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Federal Tax Preparation

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Federal Tax Preparation

Federal tax preparation Publication 929 - Main Content Table of Contents Part 1. Federal tax preparation Rules for All Dependents Filing RequirementsEarned Income Only Unearned Income Only Both Earned and Unearned Income Other Filing Requirements Should a Return Be Filed Even If Not Required? Responsibility for Child's ReturnThird party designee. Federal tax preparation Designated as representative. Federal tax preparation IRS notice. Federal tax preparation Standard DeductionStandard Deduction of Zero Dependent's Own Exemption Withholding From WagesExceptions. Federal tax preparation Part 2. Federal tax preparation Tax on Unearned Income of Certain ChildrenWhich Parent's Return To Use Parent's Election To Report Child's Interest and DividendsEffect of Making the Election Figuring Child's Income Figuring Additional Tax Tax for Certain Children Who Have Unearned IncomeProviding Parental Information (Form 8615, Lines A–C) Step 1. Federal tax preparation Figuring the Child's Net Unearned Income (Form 8615, Part I) Step 2. Federal tax preparation Figuring a Tentative Tax at the Parent's Tax Rate (Form 8615, Part II) Step 3. Federal tax preparation Figuring the Child's Tax (Form 8615, Part III) Alternative Minimum Tax Illustrated Example Part 1. Federal tax preparation Rules for All Dependents This part of the publication discusses the filing requirements for dependents, who is responsible for a child's return, how to figure a dependent's standard deduction and exemption (if any), and whether a dependent can claim exemption from federal income tax withholding. Federal tax preparation Filing Requirements Whether a dependent has to file a return generally depends on the amount of the dependent's earned and unearned income and whether the dependent is married, is age 65 or older, or is blind. Federal tax preparation A dependent may have to file a return even if his or her income is less than the amount that would normally require a return. Federal tax preparation See Other Filing Requirements, later. Federal tax preparation The following sections apply to dependents with: Earned income only, Unearned income only, and Both earned and unearned income. Federal tax preparation  To find out whether a dependent must file, read the section that applies, or use Table 1. Federal tax preparation Earned Income Only A dependent whose gross income is only earned income must file a return if the gross income is more than the amount listed in the following table. Federal tax preparation Marital Status Amount Single   Under 65 and not blind $6,100 Either 65 or older or blind $7,600 65 or older and blind $9,100 Married*   Under 65 and not blind $6,100 Either 65 or older or blind $7,300 65 or older and blind $8,500 *If a dependent's spouse itemizes deductions on a separate return, the dependent must file a return if the dependent has $5 or more of gross income (earned and/or unearned). Federal tax preparation Example. Federal tax preparation William is 16. Federal tax preparation His mother claims an exemption for him on her income tax return. Federal tax preparation He worked part time on weekends during the school year and full time during the summer. Federal tax preparation He earned $7,000 in wages. Federal tax preparation He did not have any unearned income. Federal tax preparation He must file a tax return because he has earned income only and his gross income is more than $6,100. Federal tax preparation If he is blind, he does not have to file a return because his gross income is not more than $7,600. Federal tax preparation Unearned Income Only A dependent whose gross income is only unearned income must file a return if the gross income is more than the amount listed in the following table. Federal tax preparation Marital Status Amount Single   Under 65 and not blind $1,000 Either 65 or older or blind $2,500 65 or older and blind $4,000 Married*   Under 65 and not blind $1,000 Either 65 or older or blind $2,200 65 or older and blind $3,400 *If a dependent's spouse itemizes deductions on a separate return, the dependent must file a return if the dependent has $5 or more of gross income (earned and/or unearned). Federal tax preparation Example. Federal tax preparation Sarah is 18 and single. Federal tax preparation Her parents can claim an exemption for her on their income tax return. Federal tax preparation She received $1,970 of taxable interest and dividend income. Federal tax preparation She did not work during the year. Federal tax preparation She must file a tax return because she has unearned income only and her gross income is more than $1,000. Federal tax preparation If she is blind, she does not have to file a return because she has unearned income only and her gross income is not more than $2,500. Federal tax preparation Election to report child's unearned income on parent's return. Federal tax preparation   A parent of a child under age 19 (or under age 24 if a full-time student) may be able to elect to include the child's interest and dividend income on the parent's return. Federal tax preparation See Parent's Election To Report Child's Interest and Dividends in Part 2. Federal tax preparation If the parent makes this election, the child does not have to file a return. Federal tax preparation Both Earned and Unearned Income A dependent who has both earned and unearned income generally must file a return if the dependent's gross income is more than line 5 of the following worksheet. Federal tax preparation Filing Requirement Worksheet for Most Dependents 1. Federal tax preparation Enter dependent's earned income plus $350     2. Federal tax preparation Minimum amount   $1,000 3. Federal tax preparation Compare lines 1 and 2. Federal tax preparation Enter the larger amount     4. Federal tax preparation Maximum amount   6,100 5. Federal tax preparation Compare lines 3 and 4. Federal tax preparation Enter the smaller amount     6. Federal tax preparation Enter the dependent's gross income. Federal tax preparation If line 6 is more than line 5, the dependent must file an income tax return. Federal tax preparation If the dependent is married and his or her spouse itemizes deductions on a separate return, the dependent must file an income tax return if line 6 is $5 or more. Federal tax preparation       Table 1. Federal tax preparation 2013 Filing Requirements for Dependents If your parent (or someone else) can claim you as a dependent, use this table to see if you must file a return. Federal tax preparation   See the definitions of “dependent,”“earned income,”“unearned income,” and “gross income” in the Glossary. Federal tax preparation   Single dependents—Were you either age 65 or older or blind?     No. Federal tax preparation You must file a return if any of the following apply. Federal tax preparation       Your unearned income was over $1,000. Federal tax preparation Your earned income was over $6,100. Federal tax preparation Your gross income was more than the larger of—       $1,000, or Your earned income (up to $5,750) plus $350. Federal tax preparation         Yes. Federal tax preparation You must file a return if any of the following apply. Federal tax preparation     Your unearned income was over $2,500 ($4,000 if 65 or older and blind), Your earned income was over $7,600 ($9,100 if 65 or older and blind), Your gross income was more than the larger of—       $2,500 ($4,000 if 65 or older and blind), or Your earned income (up to $5,750) plus $1,850 ($3,350 if 65 or older and blind). Federal tax preparation       Married dependents—Were you either age 65 or older or blind?     No. Federal tax preparation You must file a return if any of the following apply. Federal tax preparation       Your gross income was at least $5 and your spouse files a separate return and itemizes deductions. Federal tax preparation Your unearned income was over $1,000. Federal tax preparation Your earned income was over $6,100. Federal tax preparation Your gross income was more than the larger of—       $1,000, or Your earned income (up to $5,750) plus $350. Federal tax preparation       Yes. Federal tax preparation You must file a return if any of the following apply. Federal tax preparation       Your gross income was at least $5 and your spouse files a separate return and itemizes deductions. Federal tax preparation Your unearned income was over $2,200 ($3,400 if 65 or older and blind), Your earned income was over $7,300 ($8,500 if 65 or older and blind), Your gross income was more than the larger of—       $2,200 ($3,400 if 65 or older and blind), or Your earned income (up to $5,750) plus $1,550 ($2,750 if 65 or older and blind). Federal tax preparation       Example 1. Federal tax preparation Joe is 20, single, not blind, and a full-time college student. Federal tax preparation He does not provide more than half of his own support, and his parents claim an exemption for him on their income tax return. Federal tax preparation He received $200 taxable interest income and earned $2,750 from a part-time job. Federal tax preparation He does not have to file a tax return because his gross income of $2,950 ($200 interest plus $2,750 in wages) is not more than $3,100, the amount on line 5 of his filled-in Filing Requirement Worksheet for Most Dependents (shown next). Federal tax preparation Filled-in Example 1 Filing Requirement Worksheet  for Most Dependents 1. Federal tax preparation Enter dependent's earned income plus $350   $ 3,100 2. Federal tax preparation Minimum amount   1,000 3. Federal tax preparation Compare lines 1 and 2. Federal tax preparation Enter the larger amount   3,100 4. Federal tax preparation Maximum amount   6,100 5. Federal tax preparation Compare lines 3 and 4. Federal tax preparation Enter the smaller amount   3,100 6. Federal tax preparation Enter the dependent's gross income. Federal tax preparation If line 6 is more than line 5, the dependent must file an income tax return. Federal tax preparation If the dependent is married and his or her spouse itemizes deductions on a separate return, the dependent must file an income tax return if line 6 is $5 or more. Federal tax preparation   $ 2,950   Example 2. Federal tax preparation The facts are the same as in Example 1 except that Joe had $600 taxable interest income. Federal tax preparation He must file a tax return because his gross income of $3,350 ($600 interest plus $2,750 wages) is more than $3,100, the amount on line 5 of his filled-in worksheet (shown next). Federal tax preparation Filled-in Example 2 Filing Requirement Worksheet for Most Dependents 1. Federal tax preparation Enter dependent's earned income plus $350   $ 3,100 2. Federal tax preparation Minimum amount   1,000 3. Federal tax preparation Compare lines 1 and 2. Federal tax preparation Enter the larger amount   3,100 4. Federal tax preparation Maximum amount   6,100 5. Federal tax preparation Compare lines 3 and 4. Federal tax preparation Enter the smaller amount   3,100 6. Federal tax preparation Enter the dependent's gross income. Federal tax preparation If line 6 is more than line 5, the dependent must file an income tax return. Federal tax preparation If the dependent is married and his or her spouse itemizes deductions on a separate return, the dependent must file an income tax return if line 6 is $5 or more. Federal tax preparation   $ 3,350   Age 65 or older or blind. Federal tax preparation A dependent who is age 65 or older or blind must file a return if his or her gross income is more than line 7 of the following worksheet. Federal tax preparation Filing Requirement Worksheet  for Dependents Who Are Age 65 or Older or Blind 1. Federal tax preparation Enter dependent's earned income plus $350     2. Federal tax preparation Minimum amount   $1,000 3. Federal tax preparation Compare lines 1 and 2. Federal tax preparation Enter the larger amount     4. Federal tax preparation Maximum amount   6,100 5. Federal tax preparation Compare lines 3 and 4. Federal tax preparation Enter the smaller amount     6. Federal tax preparation Enter the amount from the following table that applies to the dependent       Marital Status Amount     Single         Either 65 or older or blind $1,500       65 or older and blind $3,000     Married         Either 65 or older or blind $1,200       65 or older and blind $2,400   7. Federal tax preparation Add lines 5 and 6. Federal tax preparation Enter the total     8. Federal tax preparation Enter the dependent's gross income. Federal tax preparation If line 8 is more than line 7, the dependent must file an income tax return. Federal tax preparation If the dependent is married and his or her spouse itemizes deductions on a separate return, the dependent must file an income tax return if line 8 is $5 or more     Example 3. Federal tax preparation The facts are the same as in Example 2 except that Joe is also blind. Federal tax preparation He does not have to file a return because his gross income of $3,350 is not more than $4,600, the amount on line 7 of his filled-in Filing Requirement Worksheet for Dependents Who Are Age 65 or Older or Blind (shown next). Federal tax preparation   Filled-in Example 3 Filing Requirement Worksheet  for Dependents Who Are Age 65 or Older or Blind 1. Federal tax preparation Enter dependent's earned income plus $350   $3,100 2. Federal tax preparation Minimum amount   1,000 3. Federal tax preparation Compare lines 1 and 2. Federal tax preparation Enter the larger amount   3,100 4. Federal tax preparation Maximum amount   6,100 5. Federal tax preparation Compare lines 3 and 4. Federal tax preparation Enter the smaller amount   3,100 6. Federal tax preparation Enter the amount from the following table that applies to the dependent   1,500   Marital Status Amount     Single         Either 65 or older or blind $1,500       65 or older and blind $3,000     Married         Either 65 or older or blind $1,200       65 or older and blind $2,400   7. Federal tax preparation Add lines 5 and 6. Federal tax preparation Enter the total   4,600 8. Federal tax preparation Enter the dependent's gross income. Federal tax preparation If line 8 is more than line 7, the dependent must file an income tax return. Federal tax preparation If the dependent is married and his or her spouse itemizes deductions on a separate return, the dependent must file an income tax return if line 8 is $5 or more   $3,350 Other Filing Requirements Some dependents may have to file a tax return even if their income is less than the amount that would normally require them to file a return. Federal tax preparation A dependent must file a tax return if he or she owes any other taxes, such as: Social security and Medicare taxes on tips not reported to his or her employer or on wages received from an employer who did not withhold these taxes, Uncollected social security and Medicare or railroad retirement taxes on tips reported to his or her employer or on group-term life insurance, Alternative minimum tax, Additional tax on a health savings account from Form 8889, Part III, Recapture taxes, such as the tax from recapture of an education credit, or Additional tax on a qualified plan, including an individual retirement arrangement (IRA), or other tax-favored account. Federal tax preparation But if the dependent is filing a return only because of this tax, the dependent can file Form 5329 by itself. Federal tax preparation A dependent must also file a tax return if he or she: Had wages of $108. Federal tax preparation 28 or more from a church or qualified church-controlled organization that is exempt from employer social security and Medicare taxes, or Had net earnings from self-employment of at least $400. Federal tax preparation Spouse itemizes. Federal tax preparation   A dependent must file a return if the dependent's spouse itemizes deductions on a separate return and the dependent has $5 or more of gross income (earned and/or unearned). Federal tax preparation Should a Return Be Filed Even If Not Required? Even if a dependent does not meet any of the filing requirements discussed earlier, he or she should file a tax return if either of the following applies. Federal tax preparation Income tax was withheld from his or her income. Federal tax preparation He or she qualifies for the earned income credit, additional child tax credit, health coverage tax credit, or refundable American opportunity education credit. Federal tax preparation See the tax return instructions to find out who qualifies for these credits. Federal tax preparation  By filing a return, the dependent can get a refund. Federal tax preparation Responsibility for Child's Return Generally, a child is responsible for filing his or her own tax return and for paying any tax, penalties, or interest on that return. Federal tax preparation If a child cannot file his or her own return for any reason, such as age, the child's parent, guardian, or other legally responsible person must file it for the child. Federal tax preparation Signing the child's return. Federal tax preparation   If the child cannot sign his or her return, a parent or guardian must sign the child's name followed by the words “By (signature), parent (or guardian) for minor child. Federal tax preparation ” Authority of parent or guardian. Federal tax preparation   A parent or guardian who signs a return on a child's behalf can deal with the IRS on all matters connected with the return. Federal tax preparation   In general, a parent or guardian who does not sign the child's return can only provide information concerning the child's return and pay the child's tax. Federal tax preparation That parent or guardian is not entitled to receive information from the IRS or legally bind the child to a tax liability arising from the return. Federal tax preparation Third party designee. Federal tax preparation   A child's parent or guardian who does not sign the child's return may be authorized, as a third party designee, to discuss the processing of the return with the IRS as well as provide information concerning the return. Federal tax preparation The child or the person signing the return on the child's behalf must check the “Yes” box in the “Third Party Designee” area of the return and name the parent or guardian as the designee. Federal tax preparation   If designated, a parent or guardian can respond to certain IRS notices and receive information about the processing of the return and the status of a refund or payment. Federal tax preparation This designation does not authorize the parent or guardian to receive any refund check, bind the child to any tax liability, or otherwise represent the child before the IRS. Federal tax preparation See the return instructions for more information. Federal tax preparation Designated as representative. Federal tax preparation   A parent or guardian who does not sign the child's return may be designated as the child's representative by the child or the person signing the return on the child's behalf. Federal tax preparation Form 2848, Power of Attorney and Declaration of Representative, is used to designate a child's representative. Federal tax preparation See Publication 947, Practice Before the IRS and Power of Attorney, for more information. Federal tax preparation   If designated, a parent or guardian can receive information about the child's return but cannot legally bind the child to a tax liability unless authorized to do so by the law of the state in which the child lives. Federal tax preparation IRS notice. Federal tax preparation   If you or the child receives a notice from the IRS concerning the child's return or tax liability, you should immediately inform the IRS that the notice concerns a child. Federal tax preparation The notice will show who to contact. Federal tax preparation The IRS will try to resolve the matter with the parent(s) or guardian(s) of the child consistent with their authority. Federal tax preparation Child's earnings. Federal tax preparation   For federal income tax purposes, amounts a child earns by performing services are included in the gross income of the child and not the gross income of the parent. Federal tax preparation This is true even if, under state law, the parent has the right to the earnings and may actually have received them. Federal tax preparation If the child does not pay the tax due on this income, the parent may be liable for the tax. Federal