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Filing 2012 Taxes Online

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Filing 2012 Taxes Online

Filing 2012 taxes online 10. Filing 2012 taxes online   Installment Sales Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Installment Sale of a Farm Installment MethodWhen to elect out. Filing 2012 taxes online Revoking the election. Filing 2012 taxes online More information. Filing 2012 taxes online Figuring Installment Sale Income Payments Received or Considered Received ExampleSection 1231 gains. Filing 2012 taxes online Summary. Filing 2012 taxes online Introduction An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. Filing 2012 taxes online If you realize a gain on an installment sale, you may be able to report part of your gain when you receive each payment. Filing 2012 taxes online This method of reporting gain is called the installment method. Filing 2012 taxes online You cannot use the installment method to report a loss. Filing 2012 taxes online You can choose to report all of your gain in the year of sale. Filing 2012 taxes online Installment obligation. Filing 2012 taxes online   The buyer's obligation to make future payments to you can be in the form of a deed of trust, note, land contract, mortgage, or other evidence of the buyer's debt to you. Filing 2012 taxes online Topics - This chapter discusses: The general rules that apply to using the installment method Installment sale of a farm Useful Items - You may want to see: Publication 523 Selling Your Home 535 Business Expenses 537 Installment Sales 538 Accounting Periods and Methods 544 Sales and Other Dispositions of Assets Form (and Instructions) 4797 Sales of Business Property 6252 Installment Sale Income See chapter 16 for information about getting publications and forms. Filing 2012 taxes online Installment Sale of a Farm The installment sale of a farm for one overall price under a single contract is not the sale of a single asset. Filing 2012 taxes online It generally includes the sale of real property and personal property reportable on the installment method. Filing 2012 taxes online It may also include the sale of property for which you must maintain an inventory, which cannot be reported on the installment method. Filing 2012 taxes online See Inventory , later. Filing 2012 taxes online The selling price must be allocated to determine the amount received for each class of asset. Filing 2012 taxes online The tax treatment of the gain or loss on the sale of each class of assets is determined by its classification as a capital asset, as property used in the business, or as property held for sale and by the length of time the asset was held. Filing 2012 taxes online (See chapter 8 for a discussion of capital assets and chapter 9 for a discussion of property used in the business. Filing 2012 taxes online ) Separate computations must be made to figure the gain or loss for each class of asset sold. Filing 2012 taxes online See Sale of a Farm in chapter 8. Filing 2012 taxes online If you report the sale of property on the installment method, any depreciation recapture under section 1245 or 1250 of the Internal Revenue Code is generally taxable as ordinary income in the year of sale. Filing 2012 taxes online See Depreciation recapture , later. Filing 2012 taxes online This applies even if no payments are received in that year. Filing 2012 taxes online Installment Method An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. Filing 2012 taxes online A farmer who is not required to maintain an inventory can use the installment method to report gain from the sale of property used or produced in farming. Filing 2012 taxes online See Inventory , later, for information on the sale of farm property where inventory items are included in the assets sold. Filing 2012 taxes online If a sale qualifies as an installment sale, the gain must be reported under the installment method unless you elect out of using the installment method. Filing 2012 taxes online Electing out of the installment method. Filing 2012 taxes online   If you elect not to use the installment method, you generally report the entire gain in the year of sale, even though you do not receive all the sale proceeds in that year. Filing 2012 taxes online   To make this election, do not report your sale on Form 6252. Filing 2012 taxes online Instead, report it on Schedule D (Form 1040), Form 4797, or both. Filing 2012 taxes online When to elect out. Filing 2012 taxes online   Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. Filing 2012 taxes online   However, if you timely file your tax return for the year the sale takes place without making the election, you still can make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Filing 2012 taxes online Write “Filed pursuant to section 301. Filing 2012 taxes online 9100-2” at the top of the amended return and file it where the original return was filed. Filing 2012 taxes online Revoking the election. Filing 2012 taxes online   Once made, the election can be revoked only with IRS approval. Filing 2012 taxes online A revocation is retroactive. Filing 2012 taxes online More information. Filing 2012 taxes online   See Electing Out of the Installment Method in Publication 537 for more information. Filing 2012 taxes online Inventory. Filing 2012 taxes online   The sale of farm inventory items cannot be reported on the installment method. Filing 2012 taxes online All gain or loss on their sale must be reported in the year of sale, even if you receive payment in later years. Filing 2012 taxes online   If inventory items are included in an installment sale, you may have an agreement stating which payments are for inventory and which are for the other assets being sold. Filing 2012 taxes online If you do not, each payment must be allocated between the inventory and the other assets sold. Filing 2012 taxes online Sale at a loss. Filing 2012 taxes online   If your sale results in a loss, you cannot use the installment method. Filing 2012 taxes online If the loss is on an installment sale of business assets, you can deduct it only in the tax year of sale. Filing 2012 taxes online Figuring Installment Sale Income Each payment on an installment sale usually consists of the following three parts. Filing 2012 taxes online Interest income. Filing 2012 taxes online Return of your adjusted basis in the property. Filing 2012 taxes online Gain on the sale. Filing 2012 taxes online In each year you receive a payment, you must include in income both the interest part and the part that is your gain on the sale. Filing 2012 taxes online You do not include in income the part that is the return of your basis in the property. Filing 2012 taxes online Basis is the amount of your investment in the property for installment sale purposes. Filing 2012 taxes online Interest income. Filing 2012 taxes online   You must report interest as ordinary income. Filing 2012 taxes online Interest is generally not included in a down payment. Filing 2012 taxes online However, you may have to treat part of each later payment as interest, even if it is not called interest in your agreement with the buyer. Filing 2012 taxes online Interest provided in the agreement is called stated interest. Filing 2012 taxes online If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. Filing 2012 taxes online See Unstated interest , later. Filing 2012 taxes online    You must continue to report the interest income on payments you receive in subsequent years as interest income. Filing 2012 taxes online Adjusted basis and installment sale income (gain on sale). Filing 2012 taxes online   After you have determined how much of each payment to treat as interest, you treat the rest of each payment as if it were made up of two parts. Filing 2012 taxes online A tax-free return of your adjusted basis in the property, and Your gain (referred to as “installment sale income” on Form 6252). Filing 2012 taxes online Figuring adjusted basis for installment sale purposes. Filing 2012 taxes online   You can use Worksheet 10-1 to figure your adjusted basis in the property for installment sale purposes. Filing 2012 taxes online When you have completed the worksheet, you will also have determined the gross profit percentage necessary to figure your installment sale income (gain) for this year. Filing 2012 taxes online    Worksheet 10-1. Filing 2012 taxes online Figuring Adjusted Basis and Gross Profit Percentage 1. Filing 2012 taxes online Enter the selling price for the property   2. Filing 2012 taxes online Enter your adjusted basis for the property     3. Filing 2012 taxes online Enter your selling expenses     4. Filing 2012 taxes online Enter any depreciation recapture     5. Filing 2012 taxes online Add lines 2, 3, and 4. Filing 2012 taxes online  This is your adjusted basis  for installment sale purposes   6. Filing 2012 taxes online Subtract line 5 from line 1. Filing 2012 taxes online If zero or less, enter -0-. Filing 2012 taxes online  This is your gross profit     If the amount entered on line 6 is zero, Stop here. Filing 2012 taxes online You cannot use the installment method. Filing 2012 taxes online   7. Filing 2012 taxes online Enter the contract price for the property   8. Filing 2012 taxes online Divide line 6 by line 7. Filing 2012 taxes online This is your gross profit percentage   Selling price. Filing 2012 taxes online   The selling price is the total cost of the property to the buyer and includes the following. Filing 2012 taxes online Any money you are to receive. Filing 2012 taxes online The fair market value (FMV) of any property you are to receive (FMV is discussed at Property used as a payment under Payments Received or Considered Received ). Filing 2012 taxes online Any existing mortgage or other debt the buyer pays, assumes, or takes (a note, mortgage, or any other liability, such as a lien, accrued interest, or taxes you owe on the property). Filing 2012 taxes online Any of your selling expenses the buyer pays. Filing 2012 taxes online Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue discount. Filing 2012 taxes online Adjusted basis for installment sale purposes. Filing 2012 taxes online   Your adjusted basis is the total of the following three items. Filing 2012 taxes online Adjusted basis. Filing 2012 taxes online Selling expenses. Filing 2012 taxes online Depreciation recapture. Filing 2012 taxes online Adjusted basis. Filing 2012 taxes online   Basis is your investment in the property for installment sale purposes. Filing 2012 taxes online The way you figure basis depends on how you acquire the property. Filing 2012 taxes online The basis of property you buy is generally its cost. Filing 2012 taxes online The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. Filing 2012 taxes online   While you own property, various events may change your original basis. Filing 2012 taxes online Some events, such as adding rooms or making permanent improvements, increase basis. Filing 2012 taxes online Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. Filing 2012 taxes online The result is adjusted basis. Filing 2012 taxes online See chapter 6 and Publication 551, Basis of Assets, for more information. Filing 2012 taxes online Selling expenses. Filing 2012 taxes online   Selling expenses relate to the sale of the property. Filing 2012 taxes online They include commissions, attorney fees, and any other expenses paid on the sale. Filing 2012 taxes online Selling expenses are added to the basis of the sold property. Filing 2012 taxes online Depreciation recapture. Filing 2012 taxes online   If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income. Filing 2012 taxes online See Depreciation Recapture in chapter 9 and Depreciation Recapture Income in Publication 537. Filing 2012 taxes online Gross profit. Filing 2012 taxes online   Gross profit is the total gain you report on the installment method. Filing 2012 taxes online   To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. Filing 2012 taxes online If the property you sold was your home, subtract from the gross profit any gain you can exclude. Filing 2012 taxes online Contract price. Filing 2012 taxes online   Contract price equals: The selling price, minus The mortgages, debts, and other liabilities assumed or taken by the buyer, plus The amount by which the mortgages, debts, and other liabilities assumed or taken by the buyer exceed your adjusted basis for installment sale purposes. Filing 2012 taxes online Gross profit percentage. Filing 2012 taxes online   A certain percentage of each payment (after subtracting interest) is reported as installment sale income. Filing 2012 taxes online This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price. Filing 2012 taxes online   The gross profit percentage generally remains the same for each payment you receive. Filing 2012 taxes online However, see the example under Selling price reduced , later, for a situation where the gross profit percentage changes. Filing 2012 taxes online Amount to report as installment sale income. Filing 2012 taxes online   Multiply the payments you receive each year (less interest) by the gross profit percentage. Filing 2012 taxes online The result is your installment sales income for the tax year. Filing 2012 taxes online In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. Filing 2012 taxes online A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. Filing 2012 taxes online For a detailed discussion, see Payments Received or Considered Received , later. Filing 2012 taxes online Selling price reduced. Filing 2012 taxes online   If the selling price is reduced at a later date, the gross profit on the sale also will change. Filing 2012 taxes online You then must refigure the gross profit percentage for the remaining payments. Filing 2012 taxes online Refigure your gross profit using Worksheet 10-2. Filing 2012 taxes online New Gross Profit Percentage — Selling Price Reduced. Filing 2012 taxes online You will spread any remaining gain over future installments. Filing 2012 taxes online    Worksheet 10-2. Filing 2012 taxes online New Gross Profit Percentage — Selling Price Reduced 1. Filing 2012 taxes online Enter the reduced selling  price for the property   2. Filing 2012 taxes online Enter your adjusted  basis for the  property     3. Filing 2012 taxes online Enter your selling  expenses     4. Filing 2012 taxes online Enter any depreciation  recapture     5. Filing 2012 taxes online Add lines 2, 3, and 4. Filing 2012 taxes online   6. Filing 2012 taxes online Subtract line 5 from line 1. Filing 2012 taxes online  This is your adjusted  gross profit   7. Filing 2012 taxes online Enter any installment sale  income reported in  prior year(s)   8. Filing 2012 taxes online Subtract line 7 from line 6   9. Filing 2012 taxes online Future installments     10. Filing 2012 taxes online Divide line 8 by line 9. Filing 2012 taxes online  This is your new  gross profit percentage*. Filing 2012 taxes online   * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. Filing 2012 taxes online Example. Filing 2012 taxes online In 2011, you sold land with a basis of $40,000 for $100,000. Filing 2012 taxes online Your gross profit was $60,000. Filing 2012 taxes online You received a $20,000 down payment and the buyer's note for $80,000. Filing 2012 taxes online The note provides for monthly payments of $1,953 each, figured at 8% interest, amortized over four years, beginning in January 2012. Filing 2012 taxes online Your gross profit percentage was 60%. Filing 2012 taxes online You received the down payment of $20,000 in 2011 and total payments of $23,436 in 2012, of which $17,675 was principal and $5,761 was interest according to the amortization schedule. Filing 2012 taxes online You reported a gain of $12,000 on the down payment received in 2011 and $10,605 ($17,675 X 60% (. Filing 2012 taxes online 60)) in 2012. Filing 2012 taxes online In January 2013, you and the buyer agreed to reduce the purchase price to $85,000 and payments during 2013, 2014, and 2015 are reduced to $1,483 a month amortized over the remaining three years. Filing 2012 taxes online The new gross profit percentage, 47. Filing 2012 taxes online 32%, is figured in Example — Worksheet 10-2. Filing 2012 taxes online Example — Worksheet 10-2. Filing 2012 taxes online New Gross Profit Percentage — Selling Price Reduced 1. Filing 2012 taxes online Enter the reduced selling  price for the property 85,000 2. Filing 2012 taxes online Enter your adjusted  basis for the  property 40,000   3. Filing 2012 taxes online Enter your selling  expenses -0-   4. Filing 2012 taxes online Enter any depreciation  recapture -0-   5. Filing 2012 taxes online Add lines 2, 3, and 4. Filing 2012 taxes online 40,000 6. Filing 2012 taxes online Subtract line 5 from line 1. Filing 2012 taxes online  This is your adjusted  gross profit 45,000 7. Filing 2012 taxes online Enter any installment sale  income reported in  prior year(s) 22,605 8. Filing 2012 taxes online Subtract line 7 from line 6 22,395 9. Filing 2012 taxes online Future installments   47,325 10. Filing 2012 taxes online Divide line 8 by line 9. Filing 2012 taxes online  This is your new  gross profit percentage*. Filing 2012 taxes online 47. Filing 2012 taxes online 32% * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. Filing 2012 taxes online You will report installment sale income of $6,878 (47. Filing 2012 taxes online 32% of $14,535) in 2013, $7,449 (47. Filing 2012 taxes online 32% of $15,742) in 2014, and $8,067 (47. Filing 2012 taxes online 32% of $17,048) in 2015. Filing 2012 taxes online Form 6252. Filing 2012 taxes online   Use Form 6252 to report an installment sale in the year it takes place and to report payments received, or considered received because of related party resales, in later years. Filing 2012 taxes online Attach it to your tax return for each year. Filing 2012 taxes online Disposition of Installment Obligation If you are using the installment method and you dispose of the installment obligation, generally you will have a gain or loss to report. Filing 2012 taxes online It is considered gain or loss on the sale of the property for which you received the installment obligation. Filing 2012 taxes online Cancellation. Filing 2012 taxes online   If an installment obligation is canceled or otherwise becomes unenforceable, it is treated as a disposition other than a sale or exchange. Filing 2012 taxes online Your gain or loss is the difference between your basis in the obligation and its fair market value (FMV) at the time you cancel it. Filing 2012 taxes online If the parties are related, the FMV of the obligation is considered to be no less than its full face value. Filing 2012 taxes online Transfer due to death. Filing 2012 taxes online   The transfer of an installment obligation (other than to a buyer) as a result of the death of the seller is not a disposition. Filing 2012 taxes online Any unreported gain from the installment obligation is not treated as gross income to the decedent. Filing 2012 taxes online No income is reported on the decedent's return due to the transfer. Filing 2012 taxes online Whoever receives the installment obligation as a result of the seller's death is taxed on the installment payments the same as the seller would have been had the seller lived to receive the payments. Filing 2012 taxes online   However, if the installment obligation is canceled, becomes unenforceable, or is transferred to the buyer because of the death of the holder of the obligation, it is a disposition. Filing 2012 taxes online The estate must figure its gain or loss on the disposition. Filing 2012 taxes online If the holder and the buyer were related, the FMV of the installment obligation is considered to be no less than its full face value. Filing 2012 taxes online More information. Filing 2012 taxes online   For more information on the disposition of an installment obligation, see Publication 537. Filing 2012 taxes online Sale of depreciable property. Filing 2012 taxes online   You generally cannot report gain from the sale of depreciable property to a related person on the installment method. Filing 2012 taxes online See Sale to a Related Person in Publication 537. Filing 2012 taxes online   You cannot use the installment method to report any depreciation recapture income up to the gain on the sale. Filing 2012 taxes online However, report any gain greater than the recapture income on the installment method. Filing 2012 taxes online   The recapture income reported in the year of sale is included in your installment sale basis to determine your gross profit on the installment sale. Filing 2012 taxes online   Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. Filing 2012 taxes online Report the depreciation recapture income in Part II of Form 4797 as ordinary income in the year of sale. Filing 2012 taxes online    If you sell depreciable business property, prepare Form 4797 first in order to figure the amount to enter on line 12 of Part I, Form 6252. Filing 2012 taxes online See the Form 6252 instructions for details. Filing 2012 taxes online   For more information on the section 179 deduction, see Section 179 Expense Deduction in chapter 7. Filing 2012 taxes online For more information on depreciation recapture, see Depreciation Recapture in  chapter 9. Filing 2012 taxes online Payments Received or Considered Received You must figure your gain each year on the payments you receive, or are treated as receiving, from an installment sale. Filing 2012 taxes online In certain situations, you are considered to have received a payment, even though the buyer does not pay you directly. Filing 2012 taxes online These situations occur when the buyer assumes or pays any of your debts, such as a loan, or pays any of your expenses, such as a sales commission. Filing 2012 taxes online However, as discussed later, the buyer's assumption of your debt is treated as a recovery of basis, rather than as a payment, in many cases. Filing 2012 taxes online Buyer pays seller's expenses. Filing 2012 taxes online   If the buyer pays any of your expenses related to the sale of your property, it is considered a payment to you in the year of sale. Filing 2012 taxes online Include these expenses in the selling and contract prices when figuring the gross profit percentage. Filing 2012 taxes online Buyer assumes mortgage. Filing 2012 taxes online   If the buyer assumes or pays off your mortgage, or otherwise takes the property subject to the mortgage, the following rules apply. Filing 2012 taxes online Mortgage less than basis. Filing 2012 taxes online   If the buyer assumes a mortgage that is not more than your installment sale basis in the property, it is not considered a payment to you. Filing 2012 taxes online It is considered a recovery of your basis. Filing 2012 taxes online The contract price is the selling price minus the mortgage. Filing 2012 taxes online Example. Filing 2012 taxes online You sell property with an adjusted basis of $19,000. Filing 2012 taxes online You have selling expenses of $1,000. Filing 2012 taxes online The buyer assumes your existing mortgage of $15,000 and agrees to pay you $10,000 (a cash down payment of $2,000 and $2,000 (plus 8% interest) in each of the next 4 years). Filing 2012 taxes online The selling price is $25,000 ($15,000 + $10,000). Filing 2012 taxes online Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). Filing 2012 taxes online The contract price is $10,000 ($25,000 − $15,000 mortgage). Filing 2012 taxes online Your gross profit percentage is 50% ($5,000 ÷ $10,000). Filing 2012 taxes online You report half of each $2,000 payment received as gain from the sale. Filing 2012 taxes online You also report all interest you receive as ordinary income. Filing 2012 taxes online Mortgage more than basis. Filing 2012 taxes online   If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. Filing 2012 taxes online The part of the mortgage greater than your basis is treated as a payment received in the year of sale. Filing 2012 taxes online   To figure the contract price, subtract the mortgage from the selling price. Filing 2012 taxes online This is the total amount (other than interest) you will receive directly from the buyer. Filing 2012 taxes online Add to this amount the payment you are considered to have received (the difference between the mortgage and your installment sale basis). Filing 2012 taxes online The contract price is then the same as your gross profit from the sale. Filing 2012 taxes online    If the mortgage the buyer assumes is equal to or more than your installment sale basis, the gross profit percentage always will be 100%. Filing 2012 taxes online Example. Filing 2012 taxes online The selling price for your property is $9,000. Filing 2012 taxes online The buyer will pay you $1,000 annually (plus 8% interest) over the next 3 years and assume an existing mortgage of $6,000. Filing 2012 taxes online Your adjusted basis in the property is $4,400. Filing 2012 taxes online You have selling expenses of $600, for a total installment sale basis of $5,000. Filing 2012 taxes online The part of the mortgage that is more than your installment sale basis is $1,000 ($6,000 − $5,000). Filing 2012 taxes online This amount is included in the contract price and treated as a payment received in the year of sale. Filing 2012 taxes online The contract price is $4,000: Selling price $9,000 Minus: Mortgage (6,000) Amount actually received $3,000 Add difference:   Mortgage $6,000   Minus: Installment sale basis 5,000 1,000 Contract price $4,000   Your gross profit on the sale is also $4,000: Selling price $9,000 Minus: Installment sale basis (5,000) Gross profit $4,000   Your gross profit percentage is 100%. Filing 2012 taxes online Report 100% of each payment (less interest) as gain from the sale. Filing 2012 taxes online Treat the $1,000 difference between the mortgage and your installment sale basis as a payment and report 100% of it as gain in the year of sale. Filing 2012 taxes online Buyer assumes other debts. Filing 2012 taxes online   If the buyer assumes any other debts, such as a loan or back taxes, it may be considered a payment to you in the year of sale. Filing 2012 taxes online   If the buyer assumes the debt instead of paying it off, only part of it may have to be treated as a payment. Filing 2012 taxes online Compare the debt to your installment sale basis in the property being sold. Filing 2012 taxes online If the debt is less than your installment sale basis, none of it is treated as a payment. Filing 2012 taxes online If it is more, only the difference is treated as a payment. Filing 2012 taxes online If the buyer assumes more than one debt, any part of the total that is more than your installment sale basis is considered a payment. Filing 2012 taxes online These rules are the same as the rules discussed earlier under Buyer assumes mortgage . Filing 2012 taxes online However, they apply only to the following types of debt the buyer assumes. Filing 2012 taxes online Those acquired from ownership of the property you are selling, such as a mortgage, lien, overdue interest, or back taxes. Filing 2012 taxes online Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased. Filing 2012 taxes online   If the buyer assumes any other type of debt, such as a personal loan or your legal fees relating to the sale, it is treated as if the buyer had paid off the debt at the time of the sale. Filing 2012 taxes online The value of the assumed debt is then considered a payment to you in the year of sale. Filing 2012 taxes online Property used as a payment. Filing 2012 taxes online   If you receive property rather than money from the buyer, it is still considered a payment in the year received. Filing 2012 taxes online However, see Trading property for like-kind property , later. Filing 2012 taxes online Generally, the amount of the payment is the property's FMV on the date you receive it. Filing 2012 taxes online Exception. Filing 2012 taxes online   If the property the buyer gives you is payable on demand or readily tradable (see examples later), the amount you should consider as payment in the year received is: The FMV of the property on the date you receive it if you use the cash method of accounting, The face amount of the obligation on the date you receive it if you use an accrual method of accounting, or The stated redemption price at maturity less any original issue discount (OID) or, if there is no OID, the stated redemption price at maturity appropriately discounted to reflect total unstated interest. Filing 2012 taxes online See Unstated interest , later. Filing 2012 taxes online Examples. Filing 2012 taxes online If you receive a note from the buyer as payment, and the note stipulates that you can demand payment from the buyer at any time, the note is payable on demand. Filing 2012 taxes online If you receive marketable securities from the buyer as payment, and you can sell the securities on an established securities market (such as the New York Stock Exchange) at any time, the securities are readily tradable. Filing 2012 taxes online In these examples, use the above rules to determine the amount you should consider as payment in the year received. Filing 2012 taxes online Debt not payable on demand. Filing 2012 taxes online   Any evidence of debt you receive from the buyer that is not payable on demand is not considered a payment. Filing 2012 taxes online This is true even if the debt is guaranteed by a third party, including a government agency. Filing 2012 taxes online Fair market value (FMV). Filing 2012 taxes online   This is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of all the necessary facts. Filing 2012 taxes online Third-party note. Filing 2012 taxes online   If the property the buyer gives you is a third-party note (or other obligation of a third party), you are considered to have received a payment equal to the note's FMV. Filing 2012 taxes online Because the FMV of the note is itself a payment on your installment sale, any payments you later receive from the third party are not considered payments on the sale. Filing 2012 taxes online The excess of the note's face value over its FMV is interest. Filing 2012 taxes online Exclude this interest in determining the selling price of the property. Filing 2012 taxes online However, see Exception under Property used as a payment , earlier. Filing 2012 taxes online Example. Filing 2012 taxes online You sold real estate in an installment sale. Filing 2012 taxes online As part of the down payment, the buyer assigned to you a $50,000, 8% third-party note. Filing 2012 taxes online The FMV of the third-party note at the time of the sale was $30,000. Filing 2012 taxes online This amount, not $50,000, is a payment to you in the year of sale. Filing 2012 taxes online The third-party note had an FMV equal to 60% of its face value ($30,000 ÷ $50,000), so 60% of each principal payment you receive on this note is a nontaxable return of capital. Filing 2012 taxes online The remaining 40% is interest taxed as ordinary income. Filing 2012 taxes online Bond. Filing 2012 taxes online   A bond or other evidence of debt you receive from the buyer that is payable on demand or readily tradable in an established securities market is treated as a payment in the year you receive it. Filing 2012 taxes online For more information on the amount you should treat as a payment, see Exception under Property used as a payment , earlier. Filing 2012 taxes online   If you receive a government or corporate bond for a sale before October 22, 2004, and the bond has interest coupons attached or can be readily traded in an established securities market, you are considered to have received payment equal to the bond's FMV. Filing 2012 taxes online However, see Exception under Property used as a payment , earlier. Filing 2012 taxes online Buyer's note. Filing 2012 taxes online   The buyer's note (unless payable on demand) is not considered payment on the sale. Filing 2012 taxes online However, its full face value is included when figuring the selling price and the contract price. Filing 2012 taxes online Payments you receive on the note are used to figure your gain in the year received. Filing 2012 taxes online Sale to a related person. Filing 2012 taxes online   If you sell depreciable property to a related person and the sale is an installment sale, you may not be able to report the sale using the installment method. Filing 2012 taxes online For information on these rules, see the Instructions for Form 6252 and Sale to a Related Person in Publication 537. Filing 2012 taxes online Trading property for like-kind property. Filing 2012 taxes online   If you trade business or investment property solely for the same kind of property to be held as business or investment property, you can postpone reporting the gain. Filing 2012 taxes online See Like-Kind Exchanges in chapter 8 for a discussion of like-kind property. Filing 2012 taxes online   If, in addition to like-kind property, you receive an installment obligation in the exchange, the following rules apply to determine installment sale income each year. Filing 2012 taxes online The contract price is reduced by the FMV of the like-kind property received in the trade. Filing 2012 taxes online The gross profit is reduced by any gain on the trade that can be postponed. Filing 2012 taxes online Like-kind property received in the trade is not considered payment on the installment obligation. Filing 2012 taxes online Unstated interest. Filing 2012 taxes online   An installment sale contract may provide that each deferred payment on the sale will include interest or that there will be an interest payment in addition to the principal payment. Filing 2012 taxes online Interest provided in the contract is called stated interest. Filing 2012 taxes online   If an installment sale contract does not provide for adequate stated interest, part of the stated principal amount of the contract may be recharacterized as interest. Filing 2012 taxes online If Internal Revenue Code section 483 applies to the contract, this interest is called unstated interest. Filing 2012 taxes online   If Internal Revenue Code section 1274 applies to the contract, this interest is called original issue discount (OID). Filing 2012 taxes online   Generally, if a buyer gives a debt in consideration for personal use property, the unstated interest rules do not apply. Filing 2012 taxes online Therefore, the buyer cannot deduct the unstated interest. Filing 2012 taxes online The seller must report the unstated interest as income. Filing 2012 taxes online Personal-use property is any property in which substantially all of its use by the buyer is not in connection with a trade or business or an investment activity. Filing 2012 taxes online   If the debt is subject to the Internal Revenue Code section 483 rules and is also subject to the below-market loan rules, such as a gift loan, compensation-related loan or corporation-shareholder loan, then both parties are subject to the below-market loan rules rather than the unstated interest rules. Filing 2012 taxes online   Unstated interest reduces the stated selling price of the property and the buyer's basis in the property. Filing 2012 taxes online It increases the seller's interest income and the buyer's interest expense. Filing 2012 taxes online   In general, an installment sale contract provides for adequate stated interest if the stated interest rate (based on an appropriate compounding period) is at least equal to the applicable federal rate (AFR). Filing 2012 taxes online    The AFRs are published monthly in the Internal Revenue Bulletin (IRB). Filing 2012 taxes online You can get this information by contacting an IRS office. Filing 2012 taxes online IRBs are also available at IRS. Filing 2012 taxes online gov. Filing 2012 taxes online More information. Filing 2012 taxes online   For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. Filing 2012 taxes online Example. Filing 2012 taxes online You sell property at a contract price of $6,000 and your gross profit is $1,500. Filing 2012 taxes online Your gross profit percentage is 25% ($1,500 ÷ $6,000). Filing 2012 taxes online After subtracting interest, you report 25% of each payment, including the down payment, as installment sale income from the sale for the tax year you receive the payment. Filing 2012 taxes online The remainder (balance) of each payment is the tax-free return of your adjusted basis. Filing 2012 taxes online Example On January 3, 2013, you sold your farm, including the home, farm land and buildings. Filing 2012 taxes online You received $50,000 down and the buyer's note for $200,000. Filing 2012 taxes online In addition, the buyer assumed an outstanding $50,000 mortgage on the farm land. Filing 2012 taxes online The total selling price was $300,000. Filing 2012 taxes online The note payments of $25,000 each, plus adequate interest, are due every July 1 and January 1, beginning in July 2013. Filing 2012 taxes online Your selling expenses were $15,000. Filing 2012 taxes online Adjusted basis and depreciation. Filing 2012 taxes online   The adjusted basis and depreciation claimed on each asset sold are as follows:   Depreciation Adjusted Asset Claimed Basis Home* -0- $33,743 Farm land -0- 73,610 Buildings $31,500 35,130 * Owned and used as main home for at least 2 of the 5 years prior to the sale Gain on each asset. Filing 2012 taxes online   The following schedule shows the assets included in the sale, each asset's selling price based on its respective value, the selling expense allocated to each asset, the adjusted basis of each asset, and the gain on each asset. Filing 2012 taxes online The selling expense for each asset is 5% of the selling price ($15,000 selling expense ÷ $300,000 selling price). Filing 2012 taxes online   Selling Selling Adjusted     Price Expense Basis Gain Home* $60,000 $3,000 $33,743 $23,257 Farm land  165,000  8,250  73,610  83,140 Buildings 75,000 3,750 35,130 36,120   $300,000 $15,000 $142,483 $142,517 * Owned and used as main home for at least 2 of the 5 years prior to the sale Depreciation recapture. Filing 2012 taxes online   The buildings are section 1250 property. Filing 2012 taxes online There is no depreciation recapture income for them because they were depreciated using the straight line method. Filing 2012 taxes online See chapter 9 for more information on depreciation recapture. Filing 2012 taxes online   Special rules may apply when you sell section 1250 assets depreciated under the straight line method. Filing 2012 taxes online See the Unrecaptured Section 1250 Gain Worksheet in the Instructions for Schedule D (Form 1040). Filing 2012 taxes online See chapter 3 of Publication 544, Sales and Other Dispositions of Assets, for more information on section 1250 assets. Filing 2012 taxes online Installment sale basis and gross profit. Filing 2012 taxes online   The following table shows each asset reported on the installment method, its selling price, installment sale basis, and gross profit. Filing 2012 taxes online     Installment     Selling Sale Gross   Price Basis Profit Farm land $165,000 $73,610 $83,140 Buildings 75,000 35,130 36,120   $240,000 $108,740 $119,260 Section 1231 gains. Filing 2012 taxes online   The gain on the farm land and buildings is reported as section 1231 gains. Filing 2012 taxes online See Section 1231 Gains and Losses in chapter 9. Filing 2012 taxes online Contract price and gross profit percentage. Filing 2012 taxes online   The contract price is $250,000 for the part of the sale reported on the installment method. Filing 2012 taxes online This is the selling price ($300,000) minus the mortgage assumed ($50,000). Filing 2012 taxes online   Gross profit percentage for the sale is 47. Filing 2012 taxes online 70% ($119,260 gross profit ÷ $250,000 contract price). Filing 2012 taxes online The gross profit percentage for each asset is figured as follows:   Percent Farm land ($83,140 ÷ $250,000) 33. Filing 2012 taxes online 256 Buildings ($36,120 ÷ $250,000) 14. Filing 2012 taxes online 448 Total 47. Filing 2012 taxes online 70 Figuring the gain to report on the installment method. Filing 2012 taxes online   One hundred percent (100%) of each payment is reported on the installment method. Filing 2012 taxes online The total amount received on the sale in 2013 is $75,000 ($50,000 down payment + $25,000 payment on July 1). Filing 2012 taxes online The installment sale part of the total payments received in 2013 is also $75,000. Filing 2012 taxes online Figure the gain to report for each asset by multiplying its gross profit percentage times $75,000. Filing 2012 taxes online   Income Farm land—33. Filing 2012 taxes online 256% × $75,000 $24,942 Buildings—14. Filing 2012 taxes online 448% × $75,000 10,836 Total installment income for 2013 $35,778 Reporting the sale. Filing 2012 taxes online   Report the installment sale on Form 6252. Filing 2012 taxes online Then report the amounts from Form 6252 on Form 4797 and Schedule D (Form 1040). Filing 2012 taxes online Attach a separate page to Form 6252 that shows the computations in the example. Filing 2012 taxes online If you sell depreciable business property, prepare Form 4797 first in order to figure the amount to enter on line 12 of Part I, Form 6252. Filing 2012 taxes online Section 1231 gains. Filing 2012 taxes online   The gains on the farm land and buildings are section 1231 gains. Filing 2012 taxes online They may be reported as either capital or ordinary gain depending on the net balance when combined with other section 1231 losses. Filing 2012 taxes online A net 1231 gain is capital gain and a net 1231 loss is an ordinary loss. Filing 2012 taxes online Installment income for years after 2013. Filing 2012 taxes online   You figure installment income for the years after 2013 by applying the same gross profit percentages to the payments you receive each year. Filing 2012 taxes online If you receive $50,000 during the year, the entire $50,000 is considered received on the installment sale (100% × $50,000). Filing 2012 taxes online You realize income as follows:   Income Farm land—33. Filing 2012 taxes online 256% × $50,000 $16,628 Buildings—14. Filing 2012 taxes online 448% × $50,000 7,224 Total installment income $23,852   In this example, no gain ever is recognized from the sale of your home. Filing 2012 taxes online You will combine your section 1231 gains from this sale with section 1231 gains and losses from other sales in each of the later years to determine whether to report them as ordinary or capital gains. Filing 2012 taxes online The interest received with each payment will be included in full as ordinary income. Filing 2012 taxes online Summary. Filing 2012 taxes online   The installment income (rounded to the nearest dollar) from the sale of the farm is reported as follows: Selling price $190,000 Minus: Installment basis (108,740) Gross profit $81,260     Gain reported in 2012 (year of sale) $35,778 Gain reported in 2013:   $50,000 × 47. Filing 2012 taxes online 70% 23,850 Gain reported in 2014:   $50,000 × 47. Filing 2012 taxes online 70% 23,850 Gain reported in 2015:   $50,000 × 47. Filing 2012 taxes online 70% 23,850 Gain reported in 2016:   $25,000 × 47. Filing 2012 taxes online 70% 11,925 Total gain reported $119,253 Prev  Up  Next   Home   More Online Publications
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Answers to Frequently Asked Questions for Individuals of the Same Sex Who Are Married Under State Law

The following questions and answers provide information to individuals of the same sex who are lawfully married (same-sex spouses). These questions and answers reflect the holdings in Revenue Ruling 2013-17 in 2013-38 IRB 201.

Q1. When are individuals of the same sex lawfully married for federal tax purposes?

A1. For federal tax purposes, the IRS looks to state or foreign law to determine whether individuals are married. The IRS has a general rule recognizing a marriage of same-sex spouses that was validly entered into in a domestic or foreign jurisdiction whose laws authorize the marriage of two individuals of the same sex even if the married couple resides in a domestic or foreign jurisdiction that does not recognize the validity of same-sex marriages.

Q2. Can same-sex spouses file federal tax returns using a married filing jointly or married filing separately status?

A2. Yes. For tax year 2013 and going forward, same-sex spouses generally must file using a married filing separately or jointly filing status. For tax year 2012 and all prior years, same-sex spouses who file an original tax return on or after Sept. 16, 2013 (the effective date of Rev. Rul. 2013-17), generally must file using a married filing separately or jointly filing status. For tax year 2012, same-sex spouses who filed their tax return before Sept. 16, 2013, may choose (but are not required) to amend their federal tax returns to file using married filing separately or jointly filing status. For tax years 2011 and earlier, same-sex spouses who filed their tax returns timely may choose (but are not required) to amend their federal tax returns to file using married filing separately or jointly filing status provided the period of limitations for amending the return has not expired. A taxpayer generally may file a claim for refund for three years from the date the return was filed or two years from the date the tax was paid, whichever is later. For information on filing an amended return, go to Tax Topic 308, Amended Returns, at http://www.irs.gov/taxtopics/tc308.html

Q3. Can a taxpayer and his or her same-sex spouse file a joint return if they were married in a state that recognizes same-sex marriages but they live in a state that does not recognize their marriage?

A3. Yes. For federal tax purposes, the IRS has a general rule recognizing a marriage of same-sex individuals that was validly entered into in a domestic or foreign jurisdiction whose laws authorize the marriage of two individuals of the same sex even if the married couple resides in a domestic or foreign jurisdiction that does not recognize the validity of same-sex marriages. The rules for using a married filing jointly or married filing separately status described in Q&A #2 apply to these married individuals. 

Q4. Can a taxpayer’s same-sex spouse be a dependent of the taxpayer?

A4. No. A taxpayer’s spouse cannot be a dependent of the taxpayer.

Q5. Can a same-sex spouse file using head of household filing status?

A5. A taxpayer who is married cannot file using head of household filing status. However, a married taxpayer may be considered unmarried and may use the head-of-household filing status if the taxpayer lives apart from his or her spouse for the last 6 months of the taxable year and provides more than half the cost of maintaining a household that is the principal place of abode of the taxpayer’s dependent child for more than half of the year. See Publication 501 for more details.

Q6. If same-sex spouses (who file using the married filing separately status) have a child, which parent may claim the child as a dependent?

A6. If a child is a qualifying child under section 152(c) of both parents who are spouses (who file using the married filing separate status), either parent, but not both, may claim a dependency deduction for the qualifying child. If both parents claim a dependency deduction for the child on their income tax returns, the IRS will treat the child as the qualifying child of the parent with whom the child resides for the longer period of time during the taxable year. If the child resides with each parent for the same amount of time during the taxable year, the IRS will treat the child as the qualifying child of the parent with the higher adjusted gross income.   

Q7. Can a taxpayer who is married to a person of the same sex claim the standard deduction if the taxpayer’s spouse itemized deductions?

A7. No. If a taxpayer’s spouse itemized his or her deductions, the taxpayer cannot claim the standard deduction (section 63(c)(6)(A)).

Q8. If a taxpayer adopts the child of his or her same-sex spouse as a second parent or co-parent, may the taxpayer (“adopting parent”) claim the adoption credit for the qualifying adoption expenses he or she pays or incurs to adopt the child?

A8. No. The adopting parent may not claim an adoption credit. A taxpayer may not claim an adoption credit for expenses incurred in adopting the child of the taxpayer’s spouse (section 23). 

Q9. Do provisions of the federal tax law such as section 66 (treatment of community income) and section 469(i)(5) ($25,000 offset for passive activity losses for rental real estate activities) apply to same-sex spouses?

A9. Yes. Like other provisions of the federal tax law that apply to married taxpayers, section 66 and section 469(i)(5) apply to same-sex spouses because same-sex spouses are married for all federal tax purposes.

Q10. If an employer provided health coverage for an employee’s same-sex spouse and included the value of that coverage in the employee’s gross income, can the employee file an amended Form 1040 reflecting the employee’s status as a married individual to recover federal income tax paid on the value of the health coverage of the employee’s spouse?

A10. Yes, for all years for which the period of limitations for filing a claim for refund is open. Generally, a taxpayer may file a claim for refund for three years from the date the return was filed or two years from the date the tax was paid, whichever is later. If an employer provided health coverage for an employee’s same-sex spouse, the employee may claim a refund of income taxes paid on the value of coverage that would have been excluded from income had the employee’s spouse been recognized as the employee’s legal spouse for tax purposes. This claim for a refund generally would be made through the filing of an amended Form 1040. For information on filing an amended return, go to Tax Topic 308, Amended Returns, at http://www.irs.gov/taxtopics/tc308.html. For a discussion regarding refunds of Social Security and Medicare taxes, see Q&A #12 and Q&A #13.

Example. Employer sponsors a group health plan covering eligible employees and their dependents and spouses (including same-sex spouses). Fifty percent of the cost of health coverage elected by employees is paid by Employer. Employee A was married to same-sex Spouse B at all times during 2012. Employee A elected coverage for Spouse B through Employer’s group health plan beginning Jan. 1, 2012. The value of the employer-funded portion of Spouse B’s health coverage was $250 per month.

The amount in Box 1, “Wages, tips, other compensation,” of the 2012 Form W-2 provided by Employer to Employee A included $3,000 ($250 per month x 12 months) of income reflecting the value of employer-funded health coverage provided to Spouse B.  Employee A filed Form 1040 for the 2012 taxable year reflecting the Box 1 amount reported on Form W-2.

Employee A may file an amended Form 1040 for the 2012 taxable year excluding the value of Spouse B’s employer-funded health coverage ($3,000) from gross income.

Q11. If an employer sponsored a cafeteria plan that allowed employees to pay premiums for health coverage on a pre-tax basis, can a participating employee file an amended return to recover income taxes paid on premiums that the employee paid on an after-tax basis for the health coverage of the employee’s same-sex spouse?

A11. Yes, for all years for which the period of limitations for filing a claim for refund is open. Generally, a taxpayer may file a claim for refund for three years from the date the return was filed or two years from the date the tax was paid, whichever is later. If an employer sponsored a cafeteria plan under which an employee elected to pay for health coverage for the employee on a pre-tax basis, and if the employee purchased coverage on an after-tax basis for the employee’s same-sex spouse under the employer’s health plan, the employee may claim a refund of income taxes paid on the premiums for the coverage of the employee’s spouse. This claim for a refund generally would be made through the filing of an amended Form 1040. For information on filing an amended return, go to Tax Topic 308, Amended Returns, at http://www.irs.gov/taxtopics/tc308.html. For a discussion regarding refunds of Social Security and Medicare taxes, see Q&A #12 and Q&A #13.

Example. Employer sponsors a group health plan as part of a cafeteria plan with a calendar year plan year. The full cost of spousal and dependent coverage is paid by the employees. In the open enrollment period for the 2012 plan year, Employee C elected to purchase self-only health coverage through salary reduction under Employer’s cafeteria plan. On March 1, 2012, Employee C was married to same-sex spouse D. Employee C purchased health coverage for Spouse D through Employer’s group health plan beginning March 1, 2012. The premium paid by Employee C for Spouse D’s health coverage was $500 per month.

The amount in Box 1, “Wages, tips, other compensation,” of the 2012 Form W-2 provided by Employer to Employee C included the $5,000 ($500 per month x 10 months) of premiums paid by Employee C for Spouse D’s health coverage. Employee C filed Form 1040 for the 2012 taxable year reflecting the Box 1 amount reported on Form W-2.

Employee C’s salary reduction election is treated as including the value of the same-sex spousal coverage purchased for Spouse D. Employee C may file an amended Form 1040 for the 2012 taxable year excluding the premiums paid for Spouse D’s health coverage ($5,000) from gross income.

Q12. In the situations described in Q&A #10 and Q&A #11, may the employer claim a refund for the Social Security taxes and Medicare taxes paid on the benefits? 

A12. Yes. If the period of limitations for filing a claim for refund is open, the employer may claim a refund of, or make an adjustment for, any overpayment of Social Security taxes and Medicare taxes. The requirements for filing a claim for refund or for making an adjustment for an overpayment of the employer and employee portions of Social Security and Medicare taxes can be found in the Instructions for Form 941-X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund. Notice 2013-61 provides special administrative procedures for employers to file claims for refunds or make adjustments for overpayments of Social Security taxes and Medicare taxes paid on same-sex spouse benefits. 

Q13. In the situations described in Q&A #10 and Q&A #11, may the employer claim a refund or make an adjustment of income tax withholding that was withheld from the employee with respect to the benefits in prior years? 

A13. No. Claims for refund of overwithheld income tax for prior years cannot be made by employers. The employee may file for any refund of income tax due for prior years on Form 1040X, provided the period of limitations for claiming a refund has not expired. See Q&A #10 and Q&A #11.

Employers may make adjustments for income tax withholding that was overwithheld from an employee in the current year provided the employer has repaid or reimbursed the employee for the overwithheld income tax before the end of the calendar year.

Q14. If an employer cannot locate a former employee with a same-sex spouse who received the benefits described in Q&A #10 and Q&A #11, may the employer still claim a refund of the employer portion of the Social Security and Medicare taxes on the benefits?

A14. Yes, if the employer makes reasonable attempts to locate an employee who received the benefits described in Q&A #10 and Q&A #11 that were treated as wages but the employer is unable to locate the employee, the employer can claim a refund of the employer portion of Social Security and Medicare taxes, but not the employee portion. Also, if an employee is notified and given the opportunity to participate in the claim for refund of Social Security and Medicare taxes but declines in writing, the employer can claim a refund of the employer portion of the taxes, but not the employee portion. Employers can use the special administrative procedure set forth in Notice 2013-61 to file these claims.

Q15. If a sole proprietor employs his or her same-sex spouse in his or her business, can the sole proprietor get a refund of Social Security, Medicare and FUTA taxes on the wages that the sole proprietor paid to the same-sex spouse as an employee in the business?

A15. Services performed by an employee in the employ of his or her spouse are excluded from the definition of employment for purposes of the Federal Unemployment Tax Act (FUTA). Therefore, for all years for which the period of limitations is open, the sole proprietor can claim a refund of the FUTA tax paid on the compensation that the sole proprietor paid his or her same-sex spouse as an employee in the business. Services of a spouse are excluded from Social Security and Medicare taxes only if the services are not in the course of the employer's trade or business, or if it is domestic service in a private home of the employer.

Q16. What rules apply to qualified retirement plans pursuant to Rev. Rul. 2013-17?

A16. Qualified retirement plans are required to comply with the following rules pursuant to Rev. Rul. 2013-17:

  1. A qualified retirement plan must treat a same-sex spouse as a spouse for purposes of satisfying the federal tax laws relating to qualified retirement plans.
  2. For purposes of satisfying the federal tax laws relating to qualified retirement plans, a qualified retirement plan must recognize a same-sex marriage that was validly entered into in a jurisdiction whose laws authorize the marriage, even if the married couple lives in a domestic or foreign jurisdiction that does not recognize the validity of same-sex marriages.
  3. A person who is in a registered domestic partnership or civil union is not  considered to be a spouse for purposes of applying the federal tax law requirements relating to qualified retirement plans, regardless of whether that person’s partner is of the opposite or same sex.

Q17. What are some examples of the consequences of these rules for qualified retirement plans?

A17. The following are some examples of the consequences of these rules:

  1. Plan A, a qualified defined benefit plan, is maintained by Employer X, which operates only in a state that does not recognize same-sex marriages. Nonetheless, Plan A must treat a participant who is married to a spouse of the same sex under the laws of a different jurisdiction as married for purposes of applying the qualification requirements that relate to spouses.
  2. Plan B is a qualified defined contribution plan and provides that the participant’s account must be paid to the participant’s spouse upon the participant’s death unless the spouse consents to a different beneficiary. Plan B does not provide for any annuity forms of distribution. Plan B must pay this death benefit to the same-sex surviving spouse of any deceased participant. Plan B is not required to provide this death benefit to a surviving registered domestic partner of a deceased participant. However, Plan B is allowed to make a participant’s registered domestic partner the default beneficiary who will receive the death benefit unless the participant chooses a different beneficiary.

Q18. As of when do the rules of Rev. Rul. 2013-17 apply to qualified retirement plans?

A18. Qualified retirement plans must comply with these rules as of Sept. 16, 2013. Although Rev. Rul. 2013-17 allows taxpayers to file amended returns that relate to prior periods in reliance on the rules in Rev. Rul. 2013-17 with respect to many matters, this rule does not extend to matters relating to qualified retirement plans. The IRS has not yet provided guidance regarding the application of Windsor and these rules to qualified retirement plans with respect to periods before Sept. 16, 2013.

Q19. Will the IRS issue further guidance on how qualified retirement plans and other tax-favored retirement arrangements must comply with Windsor and Rev. Rul. 2013-17?

A19. The IRS intends to issue further guidance on how qualified retirement plans and other tax-favored retirement arrangements must comply with Windsor and Rev. Rul. 2013-17.  It is expected that future guidance will address the following, among other issues:

  1. Plan amendment requirements (including the timing of any required amendments).
  2. Any necessary corrections relating to plan operations for periods before future guidance is issued.

Q20. Can a same-sex married couple elect to treat a jointly owned and operated unincorporated business as a Qualified Joint Venture?

A20. Yes. Spouses that wholly own and operate an unincorporated business and that meet certain other requirements may avoid Federal partnership tax treatment by electing to be a Qualified Joint Venture. For more information on Qualified Joint Ventures, see the tax topic “Husband and Wife Business” at http://www.irs.gov/Businesses/Small-Businesses-&-Self-Employed/Husband-and-Wife-Business.

Q21. In the situations described in FAQ #10 and FAQ #11, may the employee claim a refund for the social security and Medicare taxes paid on the benefits if the employer will not?

A21. Yes. If the period of limitations for filing a claim for refund is open and the employee has not been reimbursed by the employer for the Social Security and Medicare taxes and has not authorized the employer to file a claim for refund of those taxes on his or her behalf, the employee may claim a refund. The employee should seek a refund of Social Security and Medicare taxes from his or her employer first. However, if the employer indicates an intention not to file a claim or adjust the overpaid Social Security and Medicare taxes, the employee may claim a refund of any overpayment of employee Social Security and Medicare taxes by filing Form 843, Claim for Refund and Request for Abatement. The requirements for an employee filing a claim for refund of the employee portions of Social Security and Medicare taxes can be found in the Instructions for Form 843. Employees should write “Windsor Claim” in dark, bold letters across the top margin of Form 843.

Q22. Is an employer that repays or reimburses an employee on or before Dec. 31, 2013, for an overpayment of Social Security and Medicare taxes and income tax withholding with respect to same-sex spouse benefits provided in 2013 required to obtain a written statement from the employee confirming the employee did not make a claim for refund of the overcollected taxes (or the claim was rejected) and will not make any future claim for refund or credit of the overcollected taxes?

A22. No. An employer using the first special administrative procedure under Notice 2013-61 (i.e., employer repays or reimburses an employee for 2013 overpayments of taxes on or before Dec. 31, 2013, and corrects the overpayment on the fourth quarter 2013 Form 941) does not need to obtain the written statement from its employee with respect to the 2013 overpayments. However, an employer using the second special administrative procedure under Notice 2013-61 (i.e., employer does not repay or reimburse an employee for an overpayment of taxes on or before Dec. 31, 2013, and corrects the overpayment on a Form 941-X) is required to obtain such written statement from each affected employee.

Q23. If an individual employed his or her same-sex spouse to perform domestic (household) services in the individual’s private home, can the individual get a refund of Social Security, Medicare and FUTA taxes on wages that the individual paid to the spouse for such service? If so, which forms should the individual use to claim refunds?

A23. Yes, if the period of limitations for filing a claim for refund is open, the individual can get a refund of Social Security, Medicare and FUTA taxes paid on remuneration for domestic services in the individual’s private home that were performed by his or her same sex spouse as the individual’s employee. If the taxes for these services were reported on Schedule H (Form 1040), Household Employment Taxes, and taxes were paid in connection with the Form 1040, the individual should file an amended Form 1040 to claim refund of those taxes together with an amended Schedule H. For information on filing an amended return, go to Tax Topic 308, Amended Returns, at http://www.irs.gov/taxtopics/tc308.html. If the Social Security and Medicare taxes for the domestic service were reported on Form 941, Employer’s QUARTERLY Federal Tax Return, the individual employer can use Form 941-X, Adjusted Employer’s QUARTERLY Federal Tax Return or Claim for Refund, to claim a refund of these taxes. The requirements for filing a claim for refund or making an adjustment of the employer and employee portions of Social Security and Medicare taxes can be found in the Instructions for Form 941-X. Notice 2013-61 provides special administrative procedures for employers to file claims for refunds or make adjustments for an overpayment of social security taxes and Medicare taxes on same-sex spouse benefits. If the FUTA taxes for the domestic service were reported on Form 940, Employer’s Annual Federal Unemployment (FUTA) Tax Return, the individual employer can file an amended Form 940 for the prior year to obtain a refund. The previous year’s Form 940 should be used to claim a refund of FUTA taxes for that prior year. (Forms 940 for prior years may also be found at IRS.gov.)

Related Items:

 

Page Last Reviewed or Updated: 07-Mar-2014

The Filing 2012 Taxes Online

Filing 2012 taxes online Publication 4492 - Introductory Material Table of Contents Introduction Useful Items - You may want to see: Introduction This publication explains the major provisions of the Katrina Emergency Tax Relief Act of 2005 and the Gulf Opportunity Zone Act of 2005. Filing 2012 taxes online Useful Items - You may want to see: Publication 526 Charitable Contributions 536 Net Operating Losses (NOLs) for Individuals, Estates, and Trusts 547 Casualties, Disasters, and Thefts 946 How To Depreciate Property Form (and Instructions) 4506Request for Copy of Tax Return 4506-TRequest for Transcript of Tax Return 4684Casualties and Thefts 5884Work Opportunity Credit 5884-ACredits for Employers Affected by Hurricane Katrina, Rita, or Wilma 8863Education Credits (Hope and Lifetime Learning Credits) 8914Exemption Amount for Taxpayers Housing Individuals Displaced by Hurricane Katrina 8915Qualified Hurricane Retirement Plan Distributions and Repayments Prev  Up  Next   Home   More Online Publications