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Complete Tax Free File

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Complete Tax Free File

Complete tax free file Publication 517 - Main Content Table of Contents Social Security CoverageCoverage of Members of the Clergy Coverage of Religious Workers (Church Employees) U. Complete tax free file S. Complete tax free file Citizens and Resident and Nonresident Aliens Ministerial ServicesMinisters Members of Religious Orders Christian Science Practitioners and Readers Exemption From Self-Employment (SE) TaxMembers of the Clergy Members of Recognized Religious Sects Self-Employment Tax: Figuring Net EarningsRegular Method Nonfarm Optional Method Income Tax: Income and ExpensesIncome Items Expense Items Income Tax Withholding and Estimated Tax Filing Your Return Retirement Savings ArrangementsDeducting contributions to tax-sheltered annuity plans. Complete tax free file Full-time student. Complete tax free file Adjusted gross income. Complete tax free file More information. Complete tax free file Earned Income Credit Comprehensive ExampleForm W-2 From Church Form W-2 From College Schedule C-EZ (Form 1040) Form 2106-EZ Schedule A (Form 1040) Schedule SE (Form 1040) Form 1040 Attachment 1 Attachment 2 How To Get Tax HelpLow Income Taxpayer Clinics Social Security Coverage This section gives information about which system (SECA or FICA) is used to collect social security and Medicare taxes from members of the clergy (ministers, members of a religious order, and Christian Science practitioners and readers) and religious workers (church employees). Complete tax free file Coverage of Members of the Clergy The services you perform in the exercise of your ministry, of the duties required by your religious order, or of your profession as a Christian Science practitioner or reader are covered by social security and Medicare under SECA. Complete tax free file Your earnings for these ministerial services (defined later) are subject to self-employment (SE) tax unless one of the following applies. Complete tax free file You are a member of a religious order who has taken a vow of poverty. Complete tax free file You ask the Internal Revenue Service (IRS) for an exemption from SE tax for your services and the IRS approves your request. Complete tax free file See Exemption From Self-Employment (SE) Tax , later. Complete tax free file You are subject only to the social security laws of a foreign country under the provisions of a social security agreement between the United States and that country. Complete tax free file For more information, see Bilateral Social Security (Totalization) Agreements in Publication 54. Complete tax free file Your earnings that are not from ministerial services may be subject to social security tax under FICA or SECA according to the rules that apply to taxpayers in general. Complete tax free file See Ministerial Services , later. Complete tax free file Ministers If you are a minister of a church, your earnings for the services you perform in your capacity as a minister are subject to SE tax, even if you perform these services as an employee of that church. Complete tax free file However, you can request that the IRS grant you an exemption, as discussed under Exemption From Self-Employment (SE) Tax , later. Complete tax free file For the specific services covered, see Ministerial Services , later. Complete tax free file Ministers defined. Complete tax free file   Ministers are individuals who are duly ordained, commissioned, or licensed by a religious body constituting a church or church denomination. Complete tax free file Ministers have the authority to conduct religious worship, perform sacerdotal functions, and administer ordinances or sacraments according to the prescribed tenets and practices of that church or denomination. Complete tax free file   If a church or denomination ordains some ministers and licenses or commissions others, anyone licensed or commissioned must be able to perform substantially all the religious functions of an ordained minister to be treated as a minister for social security purposes. Complete tax free file Employment status for other tax purposes. Complete tax free file   Even though all of your income from performing ministerial services is subject to self-employment tax for social security tax purposes, you may be an employee for income tax or retirement plan purposes in performing those same services. Complete tax free file For income tax or retirement plan purposes, your income earned as an employee will be considered wages. Complete tax free file Common-law employee. Complete tax free file   Under common-law rules, you are considered either an employee or a self-employed person. Complete tax free file Generally, you are an employee if you perform services for someone who has the legal right to control both what you do and how you do it, even if you have considerable discretion and freedom of action. Complete tax free file For more information about the common-law rules, see Publication 15-A, Employer's Supplemental Tax Guide. Complete tax free file   If a congregation employs you and pays you a salary, you are generally a common-law employee and income from the exercise of your ministry is wages for income tax purposes. Complete tax free file However, amounts received directly from members of the congregation, such as fees for performing marriages, baptisms, or other personal services, are not wages; such amounts are self-employment income for both income tax purposes and social security tax purposes. Complete tax free file Example. Complete tax free file A church hires and pays you a salary to perform ministerial services subject to its control. Complete tax free file Under the common-law rules, you are an employee of the church while performing those services. Complete tax free file Form SS-8. Complete tax free file   If you are not certain whether you are an employee or a self-employed person, you can get a determination from the IRS by filing Form SS-8. Complete tax free file Members of Religious Orders If you are a member of a religious order who has not taken a vow of poverty, your earnings for ministerial services you perform as a member of the order are subject to SE tax. Complete tax free file See Ministerial Services , later. Complete tax free file However, you can request that the IRS grant you an exemption as discussed under Exemption From Self-Employment (SE) Tax , later. Complete tax free file Vow of poverty. Complete tax free file   If you are a member of a religious order and have taken a vow of poverty, you are already exempt from paying SE tax on your earnings for ministerial services you perform as an agent of your church or its agencies. Complete tax free file You do not need to request a separate exemption. Complete tax free file For income tax purposes, the earnings are tax free to you. Complete tax free file Your earnings are considered the income of the religious order. Complete tax free file Services covered under FICA at the election of the order. Complete tax free file   However, even if you have taken a vow of poverty, the services you perform for your church or its agencies may be covered under social security. Complete tax free file Your services are covered if your order, or an autonomous subdivision of the order, elects social security coverage for its current and future vow-of-poverty members. Complete tax free file   The order or subdivision elects coverage by filing Form SS-16. Complete tax free file The election may cover certain vow-of-poverty members for a retroactive period of up to 20 calendar quarters before the quarter in which it files the certificate. Complete tax free file If the election is made, the order or subdivision pays both the employer's and employee's share of the tax. Complete tax free file You do not pay any of the FICA tax. Complete tax free file Services performed outside the order. Complete tax free file   Even if you are a member of a religious order who has taken a vow of poverty and the order requires you to turn over amounts you earn, your earnings are subject to federal income tax and either SE tax or FICA tax (including estimated tax payments and/or withholding) if you: Are self-employed or an employee of an organization outside your religious community, and Perform work not required by, or done on behalf of, the order. Complete tax free file   In these cases, your income from self-employment or as an employee of that outside organization is taxable to you directly. Complete tax free file You may, however, be able to take a charitable deduction for the amount you turn over to the order. Complete tax free file See Publication 526, Charitable Contributions. Complete tax free file Rulings. Complete tax free file   Organizations and individuals may request rulings from the IRS on whether they are religious orders, or members of a religious order, respectively, for FICA tax, SE tax, and federal income tax withholding purposes. Complete tax free file To request a ruling, follow the procedures in Revenue Procedure 2014-1, 2014-1 I. Complete tax free file R. Complete tax free file B. Complete tax free file 1, available at www. Complete tax free file irs. Complete tax free file gov/irb/2014-1_IRB/ar05. Complete tax free file html. Complete tax free file Christian Science Practitioners and Readers Generally, your earnings from services you perform in your profession as a Christian Science practitioner or reader are subject to SE tax. Complete tax free file However, you can request an exemption as discussed under Exemption From Self-Employment (SE) Tax , later. Complete tax free file Practitioners. Complete tax free file   Christian Science practitioners are members in good standing of the Mother Church, The First Church of Christ, Scientist, in Boston, Massachusetts, who practice healing according to the teachings of Christian Science. Complete tax free file State law specifically exempts Christian Science practitioners from licensing requirements. Complete tax free file   Some Christian Science practitioners also are Christian Science teachers or lecturers. Complete tax free file Income from teaching or lecturing is considered the same as income from their work as practitioners. Complete tax free file Readers. Complete tax free file   For tax purposes, Christian Science readers are considered the same as ordained, commissioned, or licensed ministers. Complete tax free file Coverage of Religious Workers (Church Employees) If you are a religious worker (a church employee) and are not in one of the classes already discussed, your wages are generally subject to social security and Medicare tax under FICA, not SECA. Complete tax free file Some exceptions are discussed next. Complete tax free file Election by Church To Exclude Its Employees From FICA Coverage Churches and qualified church-controlled organizations (church organizations) that are opposed for religious reasons to the payment of social security and Medicare taxes can elect to exclude their employees from FICA coverage. Complete tax free file If your employer makes this election, it does not pay the employer's portion of the FICA taxes or withhold from your pay your portion of the FICA taxes. Complete tax free file Instead, your wages are subject to SECA and you must pay SE tax on your wages if they exceed $108. Complete tax free file 28 during the tax year. Complete tax free file However, you can request an exemption from SE tax if you are a member of a recognized religious sect, as discussed below. Complete tax free file Churches and church organizations make this election by filing two copies of Form 8274. Complete tax free file For more information about making this election, see Form 8274. Complete tax free file Election by Certain Church Employees Who Are Opposed to Social Security and Medicare You may be able to choose to be exempt from social security and Medicare taxes, including the SE tax, if you are a member of a recognized religious sect or division and work for a church (or church-controlled nonprofit division) that does not pay the employer's part of the social security tax on wages. Complete tax free file This exemption does not apply to your service, if any, as a minister of a church or as a member of a religious order. Complete tax free file Make this choice by filing Form 4029. Complete tax free file See Requesting Exemption—Form 4029 , later, under Members of Recognized Religious Sects. Complete tax free file U. Complete tax free file S. Complete tax free file Citizens and Resident and Nonresident Aliens To be covered under the SE tax provisions (SECA), individuals generally must be citizens or resident aliens of the United States. Complete tax free file Nonresident aliens are not covered under SECA unless a social security agreement in effect between the United States and the foreign country determines that you are covered under the U. Complete tax free file S. Complete tax free file social security system. Complete tax free file To determine your alien status, see Publication 519, U. Complete tax free file S. Complete tax free file Tax Guide for Aliens. Complete tax free file Residents of Puerto Rico, the U. Complete tax free file S. Complete tax free file Virgin Islands, Guam, the CNMI, and American Samoa. Complete tax free file   If you are a resident of one of these U. Complete tax free file S. Complete tax free file possessions but not a U. Complete tax free file S. Complete tax free file citizen, for SE tax purposes you are treated the same as a citizen or resident alien of the United States. Complete tax free file For information on figuring the tax, see Self-Employment Tax: Figuring Net Earnings , later. Complete tax free file Ministerial Services Ministerial services, in general, are the services you perform in the exercise of your ministry, in the exercise of your duties as required by your religious order, or in the exercise of your profession as a Christian Science practitioner or reader. Complete tax free file Income you receive for performing ministerial services is subject to SE tax unless you have an exemption as explained later. Complete tax free file Even if you have an exemption, only the income you receive for performing ministerial services is exempt. Complete tax free file The exemption does not apply to any other income. Complete tax free file The following discussions provide more detailed information on ministerial services of ministers, members of a religious order, and Christian Science practitioners and readers. Complete tax free file Ministers Most services you perform as a minister, priest, rabbi, etc. Complete tax free file , are ministerial services. Complete tax free file These services include: Performing sacerdotal functions, Conducting religious worship, and Controlling, conducting, and maintaining religious organizations (including the religious boards, societies, and other integral agencies of such organizations) that are under the authority of a religious body that is a church or denomination. Complete tax free file You are considered to control, conduct, and maintain a religious organization if you direct, manage, or promote the organization's activities. Complete tax free file A religious organization is under the authority of a religious body that is a church or denomination if it is organized for and dedicated to carrying out the principles of a faith according to the requirements governing the creation of institutions of the faith. Complete tax free file Services for nonreligious organizations. Complete tax free file   Your services for a nonreligious organization are ministerial services if the services are assigned or designated by your church. Complete tax free file Assigned or designated services qualify even if they do not involve performing sacerdotal functions or conducting religious worship. Complete tax free file   If your services are not assigned or designated by your church, they are ministerial services only if they involve performing sacerdotal functions or conducting religious worship. Complete tax free file Services that are not part of your ministry. Complete tax free file   Income from services you perform as an employee that are not ministerial services is subject to social security and Medicare tax withholding under FICA (not SECA) under the rules that apply to employees in general. Complete tax free file The following are not ministerial services. Complete tax free file Services you perform for nonreligious organizations other than the services stated above. Complete tax free file Services you perform as a duly ordained, commissioned, or licensed minister of a church as an employee of the United States, the District of Columbia, a foreign government, or any of their political subdivisions. Complete tax free file These services are not ministerial services even if you are performing sacerdotal functions or conducting religious worship. Complete tax free file (For example, if you perform services as a chaplain in the Armed Forces of the United States, those services are not ministerial services. Complete tax free file ) Services you perform in a government-owned and operated hospital. Complete tax free file (These services are considered performed by a government employee, not by a minister as part of the ministry. Complete tax free file ) However, services that you perform at a church-related hospital or health and welfare institution, or a private nonprofit hospital, are considered to be part of the ministry and are considered ministerial services. Complete tax free file Books or articles. Complete tax free file   Writing religious books or articles is considered to be in the exercise of your ministry and is considered a ministerial service. Complete tax free file   This rule also applies to members of religious orders and to Christian Science practitioners and readers. Complete tax free file Members of Religious Orders Services you perform as a member of a religious order in the exercise of duties required by the order are ministerial services. Complete tax free file The services are considered ministerial because you perform them as an agent of the order. Complete tax free file For example, if the order directs you to perform services for another agency of the supervising church or an associated institution, you are considered to perform the services as an agent of the order. Complete tax free file However, if the order directs you to work outside the order, this employment will not be considered a duty required by the order unless: Your services are the kind that are ordinarily performed by members of the order, and Your services are part of the duties that must be exercised for, or on behalf of, the religious order as its agent. Complete tax free file Effect of employee status. Complete tax free file   Ordinarily, if your services are not considered directed or required of you by the order, you and the outside party for whom you work are considered employee and employer. Complete tax free file In this case, your earnings from the services are taxed under the rules that apply to employees in general, not under the rules for services provided as agent for the order. Complete tax free file This result is true even if you have taken a vow of poverty. Complete tax free file Example. Complete tax free file Pat Brown and Chris Green are members of a religious order and have taken vows of poverty. Complete tax free file They renounce all claims to their earnings. Complete tax free file The earnings belong to the order. Complete tax free file Pat is a licensed attorney. Complete tax free file The superiors of the order instructed her to get a job with a law firm. Complete tax free file Pat joined a law firm as an employee and, as she requested, the firm made the salary payments directly to the order. Complete tax free file Chris is a secretary. Complete tax free file The superiors of the order instructed him to accept a job with the business office of the church that supervises the order. Complete tax free file Chris took the job and gave all his earnings to the order. Complete tax free file Pat's services are not duties required by the order. Complete tax free file Her earnings are subject to social security and Medicare tax under FICA and to federal income tax. Complete tax free file Chris' services are duties required by the order. Complete tax free file He is acting as an agent of the order and not as an employee of a third party. Complete tax free file He does not include the earnings in gross income, and they are not subject to income tax withholding or to social security and Medicare tax under FICA or SECA. Complete tax free file Christian Science Practitioners and Readers Services you perform as a Christian Science practitioner or reader in the exercise of your profession are ministerial services. Complete tax free file Amounts you receive for performing these services are generally subject to SE tax. Complete tax free file You may request an exemption from SE tax, discussed next, which applies only to those services. Complete tax free file Exemption From Self-Employment (SE) Tax You can request an exemption from SE tax if you are a member of the clergy (minister, member of a religious order, or Christian Science practitioner or reader) or a member of a recognized religious sect. Complete tax free file Generally, members of religious orders who have taken a vow of poverty are already exempt from paying SE tax, as discussed earlier under Members of Religious Orders under Social Security Coverage. Complete tax free file They do not have to request the exemption. Complete tax free file Who cannot be exempt. Complete tax free file   You cannot be exempt from SE tax if you made one of the following elections to be covered under social security. Complete tax free file These elections are irrevocable. Complete tax free file You elected to be covered under social security by filing Form 2031, Revocation of Exemption From Self-Employment Tax for Use by Ministers, Members of Religious Orders, and Christian Science Practitioners, for your 1986, 1987, 2000, or 2001 tax year. Complete tax free file You elected before 1968 to be covered under social security for your ministerial services. Complete tax free file Requesting exemption. Complete tax free file    Table 2, earlier, briefly summarizes the procedure for requesting exemption from the SE tax. Complete tax free file More detailed explanations follow. Complete tax free file If you are a minister, member of a religious order, or Christian Science practitioner, an approved exemption only applies to earnings you receive for ministerial services, discussed earlier. Complete tax free file It does not apply to any other self-employment income. Complete tax free file Table 2. Complete tax free file The Self-Employment Tax Exemption Application and Approval Process   Who Can Apply Members of the Clergy Members of Recognized  Religious Sects How File Form 4361 File Form 4029 When File by the due date (including extensions) of your income tax return for the second tax year in which you had at least $400 of net earnings from self-employment (at least part from ministerial services) File anytime Approval If approved, you will receive an approved copy of Form 4361 If approved, you will receive an approved copy of Form 4029 Effective Date For all tax years after 1967 in which you have at least $400 of net earnings from self-employment For all tax years beginning with the first year you meet the eligibility requirements discussed later Members of the Clergy To claim the exemption from SE tax, you must meet all of the following conditions. Complete tax free file You file Form 4361, described below under Requesting Exemption—Form 4361 . Complete tax free file You are conscientiously opposed to public insurance because of your individual religious considerations (not because of your general conscience), or you are opposed because of the principles of your religious denomination. Complete tax free file You file for other than economic reasons. Complete tax free file You inform the ordaining, commissioning, or licensing body of your church or order that you are opposed to public insurance if you are a minister or a member of a religious order (other than a vow-of-poverty member). Complete tax free file This requirement does not apply to Christian Science practitioners or readers. Complete tax free file You establish that the organization that ordained, commissioned, or licensed you, or your religious order, is a tax-exempt religious organization. Complete tax free file You establish that the organization is a church or a convention or association of churches. Complete tax free file You did not make an election discussed earlier under Who cannot be exempt . Complete tax free file You sign and return the statement the IRS mails to you to certify that you are requesting an exemption based on the grounds listed on the statement. Complete tax free file Requesting Exemption—Form 4361 To request exemption from SE tax, file Form 4361 in triplicate (original and two copies) with the IRS. Complete tax free file The IRS will return to you a copy of the Form 4361 that you filed indicating whether it has approved your exemption. Complete tax free file If it is approved, keep the approved copy of Form 4361 in your permanent records. Complete tax free file When to file. Complete tax free file   File Form 4361 by the date your income tax return is due, including extensions, for the second tax year in which both of the following are true. Complete tax free file You have net earnings from self-employment of at least $400. Complete tax free file Any part of those net earnings was from ministerial services you performed as a: Minister, Member of a religious order, or Christian Science practitioner or reader. Complete tax free file The 2 years do not have to be consecutive tax years. Complete tax free file    The approval process can take some time, so you should file Form 4361 as soon as possible. Complete tax free file Example 1. Complete tax free file Rev. Complete tax free file Lawrence Jaeger, a clergyman ordained in 2013, has net self-employment earnings as a minister of $450 in 2013 and $500 in 2014. Complete tax free file He must file his application for exemption by the due date, including extensions, for his 2014 income tax return. Complete tax free file However, if Rev. Complete tax free file Jaeger does not receive IRS approval for an exemption by April 15, 2015, his SE tax for 2014 is due by that date. Complete tax free file Example 2. Complete tax free file Rev. Complete tax free file Louise Wolfe has only $300 in net self-employment earnings as a minister in 2013, but earned more than $400 in 2012 and expects to earn more than $400 in 2014. Complete tax free file She must file her application for exemption by the due date, including extensions, for her 2014 income tax return. Complete tax free file However, if she does not receive IRS approval for an exemption by April 15, 2015, her SE tax for 2014 is due by that date. Complete tax free file Example 3. Complete tax free file In 2011, Rev. Complete tax free file David Moss was ordained a minister and had $700 in net self-employment earnings as a minister. Complete tax free file In 2012, he received $1,000 as a minister, but his related expenses were over $1,000. Complete tax free file Therefore, he had no net self-employment earnings as a minister in 2012. Complete tax free file Also in 2012, he opened a book store and had $8,000 in net self-employment earnings from the store. Complete tax free file In 2013, he had net self-employment earnings of $1,500 as a minister and $10,000 net self-employment earnings from the store. Complete tax free file Rev. Complete tax free file Moss had net earnings from self-employment in 2011 and 2013 that were $400 or more each year, and part of the self-employment earnings in each of those years was for his services as a minister. Complete tax free file Thus, he must file his application for exemption by the due date, including extensions, for his 2013 income tax return. Complete tax free file Death of individual. Complete tax free file   The right to file an application for exemption ends with an individual's death. Complete tax free file A surviving spouse, executor, or administrator cannot file an exemption application for a deceased clergy member. Complete tax free file Effective date of exemption. Complete tax free file   An approved exemption is effective for all tax years after 1967 in which you have $400 or more of net earnings from self-employment and any part of those earnings is for services as a member of the clergy. Complete tax free file Once the exemption is approved, it is irrevocable. Complete tax free file Example. Complete tax free file Rev. Complete tax free file Trudy Austin, ordained in 2010, had $400 or more in net self-employment earnings as a minister in both 2010 and 2013. Complete tax free file She files an application for exemption on February 20, 2014. Complete tax free file If an exemption is granted, it is effective for 2010 and the following years. Complete tax free file Refunds of SE tax. Complete tax free file   If, after receiving an approved Form 4361, you find that you overpaid SE tax, you can file a claim for refund on Form 1040X. Complete tax free file Generally, for a refund, you must file Form 1040X within 3 years from the date you filed the return or within 2 years from the date you paid the tax, whichever is later. Complete tax free file A return you filed, or tax you paid, before the due date is considered to have been filed or paid on the due date. Complete tax free file   If you file a claim after the 3-year period but within 2 years from the time you paid the tax, the credit or refund will not be more than the tax you paid within the 2 years immediately before you file the claim. Complete tax free file Members of Recognized Religious Sects If you are a member of a recognized religious sect, or a division of a recognized religious sect, you can apply for an exemption from payment of social security and Medicare taxes on both your self-employment income and the wages you earn from an employer who also has an exemption. Complete tax free file Exception. Complete tax free file   If you received social security benefits or payments, or anyone else received these benefits or payments based on your wages or self-employment income, you cannot apply. Complete tax free file However, if you pay your benefits back, you may be considered for exemption. Complete tax free file Contact your local Social Security Administration office to find out the amount you must pay back. Complete tax free file Eligibility requirements. Complete tax free file   To claim this exemption from SE tax, all the following requirements must be met. Complete tax free file You must file Form 4029, discussed later under Requesting Exemption—Form 4029 . Complete tax free file As a follower of the established teachings of the sect or division, you must be conscientiously opposed to accepting benefits of any private or public insurance that makes payments for death, disability, old age, retirement, or medical care, or provides services for medical care. Complete tax free file You must waive all rights to receive any social security payment or benefit and agree that no benefits or payments will be made to anyone else based on your wages and self-employment income. Complete tax free file The Commissioner of Social Security must determine that: Your sect or division has the established teachings as described in (2) above, It is the practice, and has been for a substantial period of time, for members of the sect or division to provide for their dependent members in a manner that is reasonable in view of the members' general level of living, and The sect or division has existed at all times since December 31, 1950. Complete tax free file Requesting Exemption—Form 4029 To request the exemption, file Form 4029 in triplicate (original and two copies) with the Social Security Administration at the address shown on the form. Complete tax free file The sect or division must complete part of the form. Complete tax free file The IRS will return to you a copy of the Form 4029 that you filed indicating whether it has approved your exemption. Complete tax free file If it is approved, keep the approved copy of Form 4029 in your permanent records. Complete tax free file When to file. Complete tax free file   You can file Form 4029 at any time. Complete tax free file   If you have an approved exemption from SE tax and for some reason that approved exemption ended, you must file a new Form 4029 if you subsequently meet the eligibility requirements, discussed earlier. Complete tax free file See Effective date of exemption next for information on when the newly approved exemption would become effective. Complete tax free file    If you have a previously approved exemption from SE tax and you change membership to another recognized religious sect, without any change to your eligibility requirements, then you do not need to file a new Form 4029. Complete tax free file Effective date of exemption. Complete tax free file   An approved exemption from SE tax generally is effective for all tax years beginning with the first year you meet the eligibility requirements discussed earlier. Complete tax free file (For example, if you meet the eligibility requirements in 2011, you file Form 4029 in 2012, and the IRS approves your exemption in 2013, your exemption is effective for tax year 2011 and all later years. Complete tax free file )   The exemption will end if you fail to meet the eligibility requirements or if the Commissioner of Social Security determines that the sect or division fails to meet them. Complete tax free file You must notify the IRS within 60 days if you are no longer a member of the religious group, or if you no longer follow the established teachings of this group. Complete tax free file The exemption will end for the tax year where you or your sect/division first fails to meet the eligibility requirements. Complete tax free file Refunds of SE tax paid. Complete tax free file    To get a refund of any SE tax you paid while the exemption was in effect, file Form 1040X. Complete tax free file For information on filing this form, see Refunds of SE tax under Requesting Exemption—Form 4361, earlier. Complete tax free file Exemption From FICA Taxes Generally, under FICA, the employer and the employee each pay half of the social security and Medicare tax. Complete tax free file Both the employee and the employer, if they meet the eligibility requirements discussed earlier, can apply to be exempt from their share of FICA taxes on wages paid by the employer to the employee. Complete tax free file A partnership in which each partner holds a religious exemption from social security and Medicare is an employer for this purpose. Complete tax free file If the employer's application is approved, the exemption will apply only to FICA taxes on wages paid to employees who also received an approval of identical applications. Complete tax free file Information for employers. Complete tax free file   If you have an approved Form 4029 and you have an employee who has an approved Form 4029, do not report wages you paid to the employee as social security and Medicare wages. Complete tax free file   If you have an employee who does not have an approved Form 4029, you must withhold the employee's share of social security and Medicare taxes and pay the employer's share. Complete tax free file Form W-2. Complete tax free file   When preparing a Form W-2 for an employee with an approved Form 4029, enter “Form 4029” in box 14, “Other. Complete tax free file ” Do not make any entries in boxes 3, 4, 5, or 6. Complete tax free file Forms 941, 943, and 944. Complete tax free file   If both you and your employee have received approved Forms 4029, do not include these exempt wages on the following forms. Complete tax free file Instead, follow the instructions given below. Complete tax free file Form 941, Employer's QUARTERLY Federal Tax Return: check the box on line 4 and enter “Form 4029” in the empty space below the check box. Complete tax free file Form 943, Employer's Annual Federal Tax Return for Agricultural Employees: enter “Form 4029” on the dotted line next to the lines 2 and 4 entry spaces. Complete tax free file Form 944, Employer's ANNUAL Federal Tax Return: check the box on line 3 and enter “Form 4029” in the empty space below the check box. Complete tax free file Effective date. Complete tax free file   An approved exemption from FICA becomes effective on the first day of the first calendar quarter after the quarter in which you file Form 4029. Complete tax free file The exemption will end on the last day of the calendar quarter before the quarter in which the employer, employee, sect, or division fails to meet the requirements. Complete tax free file Self-Employment Tax: Figuring Net Earnings There are two methods for figuring your net earnings from self-employment as a member of the clergy or a religious worker. Complete tax free file Regular method. Complete tax free file Nonfarm optional method. Complete tax free file You may find Worksheets 1 through 4 helpful in figuring your net earnings from self-employment. Complete tax free file Blank worksheets are in the back of this publication, after the Comprehensive Example. Complete tax free file Regular Method Most people use the regular method. Complete tax free file Under this method, figure your net earnings from self-employment by totaling your gross income for services you performed as a minister, a member of a religious order who has not taken a vow of poverty, or a Christian Science practitioner or reader. Complete tax free file Then, subtract your allowable business deductions and multiply the difference by 92. Complete tax free file 35% (. Complete tax free file 9235). Complete tax free file Use Schedule SE (Form 1040) to figure your net earnings and SE tax. Complete tax free file If you are an employee of a church that elected to exclude you from FICA coverage, figure net earnings by multiplying your church wages shown on Form W-2 by 92. Complete tax free file 35% (. Complete tax free file 9235). Complete tax free file Do not reduce your wages by any business deductions when making this computation. Complete tax free file Use Schedule SE (Form 1040), Section B, to figure your net earnings and SE tax. Complete tax free file If you have an approved exemption, or you are automatically exempt, do not include the income or deductions from ministerial services in figuring your net earnings from self-employment. Complete tax free file Amounts included in gross income. Complete tax free file   To figure your net earnings from self-employment (on Schedule SE (Form 1040)), include in gross income: Salaries and fees for your ministerial services (discussed earlier), Offerings you receive for marriages, baptisms, funerals, masses, etc. Complete tax free file , The value of meals and lodging provided to you, your spouse, and your dependents for your employer's convenience, The fair rental value of a parsonage provided to you (including the cost of utilities that are furnished) and the rental allowance (including an amount for payment of utilities) paid to you, and Any amount a church pays toward your income tax or SE tax, other than withholding the amount from your salary. Complete tax free file This amount is also subject to income tax. Complete tax free file   For the income tax treatment of items (2) and (4), see Income Tax: Income and Expenses , later. Complete tax free file Example. Complete tax free file Pastor Roger Adams receives an annual salary of $39,000 as a full-time minister. Complete tax free file The $39,000 includes $5,000 that is designated as a rental allowance to pay utilities. Complete tax free file His church owns a parsonage that has a fair rental value of $12,000 per year. Complete tax free file The church gives Pastor Adams the use of the parsonage. Complete tax free file He is not exempt from SE tax. Complete tax free file He must include $51,000 ($39,000 plus $12,000) when figuring his net earnings for SE tax purposes. Complete tax free file The results would be the same if, instead of the use of the parsonage and receipt of the rental allowance for utilities, Pastor Adams had received an annual salary of $51,000 of which $17,000 ($5,000 plus $12,000) per year was designated as a rental allowance. Complete tax free file Overseas duty. Complete tax free file   Your net earnings from self-employment are determined without any foreign earned income exclusion or the foreign housing exclusion or deduction if you are a U. Complete tax free file S. Complete tax free file citizen or resident alien serving abroad and living in a foreign country. Complete tax free file   For information on excluding foreign earned income or the foreign housing amount, see Publication 54. Complete tax free file Example. Complete tax free file Diane Jones was the minister of a U. Complete tax free file S. Complete tax free file church in Mexico. Complete tax free file She earned $35,000 in that position and was able to exclude it all for income tax purposes under the foreign earned income exclusion. Complete tax free file The United States does not have a social security agreement with Mexico, so Mrs. Complete tax free file Jones is subject to U. Complete tax free file S. Complete tax free file SE tax and must include $35,000 when figuring net earnings from self-employment. Complete tax free file Specified U. Complete tax free file S. Complete tax free file possessions. Complete tax free file    The exclusion from gross income for amounts derived from American Samoa or Puerto Rico does not apply in computing net earnings from self-employment. Complete tax free file Also see Residents of Puerto Rico, the U. Complete tax free file S. Complete tax free file Virgin Islands, Guam, the CNMI, and American Samoa , earlier, under U. Complete tax free file S. Complete tax free file Citizens and Resident and Nonresident Aliens. Complete tax free file Amounts not included in gross income. Complete tax free file   Do not include the following amounts in gross income when figuring your net earnings from self-employment. Complete tax free file Offerings that others made to the church. Complete tax free file Contributions by your church to a tax-sheltered annuity plan set up for you, including any salary reduction contributions (elective deferrals) that are not included in your gross income. Complete tax free file Pension payments or retirement allowances you receive for your past ministerial services. Complete tax free file The rental value of a parsonage or a parsonage allowance provided to you after you retire. Complete tax free file Allowable deductions. Complete tax free file   When figuring your net earnings from self-employment, deduct all your expenses related to your ministerial services performed as a self-employed person. Complete tax free file These are ministerial expenses you incurred while working other than as a common-law employee of the church. Complete tax free file They include expenses incurred in performing marriages and baptisms, and in delivering speeches. Complete tax free file Deduct these expenses on Schedule C or C-EZ (Form 1040), and carry the net amount to line 2 of Schedule SE (Form 1040), Section A or B. Complete tax free file   Wages earned as a common-law employee (explained earlier) of a church are generally subject to self-employment tax unless an exemption is requested, as discussed earlier under Exemption From Self-Employment (SE) Tax . Complete tax free file Subtract any allowable expenses (including unreimbursed employee business expenses) from those wages, include the net amount on line 2 of Schedule SE (Form 1040), Section A or B, and attach an explanation. Complete tax free file Do not complete Schedule C or C-EZ (Form 1040). Complete tax free file However, for income tax purposes, the expenses are allowed only as an itemized deduction on Schedule A (Form 1040) to the extent they exceed 2% of adjusted gross income. Complete tax free file Employee reimbursement arrangements. Complete tax free file   If you received an advance, allowance, or reimbursement for your employee expenses, how you report this amount and your employee expenses depends on whether your employer reimbursed you under an accountable plan or a nonaccountable plan. Complete tax free file Ask your employer if you are not sure if it reimburses you using an accountable or a nonaccountable plan. Complete tax free file Accountable plans. Complete tax free file   To be an accountable plan, your employer's reimbursement arrangement must include all three of the following rules. Complete tax free file Your expenses must have a business connection—that is, you must have paid or incurred deductible expenses while performing services as an employee of your employer. Complete tax free file You must adequately account to your employer for these expenses within a reasonable period of time. Complete tax free file You must return any excess reimbursement or allowance within a reasonable period of time. Complete tax free file   The reimbursement is not reported on your Form W-2. Complete tax free file Generally, if your expenses equal your reimbursement, you have no deduction. Complete tax free file If your expenses are more than your reimbursement, you can deduct your excess expenses for SE tax and income tax purposes. Complete tax free file Nonaccountable plan. Complete tax free file   A nonaccountable plan is a reimbursement arrangement that does not meet all three of the rules listed under Accountable plans above. Complete tax free file In addition, even if your employer has an accountable plan, the following payments will be treated as being paid under a nonaccountable plan. Complete tax free file Excess reimbursements you fail to return to your employer. Complete tax free file Reimbursement of nondeductible expenses related to your employer's business. Complete tax free file   Your employer will combine any reimbursement paid to you under a nonaccountable plan with your wages, salary, or other compensation and report the combined total in box 1 of your Form W-2. Complete tax free file Since reimbursements under a nonaccountable plan are included in your gross income, you can deduct your related expenses (for SE tax and income tax purposes) regardless of whether they are more than, less than, or equal to your reimbursement. Complete tax free file   For more information on accountable and nonaccountable plans, see Publication 463, Travel, Entertainment, Gift, and Car Expenses. Complete tax free file Married Couple Missionary Team If both spouses are duly ordained, commissioned, or licensed ministers of a church and have an agreement that each will perform specific services for which they are paid jointly or separately, they must divide the self-employment income according to the agreement. Complete tax free file If the agreement is with one spouse only and the other spouse is not paid for any specific duties, amounts received for their services are included only in the self-employment income of the spouse having the agreement. Complete tax free file Earnings Subject to SE Tax For 2013, the maximum net earnings from self-employment subject to social security (old age, survivors, and disability insurance) tax is $113,700 minus any wages and tips you earned that were subject to social security tax. Complete tax free file The tax rate for the social security part is 12. Complete tax free file 4%. Complete tax free file In addition, all of your net earnings are subject to the Medicare (hospital insurance) part of the SE tax. Complete tax free file This tax rate is 2. Complete tax free file 9%. Complete tax free file The combined self-employment tax rate is 15. Complete tax free file 3%. Complete tax free file Additional Medicare Tax. Complete tax free file   Beginning in 2013, a 0. Complete tax free file 9% Additional Medicare Tax applies to Medicare wages, railroad retirement (RRTA) compensation, and self-employment income that are more than: $125,000 if married filing separately, $250,000 if married filing jointly, or $200,000 for any other filing status. Complete tax free file Medicare wages and self-employment income are combined to determine if income exceeds the threshold. Complete tax free file A self-employment loss is not considered for purposes of this tax. Complete tax free file RRTA compensation is separately compared to the threshold. Complete tax free file For more information, see Form 8959, Additional Medicare Tax, and its separate instructions. Complete tax free file Nonfarm Optional Method You may be able to use the nonfarm optional method for figuring your net earnings from self-employment. Complete tax free file In general, the nonfarm optional method is intended to permit continued coverage for social security and Medicare purposes when your income for the tax year is low. Complete tax free file You may use the nonfarm optional method if you meet all the following tests. Complete tax free file You are self-employed on a regular basis. Complete tax free file You meet this test if your actual net earnings from self-employment were $400 or more in at least 2 of the 3 tax years before the one for which you use this method. Complete tax free file The net earnings can be from either farm or nonfarm earnings or both. Complete tax free file You have used this method less than 5 prior years. Complete tax free file (There is a 5-year lifetime limit. Complete tax free file ) The years do not have to be consecutive. Complete tax free file Your net nonfarm profits were: Less than $5,024, and Less than 72. Complete tax free file 189% of your gross nonfarm income. Complete tax free file If you meet all three tests, use Table 3 to figure your net earnings from self-employment under the nonfarm optional method. Complete tax free file Table 3. Complete tax free file Figuring Nonfarm Net Earnings IF your gross nonfarm income is . Complete tax free file . Complete tax free file . Complete tax free file THEN your net earnings are equal to . Complete tax free file . Complete tax free file . Complete tax free file $6,960 or less Two-thirds of your gross nonfarm income. Complete tax free file More than $6,960 $4,640. Complete tax free file Actual net earnings. Complete tax free file   Multiply your total earnings subject to SE tax by 92. Complete tax free file 35% (. Complete tax free file 9235) to get actual net earnings. Complete tax free file Actual net earnings are equivalent to net earnings under the “Regular Method. Complete tax free file ” More information. Complete tax free file   For more information on the nonfarm optional method, see Publication 334, Tax Guide for Small Business, and the Schedule SE (Form 1040) instructions. Complete tax free file Income Tax: Income and Expenses Some income and expense items are treated the same for both income tax and SE tax purposes and some are treated differently. Complete tax free file Note. Complete tax free file For purposes of this section, references to members of the clergy are only to ministers or members of a religious order. Complete tax free file Income Items The tax treatment of offerings and fees, outside earnings, rental allowances, rental value of a parsonage, earnings of members of religious orders, and foreign earned income is discussed here. Complete tax free file Offerings and Fees If you are a member of the clergy, you must include in your income offerings and fees you receive for marriages, baptisms, funerals, masses, etc. Complete tax free file , in addition to your salary. Complete tax free file If the offering is made to the religious institution, it is not taxable to you. Complete tax free file Outside Earnings If you are a member of a religious organization and you give your outside earnings to the organization, you still must include the earnings in your income. Complete tax free file However, you may be entitled to a charitable contribution deduction for the amount paid to the organization. Complete tax free file For more information, see Publication 526. Complete tax free file Exclusion of Rental Allowance and Fair Rental Value of a Parsonage Ordained, commissioned, or licensed ministers of the gospel may be able to exclude from income tax the rental allowance or fair rental value of a parsonage that is provided to them as pay for their services. Complete tax free file Services include: Ministerial services, discussed earlier, Administrative duties and teaching at theological seminaries, and The ordinary duties of a minister performed as an employee of the United States (other than as a chaplain in the Armed Forces), a state, possession, political subdivision, or the District of Columbia. Complete tax free file This exclusion applies only for income tax purposes. Complete tax free file It does not apply for SE tax purposes, as discussed earlier under Amounts included in gross income under Self-Employment Tax: Figuring Net Earnings. Complete tax free file Designation requirement. Complete tax free file   The church or organization that employs you must officially designate the payment as a housing allowance before it makes the payment. Complete tax free file It must designate a definite amount. Complete tax free file It cannot determine the amount of the housing allowance at a later date. Complete tax free file If the church or organization does not officially designate a definite amount as a housing allowance, you must include your total salary in your income. Complete tax free file   If you are employed and paid by a local congregation, a resolution by a national church agency of your denomination does not effectively designate a housing allowance for you. Complete tax free file The local congregation must officially designate the part of your salary that is a housing allowance. Complete tax free file However, a resolution of a national church agency can designate your housing allowance if you are directly employed by the national agency. Complete tax free file Rental allowances. Complete tax free file   If you receive in your salary an amount officially designated as a rental allowance (including an amount to pay utility costs), you can exclude the allowance from your gross income if: You use the amount to provide or rent a home, and The amount is not more than reasonable pay for your services. Complete tax free file   The amount you exclude cannot be more than the fair rental value of the home, including furnishings, plus the cost of utilities. Complete tax free file Fair rental value of parsonage. Complete tax free file   You can exclude from gross income the fair rental value of a house or parsonage, including utilities, furnished to you as part of your earnings. Complete tax free file However, the exclusion cannot be more than the reasonable pay for your services. Complete tax free file If you pay for the utilities, you can exclude any allowance designated for utility costs, up to your actual cost. Complete tax free file Example. Complete tax free file Rev. Complete tax free file Joanna Baker is a full-time minister. Complete tax free file The church allows her to use a parsonage that has an annual fair rental value of $24,000. Complete tax free file The church pays her an annual salary of $67,000, of which $7,500 is designated for utility costs. Complete tax free file Her actual utility costs during the year were $7,000. Complete tax free file For income tax purposes, Rev. Complete tax free file Baker excludes $31,000 from gross income ($24,000 fair rental value of the parsonage plus $7,000 from the allowance for utility costs). Complete tax free file She will report $60,000 ($59,500 salary plus $500 of unused utility allowance). Complete tax free file Her income for SE tax purposes, however, is $91,000 ($67,000 salary + $24,000 fair rental value of the parsonage). Complete tax free file Home ownership. Complete tax free file   If you own your home and you receive as part of your salary a housing or rental allowance, you may exclude from gross income the smallest of: The amount actually used to provide a home, The amount officially designated as a rental allowance, or The fair rental value of the home, including furnishings, utilities, garage, etc. Complete tax free file Excess rental allowance. Complete tax free file   You must include in gross income the amount of any rental allowance that is more than the smallest of: Your reasonable salary, The fair rental value of the home plus utilities, or The amount actually used to provide a home. Complete tax free file   Include in the total on Form 1040, line 7. Complete tax free file On the dotted line next to line 7, enter “Excess allowance” and the amount. Complete tax free file You may deduct the home mortgage interest and real estate taxes paid on your home even though you pay all or part of those expenses with funds you get through a tax-free rental or parsonage allowance. Complete tax free file However, you can only deduct these expenses as itemized deductions on Schedule A (Form 1040). Complete tax free file Retired ministers. Complete tax free file   If you are a retired minister, you can exclude from your gross income the rental value of a home (plus utilities) furnished to you by your church as a part of your pay for past services, or the part of your pension that was designated as a rental allowance. Complete tax free file However, a minister's surviving spouse cannot exclude the rental value unless the rental value is for ministerial services he or she performs or performed. Complete tax free file Teachers or administrators. Complete tax free file   If you are a minister employed as a teacher or administrator by a church school, college, or university, you are performing ministerial services for purposes of the housing exclusion. Complete tax free file However, if you perform services as a teacher or administrator on the faculty of a nonchurch college, you cannot exclude from your income a housing allowance or the value of a home that the college provides to you. Complete tax free file    If you live in faculty lodging as an employee of an educational institution or academic health center, all or part of the value of that lodging may be nontaxable under a different rule. Complete tax free file In Publication 525, see Faculty lodging in the discussion on meals and lodging under Fringe Benefits. Complete tax free file   If you serve as a minister of music or minister of education, or serve in an administrative or other function of your religious organization, but are not authorized to perform substantially all of the religious duties of an ordained minister in your church (even if you are commissioned as a minister of the gospel), the housing exclusion does not apply to you. Complete tax free file Theological students. Complete tax free file   If you are a theological student serving a required internship as a part-time or assistant pastor, you cannot exclude a parsonage or rental allowance from your income unless you are ordained, commissioned, or licensed as a minister. Complete tax free file Traveling evangelists. Complete tax free file   You can exclude a designated rental allowance from out-of-town churches if you meet all of the following requirements. Complete tax free file You are an ordained minister. Complete tax free file You perform ministerial services at churches located away from your community. Complete tax free file You actually use the rental allowance to maintain your permanent home. Complete tax free file Cantors. Complete tax free file   If you have a bona fide commission and your congregation employs you on a full-time basis to perform substantially all the religious functions of the Jewish faith, you can exclude a rental allowance from your gross income. Complete tax free file Earnings—Members of Religious Orders Your earnings may be exempt from both income tax and SE tax if you are a member of a religious order who: Has taken a vow of poverty, Receives earnings for services performed as an agent of the order and in the exercise of duties required by the order, and Renounces the earnings and gives them to the order. Complete tax free file See Members of Religious Orders , earlier, under Social Security Coverage. Complete tax free file Foreign Earned Income Certain income may be exempt from income tax if you work in a foreign country or in a specified U. Complete tax free file S. Complete tax free file possession. Complete tax free file Publication 54 discusses the foreign earned income exclusion. Complete tax free file Publication 570, Tax Guide for Individuals With Income From U. Complete tax free file S. Complete tax free file Possessions, covers the rules for taxpayers with income from U. Complete tax free file S. Complete tax free file possessions. Complete tax free file You can get these free publications from the Internal Revenue Service at IRS. Complete tax free file gov or from most U. Complete tax free file S. Complete tax free file Embassies or consulates. Complete tax free file Expense Items The tax treatment of ministerial trade or business expenses, expenses allocable to tax-free income, and health insurance costs is discussed here. Complete tax free file Ministerial Trade or Business Expenses as an Employee When you figure your income tax, you must itemize your deductions on Schedule A (Form 1040) to claim allowable deductions for ministerial trade or business expenses incurred while working as an employee. Complete tax free file You also may have to file Form 2106, Employee Business Expenses (or Form 2106-EZ, Unreimbursed Employee Business Expenses). Complete tax free file You claim these expenses as miscellaneous itemized deductions that are subject to the 2%-of-adjusted-gross-income (AGI) limit. Complete tax free file See Publication 529 for more information on this limit. Complete tax free file However, you cannot deduct any of your employee business expenses that are allocable to tax-free income (discussed next). Complete tax free file Expenses Allocable to Tax-Free Income If you receive a rental or parsonage allowance that is exempt from income tax (tax free), you must allocate a portion of the expenses of operating your ministry to that tax-free income. Complete tax free file You cannot deduct the portion of your expenses that you allocate to your tax-free rental or parsonage allowance. Complete tax free file Exception. Complete tax free file   This rule does not apply to your deductions for home mortgage interest or real estate taxes on your home. Complete tax free file Figuring the allocation. Complete tax free file   Figure the portion of your otherwise deductible expenses that you cannot deduct (because you must allocate that portion to tax-free income) by multiplying the expenses by the following fraction:      Tax-free rental or parsonage allowance     All income (taxable and tax free) earned from your ministry           When figuring the allocation, include the income and expenses related to the ministerial duties you perform both as an employee and as a self-employed person. Complete tax free file    Reduce your otherwise deductible expenses only in figuring your income tax, not your SE tax. Complete tax free file Example. Complete tax free file Rev. Complete tax free file Charles Ashford received $40,000 in earnings for ministerial services consisting of a $28,000 salary for ministerial services performed as an employee, $2,000 for weddings and baptisms performed as a self-employed person, and a $10,000 tax-free parsonage allowance. Complete tax free file He incurred $4,000 of unreimbursed expenses connected with his earnings for ministerial services. Complete tax free file $3,500 of the $4,000 is for employee expenses related to his ministerial salary, and $500 is related to the weddings and baptisms he performed as a self-employed person. Complete tax free file Rev. Complete tax free file Ashford figures the nondeductible (tax-free) portion of expenses related to his ministerial salary as follows: ($10,000 ÷ $40,000) x $3,500 = $875   Rev. Complete tax free file Ashford figures the nondeductible (tax-free) portion of expenses related to his wedding and baptism income as follows: ($10,000 ÷ $40,000) x $500 = $125 Required statement. Complete tax free file   If you receive a tax-free rental or parsonage allowance and have ministerial expenses, attach a statement to your tax return. Complete tax free file The statement must contain all of the following information. Complete tax free file A list of each item of taxable ministerial income by source (such as wages, salary, weddings, baptisms, etc. Complete tax free file ) plus the amount. Complete tax free file A list of each item of tax-free ministerial income by source (parsonage allowance) plus the amount. Complete tax free file A list of each item of otherwise deductible ministerial expenses plus the amount. Complete tax free file How you figured the nondeductible part of your otherwise deductible expenses. Complete tax free file A statement that the other deductions claimed on your tax return are not allocable to your tax-free income. Complete tax free file   See the attachments prepared for the Comprehensive Example , later. Complete tax free file Following the example, you will find blank worksheets for your own use. Complete tax free file Health Insurance Costs of Self-Employed Ministers If you are self-employed, you may be able to deduct the amount you paid in 2013 for medical and dental insurance and qualified long-term care insurance for you, your spouse, and your dependents. Complete tax free file If you qualify, you can take this deduction as an adjustment to income on Form 1040, line 29. Complete tax free file See the Instructions for Form 1040 to figure your deduction. Complete tax free file The following special rules apply to the self-employed health insurance deduction. Complete tax free file You cannot take a medical expense deduction on Schedule A (Form 1040) for any expenses you claim for purposes of the self-employed health insurance deduction. Complete tax free file You cannot take the deduction for any month you are eligible to participate in a subsidized plan of your (or your spouse's) employer. Complete tax free file The deduction cannot exceed your net earnings from the business under which the insurance plan is established. Complete tax free file Your net earnings under this rule do not include the income you earned as a common-law employee (discussed earlier) of a church. Complete tax free file More information. Complete tax free file   For more information about the self-employed health insurance deduction, see chapter 6 in Publication 535. Complete tax free file Deduction for SE Tax You can deduct one-half of your SE tax in figuring adjusted gross income. Complete tax free file This is an income tax deduction only, on Form 1040, line 27. Complete tax free file Do not claim this deduction in figuring net earnings from self-employment subject to SE tax. Complete tax free file Income Tax Withholding and Estimated Tax The federal income tax is a pay-as-you-go tax. Complete tax free file You must pay the tax as you earn or receive income during the year. Complete tax free file An employee usually has income tax withheld from his or her wages or salary. Complete tax free file However, your salary is not subject to federal income tax withholding if both of the following conditions apply. Complete tax free file You are a duly ordained, commissioned, or licensed minister, a member of a religious order (who has not taken a vow of poverty), or a Christian Science practitioner or reader. Complete tax free file Your salary is for ministerial services (see Ministerial Services , earlier). Complete tax free file If your salary is not subject to withholding, or if you do not pay enough tax through withholding, you may need to make estimated tax payments to avoid penalties for not paying enough tax as you earn your income. Complete tax free file You generally must make estimated tax payments if you expect to owe taxes, including SE tax, of $1,000 or more, when you file your return. Complete tax free file Determine your estimated tax by using the worksheets in Publication 505, Tax Withholding and Estimated Tax. Complete tax free file Pay the entire estimated tax for 2014 or the first installment by April 15, 2014. Complete tax free file See Form 1040-ES for the different payment methods. Complete tax free file The April 15 date applies whether or not your tax home and your abode are outside the United States and Puerto Rico. Complete tax free file For more information, see chapter 2 of Publication 505. Complete tax free file If you perform your services as a common-law employee of the church and your salary is not subject to income tax withholding, you can enter into a voluntary withholding agreement with the church to cover any income and SE tax that may be due. Complete tax free file Filing Your Return You must file an income tax return for 2013 if your gross income was at least the amount shown in the third column of Table 4 above. Complete tax free file Table 4. Complete tax free file 2013 Filing Requirements for Most Taxpayers IF your filing status is . Complete tax free file . Complete tax free file . Complete tax free file AND at the end of 2013 you were* . Complete tax free file . Complete tax free file . Complete tax free file THEN file a return if your gross income** was at least . Complete tax free file . Complete tax free file . Complete tax free file single under age 65 65 or older   $10,000 $11,500   married filing jointly*** under 65 (both spouses) 65 or older (one spouse) 65 or older (both spouses)   $20,000  $21,200  $22,400   married filing separately any age   $3,900   head of household under 65 65 or older   $12,850 $14,350   qualifying widow(er) with dependent child under 65 65 or older   $16,100  $17,300   * If you were born on January 1, 1949, you are considered to be age 65 at the end of 2013. Complete tax free file ** Gross income means all income you received in the form of money, goods, property, and services that is not exempt from tax, including any income from sources outside the United States or from the sale of your main home (even if you can exclude part or all of it). Complete tax free file Do not include any social security benefits unless (a) you are married filing a separate return and you lived with your spouse at any time in 2013, or (b) one-half of your social security benefits plus your other gross income and any tax-exempt interest is more than $25,000 ($32,000 if married filing jointly). Complete tax free file If (a) or (b) applies, see the instructions for Form 1040, lines 20a and 20b, to figure the taxable part of social security benefits you must include in gross income. Complete tax free file Gross income includes gains, but not losses, reported on Form 8949 or Schedule D (Form 1040). Complete tax free file Gross income from a business means, for example, the amount on Schedule C (Form 1040), line 7, or Schedule F (Form 1040), line 9. Complete tax free file But, in figuring gross income, do not reduce your income by any losses, including any loss on Schedule C (Form 1040), line 7, or Schedule F (Form 1040), line 9. Complete tax free file *** If you did not live with your spouse at the end of 2013 (or on the date your spouse died) and your gross income was at least $3,900, you must file a return regardless of your age. Complete tax free file Additional requirements. Complete tax free file   Even if your income was less than the amount shown in Table 4, you must file an income tax return on Form 1040, and attach a completed Schedule SE (Form 1040), if:    You are not exempt from SE tax, and you have net earnings from self-employment (discussed earlier under Self-Employment Tax: Figuring Net Earnings ) of $400 or more in the tax year, You are exempt from SE tax on earnings from ministerial services and you have $400 or more of other net earnings subject to SE tax, or You had wages of $108. Complete tax free file 28 or more from an electing church or church-controlled organization (see Coverage of Religious Workers (Church Employees) , earlier, under Social Security Coverage). Complete tax free file Self-employment tax. Complete tax free file   If you are liable for SE tax, you must file Schedule SE (Form 1040) with your return. Complete tax free file   If you filed Form 4361 and did not receive approval from the IRS, you must pay SE tax on your ministerial earnings, as explained earlier. Complete tax free file You should report ministerial earnings and expenses from nonemployee ministerial services on Schedule C or C-EZ (Form 1040). Complete tax free file You should then carry the net amount over to line 2 of Schedule SE (Form 1040), Section A or B. Complete tax free file However, if you were a duly ordained minister who was an employee of a church and you must pay SE tax on the wages you earned for those services, do not report those wages on Schedule C or C-EZ (Form 1040). Complete tax free file Instead, report those wages less any allowable expenses (including any unreimbursed employee business expenses), on line 2 of Schedule SE (Form 1040), Section A or B, and attach an explanation. Complete tax free file Note. Complete tax free file For income tax purposes, the unreimbursed employee business expenses that you incurred as an employee of the church and subtracted from your wages on line 2 of Schedule SE (Form 1040) are allowed only as an itemized deduction on Schedule A (Form 1040) if they exceed 2% of your adjusted gross income. Complete tax free file You cannot deduct these expenses on Schedule C or C-EZ (Form 1040) as a trade or business expense. Complete tax free file Exemption from SE tax. Complete tax free file   If you filed Form 4361 and received IRS approval not to be taxed on your ministerial earnings, and you do not have any other income subject to SE tax, do not file Schedule SE (Form 1040). Complete tax free file Instead, enter “Exempt—Form 4361” on the dotted line next to Form 1040, line 56. Complete tax free file However, if you had net earnings from another trade or business of $400 or more subject to SE tax, see line A at the top of Schedule SE (Form 1040), Section B. Complete tax free file    If you filed Form 4029 and received IRS approval not to be taxed on those earnings, and you do not have any other income subject to SE tax, do not file Schedule SE (Form 1040). Complete tax free file Instead, enter “Exempt—Form 4029” on the dotted line next to Form 1040, line 56. Complete tax free file More information. Complete tax free file   For more information on filing your return, including when and where to file it, see the Instructions for Form 1040. Complete tax free file Retirement Savings Arrangements Retirement savings arrangements are plans that offer you a tax-favored way to save for your retirement. Complete tax free file You generally can deduct your contributions to the plan. Complete tax free file Your contributions and the earnings on them are not taxed until they are distributed. Complete tax free file Retirement plans for the self-employed. Complete tax free file   To set up one of the following plans you must be self-employed. Complete tax free file SEP (simplified employee pension) plan. Complete tax free file SIMPLE (savings incentive match plan for employees) plan. Complete tax free file Qualified retirement plan (also called a Keogh or H. Complete tax free file R. Complete tax free file 10 plan). Complete tax free file   The common-law rules determine whether you are an employee or a self-employed person for purposes of setting up a retirement plan. Complete tax free file See Employment status for other tax purposes under Coverage of Members of the Clergy, earlier. Complete tax free file This result is true even if your compensation for ministerial services (defined earlier) is subject to SE tax. Complete tax free file   For example, if a congregation pays you a salary for performing ministerial services and you are subject to the congregation's control, you generally are a common-law employee. Complete tax free file You are not a self-employed person for purposes of setting up a retirement plan. Complete tax free file This result is true even if your salary is subject to SE tax. Complete tax free file   On the other hand, amounts received directly from members of the congregation, such as fees for performing marriages, baptisms, or other personal services that you report on Schedule C or C-EZ (Form 1040), are earnings from self-employment for all tax purposes. Complete tax free file   For more information on establishing a SEP, SIMPLE, or qualified retirement plan, see Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans). Complete tax free file Individual retirement arrangements (IRAs). Complete tax free file   The traditional IRA and the Roth IRA are two individual retirement arrangements you can use to save money for your retirement. Complete tax free file Generally, your maximum contribution for 2013 to either of these plans (or to a combination of the two) is the smaller of your taxable compensation or $5,500 ($6,500 if you are age 50 or older). Complete tax free file   However, your maximum contribution to a Roth IRA will be further reduced or eliminated if your adjusted gross income is above a certain amount. Complete tax free file You cannot deduct Roth IRA contributions, but if you satisfy certain requirements, all earnings in the Roth IRA are tax free and neither your nondeductible contributions nor any earnings on them are taxable when distributed. Complete tax free file   If you contribute to a traditional IRA, your contribution may be deductible. Complete tax free file However, your deduction may be reduced or eliminated if you or your spouse is covered by an employer retirement plan (including, but not limited to, a SEP, SIMPLE, or qualified retirement plan). Complete tax free file   For more information on IRAs, see Publication 590. Complete tax free file Tax-sheltered annuity plans. Complete tax free file   Church employees, members of religious orders, and duly ordained, commissioned, or licensed ministers working as ministers or chaplains can participate in tax-sheltered annuity (403(b)) plans. Complete tax free file For more
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The Complete Tax Free File

Complete tax free file 6. Complete tax free file   Basis of Assets Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Cost BasisReal Property Allocating the Basis Uniform Capitalization Rules Adjusted BasisIncreases to Basis Decreases to Basis Basis Other Than CostTaxable Exchanges Involuntary Conversions Nontaxable Exchanges Property Received as a Gift Property Transferred From a Spouse Inherited Property Property Distributed From a Partnership or Corporation Introduction Your basis is the amount of your investment in property for tax purposes. Complete tax free file Use basis to figure the gain or loss on the sale, exchange, or other disposition of property. Complete tax free file Also use basis to figure depreciation, amortization, depletion, and casualty losses. Complete tax free file If you use property for both business or investment purposes and for personal purposes, you must allocate the basis based on the use. Complete tax free file Only the basis allocated to the business or investment use of the property can be depreciated. Complete tax free file Your original basis in property is adjusted (increased or decreased) by certain events. Complete tax free file For example, if you make improvements to the property, increase your basis. Complete tax free file If you take deductions for depreciation, or casualty losses, or claim certain credits, reduce your basis. Complete tax free file Keep accurate records of all items that affect the basis of your assets. Complete tax free file For information on keeping records, see chapter 1. Complete tax free file Topics - This chapter discusses: Cost basis Adjusted basis Basis other than cost Useful Items - You may want to see: Publication 535 Business Expenses 544 Sales and Other Dispositions of Assets 551 Basis of Assets 946 How To Depreciate Property See chapter 16 for information about getting publications and forms. Complete tax free file Cost Basis The basis of property you buy is usually its cost. Complete tax free file Cost is the amount you pay in cash, debt obligations, other property, or services. Complete tax free file Your cost includes amounts you pay for sales tax, freight, installation, and testing. Complete tax free file The basis of real estate and business assets will include other items, discussed later. Complete tax free file Basis generally does not include interest payments. Complete tax free file However, see Carrying charges and Capitalized interest in chapter 4 of Publication 535. Complete tax free file You also may have to capitalize (add to basis) certain other costs related to buying or producing property. Complete tax free file Under the uniform capitalization rules, discussed later, you may have to capitalize direct costs and certain indirect costs of producing property. Complete tax free file Loans with low or no interest. Complete tax free file   If you buy property on a time-payment plan that charges little or no interest, the basis of your property is your stated purchase price minus the amount considered to be unstated interest. Complete tax free file You generally have unstated interest if your interest rate is less than the applicable federal rate. Complete tax free file See the discussion of unstated interest in Publication 537, Installment Sales. Complete tax free file Real Property Real property, also called real estate, is land and generally anything built on, growing on, or attached to land. Complete tax free file If you buy real property, certain fees and other expenses you pay are part of your cost basis in the property. Complete tax free file Some of these expenses are discussed next. Complete tax free file Lump sum purchase. Complete tax free file   If you buy improvements, such as buildings, and the land on which they stand for a lump sum, allocate your cost basis between the land and improvements. Complete tax free file Allocate the cost basis according to the respective fair market values (FMVs) of the land and improvements at the time of purchase. Complete tax free file Figure the basis of each asset by multiplying the lump sum by a fraction. Complete tax free file The numerator is the FMV of that asset and the denominator is the FMV of the whole property at the time of purchase. Complete tax free file Fair market value (FMV). Complete tax free file   FMV is the price at which property would change hands between a willing buyer and a willing seller, neither having to buy or sell, and both having reasonable knowledge of all necessary facts. Complete tax free file Sales of similar property on or about the same date may help in figuring the FMV of the property. Complete tax free file If you are not certain of the FMV of the land and improvements, you can allocate the basis according to their assessed values for real estate tax purposes. Complete tax free file Real estate taxes. Complete tax free file   If you pay the real estate taxes the seller owed on real property you bought, and the seller did not reimburse you, treat those taxes as part of your basis. Complete tax free file   If you reimburse the seller for taxes the seller paid for you, you generally can deduct that amount as a tax expense. Complete tax free file Whether or not you reimburse the seller, do not include that amount in the basis of your property. Complete tax free file Settlement costs. Complete tax free file   Your basis includes the settlement fees and closing costs for buying the property. Complete tax free file See Publication 551 for a detailed list of items you can and cannot include in basis. Complete tax free file   Do not include fees and costs for getting a loan on the property. Complete tax free file Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Complete tax free file Points. Complete tax free file   If you pay points to get a loan (including a mortgage, second mortgage, or line-of-credit), do not add the points to the basis of the related property. Complete tax free file You may be able to deduct the points currently or over the term of the loan. Complete tax free file For more information about deducting points, see Points in chapter 4 of Publication 535. Complete tax free file Assumption of a mortgage. Complete tax free file   If you buy property and assume (or buy the property subject to) an existing mortgage, your basis includes the amount you pay for the property plus the amount you owe on the mortgage. Complete tax free file Example. Complete tax free file If you buy a farm for $100,000 cash and assume a mortgage of $400,000, your basis is $500,000. Complete tax free file Constructing assets. Complete tax free file   If you build property or have assets built for you, your expenses for this construction are part of your basis. Complete tax free file Some of these expenses include the following costs: Land, Labor and materials, Architect's fees, Building permit charges, Payments to contractors, Payments for rental equipment, and Inspection fees. Complete tax free file   In addition, if you use your own employees, farm materials, and equipment to build an asset, do not deduct the following expenses. Complete tax free file You must capitalize them (include them in the asset's basis). Complete tax free file Employee wages paid for the construction work, reduced by any employment credits allowed. Complete tax free file Depreciation on equipment you own while it is used in the construction. Complete tax free file Operating and maintenance costs for equipment used in the construction. Complete tax free file The cost of business supplies and materials used in the construction. Complete tax free file    Do not include the value of your own labor, or any other labor you did not pay for, in the basis of any property you construct. Complete tax free file Allocating the Basis In some instances, the rules for determining basis apply to a group of assets acquired in the same transaction or to property that consists of separate items. Complete tax free file To determine the basis of these assets or separate items, there must be an allocation of basis. Complete tax free file Group of assets acquired. Complete tax free file   If you buy multiple assets for a lump sum, allocate the amount you pay among the assets. Complete tax free file Use this allocation to figure your basis for depreciation and gain or loss on a later disposition of any of these assets. Complete tax free file You and the seller may agree in the sales contract to a specific allocation of the purchase price among the assets. Complete tax free file If this allocation is based on the value of each asset and you and the seller have adverse tax interests, the allocation generally will be accepted. Complete tax free file Farming business acquired. Complete tax free file   If you buy a group of assets that makes up a farming business, there are special rules you must use to allocate the purchase price among the assets. Complete tax free file Generally, reduce the purchase price by any cash received. Complete tax free file Allocate the remaining purchase price to the other business assets received in proportion to (but not more than) their FMV and in a certain order. Complete tax free file See Trade or Business Acquired under Allocating the Basis in Publication 551 for more information. Complete tax free file Transplanted embryo. Complete tax free file   If you buy a cow that is pregnant with a transplanted embryo, allocate to the basis of the cow the part of the purchase price equal to the FMV of the cow without the implant. Complete tax free file Allocate the rest of the purchase price to the basis of the calf. Complete tax free file Neither the cost allocated to the cow nor the cost allocated to the calf is deductible as a current business expense. Complete tax free file Uniform Capitalization Rules Under the uniform capitalization rules, you must include certain direct and indirect costs in the basis of property you produce or in your inventory costs, rather than claim them as a current deduction. Complete tax free file You recover these costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. Complete tax free file Generally, you are subject to the uniform capitalization rules if you do any of the following: Produce real or tangible personal property, or Acquire property for resale. Complete tax free file However, this rule does not apply to personal property if your average annual gross receipts for the 3-tax-year period ending with the year preceding the current tax year are $10 million or less. Complete tax free file You produce property if you construct, build, install, manufacture, develop, improve, or create the property. Complete tax free file You are not subject to the uniform capitalization rules if the property is produced for personal use. Complete tax free file In a farming business, you produce property if you raise or grow any agricultural or horticultural commodity, including plants and animals. Complete tax free file Plants. Complete tax free file   A plant produced in a farming business includes the following items: A fruit, nut, or other crop-bearing tree; An ornamental tree; A vine; A bush; Sod; and The crop or yield of a plant that will have more than one crop or yield. Complete tax free file Animals. Complete tax free file   An animal produced in a farming business includes any stock, poultry or other bird, and fish or other sea life. Complete tax free file The direct and indirect costs of producing plants or animals include preparatory costs and preproductive period costs. Complete tax free file Preparatory costs include the acquisition costs of the seed, seedling, plant, or animal. Complete tax free file For plants, preproductive period costs include the costs of items such as irrigation, pruning, frost protection, spraying, and harvesting. Complete tax free file For animals, preproductive period costs include the costs of items such as feed, maintaining pasture or pen areas, breeding, veterinary services, and bedding. Complete tax free file Exceptions. Complete tax free file   In a farming business, the uniform capitalization rules do not apply to: Any animal, Any plant with a preproductive period of 2 years or less, or Any costs of replanting certain plants lost or damaged due to casualty. Complete tax free file   Exceptions (1) and (2) do not apply to a corporation, partnership, or tax shelter required to use an accrual method of accounting. Complete tax free file See Accrual Method Required under Accounting Methods in chapter 2. Complete tax free file   In addition, you can elect not to use the uniform capitalization rules for plants with a preproductive period of more than 2 years. Complete tax free file If you make this election, special rules apply. Complete tax free file This election cannot be made by a corporation, partnership, or tax shelter required to use an accrual method of accounting. Complete tax free file This election also does not apply to any costs incurred for the planting, cultivation, maintenance, or development of any citrus or almond grove (or any part thereof) within the first 4 years the trees were planted. Complete tax free file    If you elect not to use the uniform capitalization rules, you must use the alternative depreciation system for all property used in any of your farming businesses and placed in service in any tax year during which the election is in effect. Complete tax free file See chapter 7, for additional information on depreciation. Complete tax free file Example. Complete tax free file You grow trees that have a preproductive period of more than 2 years. Complete tax free file The trees produce an annual crop. Complete tax free file You are an individual and the uniform capitalization rules apply to your farming business. Complete tax free file You must capitalize the direct costs and an allocable part of indirect costs incurred due to the production of the trees. Complete tax free file You are not required to capitalize the costs of producing the annual crop because its preproductive period is 2 years or less. Complete tax free file Preproductive period of more than 2 years. Complete tax free file   The preproductive period of plants grown in commercial quantities in the United States is based on their nationwide weighted average preproductive period. Complete tax free file Plants producing the crops or yields shown in Table 6-1 have a nationwide weighted average preproductive period of more than 2 years. Complete tax free file Other plants (not shown in Table 6-1) may also have a nationwide weighted average preproductive period of more than 2 years. Complete tax free file More information. Complete tax free file   For more information on the uniform capitalization rules that apply to property produced in a farming business, see Regulations section 1. Complete tax free file 263A-4. Complete tax free file Table 6-1. Complete tax free file Plants With a Preproductive Period of More Than 2 Years Plants producing the following crops or yields have a nationwide weighted average preproductive period of more than 2 years. Complete tax free file Almonds Apples Apricots Avocados Blueberries Cherries Chestnuts Coffee beans Currants Dates Figs Grapefruit Grapes Guavas Kiwifruit Kumquats Lemons Limes Macadamia nuts Mangoes Nectarines Olives Oranges Peaches Pears Pecans Persimmons Pistachio nuts Plums Pomegranates Prunes Tangelos Tangerines Tangors Walnuts Adjusted Basis Before figuring gain or loss on a sale, exchange, or other disposition of property or figuring allowable depreciation, depletion, or amortization, you must usually make certain adjustments to the cost basis or basis other than cost (discussed later) of the property. Complete tax free file The adjustments to the original basis are increases or decreases to the cost basis or other basis which result in the adjusted basis of the property. Complete tax free file Increases to Basis Increase the basis of any property by all items properly added to a capital account. Complete tax free file These include the cost of any improvements having a useful life of more than 1 year. Complete tax free file The following costs increase the basis of property. Complete tax free file The cost of extending utility service lines to property. Complete tax free file Legal fees, such as the cost of defending and perfecting title. Complete tax free file Legal fees for seeking a decrease in an assessment levied against property to pay for local improvements. Complete tax free file Assessments for items such as paving roads and building ditches that increase the value of the property assessed. Complete tax free file Do not deduct these expenses as taxes. Complete tax free file However, you can deduct as taxes amounts assessed for maintenance or repairs, or for meeting interest charges related to the improvements. Complete tax free file If you make additions or improvements to business property, depreciate the basis of each addition or improvement as separate depreciable property using the rules that would apply to the original property if you had placed it in service at the same time you placed the addition or improvement in service. Complete tax free file See chapter 7. Complete tax free file Deducting vs. Complete tax free file capitalizing costs. Complete tax free file   Do not add to your basis costs you can deduct as current expenses. Complete tax free file For example, amounts paid for incidental repairs or maintenance are deductible as business expenses and are not added to basis. Complete tax free file However, you can elect either to deduct or to capitalize certain other costs. Complete tax free file See chapter 7 in Publication 535. Complete tax free file Decreases to Basis The following are some items that reduce the basis of property. Complete tax free file Section 179 deduction. Complete tax free file Deductions previously allowed or allowable for amortization, depreciation, and depletion. Complete tax free file Alternative motor vehicle credit. Complete tax free file See Form 8910. Complete tax free file Alternative fuel vehicle refueling property credit. Complete tax free file See Form 8911. Complete tax free file Residential energy efficient property credits. Complete tax free file See Form 5695. Complete tax free file Investment credit (part or all) taken. Complete tax free file Casualty and theft losses and insurance reimbursements. Complete tax free file Payments you receive for granting an easement. Complete tax free file Exclusion from income of subsidies for energy conservation measures. Complete tax free file Certain canceled debt excluded from income. Complete tax free file Rebates from a manufacturer or seller. Complete tax free file Patronage dividends received from a cooperative association as a result of a purchase of property. Complete tax free file See Patronage Dividends in chapter 3. Complete tax free file Gas-guzzler tax. Complete tax free file See Form 6197. Complete tax free file Some of these items are discussed next. Complete tax free file For a more detailed list of items that decrease basis, see section 1016 of the Internal Revenue Code and Publication 551. Complete tax free file Depreciation and section 179 deduction. Complete tax free file   The adjustments you must make to the basis of the property if you take the section 179 deduction or depreciate the property are explained next. Complete tax free file For more information on these deductions, see chapter 7. Complete tax free file Section 179 deduction. Complete tax free file   If you take the section 179 expense deduction for all or part of the cost of qualifying business property, decrease the basis of the property by the deduction. Complete tax free file Depreciation. Complete tax free file   Decrease the basis of property by the depreciation you deducted or could have deducted on your tax returns under the method of depreciation you chose. Complete tax free file If you took less depreciation than you could have under the method chosen, decrease the basis by the amount you could have taken under that method. Complete tax free file If you did not take a depreciation deduction, reduce the basis by the full amount of the depreciation you could have taken. Complete tax free file   If you deducted more depreciation than you should have, decrease your basis by the amount you should have deducted plus the part of the excess depreciation you deducted that actually reduced your tax liability for any year. Complete tax free file   See chapter 7 for information on figuring the depreciation you should have claimed. Complete tax free file   In decreasing your basis for depreciation, take into account the amount deducted on your tax returns as depreciation and any depreciation you must capitalize under the uniform capitalization rules. Complete tax free file Casualty and theft losses. Complete tax free file   If you have a casualty or theft loss, decrease the basis of the property by any insurance or other reimbursement. Complete tax free file Also, decrease it by any deductible loss not covered by insurance. Complete tax free file See chapter 11 for information about figuring your casualty or theft loss. Complete tax free file   You must increase your basis in the property by the amount you spend on clean-up costs (such as debris removal) and repairs that restore the property to its pre-casualty condition. Complete tax free file To make this determination, compare the repaired property to the property before the casualty. Complete tax free file Easements. Complete tax free file   The amount you receive for granting an easement is usually considered to be proceeds from the sale of an interest in the real property. Complete tax free file It reduces the basis of the affected part of the property. Complete tax free file If the amount received is more than the basis of the part of the property affected by the easement, reduce your basis in that part to zero and treat the excess as a recognized gain. Complete tax free file See Easements and rights-of-way in chapter 3. Complete tax free file Exclusion from income of subsidies for energy conservation measures. Complete tax free file   You can exclude from gross income any subsidy you received from a public utility company for the purchase or installation of an energy conservation measure for a dwelling unit. Complete tax free file Reduce the basis of the property by the excluded amount. Complete tax free file Canceled debt excluded from income. Complete tax free file   If a debt you owe is canceled or forgiven, other than as a gift or bequest, you generally must include the canceled amount in your gross income for tax purposes. Complete tax free file A debt includes any indebtedness for which you are liable or which attaches to property you hold. Complete tax free file   You can exclude your canceled debt from income if the debt is any of the following. Complete tax free file Debt canceled in a bankruptcy case or when you are insolvent. Complete tax free file Qualified farm debt. Complete tax free file Qualified real property business debt (provided you are not a C corporation). Complete tax free file Qualified principal residence indebtedness. Complete tax free file Discharge of certain indebtedness of a qualified individual because of Midwestern disasters. Complete tax free file If you exclude canceled debt described in (1) or (2), you may have to reduce the basis of your depreciable and nondepreciable property. Complete tax free file If you exclude canceled debt described in (3), you must only reduce the basis of your depreciable property by the excluded amount. Complete tax free file   For more information about canceled debt in a bankruptcy case, see Publication 908, Bankruptcy Tax Guide. Complete tax free file For more information about insolvency and canceled debt that is qualified farm debt or qualified principal residence indebtedness, see chapter 3. Complete tax free file For more information about qualified real property business debt, see Publication 334, Tax Guide for Small Business. Complete tax free file For more information about canceled debt in Midwestern disaster areas, see Publication 4492-B, Information for Affected Taxpayers in the Midwestern Disaster Areas. Complete tax free file Basis Other Than Cost There are times when you cannot use cost as basis. Complete tax free file In these situations, the fair market value or the adjusted basis of property may be used. Complete tax free file Examples are discussed next. Complete tax free file Property changed from personal to business or rental use. Complete tax free file   When you hold property for personal use and then change it to business use or use it to produce rent, you must figure its basis for depreciation. Complete tax free file An example of changing property from personal to business use would be changing the use of your pickup truck that you originally purchased for your personal use to use in your farming business. Complete tax free file   The basis for depreciation is the lesser of: The FMV of the property on the date of the change, or Your adjusted basis on the date of the change. Complete tax free file   If you later sell or dispose of this property, the basis you use will depend on whether you are figuring a gain or loss. Complete tax free file The basis for figuring a gain is your adjusted basis in the property when you sell the property. Complete tax free file Figure the basis for a loss starting with the smaller of your adjusted basis or the FMV of the property at the time of the change to business or rental use. Complete tax free file Then make adjustments (increases and decreases) for the period after the change in the property's use, as discussed earlier under Adjusted Basis . Complete tax free file Property received for services. Complete tax free file   If you receive property for services, include the property's FMV in income. Complete tax free file The amount you include in income becomes your basis. Complete tax free file If the services were performed for a price agreed on beforehand, it will be accepted as the FMV of the property if there is no evidence to the contrary. Complete tax free file Example. Complete tax free file George Smith is an accountant and also operates a farming business. Complete tax free file George agreed to do some accounting work for his neighbor in exchange for a dairy cow. Complete tax free file The accounting work and the cow are each worth $1,500. Complete tax free file George must include $1,500 in income for his accounting services. Complete tax free file George's basis in the cow is $1,500. Complete tax free file Taxable Exchanges A taxable exchange is one in which the gain is taxable, or the loss is deductible. Complete tax free file A taxable gain or deductible loss also is known as a recognized gain or loss. Complete tax free file A taxable exchange occurs when you receive cash or get property that is not similar or related in use to the property exchanged. Complete tax free file If you receive property in exchange for other property in a taxable exchange, the basis of the property you receive is usually its FMV at the time of the exchange. Complete tax free file Example. Complete tax free file You trade a tract of farmland with an adjusted basis of $2,000 for a tractor that has an FMV of $6,000. Complete tax free file You must report a taxable gain of $4,000 for the land. Complete tax free file The tractor has a basis of $6,000. Complete tax free file Involuntary Conversions If you receive property as a result of an involuntary conversion, such as a casualty, theft, or condemnation, figure the basis of the replacement property you receive using the basis of the converted property. Complete tax free file Similar or related property. Complete tax free file   If the replacement property is similar or related in service or use to the converted property, the replacement property's basis is the same as the old property's basis on the date of the conversion. Complete tax free file However, make the following adjustments. Complete tax free file Decrease the basis by the following amounts. Complete tax free file Any loss you recognize on the involuntary conversion. Complete tax free file Any money you receive that you do not spend on similar property. Complete tax free file Increase the basis by the following amounts. Complete tax free file Any gain you recognize on the involuntary conversion. Complete tax free file Any cost of acquiring the replacement property. Complete tax free file Money or property not similar or related. Complete tax free file   If you receive money or property not similar or related in service or use to the converted property and you buy replacement property similar or related in service or use to the converted property, the basis of the replacement property is its cost decreased by the gain not recognized on the involuntary conversion. Complete tax free file Allocating the basis. Complete tax free file   If you buy more than one piece of replacement property, allocate your basis among the properties based on their respective costs. Complete tax free file Basis for depreciation. Complete tax free file   Special rules apply in determining and depreciating the basis of MACRS property acquired in an involuntary conversion. Complete tax free file For information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7. Complete tax free file For more information about involuntary conversions, see chapter 11. Complete tax free file Nontaxable Exchanges A nontaxable exchange is an exchange in which you are not taxed on any gain and you cannot deduct any loss. Complete tax free file A nontaxable gain or loss also is known as an unrecognized gain or loss. Complete tax free file If you receive property in a nontaxable exchange, its basis is usually the same as the basis of the property you transferred. Complete tax free file Like-Kind Exchanges The exchange of property for the same kind of property is the most common type of nontaxable exchange. Complete tax free file For an exchange to qualify as a like-kind exchange, you must hold for business or investment purposes both the property you transfer and the property you receive. Complete tax free file There must also be an exchange of like-kind property. Complete tax free file For more information, see Like-Kind Exchanges in  chapter 8. Complete tax free file The basis of the property you receive generally is the same as the adjusted basis of the property you gave up. Complete tax free file Example 1. Complete tax free file You traded a truck you used in your farming business for a new smaller truck to use in farming. Complete tax free file The adjusted basis of the old truck was $10,000. Complete tax free file The FMV of the new truck is $30,000. Complete tax free file Because this is a nontaxable exchange, you do not recognize any gain, and your basis in the new truck is $10,000, the same as the adjusted basis of the truck you traded. Complete tax free file Example 2. Complete tax free file You trade a field cultivator (adjusted basis of $8,000) for a planter (FMV of $9,000). Complete tax free file You use both the field cultivator and the planter in your farming business. Complete tax free file The basis of the planter you receive is $8,000, the same as the field cultivator traded Exchange expenses. Complete tax free file   Exchange expenses generally are the closing costs that you pay. Complete tax free file They include such items as brokerage commissions, attorney fees, and deed preparation fees. Complete tax free file Add them to the basis of the like-kind property you receive. Complete tax free file Property plus cash. Complete tax free file   If you trade property in a like-kind exchange and also pay money, the basis of the property you receive is the adjusted basis of the property you gave up plus the money you paid. Complete tax free file Example. Complete tax free file You trade in a truck (adjusted basis of $3,000) for another truck (FMV of $7,500) and pay $4,000. Complete tax free file Your basis in the new truck is $7,000 (the $3,000 adjusted basis of the old truck plus the $4,000 cash). Complete tax free file Special rules for related persons. Complete tax free file   If a like-kind exchange takes place directly or indirectly between related persons and either party disposes of the property within 2 years after the exchange, the exchange no longer qualifies for like-kind exchange treatment. Complete tax free file Each person must report any gain or loss not recognized on the original exchange unless the loss is not deductible under the related party rules. Complete tax free file Each person reports it on the tax return filed for the year in which the later disposition occurred. Complete tax free file If this rule applies, the basis of the property received in the original exchange will be its FMV. Complete tax free file For more information, see chapter 8. Complete tax free file Exchange of business property. Complete tax free file   Exchanging the property of one business for the property of another business generally is a multiple property exchange. Complete tax free file For information on figuring basis, see Multiple Property Exchanges in chapter 1 of Publication 544. Complete tax free file Basis for depreciation. Complete tax free file   Special rules apply in determining and depreciating the basis of MACRS property acquired in a like-kind transaction. Complete tax free file For information, see Figuring the Deduction for Property Acquired in a Nontaxable Exchange under Figuring Depreciation Under MACRS in chapter 7. Complete tax free file Partially Nontaxable Exchanges A partially nontaxable exchange is an exchange in which you receive unlike property or money in addition to like-kind property. Complete tax free file The basis of the property you receive is the same as the adjusted basis of the property you gave up with the following adjustments. Complete tax free file Decrease the basis by the following amounts. Complete tax free file Any money you receive. Complete tax free file Any loss you recognize on the exchange. Complete tax free file Increase the basis by the following amounts. Complete tax free file Any additional costs you incur. Complete tax free file Any gain you recognize on the exchange. Complete tax free file If the other party to the exchange assumes your liabilities, treat the debt assumption as money you received in the exchange. Complete tax free file Example 1. Complete tax free file You trade farmland (basis of $100,000) for another tract of farmland (FMV of $110,000) and $30,000 cash. Complete tax free file You realize a gain of $40,000. Complete tax free file This is the FMV of the land received plus the cash minus the basis of the land you traded ($110,000 + $30,000 − $100,000). Complete tax free file Include your gain in income (recognize gain) only to the extent of the cash received. Complete tax free file Your basis in the land you received is figured as follows. Complete tax free file Basis of land traded $100,000 Minus: Cash received (adjustment 1(a)) − 30,000   $70,000 Plus: Gain recognized (adjustment 2(b)) + 30,000 Basis of land received $100,000 Example 2. Complete tax free file You trade a truck (adjusted basis of $22,750) for another truck (FMV of $20,000) and $10,000 cash. Complete tax free file You realize a gain of $7,250. Complete tax free file This is the FMV of the truck received plus the cash minus the adjusted basis of the truck you traded ($20,000 + $10,000 − $22,750). Complete tax free file You include all the gain in your income (recognize gain) because the gain is less than the cash you received. Complete tax free file Your basis in the truck you received is figured as follows. Complete tax free file Adjusted basis of truck traded $22,750 Minus: Cash received (adjustment 1(a)) −10,000   $12,750 Plus: Gain recognized (adjustment 2(b)) + 7,250 Basis of truck received $20,000 Allocation of basis. Complete tax free file   If you receive like-kind and unlike properties in the exchange, allocate the basis first to the unlike property, other than money, up to its FMV on the date of the exchange. Complete tax free file The rest is the basis of the like-kind property. Complete tax free file Example. Complete tax free file You traded a tractor with an adjusted basis of $15,000 for another tractor that had an FMV of $12,500. Complete tax free file You also received $1,000 cash and a truck that had an FMV of $3,000. Complete tax free file The truck is unlike property. Complete tax free file You realized a gain of $1,500. Complete tax free file This is the FMV of the tractor received plus the FMV of the truck received plus the cash minus the adjusted basis of the tractor you traded ($12,500 + $3,000 + $1,000 − $15,000). Complete tax free file You include in income (recognize) all $1,500 of the gain because it is less than the FMV of the unlike property plus the cash received. Complete tax free file Your basis in the properties you received is figured as follows. Complete tax free file Adjusted basis of old tractor $15,000 Minus: Cash received (adjustment 1(a)) − 1,000   $14,000 Plus: Gain recognized (adjustment 2(b)) + 1,500 Total basis of properties received $15,500 Allocate the total basis of $15,500 first to the unlike property—the truck ($3,000). Complete tax free file This is the truck's FMV. Complete tax free file The rest ($12,500) is the basis of the tractor. Complete tax free file Sale and Purchase If you sell property and buy similar property in two mutually dependent transactions, you may have to treat the sale and purchase as a single nontaxable exchange. Complete tax free file Example. Complete tax free file You used a tractor on your farm for 3 years. Complete tax free file Its adjusted basis is $22,000 and its FMV is $40,000. Complete tax free file You are interested in a new tractor, which sells for $60,000. Complete tax free file Ordinarily, you would trade your old tractor for the new one and pay the dealer $20,000. Complete tax free file Your basis for depreciating the new tractor would then be $42,000 ($20,000 + $22,000, the adjusted basis of your old tractor). Complete tax free file However, you want a higher basis for depreciating the new tractor, so you agree to pay the dealer $60,000 for the new tractor if he will pay you $40,000 for your old tractor. Complete tax free file Because the two transactions are dependent on each other, you are treated as having exchanged your old tractor for the new one and paid $20,000 ($60,000 − $40,000). Complete tax free file Your basis for depreciating the new tractor is $42,000, the same as if you traded the old tractor. Complete tax free file Property Received as a Gift To figure the basis of property you receive as a gift, you must know its adjusted basis (defined earlier) to the donor just before it was given to you. Complete tax free file You also must know its FMV at the time it was given to you and any gift tax paid on it. Complete tax free file FMV equal to or greater than donor's adjusted basis. Complete tax free file   If the FMV of the property is equal to or greater than the donor's adjusted basis, your basis is the donor's adjusted basis when you received the gift. Complete tax free file Increase your basis by all or part of any gift tax paid, depending on the date of the gift. Complete tax free file   Also, for figuring gain or loss from a sale or other disposition of the property, or for figuring depreciation, depletion, or amortization deductions on business property, you must increase or decrease your basis (the donor's adjusted basis) by any required adjustments to basis while you held the property. Complete tax free file See Adjusted Basis , earlier. Complete tax free file   If you received a gift during the tax year, increase your basis in the gift (the donor's adjusted basis) by the part of the gift tax paid on it due to the net increase in value of the gift. Complete tax free file Figure the increase by multiplying the gift tax paid by the following fraction. Complete tax free file Net increase in value of the gift Amount of the gift   The net increase in value of the gift is the FMV of the gift minus the donor's adjusted basis. Complete tax free file The amount of the gift is its value for gift tax purposes after reduction by any annual exclusion and marital or charitable deduction that applies to the gift. Complete tax free file Example. Complete tax free file In 2013, you received a gift of property from your mother that had an FMV of $50,000. Complete tax free file Her adjusted basis was $20,000. Complete tax free file The amount of the gift for gift tax purposes was $36,000 ($50,000 minus the $14,000 annual exclusion). Complete tax free file She paid a gift tax of $7,320. Complete tax free file Your basis, $26,076, is figured as follows. Complete tax free file Fair market value $50,000 Minus: Adjusted basis −20,000 Net increase in value $30,000 Gift tax paid $7,320 Multiplied by ($30,000 ÷ $36,000) × . Complete tax free file 83 Gift tax due to net increase in value $6,076 Adjusted basis of property to your mother +20,000 Your basis in the property $26,076 Note. Complete tax free file If you received a gift before 1977, your basis in the gift (the donor's adjusted basis) includes any gift tax paid on it. Complete tax free file However, your basis cannot exceed the FMV of the gift when it was given to you. Complete tax free file FMV less than donor's adjusted basis. Complete tax free file   If the FMV of the property at the time of the gift is less than the donor's adjusted basis, your basis depends on whether you have a gain or a loss when you dispose of the property. Complete tax free file Your basis for figuring gain is the donor's adjusted basis plus or minus any required adjustments to basis while you held the property. Complete tax free file Your basis for figuring loss is its FMV when you received the gift plus or minus any required adjustments to basis while you held the property. Complete tax free file (See Adjusted Basis , earlier. Complete tax free file )   If you use the donor's adjusted basis for figuring a gain and get a loss, and then use the FMV for figuring a loss and get a gain, you have neither gain nor loss on the sale or other disposition of the property. Complete tax free file Example. Complete tax free file You received farmland as a gift from your parents when they retired from farming. Complete tax free file At the time of the gift, the land had an FMV of $80,000. Complete tax free file Your parents' adjusted basis was $100,000. Complete tax free file After you received the land, no events occurred that would increase or decrease your basis. Complete tax free file If you sell the land for $120,000, you will have a $20,000 gain because you must use the donor's adjusted basis at the time of the gift ($100,000) as your basis to figure a gain. Complete tax free file If you sell the land for $70,000, you will have a $10,000 loss because you must use the FMV at the time of the gift ($80,000) as your basis to figure a loss. Complete tax free file If the sales price is between $80,000 and $100,000, you have neither gain nor loss. Complete tax free file For instance, if the sales price was $90,000 and you tried to figure a gain using the donor's adjusted basis ($100,000), you would get a $10,000 loss. Complete tax free file If you then tried to figure a loss using the FMV ($80,000), you would get a $10,000 gain. Complete tax free file Business property. Complete tax free file   If you hold the gift as business property, your basis for figuring any depreciation, depletion, or amortization deductions is the same as the donor's adjusted basis plus or minus any required adjustments to basis while you hold the property. Complete tax free file Property Transferred From a Spouse The basis of property transferred to you or transferred in trust for your benefit by your spouse is the same as your spouse's adjusted basis. Complete tax free file The same rule applies to a transfer by your former spouse if the transfer is incident to divorce. Complete tax free file However, for property transferred in trust, adjust your basis for any gain recognized by your spouse or former spouse if the liabilities assumed plus the liabilities to which the property is subject are more than the adjusted basis of the property transferred. Complete tax free file The transferor must give you the records needed to determine the adjusted basis and holding period of the property as of the date of the transfer. Complete tax free file For more information, see Property Settlements in Publication 504, Divorced or Separated Individuals. Complete tax free file Inherited Property Your basis in property you inherited from a decedent, who died before January 1, 2010, or after December 31, 2010, is generally one of the following: The FMV of the property at the date of the decedent's death. Complete tax free file If a federal estate return is filed, you can use its appraised value. Complete tax free file The FMV on the alternate valuation date, if the personal representative for the estate elects to use alternate valuation. Complete tax free file For information on the alternate valuation, see the Instructions for Form 706. Complete tax free file The decedent's adjusted basis in land to the extent of the value that is excluded from the decedent's taxable estate as a qualified conservation easement. Complete tax free file If a federal estate tax return does not have to be filed, your basis in the inherited property is its appraised value at the date of death for state inheritance or transmission taxes. Complete tax free file Special-use valuation method. Complete tax free file   Under certain conditions, when a person dies, the executor or personal representative of that person's estate may elect to value qualified real property at other than its FMV. Complete tax free file If so, the executor or personal representative values the qualified real property based on its use as a farm or other closely held business. Complete tax free file If the executor or personal representative elects this method of valuation for estate tax purposes, this value is the basis of the property for the qualified heirs. Complete tax free file The qualified heirs should be able to get the necessary value from the executor or personal representative of the estate. Complete tax free file   If you are a qualified heir who received special-use valuation property, increase your basis by any gain recognized by the estate or trust because of post-death appreciation. Complete tax free file Post-death appreciation is the property's FMV on the date of distribution minus the property's FMV either on the date of the individual's death or on the alternate valuation date. Complete tax free file Figure all FMVs without regard to the special-use valuation. Complete tax free file   You may be liable for an additional estate tax if, within 10 years after the death of the decedent, you transfer the property or the property stops being used as a farm. Complete tax free file This tax does not apply if you dispose of the property in a like-kind exchange or in an involuntary conversion in which all of the proceeds are reinvested in qualified replacement property. Complete tax free file The tax also does not apply if you transfer the property to a member of your family and certain requirements are met. Complete tax free file   You can elect to increase your basis in special-use valuation property if it becomes subject to the additional estate tax. Complete tax free file To increase your basis, you must make an irrevocable election and pay interest on the additional estate tax figured from the date 9 months after the decedent's death until the date of payment of the additional estate tax. Complete tax free file If you meet these requirements, increase your basis in the property to its FMV on the date of the decedent's death or the alternate valuation date. Complete tax free file The increase in your basis is considered to have occurred immediately before the event that resulted in the additional estate tax. Complete tax free file   You make the election by filing, with Form 706-A, United States Additional Estate Tax Return, a statement that: Contains your (and the estate's) name, address, and taxpayer identification number; Identifies the election as an election under section 1016(c) of the Internal Revenue Code; Specifies the property for which you are making the election; and Provides any additional information required by the Form 706-A instructions. Complete tax free file   For more information, see Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return, Form 706-A, and the related instructions. Complete tax free file Property inherited from a decedent who died in 2010. Complete tax free file   If you inherited property from a decedent who died in 2010, different rules may apply. Complete tax free file See Publication 4895, Tax Treatment of Property Acquired From a Decendent Dying in 2010, for details. Complete tax free file Property Distributed From a Partnership or Corporation The following rules apply to determine a partner's basis and a shareholder's basis in property distributed respectively from a partnership to the partner with respect to the partner's interest in the partnership and from a corporation to the shareholder with respect to the shareholder's ownership of stock in the corporation. Complete tax free file Partner's basis. Complete tax free file   Unless there is a complete liquidation of a partner's interest, the basis of property (other than money) distributed by a partnership to the partner is its adjusted basis to the partnership immediately before the distribution. Complete tax free file However, the basis of the property to the partner cannot be more than the adjusted basis of his or her interest in the partnership reduced by any money received in the same transaction. Complete tax free file For more information, see Partner's Basis for Distributed Property in Publication 541, Partnerships. Complete tax free file Shareholder's basis. Complete tax free file   The basis of property distributed by a corporation to a shareholder is its fair market value. Complete tax free file For more information about corporate distributions, see Distributions to Shareholders in Publication 542, Corporations. Complete tax free file Prev  Up  Next   Home   More Online Publications