tax preparation Child's expenses. Federal tax preparation   Deductions for payments that are made out of a child's earnings are the child's, even if the payments are made by the parent. Federal tax preparation Example. Federal tax preparation You made payments on your child's behalf that are deductible as a business expense and a charitable contribution. Federal tax preparation You made the payments out of your child's earnings. Federal tax preparation These items can be deducted only on the child's return. Federal tax preparation Standard Deduction The standard deduction for an individual who can be claimed as a dependent on another person's tax return is generally limited to the larger of: $1,000, or The individual's earned income plus $350, but not more than the regular standard deduction (generally $6,100). Federal tax preparation However, the standard deduction may be higher for a dependent who: Is 65 or older, or Is blind. Federal tax preparation Certain dependents cannot claim any standard deduction. Federal tax preparation See Standard Deduction of Zero , later. Federal tax preparation Worksheet 1. Federal tax preparation   Use Worksheet 1 to figure the dependent's standard deduction. Federal tax preparation Worksheet 1. Federal tax preparation Standard Deduction Worksheet for Dependents Use this worksheet only if someone else can claim you (or your spouse, if filing jointly) as a dependent. Federal tax preparation If you were 65 or older and/or blind, check the correct number of boxes below. Federal tax preparation Put the total number of boxes checked in box c and go to line 1. Federal tax preparation a. Federal tax preparation You 65 or older   Blind   b. Federal tax preparation Your spouse, if claiming  spouse's exemption 65 or older   Blind   c. Federal tax preparation Total boxes checked         1. Federal tax preparation Enter your earned income (defined below) plus $350. Federal tax preparation If none, enter -0-. Federal tax preparation 1. Federal tax preparation     2. Federal tax preparation Minimum amount. Federal tax preparation   2. Federal tax preparation $1,000   3. Federal tax preparation Compare lines 1 and 2. Federal tax preparation Enter the larger of the two amounts here. Federal tax preparation 3. Federal tax preparation     4. Federal tax preparation Enter on line 4 the amount shown below for your filing status. Federal tax preparation       Single or Married filing separately—$6,100 Married filing jointly—$12,200 Head of household—$8,950 4. Federal tax preparation     5. Federal tax preparation Standard deduction. Federal tax preparation         a. Federal tax preparation Compare lines 3 and 4. Federal tax preparation Enter the smaller amount here. Federal tax preparation If under 65 and not blind, stop here. Federal tax preparation This is your standard deduction. Federal tax preparation Otherwise, go on to line 5b. Federal tax preparation 5a. Federal tax preparation     b. Federal tax preparation If 65 or older or blind, multiply $1,500 ($1,200 if married) by the number in box c above. Federal tax preparation Enter the result here. Federal tax preparation 5b. Federal tax preparation     c. Federal tax preparation Add lines 5a and 5b. Federal tax preparation This is your standard deduction for 2013. Federal tax preparation 5c. Federal tax preparation     Earned income includes wages, salaries, tips, professional fees, and other compensation received for personal services you performed. Federal tax preparation It also includes any amount received as a scholarship that you must include in income. Federal tax preparation   Example 1. Federal tax preparation Michael is single, age 15, and not blind. Federal tax preparation His parents can claim him as a dependent on their tax return. Federal tax preparation He has taxable interest income of $800 and wages of $150. Federal tax preparation He enters $500 (his earned income plus $350) on line 1 of Worksheet 1. Federal tax preparation On line 3, he enters $1,000, the larger of $500 or $1,000. Federal tax preparation Michael enters $6,100 on line 4. Federal tax preparation On line 5a, he enters $1,000, the smaller of $1,000 or $6,100. Federal tax preparation His standard deduction is $1,000. Federal tax preparation Example 2. Federal tax preparation Judy, a full-time student, is single, age 22, and not blind. Federal tax preparation Her parents can claim her as a dependent on their tax return. Federal tax preparation She has dividend income of $275 and wages of $2,500. Federal tax preparation She enters $2,850 (her earned income plus $350) on line 1 of Worksheet 1. Federal tax preparation On line 3, she enters $2,850, the larger of $2,850 or $1,000. Federal tax preparation She enters $6,100 on line 4. Federal tax preparation On line 5a, she enters $2,850 (the smaller of $2,850 or $6,100) as her standard deduction. Federal tax preparation Example 3. Federal tax preparation Amy, who is single, is claimed as a dependent on her parents' tax return. Federal tax preparation She is 18 years old and blind. Federal tax preparation She has taxable interest income of $1,000 and wages of $2,000. Federal tax preparation She enters $2,350 (her earned income plus $350) on line 1 of Worksheet 1. Federal tax preparation She enters $2,350 (the larger of $2,350 or $1,000) on line 3, $6,100 on line 4, and $2,350 (the smaller of $2,350 or $6,100) on line 5a. Federal tax preparation Because Amy is blind, she checks the box for blindness and enters “1” in box c at the top of Worksheet 1. Federal tax preparation She enters $1,500 (the number in box c times $1,500) on line 5b. Federal tax preparation Her standard deduction on line 5c is $3,850 ($2,350 + $1,500). Federal tax preparation Standard Deduction of Zero The standard deduction for the following dependents is zero. Federal tax preparation A married dependent filing a separate return whose spouse itemizes deductions. Federal tax preparation A dependent who files a return for a period of less than 12 months due to a change in his or her annual accounting period. Federal tax preparation A nonresident or dual-status alien dependent, unless the dependent is married to a U. Federal tax preparation S. Federal tax preparation citizen or resident alien at the end of the year and chooses to be treated as a U. Federal tax preparation S. Federal tax preparation resident for the year. Federal tax preparation See Publication 519, U. Federal tax preparation S. Federal tax preparation Tax Guide for Aliens, for information on making this choice. Federal tax preparation Example. Federal tax preparation Jennifer, who is a dependent of her parents, is entitled to file a joint return with her husband. Federal tax preparation However, her husband elects to file a separate return and itemize his deductions. Federal tax preparation Because he itemizes, Jennifer's standard deduction on her return is zero. Federal tax preparation She can, however, itemize any of her allowable deductions. Federal tax preparation Dependent's Own Exemption A person who can be claimed as a dependent on another taxpayer's return cannot claim his or her own exemption. Federal tax preparation This is true even if the other taxpayer does not actually claim the exemption. Federal tax preparation Example. Federal tax preparation James and Barbara can claim their child, Ben, as a dependent on their return. Federal tax preparation Ben is a college student who works during the summer and must file a tax return. Federal tax preparation Ben cannot claim his own exemption on his return. Federal tax preparation This is true even if James and Barbara do not claim him as a dependent on their return. Federal tax preparation Withholding From Wages Employers generally withhold federal income tax, social security tax, and Medicare tax from an employee's wages. Federal tax preparation If the employee claims exemption from withholding on Form W-4, the employer will not withhold federal income tax. Federal tax preparation The exemption from withholding does not apply to social security and Medicare taxes. Federal tax preparation Conditions for exemption from withholding. Federal tax preparation   An employee can claim exemption from withholding for 2014 only if he or she meets both of the following conditions. Federal tax preparation For 2013, the employee had a right to a refund of all federal income tax withheld because he or she had no tax liability. Federal tax preparation For 2014, the employee expects a refund of all federal income tax withheld because he or she expects to have no tax liability. Federal tax preparation Dependents. Federal tax preparation   An employee who is a dependent ordinarily cannot claim exemption from withholding if both of the following are true. Federal tax preparation The employee's gross income will be more than $1,000, the minimum standard deduction for 2014. Federal tax preparation The employee's unearned income will be more than $350. Federal tax preparation Exceptions. Federal tax preparation   An employee may be able to claim exemption from withholding even if the employee is a dependent, if the employee: Is age 65 or older, Is blind, or Will claim on his or her 2014 tax return: Adjustments to income, Tax credits, or Itemized deductions. Federal tax preparation The above exceptions do not apply to supplemental wages greater than $1,000,000. Federal tax preparation For more information, see Exemption From Withholding in chapter 1 of Publication 505. Federal tax preparation Example. Federal tax preparation Guy is 17 and a student. Federal tax preparation During the summer he works part time at a grocery store. Federal tax preparation He expects to earn about $1,200 this year. Federal tax preparation He also worked at the store last summer and received a refund of all his withheld income tax because he did not have a tax liability. Federal tax preparation The only other income he expects during the year is $375 interest on a savings account. Federal tax preparation He expects that his parents will be able to claim him as a dependent on their tax return. Federal tax preparation He is not blind and will not claim adjustments to income, itemized deductions, a higher standard deduction, or tax credits on his return. Federal tax preparation Guy cannot claim exemption from withholding when he fills out Form W-4 because his parents will be able to claim him as a dependent, his gross income will be more than $1,000 (the minimum standard deduction amount) and his unearned income will be more than $350. Federal tax preparation Claiming exemption from withholding. Federal tax preparation    To claim exemption from withholding, an employee must enter “Exempt” in the space provided on Form W-4, line 7. Federal tax preparation The employee must complete the rest of the form, as explained in the form instructions, and give it to his or her employer. Federal tax preparation Renewing an exemption from withholding. Federal tax preparation   An exemption from withholding is good for only one year. Federal tax preparation An employee must file a new Form W-4 by February 15 each year to continue the exemption. Federal tax preparation Part 2. Federal tax preparation Tax on Unearned Income of Certain Children The two rules that follow may affect the tax on the unearned income of certain children. Federal tax preparation If the child's interest and dividend income (including capital gain distributions) total less than $10,000, the child's parent may be able to choose to include that income on the parent's return rather than file a return for the child. Federal tax preparation (See Parent's Election To Report Child's Interest and Dividends , later. Federal tax preparation ) If the child's interest, dividends, and other unearned income total more than $2,000, part of that income may be taxed at the parent's tax rate instead of the child's tax rate. Federal tax preparation (See Tax for Certain Children Who Have Unearned Income , later. Federal tax preparation ) For these rules, the term “child” includes a legally adopted child and a stepchild. Federal tax preparation These rules apply whether or not the child is a dependent. Federal tax preparation These rules do not apply if neither of the child's parents were living at the end of the year. Federal tax preparation Which Parent's Return To Use If a child's parents are married to each other and file a joint return, use the joint return to figure the tax on the child's unearned income. Federal tax preparation The tax rate and other return information from that return are used to figure the child's tax as explained later under Tax for Certain Children Who Have Unearned Income . Federal tax preparation Parents Who Do Not File a Joint Return For parents who do not file a joint return, the following discussions explain which parent's tax return must be used to figure the tax. Federal tax preparation Only the parent whose tax return is used can make the election described under Parent's Election To Report Child's Interest and Dividends . Federal tax preparation Parents are married. Federal tax preparation   If the child's parents file separate returns, use the return of the parent with the greater taxable income. Federal tax preparation Parents not living together. Federal tax preparation   If the child's parents are married to each other but not living together, and the parent with whom the child lives (the custodial parent) is considered unmarried, use the return of the custodial parent. Federal tax preparation If the custodial parent is not considered unmarried, use the return of the parent with the greater taxable income. Federal tax preparation   For an explanation of when a married person living apart from his or her spouse is considered unmarried, see Head of Household in Publication 501. Federal tax preparation Parents are divorced. Federal tax preparation   If the child's parents are divorced or legally separated, and the parent who had custody of the child for the greater part of the year (the custodial parent) has not remarried, use the return of the custodial parent. Federal tax preparation Custodial parent remarried. Federal tax preparation   If the custodial parent has remarried, the stepparent (rather than the noncustodial parent) is treated as the child's other parent. Federal tax preparation Therefore, if the custodial parent and the stepparent file a joint return, use that joint return. Federal tax preparation Do not use the return of the noncustodial parent. Federal tax preparation   If the custodial parent and the stepparent are married, but file separate returns, use the return of the one with the greater taxable income. Federal tax preparation If the custodial parent and the stepparent are married but not living together, the earlier discussion under Parents not living together applies. Federal tax preparation Parents never married. Federal tax preparation   If a child's parents have never been married to each other, but lived together all year, use the return of the parent with the greater taxable income. Federal tax preparation If the parents did not live together all year, the rules explained earlier under Parents are divorced apply. Federal tax preparation Widowed parent remarried. Federal tax preparation   If a widow or widower remarries, the new spouse is treated as the child's other parent. Federal tax preparation The rules explained earlier under Custodial parent remarried apply. Federal tax preparation Parent's Election To Report Child's Interest and Dividends You may be able to elect to include your child's interest and dividend income (including capital gain distributions) on your tax return. Federal tax preparation If you do, your child will not have to file a return. Federal tax preparation You can make this election only if all the following conditions are met. Federal tax preparation Your child was under age 19 (or under age 24 if a full-time student) at the end of the year. Federal tax preparation Your child had income only from interest and dividends (including capital gain distributions and Alaska Permanent Fund dividends). Federal tax preparation The child's gross income was less than $10,000. Federal tax preparation The child is required to file a return unless you make this election. Federal tax preparation The child does not file a joint return for the year. Federal tax preparation No estimated tax payment was made for the year, and no overpayment from the previous year (or from any amended return) was applied to this year under your child's name and social security number. Federal tax preparation No federal income tax was withheld from your child's income under the backup withholding rules. Federal tax preparation You are the parent whose return must be used when applying the special tax rules for children. Federal tax preparation (See Which Parent's Return To Use , earlier. Federal tax preparation ) These conditions are also shown in Figure 1. Federal tax preparation Certain January 1 birthdays. Federal tax preparation   A child born on January 1, 1995, is considered to be age 19 at the end of 2013. Federal tax preparation You cannot make this election for such a child unless the child was a full-time student. Federal tax preparation   A child born on January 1, 1990, is considered to be age 24 at the end of 2013. Federal tax preparation You cannot make this election for such a child. Federal tax preparation How to make the election. Federal tax preparation    Make the election by attaching Form 8814 to your Form 1040 or Form 1040NR. Federal tax preparation (If you make this election, you cannot file Form 1040A or Form 1040EZ. Federal tax preparation ) Attach a separate Form 8814 for each child for whom you make the election. Federal tax preparation You can make the election for one or more children and not for others. Federal tax preparation Effect of Making the Election The federal income tax on your child's income may be more if you make the Form 8814 election. Federal tax preparation Rate may be higher. Federal tax preparation   If your child received qualified dividends or capital gain distributions, you may pay up to $100 more tax if you make this election instead of filing a separate tax return for the child. Federal tax preparation This is because the tax rate on the child's income between $1,000 and $2,000 is 10% if you make this election. Federal tax preparation However, if you file a separate return for the child, the tax rate may be as low as 0% (zero percent) because of the preferential tax rates for qualified dividends and capital gain distributions. Federal tax preparation Deductions you cannot take. Federal tax preparation   By making the Form 8814 election, you cannot take any of the following deductions that the child would be entitled to on his or her return. Federal tax preparation The additional standard deduction if the child is blind. Federal tax preparation The deduction for a penalty on an early withdrawal of your child's savings. Federal tax preparation Itemized deductions (such as your child's investment expenses or charitable contributions). Federal tax preparation Figure 1. Federal tax preparation Can You Include Your Child's Income On Your Tax Return? Please click here for the text description of the image. Federal tax preparation Figure 1. Federal tax preparation Can You Include Your Child's Income On Your Tax Return? Deductible investment interest. Federal tax preparation   If you use Form 8814, your child's unearned income is considered your unearned income. Federal tax preparation To figure the limit on your deductible investment interest, add the child's unearned income to yours. Federal tax preparation However, if your child received qualified dividends, capital gain distributions, or Alaska Permanent Fund dividends, see chapter 3 of Publication 550 for information about how to figure the limit. Federal tax preparation Alternative minimum tax. Federal tax preparation    If your child received tax-exempt interest (or exempt-interest dividends paid by a regulated investment company) from certain private activity bonds, you must determine if that interest is a tax preference item for alternative minimum tax (AMT) purposes. Federal tax preparation If it is, you must include it with your own tax preference items when figuring your AMT. Federal tax preparation See Form 6251, Alternative Minimum Tax—Individuals, and its instructions for details. Federal tax preparation Reduced deductions or credits. Federal tax preparation   If you use Form 8814, your increased adjusted gross income may reduce certain deductions or credits on your return, including the following. Federal tax preparation Deduction for contributions to a traditional individual retirement arrangement (IRA). Federal tax preparation Deduction for student loan interest. Federal tax preparation Itemized deductions for medical expenses, casualty and theft losses, and certain miscellaneous expenses. Federal tax preparation Credit for child and dependent care expenses. Federal tax preparation Child tax credit. Federal tax preparation Education tax credits. Federal tax preparation Earned income credit. Federal tax preparation Penalty for underpayment of estimated tax. Federal tax preparation   If you make this election for 2013 and did not have enough tax withheld or pay enough estimated tax to cover the tax you owe, you may be subject to a penalty. Federal tax preparation If you plan to make this election for 2014, you may need to increase your federal income tax withholding or your estimated tax payments to avoid the penalty. Federal tax preparation Get Publication 505 for more information. Federal tax preparation Figuring Child's Income Use Form 8814, Part I, to figure your child's interest and dividend income to report on your return. Federal tax preparation Only the amount over $2,000 is added to your income. Federal tax preparation The amount over $2,000 is shown on Form 8814, line 6. Federal tax preparation Unless the child's income includes qualified dividends or capital gain distributions (discussed next), the same amount is shown on Form 8814, line 12. Federal tax preparation Include the amount from Form 8814, line 12, on Form 1040 or Form 1040NR, line 21. Federal tax preparation If you file more than one Form 8814, include the total amounts from line 12 of all your Forms 8814 on Form 1040 or Form 1040NR, line 21. Federal tax preparation On the dotted line next to line 21, enter “Form 8814” and the total of the Form 8814, line 12 amounts. Federal tax preparation Note. Federal tax preparation The tax on the first $2,000 is figured on Form 8814, Part II. Federal tax preparation See Figuring Additional Tax , later. Federal tax preparation Qualified dividends. Federal tax preparation   Enter on Form 8814, line 2a, any ordinary dividends your child received. Federal tax preparation This amount may include qualified dividends. Federal tax preparation Qualified dividends are those dividends reported on Form 1040, line 9b, or Form 1040NR, line 10b, and are eligible for lower tax rates that apply to a net capital gain. Federal tax preparation For detailed information about qualified dividends, see Publication 550. Federal tax preparation   If your child received qualified dividends, the amount of these dividends that is added to your income must be reported on Form 1040, lines 9a and 9b, or Form 1040NR, lines 10a and 10b. Federal tax preparation You do not include these dividends on Form 8814, line 12, or on line 21 of Form 1040 or Form 1040NR. Federal tax preparation   Enter the child's qualified dividends on Form 8814, line 2b. Federal tax preparation But do not include this amount on Form 1040, lines 9a and 9b, or Form 1040NR, lines 10a and 10b. Federal tax preparation Instead, include the amount from Form 8814, line 9, on Form 1040, lines 9a and 9b, or Form 1040NR, lines 10a and 10b. Federal tax preparation (The amount on Form 8814, line 9, may be less than the amount on Form 8814, line 2b, because lines 7 through 12 of the form divide the $2,000 base amount on Form 8814, line 5, between the child's qualified dividends, capital gain distributions, and other interest and dividend income, reducing each of those amounts. Federal tax preparation ) Capital gain distributions. Federal tax preparation   Enter on Form 8814, line 3, any capital gain distributions your child received. Federal tax preparation The amount of these distributions that is added to your income must be reported on Schedule D (Form 1040), line 13, or, if you are not required to file Schedule D, on Form 1040, line 13, or Form 1040NR, line 14. Federal tax preparation You do not include it on Form 8814, line 12, or on line 21 of Form 1040 or Form 1040NR. Federal tax preparation   Include the amount from Form 8814, line 10, on Schedule D, line 13; Form 1040, line 13; or Form 1040NR, line 14, whichever applies. Federal tax preparation (The amount on Form 8814, line 10, may be less than the amount on Form 8814, line 3, because lines 7 through 12 of the form divide the $2,000 base amount on Form 8814, line 5, between the child's qualified dividends, capital gain distributions, and other interest and dividend income, reducing each of those amounts. Federal tax preparation ) Collectibles (28% rate) gain. Federal tax preparation    If any of the child's capital gain distributions are reported on Form 1099-DIV as collectibles (28% rate) gain, you must determine how much to also include on line 4 of the 28% Rate Gain Worksheet, in the instructions for Schedule D, line 18. Federal tax preparation Multiply the child's capital gain distribution included on Schedule D, line 13, by a fraction. Federal tax preparation The numerator is the part of the child's total capital gain distribution that is collectibles (28% rate) gain. Federal tax preparation The denominator is the child's total capital gain distribution. Federal tax preparation Enter the result on line 4 of the 28% Rate Gain Worksheet. Federal tax preparation Unrecaptured section 1250 gain. Federal tax preparation   If any of the child's capital gain distributions are reported on Form 1099-DIV as unrecaptured section 1250 gain, you must determine how much to include on line 11 of the Unrecaptured Section 1250 Gain Worksheet in the instructions for Schedule D, line 19. Federal tax preparation Multiply the child's capital gain distribution included on Schedule D, line 13, by a fraction. Federal tax preparation The numerator is the part of the child's total capital gain distribution that is unrecaptured section 1250 gain. Federal tax preparation The denominator is the child's total capital gain distribution. Federal tax preparation Enter the result on the Unrecaptured Section 1250 Gain Worksheet, line 11. Federal tax preparation Section 1202 gain. Federal tax preparation   If any of the child's capital gain distributions are reported as section 1202 gain (gain on qualified small business stock) on Form 1099-DIV, part or all of that gain may be eligible for the section 1202 exclusion. Federal tax preparation (For information about the exclusion, see chapter 4 of Publication 550. Federal tax preparation ) To figure that part, multiply the child's capital gain distribution included on Schedule D, line 13, by a fraction. Federal tax preparation The numerator is the part of the child's total capital gain distribution that is section 1202 gain. Federal tax preparation The denominator is the child's total capital gain distribution. Federal tax preparation Your section 1202 exclusion is generally 50% of the result, but may be subject to a limit. Federal tax preparation In some cases, the exclusion is more than 50%. Federal tax preparation See the instructions for Schedule D for details and information on how to report the exclusion amount. Federal tax preparation Example. Federal tax preparation Fred is 6 years old. Federal tax preparation In 2013, he received dividend income of $2,100, which included $1,575 of ordinary dividends and a $525 capital gain distribution from a mutual fund. Federal tax preparation (None of the distributions were reported on Form 1099-DIV as unrecaptured section 1250 gain, section 1202 gain, or collectibles (28% rate) gain. Federal tax preparation ) All of the ordinary dividends are qualified dividends. Federal tax preparation He has no other income and is not subject to backup withholding. Federal tax preparation No estimated tax payments were made under his name and social security number. Federal tax preparation Fred's parents elect to include Fred's income on their tax return instead of filing a return for him. Federal tax preparation They figure the amount to report on Form 1040, lines 9a and 9b, the amount to report on their Schedule D, line 13, and the amount to report on Form 1040, line 21, as follows. Federal tax preparation They leave lines 1a and 1b of Form 8814 blank because Fred does not have any interest income. Federal tax preparation They enter his ordinary dividends of $1,575 on lines 2a and 2b because all of Fred's ordinary dividends are qualified dividends. Federal tax preparation They enter the amount of Fred's capital gain distributions, $525, on line 3. Federal tax preparation Next, they add the amounts on lines 1a, 2a, and 3 and enter the result, $2,100, on line 4. Federal tax preparation They subtract the base amount on line 5, $2,000, from the amount on line 4, $2,100, and enter the result, $100, on line 6. Federal tax preparation This is the total amount from Form 8814 to be reported on their return. Federal tax preparation Next, they figure how much of this amount is qualified dividends and how much is capital gain distributions. Federal tax preparation They divide the amount on line 2b, $1,575, by the amount on line 4, $2,100. Federal tax preparation They enter the result, . Federal tax preparation 75, on line 7. Federal tax preparation They divide the amount on line 3, $525, by the amount on line 4, $2,100. Federal tax preparation They enter the result, . Federal tax preparation 25, on line 8. Federal tax preparation They multiply the amount on line 6, $100, by the decimal on line 7, . Federal tax preparation 75, and enter the result, $75, on line 9. Federal tax preparation They multiply the amount on line 6, $100, by the decimal on line 8, . Federal tax preparation 25, and enter the result, $25, on line 10. Federal tax preparation They include the amount from line 9, $75, on lines 9a and 9b of their Form 1040 and enter “Form 8814 – $75” on the dotted lines next to lines 9a and 9b. Federal tax preparation They include the amount from line 10, $25, on line 13 of their Schedule D (Form 1040) and enter “Form 8814 – $25” on the dotted line next to Schedule D, line 13. Federal tax preparation They enter $100 ($75 + $25) on line 11 and -0- ($100 – $100) on line 12. Federal tax preparation Because the amount on line 12 is -0-, they do not include any amount from Form 8814 on their Form 1040, line 21. Federal tax preparation Figuring Additional Tax Use Form 8814, Part II, to figure the tax on the $2,000 of your child's interest and dividends that you do not include in your income. Federal tax preparation This tax is added to the tax figured on your income. Federal tax preparation This additional tax is the smaller of: 10% x (your child's gross income − $1,000), or $100. Federal tax preparation Include the amount from line 15 of all your Forms 8814 in the total on Form 1040, line 44, or Form 1040NR, line 42. Federal tax preparation Check box a on Form 1040, line 44, or Form 1040NR, line 42. Federal tax preparation Tax for Certain Children Who Have Unearned Income If a child's interest, dividends, and other unearned income total more than $2,000, part of that income may be taxed at the parent's tax rate instead of the child's tax rate. Federal tax preparation If the parent does not or cannot choose to include the child's income on the parent's return, use Form 8615 to figure the child's tax. Federal tax preparation Attach the completed form to the child's Form 1040, Form 1040A, or Form 1040NR. Federal tax preparation When Form 8615 must be filed. Federal tax preparation   Form 8615 must be filed for a child if all of the following statements are true. Federal tax preparation The child's unearned income was more than $2,000. Federal tax preparation The child is required to file a return for 2013. Federal tax preparation The child either: Was under age 18 at the end of the year, Was age 18 at the end of the year and did not have earned income that was more than half of his or her support, or Was over age 18 and under age 24 at the end of the year, was a full-time student, and did not have earned income that was more than half of his or her support. Federal tax preparation At least one of the child's parents was alive at the end of 2013. Federal tax preparation The child does not file a joint return for 2013. Federal tax preparation These conditions are also shown in Figure 2. Federal tax preparation Certain January 1 birthdays. Federal tax preparation   Use the following chart to determine whether certain children with January 1 birthdays meet condition 3 under When Form 8615 must be filed. Federal tax preparation IF a child was born on. Federal tax preparation . Federal tax preparation . Federal tax preparation THEN, at the end of 2013, the child is considered to be. Federal tax preparation . Federal tax preparation . Federal tax preparation January 1, 1996 18* January 1, 1995 19** January 1, 1990 24*** *This child is not under age 18. Federal tax preparation The child meets condition 3 only if the child did not have earned income that was more than half of the child's support. Federal tax preparation  **This child meets condition 3 only if the child was a full-time student who did not have earned income that was more than half of the child's support. Federal tax preparation  ***Do not use Form 8615 for this child. Federal tax preparation Figure 2. Federal tax preparation Do You Have To Use Form 8615 To Figure Your Child's Tax? Please click here for the text description of the image. Federal tax preparation Figure 2. Federal tax preparation Do You Have To Use Form 8615 To Figure Your Child's Tax? Providing Parental Information (Form 8615, Lines A–C) On Form 8615, lines A and B, enter the parent's name and social security number. Federal tax preparation (If the parents filed a joint return, enter the name and social security number listed first on the joint return. Federal tax preparation ) On line C, check the box for the parent's filing status. Federal tax preparation See Which Parent's Return To Use, earlier, for information on which parent's return information must be used on Form 8615. Federal tax preparation Parent with different tax year. Federal tax preparation   If the parent and the child do not have the same tax year, complete Form 8615 using the information on the parent's return for the tax year that ends in the child's tax year. Federal tax preparation Example. Federal tax preparation Kimberly must use her mother's tax and taxable income to complete her Form 8615 for calendar year 2013 (January 1 – December 31). Federal tax preparation Kimberly's mother files her tax return on a fiscal year basis (July 1 – June 30). Federal tax preparation Kimberly must use the information on her mother's return for the tax year ending June 30, 2013, to complete her 2013 Form 8615. Federal tax preparation Parent's return information not known timely. Federal tax preparation   If the information needed from the parent's return is not known by the time the child's return is due (usually April 15), you can file the return using estimates. Federal tax preparation   You can use any reasonable estimate. Federal tax preparation This includes using information from last year's return. Federal tax preparation If you use an estimated amount on Form 8615, enter “Estimated” on the line next to the amount. Federal tax preparation   When you get the correct information, file an amended return on Form 1040X, Amended U. Federal tax preparation S. Federal tax preparation Individual Income Tax Return. Federal tax preparation Extension of time to file. Federal tax preparation   Instead of using estimates, you can get an automatic 6-month extension of time to file if, by the date your return is due, you file Form 4868, Application for Automatic Extension of Time To File U. Federal tax preparation S. Federal tax preparation Individual Income Tax Return. Federal tax preparation See the instructions for Form 4868 for details. Federal tax preparation    An extension of time to file is not an extension of time to pay. Federal tax preparation You must make an accurate estimate of the tax for 2013. Federal tax preparation If you do not pay the full amount due by the regular due date, the child will owe interest and may also be charged penalties. Federal tax preparation See Form 4868 and its instructions. Federal tax preparation Parent's return information not available. Federal tax preparation   If a child cannot get the required information about his or her parent's tax return, the child (or the child's legal representative) can request the necessary information from the Internal Revenue Service (IRS). Federal tax preparation How to request. Federal tax preparation   After the end of the tax year, send a signed, written request for the information to the Internal Revenue Service Center where the parent's return will be filed. Federal tax preparation (The IRS cannot process a request received before the end of the tax year. Federal tax preparation )    You should also consider getting an extension of time to file the child's return, because there may be a delay in getting the requested information. Federal tax preparation   The request must contain all of the following. Federal tax preparation A statement that you are making the request to comply with section 1(g) of the Internal Revenue Code and that you have tried to get the information from the parent. Federal tax preparation Proof of the child's age (for example, a copy of the child's birth certificate). Federal tax preparation Evidence the child has more than $2,000 of unearned income (for example, a copy of the child's prior year tax return or copies of Forms 1099 for the current year). Federal tax preparation The name, address, social security number (if known), and filing status (if known) of the parent whose information is to be shown on Form 8615. Federal tax preparation    A child's legal representative making the request should include a copy of his or her Power of Attorney, such as Form 2848, or proof of legal guardianship. Federal tax preparation Step 1. Federal tax preparation Figuring the Child's Net Unearned Income (Form 8615, Part I) The first step in figuring a child's tax using Form 8615 is to figure the child's net unearned income. Federal tax preparation To do that, use Form 8615, Part I. Federal tax preparation Line 1 (Unearned Income) If the child had no earned income, enter on this line the adjusted gross income shown on the child's return. Federal tax preparation Adjusted gross income is shown on Form 1040, line 38; Form 1040A, line 22; or Form 1040NR, line 37. Federal tax preparation Form 1040EZ and Form 1040NR-EZ cannot be used if Form 8615 must be filed. Federal tax preparation If the child had earned income, figure the amount to enter on Form 8615, line 1, by using the worksheet in the instructions for the form. Federal tax preparation However, use the following worksheet if: the child has excluded any foreign earned income, deducted a loss from self-employment, or has a net operating loss from another year. Federal tax preparation Alternate Worksheet for Form 8615, Line 1 A. Federal tax preparation Enter the amount from the child's Form 1040, line 22, or Form 1040NR, line 23   B. Federal tax preparation Enter the total of any net loss  from self-employment, any net operating loss deduction, any foreign earned income exclusion, and any foreign housing exclusion from the child's Form 1040 or Form 1040NR. Federal tax preparation Enter this total as a positive number (greater than zero)   C. Federal tax preparation Add line A and line B and  enter the total   D. Federal tax preparation Enter the child's earned income plus any amount from the child's Form 1040, line 30, or the child's Form 1040NR, line 30     Generally, the child's earned income is the total of the amounts reported on Form 1040, lines 7, 12, and 18 (if line 12 or 18 is a loss, use zero) or Form 1040NR, lines 8, 13, and 19 (if line 13 or 19 is a loss, use zero)   E. Federal tax preparation Subtract line D from line C. Federal tax preparation Enter the result here and on Form 8615, line 1   Unearned income defined. Federal tax preparation   Unearned income is generally all income other than salaries, wages, and other amounts received as pay for work actually performed. Federal tax preparation It includes taxable interest, dividends, capital gains (including capital gain distributions), the taxable part of social security and pension payments, certain distributions from trusts, and unemployment compensation. Federal tax preparation Unearned income includes amounts produced by assets the child obtained with earned income (such as interest on a savings account into which the child deposited wages). Federal tax preparation Nontaxable income. Federal tax preparation   For this purpose, unearned income includes only amounts the child must include in gross income. Federal tax preparation Nontaxable unearned income, such as tax-exempt interest and the nontaxable part of social security and pension payments, is not included. Federal tax preparation Capital loss. Federal tax preparation   A child's capital losses are taken into account in figuring the child's unearned income. Federal tax preparation Capital losses are first applied against capital gains. Federal tax preparation If the capital losses are more than the capital gains, the difference (up to $3,000) is subtracted from the child's interest, dividends, and other unearned income. Federal tax preparation Any difference over $3,000 is carried to the next year. Federal tax preparation Income from property received as a gift. Federal tax preparation   A child's unearned income includes all income produced by property belonging to the child. Federal tax preparation This is true even if the property was transferred to the child, regardless of when the property was transferred or purchased or who transferred it. Federal tax preparation   A child's unearned income includes income produced by property given as a gift to the child. Federal tax preparation This includes gifts to the child from grandparents or any other person and gifts made under the Uniform Gift to Minors Act. Federal tax preparation Example. Federal tax preparation Amanda Black, age 13, received the following income. Federal tax preparation Dividends—$800 Wages—$2,100 Taxable interest—$1,200 Tax-exempt interest—$100 Capital gains—$300 Capital losses—($200) The dividends were qualified dividends on stock given to her by her grandparents. Federal tax preparation Amanda's unearned income is $2,100. Federal tax preparation This is the total of the dividends ($800), taxable interest ($1,200), and capital gains reduced by capital losses ($300 − $200 = $100). Federal tax preparation Her wages are earned (not unearned) income because they are received for work actually performed. Federal tax preparation Her tax-exempt interest is not included because it is nontaxable. Federal tax preparation Trust income. Federal tax preparation   If a child is the beneficiary of a trust, distributions of taxable interest, dividends, capital gains, and other unearned income from the trust are unearned income to the child. Federal tax preparation   However, taxable distributions from a qualified disability trust are considered earned income for the purposes of completing Form 8615. Federal tax preparation See the Form 8615 instructions for details. Federal tax preparation Adjustment to income. Federal tax preparation   In figuring the amount to enter on line 1, the child's unearned income is reduced by any penalty on the early withdrawal of savings. Federal tax preparation Line 2 (Deductions) If the child does not itemize deductions on Schedule A (Form 1040 or Form 1040NR), enter $2,000 on line 2. Federal tax preparation If the child itemizes deductions, enter on line 2 the larger of: $1,000 plus the portion of the child's itemized deductions on Schedule A (Form 1040), line 29 (or Schedule A (Form 1040NR), line 15), that are directly connected with the production of the unearned income entered on line 1, or $2,000. Federal tax preparation Directly connected. Federal tax preparation   Itemized deductions are directly connected with the production of unearned income if they are for expenses paid to produce or collect taxable income or to manage, conserve, or maintain property held for producing income. Federal tax preparation These expenses include custodian fees and service charges, service fees to collect taxable interest and dividends, and certain investment counsel fees. Federal tax preparation    These expenses are added to certain other miscellaneous itemized deductions on Schedule A (Form 1040). Federal tax preparation Only the amount greater than 2% of the child's adjusted gross income can be deducted. Federal tax preparation See Publication 529, Miscellaneous Deductions, for more information. Federal tax preparation Example 1. Federal tax preparation Roger, age 12, has unearned income of $8,000, no other income, no adjustments to income, and itemized deductions of $300 (net of the 2%-of-adjusted-gross-income limit) that are directly connected with his unearned income. Federal tax preparation His adjusted gross income is $8,000, which is entered on Form 1040, line 38, and on Form 8615, line 1. Federal tax preparation Roger enters $2,000 on line 2 because that is more than the total of $1,000 plus his directly-connected itemized deductions of $300. Federal tax preparation Example 2. Federal tax preparation Eleanor, age 8, has unearned income of $16,000 and an early withdrawal penalty of $100. Federal tax preparation She has no other income. Federal tax preparation She has itemized deductions of $1,050 (net of the 2%-of-adjusted-gross-income limit) that are directly connected with the production of her unearned income. Federal tax preparation Her adjusted gross income, entered on line 1, is $15,900 ($16,000 − $100). Federal tax preparation The amount on line 2 is $2,050. Federal tax preparation This is the larger of: $1,000 plus the $1,050 of directly connected itemized deductions, or $2,000. Federal tax preparation Line 3 Subtract line 2 from line 1 and enter the result on this line. Federal tax preparation If zero or less, do not complete the rest of the form. Federal tax preparation However, you must still attach Form 8615 to the child's tax return. Federal tax preparation Figure the tax on the child's taxable income in the normal manner. Federal tax preparation Line 4 (Child's Taxable Income) Enter on line 4 the child's taxable income from Form 1040, line 43; Form 1040A, line 27; or Form 1040NR, line 41. Federal tax preparation Child files Form 2555 or 2555-EZ. Federal tax preparation   If the child files Form 2555 or 2555-EZ to claim the foreign earned income exclusion, housing exclusion, or housing deduction, the Foreign Earned Income Tax Worksheet (in the Form 1040 instructions) is used to figure the child's tax. Federal tax preparation Enter the amount from line 3 of the Foreign Earned Income Tax Worksheet as the child's taxable income on Form 8615, line 4. Federal tax preparation Line 5 (Net Unearned Income) A child's net unearned income cannot be more than his or her taxable income. Federal tax preparation Enter on Form 8615, line 5, the smaller of line 3 or line 4. Federal tax preparation This is the child's net unearned income. Federal tax preparation If zero or less, do not complete the rest of the form. Federal tax preparation However, you must still attach Form 8615 to the child's tax return. Federal tax preparation Figure the tax on the child's taxable income in the normal manner. Federal tax preparation Step 2. Federal tax preparation Figuring a Tentative Tax at the Parent's Tax Rate (Form 8615, Part II) The next step in completing Form 8615 is to figure a tentative tax on the child's net unearned income at the parent's tax rate. Federal tax preparation The tentative tax at the parent's tax rate is the difference between the tax on the parent's taxable income figured with the child's net unearned income (plus the net unearned income of any other child whose Form 8615 includes the tax return information of that parent) and the tax figured without it. Federal tax preparation When figuring the tentative tax at the parent's tax rate on Form 8615, do not refigure any of the exclusions, deductions, or credits on the parent's return because of the child's net unearned income. Federal tax preparation For example, do not refigure the medical expense deduction. Federal tax preparation Figure the tentative tax on Form 8615, lines 6 through 13. Federal tax preparation Line 6 (Parent's Taxable Income) Enter on line 6 the amount from the parent's Form 1040, line 43; Form 1040A, line 27; Form 1040EZ, line 6; Form 1040NR, line 41; or Form 1040NR-EZ, line 14. Federal tax preparation If the parent's taxable income is zero or less, enter zero on line 6. Federal tax preparation Parent files Form 2555 or 2555-EZ. Federal tax preparation   If the parent files Form 2555 or 2555-EZ to claim the foreign earned income exclusion, housing exclusion, or housing deduction, the Foreign Earned Income Tax Worksheet in the Form 1040 instructions is used to figure the parent's tax. Federal tax preparation Enter the amount from line 3 of the Foreign Earned Income Tax Worksheet as the parent's taxable income, on line 6 of Form 8615. Federal tax preparation Line 7 (Net Unearned Income of Other Children) If the tax return information of the parent is also used on any other child's Form 8615, enter on line 7 the total of the amounts from line 5 of all the other children's Forms 8615. Federal tax preparation Do not include the amount from line 5 of the Form 8615 being completed. Federal tax preparation (The term “other child” means any other child whose Form 8615 uses the tax information of the parent identified on Lines A and B of Form 8615. Federal tax preparation ) Example. Federal tax preparation Paul and Jane Persimmon have three children, Sharon, Jerry, and Mike, who must attach Form 8615 to their tax returns. Federal tax preparation The children's net unearned income amounts on line 5 of their Forms 8615 are: Sharon—$800 Jerry—$600 Mike—$1,000 Line 7 of Sharon's Form 8615 will show $1,600, the total of the amounts on line 5 of Jerry's and Mike's Forms 8615. Federal tax preparation Line 7 of Jerry's Form 8615 will show $1,800 ($800 + $1,000). Federal tax preparation Line 7 of Mike's Form 8615 will show $1,400 ($800 + $600). Federal tax preparation Other children's information not available. Federal tax preparation   If the net unearned income of the other children is not available when the return is due, either file the return using estimates or get an extension of time to file. Federal tax preparation Estimates and extensions