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Free 2009 Tax Software

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Free 2009 Tax Software

Free 2009 tax software 2. Free 2009 tax software   Depreciation of Rental Property Table of Contents The BasicsWhat Rental Property Can Be Depreciated? When Does Depreciation Begin and End? Depreciation Methods Basis of Depreciable Property Claiming the Special Depreciation Allowance MACRS DepreciationDepreciation Systems Property Classes Under GDS Recovery Periods Under GDS Conventions Figuring Your Depreciation Deduction Figuring MACRS Depreciation Under ADS Claiming the Correct Amount of Depreciation You recover the cost of income producing property through yearly tax deductions. Free 2009 tax software You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return. Free 2009 tax software Three factors determine how much depreciation you can deduct each year: (1) your basis in the property, (2) the recovery period for the property, and (3) the depreciation method used. Free 2009 tax software You cannot simply deduct your mortgage or principal payments, or the cost of furniture, fixtures and equipment, as an expense. Free 2009 tax software You can deduct depreciation only on the part of your property used for rental purposes. Free 2009 tax software Depreciation reduces your basis for figuring gain or loss on a later sale or exchange. Free 2009 tax software You may have to use Form 4562 to figure and report your depreciation. Free 2009 tax software See Which Forms To Use in chapter 3. Free 2009 tax software Also see Publication 946. Free 2009 tax software Section 179 deduction. Free 2009 tax software   The section 179 deduction is a means of recovering part or all of the cost of certain qualifying property in the year you place the property in service. Free 2009 tax software This deduction is not allowed for property used in connection with residential rental property. Free 2009 tax software See chapter 2 of Publication 946. Free 2009 tax software Alternative minimum tax (AMT). Free 2009 tax software   If you use accelerated depreciation, you may be subject to the AMT. Free 2009 tax software Accelerated depreciation allows you to deduct more depreciation earlier in the recovery period than you could deduct using a straight line method (same deduction each year). Free 2009 tax software   The prescribed depreciation methods for rental real estate are not accelerated, so the depreciation deduction is not adjusted for the AMT. Free 2009 tax software However, accelerated methods are generally used for other property connected with rental activities (for example, appliances and wall-to-wall carpeting). Free 2009 tax software   To find out if you are subject to the AMT, see the Instructions for Form 6251. Free 2009 tax software The Basics The following section discusses the information you will need to have about the rental property and the decisions to be made before figuring your depreciation deduction. Free 2009 tax software What Rental Property Can Be Depreciated? You can depreciate your property if it meets all the following requirements. Free 2009 tax software You own the property. Free 2009 tax software You use the property in your business or income-producing activity (such as rental property). Free 2009 tax software The property has a determinable useful life. Free 2009 tax software The property is expected to last more than one year. Free 2009 tax software Property you own. Free 2009 tax software   To claim depreciation, you usually must be the owner of the property. Free 2009 tax software You are considered as owning property even if it is subject to a debt. Free 2009 tax software Rented property. Free 2009 tax software   Generally, if you pay rent for property, you cannot depreciate that property. Free 2009 tax software Usually, only the owner can depreciate it. Free 2009 tax software However, if you make permanent improvements to leased property, you may be able to depreciate the improvements. Free 2009 tax software See Additions or improvements to property , later in this chapter, under Recovery Periods Under GDS. Free 2009 tax software Cooperative apartments. Free 2009 tax software   If you are a tenant-stockholder in a cooperative housing corporation and rent your cooperative apartment to others, you can deduct depreciation on your stock in the corporation. Free 2009 tax software See chapter 4, Special Situations. Free 2009 tax software Property having a determinable useful life. Free 2009 tax software   To be depreciable, your property must have a determinable useful life. Free 2009 tax software This means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. Free 2009 tax software What Rental Property Cannot Be Depreciated? Certain property cannot be depreciated. Free 2009 tax software This includes land and certain excepted property. Free 2009 tax software Land. Free 2009 tax software   You cannot depreciate the cost of land because land generally does not wear out, become obsolete, or get used up. Free 2009 tax software But if it does, the loss is accounted for upon disposition. Free 2009 tax software The costs of clearing, grading, planting, and landscaping are usually all part of the cost of land and cannot be depreciated. Free 2009 tax software   Although you cannot depreciate land, you can depreciate certain land preparation costs, such as landscaping costs, incurred in preparing land for business use. Free 2009 tax software These costs must be so closely associated with other depreciable property that you can determine a life for them along with the life of the associated property. Free 2009 tax software Example. Free 2009 tax software You built a new house to use as a rental and paid for grading, clearing, seeding, and planting bushes and trees. Free 2009 tax software Some of the bushes and trees were planted right next to the house, while others were planted around the outer border of the lot. Free 2009 tax software If you replace the house, you would have to destroy the bushes and trees right next to it. Free 2009 tax software These bushes and trees are closely associated with the house, so they have a determinable useful life. Free 2009 tax software Therefore, you can depreciate them. Free 2009 tax software Add your other land preparation costs to the basis of your land because they have no determinable life and you cannot depreciate them. Free 2009 tax software Excepted property. Free 2009 tax software   Even if the property meets all the requirements listed earlier under What Rental Property Can Be Depreciated , you cannot depreciate the following property. Free 2009 tax software Property placed in service and disposed of (or taken out of business use) in the same year. Free 2009 tax software Equipment used to build capital improvements. Free 2009 tax software You must add otherwise allowable depreciation on the equipment during the period of construction to the basis of your improvements. Free 2009 tax software For more information, see chapter 1 of Publication 946. Free 2009 tax software When Does Depreciation Begin and End? You begin to depreciate your rental property when you place it in service for the production of income. Free 2009 tax software You stop depreciating it either when you have fully recovered your cost or other basis, or when you retire it from service, whichever happens first. Free 2009 tax software Placed in Service You place property in service in a rental activity when it is ready and available for a specific use in that activity. Free 2009 tax software Even if you are not using the property, it is in service when it is ready and available for its specific use. Free 2009 tax software Example 1. Free 2009 tax software On November 22 of last year, you purchased a dishwasher for your rental property. Free 2009 tax software The appliance was delivered on December 7, but was not installed and ready for use until January 3 of this year. Free 2009 tax software Because the dishwasher was not ready for use last year, it is not considered placed in service until this year. Free 2009 tax software If the appliance had been installed and ready for use when it was delivered in December of last year, it would have been considered placed in service in December, even if it was not actually used until this year. Free 2009 tax software Example 2. Free 2009 tax software On April 6, you purchased a house to use as residential rental property. Free 2009 tax software You made extensive repairs to the house and had it ready for rent on July 5. Free 2009 tax software You began to advertise the house for rent in July and actually rented it beginning September 1. Free 2009 tax software The house is considered placed in service in July when it was ready and available for rent. Free 2009 tax software You can begin to depreciate the house in July. Free 2009 tax software Example 3. Free 2009 tax software You moved from your home in July. Free 2009 tax software During August and September you made several repairs to the house. Free 2009 tax software On October 1, you listed the property for rent with a real estate company, which rented it on December 1. Free 2009 tax software The property is considered placed in service on October 1, the date when it was available for rent. Free 2009 tax software Conversion to business use. Free 2009 tax software   If you place property in service in a personal activity, you cannot claim depreciation. Free 2009 tax software However, if you change the property's use to business or the production of income, you can begin to depreciate it at the time of the change. Free 2009 tax software You place the property in service for business or income-producing use on the date of the change. Free 2009 tax software Example. Free 2009 tax software You bought a house and used it as your personal home several years before you converted it to rental property. Free 2009 tax software Although its specific use was personal and no depreciation was allowable, you placed the home in service when you began using it as your home. Free 2009 tax software You can begin to claim depreciation in the year you converted it to rental property because at that time its use changed to the production of income. Free 2009 tax software Idle Property Continue to claim a deduction for depreciation on property used in your rental activity even if it is temporarily idle (not in use). Free 2009 tax software For example, if you must make repairs after a tenant moves out, you still depreciate the rental property during the time it is not available for rent. Free 2009 tax software Cost or Other Basis Fully Recovered You must stop depreciating property when the total of your yearly depreciation deductions equals your cost or other basis of your property. Free 2009 tax software For this purpose, your yearly depreciation deductions include any depreciation that you were allowed to claim, even if you did not claim it. Free 2009 tax software See Basis of Depreciable Property , later. Free 2009 tax software Retired From Service You stop depreciating property when you retire it from service, even if you have not fully recovered its cost or other basis. Free 2009 tax software You retire property from service when you permanently withdraw it from use in a trade or business or from use in the production of income because of any of the following events. Free 2009 tax software You sell or exchange the property. Free 2009 tax software You convert the property to personal use. Free 2009 tax software You abandon the property. Free 2009 tax software The property is destroyed. Free 2009 tax software Depreciation Methods Generally, you must use the Modified Accelerated Cost Recovery System (MACRS) to depreciate residential rental property placed in service after 1986. Free 2009 tax software If you placed rental property in service before 1987, you are using one of the following methods. Free 2009 tax software ACRS (Accelerated Cost Recovery System) for property placed in service after 1980 but before 1987. Free 2009 tax software Straight line or declining balance method over the useful life of property placed in service before 1981. Free 2009 tax software See MACRS Depreciation , later, for more information. Free 2009 tax software Rental property placed in service before 2013. Free 2009 tax software   Continue to use the same method of figuring depreciation that you used in the past. Free 2009 tax software Use of real property changed. Free 2009 tax software   Generally, you must use MACRS to depreciate real property that you acquired for personal use before 1987 and changed to business or income-producing use after 1986. Free 2009 tax software This includes your residence that you changed to rental use. Free 2009 tax software See Property Owned or Used in 1986 in Publication 946, chapter 1, for those situations in which MACRS is not allowed. Free 2009 tax software Improvements made after 1986. Free 2009 tax software   Treat an improvement made after 1986 to property you placed in service before 1987 as separate depreciable property. Free 2009 tax software As a result, you can depreciate that improvement as separate property under MACRS if it is the type of property that otherwise qualifies for MACRS depreciation. Free 2009 tax software For more information about improvements, see Additions or improvements to property , later in this chapter under Recovery Periods Under GDS. Free 2009 tax software This publication discusses MACRS depreciation only. Free 2009 tax software If you need information about depreciating property placed in service before 1987, see Publication 534. Free 2009 tax software Basis of Depreciable Property The basis of property used in a rental activity is generally its adjusted basis when you place it in service in that activity. Free 2009 tax software This is its cost or other basis when you acquired it, adjusted for certain items occurring before you place it in service in the rental activity. Free 2009 tax software If you depreciate your property under MACRS, you may also have to reduce your basis by certain deductions and credits with respect to the property. Free 2009 tax software Basis and adjusted basis are explained in the following discussions. Free 2009 tax software If you used the property for personal purposes before changing it to rental use, its basis for depreciation is the lesser of its adjusted basis or its fair market value when you change it to rental use. Free 2009 tax software See Basis of Property Changed to Rental Use in chapter 4. Free 2009 tax software Cost Basis The basis of property you buy is usually its cost. Free 2009 tax software The cost is the amount you pay for it in cash, in debt obligation, in other property, or in services. Free 2009 tax software Your cost also includes amounts you pay for: Sales tax charged on the purchase (but see Exception next), Freight charges to obtain the property, and Installation and testing charges. Free 2009 tax software Exception. Free 2009 tax software   If you deducted state and local general sales taxes as an itemized deduction on Schedule A (Form 1040), do not include those sales taxes as part of your cost basis. Free 2009 tax software Such taxes were deductible before 1987 and after 2003. Free 2009 tax software Loans with low or no interest. Free 2009 tax software   If you buy property on any time-payment plan that charges little or no interest, the basis of your property is your stated purchase price, less the amount considered to be unstated interest. Free 2009 tax software See Unstated Interest and Original Issue Discount (OID) in Publication 537, Installment Sales. Free 2009 tax software Real property. Free 2009 tax software   If you buy real property, such as a building and land, certain fees and other expenses you pay are part of your cost basis in the property. Free 2009 tax software Real estate taxes. Free 2009 tax software   If you buy real property and agree to pay real estate taxes on it that were owed by the seller and the seller does not reimburse you, the taxes you pay are treated as part of your basis in the property. Free 2009 tax software You cannot deduct them as taxes paid. Free 2009 tax software   If you reimburse the seller for real estate taxes the seller paid for you, you can usually deduct that amount. Free 2009 tax software Do not include that amount in your basis in the property. Free 2009 tax software Settlement fees and other costs. Free 2009 tax software   The following settlement fees and closing costs for buying the property are part of your basis in the property. Free 2009 tax software Abstract fees. Free 2009 tax software Charges for installing utility services. Free 2009 tax software Legal fees. Free 2009 tax software Recording fees. Free 2009 tax software Surveys. Free 2009 tax software Transfer taxes. Free 2009 tax software Title insurance. Free 2009 tax software Any amounts the seller owes that you agree to pay, such as back taxes or interest, recording or mortgage fees, charges for improvements or repairs, and sales commissions. Free 2009 tax software   The following are settlement fees and closing costs you cannot include in your basis in the property. Free 2009 tax software Fire insurance premiums. Free 2009 tax software Rent or other charges relating to occupancy of the property before closing. Free 2009 tax software Charges connected with getting or refinancing a loan, such as: Points (discount points, loan origination fees), Mortgage insurance premiums, Loan assumption fees, Cost of a credit report, and Fees for an appraisal required by a lender. Free 2009 tax software   Also, do not include amounts placed in escrow for the future payment of items such as taxes and insurance. Free 2009 tax software Assumption of a mortgage. Free 2009 tax software   If you buy property and become liable for an existing mortgage on the property, your basis is the amount you pay for the property plus the amount remaining to be paid on the mortgage. Free 2009 tax software Example. Free 2009 tax software You buy a building for $60,000 cash and assume a mortgage of $240,000 on it. Free 2009 tax software Your basis is $300,000. Free 2009 tax software Separating cost of land and buildings. Free 2009 tax software   If you buy buildings and your cost includes the cost of the land on which they stand, you must divide the cost between the land and the buildings to figure the basis for depreciation of the buildings. Free 2009 tax software The part of the cost that you allocate to each asset is the ratio of the fair market value of that asset to the fair market value of the whole property at the time you buy it. Free 2009 tax software   If you are not certain of the fair market values of the land and the buildings, you can divide the cost between them based on their assessed values for real estate tax purposes. Free 2009 tax software Example. Free 2009 tax software You buy a house and land for $200,000. Free 2009 tax software The purchase contract does not specify how much of the purchase price is for the house and how much is for the land. Free 2009 tax software The latest real estate tax assessment on the property was based on an assessed value of $160,000, of which $136,000 was for the house and $24,000 was for the land. Free 2009 tax software You can allocate 85% ($136,000 ÷ $160,000) of the purchase price to the house and 15% ($24,000 ÷ $160,000) of the purchase price to the land. Free 2009 tax software Your basis in the house is $170,000 (85% of $200,000) and your basis in the land is $30,000 (15% of $200,000). Free 2009 tax software Basis Other Than Cost You cannot use cost as a basis for property that you received: In return for services you performed; In an exchange for other property; As a gift; From your spouse, or from your former spouse as the result of a divorce; or As an inheritance. Free 2009 tax software If you received property in one of these ways, see Publication 551 for information on how to figure your basis. Free 2009 tax software Adjusted Basis To figure your property's basis for depreciation, you may have to make certain adjustments (increases and decreases) to the basis of the property for events occurring between the time you acquired the property and the time you placed it in service for business or the production of income. Free 2009 tax software The result of these adjustments to the basis is the adjusted basis. Free 2009 tax software Increases to basis. Free 2009 tax software   You must increase the basis of any property by the cost of all items properly added to a capital account. Free 2009 tax software These include the following. Free 2009 tax software The cost of any additions or improvements made before placing your property into service as a rental that have a useful life of more than 1 year. Free 2009 tax software Amounts spent after a casualty to restore the damaged property. Free 2009 tax software The cost of extending utility service lines to the property. Free 2009 tax software Legal fees, such as the cost of defending and perfecting title, or settling zoning issues. Free 2009 tax software Additions or improvements. Free 2009 tax software   Add to the basis of your property the amount an addition or improvement actually cost you, including any amount you borrowed to make the addition or improvement. Free 2009 tax software This includes all direct costs, such as material and labor, but does not include your own labor. Free 2009 tax software It also includes all expenses related to the addition or improvement. Free 2009 tax software   For example, if you had an architect draw up plans for remodeling your property, the architect's fee is a part of the cost of the remodeling. Free 2009 tax software Or, if you had your lot surveyed to put up a fence, the cost of the survey is a part of the cost of the fence. Free 2009 tax software   Keep separate accounts for depreciable additions or improvements made after you place the property in service in your rental activity. Free 2009 tax software For information on depreciating additions or improvements, see Additions or improvements to property , later in this chapter, under Recovery Periods Under GDS. Free 2009 tax software    The cost of landscaping improvements is usually treated as an addition to the basis of the land, which is not depreciable. Free 2009 tax software However, see What Rental Property Cannot Be Depreciated, earlier. Free 2009 tax software Assessments for local improvements. Free 2009 tax software   Assessments for items which tend to increase the value of property, such as streets and sidewalks, must be added to the basis of the property. Free 2009 tax software For example, if your city installs curbing on the street in front of your house, and assesses you and your neighbors for its cost, you must add the assessment to the basis of your property. Free 2009 tax software Also add the cost of legal fees paid to obtain a decrease in an assessment levied against property to pay for local improvements. Free 2009 tax software You cannot deduct these items as taxes or depreciate them. Free 2009 tax software    However, you can deduct as taxes, charges or assessments for maintenance, repairs, or interest charges related to the improvements. Free 2009 tax software Do not add them to your basis in the property. Free 2009 tax software Deducting vs. Free 2009 tax software capitalizing costs. Free 2009 tax software   Do not add to your basis costs you can deduct as current expenses. Free 2009 tax software However, there are certain costs you can choose either to deduct or to capitalize. Free 2009 tax software If you capitalize these costs, include them in your basis. Free 2009 tax software If you deduct them, do not include them in your basis. Free 2009 tax software   The costs you may choose to deduct or capitalize include carrying charges, such as interest and taxes, that you must pay to own property. Free 2009 tax software   For more information about deducting or capitalizing costs and how to make the election, see Carrying Charges in Publication 535, chapter 7. Free 2009 tax software Decreases to basis. Free 2009 tax software   You must decrease the basis of your property by any items that represent a return of your cost. Free 2009 tax software These include the following. Free 2009 tax software Insurance or other payment you receive as the result of a casualty or theft loss. Free 2009 tax software Casualty loss not covered by insurance for which you took a deduction. Free 2009 tax software Amount(s) you receive for granting an easement. Free 2009 tax software Residential energy credits you were allowed before 1986, or after 2005, if you added the cost of the energy items to the basis of your home. Free 2009 tax software Exclusion from income of subsidies for energy conservation measures. Free 2009 tax software Special depreciation allowance claimed on qualified property. Free 2009 tax software Depreciation you deducted, or could have deducted, on your tax returns under the method of depreciation you chose. Free 2009 tax software If you did not deduct enough or deducted too much in any year, see Depreciation under Decreases to Basis in Publication 551. Free 2009 tax software   If your rental property was previously used as your main home, you must also decrease the basis by the following. Free 2009 tax software Gain you postponed from the sale of your main home before May 7, 1997, if the replacement home was converted to your rental property. Free 2009 tax software District of Columbia first-time homebuyer credit allowed on the purchase of your main home after August 4, 1997 and before January 1, 2012. Free 2009 tax software Amount of qualified principal residence indebtedness discharged on or after January 1, 2007. Free 2009 tax software Claiming the Special Depreciation Allowance For 2013, your residential rental property may qualify for a special depreciation allowance. Free 2009 tax software This allowance is figured before you figure your regular depreciation deduction. Free 2009 tax software See Publication 946, chapter 3, for details. Free 2009 tax software Also see the Instructions for Form 4562, Line 14. Free 2009 tax software If you qualify for, but choose not to take, a special depreciation allowance, you must attach a statement to your return. Free 2009 tax software The details of this election are in Publication 946, chapter 3, and the Instructions for Form 4562, Line 14. Free 2009 tax software MACRS Depreciation Most business and investment property placed in service after 1986 is depreciated using MACRS. Free 2009 tax software This section explains how to determine which MACRS depreciation system applies to your property. Free 2009 tax software It also discusses other information you need to know before you can figure depreciation under MACRS. Free 2009 tax software This information includes the property's: Recovery class, Applicable recovery period, Convention, Placed-in-service date, Basis for depreciation, and Depreciation method. Free 2009 tax software Depreciation Systems MACRS consists of two systems that determine how you depreciate your property—the General Depreciation System (GDS) and the Alternative Depreciation System (ADS). Free 2009 tax software You must use GDS unless you are specifically required by law to use ADS or you elect to use ADS. Free 2009 tax software Excluded Property You cannot use MACRS for certain personal property (such as furniture or appliances) placed in service in your rental property in 2013 if it had been previously placed in service before 1987 when MACRS became effective. Free 2009 tax software In most cases, personal property is excluded from MACRS if you (or a person related to you) owned or used it in 1986 or if your tenant is a person (or someone related to the person) who owned or used it in 1986. Free 2009 tax software However, the property is not excluded if your 2013 deduction under MACRS (using a half-year convention) is less than the deduction you would have under ACRS. Free 2009 tax software For more information, see What Method Can You Use To Depreciate Your Property? in Publication 946, chapter 1. Free 2009 tax software Electing ADS If you choose, you can use the ADS method for most property. Free 2009 tax software Under ADS, you use the straight line method of depreciation. Free 2009 tax software The election of ADS for one item in a class of property generally applies to all property in that class that is placed in service during the tax year of the election. Free 2009 tax software However, the election applies on a property-by-property basis for residential rental property and nonresidential real property. Free 2009 tax software If you choose to use ADS for your residential rental property, the election must be made in the first year the property is placed in service. Free 2009 tax software Once you make this election, you can never revoke it. Free 2009 tax software For property placed in service during 2013, you make the election to use ADS by entering the depreciation on Form 4562, Part III, Section C, line 20c. Free 2009 tax software Property Classes Under GDS Each item of property that can be depreciated under MACRS is assigned to a property class, determined by its class life. Free 2009 tax software The property class generally determines the depreciation method, recovery period, and convention. Free 2009 tax software The property classes under GDS are: 3-year property, 5-year property, 7-year property, 10-year property, 15-year property, 20-year property, Nonresidential real property, and Residential rental property. Free 2009 tax software Under MACRS, property that you placed in service during 2013 in your rental activities generally falls into one of the following classes. Free 2009 tax software 5-year property. Free 2009 tax software This class includes computers and peripheral equipment, office machinery (typewriters, calculators, copiers, etc. Free 2009 tax software ), automobiles, and light trucks. Free 2009 tax software This class also includes appliances, carpeting, furniture, etc. Free 2009 tax software , used in a residential rental real estate activity. Free 2009 tax software Depreciation on automobiles, other property used for transportation, computers and related peripheral equipment, and property of a type generally used for entertainment, recreation, or amusement is limited. Free 2009 tax software See chapter 5 of Publication 946. Free 2009 tax software 7-year property. Free 2009 tax software This class includes office furniture and equipment (desks, file cabinets, etc. Free 2009 tax software ). Free 2009 tax software This class also includes any property that does not have a class life and that has not been designated by law as being in any other class. Free 2009 tax software 15-year property. Free 2009 tax software This class includes roads, fences, and shrubbery (if depreciable). Free 2009 tax software Residential rental property. Free 2009 tax software This class includes any real property that is a rental building or structure (including a mobile home) for which 80% or more of the gross rental income for the tax year is from dwelling units. Free 2009 tax software It does not include a unit in a hotel, motel, inn, or other establishment where more than half of the units are used on a transient basis. Free 2009 tax software If you live in any part of the building or structure, the gross rental income includes the fair rental value of the part you live in. Free 2009 tax software The other property classes do not generally apply to property used in rental activities. Free 2009 tax software These classes are not discussed in this publication. Free 2009 tax software See Publication 946 for more information. Free 2009 tax software Recovery Periods Under GDS The recovery period of property is the number of years over which you recover its cost or other basis. Free 2009 tax software The recovery periods are generally longer under ADS than GDS. Free 2009 tax software The recovery period of property depends on its property class. Free 2009 tax software Under GDS, the recovery period of an asset is generally the same as its property class. Free 2009 tax software Class lives and recovery periods for most assets are listed in Appendix B of Publication 946. Free 2009 tax software See Table 2-1 for recovery periods of property commonly used in residential rental activities. Free 2009 tax software Qualified Indian reservation property. Free 2009 tax software   Shorter recovery periods are provided under MACRS for qualified Indian reservation property placed in service on Indian reservations. Free 2009 tax software For more information, see chapter 4 of Publication 946. Free 2009 tax software Additions or improvements to property. Free 2009 tax software   Treat additions or improvements you make to your depreciable rental property as separate property items for depreciation purposes. Free 2009 tax software   The property class and recovery period of the addition or improvement is the one that would apply to the original property if you had placed it in service at the same time as the addition or improvement. Free 2009 tax software   The recovery period for an addition or improvement to property begins on the later of: The date the addition or improvement is placed in service, or The date the property to which the addition or improvement was made is placed in service. Free 2009 tax software Example. Free 2009 tax software You own a residential rental house that you have been renting since 1986 and depreciating under ACRS. Free 2009 tax software You built an addition onto the house and placed it in service in 2013. Free 2009 tax software You must use MACRS for the addition. Free 2009 tax software Under GDS, the addition is depreciated as residential rental property over 27. Free 2009 tax software 5 years. Free 2009 tax software Table 2-1. Free 2009 tax software MACRS Recovery Periods for Property Used in Rental Activities   MACRS Recovery Period   Type of Property General Depreciation System Alternative Depreciation System   Computers and their peripheral equipment 5 years 5 years   Office machinery, such as: Typewriters Calculators Copiers 5 years 6 years   Automobiles 5 years 5 years   Light trucks 5 years 5 years   Appliances, such as: Stoves Refrigerators 5 years 9 years   Carpets 5 years 9 years   Furniture used in rental property 5 years 9 years   Office furniture and equipment, such as: Desks Files 7 years 10 years   Any property that does not have a class life and that has not been designated by law as being in any other class 7 years 12 years   Roads 15 years 20 years   Shrubbery 15 years 20 years   Fences 15 years 20 years   Residential rental property (buildings or structures) and structural components such as furnaces, waterpipes, venting, etc. Free 2009 tax software 27. Free 2009 tax software 5 years 40 years   Additions and improvements, such as a new roof The same recovery period as that of the property to which the addition or improvement is made, determined as if the property were placed in service at the same time as the addition or improvement. Free 2009 tax software   Conventions A convention is a method established under MACRS to set the beginning and end of the recovery period. Free 2009 tax software The convention you use determines the number of months for which you can claim depreciation in the year you place property in service and in the year you dispose of the property. Free 2009 tax software Mid-month convention. Free 2009 tax software    A mid-month convention is used for all residential rental property and nonresidential real property. Free 2009 tax software Under this convention, you treat all property placed in service, or disposed of, during any month as placed in service, or disposed of, at the midpoint of that month. Free 2009 tax software Mid-quarter convention. Free 2009 tax software   A mid-quarter convention must be used if the mid-month convention does not apply and the total depreciable basis of MACRS property placed in service in the last 3 months of a tax year (excluding nonresidential real property, residential rental property, and property placed in service and disposed of in the same year) is more than 40% of the total basis of all such property you place in service during the year. Free 2009 tax software   Under this convention, you treat all property placed in service, or disposed of, during any quarter of a tax year as placed in service, or disposed of, at the midpoint of the quarter. Free 2009 tax software Example. Free 2009 tax software During the tax year, Tom Martin purchased the following items to use in his rental property. Free 2009 tax software He elects not to claim the special depreciation allowance discussed earlier. Free 2009 tax software A dishwasher for $400 that he placed in service in January. Free 2009 tax software Used furniture for $100 that he placed in service in September. Free 2009 tax software A refrigerator for $800 that he placed in service in October. Free 2009 tax software Tom uses the calendar year as his tax year. Free 2009 tax software The total basis of all property placed in service that year is $1,300. Free 2009 tax software The $800 basis of the refrigerator placed in service during the last 3 months of his tax year exceeds $520 (40% × $1,300). Free 2009 tax software Tom must use the mid-quarter convention instead of the half-year convention for all three items. Free 2009 tax software Half-year convention. Free 2009 tax software    The half-year convention is used if neither the mid-quarter convention nor the mid-month convention applies. Free 2009 tax software Under this convention, you treat all property placed in service, or disposed of, during a tax year as placed in service, or disposed of, at the midpoint of that tax year. Free 2009 tax software   If this convention applies, you deduct a half year of depreciation for the first year and the last year that you depreciate the property. Free 2009 tax software You deduct a full year of depreciation for any other year during the recovery period. Free 2009 tax software Figuring Your Depreciation Deduction You can figure your MACRS depreciation deduction in one of two ways. Free 2009 tax software The deduction is substantially the same both ways. Free 2009 tax software You can either: Actually compute the deduction using the depreciation method and convention that apply over the recovery period of the property, or Use the percentage from the MACRS percentage tables. Free 2009 tax software In this publication we will use the percentage tables. Free 2009 tax software For instructions on how to compute the deduction, see chapter 4 of Publication 946. Free 2009 tax software Residential rental property. Free 2009 tax software   You must use the straight line method and a mid-month convention for residential rental property. Free 2009 tax software In the first year that you claim depreciation for residential rental property, you can claim depreciation only for the number of months the property is in use, and you must use the mid-month convention (explained under Conventions , earlier). Free 2009 tax software 5-, 7-, or 15-year property. Free 2009 tax software   For property in the 5- or 7-year class, use the 200% declining balance method and a half-year convention. Free 2009 tax software However, in limited cases you must use the mid-quarter convention, if it applies. Free 2009 tax software For property in the 15-year class, use the 150% declining balance method and a half-year convention. Free 2009 tax software   You can also choose to use the 150% declining balance method for property in the 5- or 7-year class. Free 2009 tax software The choice to use the 150% method for one item in a class of property applies to all property in that class that is placed in service during the tax year of the election. Free 2009 tax software You make this election on Form 4562. Free 2009 tax software In Part III, column (f), enter “150 DB. Free 2009 tax software ” Once you make this election, you cannot change to another method. Free 2009 tax software   If you use either the 200% or 150% declining balance method, you figure your deduction using the straight line method in the first tax year that the straight line method gives you an equal or larger deduction. Free 2009 tax software   You can also choose to use the straight line method with a half-year or mid-quarter convention for 5-, 7-, or 15-year property. Free 2009 tax software The choice to use the straight line method for one item in a class of property applies to all property in that class that is placed in service during the tax year of the election. Free 2009 tax software You elect the straight line method on Form 4562. Free 2009 tax software In Part III, column (f), enter “S/L. Free 2009 tax software ” Once you make this election, you cannot change to another method. Free 2009 tax software MACRS Percentage Tables You can use the percentages in Table 2-2, earlier, to compute annual depreciation under MACRS. Free 2009 tax software The tables show the percentages for the first few years or until the change to the straight line method is made. Free 2009 tax software See Appendix A of Publication 946 for complete tables. Free 2009 tax software The percentages in Tables 2-2a, 2-2b, and 2-2c make the change from declining balance to straight line in the year that straight line will give a larger deduction. Free 2009 tax software If you elect to use the straight line method for 5-, 7-, or 15-year property, or the 150% declining balance method for 5- or 7-year property, use the tables in Appendix A of Publication 946. Free 2009 tax software How to use the percentage tables. Free 2009 tax software   You must apply the table rates to your property's unadjusted basis (defined below) each year of the recovery period. Free 2009 tax software   Once you begin using a percentage table to figure depreciation, you must continue to use it for the entire recovery period unless there is an adjustment to the basis of your property for a reason other than: Depreciation allowed or allowable, or An addition or improvement that is depreciated as a separate item of property. Free 2009 tax software   If there is an adjustment for any reason other than (1) or (2), for example, because of a deductible casualty loss, you can no longer use the table. Free 2009 tax software For the year of the adjustment and for the remaining recovery period, figure depreciation using the property's adjusted basis at the end of the year and the appropriate depreciation method, as explained earlier under Figuring Your Depreciation Deduction . Free 2009 tax software See Figuring the Deduction Without Using the Tables in Publication 946, chapter 4. Free 2009 tax software Unadjusted basis. Free 2009 tax software   This is the same basis you would use to figure gain on a sale (see Basis of Depreciable Property , earlier), but without reducing your original basis by any MACRS depreciation taken in earlier years. Free 2009 tax software   However, you do reduce your original basis by other amounts claimed on the property, including: Any amortization, Any section 179 deduction, and Any special depreciation allowance. Free 2009 tax software For more information, see chapter 4 of Publication 946. Free 2009 tax software Please click here for the text description of the image. Free 2009 tax software Table 2-2 Tables 2-2a, 2-2b, and 2-2c. Free 2009 tax software   The percentages in these tables take into account the half-year and mid-quarter conventions. Free 2009 tax software Use Table 2-2a for 5-year property, Table 2-2b for 7-year property, and Table 2-2c for 15-year property. Free 2009 tax software Use the percentage in the second column (half-year convention) unless you are required to use the mid-quarter convention (explained earlier). Free 2009 tax software If you must use the mid-quarter convention, use the column that corresponds to the calendar year quarter in which you placed the property in service. Free 2009 tax software Example 1. Free 2009 tax software You purchased a stove and refrigerator and placed them in service in June. Free 2009 tax software Your basis in the stove is $600 and your basis in the refrigerator is $1,000. Free 2009 tax software Both are 5-year property. Free 2009 tax software Using the half-year convention column in Table 2-2a, the depreciation percentage for Year 1 is 20%. Free 2009 tax software For that year your depreciation deduction is $120 ($600 × . Free 2009 tax software 20) for the stove and $200 ($1,000 × . Free 2009 tax software 20) for the refrigerator. Free 2009 tax software For Year 2, the depreciation percentage is 32%. Free 2009 tax software That year's depreciation deduction will be $192 ($600 × . Free 2009 tax software 32) for the stove and $320 ($1,000 × . Free 2009 tax software 32) for the refrigerator. Free 2009 tax software Example 2. Free 2009 tax software Assume the same facts as in Example 1, except you buy the refrigerator in October instead of June. Free 2009 tax software Since the refrigerator was placed in service in the last 3 months of the tax year, and its basis ($1,000) is more than 40% of the total basis of all property placed in service during the year ($1,600 × . Free 2009 tax software 40 = $640), you are required to use the mid-quarter convention to figure depreciation on both the stove and refrigerator. Free 2009 tax software Because you placed the refrigerator in service in October, you use the fourth quarter column of Table 2-2a and find the depreciation percentage for Year 1 is 5%. Free 2009 tax software Your depreciation deduction for the refrigerator is $50 ($1,000 x . Free 2009 tax software 05). Free 2009 tax software Because you placed the stove in service in June, you use the second quarter column of Table 2-2a and find the depreciation percentage for Year 1 is 25%. Free 2009 tax software For that year, your depreciation deduction for the stove is $150 ($600 x . Free 2009 tax software 25). Free 2009 tax software Table 2-2d. Free 2009 tax software    Use this table when you are using the GDS 27. Free 2009 tax software 5 year option for residential rental property. Free 2009 tax software Find the row for the month that you placed the property in service. Free 2009 tax software Use the percentages listed for that month to figure your depreciation deduction. Free 2009 tax software The mid-month convention is taken into account in the percentages shown in the table. Free 2009 tax software Continue to use the same row (month) under the column for the appropriate year. Free 2009 tax software Example. Free 2009 tax software You purchased a single family rental house for $185,000 and placed it in service on February 8. Free 2009 tax software The sales contract showed that the building cost $160,000 and the land cost $25,000. Free 2009 tax software Your basis for depreciation is its original cost, $160,000. Free 2009 tax software This is the first year of service for your residential rental property and you decide to use GDS which has a recovery period of 27. Free 2009 tax software 5 years. Free 2009 tax software Using Table 2-2d, you find that the percentage for property placed in service in February of Year 1 is 3. Free 2009 tax software 182%. Free 2009 tax software That year's depreciation deduction is $5,091 ($160,000 x . Free 2009 tax software 03182). Free 2009 tax software Figuring MACRS Depreciation Under ADS Table 2–1, earlier, shows the ADS recovery periods for property used in rental activities. Free 2009 tax software See Appendix B in Publication 946 for other property. Free 2009 tax software If your property is not listed in Appendix B, it is considered to have no class life. Free 2009 tax software Under ADS, personal property with no class life is depreciated using a recovery period of 12 years. Free 2009 tax software Use the mid-month convention for residential rental property and nonresidential real property. Free 2009 tax software For all other property, use the half-year or mid-quarter convention, as appropriate. Free 2009 tax software See Publication 946 for ADS depreciation tables. Free 2009 tax software Claiming the Correct Amount of Depreciation You should claim the correct amount of depreciation each tax year. Free 2009 tax software If you did not claim all the depreciation you were entitled to deduct, you must still reduce your basis in the property by the full amount of depreciation that you could have deducted. Free 2009 tax software For more information, see Depreciation under Decreases to Basis in Publication 551. Free 2009 tax software If you deducted an incorrect amount of depreciation for property in any year, you may be able to make a correction by filing Form 1040X, Amended U. Free 2009 tax software S. Free 2009 tax software Individual Income Tax Return. Free 2009 tax software If you are not allowed to make the correction on an amended return, you can change your accounting method to claim the correct amount of depreciation. Free 2009 tax software Filing an amended return. Free 2009 tax software   You can file an amended return to correct the amount of depreciation claimed for any property in any of the following situations. Free 2009 tax software You claimed the incorrect amount because of a mathematical error made in any year. Free 2009 tax software You claimed the incorrect amount because of a posting error made in any year. Free 2009 tax software You have not adopted a method of accounting for property placed in service by you in tax years ending after December 29, 2003. Free 2009 tax software You claimed the incorrect amount on property placed in service by you in tax years ending before December 30, 2003. Free 2009 tax software   Generally, you adopt a method of accounting for depreciation by using a permissible method of determining depreciation when you file your first tax return for the property used in your rental activity. Free 2009 tax software This also occurs when you use the same impermissible method of determining depreciation (for example, using the wrong MACRS recovery period) in two or more consecutively filed tax returns. Free 2009 tax software   If an amended return is allowed, you must file it by the later of the following dates. Free 2009 tax software 3 years from the date you filed your original return for the year in which you did not deduct the correct amount. Free 2009 tax software A return filed before an unextended due date is considered filed on that due date. Free 2009 tax software 2 years from the time you paid your tax for that year. Free 2009 tax software Changing your accounting method. Free 2009 tax software   To change your accounting method, you generally must file Form 3115, Application for Change in Accounting Method, to get the consent of the IRS. Free 2009 tax software In some instances, that consent is automatic. Free 2009 tax software For more information, see Changing Your Accounting Method in Publication 946,  chapter 1. Free 2009 tax software Prev  Up  Next   Home   More Online Publications
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The Free 2009 Tax Software

Free 2009 tax software Publication 939 - Main Content Table of Contents General Information Taxation of Periodic PaymentsInvestment in the Contract Expected Return Computation Under the General Rule How To Use Actuarial TablesUnisex Annuity Tables Special Elections Worksheets for Determining Taxable Annuity Actuarial Tables Requesting a Ruling on Taxation of Annuity How To Get Tax HelpLow Income Taxpayer Clinics General Information Some of the terms used in this publication are defined in the following paragraphs. Free 2009 tax software A pension is generally a series of payments made to you after you retire from work. Free 2009 tax software Pension payments are made regularly and are for past services with an employer. Free 2009 tax software An annuity is a series of payments under a contract. Free 2009 tax software You can buy the contract alone or you can buy it with the help of your employer. Free 2009 tax software Annuity payments are made regularly for more than one full year. Free 2009 tax software Note. Free 2009 tax software Distributions from pensions and annuities follow the same rules as outlined in this publication unless otherwise noted. Free 2009 tax software Types of pensions and annuities. Free 2009 tax software   Particular types of pensions and annuities include: Fixed period annuities. Free 2009 tax software You receive definite amounts at regular intervals for a definite length of time. Free 2009 tax software Annuities for a single life. Free 2009 tax software You receive definite amounts at regular intervals for life. Free 2009 tax software The payments end at death. Free 2009 tax software Joint and survivor annuities. Free 2009 tax software The first annuitant receives a definite amount at regular intervals for life. Free 2009 tax software After he or she dies, a second annuitant receives a definite amount at regular intervals for life. Free 2009 tax software The amount paid to the second annuitant may or may not differ from the amount paid to the first annuitant. Free 2009 tax software Variable annuities. Free 2009 tax software You receive payments that may vary in amount for a definite length of time or for life. Free 2009 tax software The amounts you receive may depend upon such variables as profits earned by the pension or annuity funds or cost-of-living indexes. Free 2009 tax software Disability pensions. Free 2009 tax software You are under minimum retirement age and receive payments because you retired on disability. Free 2009 tax software If, at the time of your retirement, you were permanently and totally disabled, you may be eligible for the credit for the elderly or the disabled discussed in Publication 524. Free 2009 tax software If your annuity starting date is after November 18, 1996, the General Rule cannot be used for the following qualified plans. Free 2009 tax software A qualified employee plan is an employer's stock bonus, pension, or profit-sharing plan that is for the exclusive benefit of employees or their beneficiaries. Free 2009 tax software This plan must meet Internal Revenue Code requirements. Free 2009 tax software It qualifies for special tax benefits, including tax deferral for employer contributions and rollover distributions. Free 2009 tax software However, you must use the General Rule if you were 75 or over and the annuity payments are guaranteed for more than 5 years. Free 2009 tax software A qualified employee annuity is a retirement annuity purchased by an employer for an employee under a plan that meets Internal Revenue Code requirements. Free 2009 tax software A tax-sheltered annuity is a special annuity plan or contract purchased for an employee of a public school or tax-exempt organization. Free 2009 tax software   The General Rule is used to figure the tax treatment of various types of pensions and annuities, including nonqualified employee plans. Free 2009 tax software A nonqualified employee plan is an employer's plan that does not meet Internal Revenue Code requirements. Free 2009 tax software It does not qualify for most of the tax benefits of a qualified plan. Free 2009 tax software Annuity worksheets. Free 2009 tax software   The worksheets found near the end of the text of this publication may be useful to you in figuring the taxable part of your annuity. Free 2009 tax software Request for a ruling. Free 2009 tax software   If you are unable to determine the income tax treatment of your pension or annuity, you may ask the Internal Revenue Service to figure the taxable part of your annuity payments. Free 2009 tax software This is treated as a request for a ruling. Free 2009 tax software See Requesting a Ruling on Taxation of Annuity near the end of this publication. Free 2009 tax software Withholding tax and estimated tax. Free 2009 tax software   Your pension or annuity is subject to federal income tax withholding unless you choose not to have tax withheld. Free 2009 tax software If you choose not to have tax withheld from your pension or annuity, or if you do not have enough income tax withheld, you may have to make estimated tax payments. Free 2009 tax software Taxation of Periodic Payments This section explains how the periodic payments you receive under a pension or annuity plan are taxed under the General Rule. Free 2009 tax software Periodic payments are amounts paid at regular intervals (such as weekly, monthly, or yearly) for a period of time greater than one year (such as for 15 years or for life). Free 2009 tax software These payments are also known as amounts received as an annuity. Free 2009 tax software If you receive an amount from your plan that is a nonperiodic payment (amount not received as an annuity), see Taxation of Nonperiodic Payments in Publication 575. Free 2009 tax software In general, you can recover your net cost of the pension or annuity tax free over the period you are to receive the payments. Free 2009 tax software The amount of each payment that is more than the part that represents your net cost is taxable. Free 2009 tax software Under the General Rule, the part of each annuity payment that represents your net cost is in the same proportion that your investment in the contract is to your expected return. Free 2009 tax software These terms are explained in the following discussions. Free 2009 tax software Investment in the Contract In figuring how much of your pension or annuity is taxable under the General Rule, you must figure your investment in the contract. Free 2009 tax software First, find your net cost of the contract as of the annuity starting date (defined later). Free 2009 tax software To find this amount, you must first figure the total premiums, contributions, or other amounts paid. Free 2009 tax software This includes the amounts your employer contributed if you were required to include these amounts in income. Free 2009 tax software It also includes amounts you actually contributed (except amounts for health and accident benefits and deductible voluntary employee contributions). Free 2009 tax software From this total cost you subtract: Any refunded premiums, rebates, dividends, or unrepaid loans (any of which were not included in your income) that you received by the later of the annuity starting date or the date on which you received your first payment. Free 2009 tax software Any additional premiums paid for double indemnity or disability benefits. Free 2009 tax software Any other tax-free amounts you received under the contract or plan before the later of the dates in (1). Free 2009 tax software The annuity starting date   is the later of the first day of the first period for which you receive payment under the contract or the date on which the obligation under the contract becomes fixed. Free 2009 tax software Example. Free 2009 tax software On January 1 you completed all your payments required under an annuity contract providing for monthly payments starting on August 1, for the period beginning July 1. Free 2009 tax software The annuity starting date is July 1. Free 2009 tax software This is the date you use in figuring your investment in the contract and your expected return (discussed later). Free 2009 tax software Adjustments If any of the following items apply, adjust (add or subtract) your total cost to find your net cost. Free 2009 tax software Foreign employment. Free 2009 tax software   If you worked abroad, your cost may include contributions by your employer to the retirement plan, but only if those contributions would be excludible from your gross income had they been paid directly to you as compensation. Free 2009 tax software The contributions that apply are: Contributions before 1963 by your employer, Contributions after 1962 by your employer if the contributions would be excludible from your gross income (without regard to the foreign earned income exclusion) had they been paid directly to you, or Contributions after 1996 by your employer on your behalf if you performed the services of a foreign missionary (a duly ordained, commissioned, or licensed minister of a church or a lay person) if the contributions would be excludible from your gross income had they been paid directly to you. Free 2009 tax software Foreign employment contributions while a nonresident alien. Free 2009 tax software   In determining your cost, special rules apply if you are a U. Free 2009 tax software S. Free 2009 tax software citizen or resident alien who received distributions from a plan to which contributions were made while you were a nonresident alien. Free 2009 tax software Your contributions and your employer's contributions are not included in your cost if the contributions: Were made based on compensation which was for services performed outside the United States which you were a nonresident alien, and Were not subject to income tax under the laws of the United States or any foreign country, but only if the contribution would have been subject to income tax if they had been paid as cash compensation when the services were performed. Free 2009 tax software Death benefit exclusion. Free 2009 tax software   If you are the beneficiary of a deceased employee (or former employee), who died before August 21, 1996, you may qualify for a death benefit exclusion of up to $5,000. Free 2009 tax software The beneficiary of a deceased employee who died after August 20, 1996, will not qualify for the death benefit exclusion. Free 2009 tax software How to adjust your total cost. Free 2009 tax software   If you are eligible, treat the amount of any allowable death benefit exclusion as additional cost paid by the employee. Free 2009 tax software Add it to the cost or unrecovered cost of the annuity at the annuity starting date. Free 2009 tax software See Example 3 under Computation Under General Rule for an illustration of the adjustment to the cost of the contract. Free 2009 tax software Net cost. Free 2009 tax software   Your total cost plus certain adjustments and minus other amounts already recovered before the annuity starting date is your net cost. Free 2009 tax software This is the unrecovered investment in the contract as of the annuity starting date. Free 2009 tax software If your annuity starting date is after 1986, this is the maximum amount that you may recover tax free under the contract. Free 2009 tax software Refund feature. Free 2009 tax software   Adjustment for the value of the refund feature is only applicable when you report your pension or annuity under the General Rule. Free 2009 tax software Your annuity contract has a refund feature if: The expected return ( discussed later) of an annuity depends entirely or partly on the life of one or more individuals, The contract provides that payments will be made to a beneficiary or the estate of an annuitant on or after the death of the annuitant if a stated amount or a stated number of payments has not been paid to the annuitant or annuitants before death, and The payments are a refund of the amount you paid for the annuity contract. Free 2009 tax software   If your annuity has a refund feature, you must reduce your net cost of the contract by the value of the refund feature (figured using Table III or VII at the end of this publication, also see How To Use Actuarial Tables , later) to find the investment in the contract. Free 2009 tax software Zero value of refund feature. Free 2009 tax software   For a joint and survivor annuity, the value of the refund feature is zero if: Both annuitants are age 74 or younger, The payments are guaranteed for less than 2½ years, and The survivor's annuity is at least 50% of the first annuitant's annuity. Free 2009 tax software   For a single-life annuity without survivor benefit, the value of the refund feature is zero if: The payments are guaranteed for less than 2½ years, and The annuitant is: Age 57 or younger (if using the new (unisex) annuity tables), Age 42 or younger (if male and using the old annuity tables), or Age 47 or younger (if female and using the old annuity tables). Free 2009 tax software   If you do not meet these requirements, you will have to figure the value of the refund feature, as explained in the following discussion. Free 2009 tax software Examples. Free 2009 tax software The first example shows how to figure the value of the refund feature when there is only one beneficiary. Free 2009 tax software Example 2 shows how to figure the value of the refund feature when the contract provides, in addition to a whole life annuity, one or more temporary life annuities for the lives of children. Free 2009 tax software In both examples, the taxpayer elects to use Tables V through VIII. Free 2009 tax software If you need the value of the refund feature for a joint and survivor annuity, write to the Internal Revenue Service as explained under Requesting a Ruling on Taxation of Annuity near the end of this publication. Free 2009 tax software Example 1. Free 2009 tax software At age 65, Barbara bought for $21,053 an annuity with a refund feature. Free 2009 tax software She will get $100 a month for life. Free 2009 tax software Barbara's contract provides that if she does not live long enough to recover the full $21,053, similar payments will be made to her surviving beneficiary until a total of $21,053 has been paid under the contract. Free 2009 tax software In this case, the contract cost and the total guaranteed return are the same ($21,053). Free 2009 tax software Barbara's investment in the contract is figured as follows: Net cost $21,053 Amount to be received annually $1,200   Number of years for which payment is guaranteed ($21,053 divided by $1,200) 17. Free 2009 tax software 54   Rounded to nearest whole number of years 18   Percentage from Actuarial Table VII for age 65 with 18 years of guaranteed payments 15%   Value of the refund feature (rounded to the nearest dollar)—15% of $21,053 3,158 Investment in the contract, adjusted for value of refund feature $17,895       If the total guaranteed return were less than the $21,053 net cost of the contract, Barbara would apply the appropriate percentage from the tables to the lesser amount. Free 2009 tax software For example, if the contract guaranteed the $100 monthly payments for 17 years to Barbara's estate or beneficiary if she were to die before receiving all the payments for that period, the total guaranteed return would be $20,400 ($100 × 12 × 17 years). Free 2009 tax software In this case, the value of the refund feature would be $2,856 (14% of $20,400) and Barbara's investment in the contract would be $18,197 ($21,053 minus $2,856) instead of $17,895. Free 2009 tax software Example 2. Free 2009 tax software John died while still employed. Free 2009 tax software His widow, Eleanor, age 48, receives $171 a month for the rest of her life. Free 2009 tax software John's son, Elmer, age 9, receives $50 a month until he reaches age 18. Free 2009 tax software John's contributions to the retirement fund totaled $7,559. Free 2009 tax software 45, with interest on those contributions of $1,602. Free 2009 tax software 53. Free 2009 tax software The guarantee or total refund feature of the contract is $9,161. Free 2009 tax software 98 ($7,559. Free 2009 tax software 45 plus $1,602. Free 2009 tax software 53). Free 2009 tax software The adjustment in the investment in the contract is figured as follows: A) Expected return:*       1) Widow's expected return:         Annual annuity ($171 × 12) $2,052       Multiplied by factor from Table V         (nearest age 48) 34. Free 2009 tax software 9 $71,614. Free 2009 tax software 80   2) Child's expected return:         Annual annuity ($50 × 12) $600       Multiplied by factor from         Table VIII (nearest age 9         for term of 9 years) 9. Free 2009 tax software 0 5,400. Free 2009 tax software 00   3) Total expected return   $77,014. Free 2009 tax software 80 B) Adjustment for refund feature:       1) Contributions (net cost) $7,559. Free 2009 tax software 45   2) Guaranteed amount (contributions of $7,559. Free 2009 tax software 45 plus interest of $1,602. Free 2009 tax software 53) $9,161. Free 2009 tax software 98   3) Minus: Expected return under child's (temporary life) annuity (A(2)) 5,400. Free 2009 tax software 00   4) Net guaranteed amount $3,761. Free 2009 tax software 98   5) Multiple from Table VII (nearest age 48 for 2 years duration (recovery of $3,761. Free 2009 tax software 98 at $171 a month to nearest whole year)) 0%   6) Adjustment required for value of refund feature rounded to the nearest whole dollar  (0% × $3,761. Free 2009 tax software 98, the smaller of B(3) or B(6)) 0 *Expected return is the total amount you and other eligible annuitants can expect to receive under the contract. Free 2009 tax software See the discussion of expected return, later in this publication. Free 2009 tax software Free IRS help. Free 2009 tax software   If you need to request assistance to figure the value of the refund feature, see Requesting a Ruling on Taxation of Annuity near the end of this publication. Free 2009 tax software Expected Return Your expected return is the total amount you and other eligible annuitants can expect to receive under the contract. Free 2009 tax software The following discussions explain how to figure the expected return with each type of annuity. Free 2009 tax software A person's age, for purposes of figuring the expected return, is the age at the birthday nearest to the annuity starting date. Free 2009 tax software Fixed period annuity. Free 2009 tax software   If you will get annuity payments for a fixed number of years, without regard to your life expectancy, you must figure your expected return based on that fixed number of years. Free 2009 tax software It is the total amount you will get beginning at the annuity starting date. Free 2009 tax software You will receive specific periodic payments for a definite period of time, such as a fixed number of months (but not less than 13). Free 2009 tax software To figure your expected return, multiply the fixed number of months for which payments are to be made by the amount of the payment specified for each period. Free 2009 tax software Single life annuity. Free 2009 tax software   If you are to get annuity payments for the rest of your life, find your expected return as follows. Free 2009 tax software You must multiply the amount of the annual payment by a multiple based on your life expectancy as of the annuity starting date. Free 2009 tax software These multiples are set out in actuarial Tables I and V near the end of this publication (see How To Use Actuarial Tables , later). Free 2009 tax software   You may need to adjust these multiples if the payments are made quarterly, semiannually, or annually. Free 2009 tax software See Adjustments to Tables I, II, V, VI, and VIA following Table I. Free 2009 tax software Example. Free 2009 tax software Henry bought an annuity contract that will give him an annuity of $500 a month for his life. Free 2009 tax software If at the annuity starting date Henry's nearest birthday is 66, the expected return is figured as follows: Annual payment ($500 × 12 months) $6,000 Multiple shown in Table V, age 66 × 19. Free 2009 tax software 2 Expected return $115,200 If the payments were to be made to Henry quarterly and the first payment was made one full month after the annuity starting date, Henry would adjust the 19. Free 2009 tax software 2 multiple by +. Free 2009 tax software 1. Free 2009 tax software His expected return would then be $115,800 ($6,000 × 19. Free 2009 tax software 3). Free 2009 tax software Annuity for shorter of life or specified period. Free 2009 tax software   With this type of annuity, you are to get annuity payments either for the rest of your life or until the end of a specified period, whichever period is shorter. Free 2009 tax software To figure your expected return, multiply the amount of your annual payment by a multiple in Table IV or VIII for temporary life annuities. Free 2009 tax software Find the proper multiple based on your sex (if using Table IV), your age at the annuity starting date, and the nearest whole number of years in the specified period. Free 2009 tax software Example. Free 2009 tax software Harriet purchased an annuity this year that will pay her $200 each month for five years or until she dies, whichever period is shorter. Free 2009 tax software She was age 65 at her birthday nearest the annuity starting date. Free 2009 tax software She figures the expected return as follows: Annual payment ($200 × 12 months) $2,400 Multiple shown in Table VIII, age 65, 5-year term × 4. Free 2009 tax software 9 Expected return $11,760 She uses Table VIII (not Table IV) because all her contributions were made after June 30, 1986. Free 2009 tax software See Special Elections, later. Free 2009 tax software Joint and survivor annuities. Free 2009 tax software   If you have an annuity that pays you a periodic income for life and after your death provides an identical lifetime periodic income to your spouse (or some other person), you figure the expected return based on your combined life expectancies. Free 2009 tax software To figure the expected return, multiply the annual payment by a multiple in Table II or VI based on your joint life expectancies. Free 2009 tax software If your payments are made quarterly, semiannually, or annually, you may need to adjust these multiples. Free 2009 tax software See Adjustments to Tables I, II, V, VI, and VIA following Table I near the end of this publication. Free 2009 tax software Example. Free 2009 tax software John bought a joint and survivor annuity providing payments of $500 a month for his life, and, after his death, $500 a month for the remainder of his wife's life. Free 2009 tax software At John's annuity starting date, his age at his nearest birthday is 70 and his wife's at her nearest birthday is 67. Free 2009 tax software The expected return is figured as follows: Annual payment ($500 × 12 months) $6,000 Multiple shown in Table VI, ages 67 and 70 × 22. Free 2009 tax software 0 Expected return $132,000 Different payments to survivor. Free 2009 tax software   If your contract provides that payments to a survivor annuitant will be different from the amount you receive, you must use a computation which accounts for both the joint lives of the annuitants and the life of the survivor. Free 2009 tax software Example 1. Free 2009 tax software Gerald bought a contract providing for payments to him of $500 a month for life and, after his death, payments to his wife, Mary, of $350 a month for life. Free 2009 tax software If, at the annuity starting date, Gerald's nearest birthday is 70 and Mary's is 67, the expected return under the contract is figured as follows: Combined multiple for Gerald and Mary, ages 70 and 67 (from Table VI)   22. Free 2009 tax software 0 Multiple for Gerald, age 70 (from Table V)   16. Free 2009 tax software 0 Difference: Multiple applicable to Mary   6. Free 2009 tax software 0 Gerald's annual payment ($500 × 12) $6,000   Gerald's multiple 16. Free 2009 tax software 0   Gerald's expected return   $96,000 Mary's annual payment ($350 × 12) $4,200   Mary's multiple 6. Free 2009 tax software 0   Mary's expected return   25,200 Total expected return under the contract   $121,200 Example 2. Free 2009 tax software Your husband died while still employed. Free 2009 tax software Under the terms of his employer's retirement plan, you are entitled to get an immediate annuity of $400 a month for the rest of your life or until you remarry. Free 2009 tax software Your daughters, Marie and Jean, are each entitled to immediate temporary life annuities of $150 a month until they reach age 18. Free 2009 tax software You were 50 years old at the annuity starting date. Free 2009 tax software Marie was 16 and Jean was 14. Free 2009 tax software Using the multiples shown in Tables V and VIII at the end of this publication, the total expected return on the annuity starting date is $169,680, figured as follows: Widow, age 50 (multiple from Table V—33. Free 2009 tax software 1 × $4,800 annual payment) $158,880 Marie, age 16 for 2 years duration (multiple from Table VIII—2. Free 2009 tax software 0 × $1,800 annual payment) 3,600 Jean, age 14 for 4 years duration (multiple from Table VIII—4. Free 2009 tax software 0 × $1,800 annual payment) 7,200 Total expected return $169,680 No computation of expected return is made based on your husband's age at the date of death because he died before the annuity starting date. Free 2009 tax software Computation Under the General Rule Note. Free 2009 tax software Variable annuities use a different computation for determining the exclusion amounts. Free 2009 tax software See Variable annuities later. Free 2009 tax software Under the General Rule, you figure the taxable part of your annuity by using the following steps: Step 1. Free 2009 tax software   Figure the amount of your investment in the contract, including any adjustments for the refund feature and the death benefit exclusion, if applicable. Free 2009 tax software See Death benefit exclusion , earlier. Free 2009 tax software Step 2. Free 2009 tax software   Figure your expected return. Free 2009 tax software Step 3. Free 2009 tax software   Divide Step 1 by Step 2 and round to three decimal places. Free 2009 tax software This will give you the exclusion percentage. Free 2009 tax software Step 4. Free 2009 tax software   Multiply the exclusion percentage by the first regular periodic payment. Free 2009 tax software The result is the tax-free part of each pension or annuity payment. Free 2009 tax software   The tax-free part remains the same even if the total payment increases due to variation in the annuity amount such as cost of living increases, or you outlive the life expectancy factor used. Free 2009 tax software However, if your annuity starting date is after 1986, the total amount of annuity income that is tax free over the years cannot exceed your net cost. Free 2009 tax software   Each annuitant applies the same exclusion percentage to his or her initial payment called for in the contract. Free 2009 tax software Step 5. Free 2009 tax software   Multiply the tax-free part of each payment (step 4) by the number of payments received during the year. Free 2009 tax software This will give you the tax-free part of the total payment for the year. Free 2009 tax software    In the first year of your annuity, your first payment or part of your first payment may be for a fraction of the payment period. Free 2009 tax software This fractional amount is multiplied by your exclusion percentage to get the tax-free part. Free 2009 tax software Step 6. Free 2009 tax software   Subtract the tax-free part from the total payment you received. Free 2009 tax software The rest is the taxable part of your pension or annuity. Free 2009 tax software Example 1. Free 2009 tax software You purchased an annuity with an investment in the contract of $10,800. Free 2009 tax software Under its terms, the annuity will pay you $100 a month for life. Free 2009 tax software The multiple for your age (age 65) is 20. Free 2009 tax software 0 as shown in Table V. Free 2009 tax software Your expected return is $24,000 (20 × 12 × $100). Free 2009 tax software Your cost of $10,800, divided by your expected return of $24,000, equals 45. Free 2009 tax software 0%. Free 2009 tax software This is the percentage you will not have to include in income. Free 2009 tax software Each year, until your net cost is recovered, $540 (45% of $1,200) will be tax free and you will include $660 ($1,200 − $540) in your income. Free 2009 tax software If you had received only six payments of $100 ($600) during the year, your exclusion would have been $270 (45% of $100 × 6 payments). Free 2009 tax software Example 2. Free 2009 tax software Gerald bought a joint and survivor annuity. Free 2009 tax software Gerald's investment in the contract is $62,712 and the expected return is $121,200. Free 2009 tax software The exclusion percentage is 51. Free 2009 tax software 7% ($62,712 ÷ $121,200). Free 2009 tax software Gerald will receive $500 a month ($6,000 a year). Free 2009 tax software Each year, until his net cost is recovered, $3,102 (51. Free 2009 tax software 7% of his total payments received of $6,000) will be tax free and $2,898 ($6,000 − $3,102) will be included in his income. Free 2009 tax software If Gerald dies, his wife will receive $350 a month ($4,200 a year). Free 2009 tax software If Gerald had not recovered all of his net cost before his death, his wife will use the same exclusion percentage (51. Free 2009 tax software 7%). Free 2009 tax software Each year, until the entire net cost is recovered, his wife will receive $2,171. Free 2009 tax software 40 (51. Free 2009 tax software 7% of her payments received of $4,200) tax free. Free 2009 tax software She will include $2,028. Free 2009 tax software 60 ($4,200 − $2,171. Free 2009 tax software 40) in her income tax return. Free 2009 tax software Example 3. Free 2009 tax software Using the same facts as Example 2 under Different payments to survivor, you are to receive an annual annuity of $4,800 until you die or remarry. Free 2009 tax software Your two daughters each receive annual annuities of $1,800 until they reach age 18. Free 2009 tax software Your husband contributed $25,576 to the plan. Free 2009 tax software You are eligible for the $5,000 death benefit exclusion because your husband died before August 21, 1996. Free 2009 tax software Adjusted Investment in the Contract Contributions $25,576 Plus: Death benefit exclusion 5,000 Adjusted investment in the contract $30,576 The total expected return, as previously figured (in Example 2 under Different payments to survivor), is $169,680. Free 2009 tax software The exclusion percentage of 18. Free 2009 tax software 0% ($30,576 ÷ $169,680) applies to the annuity payments you and each of your daughters receive. Free 2009 tax software Each full year $864 (18. Free 2009 tax software 0% × $4,800) will be tax free to you, and you must include $3,936 in your income tax return. Free 2009 tax software Each year, until age 18, $324 (18. Free 2009 tax software 0% × $1,800) of each of your daughters' payments will be tax free and each must include the balance, $1,476, as income on her own income tax return. Free 2009 tax software Part-year payments. Free 2009 tax software   If you receive payments for only part of a year, apply the exclusion percentage to the first regular periodic payment, and multiply the result by the number of payments received during the year. Free 2009 tax software   If you receive amounts during the year that represent 12 payments, one for each month in that year, and an amount that represents payments for months in a prior year, apply the exclusion percentage to the first regular periodic payment, and multiply the result by the number of payments the amounts received represent. Free 2009 tax software For instance, if you received amounts during the year that represent the 12 payments for that year plus an amount that represents three payments for a prior year, multiply that amount by the 15 (12 + 3) payments received that the year. Free 2009 tax software   If you received a fractional payment, follow Step 5, discussed earlier. Free 2009 tax software This gives you the tax-free part of your total payment. Free 2009 tax software Example. Free 2009 tax software On September 28, Mary bought an annuity contract for $22,050 that will give her $125 a month for life, beginning October 30. Free 2009 tax software The applicable multiple from Table V is 23. Free 2009 tax software 3 (age 61). Free 2009 tax software Her expected return is $34,950 ($125 × 12 × 23. Free 2009 tax software 3). Free 2009 tax software Mary's investment in the contract of $22,050, divided by her expected return of $34,950, equals 63. Free 2009 tax software 1%. Free 2009 tax software Each payment received will consist of 63. Free 2009 tax software 1% return of cost and 36. Free 2009 tax software 9% taxable income, until her net cost of the contract is fully recovered. Free 2009 tax software During the first year, Mary received three payments of $125, or $375, of which $236. Free 2009 tax software 63 (63. Free 2009 tax software 1% × $375) is a return of cost. Free 2009 tax software The remaining $138. Free 2009 tax software 37 is included in income. Free 2009 tax software Increase in annuity payments. Free 2009 tax software   The tax-free amount remains the same as the amount figured at the annuity starting date, even if the payment increases. Free 2009 tax software All increases in the installment payments are fully taxable. Free 2009 tax software   However, if your annuity payments are scheduled to increase at a definite date in the future you must figure the expected return for that annuity using the method described in section 1. Free 2009 tax software 72-5(a)(5) of the regulations. Free 2009 tax software Example. Free 2009 tax software Joe's wife died while she was still employed and, as her beneficiary, he began receiving an annuity of $147 per month. Free 2009 tax software In figuring the taxable part, Joe elects to use Tables V through VIII. Free 2009 tax software The cost of the contract was $7,938, consisting of the sum of his wife's net contributions, adjusted for any refund feature. Free 2009 tax software His expected return as of the annuity starting date is $35,280 (age 65, multiple of 20. Free 2009 tax software 0 × $1,764 annual payment). Free 2009 tax software The exclusion percentage is $7,938 ÷ $35,280, or 22. Free 2009 tax software 5%. Free 2009 tax software During the year he received 11 monthly payments of $147, or $1,617. Free 2009 tax software Of this amount, 22. Free 2009 tax software 5% × $147 × 11 ($363. Free 2009 tax software 83) is tax free as a return of cost and the balance of $1,253. Free 2009 tax software 17 is taxable. Free 2009 tax software Later, because of a cost-of-living increase, his annuity payment was increased to $166 per month, or $1,992 a year (12 × $166). Free 2009 tax software The tax-free part is still only 22. Free 2009 tax software 5% of the annuity payments as of the annuity starting date (22. Free 2009 tax software 5% × $147 × 12 = $396. Free 2009 tax software 90 for a full year). Free 2009 tax software The increase of $228 ($1,992 − $1,764 (12 × $147)) is fully taxable. Free 2009 tax software Variable annuities. Free 2009 tax software   For variable annuity payments, figure the amount of each payment that is tax free by dividing your investment in the contract (adjusted for any refund feature) by the total number of periodic payments you expect to get under the contract. Free 2009 tax software   If the annuity is for a definite period, you determine the total number of payments by multiplying the number of payments to be made each year by the number of years you will receive payments. Free 2009 tax software If the annuity is for life, you determine the total number of payments by using a multiple from the appropriate actuarial table. Free 2009 tax software Example. Free 2009 tax software Frank purchased a variable annuity at age 65. Free 2009 tax software The total cost of the contract was $12,000. Free 2009 tax software The annuity starting date is January 1 of the year of purchase. Free 2009 tax software His annuity will be paid, starting July 1, in variable annual installments for his life. Free 2009 tax software The tax-free amount of each payment, until he has recovered his cost of his contract, is: Investment in the contract $12,000 Number of expected annual payments (multiple for age 65 from Table V) 20 Tax-free amount of each payment ($12,000 ÷ 20) $600 If Frank's first payment is $920, he includes only $320 ($920 − $600) in his gross income. Free 2009 tax software   If the tax-free amount for a year is more than the payments you receive in that year, you may choose, when you receive the next payment, to refigure the tax-free part. Free 2009 tax software Divide the amount of the periodic tax-free part that is more than the payment you received by the remaining number of payments you expect. Free 2009 tax software The result is added to the previously figured periodic tax-free part. Free 2009 tax software The sum is the amount of each future payment that will be tax free. Free 2009 tax software Example. Free 2009 tax software Using the facts of the previous example about Frank, assume that after Frank's $920 payment, he received $500 in the following year, and $1,200 in the year after that. Free 2009 tax software Frank does not pay tax on the $500 (second year) payment because $600 of each annual pension payment is tax free. Free 2009 tax software Since the $500 payment is less than the $600 annual tax-free amount, he may choose to refigure his tax-free part when he receives his $1,200 (third year) payment, as follows: Amount tax free in second year $600. Free 2009 tax software 00 Amount received in second year 500. Free 2009 tax software 00 Difference $100. Free 2009 tax software 00 Number of remaining payments after the first 2 payments (age 67, from Table V) 18. Free 2009 tax software 4 Amount to be added to previously determined annual tax-free part ($100 ÷ 18. Free 2009 tax software 4) $5. Free 2009 tax software 43 Revised annual tax-free part for third and later years ($600 + $5. Free 2009 tax software 43) $605. Free 2009 tax software 43 Amount taxable in third year ($1,200 − $605. Free 2009 tax software 43) $594. Free 2009 tax software 57 If you choose to refigure your tax-free amount,   you must file a statement with your income tax return stating that you are refiguring the tax-free amount in accordance with the rules of section 1. Free 2009 tax software 72–4(d)(3) of the Income Tax Regulations. Free 2009 tax software The statement must also show the following information: The annuity starting date and your age on that date. Free 2009 tax software The first day of the first period for which you received an annuity payment in the current year. Free 2009 tax software Your investment in the contract as originally figured. Free 2009 tax software The total of all amounts received tax free under the annuity from the annuity starting date through the first day of the first period for which you received an annuity payment in the current tax year. Free 2009 tax software Exclusion Limits Your annuity starting date determines the total amount of annuity income that you can exclude from income over the years. Free 2009 tax software Exclusion limited to net cost. Free 2009 tax software   If your annuity starting date is after 1986, the total amount of annuity income that you can exclude over the years as a return of your cost cannot exceed your net cost (figured without any reduction for a refund feature). Free 2009 tax software This is the unrecovered investment in the contract as of the annuity starting date. Free 2009 tax software   If your annuity starting date is after July 1, 1986, any unrecovered net cost at your (or last annuitant's) death is allowed as a miscellaneous itemized deduction on the final return of the decedent. Free 2009 tax software This deduction is not subject to the 2%-of-adjusted-gross-income limit. Free 2009 tax software Example 1. Free 2009 tax software Your annuity starting date is after 1986. Free 2009 tax software Your total cost is $12,500, and your net cost is $10,000, taking into account certain adjustments. Free 2009 tax software There is no refund feature. Free 2009 tax software Your monthly annuity payment is $833. Free 2009 tax software 33. Free 2009 tax software Your exclusion ratio is 12% and you exclude $100 a month. Free 2009 tax software Your exclusion ends after 100 months, when you have excluded your net cost of $10,000. Free 2009 tax software Thereafter, your annuity payments are fully taxable. Free 2009 tax software Example 2. Free 2009 tax software The facts are the same as in Example 1, except that there is a refund feature, and you die after 5 years with no surviving annuitant. Free 2009 tax software The adjustment for the refund feature is $1,000, so the investment in the contract is $9,000. Free 2009 tax software The exclusion ratio is 10. Free 2009 tax software 8%, and your monthly exclusion is $90. Free 2009 tax software After 5 years (60 months), you have recovered tax free only $5,400 ($90 x 60). Free 2009 tax software An itemized deduction for the unrecovered net cost of $4,600 ($10,000 net cost minus $5,400) may be taken on your final income tax return. Free 2009 tax software Your unrecovered investment is determined without regard to the refund feature adjustment, discussed earlier, under Adjustments. Free 2009 tax software Exclusion not limited to net cost. Free 2009 tax software   If your annuity starting date was before 1987, you could continue to take your monthly exclusion for as long as you receive your annuity. Free 2009 tax software If you choose a joint and survivor annuity, your survivor continues to take the survivor's exclusion figured as of the annuity starting date. Free 2009 tax software The total exclusion may be more than your investment in the contract. Free 2009 tax software How To Use Actuarial Tables In figuring, under the General Rule, the taxable part of your annuity payments that you are to get for the rest of your life (rather than for a fixed number of years), you must use one or more of the actuarial tables in this publication. Free 2009 tax software Unisex Annuity Tables Effective July 1, 1986, the Internal Revenue Service adopted new annuity Tables V through VIII, in which your sex is not considered when determining the applicable factor. Free 2009 tax software These tables correspond to the old Tables I through IV. Free 2009 tax software In general, Tables V through VIII must be used if you made contributions to the retirement plan after June 30, 1986. Free 2009 tax software If you made no contributions to the plan after June 30, 1986, generally you must use only Tables I through IV. Free 2009 tax software However, if you received an annuity payment after June 30, 1986, you may elect to use Tables V through VIII (see Annuity received after June 30, 1986, later). Free 2009 tax software Special Elections Although you generally must use Tables V through VIII if you made contributions to the retirement plan after June 30, 1986, and Tables I through IV if you made no contributions after June 30, 1986, you can make the following special elections to select which tables to use. Free 2009 tax software Contributions made both before July 1986 and after June 1986. Free 2009 tax software   If you made contributions to the retirement plan both before July 1986 and after June 1986, you may elect to use Tables I through IV for the pre-July 1986 cost of the contract, and Tables V through VIII for the post-June 1986 cost. Free 2009 tax software (See the examples below. Free 2009 tax software )    Making the election. Free 2009 tax software Attach this statement to your income tax return for the first year in which you receive an annuity:    “I elect to apply the provisions of paragraph (d) of section 1. Free 2009 tax software 72–6 of the Income Tax Regulations. Free 2009 tax software ”   The statement must also include your name, address, social security number, and the amount of the pre-July 1986 investment in the contract. Free 2009 tax software   If your investment in the contract includes post-June 1986 contributions to the plan, and you do not make the election to use Tables I through IV and Tables V through VIII, then you can only use Tables V through VIII in figuring the taxable part of your annuity. Free 2009 tax software You must also use Tables V through VIII if you are unable or do not wish to determine the portions of your contributions which were made before July 1, 1986, and after June 30, 1986. Free 2009 tax software    Advantages of election. Free 2009 tax software In general, a lesser amount of each annual annuity payment is taxable if you separately figure your exclusion ratio for pre-July 1986 and post-June 1986 contributions. Free 2009 tax software    If you intend to make this election, save your records that substantiate your pre-July 1986 and post-June 1986 contributions. Free 2009 tax software If the death benefit exclusion applies (see discussion, earlier), you do not have to apportion it between the pre-July 1986 and the post-June 1986 investment in the contract. Free 2009 tax software   The following examples illustrate the separate computations required if you elect to use Tables I through IV for your pre-July 1986 investment in the contract and Tables V through VIII for your post-June 1986 investment in the contract. Free 2009 tax software Example 1. Free 2009 tax software Bill, who is single, contributed $42,000 to the retirement plan and will receive an annual annuity of $24,000 for life. Free 2009 tax software Payment of the $42,000 contribution is guaranteed under a refund feature. Free 2009 tax software Bill is 55 years old as of the annuity starting date. Free 2009 tax software For figuring the taxable part of Bill's annuity, he chose to make separate computations for his pre-July 1986 investment in the contract of $41,300, and for his post-June 1986 investment in the contract of $700. Free 2009 tax software       Pre- July 1986   Post- June 1986 A. Free 2009 tax software Adjustment for refund feature         1) Net cost $41,300   $700   2) Annual annuity—$24,000  ($41,300/$42,000 × $24,000) $23,600       ($700/$42,000 × $24,000)     $400   3) Guarantee under contract $41,300   $700   4) No. Free 2009 tax software of years payments  guaranteed (rounded), A(3) ÷ A(2) 2   2   5) Applicable percentage from  Tables III and VII 1%   0%   6) Adjustment for value of refund  feature, A(5) × smaller of A(1)  or A(3) $413   $0 B. Free 2009 tax software Investment in the contract         1) Net cost $41,300   $700   2) Minus: Amount in A(6) 413   0   3) Investment in the contract $40,887   $700 C. Free 2009 tax software Expected return         1) Annual annuity receivable $24,000   $24,000   2) Multiples from Tables I and V 21. Free 2009 tax software 7   28. Free 2009 tax software 6   3) Expected return, C(1) × C(2) $520,800   $686,400 D. Free 2009 tax software Tax-free part of annuity         1) Exclusion ratio as decimal,  B(3) ÷ C(3) . Free 2009 tax software 079   . Free 2009 tax software 001   2) Tax-free part, C(1) × D(1) $1,896   $24 The tax-free part of Bill's total annuity is $1,920 ($1,896 plus $24). Free 2009 tax software The taxable part of his annuity is $22,080 ($24,000 minus $1,920). Free 2009 tax software If the annuity starting date is after 1986, the exclusion over the years cannot exceed the net cost (figured without any reduction for a refund feature). Free 2009 tax software Example 2. Free 2009 tax software Al is age 62 at his nearest birthday to the annuity starting date. Free 2009 tax software Al's wife is age 60 at her nearest birthday to the annuity starting date. Free 2009 tax software The joint and survivor annuity pays $1,000 per month to Al for life, and $500 per month to Al's surviving wife after his death. Free 2009 tax software The pre-July 1986 investment in the contract is $53,100 and the post-June 1986 investment in the contract is $7,000. Free 2009 tax software Al makes the election described in Example 1 . Free 2009 tax software For purposes of this example, assume the refund feature adjustment is zero. Free 2009 tax software If an adjustment is required, IRS will figure the amount. Free 2009 tax software See Requesting a Ruling on Taxation of Annuity near the end of this publication. Free 2009 tax software       Pre-  July 1986   Post-  June 1986 A. Free 2009 tax software Adjustment for refund feature         1) Net cost $53,100   $7,000   2) Annual annuity—$12,000  ($53,100/$60,100 × $12,000) $10,602       ($7,000/$60,100 × $12,000)     $1,398   3) Guaranteed under the contract $53,100   $7,000   4) Number of years guaranteed,  rounded, A(3) ÷ A(2) 5   5   5) Applicable percentages 0%   0%   6) Refund feature adjustment, A(5) × smaller of A(1) or A(3) 0   0 B. Free 2009 tax software Investment in the contract         1) Net cost $53,100   $7,000   2) Refund feature adjustment 0   0   3) Investment in the contract adjusted for refund feature $53,100   $7,000 C. Free 2009 tax software Expected return         1) Multiple for both annuitants from Tables II and VI 25. Free 2009 tax software 4   28. Free 2009 tax software 8   2) Multiple for first annuitant from Tables I and V 16. Free 2009 tax software 9   22. Free 2009 tax software 5   3) Multiple applicable to surviving annuitant, subtract C(2) from C(1) 8. Free 2009 tax software 5   6. Free 2009 tax software 3   4) Annual annuity to surviving annuitant $6,000   $6,000   5) Portion of expected return for surviving annuitant, C(4) × C(3) $51,000   $37,800   6) Annual annuity to first annuitant $12,000   $12,000   7) Plus: Portion of expected return for first annuitant, C(6) × C(2) $202,800   $270,000   8) Expected return for both annuitants, C(5) + C(7) $253,800   $307,800 D. Free 2009 tax software Tax-free part of annuity         1) Exclusion ratio as a decimal, B(3) ÷ C(8) . Free 2009 tax software 209   . Free 2009 tax software 023   2) Retiree's tax-free part of annuity, C(6) × D(1) $2,508   $276   3) Survivor's tax-free part of annuity, C(4) × D(1) $1,254   $138 The tax-free part of Al's total annuity is $2,784 ($2,508 + $276). Free 2009 tax software The taxable part of his annuity is $9,216 ($12,000 − $2,784). Free 2009 tax software The exclusion over the years cannot exceed the net cost of the contract (figured without any reduction for a refund feature) if the annuity starting date is after 1986. Free 2009 tax software After Al's death, his widow will apply the same exclusion percentages (20. Free 2009 tax software 9% and 2. Free 2009 tax software 3%) to her annual annuity of $6,000 to figure the tax-free part of her annuity. Free 2009 tax software Annuity received after June 30, 1986. Free 2009 tax software   If you receive an annuity payment after June 30, 1986, (regardless of your annuity starting date), you may elect to treat the entire cost of the contract as post-June 1986 cost (even if you made no post-June 1986 contributions to the plan) and use Tables V through VIII. Free 2009 tax software Once made, you cannot revoke the election, which will apply to all payments during the year and in any later year. Free 2009 tax software    Make the election by attaching the following statement to your income tax return. Free 2009 tax software    “I elect, under section 1. Free 2009 tax software 72–9 of the Income Tax Regulations, to treat my entire cost of the contract as a post-June 1986 cost of the plan. Free 2009 tax software ”   The statement must also include your name, address, and social security number. Free 2009 tax software   You should also indicate you are making this election if you are unable or do not wish to determine the parts of your contributions which were made before July 1, 1986, and after June 30, 1986. Free 2009 tax software Disqualifying form of payment or settlement. Free 2009 tax software   If your annuity starting date is after June 30, 1986, and the contract provides for a disqualifying form of payment or settlement, such as an option to receive a lump sum in full discharge of the obligation under the contract, the entire investment in the contract is treated as post-June 1986 investment in the contract. Free 2009 tax software See regulations section 1. Free 2009 tax software 72–6(d)(3) for additional examples of disqualifying forms of payment or settlement. Free 2009 tax software You can find the Income Tax Regulations in many libraries and at Internal Revenue Service Offices. Free 2009 tax software Worksheets for Determining Taxable Annuity Worksheets I and II. Free 2009 tax software   Worksheets I and II follow for determining your taxable annuity under Regulations Section 1. Free 2009 tax software 72–6(d)(6) Election. Free 2009 tax software Worksheet I For Determining Taxable Annuity Under Regulations Section 1. Free 2009 tax software 72-6(d)(6) Election For Single Annuitant With No Survivor Annuity               Pre-July 1986   Post-June 1986 A. Free 2009 tax software   Refund Feature Adjustment             1)   Net cost (total cost less returned premiums, dividends, etc. Free 2009 tax software )             2)   Annual annuity allocation:                   Portion of net cost in A(1) x annual annuity                   Net cost             3)   Guaranteed under the contract             4)   Number of years guaranteed, rounded to whole years:                   A(3) divided by A(2)             5)   Applicable percentages* from Tables III and VII                   *If your annuity meets the three conditions listed in Zero value of refund feature in Investment in the Contract, earlier, both percentages are 0. Free 2009 tax software If not, the IRS will calculate the refund feature percentage. Free 2009 tax software             6)   Refund feature adjustment:                   A(5) times lesser of A(1) or A(3)                             B. Free 2009 tax software   Investment in the Contract             1)   Net cost:                   A(1)             2)   Refund feature adjustment:                   A(6)             3)   Investment in the contract adjusted for refund feature:                   B(1) minus B(2)                             C. Free 2009 tax software   Expected Return             1)   Annual Annuity:                   12 times monthly annuity**             2)   Expected return multiples from Tables I and V             3)     Expected return:                   C(1) times C(2)                             D. Free 2009 tax software   Tax-Free Part of Annuity             1)     Exclusion ratio, as a decimal rounded to 3 places:                   B(3) divided by C(3)             2)     Tax-free part of annuity:                   C(1) times D(1)             **If the annuity is not paid monthly, figure the amount to enter by using the total number of periodic payments for the year times the amount of the periodic payment. Free 2009 tax software     Worksheet II For Determining Taxable Annuity Under Regulations Section 1. Free 2009 tax software 72-6(d)(6) Election For Joint and Survivor Annuity               Pre-July 1986   Post-June 1986 A. Free 2009 tax software   Refund Feature Adjustment             1)   Net cost (total cost less returned premiums, dividends, etc. Free 2009 tax software )             2)   Annual annuity allocation:                   Portion of net cost in A(1) x annual annuity                   Net cost             3)   Guaranteed under the contract             4)     Number of years guaranteed, rounded to whole years:                   A(3) divided by A(2)             5)   Applicable percentages*                   *If your annuity meets the three conditions listed in Zero value of refund feature in Investment in the Contract, earlier, both percentages are 0. Free 2009 tax software If not, the IRS will calculate the refund feature percentage. Free 2009 tax software             6)   Refund feature adjustment:                   A(5) times lesser of A(1) or A(3)                             B. Free 2009 tax software   Investment in the Contract             1)   Net cost:                   A(1)             2)   Refund feature adjustment:                   A(6)             3)   Investment in the contract adjusted for refund future:                   B(1) minus B(2)                             C. Free 2009 tax software   Expected Return             1)   Multiples for both annuitants, Tables II and VI             2)   Multiple for retiree. Free 2009 tax software Tables I and VI             3)   Multiple for survivor:                   C(1) minus C(2)             4)   Annual annuity to survivor:                   12 times potential monthly rate for survivor**             5)   Expected return for survivor:                   C(3) times C(4)             6)   Annual annuity to retiree:                   12 times monthly rate for retiree**             7)   Expected return for retiree:                   C(2) times C(6)             8)   Total expected return:                   C(5) plus C(7)                             D. Free 2009 tax software   Tax-Free Part of Annuity             1)   Exclusion ratio, as a decimal rounded to 3 places:                   B(3) divided by C(8)             2)   Retiree's tax-free part of annuity:                   C(6) times D(1)             3)   Survivor's tax-free part of annuity, if surviving after death of retiree:                   C(4) times D(1)             **If the annuity is not paid monthly, figure the amount to enter by using the total number of periodic payments for the year times the amount of the periodic payment. Free 2009 tax software   Actuarial Tables Please click here for the text description of the image. Free 2009 tax software Actuarial Tables Please click here for the text description of the image. Free 2009 tax software Actuarial Tables Please click here for the text description of the image. Free 2009 tax software Actuarial tables Please click here for the text description of the image. 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Free 2009 tax software Actuarial tables Requesting a Ruling on Taxation of Annuity If you are a retiree, or the survivor of an employee or retiree, you may ask the Internal Revenue Service to help you determine the taxation of your annuity. Free 2009 tax software If you make this request, you are asking for a ruling. Free 2009 tax software User fee. Free 2009 tax software   Under the law in effect at the time this publication went to print, the IRS must charge a user fee for all ruling requests. Free 2009 tax software You should call the IRS for the proper fee. Free 2009 tax software A request solely for the value of the refund feature is not treated as a ruling request and requires no fee. Free 2009 tax software Send your request to:     Internal Revenue Service  Attention: EP Letter Rulings P. Free 2009 tax software O. Free 2009 tax software Box 27063 McPherson Station Washington, DC 20038 The user fee is allowed as a miscellaneous itemized deduction, subject to the 2%-of-adjusted-gross-income limit. Free 2009 tax software When to make the request. Free 2009 tax software   Please note that requests sent between February 1 and April 15 may experience some delay. Free 2009 tax software We process requests in the order received, and we will reply to your request as soon as we can process it. Free 2009 tax software If you do not receive your ruling by the required filing date, you may use Form 4868, Application for Automatic Extension of Time To File U. Free 2009 tax software S. Free 2009 tax software Individual Income Tax Return, to get an extension of time to file. Free 2009 tax software Information you must furnish. Free 2009 tax software   You must furnish the information listed below so the IRS can comply with your request. Free 2009 tax software Failure to furnish the information will result in a delay in processing your request. Free 2009 tax software Please send only copies of the following documents, as the IRS retains all material sent for its records: A letter explaining the question(s) you wish to have resolved or the information you need from the ruling. Free 2009 tax software Copies of any documents showing distributions, annuity rates, and annuity options available to you. Free 2009 tax software A copy of any Form 1099–R you received since your annuity began. Free 2009 tax software A statement indicating whether you have filed your return for the year for which you are making the request. Free 2009 tax software If you have requested an extension of time to file that return, please indicate the extension date. Free 2009 tax software Your daytime phone number. Free 2009 tax software Your current mailing address. Free 2009 tax software A power of attorney if someone other than you, an attorney, a certified public accountant, or an enrolled agent is signing this request. