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40 Ez Form

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40 Ez Form

40 ez form 4. 40 ez form   Sales and Trades of Investment Property Table of Contents IntroductionNominees. 40 ez form Topics - This chapter discusses: Useful Items - You may want to see: What Is a Sale or Trade?Dividend versus sale or trade. 40 ez form Worthless Securities Constructive Sales of Appreciated Financial Positions Section 1256 Contracts Marked to Market Basis of Investment PropertyCost Basis Basis Other Than Cost Adjusted Basis Stocks and Bonds How To Figure Gain or LossFair market value. 40 ez form Debt paid off. 40 ez form Payment of cash. 40 ez form Special Rules for Mutual Funds Nontaxable TradesLike-Kind Exchanges Corporate Stocks Exchange of Shares In One Mutual Fund For Shares In Another Mutual Fund Insurance Policies and Annuities U. 40 ez form S. 40 ez form Treasury Notes or Bonds Transfers Between Spouses Related Party TransactionsGain on Sale or Trade of Depreciable Property Capital Gains and LossesCapital or Ordinary Gain or Loss Holding Period Nonbusiness Bad Debts Short Sales Wash Sales Options Straddles Sales of Stock to ESOPs or Certain Cooperatives Rollover of Gain From Publicly Traded Securities Gains on Qualified Small Business Stock Exclusion of Gain From DC Zone Assets Reporting Capital Gains and LossesException 1. 40 ez form Exception 2. 40 ez form Section 1256 contracts and straddles. 40 ez form Market discount bonds. 40 ez form File Form 1099-B or Form 1099-S with the IRS. 40 ez form Capital Losses Capital Gain Tax Rates Special Rules for Traders in SecuritiesHow To Report Introduction This chapter explains the tax treatment of sales and trades of investment property. 40 ez form Investment property. 40 ez form   This is property that produces investment income. 40 ez form Examples include stocks, bonds, and Treasury bills and notes. 40 ez form Property used in a trade or business is not investment property. 40 ez form Form 1099-B. 40 ez form   If you sold property such as stocks, bonds, mutual funds, or certain commodities through a broker during the year, you should receive, for each sale, a Form 1099-B, Proceeds From Broker and Barter Exchange Transactions, or substitute statement, from the broker. 40 ez form You should receive the statement by February 15 of the next year. 40 ez form It will show the gross proceeds from the sale. 40 ez form The IRS will also get a copy of Form 1099-B from the broker. 40 ez form   Use Form 1099-B (or substitute statement received from your broker) to complete Form 8949. 40 ez form If you sold a covered security in 2013, your broker will send you a Form 1099-B (or substitute statement) that shows your basis. 40 ez form This will help you complete Form 8949. 40 ez form Generally, a covered security is a security you acquired after 2010, with certain exceptions explained in the Instructions for Form 8949. 40 ez form    For more information on Form 8949 and Schedule D (Form 1040), see Reporting Capital Gains and Losses in this chapter. 40 ez form Also see the Instructions for Form 8949 and the Instructions for Schedule D (Form 1040). 40 ez form Nominees. 40 ez form   If someone receives gross proceeds as a nominee for you, that person will give you a Form 1099-B, which will show gross proceeds received on your behalf. 40 ez form   If you receive a Form 1099-B that includes gross proceeds belonging to another person, see Nominees , later under Reporting Capital Gains and Losses for more information. 40 ez form Other property transactions. 40 ez form   Certain transfers of property are discussed in other IRS publications. 40 ez form These include: Sale of your main home, discussed in Publication 523, Selling Your Home; Installment sales, covered in Publication 537; Various types of transactions involving business property, discussed in Publication 544, Sales and Other Dispositions of Assets; Transfers of property at death, covered in Publication 559; and Disposition of an interest in a passive activity, discussed in Publication 925. 40 ez form Topics - This chapter discusses: What Is a Sale or Trade? , Basis of Investment Property , Adjusted Basis , How To Figure Gain or Loss , Nontaxable trades , Transfers Between Spouses , Related Party Transactions , Capital Gains and Losses , Reporting Capital Gains and Losses , and Special Rules for Traders in Securities . 40 ez form Useful Items - You may want to see: Publication 551 Basis of Assets Form (and Instructions) Schedule D (Form 1040) Capital Gains and Losses 6781 Gains and Losses From Section 1256 Contracts and Straddles 8582 Passive Activity Loss Limitations 8824 Like-Kind Exchanges 8949 Sales and Other Dispositions of Capital Assets See chapter 5, How To Get Tax Help , for information about getting these publications and forms. 40 ez form What Is a Sale or Trade? This section explains what is a sale or trade. 40 ez form It also explains certain transactions and events that are treated as sales or trades. 40 ez form A sale is generally a transfer of property for money or a mortgage, note, or other promise to pay money. 40 ez form A trade is a transfer of property for other property or services, and may be taxed in the same way as a sale. 40 ez form Sale and purchase. 40 ez form   Ordinarily, a transaction is not a trade when you voluntarily sell property for cash and immediately buy similar property to replace it. 40 ez form The sale and purchase are two separate transactions. 40 ez form But see Like-Kind Exchanges under Nontaxable Trades, later. 40 ez form Redemption of stock. 40 ez form   A redemption of stock is treated as a sale or trade and is subject to the capital gain or loss provisions unless the redemption is a dividend or other distribution on stock. 40 ez form Dividend versus sale or trade. 40 ez form   Whether a redemption is treated as a sale, trade, dividend, or other distribution depends on the circumstances in each case. 40 ez form Both direct and indirect ownership of stock will be considered. 40 ez form The redemption is treated as a sale or trade of stock if: The redemption is not essentially equivalent to a dividend — see Dividends and Other Distributions in chapter 1, There is a substantially disproportionate redemption of stock, There is a complete redemption of all the stock of the corporation owned by the shareholder, or The redemption is a distribution in partial liquidation of a corporation. 40 ez form Redemption or retirement of bonds. 40 ez form   A redemption or retirement of bonds or notes at their maturity generally is treated as a sale or trade. 40 ez form See Stocks, stock rights, and bonds and Discounted Debt Instruments under Capital or Ordinary Gain or Loss, later. 40 ez form   In addition, a significant modification of a bond is treated as a trade of the original bond for a new bond. 40 ez form For details, see Regulations section 1. 40 ez form 1001-3. 40 ez form Surrender of stock. 40 ez form   A surrender of stock by a dominant shareholder who retains ownership of more than half of the corporation's voting shares is treated as a contribution to capital rather than as an immediate loss deductible from taxable income. 40 ez form The surrendering shareholder must reallocate his or her basis in the surrendered shares to the shares he or she retains. 40 ez form Trade of investment property for an annuity. 40 ez form   The transfer of investment property to a corporation, trust, fund, foundation, or other organization, in exchange for a fixed annuity contract that will make guaranteed annual payments to you for life, is a taxable trade. 40 ez form If the present value of the annuity is more than your basis in the property traded, you have a taxable gain in the year of the trade. 40 ez form Figure the present value of the annuity according to factors used by commercial insurance companies issuing annuities. 40 ez form Transfer by inheritance. 40 ez form   The transfer of property of a decedent to the executor or administrator of the estate, or to the heirs or beneficiaries, is not a sale or other disposition. 40 ez form No taxable gain or deductible loss results from the transfer. 40 ez form Termination of certain rights and obligations. 40 ez form   The cancellation, lapse, expiration, or other termination of a right or obligation (other than a securities futures contract) with respect to property that is a capital asset (or that would be a capital asset if you acquired it) is treated as a sale. 40 ez form Any gain or loss is treated as a capital gain or loss. 40 ez form   This rule does not apply to the retirement of a debt instrument. 40 ez form See Redemption or retirement of bonds , earlier. 40 ez form Worthless Securities Stocks, stock rights, and bonds (other than those held for sale by a securities dealer) that became completely worthless during the tax year are treated as though they were sold on the last day of the tax year. 40 ez form This affects whether your capital loss is long term or short term. 40 ez form See Holding Period , later. 40 ez form Worthless securities also include securities that you abandon after March 12, 2008. 40 ez form To abandon a security, you must permanently surrender and relinquish all rights in the security and receive no consideration in exchange for it. 40 ez form All the facts and circumstances determine whether the transaction is properly characterized as an abandonment or other type of transaction, such as an actual sale or exchange, contribution to capital, dividend, or gift. 40 ez form If you are a cash basis taxpayer and make payments on a negotiable promissory note that you issued for stock that became worthless, you can deduct these payments as losses in the years you actually make the payments. 40 ez form Do not deduct them in the year the stock became worthless. 40 ez form How to report loss. 40 ez form   Report worthless securities in Form 8949, Part I or Part II, whichever applies. 40 ez form    Report your worthless securities transactions on Form 8949 with the correct box checked for these transactions. 40 ez form See Form 8949 and the Instructions for Form 8949. 40 ez form Filing a claim for refund. 40 ez form   If you do not claim a loss for a worthless security on your original return for the year it becomes worthless, you can file a claim for a credit or refund due to the loss. 40 ez form You must use Form 1040X, Amended U. 40 ez form S. 40 ez form Individual Income Tax Return, to amend your return for the year the security became worthless. 40 ez form You must file it within 7 years from the date your original return for that year had to be filed, or 2 years from the date you paid the tax, whichever is later. 40 ez form (Claims not due to worthless securities or bad debts generally must be filed within 3 years from the date a return is filed, or 2 years from the date the tax is paid, whichever is later. 40 ez form ) For more information about filing a claim, see Publication 556. 40 ez form Constructive Sales of Appreciated Financial Positions You are treated as having made a constructive sale when you enter into certain transactions involving an appreciated financial position (defined later) in stock, a partnership interest, or certain debt instruments. 40 ez form You must recognize gain as if the position were disposed of at its fair market value on the date of the constructive sale. 40 ez form This gives you a new holding period for the position that begins on the date of the constructive sale. 40 ez form Then, when you close the transaction, you reduce your gain (or increase your loss) by the gain recognized on the constructive sale. 40 ez form Constructive sale. 40 ez form   You are treated as having made a constructive sale of an appreciated financial position if you: Enter into a short sale of the same or substantially identical property, Enter into an offsetting notional principal contract relating to the same or substantially identical property, Enter into a futures or forward contract to deliver the same or substantially identical property (including a forward contract that provides for cash settlement), or Acquire the same or substantially identical property (if the appreciated financial position is a short sale, an offsetting notional principal contract, or a futures or forward contract). 40 ez form   You are also treated as having made a constructive sale of an appreciated financial position if a person related to you enters into a transaction described above with a view toward avoiding the constructive sale treatment. 40 ez form For this purpose, a related person is any related party described under Related Party Transactions , later in this chapter. 40 ez form Exception for nonmarketable securities. 40 ez form   You are not treated as having made a constructive sale solely because you entered into a contract for sale of any stock, debt instrument, or partnership interest that is not a marketable security if it settles within 1 year of the date you enter into it. 40 ez form Exception for certain closed transactions. 40 ez form   Do not treat a transaction as a constructive sale if all of the following are true. 40 ez form You closed the transaction on or before the 30th day after the end of your tax year. 40 ez form You held the appreciated financial position throughout the 60-day period beginning on the date you closed the transaction. 40 ez form Your risk of loss was not reduced at any time during that 60-day period by holding certain other positions. 40 ez form   If a closed transaction is reestablished in a substantially similar position during the 60-day period beginning on the date the first transaction was closed, this exception still applies if the reestablished position is closed before the 30th day after the end of your tax year in which the first transaction was closed and, after that closing, (2) and (3) above are true. 40 ez form   This exception also applies to successive short sales of an entire appreciated financial position. 40 ez form For more information, see Revenue Ruling 2003-1 in Internal Revenue Bulletin 2003-3. 40 ez form This bulletin is available at www. 40 ez form irs. 40 ez form gov/pub/irs-irbs/irb03-03. 40 ez form pdf. 40 ez form Appreciated financial position. 40 ez form   This is any interest in stock, a partnership interest, or a debt instrument (including a futures or forward contract, a short sale, or an option) if disposing of the interest would result in a gain. 40 ez form Exceptions. 40 ez form   An appreciated financial position does not include the following. 40 ez form Any position from which all of the appreciation is accounted for under marked-to-market rules, including section 1256 contracts (described later under Section 1256 Contracts Marked to Market ). 40 ez form Any position in a debt instrument if: The position unconditionally entitles the holder to receive a specified principal amount, The interest payments (or other similar amounts) with respect to the position are payable at a fixed rate or a variable rate described in Regulations section 1. 40 ez form 860G-1(a)(3), and The position is not convertible, either directly or indirectly, into stock of the issuer (or any related person). 40 ez form Any hedge with respect to a position described in (2). 40 ez form Certain trust instruments treated as stock. 40 ez form   For the constructive sale rules, an interest in an actively traded trust is treated as stock unless substantially all of the value of the property held by the trust is debt that qualifies for the exception to the definition of an appreciated financial position (explained in (2) above). 40 ez form Sale of appreciated financial position. 40 ez form   A transaction treated as a constructive sale of an appreciated financial position is not treated as a constructive sale of any other appreciated financial position, as long as you continue to hold the original position. 40 ez form However, if you hold another appreciated financial position and dispose of the original position before closing the transaction that resulted in the constructive sale, you are treated as if, at the same time, you constructively sold the other appreciated financial position. 40 ez form Section 1256 Contracts Marked to Market If you hold a section 1256 contract at the end of the tax year, you generally must treat it as sold at its fair market value on the last business day of the tax year. 40 ez form Section 1256 Contract A section 1256 contract is any: Regulated futures contract, Foreign currency contract, Nonequity option, Dealer equity option, or Dealer securities futures contract. 40 ez form Exceptions. 40 ez form   A section 1256 contract does not include: Interest rate swaps, Currency swaps, Basis swaps, Interest rate caps, Interest rate floors, Commodity swaps, Equity swaps, Equity index swaps, Credit default swaps, or Similar agreements. 40 ez form For more details, including definitions of these terms, see section 1256. 40 ez form Regulated futures contract. 40 ez form   This is a contract that: Provides that amounts which must be deposited to, or can be withdrawn from, your margin account depend on daily market conditions (a system of marking to market), and Is traded on, or subject to the rules of, a qualified board of exchange. 40 ez form A qualified board of exchange is a domestic board of trade designated as a contract market by the Commodity Futures Trading Commission, any board of trade or exchange approved by the Secretary of the Treasury, or a national securities exchange registered with the Securities and Exchange Commission. 40 ez form Foreign currency contract. 40 ez form   This is a contract that: Requires delivery of a foreign currency that has positions traded through regulated futures contracts (or settlement of which depends on the value of that type of foreign currency), Is traded in the interbank market, and Is entered into at arm's length at a price determined by reference to the price in the interbank market. 40 ez form   Bank forward contracts with maturity dates longer than the maturities ordinarily available for regulated futures contracts are considered to meet the definition of a foreign currency contract if the above three conditions are satisfied. 40 ez form   Special rules apply to certain foreign currency transactions. 40 ez form These transactions may result in ordinary gain or loss treatment. 40 ez form For details, see Internal Revenue Code section 988 and Regulations sections 1. 40 ez form 988-1(a)(7) and 1. 40 ez form 988-3. 40 ez form Nonequity option. 40 ez form   This is any listed option (defined later) that is not an equity option. 40 ez form Nonequity options include debt options, commodity futures options, currency options, and broad-based stock index options. 40 ez form A broad-based stock index is based on the value of a group of diversified stocks or securities (such as the Standard and Poor's 500 index). 40 ez form Warrants based on a stock index that are economically, substantially identical in all material respects to options based on a stock index are treated as options based on a stock index. 40 ez form Cash-settled options. 40 ez form   Cash-settled options based on a stock index and either traded on or subject to the rules of a qualified board of exchange are nonequity options if the Securities and Exchange Commission (SEC) determines that the stock index is broad based. 40 ez form   This rule does not apply to options established before the SEC determines that the stock index is broad based. 40 ez form Listed option. 40 ez form   This is any option traded on, or subject to the rules of, a qualified board or exchange (as discussed earlier under Regulated futures contract). 40 ez form A listed option, however, does not include an option that is a right to acquire stock from the issuer. 40 ez form Dealer equity option. 40 ez form   This is any listed option that, for an options dealer: Is an equity option, Is bought or granted by that dealer in the normal course of the dealer's business activity of dealing in options, and Is listed on the qualified board of exchange where that dealer is registered. 40 ez form   An “options dealer” is any person registered with an appropriate national securities exchange as a market maker or specialist in listed options. 40 ez form Equity option. 40 ez form   This is any option: To buy or sell stock, or That is valued directly or indirectly by reference to any stock or narrow-based security index. 40 ez form  Equity options include options on a group of stocks only if the group is a narrow-based stock index. 40 ez form Dealer securities futures contract. 40 ez form   For any dealer in securities futures contracts or options on those contracts, this is a securities futures contract (or option on such a contract) that: Is entered into by the dealer (or, in the case of an option, is purchased or granted by the dealer) in the normal course of the dealer's activity of dealing in this type of contract (or option), and Is traded on a qualified board or exchange (as defined under Regulated futures contract , earlier). 40 ez form A securities futures contract that is not a dealer securities futures contract is treated as described later under Securities Futures Contracts . 40 ez form Marked-to-Market Rules A section 1256 contract that you hold at the end of the tax year will generally be treated as sold at its fair market value on the last business day of the tax year, and you must recognize any gain or loss that results. 40 ez form That gain or loss is taken into account in figuring your gain or loss when you later dispose of the contract, as shown in the example under 60/40 rule, below. 40 ez form Hedging exception. 40 ez form   The marked-to-market rules do not apply to hedging transactions. 40 ez form See Hedging Transactions , later. 40 ez form 60/40 rule. 40 ez form   Under the marked-to-market system, 60% of your capital gain or loss will be treated as a long-term capital gain or loss, and 40% will be treated as a short-term capital gain or loss. 40 ez form This is true regardless of how long you actually held the property. 40 ez form Example. 40 ez form On June 22, 2012, you bought a regulated futures contract for $50,000. 40 ez form On December 31, 2012 (the last business day of your tax year), the fair market value of the contract was $57,000. 40 ez form You recognized a $7,000 gain on your 2012 tax return, treated as 60% long-term and 40% short-term capital gain. 40 ez form On February 1, 2013, you sold the contract for $56,000. 40 ez form Because you recognized a $7,000 gain on your 2012 return, you recognize a $1,000 loss ($57,000 − $56,000) on your 2013 tax return, treated as 60% long-term and 40% short-term capital loss. 40 ez form Limited partners or entrepreneurs. 40 ez form   The 60/40 rule does not apply to dealer equity options or dealer securities futures contracts that result in capital gain or loss allocable to limited partners or limited entrepreneurs (defined later under Hedging Transactions ). 40 ez form Instead, these gains or losses are treated as short term. 40 ez form Terminations and transfers. 40 ez form   The marked-to-market rules also apply if your obligation or rights under section 1256 contracts are terminated or transferred during the tax year. 40 ez form In this case, use the fair market value of each section 1256 contract at the time of termination or transfer to determine the gain or loss. 40 ez form Terminations or transfers may result from any offsetting, delivery, exercise, assignment, or lapse of your obligation or rights under section 1256 contracts. 40 ez form Loss carryback election. 40 ez form   An individual having a net section 1256 contracts loss (defined later), generally can elect to carry this loss back 3 years instead of carrying it over to the next year. 40 ez form See How To Report , later, for information about reporting this election on your return. 40 ez form   The loss carried back to any year under this election cannot be more than the net section 1256 contracts gain in that year. 40 ez form In addition, the amount of loss carried back to an earlier tax year cannot increase or produce a net operating loss for that year. 40 ez form   The loss is carried to the earliest carryback year first, and any unabsorbed loss amount can then be carried to each of the next 2 tax years. 40 ez form In each carryback year, treat 60% of the carryback amount as a long-term capital loss and 40% as a short-term capital loss from section 1256 contracts. 40 ez form   If only a portion of the net section 1256 contracts loss is absorbed by carrying the loss back, the unabsorbed portion can be carried forward, under the capital loss carryover rules, to the year following the loss. 40 ez form (See Capital Losses under Reporting Capital Gains and Losses, later. 40 ez form ) Figure your capital loss carryover as if, for the loss year, you had an additional short-term capital gain of 40% of the amount of net section 1256 contracts loss absorbed in the carryback years and an additional long-term capital gain of 60% of the absorbed loss. 40 ez form In the carryover year, treat any capital loss carryover from losses on section 1256 contracts as if it were a loss from section 1256 contracts for that year. 40 ez form Net section 1256 contracts loss. 40 ez form   This loss is the lesser of: The net capital loss for your tax year determined by taking into account only the gains and losses from section 1256 contracts, or The capital loss carryover to the next tax year determined without this election. 40 ez form Net section 1256 contracts gain. 40 ez form   This gain is the lesser of: The capital gain net income for the carryback year determined by taking into account only gains and losses from section 1256 contracts, or The capital gain net income for that year. 40 ez form  Figure your net section 1256 contracts gain for any carryback year without regard to the net section 1256 contracts loss for the loss year or any later tax year. 40 ez form Traders in section 1256 contracts. 40 ez form   Gain or loss from the trading of section 1256 contracts is capital gain or loss subject to the marked-to-market rules. 40 ez form However, this does not apply to contracts held for purposes of hedging property if any loss from the property would be an ordinary loss. 40 ez form Treatment of underlying property. 40 ez form   The determination of whether an individual's gain or loss from any property is ordinary or capital gain or loss is made without regard to the fact that the individual is actively engaged in dealing in or trading section 1256 contracts related to that property. 40 ez form How To Report If you disposed of regulated futures or foreign currency contracts in 2013 (or had unrealized profit or loss on these contracts that were open at the end of 2012 or 2013), you should receive Form 1099-B, or substitute statement, from your broker. 40 ez form Form 6781. 40 ez form   Use Part I of Form 6781 to report your gains and losses from all section 1256 contracts that are open at the end of the year or that were closed out during the year. 40 ez form This includes the amount shown in box 10 of Form 1099-B. 40 ez form Then enter the net amount of these gains and losses on Schedule D (Form 1040), line 4 or line 11, as appropriate. 40 ez form Include a copy of Form 6781 with your income tax return. 40 ez form   If the Form 1099-B you receive includes a straddle or hedging transaction, defined later, it may be necessary to show certain adjustments on Form 6781. 40 ez form Follow the Form 6781 instructions for completing Part I. 40 ez form Loss carryback election. 40 ez form   To carry back your loss under the election procedures described earlier, file Form 1040X or Form 1045, Application for Tentative Refund, for the year to which you are carrying the loss with an amended Form 6781 and an amended Schedule D (Form 1040) attached. 40 ez form Follow the instructions for completing Form 6781 for the loss year to make this election. 40 ez form Hedging Transactions The marked-to-market rules, described earlier, do not apply to hedging transactions. 40 ez form A transaction is a hedging transaction if both of the following conditions are met. 40 ez form You entered into the transaction in the normal course of your trade or business primarily to manage the risk of: Price changes or currency fluctuations on ordinary property you hold (or will hold), or Interest rate or price changes, or currency fluctuations, on your current or future borrowings or ordinary obligations. 40 ez form You clearly identified the transaction as being a hedging transaction before the close of the day on which you entered into it. 40 ez form This hedging transaction exception does not apply to transactions entered into by or for any syndicate. 40 ez form A syndicate is a partnership, S corporation, or other entity (other than a regular corporation) that allocates more than 35% of its losses to limited partners or limited entrepreneurs. 40 ez form A limited entrepreneur is a person who has an interest in an enterprise (but not as a limited partner) and who does not actively participate in its management. 40 ez form However, an interest is not considered held by a limited partner or entrepreneur if the interest holder actively participates (or did so for at least 5 full years) in the management of the entity, or is the spouse, child (including a legally adopted child), grandchild, or parent of an individual who actively participates in the management of the entity. 40 ez form Hedging loss limit. 40 ez form   If you are a limited partner or entrepreneur in a syndicate, the amount of a hedging loss you can claim is limited. 40 ez form A “hedging loss” is the amount by which the allowable deductions in a tax year that resulted from a hedging transaction (determined without regard to the limit) are more than the income received or accrued during the tax year from this transaction. 40 ez form   Any hedging loss allocated to you for the tax year is limited to your taxable income for that year from the trade or business in which the hedging transaction occurred. 40 ez form Ignore any hedging transaction items in determining this taxable income. 40 ez form If you have a hedging loss that is disallowed because of this limit, you can carry it over to the next tax year as a deduction resulting from a hedging transaction. 40 ez form   If the hedging transaction relates to property other than stock or securities, the limit on hedging losses applies if the limited partner or entrepreneur is an individual. 40 ez form   The limit on hedging losses does not apply to any hedging loss to the extent that it is more than all your unrecognized gains from hedging transactions at the end of the tax year that are from the trade or business in which the hedging transaction occurred. 40 ez form The term “unrecognized gain” has the same meaning as defined under Loss Deferral Rules in Straddles, later. 40 ez form Sale of property used in a hedge. 40 ez form   Once you identify personal property as being part of a hedging transaction, you must treat gain from its sale or exchange as ordinary income, not capital gain. 40 ez form Self-Employment Income Gains and losses derived in the ordinary course of a commodity or option dealer's trading in section 1256 contracts and property related to these contracts are included in net earnings from self-employment. 40 ez form See the Instructions for Schedule SE (Form 1040). 40 ez form In addition, the rules relating to contributions to self-employment retirement plans apply. 40 ez form For information on retirement plan contributions, see Publication 560 and Publication 590. 40 ez form Basis of Investment Property Basis is a way of measuring your investment in property for tax purposes. 40 ez form You must know the basis of your property to determine whether you have a gain or loss on its sale or other disposition. 40 ez form Investment property you buy normally has an original basis equal to its cost. 40 ez form If you get property in some way other than buying it, such as by gift or inheritance, its fair market value may be important in figuring the basis. 40 ez form Cost Basis The basis of property you buy is usually its cost. 40 ez form The cost is the amount you pay in cash, debt obligations, or other property or services. 40 ez form Unstated interest. 40 ez form   If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price, minus the amount considered to be unstated interest. 40 ez form You generally have unstated interest if your interest rate is less than the applicable federal rate. 40 ez form For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. 40 ez form Basis Other Than Cost There are times when you must use a basis other than cost. 40 ez form In these cases, you may need to know the property's fair market value or the adjusted basis of the previous owner. 40 ez form Fair market value. 40 ez form   This is the price at which the property would change hands between a buyer and a seller, neither being forced to buy or sell and both having reasonable knowledge of all the relevant facts. 40 ez form Sales of similar property, around the same date, may be helpful in figuring fair market value. 40 ez form Property Received for Services If you receive investment property for services, you must include the property's fair market value in income. 40 ez form The amount you include in income then becomes your basis in the property. 40 ez form If the services were performed for a price that was agreed to beforehand, this price will be accepted as the fair market value of the property if there is no evidence to the contrary. 40 ez form Restricted property. 40 ez form   If you receive, as payment for services, property that is subject to certain restrictions, your basis in the property generally is its fair market value when it becomes substantially vested. 40 ez form Property becomes substantially vested when it is transferable or is no longer subject to substantial risk of forfeiture, whichever happens first. 40 ez form See Restricted Property in Publication 525 for more information. 40 ez form Bargain purchases. 40 ez form   If you buy investment property at less than fair market value, as payment for services, you must include the difference in income. 40 ez form Your basis in the property is the price you pay plus the amount you include in income. 40 ez form Property Received in Taxable Trades If you received investment property in trade for other property, the basis of the new property is its fair market value at the time of the trade unless you received the property in a nontaxable trade. 40 ez form Example. 40 ez form You trade A Company stock for B Company stock having a fair market value of $1,200. 40 ez form If the adjusted basis of the A Company stock is less than $1,200, you have a taxable gain on the trade. 40 ez form If the adjusted basis of the A Company stock is more than $1,200, you have a deductible loss on the trade. 40 ez form The basis of your B Company stock is $1,200. 40 ez form If you later sell the B Company stock for $1,300, you will have a gain of $100. 40 ez form Property Received in Nontaxable Trades If you have a nontaxable trade, you do not recognize gain or loss until you dispose of the property you received in the trade. 40 ez form See Nontaxable Trades , later. 40 ez form The basis of property you received in a nontaxable or partly nontaxable trade is generally the same as the adjusted basis of the property you gave up. 40 ez form Increase this amount by any cash you paid, additional costs you had, and any gain recognized. 40 ez form Reduce this amount by any cash or unlike property you received, any loss recognized, and any liability of yours that was assumed or treated as assumed. 40 ez form Property Received From Your Spouse If property is transferred to you from your spouse (or former spouse, if the transfer is incident to your divorce), your basis is the same as your spouse's or former spouse's adjusted basis just before the transfer. 40 ez form See Transfers Between Spouses , later. 40 ez form Recordkeeping. 40 ez form The transferor must give you the records necessary to determine the adjusted basis and holding period of the property as of the date of the transfer. 40 ez form Property Received as a Gift To figure your basis in property that you received as a gift, you must know its adjusted basis to the donor just before it was given to you, its fair market value at the time it was given to you, the amount of any gift tax paid on it, and the date it was given to you. 40 ez form Fair market value less than donor's adjusted basis. 40 ez form   If the fair market value of the property at the time of the gift was less than the donor's adjusted basis just before the gift, your basis for gain on its sale or other disposition is the same as the donor's adjusted basis plus or minus any required adjustments to basis during the period you hold the property. 40 ez form Your basis for loss is its fair market value at the time of the gift plus or minus any required adjustments to basis during the period you hold the property. 40 ez form No gain or loss. 40 ez form   If you use the basis for figuring a gain and the result is a loss, and then use the basis for figuring a loss and the result is a gain, you will have neither a gain nor a loss. 40 ez form Example. 40 ez form You receive a gift of investment property having an adjusted basis of $10,000 at the time of the gift. 40 ez form The fair market value at the time of the gift is $9,000. 40 ez form You later sell the property for $9,500. 40 ez form You have neither gain nor loss. 40 ez form Your basis for figuring gain is $10,000, and $9,500 minus $10,000 results in a $500 loss. 40 ez form Your basis for figuring loss is $9,000, and $9,500 minus $9,000 results in a $500 gain. 40 ez form Fair market value equal to or more than donor's adjusted basis. 40 ez form   If the fair market value of the property at the time of the gift was equal to or more than the donor's adjusted basis just before the gift, your basis for gain or loss on its sale or other disposition is the donor's adjusted basis plus or minus any required adjustments to basis during the period you hold the property. 40 ez form Also, you may be allowed to add to the donor's adjusted basis all or part of any gift tax paid, depending on the date of the gift. 40 ez form Gift received before 1977. 40 ez form   If you received property as a gift before 1977, your basis in the property is the donor's adjusted basis increased by the total gift tax paid on the gift. 40 ez form However, your basis cannot be more than the fair market value of the gift at the time it was given to you. 40 ez form Example 1. 40 ez form You were given XYZ Company stock in 1976. 40 ez form At the time of the gift, the stock had a fair market value of $21,000. 40 ez form The donor's adjusted basis was $20,000. 40 ez form The donor paid a gift tax of $500 on the gift. 40 ez form Your basis for gain or loss is $20,500, the donor's adjusted basis plus the amount of gift tax paid. 40 ez form Example 2. 40 ez form The facts are the same as in Example 1 except that the gift tax paid was $1,500. 40 ez form Your basis is $21,000, the donor's adjusted basis plus the gift tax paid, but limited to the fair market value of the stock at the time of the gift. 40 ez form Gift received after 1976. 40 ez form   If you received property as a gift after 1976, your basis is the donor's adjusted basis increased by the part of the gift tax paid that was for the net increase in value of the gift. 40 ez form You figure this part by multiplying the gift tax paid on the gift by a fraction. 40 ez form The numerator (top part) is the net increase in value of the gift and the denominator (bottom part) is the amount of the gift. 40 ez form   The net increase in value of the gift is the fair market value of the gift minus the donor's adjusted basis. 40 ez form The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. 40 ez form Example. 40 ez form In 2013, you received a gift of property from your mother. 40 ez form At the time of the gift, the property had a fair market value of $101,000 and an adjusted basis to her of $40,000. 40 ez form The amount of the gift for gift tax purposes was $87,000 ($101,000 minus the $14,000 annual exclusion), and your mother paid a gift tax of $21,000. 40 ez form You figure your basis in the following way: Fair market value $101,000 Minus: Adjusted basis 40,000 Net increase in value of gift $61,000 Gift tax paid $21,000 Multiplied by . 40 ez form 701 ($61,000 ÷ $87,000) . 40 ez form 701 Gift tax due to net increase in value $14,721 Plus: Adjusted basis of property to  your mother 40,000 Your basis in the property $54,721 Part sale, part gift. 40 ez form   If you get property in a transfer that is partly a sale and partly a gift, your basis is the larger of the amount you paid for the property or the transferor's adjusted basis in the property at the time of the transfer. 40 ez form Add to that amount the amount of any gift tax paid on the gift, as described in the preceding discussion. 40 ez form For figuring loss, your basis is limited to the property's fair market value at the time of the transfer. 40 ez form Gift tax information. 40 ez form   For information on gift tax, see Publication 950, Introduction to Estate and Gift Taxes. 40 ez form For information on figuring the amount of gift tax to add to your basis, see Property Received as a Gift in Publication 551. 40 ez form Property Received as Inheritance Before or after 2010. 40 ez form   If you inherited property from a decedent who died before or after 2010, or who died in 2010 and the executor of the decedent's estate elected not to file Form 8939, Allocation of Increase in Basis for Property Acquired From a Decedent, your basis in that property generally is its fair market value (its appraised value on Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return) on: The date of the decedent's death, or The later alternate valuation date if the estate qualifies for, and elects to use, alternate valuation. 40 ez form If no Form 706 was filed, use the appraised value on the date of death for state inheritance or transmission taxes. 40 ez form For stocks and bonds, if no Form 706 was filed and there are no state inheritance or transmission taxes, see the Form 706 instructions for figuring the fair market value of the stocks and bonds on the date of the decedent's death. 40 ez form Appreciated property you gave the decedent. 40 ez form   Your basis in certain appreciated property that you inherited is the decedent's adjusted basis in the property immediately before death rather than its fair market value. 40 ez form This applies to appreciated property that you or your spouse gave the decedent as a gift during the 1-year period ending on the date of death. 40 ez form Appreciated property is any property whose fair market value on the day you gave it to the decedent was more than its adjusted basis. 40 ez form More information. 40 ez form   See Publication 551 for more information on the basis of inherited property, including community property, property held by a surviving tenant in a joint tenancy or tenancy by the entirety, a qualified joint interest, and a farm or closely held business. 40 ez form Inherited in 2010 and executor elected to file Form 8939. 40 ez form   If you inherited property from a decedent who died in 2010 and the executor made the election to file Form 8939, see Publication 4895, Tax Treatment of Property Acquired From a Decedent Dying in 2010, to figure your basis. 40 ez form Adjusted Basis Before you can figure any gain or loss on a sale, exchange, or other disposition of property or figure allowable depreciation, depletion, or amortization, you usually must make certain adjustments (increases and decreases) to the basis of the property. 40 ez form The result of these adjustments to the basis is the adjusted basis. 40 ez form Adjustments to the basis of stocks and bonds are explained in the following discussion. 40 ez form For information about other adjustments to basis, see Publication 551. 40 ez form Stocks and Bonds The basis of stocks or bonds you own generally is the purchase price plus the costs of purchase, such as commissions and recording or transfer fees. 40 ez form If you acquired stock or bonds other than by purchase, your basis is usually determined by fair market value or the previous owner's adjusted basis as discussed earlier under Basis Other Than Cost . 40 ez form The basis of stock must be adjusted for certain events that occur after purchase. 40 ez form For example, if you receive more stock from nontaxable stock dividends or stock splits, you must reduce the basis of your original stock. 40 ez form You must also reduce your basis when you receive nondividend distributions (discussed in chapter 1). 40 ez form These distributions, up to the amount of your basis, are a nontaxable return of capital. 40 ez form The IRS partners with companies that offer Form 8949 and Schedule D (Form 1040) software that can import trades from many brokerage firms and accounting software to help you keep track of your adjusted basis in securities. 40 ez form To find out more, go to www. 40 ez form irs. 40 ez form gov/Filing/Filing-Options. 40 ez form Identifying stock or bonds sold. 40 ez form   If you can adequately identify the shares of stock or the bonds you sold, their basis is the cost or other basis of the particular shares of stock or bonds. 40 ez form Adequate identification. 40 ez form   You will make an adequate identification if you show that certificates representing shares of stock from a lot that you bought on a certain date or for a certain price were delivered to your broker or other agent. 40 ez form Broker holds stock. 40 ez form   If you have left the stock certificates with your broker or other agent, you will make an adequate identification if you: Tell your broker or other agent the particular stock to be sold or transferred at the time of the sale or transfer, and Receive a written confirmation of this from your broker or other agent within a reasonable time. 40 ez form  Stock identified this way is the stock sold or transferred even if stock certificates from a different lot are delivered to the broker or other agent. 40 ez form Single stock certificate. 40 ez form   If you bought stock in different lots at different times and you hold a single stock certificate for this stock, you will make an adequate identification if you: Tell your broker or other agent the particular stock to be sold or transferred when you deliver the certificate to your broker or other agent, and Receive a written confirmation of this from your broker or other agent within a reasonable time. 40 ez form   If you sell part of the stock represented by a single certificate directly to the buyer instead of through a broker, you will make an adequate identification if you keep a written record of the particular stock that you intend to sell. 40 ez form Bonds. 40 ez form   These methods of identification also apply to bonds sold or transferred. 40 ez form Identification not possible. 40 ez form   If you buy and sell securities at various times in varying quantities and you cannot adequately identify the shares you sell, the basis of the securities you sell is the basis of the securities you acquired first. 40 ez form Except for certain mutual fund shares, discussed later, you cannot use the average price per share to figure gain or loss on the sale of the shares. 40 ez form Example. 40 ez form You bought 100 shares of stock of XYZ Corporation in 1998 for $10 a share. 40 ez form In January 1999 you bought another 200 shares for $11 a share. 40 ez form In July 1999 you gave your son 50 shares. 40 ez form In December 2001 you bought 100 shares for $9 a share. 40 ez form In April 2013 you sold 130 shares. 40 ez form You cannot identify the shares you disposed of, so you must use the stock you acquired first to figure the basis. 40 ez form The shares of stock you gave your son had a basis of $500 (50 × $10). 40 ez form You figure the basis of the 130 shares of stock you sold in 2013 as follows: 50 shares (50 × $10) balance of stock bought in 1998 $ 500 80 shares (80 × $11) stock bought in January 1999 880 Total basis of stock sold in 2013 $1,380 Shares in a mutual fund or REIT. 40 ez form    The basis of shares in a mutual fund (or other regulated investment company) or a real estate investment trust (REIT) is generally figured in the same way as the basis of other stock and usually includes any commissions or load charges paid for the purchase. 40 ez form Example. 40 ez form You bought 100 shares of Fund A for $10 a share. 40 ez form You paid a $50 commission to the broker for the purchase. 40 ez form Your cost basis for each share is $10. 40 ez form 50 ($1,050 ÷ 100). 40 ez form Commissions and load charges. 40 ez form   The fees and charges you pay to acquire or redeem shares of a mutual fund are not deductible. 40 ez form You can usually add acquisition fees and charges to your cost of the shares and thereby increase your basis. 40 ez form A fee paid to redeem the shares is usually a reduction in the redemption price (sales price). 40 ez form   You cannot add your entire acquisition fee or load charge to the cost of the mutual fund shares acquired if all of the following conditions apply. 40 ez form You get a reinvestment right because of the purchase of the shares or the payment of the fee or charge. 40 ez form You dispose of the shares within 90 days of the purchase date. 40 ez form You acquire new shares in the same mutual fund or another mutual fund, for which the fee or charge is reduced or waived because of the reinvestment right you got when you acquired the original shares. 40 ez form   The amount of the original fee or charge in excess of the reduction in (3) is added to the cost of the original shares. 40 ez form The rest of the original fee or charge is added to the cost basis of the new shares (unless all three conditions above also apply to the purchase of the new shares). 40 ez form Choosing average basis for mutual fund shares. 40 ez form   You can choose to use the average basis of mutual fund shares if you acquired the identical shares at various times and prices, or you acquired the shares after 2010 in connection with a dividend reinvestment plan, and left them on deposit in an account kept by a custodian or agent. 40 ez form The methods you can use to figure average basis are explained later. 40 ez form Undistributed capital gains. 40 ez form   If you had to include in your income any undistributed capital gains of the mutual fund or REIT, increase your basis in the stock by the difference between the amount you included and the amount of tax paid for you by the fund or REIT. 40 ez form See Undistributed capital gains of mutual funds and REITs under Capital Gain Distributions in chapter 1. 40 ez form Reinvestment right. 40 ez form   This is the right to acquire mutual fund shares in the same or another mutual fund without paying a fee or load charge, or by paying a reduced fee or load charge. 40 ez form      The original cost basis of mutual fund shares you acquire by reinvesting your distributions is the amount of the distributions used to purchase each full or fractional share. 40 ez form This rule applies even if the distribution is an exempt-interest dividend that you do not report as income. 40 ez form Table 4-1. 40 ez form This is a worksheet you can use to keep track of the adjusted basis of your mutual fund shares. 40 ez form Enter the cost per share when you acquire new shares and any adjustments to their basis when the adjustment occurs. 40 ez form This worksheet will help you figure the adjusted basis when you sell or redeem shares. 40 ez form Table 4-1. 40 ez form Mutual Fund Record Mutual Fund Acquired1 Adjustment to Basis Per Share Adjusted2 Basis Per Share Sold or redeemed Date Number of Shares Cost Per Share Date Number of Shares                                                                                                                                                                                                                                                                         1 Include share received from reinvestment of distributions. 40 ez form 2 Cost plus or minus adjustments. 40 ez form Automatic investment service. 40 ez form   If you participate in an automatic investment service, your basis for each share of stock, including fractional shares, bought by the bank or other agent is the purchase price plus a share of the broker's commission. 40 ez form Dividend reinvestment plans. 40 ez form   If you participate in a dividend reinvestment plan and receive stock from the corporation at a discount, your basis is the full fair market value of the stock on the dividend payment date. 40 ez form You must include the amount of the discount in your income. 40 ez form Public utilities. 40 ez form   If, before 1986, you excluded from income the value of stock you had received under a qualified public utility reinvestment plan, your basis in that stock is zero. 40 ez form Stock dividends. 40 ez form   Stock dividends are distributions made by a corporation of its own stock. 40 ez form Generally, stock dividends are not taxable to you. 40 ez form However, see Distributions of Stock and Stock Rights under Dividends and Other Distributions in chapter 1 for some exceptions. 40 ez form If the stock dividends are not taxable, you must divide your basis for the old stock between the old and new stock. 40 ez form New and old stock identical. 40 ez form   If the new stock you received as a nontaxable dividend is identical to the old stock on which the dividend was declared, divide the adjusted basis of the old stock by the number of shares of old and new stock. 40 ez form The result is your basis for each share of stock. 40 ez form Example 1. 40 ez form You owned one share of common stock that you bought for $45. 40 ez form The corporation distributed two new shares of common stock for each share held. 40 ez form You then had three shares of common stock. 40 ez form Your basis in each share is $15 ($45 ÷ 3). 40 ez form Example 2. 40 ez form You owned two shares of common stock. 40 ez form You bought one for $30 and the other for $45. 40 ez form The corporation distributed two new shares of common stock for each share held. 40 ez form You had six shares after the distribution—three with a basis of $10 each ($30 ÷ 3) and three with a basis of $15 each ($45 ÷ 3). 40 ez form New and old stock not identical. 40 ez form   If the new stock you received as a nontaxable dividend is not identical to the old stock on which it was declared, the basis of the new stock is calculated differently. 40 ez form Divide the adjusted basis of the old stock between the old and the new stock in the ratio of the fair market value of each lot of stock to the total fair market value of both lots on the date of distribution of the new stock. 40 ez form Example. 40 ez form You bought a share of common stock for $100. 40 ez form Later, the corporation distributed a share of preferred stock for each share of common stock held. 40 ez form At the date of distribution, your common stock had a fair market value of $150 and the preferred stock had a fair market value of $50. 40 ez form You figure the basis of the old and new stock by dividing your $100 basis between them. 40 ez form The basis of your common stock is $75 (($150 ÷ $200) × $100), and the basis of the new preferred stock is $25 (($50 ÷ $200) × $100). 40 ez form Stock bought at various times. 40 ez form   Figure the basis of stock dividends received on stock you bought at various times and at different prices by allocating to each lot of stock the share of the stock dividends due to it. 40 ez form Taxable stock dividends. 40 ez form   If your stock dividend is taxable when you receive it, the basis of your new stock is its fair market value on the date of distribution. 40 ez form The basis of your old stock does not change. 40 ez form Stock splits. 40 ez form   Figure the basis of stock splits in the same way as stock dividends if identical stock is distributed on the stock held. 40 ez form Stock rights. 40 ez form   A stock right is a right to acquire a corporation's stock. 40 ez form It may be exercised, it may be sold if it has a market value, or it may expire. 40 ez form Stock rights are rarely taxable when you receive them. 40 ez form See Distributions of Stock and Stock Rights under Dividends and Other Distributions in chapter 1. 40 ez form Taxable stock rights. 40 ez form   If you receive stock rights that are taxable, the basis of the rights is their fair market value at the time of distribution. 40 ez form The basis of the old stock does not change. 40 ez form Nontaxable stock rights. 40 ez form   If you receive nontaxable stock rights and allow them to expire, they have no basis. 40 ez form   If you exercise or sell the nontaxable stock rights and if, at the time of distribution, the stock rights had a fair market value of 15% or more of the fair market value of the old stock, you must divide the adjusted basis of the old stock between the old stock and the stock rights. 40 ez form Use a ratio of the fair market value of each to the total fair market value of both at the time of distribution. 40 ez form   If the fair market value of the stock rights was less than 15%, their basis is zero. 40 ez form However, you can choose to divide the basis of the old stock between the old stock and the stock rights. 40 ez form To make the choice, attach a statement to your return for the year in which you received the rights, stating that you choose to divide the basis of the stock. 40 ez form Basis of new stock. 40 ez form   If you exercise the stock rights, the basis of the new stock is its cost plus the basis of the stock rights exercised. 40 ez form Example. 40 ez form You own 100 shares of ABC Company stock, which cost you $22 per share. 40 ez form The ABC Company gave you 10 nontaxable stock rights that would allow you to buy 10 more shares at $26 per share. 40 ez form At the time the stock rights were distributed, the stock had a market value of $30, not including the stock rights. 40 ez form Each stock right had a market value of $3. 40 ez form The market value of the stock rights was less than 15% of the market value of the stock, but you chose to divide the basis of your stock between the stock and the rights. 40 ez form You figure the basis of the rights and the basis of the old stock as follows: 100 shares × $22 = $2,200, basis of old stock   100 shares × $30 = $3,000, market value of old stock   10 rights × $3 = $30, market value of rights   ($3,000 ÷ $3,030) × $2,200 = $2,178. 40 ez form 22, new basis of old stock   ($30 ÷ $3,030) × $2,200 = $21. 40 ez form 78, basis of rights   If you sell the rights, the basis for figuring gain or loss is $2. 40 ez form 18 ($21. 40 ez form 78 ÷ 10) per right. 40 ez form If you exercise the rights, the basis of the stock you acquire is the price you pay ($26) plus the basis of the right exercised ($2. 40 ez form 18), or $28. 40 ez form 18 per share. 40 ez form The remaining basis of the old stock is $21. 40 ez form 78 per share. 40 ez form Investment property received in liquidation. 40 ez form   In general, if you receive investment property as a distribution in partial or complete liquidation of a corporation and if you recognize gain or loss when you acquire the property, your basis in the property is its fair market value at the time of the distribution. 40 ez form S corporation stock. 40 ez form   You must increase your basis in stock of an S corporation by your pro rata share of the following items. 40 ez form All income items of the S corporation, including tax-exempt income, that are separately stated and passed through to you as a shareholder. 40 ez form The nonseparately stated income of the S corporation. 40 ez form The amount of the deduction for depletion (other than oil and gas depletion) that is more than the basis of the property being depleted. 40 ez form   You must decrease your basis in stock of an S corporation by your pro rata share of the following items. 40 ez form Distributions by the S corporation that were not included in your income. 40 ez form All loss and deduction items of the S corporation that are separately stated and passed through to you. 40 ez form Any nonseparately stated loss of the S corporation. 40 ez form Any expense of the S corporation that is not deductible in figuring its taxable income and not properly chargeable to a capital account. 40 ez form The amount of your deduction for depletion of oil and gas wells to the extent the deduction is not more than your share of the adjusted basis of the wells. 40 ez form However, your basis in the stock cannot be reduced below zero. 40 ez form Specialized small business investment company stock or partnership interest. 40 ez form   If you bought this stock or interest as replacement property for publicly traded securities you sold at a gain, you must reduce the basis of the stock or interest by the amount of any postponed gain on that sale. 40 ez form See Rollover of Gain From Publicly Traded Securities , later. 40 ez form Qualified small business stock. 40 ez form   If you bought this stock as replacement property for other qualified small business stock you sold at a gain, you must reduce the basis of this replacement stock by the amount of any postponed gain on the earlier sale. 40 ez form See Gains on Qualified Small Business Stock , later. 40 ez form Short sales. 40 ez form   If you cannot deduct payments you make to a lender in lieu of dividends on stock used in a short sale, the amount you pay to the lender is a capital expense, and you must add it to the basis of the stock used to close the short sale. 40 ez form   See Payments in lieu of dividends , later, for information about deducting payments in lieu of dividends. 40 ez form Premiums on bonds. 40 ez form   If you buy a bond at a premium, the premium is treated as part of your basis in the bond. 40 ez form If you choose to amortize the premium paid on a taxable bond, you must reduce the basis of the bond by the amortized part of the premium each year over the life of the bond. 40 ez form   Although you cannot deduct the premium on a tax-exempt bond, you must amortize it to determine your adjusted basis in the bond. 40 ez form You must reduce the basis of the bond by the premium you amortized for the period you held the bond. 40 ez form   See Bond Premium Amortization in chapter 3 for more information. 40 ez form Market discount on bonds. 40 ez form   If you include market discount on a bond in income currently, increase the basis of your bond by the amount of market discount you include in your income. 40 ez form See Market Discount Bonds in chapter 1 for more information. 40 ez form Bonds purchased at par value. 40 ez form   A bond purchased at par value (face amount) has no premium or discount. 40 ez form When you sell or otherwise dispose of the bond, you figure the gain or loss by comparing the bond proceeds to the purchase price of the bond. 40 ez form Example. 40 ez form You purchased a bond several years ago for its par value of $10,000. 40 ez form You sold the bond this year for $10,100. 40 ez form You have a gain of $100. 40 ez form However, if you had sold the bond for $9,900, you would have a loss of $100. 40 ez form Acquisition discount on short-term obligations. 40 ez form   If you include acquisition discount on a short-term obligation in your income currently, increase the basis of the obligation by the amount of acquisition discount you include in your income. 40 ez form See Discount on Short-Term Obligations in chapter 1 for more information. 40 ez form Original issue discount (OID) on debt instruments. 40 ez form   Increase the basis of a debt instrument by the OID you include in your income. 40 ez form See Original Issue Discount (OID) in chapter 1. 40 ez form Discounted tax-exempt obligations. 40 ez form   OID on tax-exempt obligations is generally not taxable. 40 ez form However, when you dispose of a tax-exempt obligation issued after September 3, 1982, that you acquired after March 1, 1984, you must accrue OID on the obligation to determine its adjusted basis. 40 ez form The accrued OID is added to the basis of the obligation to determine your gain or loss. 40 ez form   For information on determining OID on a long-term obligation, see Debt Instruments Issued After July 1, 1982, and Before 1985 or Debt Instruments Issued After 1984, whichever applies, in Publication 1212 under Figuring OID on Long-Term Debt Instruments. 40 ez form   If the tax-exempt obligation has a maturity of 1 year or less, accrue OID under the rules for acquisition discount on short-term obligations. 40 ez form See Discount on Short-Term Obligations in chapter 1. 40 ez form Stripped tax-exempt obligation. 40 ez form   If you acquired a stripped tax-exempt bond or coupon after October 22, 1986, you must accrue OID on it to determine its adjusted basis when you dispose of it. 40 ez form For stripped tax-exempt bonds or coupons acquired after June 10, 1987, part of this OID may be taxable. 40 ez form You accrue the OID on these obligations in the manner described in chapter 1 under Stripped Bonds and Coupons . 40 ez form   Increase your basis in the stripped tax-exempt bond or coupon by the taxable and nontaxable accrued OID. 40 ez form Also increase your basis by the interest that accrued (but was not paid and was not previously reflected in your basis) before the date you sold the bond or coupon. 40 ez form In addition, for bonds acquired after June 10, 1987, add to your basis any accrued market discount not previously reflected in basis. 40 ez form How To Figure Gain or Loss You figure gain or loss on a sale or trade of property by comparing the amount you realize with the adjusted basis of the property. 40 ez form Gain. 40 ez form   If the amount you realize from a sale or trade is more than the adjusted basis of the property you transfer, the difference is a gain. 40 ez form Loss. 40 ez form   If the adjusted basis of the property you transfer is more than the amount you realize, the difference is a loss. 40 ez form Amount realized. 40 ez form   The amount you realize from a sale or trade of property is everything you receive for the property minus your expenses of sale (such as redemption fees, sales commissions, sales charges, or exit fees). 40 ez form Amount realized includes the money you receive plus the fair market value of any property or services you receive. 40 ez form   If you finance the buyer's purchase of your property and the debt instrument does not provide for adequate stated interest, the unstated interest that you must report as ordinary income will reduce the amount realized from the sale. 40 ez form For more information, see Publication 537. 40 ez form   If a buyer of property issues a debt instrument to the seller of the property, the amount realized is determined by reference to the issue price of the debt instrument, which may or may not be the fair market value of the debt instrument. 40 ez form See Regulations section 1. 40 ez form 1001-1(g). 40 ez form However, if the debt instrument was previously issued by a third party (one not part of the sale transaction), the fair market value of the debt instrument is used to determine the amount realized. 40 ez form Fair market value. 40 ez form   Fair market value is the price at which property would change hands between a buyer and a seller, neither being forced to buy or sell and both having reasonable knowledge of all the relevant facts. 40 ez form Example. 40 ez form You trade A Company stock with an adjusted basis of $7,000 for B Company stock with a fair market value of $10,000, which is your amount realized. 40 ez form Your gain is $3,000 ($10,000 – $7,000). 40 ez form If you also receive a note for $6,000 that has an issue price of $6,000, your gain is $9,000 ($10,000 + $6,000 – $7,000). 40 ez form Debt paid off. 40 ez form   A debt against the property, or against you, that is paid off as a part of the transaction or that is assumed by the buyer must be included in the amount realized. 40 ez form This is true even if neither you nor the buyer is personally liable for the debt. 40 ez form For example, if you sell or trade property that is subject to a nonrecourse loan, the amount you realize generally includes the full amount of the note assumed by the buyer even if the amount of the note is more than the fair market value of the property. 40 ez form Example. 40 ez form You sell stock that you had pledged as security for a bank loan of $8,000. 40 ez form Your basis in the stock is $6,000. 40 ez form The buyer pays off your bank loan and pays you $20,000 in cash. 40 ez form The amount realized is $28,000 ($20,000 + $8,000). 40 ez form Your gain is $22,000 ($28,000 – $6,000). 40 ez form Payment of cash. 40 ez form   If you trade property and cash for other property, the amount you realize is the fair market value of the property you receive. 40 ez form Determine your gain or loss by subtracting the cash you pay and the adjusted basis of the property you trade in from the amount you realize. 40 ez form If the result is a positive number, it is a gain. 40 ez form If the result is a negative number, it is a loss. 40 ez form No gain or loss. 40 ez form   You may have to use a basis for figuring gain that is different from the basis used for figuring loss. 40 ez form In this case, you may have neither a gain nor a loss. 40 ez form See No gain or loss in the discussion on the basis of property you received as a gift under Basis Other Than Cost, earlier. 40 ez form Special Rules for Mutual Funds To figure your gain or loss when you dispose of mutual fund shares, you need to determine which shares were sold and the basis of those shares. 40 ez form If your shares in a mutual fund were acquired all on the same day and for the same price, figuring their basis is not difficu
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The 40 Ez Form

40 ez form 12. 40 ez form   Business Deduction for Work-Related Education Table of Contents What's New Introduction Qualifying Work-Related EducationEducation Required by Employer or by Law Education To Maintain or Improve Skills Education To Meet Minimum Requirements Education That Qualifies You for a New Trade or Business What Expenses Can Be DeductedUnclaimed reimbursement. 40 ez form Transportation Expenses Travel Expenses No Double Benefit Allowed How To Treat ReimbursementsAccountable Plans Nonaccountable Plans Deducting Business ExpensesSelf-Employed Persons Employees Performing Artists and Fee-Basis Officials Impairment-Related Work Expenses Recordkeeping Illustrated Example What's New Standard mileage rate. 40 ez form  Generally, if you claim a business deduction for work-related education and you drive your car to and from school, the amount you can deduct for miles driven from January 1, 2013 through December 31, 2013, is 56. 40 ez form 5 cents per mile. 40 ez form For more information, see Transportation Expenses under What Expenses Can Be Deducted, later. 40 ez form Introduction This chapter discusses work-related education expenses that you may be able to deduct as business expenses. 40 ez form To claim such a deduction, you must: Itemize your deductions on Schedule A (Form 1040 or 1040NR) if you are an employee, File Schedule C (Form 1040), Profit or Loss From Business, Schedule C-EZ (Form 1040), Net Profit From Business, or Schedule F (Form 1040), Profit or Loss From Farming if you are self-employed, and Have expenses for education that meet the requirements discussed under Qualifying Work-Related Education , later. 40 ez form What is the tax benefit of taking a business deduction for work-related education. 40 ez form   If you are an employee and can itemize your deductions, you may be able to claim a deduction for the expenses you pay for your work-related education. 40 ez form Your deduction will be the amount by which your qualifying work-related education expenses plus other job and certain miscellaneous expenses (except for impairment-related work expenses of disabled individuals) is greater than 2% of your adjusted gross income. 40 ez form An itemized deduction reduces the amount of your income subject to tax. 40 ez form   If you are self-employed, you deduct your expenses for qualifying work-related education directly from your self-employment income. 40 ez form This reduces the amount of your income subject to both income tax and self-employment tax. 40 ez form   Your work-related education expenses may also qualify you for other tax benefits, such as the American opportunity and lifetime learning credits. 40 ez form You may qualify for these other benefits even if you do not meet the requirements listed above. 40 ez form   Also, your work-related education expenses may qualify you to claim more than one tax benefit. 40 ez form Generally, you may claim any number of benefits as long as you use different expenses to figure each one. 40 ez form Qualifying Work-Related Education You can deduct the costs of qualifying work-related education as business expenses. 40 ez form This is education that meets at least one of the following two tests. 40 ez form The education is required by your employer or the law to keep your present salary, status, or job. 40 ez form The required education must serve a bona fide business purpose of your employer. 40 ez form The education maintains or improves skills needed in your present work. 40 ez form However, even if the education meets one or both of the above tests, it is not qualifying work-related education if it: Is needed to meet the minimum educational requirements of your present trade or business, or Is part of a program of study that will qualify you for a new trade or business. 40 ez form You can deduct the costs of qualifying work-related education as a business expense even if the education could lead to a degree. 40 ez form Use Figure 12-1, Does Your Work-Related Education Qualify as a quick check to see if your education qualifies. 40 ez form Education Required by Employer or by Law Once you have met the minimum educational requirements for your job, your employer or the law may require you to get more education. 40 ez form This additional education is qualifying work-related education if all three of the following requirements are met. 40 ez form It is required for you to keep your present salary, status, or job, The requirement serves a bona fide business purpose of your employer, and The education is not part of a program that will qualify you for a new trade or business. 40 ez form When you get more education than your employer or the law requires, the additional education can be qualifying work-related education only if it maintains or improves skills required in your present work. 40 ez form See Education To Maintain or Improve Skills , later. 40 ez form Example. 40 ez form You are a teacher who has satisfied the minimum requirements for teaching. 40 ez form Your employer requires you to take an additional college course each year to keep your teaching job. 40 ez form If the courses will not qualify you for a new trade or business, they are qualifying work-related education even if you eventually receive a master's degree and an increase in salary because of this extra education. 40 ez form This image is too large to be displayed in the current screen. 40 ez form Please click the link to view the image. 40 ez form Figure 12-1 Education To Maintain or Improve Skills If your education is not required by your employer or the law, it can be qualifying work-related education only if it maintains or improves skills needed in your present work. 40 ez form This could include refresher courses, courses on current developments, and academic or vocational courses. 40 ez form Example. 40 ez form You repair televisions, radios, and stereo systems for XYZ Store. 40 ez form To keep up with the latest changes, you take special courses in radio and stereo service. 40 ez form These courses maintain and improve skills required in your work. 40 ez form Maintaining skills vs. 40 ez form qualifying for new job. 40 ez form   Education to maintain or improve skills needed in your present work is not qualifying education if it will also qualify you for a new trade or business. 40 ez form Education during temporary absence. 40 ez form   If you stop working for a year or less in order to get education to maintain or improve skills needed in your present work and then return to the same general type of work, your absence is considered temporary. 40 ez form Education that you get during a temporary absence is qualifying work-related education if it maintains or improves skills needed in your present work. 40 ez form Example. 40 ez form You quit your biology research job to become a full-time biology graduate student for 1 year. 40 ez form If you return to work in biology research after completing the courses, the education is related to your present work even if you do not go back to work with the same employer. 40 ez form Education during indefinite absence. 40 ez form   If you stop work for more than a year, your absence from your job is considered indefinite. 40 ez form Education during an indefinite absence, even if it maintains or improves skills needed in the work from which you are absent, is considered to qualify you for a new trade or business. 40 ez form Therefore, it is not qualifying work-related education. 40 ez form Education To Meet Minimum Requirements Education you need to meet the minimum educational requirements for your present trade or business is not qualifying work-related education. 40 ez form The minimum educational requirements are determined by: Laws and regulations, Standards of your profession, trade, or business, and Your employer. 40 ez form Once you have met the minimum educational requirements that were in effect when you were hired, you do not have to meet any new minimum educational requirements. 40 ez form This means that if the minimum requirements change after you were hired, any education you need to meet the new requirements can be qualifying education. 40 ez form You have not necessarily met the minimum educational requirements of your trade or business simply because you are already doing the work. 40 ez form Example 1. 40 ez form You are a full-time engineering student. 40 ez form Although you have not received your degree or certification, you work part time as an engineer for a firm that will employ you as a full-time engineer after you finish college. 40 ez form Although your college engineering courses improve your skills in your present job, they are also needed to meet the minimum job requirements for a full-time engineer. 40 ez form The education is not qualifying work-related education. 40 ez form Example 2. 40 ez form You are an accountant and you have met the minimum educational requirements of your employer. 40 ez form Your employer later changes the minimum educational requirements and requires you to take college courses to keep your job. 40 ez form These additional courses can be qualifying work-related education because you have already satisfied the minimum requirements that were in effect when you were hired. 40 ez form Requirements for Teachers States or school districts usually set the minimum educational requirements for teachers. 40 ez form The requirement is the college degree or the minimum number of college hours usually required of a person hired for that position. 40 ez form If there are no requirements, you will have met the minimum educational requirements when you become a faculty member. 40 ez form The determination of whether you are a faculty member of an educational institution must be made on the basis of the particular practices of the institution. 40 ez form You generally will be considered a faculty member when one or more of the following occurs. 40 ez form You have tenure. 40 ez form Your years of service count toward obtaining tenure. 40 ez form You have a vote in faculty decisions. 40 ez form Your school makes contributions for you to a retirement plan other than social security or a similar program. 40 ez form Example 1. 40 ez form The law in your state requires beginning secondary school teachers to have a bachelor's degree, including 10 professional education courses. 40 ez form In addition, to keep the job a teacher must complete a fifth year of training within 10 years from the date of hire. 40 ez form If the employing school certifies to the state Department of Education that qualified teachers cannot be found, the school can hire persons with only 3 years of college. 40 ez form However, to keep their jobs, these teachers must get a bachelor's degree and the required professional education courses within 3 years. 40 ez form Under these facts, the bachelor's degree, whether or not it includes the 10 professional education courses, is considered the minimum educational requirement for qualification as a teacher in your state. 40 ez form If you have all the required education except the fifth year, you have met the minimum educational requirements. 40 ez form The fifth year of training is qualifying work-related education unless it is part of a program of study that will qualify you for a new trade or business. 40 ez form Example 2. 40 ez form Assume the same facts as in Example 1 except that you have a bachelor's degree and only six professional education courses. 40 ez form The additional four education courses can be qualifying work-related education. 40 ez form Although you do not have all the required courses, you have already met the minimum educational requirements. 40 ez form Example 3. 40 ez form Assume the same facts as in Example 1 except that you are hired with only 3 years of college. 40 ez form The courses you take that lead to a bachelor's degree (including those in education) are not qualifying work-related education. 40 ez form They are needed to meet the minimum educational requirements for employment as a teacher. 40 ez form Example 4. 40 ez form You have a bachelor's degree and you work as a temporary instructor at a university. 40 ez form At the same time, you take graduate courses toward an advanced degree. 40 ez form The rules of the university state that you can become a faculty member only if you get a graduate degree. 40 ez form Also, you can keep your job as an instructor only as long as you show satisfactory progress toward getting this degree. 40 ez form You have not met the minimum educational requirements to qualify you as a faculty member. 40 ez form The graduate courses are not qualifying work-related education. 40 ez form Certification in a new state. 40 ez form   Once you have met the minimum educational requirements for teachers for your state, you are considered to have met the minimum educational requirements in all states. 40 ez form This is true even if you must get additional education to be certified in another state. 40 ez form Any additional education you need is qualifying work-related education. 40 ez form You have already met the minimum requirements for teaching. 40 ez form Teaching in another state is not a new trade or business. 40 ez form Example. 40 ez form You hold a permanent teaching certificate in State A and are employed as a teacher in that state for several years. 40 ez form You move to State B and are promptly hired as a teacher. 40 ez form You are required, however, to complete certain prescribed courses to get a permanent teaching certificate in State B. 40 ez form These additional courses are qualifying work-related education because the teaching position in State B involves the same general kind of work for which you were qualified in State A. 40 ez form Education That Qualifies You for a New Trade or Business Education that is part of a program of study that will qualify you for a new trade or business is not qualifying work-related education. 40 ez form This is true even if you do not plan to enter that trade or business. 40 ez form If you are an employee, a change of duties that involves the same general kind of work is not a new trade or business. 40 ez form Example 1. 40 ez form You are an accountant. 40 ez form Your employer requires you to get a law degree at your own expense. 40 ez form You register at a law school for the regular curriculum that leads to a law degree. 40 ez form Even if you do not intend to become a lawyer, the education is not qualifying because the law degree will qualify you for a new trade or business. 40 ez form Example 2. 40 ez form You are a general practitioner of medicine. 40 ez form You take a 2-week course to review developments in several specialized fields of medicine. 40 ez form The course does not qualify you for a new profession. 40 ez form It is qualifying work- related education because it maintains or improves skills required in your present profession. 40 ez form Example 3. 40 ez form While working in the private practice of psychiatry, you enter a program to study and train at an accredited psychoanalytic institute. 40 ez form The program will lead to qualifying you to practice psychoanalysis. 40 ez form The psychoanalytic training does not qualify you for a new profession. 40 ez form It is qualifying work-related education because it maintains or improves skills required in your present profession. 40 ez form Bar or CPA Review Course Review courses to prepare for the bar examination or the certified public accountant (CPA) examination are not qualifying work-related education. 40 ez form They are part of a program of study that can qualify you for a new profession. 40 ez form Teaching and Related Duties All teaching and related duties are considered the same general kind of work. 40 ez form A change in duties in any of the following ways is not considered a change to a new business. 40 ez form Elementary school teacher to secondary school teacher. 40 ez form Teacher of one subject, such as biology, to teacher of another subject, such as art. 40 ez form Classroom teacher to guidance counselor. 40 ez form Classroom teacher to school administrator. 40 ez form What Expenses Can Be Deducted If your education meets the requirements described earlier under Qualifying Work-Related Education you can generally deduct your education expenses as business expenses. 40 ez form If you are not self-employed, you can deduct business expenses only if you itemize your deductions. 40 ez form You cannot deduct expenses related to tax-exempt and excluded income. 40 ez form Deductible expenses. 40 ez form   The following education expenses can be deducted. 40 ez form Tuition, books, supplies, lab fees, and similar items. 40 ez form Certain transportation and travel costs. 40 ez form Other education expenses, such as costs of research and typing when writing a paper as part of an educational program. 40 ez form Nondeductible expenses. 40 ez form   You cannot deduct personal or capital expenses. 40 ez form For example, you cannot deduct the dollar value of vacation time or annual leave you take to attend classes. 40 ez form This amount is a personal expense. 40 ez form Unclaimed reimbursement. 40 ez form   If you do not claim reimbursement that you are entitled to receive from your employer, you cannot deduct the expenses that apply to that unclaimed reimbursement. 40 ez form Example. 40 ez form Your employer agrees to pay your education expenses if you file a voucher showing your expenses. 40 ez form You do not file a voucher and you do not get reimbursed. 40 ez form Because you did not file a voucher, you cannot deduct the expenses on your tax return. 40 ez form Transportation Expenses If your education qualifies, you can deduct local transportation costs of going directly from work to school. 40 ez form If you are regularly employed and go to school on a temporary basis, you can also deduct the costs of returning from school to home. 40 ez form Temporary basis. 40 ez form   You go to school on a temporary basis if either of the following situations applies to you. 40 ez form Your attendance at school is realistically expected to last 1 year or less and does indeed last for 1 year or less. 40 ez form Initially, your attendance at school is realistically expected to last 1 year or less, but at a later date your attendance is reasonably expected to last more than 1 year. 40 ez form Your attendance is temporary up to the date you determine it will last more than 1 year. 40 ez form If you are in either situation (1) or (2) above, your attendance is not temporary if facts and circumstances indicate otherwise. 40 ez form Attendance not on a temporary basis. 40 ez form   You do not go to school on a temporary basis if either of the following situations apply to you. 40 ez form Your attendance at school is realistically expected to last more than 1 year. 40 ez form It does not matter how long you actually attend. 40 ez form Initially, your attendance at school is realistically expected to last 1 year or less, but at a later date your attendance is reasonably expected to last more than 1 year. 40 ez form Your attendance is not temporary after the date you determine it will last more than 1 year. 40 ez form Deductible Transportation Expenses If you are regularly employed and go directly from home to school on a temporary basis, you can deduct the round-trip costs of transportation between your home and school. 40 ez form This is true regardless of the location of the school, the distance traveled, or whether you attend school on nonwork days. 40 ez form Transportation expenses include the actual costs of bus, subway, cab, or other fares, as well as the costs of using your car. 40 ez form Transportation expenses do not include amounts spent for travel, meals, or lodging while you are away from home overnight. 40 ez form Example 1. 40 ez form You regularly work in a nearby town, and go directly from work to home. 40 ez form You also attend school every work night for 3 months to take a course that improves your job skills. 40 ez form Since you are attending school on a temporary basis, you can deduct your daily round-trip transportation expenses in going between home and school. 40 ez form This is true regardless of the distance traveled. 40 ez form Example 2. 40 ez form Assume the same facts as in Example 1 except that on certain nights you go directly from work to school and then home. 40 ez form You can deduct your transportation expenses from your regular work site to school and then home. 40 ez form Example 3. 40 ez form Assume the same facts as in Example 1 except that you attend the school for 9 months on Saturdays, nonwork days. 40 ez form Since you are attending school on a temporary basis, you can deduct your round-trip transportation expenses in going between home and school. 40 ez form Example 4. 40 ez form Assume the same facts as in Example 1 except that you attend classes twice a week for 15 months. 40 ez form Since your attendance in school is not considered temporary, you cannot deduct your transportation expenses in going between home and school. 40 ez form If you go directly from work to school, you can deduct the one-way transportation expenses of going from work to school. 40 ez form If you go from work to home to school and return home, your transportation expenses cannot be more than if you had gone directly from work to school. 40 ez form Using your car. 40 ez form    If you use your car (whether you own or lease it) for transportation to school, you can deduct your actual expenses or use the standard mileage rate to figure the amount you can deduct. 40 ez form The standard mileage rate for miles driven from January 1, 2013 through December 31, 2013, is 56. 40 ez form 5 cents per mile. 40 ez form Whichever method you use, you can also deduct parking fees and tolls. 40 ez form See Publication 463, chapter 4, for information on deducting your actual expenses of using a car. 40 ez form Travel Expenses You can deduct expenses for travel, meals (see 50% limit on meals , later), and lodging if you travel overnight mainly to obtain qualifying work-related education. 40 ez form Travel expenses for qualifying work-related education are treated the same as travel expenses for other employee business purposes. 40 ez form For more information, see chapter 1 of Publication 463. 40 ez form You cannot deduct expenses for personal activities such as sightseeing, visiting, or entertaining. 40 ez form Mainly personal travel. 40 ez form   If your travel away from home is mainly personal, you cannot deduct all of your expenses for travel, meals, and lodging. 40 ez form You can deduct only your expenses for lodging and 50% of your expenses for meals during the time you attend the qualified educational activities. 40 ez form   Whether a trip's purpose is mainly personal or educational depends upon the facts and circumstances. 40 ez form An important factor is the comparison of time spent on personal activities with time spent on educational activities. 40 ez form If you spend more time on personal activities, the trip is considered mainly educational only if you can show a substantial nonpersonal reason for traveling to a particular location. 40 ez form Example 1. 40 ez form John works in Newark, New Jersey. 40 ez form He traveled to Chicago to take a deductible 1-week course at the request of his employer. 40 ez form His main reason for going to Chicago was to take the course. 40 ez form While there, he took a sightseeing trip, entertained some friends, and took a side trip to Pleasantville for a day. 40 ez form Since the trip was mainly for business, John can deduct his round-trip airfare to Chicago. 40 ez form He cannot deduct his transportation expenses of going to Pleasantville. 40 ez form He can deduct only the meals (subject to the 50% limit) and lodging connected with his educational activities. 40 ez form Example 2. 40 ez form Sue works in Boston. 40 ez form She went to a university in Michigan to take a course for work. 40 ez form The course is qualifying work-related education. 40 ez form She took one course, which is one-fourth of a full course load of study. 40 ez form She spent the rest of the time on personal activities. 40 ez form Her reasons for taking the course in Michigan were all personal. 40 ez form Sue's trip is mainly personal because three-fourths of her time is considered personal time. 40 ez form She cannot deduct the cost of her round-trip train ticket to Michigan. 40 ez form She can deduct one-fourth of the meals (subject to the 50% limit) and lodging costs for the time she attended the university. 40 ez form Example 3. 40 ez form Dave works in Nashville and recently traveled to California to take a 2-week seminar. 40 ez form The seminar is qualifying work-related education. 40 ez form While there, he spent an extra 8 weeks on personal activities. 40 ez form The facts, including the extra 8-week stay, show that his main purpose was to take a vacation. 40 ez form Dave cannot deduct his round-trip airfare or his meals and lodging for the 8 weeks. 40 ez form He can deduct only his expenses for meals (subject to the 50% limit) and lodging for the 2 weeks he attended the seminar. 40 ez form Cruises and conventions. 40 ez form   Certain cruises and conventions offer seminars or courses as part of their itinerary. 40 ez form Even if the seminars or courses are work related, your deduction for travel may be limited. 40 ez form This applies to: Travel by ocean liner, cruise ship, or other form of luxury water transportation, and Conventions outside the North American area. 40 ez form   For a discussion of the limits on travel expense deductions that apply to cruises and conventions, see Luxury Water Travel and Conventions in chapter 1 of Publication 463. 40 ez form 50% limit on meals. 40 ez form   You can deduct only 50% of the cost of your meals while traveling away from home to obtain qualifying work-related education. 40 ez form If you were reimbursed for the meals, see How To Treat Reimbursements , later. 40 ez form   Employees must use Form 2106 or Form 2106-EZ to apply the 50% limit. 40 ez form Travel as Education You cannot deduct the cost of travel as a form of education even if it is directly related to your duties in your work or business. 40 ez form Example. 40 ez form You are a French language teacher. 40 ez form While on sabbatical leave granted for travel, you traveled through France to improve your knowledge of the French language. 40 ez form You chose your itinerary and most of your activities to improve your French language skills. 40 ez form You cannot deduct your travel expenses as education expenses. 40 ez form This is true even if you spent most of your time learning French by visiting French schools and families, attending movies or plays, and engaging in similar activities. 40 ez form No Double Benefit Allowed You cannot do either of the following. 40 ez form Deduct work-related education expenses as business expenses if you benefit from these expenses under any other provision of the law, for example, as a tuition and fees deduction. 40 ez form Deduct work-related education expenses paid with tax-free scholarship, grant, or employer-provided educational assistance. 40 ez form See Adjustments to Qualifying Work-Related Education Expenses, next. 40 ez form Adjustments to Qualifying Work-Related Education Expenses If you pay qualifying work-related education expenses with certain tax-free funds, you cannot claim a deduction for those amounts. 40 ez form You must reduce the qualifying expenses by the amount of such expenses allocable to the tax-free educational assistance. 40 ez form Tax-free educational assistance. 40 ez form   This includes: The tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions). 40 ez form Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. 40 ez form Amounts that do not reduce qualifying work-related education expenses. 40 ez form   Do not reduce the qualifying work-related education expenses by amounts paid with funds the student receives as: Payment for services, such as wages, A loan, A gift, An inheritance, or A withdrawal from the student's personal savings. 40 ez form Also, do not reduce the qualifying work-related education expenses by any scholarship or fellowship reported as income on the student's return or any scholarship which, by its terms, cannot be applied to qualifying work-related education expenses. 40 ez form How To Treat Reimbursements How you treat reimbursements depends on the arrangement you have with your employer. 40 ez form There are two basic types of reimbursement arrangements—accountable plans and nonaccountable plans. 40 ez form You can tell the type of plan you are reimbursed under by the way the reimbursement is reported on your Form W-2. 40 ez form Note. 40 ez form The following rules about reimbursement arrangements also apply to expense allowances received from your employer. 40 ez form Accountable Plans To be an accountable plan, your employer's reimbursement arrangement must require you to meet all three of the following rules. 40 ez form Your expenses must have a business connection. 40 ez form This means your expenses must be deductible under the rules for qualifying work-related education explained earlier. 40 ez form You must adequately account to your employer for your expenses within a reasonable period of time. 40 ez form You must return any reimbursement or allowance in excess of the expenses accounted for within a reasonable period of time. 40 ez form If you are reimbursed under an accountable plan, your employer should not include any reimbursement in your income in box 1 of your Form W-2. 40 ez form If your employer included reimbursements in box 1 of your Form W-2 and you meet all three rules for accountable plans, ask your employer for a corrected Form W-2. 40 ez form Accountable plan rules not met. 40 ez form   Even though you are reimbursed under an accountable plan, some of your expenses may not meet all three rules for accountable plans. 40 ez form Those expenses that fail to meet the three rules are treated as having been reimbursed under a Nonaccountable Plan (discussed later). 40 ez form Expenses equal reimbursement. 40 ez form   Under an accountable plan, if your expenses equal your reimbursement, you do not complete Form 2106 or 2106-EZ. 40 ez form Because your expenses and reimbursements are equal, you do not have a deduction. 40 ez form Excess expenses. 40 ez form   If your expenses are more than your reimbursement, you can deduct your excess expenses. 40 ez form This is discussed later, under Deducting Business Expenses . 40 ez form Allocating your reimbursements for meals. 40 ez form   Because your excess meal expenses are subject to the 50% limit, you must figure them separately from your other expenses. 40 ez form If your employer paid you a single amount to cover both meals and other expenses, you must allocate the reimbursement so that you can figure your excess meal expenses separately. 40 ez form Make the allocation as follows. 40 ez form Divide your meal expenses by your total expenses. 40 ez form Multiply your total reimbursement by the result from (1). 40 ez form This is the allocated reimbursement for your meal expenses. 40 ez form Subtract the amount figured in (2) from your total reimbursement. 40 ez form The difference is the allocated reimbursement for your other expenses of qualifying work-related education. 40 ez form Example. 40 ez form Your employer paid you an expense allowance of $2,000 under an accountable plan. 40 ez form The allowance was to cover all of your expenses of traveling away from home to take a 2-week training course for work. 40 ez form There was no indication of how much of the reimbursement was for each type of expense. 40 ez form Your actual expenses equal $2,500 ($425 for meals + $700 lodging + $150 transportation expenses + $1,225 for books and tuition). 40 ez form Using the steps listed above, allocate the reimbursement between the $425 meal expenses and the $2,075 other expenses. 40 ez form   1. 40 ez form $425 meal expenses  $2,500 total expenses = . 40 ez form 17   2. 40 ez form $2,000 (reimbursement)×. 40 ez form 17     =$340 (allocated reimbursement for meal expenses)   3. 40 ez form $2,000 (reimbursement)−$340 (meals)     = $1,660 (allocated reimbursement for other qualifying work-related education expenses) Your excess meal expenses are $85 ($425 − $340) and your excess other expenses are $415 ($2,075 − $1,660). 40 ez form After you apply the 50% limit to your meals, you have a deduction for work-related education expenses of $458 (($85 × 50%) + $415). 40 ez form Nonaccountable Plans Your employer will combine the amount of any reimbursement or other expense allowance paid to you under a nonaccountable plan with your wages, salary, or other pay and report the total in box 1 of your Form W-2. 40 ez form You can deduct your expenses regardless of whether they are more than, less than, or equal to your reimbursement. 40 ez form This is discussed later under Deducting Business Expenses . 40 ez form An illustrated example of a nonaccountable plan, using Form 2106-EZ, is shown at the end of this chapter. 40 ez form Reimbursements for nondeductible expenses. 40 ez form   Reimbursements you received for nondeductible expenses are treated as paid under a nonaccountable plan. 40 ez form You must include them in your income. 40 ez form For example, you must include in your income reimbursements your employer gave you for expenses of education that: You need to meet the minimum educational requirements for your job, or Is part of a program of study that can qualify you for a new trade or business. 40 ez form   For more information on accountable and nonaccountable plans, see chapter 6 of Publication 463. 40 ez form Deducting Business Expenses Self-employed persons and employees report their business expenses differently. 40 ez form The following information explains what forms you must use to deduct the cost of your qualifying work-related education as a business expense. 40 ez form Self-Employed Persons If you are self-employed, you must report the cost of your qualifying work-related education on the appropriate form used to report your business income and expenses (generally Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Schedule F (Form 1040)). 40 ez form If your education expenses include expenses for a car or truck, travel, or meals, report those expenses the same way you report other business expenses for those items. 40 ez form See the instructions for the form you file for information on how to complete it. 40 ez form Employees If you are an employee, you can deduct the cost of qualifying work-related education only if you: Did not receive (and were not entitled to receive) any reimbursement from your employer, Were reimbursed under a nonaccountable plan (amount is included in box 1 of Form W-2), or Received reimbursement under an accountable plan, but the amount received was less than your expenses for which you claimed reimbursement. 40 ez form If either (1) or (2) applies, you can deduct the total qualifying cost. 40 ez form If (3) applies, you can deduct only the qualifying costs that were more than your reimbursement. 40 ez form In order to deduct the cost of your qualifying work-related education as a business expense, include the amount with your deduction for any other employee business expenses on Schedule A (Form 1040), line 21, or Schedule A (Form 1040NR), line 7. 40 ez form (Special rules for expenses of certain performing artists and fee-basis officials and for impairment-related work expenses are explained later. 40 ez form ) This deduction (except for impairment-related work expenses of disabled individuals) is subject to the 2%-of-adjusted-gross-income limit that applies to most miscellaneous itemized deductions. 40 ez form Form 2106 or 2106-EZ. 40 ez form   To figure your deduction for employee business expenses, including qualifying work-related education, you generally must complete Form 2106 or 2106-EZ. 40 ez form Form not required. 40 ez form   Do not complete either Form 2106 or 2106-EZ if: All reimbursements, if any, are included in box 1 of your Form W-2, and You are not claiming travel, transportation, meal, or entertainment expenses. 40 ez form   If you meet both of these requirements, enter the expenses directly on Schedule A (Form 1040), line 21, or Schedule A (Form 1040NR), line 7. 40 ez form (Special rules for expenses of certain Performing Artists and Fee-Basis Officials and for Impairment-Related Work Expenses are explained later. 40 ez form ) Using Form 2106-EZ. 40 ez form   This form is shorter and easier to use than Form 2106. 40 ez form Generally, you can use this form if: All reimbursements, if any, are included in box 1 of your Form W-2, and You are using the standard mileage rate if you are claiming vehicle expenses. 40 ez form   If you do not meet both of these requirements, use Form 2106. 40 ez form Performing Artists and Fee-Basis Officials If you are a qualified performing artist, or a state (or local) government official who is paid in whole or in part on a fee basis, you can deduct the cost of your qualifying work-related education as an adjustment to gross income rather than as an itemized deduction. 40 ez form Include the cost of your qualifying work-related education with any other employee business expenses on Form 1040, line 24, or Form 1040NR, line 35. 40 ez form You do not have to itemize your deductions on Schedule A (Form 1040 or 1040NR), and, therefore, the deduction is not subject to the 2%-of-adjusted-gross-income limit. 40 ez form You must complete Form 2106 or 2106-EZ to figure your deduction even if you meet the requirements described earlier under Form not required . 40 ez form For more information on qualified performing artists, see chapter 6 of Publication 463. 40 ez form Impairment-Related Work Expenses If you are disabled and have impairment-related work expenses that are necessary for you to be able to get qualifying work-related education, you can deduct these expenses on Schedule A (Form 1040), line 28, or Schedule A (Form 1040NR), line 14. 40 ez form They are not subject to the 2%-of-adjusted-gross-income limit. 40 ez form To deduct these expenses, you must complete Form 2106 or 2106-EZ even if you meet the requirements described earlier under Form not required . 40 ez form For more information on impairment-related work expenses, see chapter 6 of Publication 463. 40 ez form Recordkeeping You must keep records as proof of any deduction claimed on your tax return. 40 ez form Generally, you should keep your records for 3 years from the date of filing the tax return and claiming the deduction. 40 ez form If you are an employee who is reimbursed for expenses and you give your records and documentation to your employer, you do not have to keep duplicate copies of this information. 40 ez form However, you should keep your records for a 3-year period if: You claim deductions for expenses that are more than your reimbursement, Your employer does not use adequate accounting procedures to verify expense accounts, You are related to your employer, or Your expenses are reimbursed under a nonaccountable plan. 40 ez form Examples of records to keep. 40 ez form   If any of the above cases apply to you, you must be able to prove that your expenses are deductible. 40 ez form You should keep adequate records or have sufficient evidence that will support your expenses. 40 ez form Estimates or approximations do not qualify as proof of an expense. 40 ez form Some examples of what can be used to help prove your expenses are: Documents, such as transcripts, course descriptions, catalogs, etc. 40 ez form , showing periods of enrollment in educational institutions, principal subjects studied, and descriptions of educational activity. 40 ez form Canceled checks and receipts to verify amounts you spent for: Tuition and books, Meals and lodging while away from home overnight for educational purposes, Travel and transportation, and Other education expenses. 40 ez form Statements from your employer explaining whether the education was necessary for you to keep your job, salary, or status; how the education helped maintain or improve skills needed in your job; how much reimbursement you received; and, if you are a teacher, the type of certificate and subjects taught. 40 ez form Complete information about any scholarship or fellowship grants, including amounts you received during the year. 40 ez form Illustrated Example Victor Jones teaches math at a private high school in North Carolina. 40 ez form He was selected to attend a 3-week math seminar at a university in California. 40 ez form The seminar will improve his skills in his current job and is qualifying work-related education. 40 ez form He was reimbursed for his expenses under his employer's nonaccountable plan, so his reimbursement of $2,100 is included in the wages shown in box 1 of his Form W-2. 40 ez form Victor will file Form 1040. 40 ez form His actual expenses for the seminar are as follows:   Lodging   $1,050     Meals   526     Airfare   550     Taxi fares   50     Tuition and books   400     Total Expenses   $2,576   Victor files Form 2106-EZ with his tax return. 40 ez form He shows his expenses for the seminar in Part I of the form. 40 ez form He enters $1,650 ($1,050 + $550 + $50) on line 3 to account for his lodging, airfare, and taxi fares. 40 ez form He enters $400 on line 4 for his tuition and books. 40 ez form On the line provided for total meals and entertainment expenses, Victor enters $526 for meal expenses. 40 ez form He multiplies that amount by 50% and enters the result, $263, on line 5. 40 ez form On line 6, Victor totals the amounts from lines 3 through 5. 40 ez form He carries the total, $2,313, to Schedule A (Form 1040), line 21. 40 ez form Since he does not claim any vehicle expenses, Victor leaves Part II blank. 40 ez form His filled-in form is shown on the next page. 40 ez form This image is too large to be displayed in the current screen. 40 ez form Please click the link to view the image. 40 ez form Form 2106-EZ for V. 40 ez form 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