are discussed earlier under Providing Parental Information (Form 8615, Lines A–C) . Federal tax preparation Line 8 (Parent's Taxable Income Plus Children's Net Unearned Income) Enter on this line the total of lines 5, 6, and 7. Federal tax preparation You must determine the amount of net capital gain and qualified dividends included on this line before completing Form 8615, line 9. Federal tax preparation Net capital gain. Federal tax preparation   Net capital gain is the smaller of the gain, if any, on Schedule D (Form 1040), line 15, or the gain, if any, on Schedule D, line 16. Federal tax preparation If Schedule D is not required, it is the amount on Form 1040, line 13; Form 1040A, line 10; or Form 1040NR, line 14. Federal tax preparation Qualified dividends. Federal tax preparation   Qualified dividends are those dividends reported on line 9b of Form 1040 or Form 1040A, or line 10b of Form 1040NR. Federal tax preparation Net capital gain and qualified dividends on line 8. Federal tax preparation   If neither the child, nor the parent, nor any other child has net capital gain, the net capital gain on line 8 is zero. Federal tax preparation   If neither the child, nor the parent, nor any other child has qualified dividends, the amount of qualified dividends on line 8 is zero. Federal tax preparation   If the child, parent, or any other child has net capital gain, figure the amount of net capital gain included on line 8 by adding together the net capital gain amounts included on lines 5, 6, and 7 of Form 8615. Federal tax preparation   If the child, parent, or any other child has qualified dividends, figure the amount of qualified dividends included on line 8 by adding together the qualified dividend amounts included on lines 5, 6, and 7. Federal tax preparation   Use the instructions for Form 8615, line 8, including the appropriate Line 5 Worksheet, to find these amounts. Federal tax preparation See the instructions for Form 8615 for more details. Federal tax preparation Note. Federal tax preparation The amount of any net capital gain or qualified dividends is not separately reported on line 8. Federal tax preparation It is  needed, however, when figuring the tax on line 9. Federal tax preparation Line 9 (Tax on Parent's Taxable Income Plus Children's Net Unearned Income) Figure the tax on the amount on line 8 using the Tax Table, the Tax Computation Worksheet, the Qualified Dividends and Capital Gain Tax Worksheet (in the Form 1040, 1040A, or 1040NR instructions), the Schedule D Tax Worksheet (in the Schedule D instructions), or Schedule J (Form 1040), as follows. Federal tax preparation If line 8 does not include any net capital gain or qualified dividends, use the Tax Table or Tax Computation Worksheet to figure this tax. Federal tax preparation But if Schedule J, Income Averaging for Farmers and Fishermen, is used to figure the tax on the parent's return, use it to figure this tax. Federal tax preparation If line 8 includes any net capital gain or qualified dividends, use the Qualified Dividends and Capital Gain Tax Worksheet to figure this tax. Federal tax preparation For details, see the instructions for Form 8615, line 9. Federal tax preparation However, if the child, parent, or any other child has 28% rate gain or unrecaptured section 1250 gain, use the Schedule D Tax Worksheet. Federal tax preparation But if Schedule J is used to figure the tax on the parent's return, use it to figure this tax. Federal tax preparation Child files Form 2555 or 2555-EZ. Federal tax preparation   If line 8 includes any net capital gain or qualified dividends and the child, or any other child filing Form 8615, also files Form 2555 or 2555-EZ, use Using the Schedule D Tax Worksheet for line 9 tax, next, to figure the line 9 tax. Federal tax preparation Using the Schedule D Tax Worksheet for line 9 tax. Federal tax preparation    Use the Schedule D Tax Worksheet (in the Schedule D instructions) to figure the line 9 tax on Form 8615 if the child, parent, or any other child has unrecaptured section 1250 gain or 28% rate gain. Federal tax preparation If you must use the Schedule D Tax Worksheet, first complete any Schedule D and any actual Schedule D Tax Worksheet required for the child, parent, or any other child. Federal tax preparation Then figure the line 9 tax using another Schedule D Tax Worksheet. Federal tax preparation (Do not attach this Schedule D Tax Worksheet to the child's return. Federal tax preparation )   Complete this Schedule D Tax Worksheet as follows. Federal tax preparation On line 1, enter the amount from Form 8615, line 8. Federal tax preparation On line 2, enter the qualified dividends included on Form 8615, line 8. Federal tax preparation (See the earlier discussion for line 8. Federal tax preparation ) On line 3, enter the total of the amounts, if any, on line 4g of all Forms 4952 filed by the child, parent, or any other child. Federal tax preparation On line 4, enter the total of the amounts, if any, on line 4e of all Forms 4952 filed by the child, parent, or any other child. Federal tax preparation If applicable, include instead the smaller amount entered on the dotted line next to line 4e. Federal tax preparation On lines 5 and 6, follow the worksheet instructions. Federal tax preparation On line 7, enter the net capital gain included on Form 8615, line 8. Federal tax preparation (See the earlier discussion for line 8. Federal tax preparation ) On lines 8 through 10, follow the worksheet instructions. Federal tax preparation On line 11, enter zero if neither the child, nor the parent, nor any other child has unrecaptured section 1250 gain (Schedule D, line 19) or 28% rate gain (Schedule D, line 18). Federal tax preparation Otherwise, enter the amount of unrecaptured section 1250 gain and 28% rate gain included in the net capital gain on line 8 of Form 8615. Federal tax preparation Figure these amounts as explained later under Figuring unrecaptured section 1250 gain (line 11) and Figuring 28% rate gain (line 11). Federal tax preparation If the Foreign Earned Income Tax Worksheet was used to figure the parent's tax or the tax of any child, go to step 10 below. Federal tax preparation Otherwise, skip steps 10, 11, and 12 below, and go to step 13. Federal tax preparation Determine whether there is a line 8 capital gain excess as follows. Federal tax preparation Add the amounts on line 2 of all Foreign Earned Income Tax Worksheets completed by the parent or any child for whom Form 8615 is filed. Federal tax preparation (But for each child do not add more than the excess, if any, of the amount on line 5 of the child's Form 8615 over the child's taxable income on Form 1040, line 43; Form 1040A, line 27; or Form 1040NR, line 41. Federal tax preparation ) Subtract (a) from the amount on line 1 of this Schedule D Tax Worksheet. Federal tax preparation Subtract (b) from the amount on line 10 of this Schedule D Tax Worksheet. Federal tax preparation If the result is more than zero, that amount is the line 8 capital gain excess. Federal tax preparation If the result is zero or less, there is no line 8 capital gain excess. Federal tax preparation If there is no line 8 capital gain excess, skip step 12 below and go to step 13. Federal tax preparation If there is a line 8 capital gain excess, complete a second Schedule D Tax Worksheet as instructed above and in step 13, but in its entirety and with the following additional modifications. Federal tax preparation (These modifications are to be made only for purposes of filling out this additional Schedule D Tax Worksheet. Federal tax preparation ) Reduce the amount you would otherwise enter on line 9 (but not below zero) by the line 8 capital gain excess. Federal tax preparation Reduce the amount you would otherwise enter on line 6 (but not below zero) by any of the line 8 capital gain excess not used in (a) above. Federal tax preparation If the child, parent, or any other child has 28% rate gain, reduce the amount you would otherwise enter on line 8 of Worksheet 1 for Line 11 of the Schedule D Tax Worksheet – 28% Rate Gain (Line 9 Tax), shown later, (but not below zero) by the line 8 capital gain excess, and refigure the amount on line 11 of this Schedule D Tax Worksheet. Federal tax preparation If the child, parent, or any other child has unrecaptured section 1250 gain, reduce the amount you would otherwise enter on line 8 of Worksheet 2 for Line 11 of the Schedule D Tax Worksheet – Unrecaptured Section 1250 Gain (Line 9 Tax) (but not below zero) by the line 8 capital gain excess not used in 12(c), and refigure the amount on line 11 of this Schedule D Tax Worksheet. Federal tax preparation Complete lines 12 through 45 following the worksheet instructions. Federal tax preparation Use the parent's filing status to complete lines 15, 42, and 44. Federal tax preparation Enter the amount from line 45 of this Schedule D Tax Worksheet on Form 8615, line 9, and check the box on that line
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Understanding your CP120 Notice

You filed a tax-exempt return, but our records don't show you are tax-exempt.


What you need to do

  • Mail or fax us a copy of the letter we provided you or your parent organization recognizing your tax exempt status.
  • Apply for tax exempt status by completing and submitting the appropriate application and fee.
  • Mail the application and appropriate fee to the address on your notice.

You may want to...


Answers to Common Questions

What if I don't qualify or don't want to apply for tax-exempt status?
You should complete the appropriate federal income tax form.

What if I believe I am tax-exempt and not required to submit an application?
You must show on your annual return the subsection under which you're claiming to be tax-exempt.


Tips for next year

Consider filing your taxes electronically. Filing online can help you avoid mistakes and find credits and deductions that you may qualify for. In many cases you can file for free. Learn more about e-file.

Page Last Reviewed or Updated: 26-Mar-2014

Printable samples of this notice (PDF)

 

 

How to get help

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

The Federal Tax Preparation

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