2012 tax form   2. 2012 tax form Enter any income resulting from the conversion of an IRA (other than a Roth IRA) to a Roth IRA (included on Form 1040, line 15b, Form 1040A, line 11b, or Form 1040NR, line 16b) and a rollover from a qualified retirement plan to a Roth IRA (included on Form 1040, line 16b, Form 1040A, line 12b, or Form 1040NR, line 17b) 2. 2012 tax form   3. 2012 tax form Subtract line 2 from line 1 3. 2012 tax form   4. 2012 tax form Enter any traditional IRA deduction from Form 1040, line 32; Form 1040A, line 17; or Form 1040NR, line 32 4. 2012 tax form   5. 2012 tax form Enter any student loan interest deduction from Form 1040, line 33; Form 1040A, line 18; or Form 1040NR, line 33 5. 2012 tax form   6. 2012 tax form Enter any tuition and fees deduction from Form 1040, line 34, or Form 1040A, line 19 6. 2012 tax form   7. 2012 tax form Enter any domestic production activities deduction from Form 1040, line 35, or Form 1040NR, line 34 7. 2012 tax form   8. 2012 tax form Enter any foreign earned income exclusion and/or housing exclusion from Form 2555, line 45, or Form 2555-EZ, line 18 8. 2012 tax form   9. 2012 tax form Enter any foreign housing deduction from Form 2555, line 50 9. 2012 tax form   10. 2012 tax form Enter any excludable qualified savings bond interest from Form 8815, line 14 10. 2012 tax form   11. 2012 tax form Enter any excluded employer-provided adoption benefits from Form 8839, line 28 11. 2012 tax form   12. 2012 tax form Add the amounts on lines 3 through 11 12. 2012 tax form   13. 2012 tax form Enter: $188,000 if married filing jointly or qualifying widow(er), $10,000 if married filing separately and you lived with your spouse at any time during the year, or $127,000 for all others 13. 2012 tax form   Is the amount on line 12 more than the amount on line 13? If yes, see the note below. 2012 tax form  If no, the amount on line 12 is your modified adjusted gross income for Roth IRA purposes. 2012 tax form       Note. 2012 tax form If the amount on line 12 is more than the amount on line 13 and you have other income or loss items, such as social security income or passive activity losses, that are subject to AGI-based phaseouts, you can refigure your AGI solely for the purpose of figuring your modified AGI for Roth IRA purposes. 2012 tax form (If you receive social security benefits, use Worksheet 1 in Appendix B to refigure your AGI. 2012 tax form ) Then go to line 3 above in this Worksheet 2-1 to refigure your modified AGI. 2012 tax form If you do not have other income or loss items subject to AGI-based phaseouts, your modified adjusted gross income for Roth IRA purposes is the amount on line 12 above. 2012 tax form Roth IRAs only. 2012 tax form   If contributions are made only to Roth IRAs, your contribution limit generally is the lesser of: $5,500 ($6,500 if you are age 50 or older), or Your taxable compensation. 2012 tax form   However, if your modified AGI is above a certain amount, your contribution limit may be reduced, as explained later under Contribution limit reduced . 2012 tax form Roth IRAs and traditional IRAs. 2012 tax form   If contributions are made to both Roth IRAs and traditional IRAs established for your benefit, your contribution limit for Roth IRAs generally is the same as your limit would be if contributions were made only to Roth IRAs, but then reduced by all contributions for the year to all IRAs other than Roth IRAs. 2012 tax form Employer contributions under a SEP or SIMPLE IRA plan do not affect this limit. 2012 tax form   This means that your contribution limit is the lesser of: $5,500 ($6,500 if you are age 50 or older) minus all contributions (other than employer contributions under a SEP or SIMPLE IRA plan) for the year to all IRAs other than Roth IRAs, or Your taxable compensation minus all contributions (other than employer contributions under a SEP or SIMPLE IRA plan) for the year to all IRAs other than Roth IRAs. 2012 tax form   However, if your modified AGI is above a certain amount, your contribution limit may be reduced, as explained below under Contribution limit reduced . 2012 tax form   Simplified employee pensions (SEPs) are discussed in Publication 560. 2012 tax form Savings incentive match plans for employees (SIMPLEs) are discussed in chapter 3. 2012 tax form Repayment of reservist distributions. 2012 tax form   You can repay qualified reservist distributions even if the repayments would cause your total contributions to the Roth IRA to be more than the general limit on contributions. 2012 tax form However, the total repayments cannot be more than the amount of your distribution. 2012 tax form Note. 2012 tax form If you make repayments of qualified reservist distributions to a Roth IRA, increase your basis in the Roth IRA by the amount of the repayment. 2012 tax form For more information, see Qualified reservist repayments under How Much Can Be Contributed? in chapter 1. 2012 tax form Contribution limit reduced. 2012 tax form   If your modified AGI is above a certain amount, your contribution limit is gradually reduced. 2012 tax form Use Table 2-1, later, to determine if this reduction applies to you. 2012 tax form Table 2-1. 2012 tax form Effect of Modified AGI on Roth IRA Contribution This table shows whether your contribution to a Roth IRA is affected by the amount of your modified adjusted gross income (modified AGI). 2012 tax form IF you have taxable compensation and your filing status is . 2012 tax form . 2012 tax form . 2012 tax form AND your modified AGI is . 2012 tax form . 2012 tax form . 2012 tax form THEN . 2012 tax form . 2012 tax form . 2012 tax form married filing jointly or  qualifying widow(er) less than $178,000 you can contribute up to $5,500 ($6,500 if you are age 50 or older) as explained under How Much Can Be Contributed . 2012 tax form at least $178,000 but less than $188,000 the amount you can contribute is reduced as explained under Contribution limit reduced . 2012 tax form $188,000 or more you cannot contribute to a Roth IRA. 2012 tax form married filing separately and you lived with your spouse at any time during the year zero (-0-) you can contribute up to $5,500 ($6,500 if you are age 50 or older) as explained under How Much Can Be Contributed . 2012 tax form more than zero (-0-) but less than $10,000 the amount you can contribute is reduced as explained under Contribution limit reduced . 2012 tax form $10,000 or more you cannot contribute to a Roth IRA. 2012 tax form single, head of household,  or married filing separately and you did not live with your spouse at any time during the year less than $112,000 you can contribute up to $5,500 ($6,500 if you are age 50 or older) as explained under How Much Can Be Contributed . 2012 tax form at least $112,000 but less than $127,000 the amount you can contribute is reduced as explained under Contribution limit reduced . 2012 tax form $127,000 or more you cannot contribute to a Roth IRA. 2012 tax form Figuring the reduction. 2012 tax form   If the amount you can contribute must be reduced, use Worksheet 2-2, later, to figure your reduced contribution limit. 2012 tax form Worksheet 2-2. 2012 tax form Determining Your Reduced Roth IRA Contribution Limit Before using this worksheet, check Table 2-1, earlier, to determine whether or not your Roth IRA contribution limit is reduced. 2012 tax form If it is, use this worksheet to determine how much it is reduced. 2012 tax form 1. 2012 tax form Enter your modified AGI for Roth IRA purposes (Worksheet 2-1, line 12) 1. 2012 tax form   2. 2012 tax form Enter: $178,000 if filing a joint return or qualifying widow(er), $-0- if married filing a separate return and you lived with your spouse at any time in 2013, or $112,000 for all others 2. 2012 tax form   3. 2012 tax form Subtract line 2 from line 1 3. 2012 tax form   4. 2012 tax form Enter: $10,000 if filing a joint return or qualifying widow(er) or married filing a separate return and you lived with your spouse at any time during the year, or $15,000 for all others 4. 2012 tax form   5. 2012 tax form Divide line 3 by line 4 and enter the result as a decimal (rounded to at least three places). 2012 tax form If the result is 1. 2012 tax form 000 or more, enter 1. 2012 tax form 000 5. 2012 tax form   6. 2012 tax form Enter the lesser of: $5,500 ($6,500 if you are age 50 or older), or Your taxable compensation 6. 2012 tax form   7. 2012 tax form Multiply line 5 by line 6 7. 2012 tax form   8. 2012 tax form Subtract line 7 from line 6. 2012 tax form Round the result up to the nearest $10. 2012 tax form If the result is less than $200, enter $200 8. 2012 tax form   9. 2012 tax form Enter contributions for the year to other IRAs 9. 2012 tax form   10. 2012 tax form Subtract line 9 from line 6 10. 2012 tax form   11. 2012 tax form Enter the lesser of line 8 or line 10. 2012 tax form This is your reduced Roth IRA contribution limit 11. 2012 tax form      Round your reduced contribution limit up to the nearest $10. 2012 tax form If your reduced contribution limit is more than $0, but less than $200, increase the limit to $200. 2012 tax form Example. 2012 tax form You are a 45-year-old, single individual with taxable compensation of $113,000. 2012 tax form You want to make the maximum allowable contribution to your Roth IRA for 2013. 2012 tax form Your modified AGI for 2013 is $113,000. 2012 tax form You have not contributed to any traditional IRA, so the maximum contribution limit before the modified AGI reduction is $5,500. 2012 tax form You figure your reduced Roth IRA contribution of $5,140 as shown on Worksheet 2-2. 2012 tax form Example—Illustrated, later. 2012 tax form   Worksheet 2-2. 2012 tax form Example—Illustrated Before using this worksheet, check Table 2-1, earlier, to determine whether or not your Roth IRA contribution limit is reduced. 2012 tax form If it is, use this worksheet to determine how much it is reduced. 2012 tax form 1. 2012 tax form Enter your modified AGI for Roth IRA purposes (Worksheet 2-1, line 12) 1. 2012 tax form 113,000 2. 2012 tax form Enter: $178,000 if filing a joint return or qualifying widow(er), $-0- if married filing a separate return and you lived with your spouse at any time in 2013, or $112,000 for all others 2. 2012 tax form 112,000 3. 2012 tax form Subtract line 2 from line 1 3. 2012 tax form 1,000 4. 2012 tax form Enter: $10,000 if filing a joint return or qualifying widow(er) or married filing a separate return and you lived with your spouse at any time during the year, or $15,000 for all others 4. 2012 tax form 15,000 5. 2012 tax form Divide line 3 by line 4 and enter the result as a decimal (rounded to at least three places). 2012 tax form If the result is 1. 2012 tax form 000 or more, enter 1. 2012 tax form 000 5. 2012 tax form . 2012 tax form 067 6. 2012 tax form Enter the lesser of: $5,500 ($6,500 if you are age 50 or older), or Your taxable compensation 6. 2012 tax form 5,500 7. 2012 tax form Multiply line 5 by line 6 7. 2012 tax form 369 8. 2012 tax form Subtract line 7 from line 6. 2012 tax form Round the result up to the nearest $10. 2012 tax form If the result is less than $200, enter $200 8. 2012 tax form 5,140 9. 2012 tax form Enter contributions for the year to other IRAs 9. 2012 tax form 0 10. 2012 tax form Subtract line 9 from line 6 10. 2012 tax form 5,500 11. 2012 tax form Enter the lesser of line 8 or line 10. 2012 tax form This is your reduced Roth IRA contribution limit 11. 2012 tax form 5,140 When Can You Make Contributions? You can make contributions to a Roth IRA for a year at any time during the year or by the due date of your return for that year (not including extensions). 2012 tax form You can make contributions for 2013 by the due date (not including extensions) for filing your 2013 tax return. 2012 tax form This means that most people can make contributions for 2013 by April 15, 2014. 2012 tax form What if You Contribute Too Much? A 6% excise tax applies to any excess contribution to a Roth IRA. 2012 tax form Excess contributions. 2012 tax form   These are the contributions to your Roth IRAs for a year that equal the total of: Amounts contributed for the tax year to your Roth IRAs (other than amounts properly and timely rolled over from a Roth IRA or properly converted from a traditional IRA or rolled over from a qualified retirement plan, as described later) that are more than your contribution limit for the year (explained earlier under How Much Can Be Contributed? ), plus Any excess contributions for the preceding year, reduced by the total of: Any distributions out of your Roth IRAs for the year, plus Your contribution limit for the year minus your contributions to all your IRAs for the year. 2012 tax form Withdrawal of excess contributions. 2012 tax form   For purposes of determining excess contributions, any contribution that is withdrawn on or before the due date (including extensions) for filing your tax return for the year is treated as an amount not contributed. 2012 tax form This treatment only applies if any earnings on the contributions are also withdrawn. 2012 tax form The earnings are considered earned and received in the year the excess contribution was made. 2012 tax form   If you timely filed your 2013 tax return without withdrawing a contribution that you made in 2013, you can still have the contribution returned to you within 6 months of the due date of your 2013 tax return, excluding extensions. 2012 tax form If you do, file an amended return with “Filed pursuant to section 301. 2012 tax form 9100-2” written at the top. 2012 tax form Report any related earnings on the amended return and include an explanation of the withdrawal. 2012 tax form Make any other necessary changes on the amended return. 2012 tax form Applying excess contributions. 2012 tax form    If contributions to your Roth IRA for a year were more than the limit, you can apply the excess contribution in one year to a later year if the contributions for that later year are less than the maximum allowed for that year. 2012 tax form Can You Move Amounts Into a Roth IRA? You may be able to convert amounts from either a traditional, SEP, or SIMPLE IRA into a Roth IRA. 2012 tax form You may be able to roll over amounts from a qualified retirement plan to a Roth IRA. 2012 tax form You may be able to recharacterize contributions made to one IRA as having been made directly to a different IRA. 2012 tax form You can roll amounts over from a designated Roth account or from one Roth IRA to another Roth IRA. 2012 tax form Conversions You can convert a traditional IRA to a Roth IRA. 2012 tax form The conversion is treated as a rollover, regardless of the conversion method used. 2012 tax form Most of the rules for rollovers, described in chapter 1 under Rollover From One IRA Into Another , apply to these rollovers. 2012 tax form However, the 1-year waiting period does not apply. 2012 tax form Conversion methods. 2012 tax form   You can convert amounts from a traditional IRA to a Roth IRA in any of the following three ways. 2012 tax form Rollover. 2012 tax form You can receive a distribution from a traditional IRA and roll it over (contribute it) to a Roth IRA within 60 days after the distribution. 2012 tax form Trustee-to-trustee transfer. 2012 tax form You can direct the trustee of the traditional IRA to transfer an amount from the traditional IRA to the trustee of the Roth IRA. 2012 tax form Same trustee transfer. 2012 tax form If the trustee of the traditional IRA also maintains the Roth IRA, you can direct the trustee to transfer an amount from the traditional IRA to the Roth IRA. 2012 tax form Same trustee. 2012 tax form   Conversions made with the same trustee can be made by redesignating the traditional IRA as a Roth IRA, rather than opening a new account or issuing a new contract. 2012 tax form Income. 2012 tax form   You must include in your gross income distributions from a traditional IRA that you would have had to include in income if you had not converted them into a Roth IRA. 2012 tax form These amounts are normally included in income on your return for the year that you converted them from a traditional IRA to a Roth IRA. 2012 tax form If you must include any amount in your gross income, you may have to increase your withholding or make estimated tax payments. 2012 tax form See Publication 505, Tax Withholding and Estimated Tax. 2012 tax form More information. 2012 tax form   For more information on conversions, see Converting From Any Traditional IRA Into a Roth IRA in chapter 1. 2012 tax form Rollover From Employer's Plan Into a Roth IRA You can roll over into a Roth IRA all or part of an eligible rollover distribution you receive from your (or your deceased spouse's): Employer's qualified pension, profit-sharing, or stock bonus plan (including a 401(k) plan); Annuity plan; Tax-sheltered annuity plan (section 403(b) plan); or Governmental deferred compensation plan (section 457 plan). 2012 tax form Any amount rolled over is subject to the same rules for converting a traditional IRA into a Roth IRA. 2012 tax form See Converting From Any Traditional IRA Into a Roth IRA in chapter 1. 2012 tax form Also, the rollover contribution must meet the rollover requirements that apply to the specific type of retirement plan. 2012 tax form Rollover methods. 2012 tax form   You can roll over amounts from a qualified retirement plan to a Roth IRA in one of the following ways. 2012 tax form Rollover. 2012 tax form You can receive a distribution from a qualified retirement plan and roll it over (contribute) to a Roth IRA within 60 days after the distribution. 2012 tax form Since the distribution is paid directly to you, the payer generally must withhold 20% of it. 2012 tax form Direct rollover option. 2012 tax form Your employer's qualified plan must give you the option to have any part of an eligible rollover distribution paid directly to a Roth IRA. 2012 tax form Generally, no tax is withheld from any part of the designated distribution that is directly paid to the trustee of the Roth IRA. 2012 tax form Rollover by nonspouse beneficiary. 2012 tax form   If you are a designated beneficiary (other than a surviving spouse) of a deceased employee, you can roll over all or part of an eligible rollover distribution from one of the types of plans listed above into a Roth IRA. 2012 tax form You must make the rollover by a direct trustee-to-trustee transfer into an inherited Roth IRA. 2012 tax form   You will determine your required minimum distributions in years after you make the rollover based on whether the employee died before his or her required beginning date for taking distributions from the plan. 2012 tax form For more information, see Distributions after the employee’s death under Tax on Excess Accumulation in Publication 575. 2012 tax form Income. 2012 tax form   You must include in your gross income distributions from a qualified retirement plan that you would have had to include in income if you had not rolled them over into a Roth IRA. 2012 tax form You do not include in gross income any part of a distribution from a qualified retirement plan that is a return of contributions (after-tax contributions) to the plan that were taxable to you when paid. 2012 tax form These amounts are normally included in income on your return for the year of the rollover from the qualified employer plan to a Roth IRA. 2012 tax form If you must include any amount in your gross income, you may have to increase your withholding or make estimated tax payments. 2012 tax form See Publication 505, Tax Withholding and Estimated Tax. 2012 tax form For more information on eligible rollover distributions from qualified retirement plans and withholding, see Rollover From Employer's Plan Into an IRA in chapter 1. 2012 tax form Military Death Gratuities and Servicemembers' Group Life Insurance (SGLI) Payments If you received a military death gratuity or SGLI payment with respect to a death from injury that occurred after October 6, 2001, you can contribute (roll over) all or part of the amount received to your Roth IRA. 2012 tax form The contribution is treated as a qualified rollover contribution. 2012 tax form The amount you can roll over to your Roth IRA cannot exceed the total amount that you received reduced by any part of that amount that was contributed to a Coverdell ESA or another Roth IRA. 2012 tax form Any military death gratuity or SGLI payment contributed to a Roth IRA is disregarded for purposes of the 1-year waiting period between rollovers. 2012 tax form The rollover must be completed before the end of the 1-year period beginning on the date you received the payment. 2012 tax form The amount contributed to your Roth IRA is treated as part of your cost basis (investment in the contract) in the Roth IRA that is not taxable when distributed. 2012 tax form Rollover From a Roth IRA You can withdraw, tax free, all or part of the assets from one Roth IRA if you contribute them within 60 days to another Roth IRA. 2012 tax form Most of the rules for rollovers, described in chapter 1 under Rollover From One IRA Into Another , apply to these rollovers. 2012 tax form However, rollovers from retirement plans other than Roth IRAs are disregarded for purposes of the 1-year waiting period between rollovers. 2012 tax form A rollover from a Roth IRA to an employer retirement plan is not allowed. 2012 tax form A rollover from a designated Roth account can only be made to another designated Roth account or to a Roth IRA. 2012 tax form If you roll over an amount from one Roth IRA to another Roth IRA, the 5-year period used to determine qualified distributions does not change. 2012 tax form The 5-year period begins with the first taxable year for which the contribution was made to the initial Roth IRA. 2012 tax form See What are Qualified Distributions , later. 2012 tax form Rollover of Exxon Valdez Settlement Income If you are a qualified taxpayer (defined in chapter 1, earlier) and you received qualified settlement income (defined in chapter 1, earlier), you can contribute all or part of the amount received to an eligible retirement plan which includes a Roth IRA. 2012 tax form The rules for contributing qualified settlement income to a Roth IRA are the same as the rules for contributing qualified settlement income to a traditional IRA with the following exception. 2012 tax form Qualified settlement income that is contributed to a Roth IRA, or to a designated Roth account, will be: Included in your taxable income for the year the qualified settlement income was received, and Treated as part of your cost basis (investment in the contract) in the Roth IRA that is not taxable when distributed. 2012 tax form For more information, see Rollover of Exxon Valdez Settlement Income in chapter 1. 2012 tax form Rollover of Airline Payments If you are a qualified airline employee (defined next), you may contribute any portion of an airline payment (defined below) you receive to a Roth IRA. 2012 tax form The contribution must be made within 180 days from the date you received the payment. 2012 tax form The contribution will be treated as a qualified rollover contribution. 2012 tax form The rollover contribution is included in income to the extent it would be included in income if it were not part of the rollover contribution. 2012 tax form Also, any reduction in the airline payment amount on account of employment taxes shall be disregarded when figuring the amount you can contribute to your Roth IRA. 2012 tax form Qualified airline employee. 2012 tax form    A current or former employee of a commercial airline carrier who was a participant in a qualified defined benefit plan maintained by the carrier which was terminated or became subject to restrictions under Section 402(b) of the Pension Protection Act of 2006. 2012 tax form These provisions also apply to surviving spouses of qualified airline employees. 2012 tax form Airline payment. 2012 tax form    An airline payment is any payment of money or other property that is paid to a qualified airline employee from a commercial airline carrier. 2012 tax form The payment also must be made both: Under the approval of an order of federal bankruptcy court in a case filed after September 11, 2001, and before January 1, 2007, and In respect of the qualified airline employee’s interest in a bankruptcy claim against the airline carrier, any note of the carrier (or amount paid in lieu of a note being issued), or any other fixed obligation of the carrier to pay a lump sum amount. 2012 tax form Any reduction in the airline payment amount on account of employment taxes shall be disregarded when figuring the amount you can roll over to your traditional IRA. 2012 tax form Also, an airline payment shall not include any amount payable on the basis of the airline carrier’s future earnings or profits. 2012 tax form Are Distributions Taxable? You do not include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s). 2012 tax form You also do not include distributions from your Roth IRA that you roll over tax free into another Roth IRA. 2012 tax form You may have to include part of other distributions in your income. 2012 tax form See Ordering Rules for Distributions , later. 2012 tax form Basis of distributed property. 2012 tax form   The basis of property distributed from a Roth IRA is its fair market value (FMV) on the date of distribution, whether or not the distribution is a qualified distribution. 2012 tax form Withdrawals of contributions by due date. 2012 tax form   If you withdraw contributions (including any net earnings on the contributions) by the due date of your return for the year in which you made the contribution, the contributions are treated as if you never made them. 2012 tax form If you have an extension of time to file your return, you can withdraw the contributions and earnings by the extended due date. 2012 tax form The withdrawal of contributions is tax free, but you must include the earnings on the contributions in income for the year in which you made the contributions. 2012 tax form What Are Qualified Distributions? A qualified distribution is any payment or distribution from your Roth IRA that meets the following requirements. 2012 tax form It is made after the 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for your benefit, and The payment or distribution is: Made on or after the date you reach age 59½, Made because you are disabled (defined earlier), Made to a beneficiary or to your estate after your death, or One that meets the requirements listed under First home under Exceptions in chapter 1 (up to a $10,000 lifetime limit). 2012 tax form Additional Tax on Early Distributions If you receive a distribution that is not a qualified distribution, you may have to pay the 10% additional tax on early distributions as explained in the following paragraphs. 2012 tax form Distributions of conversion and certain rollover contributions within 5-year period. 2012 tax form   If, within the 5-year period starting with the first day of your tax year in which you convert an amount from a traditional IRA or rollover an amount from a qualified retirement plan to a Roth IRA, you take a distribution from a Roth IRA, you may have to pay the 10% additional tax on early distributions. 2012 tax form You generally must pay the 10% additional tax on any amount attributable to the part of the amount converted or rolled over (the conversion or rollover contribution) that you had to include in income (recapture amount). 2012 tax form A separate 5-year period applies to each conversion and rollover. 2012 tax form See Ordering Rules for Distributions , later, to determine the recapture amount, if any. 2012 tax form   The 5-year period used for determining whether the 10% early distribution tax applies to a distribution from a conversion or rollover contribution is separately determined for each conversion and rollover, and is not necessarily the same as the 5-year period used for determining whether a distribution is a qualified distribution. 2012 tax form See What Are Qualified Distributions , earlier. 2012 tax form   For example, if a calendar-year taxpayer makes a conversion contribution on February 25, 2013, and makes a regular contribution for 2012 on the same date, the 5-year period for the conversion begins January 1, 2013, while the 5-year period for the regular contribution begins on January 1, 2012. 2012 tax form   Unless one of the exceptions listed later applies, you must pay the additional tax on the portion of the distribution attributable to the part of the conversion or rollover contribution that you had to include in income because of the conversion or rollover. 2012 tax form   You must pay the 10% additional tax in the year of the distribution, even if you had included the conversion or rollover contribution in an earlier year. 2012 tax form You also must pay the additional tax on any portion of the distribution attributable to earnings on contributions. 2012 tax form Other early distributions. 2012 tax form   Unless one of the exceptions listed below applies, you must pay the 10% additional tax on the taxable part of any distributions that are not qualified distributions. 2012 tax form Exceptions. 2012 tax form   You may not have to pay the 10% additional tax in the following situations. 2012 tax form You have reached age 59½. 2012 tax form You are totally and permanently disabled. 2012 tax form You are the beneficiary of a deceased IRA owner. 2012 tax form You use the distribution to buy, build, or rebuild a first home. 2012 tax form The distributions are part of a series of substantially equal payments. 2012 tax form You have unreimbursed medical expenses that are more than 10% (or 7. 2012 tax form 5% if you or your spouse was born before January 2, 1949) of your adjusted gross income (defined earlier) for the year. 2012 tax form You are paying medical insurance premiums during a period of unemployment. 2012 tax form The distributions are not more than your qualified higher education expenses. 2012 tax form The distribution is due to an IRS levy of the qualified plan. 2012 tax form The distribution is a qualified reservist distribution. 2012 tax form Most of these exceptions are discussed earlier in chapter 1 under Early Distributions . 2012 tax form Please click here for the text description of the image. 2012 tax form Is Roth Distributions a Qualified Distribution? Ordering Rules for Distributions If you receive a distribution from your Roth IRA that is not a qualified distribution, part of it may be taxable. 2012 tax form There is a set order in which contributions (including conversion contributions and rollover contributions from qualified retirement plans) and earnings are considered to be distributed from your Roth IRA. 2012 tax form For these purposes, disregard the withdrawal of excess contributions and the earnings on them (discussed earlier under What if You Contribute Too Much ). 2012 tax form Order the distributions as follows. 2012 tax form Regular contributions. 2012 tax form Conversion and rollover contributions, on a first-in, first-out basis (generally, total conversions and rollovers from the earliest year first). 2012 tax form See Aggregation (grouping and adding) rules, later. 2012 tax form Take these conversion and rollover contributions into account as follows: Taxable portion (the amount required to be included in gross income because of the conversion or rollover) first, and then the Nontaxable portion. 2012 tax form Earnings on contributions. 2012 tax form Disregard rollover contributions from other Roth IRAs for this purpose. 2012 tax form Aggregation (grouping and adding) rules. 2012 tax form   Determine the taxable amounts distributed (withdrawn), distributions, and contributions by grouping and adding them together as follows. 2012 tax form Add all distributions from all your Roth IRAs during the year together. 2012 tax form Add all regular contributions made for the year (including contributions made after the close of the year, but before the due date of your return) together. 2012 tax form Add this total to the total undistributed regular contributions made in prior years. 2012 tax form Add all conversion and rollover contributions made during the year together. 2012 tax form For purposes of the ordering rules, in the case of any conversion or rollover in which the conversion or rollover distribution is made in 2013 and the conversion or rollover contribution is made in 2014, treat the conversion or rollover contribution as contributed before any other conversion or rollover contributions made in 2014. 2012 tax form Add any recharacterized contributions that end up in a Roth IRA to the appropriate contribution group for the year that the original contribution would have been taken into account if it had been made directly to the Roth IRA. 2012 tax form   Disregard any recharacterized contribution that ends up in an IRA other than a Roth IRA for the purpose of grouping (aggregating) both contributions and distributions. 2012 tax form Also disregard any amount withdrawn to correct an excess contribution (including the earnings withdrawn) for this purpose. 2012 tax form Example. 2012 tax form On October 15, 2009, Justin converted all $80,000 in his traditional IRA to his Roth IRA. 2012 tax form His Forms 8606 from prior years show that $20,000 of the amount converted is his basis. 2012 tax form Justin included $60,000 ($80,000 − $20,000) in his gross income. 2012 tax form On February 23, 2013, Justin made a regular contribution of $5,000 to a Roth IRA. 2012 tax form On November 8, 2013, at age 60, Justin took a $7,000 distribution from his Roth IRA. 2012 tax form The first $5,000 of the distribution is a return of Justin's regular contribution and is not includible in his income. 2012 tax form The next $2,000 of the distribution is not includible in income because it was included previously. 2012 tax form Figuring your recapture amount. 2012 tax form   If you had an early distribution from your Roth IRAs in 2013, you must allocate the early distribution by using the Recapture Amount—Allocation Chart, later. 2012 tax form Recapture Amount—Allocation Chart Enter the amount from your 2013 Form 8606, line 19   Before you begin: You will need your prior year Form(s) 8606 and income tax return(s) if you entered an amount on any line(s) as indicated below. 2012 tax form   You will now allocate the amount you entered above (2013 Form 8606, line 19) in the order shown, to the amounts on the lines listed below (to the extent a prior year distribution was not allocable to the amount). 2012 tax form The maximum amount you can enter on each line below is the amount entered on the referenced lines of the form for that year. 2012 tax form Note. 2012 tax form Once you have allocated the full amount from your 2013 Form 8606, line 19, STOP. 2012 tax form See the Example , earlier. 2012 tax form Tax Year Your Form 2013 Form 8606, line 20   Form 8606, line 22   1998 Form 8606, line 16   Form 8606, line 15   1999 Form 8606, line 16   Form 8606, line 15   2000 Form 8606, line 16   Form 8606, line 15   2001 Form 8606, line 18   Form 8606, line 17   2002 Form 8606, line 18   Form 8606, line 17   2003 Form 8606, line 18   Form 8606, line 17   2004 Form 8606, line 18   Form 8606, line 17   2005 Form 8606, line 18   Form 8606, line 17   2006 Form 8606, line 18   Form 8606, line 17   2007 Form 8606, line 18   Form 8606, line 17   2008 Form 8606, line 18  and  Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*   Form 8606, line 17  and  Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**   2009 Form 8606, line 18  and  Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*   Form 8606, line 17  and  Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**   2010 Form 8606, lines 18 and 23   Form 8606, lines 17 and 22   2011 Form 8606, line 18  and  Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*   Form 8606, line 17  and  Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**   2012 Form 8606, line 18  and  Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*   Form 8606, line 17  and  Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**   2013 Form 8606, line 18  and  Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*   Form 8606, line 17  and  Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**   2013 Form 8606, line 25       *Only include those amounts rolled over to a Roth IRA. 2012 tax form  **Only include any contributions (usually Form 1099-R, box 5) that were taxable to you when made and rolled over to a Roth IRA. 2012 tax form Amount to include on Form 5329, line 1. 2012 tax form   Include on line 1 of your 2013 Form 5329 the following four amounts from the Recapture Amount—Allocation Chart that you filled out. 2012 tax form The amount you allocated to line 20 of your 2013 Form 8606. 2012 tax form The amount(s) allocated to your 2009 through 2013 Forms 8606, line 18, and your 2010 Form 8606, line 23. 2012 tax form The amount(s) allocated to your 2009, 2011, 2012, and 2013 Forms 1040, line 16b; Forms 1040A, line 12b; and Forms 1040NR, line 17b. 2012 tax form The amount from your 2013 Form 8606, line 25. 2012 tax form   Also, include any amount you allocated to line 20 of your 2013 Form 8606 on your 2013 Form 5329, line 2, and enter exception number 09. 2012 tax form Example. 2012 tax form Ishmael, age 32, opened a Roth IRA in 2000. 2012 tax form He made the maximum contributions to it every year. 2012 tax form In addition, he made the following transactions into his Roth IRA. 2012 tax form In 2005, he converted $10,000 from his traditional IRA into his Roth IRA. 2012 tax form He filled out a 2005 Form 8606 and attached it with his 2005 Form 1040. 2012 tax form He entered $0 on line 17 of Form 8606 because he took a deduction for all the contributions to the traditional IRA, therefore he has no basis. 2012 tax form He entered $10,000 on line 18 of Form 8606. 2012 tax form In 2011, he rolled over the entire balance of his qualified retirement plan, $20,000, into a Roth IRA when he changed jobs. 2012 tax form He used a 2011 Form 1040 to file his taxes. 2012 tax form He entered $20,000 on line 16a of Form 1040 because that was the amount reported in box 1 of his 2011 Form 1099-R. 2012 tax form Box 5 of his 2011 Form 1099-R reported $0 since he did not make any after-tax contributions to the qualified retirement plan. 2012 tax form He entered $20,000 on line 16b of Form 1040 since that is the taxable amount that was rolled over in 2011. 2012 tax form The total balance in his Roth IRA as of January 1, 2013 was $105,000 ($50,000 in contributions from 2000 through 2012 + $10,000 from the 2005 conversion + $20,000 from the 2011 rollover + $25,000 from earnings). 2012 tax form He has not taken any early distribution from his Roth IRA before 2013. 2012 tax form In 2013, he made the maximum contribution of $5,500 to his Roth IRA. 2012 tax form In August of 2013, he took a $85,500 early distribution from his Roth IRA to use as a down payment on the purchase of his first home. 2012 tax form See his filled out Illustrated Recapture Amount—Allocation Chart, later, to see how he allocated the amounts from the above transactions. 2012 tax form Based on his allocation, he would enter $20,000 on his 2013 Form 5329, line 1 (see Amount to include on Form 5329, line 1 , above). 2012 tax form He should also report $10,000 on his 2013 Form 5329, line 2, and enter exception 09 since that amount is not subject to the 10% additional tax on early distributions. 2012 tax form Illustrated Recapture Amount—Allocation Chart Enter the amount from your 2013 Form 8606, line 19 $85,500 Before you begin: You will need your prior year Form(s) 8606 and income tax return(s) if you entered an amount on any line(s) as indicated below. 2012 tax form   You will now allocate the amount you entered above (2013 Form 8606, line 19) in the order shown, to the amounts on the lines listed below (to the extent a prior year distribution was not allocable to the amount). 2012 tax form The maximum amount you can enter on each line below is the amount entered on the referenced lines of the form for that year. 2012 tax form Note. 2012 tax form Once you have allocated the full amount from your 2013 Form 8606, line 19, STOP. 2012 tax form See the Example , earlier. 2012 tax form Tax Year Your Form 2013 Form 8606, line 20 $10,000 Form 8606, line 22 $55,500 1998 Form 8606, line 16   Form 8606, line 15   1999 Form 8606, line 16   Form 8606, line 15   2000 Form 8606, line 16   Form 8606, line 15   2001 Form 8606, line 18   Form 8606, line 17   2002 Form 8606, line 18   Form 8606, line 17   2003 Form 8606, line 18   Form 8606, line 17   2004 Form 8606, line 18   Form 8606, line 17   2005 Form 8606, line 18 $10,000 Form 8606, line 17 $-0- 2006 Form 8606, line 18   Form 8606, line 17   2007 Form 8606, line 18   Form 8606, line 17   2008 Form 8606, line 18  and  Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*   Form 8606, line 17  and  Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**   2009 Form 8606, line 18  and  Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*   Form 8606, line 17  and  Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**   2010 Form 8606, lines 18 and 23   Form 8606, lines 17 and 22   2011 Form 8606, line 18  and  Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b* $10,000 Form 8606, line 17  and  Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**   2012 Form 8606, line 18  and  Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*   Form 8606, line 17  and  Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**   2013 Form 8606, line 18  and  Form 1040, line 16b; Form 1040A, line 12b; or Form 1040NR, line 17b*   Form 8606, line 17  and  Form 1040, line 16a; Form 1040A, line 12a; or Form 1040NR, line 17a**   2013 Form 8606, line 25       *Only include those amounts rolled over to a Roth IRA. 2012 tax form  **Only include any contributions (usually Form 1099-R, box 5) that were taxable to you when made and rolled over to a Roth IRA. 2012 tax form How Do You Figure the Taxable Part? To figure the taxable part of a distribution that is not a qualified distribution, complete Form 8606, Part III. 2012 tax form Must You Withdraw or Use Assets? You are not required to take distributions from your Roth IRA at any age. 2012 tax form The minimum distribution rules that apply to traditional IRAs do not apply to Roth IRAs while the owner is alive. 2012 tax form However, after the death of a Roth IRA owner, certain of the minimum distribution rules that apply to traditional IRAs also apply to Roth IRAs as explained later under Distributions After Owner's Death . 2012 tax form Minimum distributions. 2012 tax form   You cannot use your Roth IRA to satisfy minimum distribution requirements for your traditional IRA. 2012 tax form Nor can you use distributions from traditional IRAs for required distributions from Roth IRAs. 2012 tax form See Distributions to beneficiaries , later. 2012 tax form Recognizing Losses on Investments If you have a loss on your Roth IRA investment, you can recognize the loss on your income tax return, but only when all the amounts in all of your Roth IRA accounts have been distributed to you and the total distributions are less than your unrecovered basis. 2012 tax form Your basis is the total amount of contributions in your Roth IRAs. 2012 tax form You claim the loss as a miscellaneous itemized deduction, subject to the 2%-of-adjusted-gross-income limit that applies to certain miscellaneous itemized deductions on Schedule A (Form 1040). 2012 tax form Any such losses are added back to taxable income for purposes of calculating the alternative minimum tax. 2012 tax form Distributions After Owner's Death If a Roth IRA owner dies, the minimum distribution rules that apply to traditional IRAs apply to Roth IRAs as though the Roth IRA owner died before his or her required beginning date. 2012 tax form See When Can You Withdraw or Use Assets? in chapter 1. 2012 tax form Distributions to beneficiaries. 2012 tax form   Generally, the entire interest in the Roth IRA must be distributed by the end of the fifth calendar year after the year of the owner's death unless the interest is payable to a designated beneficiary over the life or life expectancy of the designated beneficiary. 2012 tax form (See When Must You Withdraw Assets? (Required Minimum Distributions) in chapter 1. 2012 tax form )   If paid as an annuity, the entire interest must be payable over a period not greater than the designated beneficiary's life expectancy and distributions must begin before the end of the calendar year following the year of death. 2012 tax form Distributions from another Roth IRA cannot be substituted for these distributions unless the other Roth IRA was inherited from the same decedent. 2012 tax form   If the sole beneficiary is the spouse, he or she can either delay distributions until the decedent would have reached age 70½ or treat the Roth IRA as his or her own. 2012 tax form Combining with other Roth IRAs. 2012 tax form   A beneficiary can combine an inherited Roth IRA with another Roth IRA maintained by the beneficiary only if the beneficiary either: Inherited the other Roth IRA from the same decedent, or Was the spouse of the decedent and the sole beneficiary of the Roth IRA and elects to treat it as his or her own IRA. 2012 tax form Distributions that are not qualified distributions. 2012 tax form   If a distribution to a beneficiary is not a qualified distribution, it is generally includible in the beneficiary's gross income in the same manner as it would have been included in the owner's income had it been distributed to the IRA owner when he or she was alive. 2012 tax form   If the owner of a Roth IRA dies before the end of: The 5-year period beginning with the first taxable year for which a contribution was made to a Roth IRA set up for the owner's benefit, or The 5-year period starting with the year of a conversion contribution from a traditional IRA or a rollover from a qualified retirement plan to a Roth IRA, each type of contribution is divided among multiple beneficiaries according to the pro-rata share of each. 2012 tax form See Ordering Rules for Distributions , earlier in this chapter under Are Distributions Taxable. 2012 tax form Example. 2012 tax form When Ms. 2012 tax form Hibbard died in 2013, her Roth IRA contained regular contributions of $4,000, a conversion contribution of $10,000 that was made in 2009, and earnings of $2,000. 2012 tax form No distributions had been made from her IRA. 2012 tax form She had no basis in the conversion contribution in 2009. 2012 tax form When she established this Roth IRA (her first) in 2009, she named each of her four children as equal beneficiaries. 2012 tax form Each child will receive one-fourth of each type of contribution and one-fourth of the earnings. 2012 tax form An immediate distribution of $4,000 to each child will be treated as $1,000 from regular contributions, $2,500 from conversion contributions, and $500 from earnings. 2012 tax form In this case, because the distributions are made before the end of the applicable 5-year period for a qualified distribution, each beneficiary includes $500 in income for 2013. 2012 tax form The 10% additional tax on early distributions does not apply because the distribution was made to the beneficiaries as a result of the death of the IRA owner. 2012 tax form If distributions from an inherited Roth IRA are less than the required minimum distribution for the year, discussed in chapter 1 under When Must You Withdraw Assets? (Required Minimum Distributions), you may have to pay a 50% excise tax for that year on the amount not distributed as required. 2012 tax form For the tax on excess accumulations (insufficient distributions), see Excess Accumulations (Insufficient Distributions) under What Acts Result in Penalties or Additional Taxes? in chapter 1. 2012 tax form If this applies to you, substitute “Roth IRA” for “traditional IRA” in that discussion. 2012 tax form Prev  Up  Next   Home   More Online Publications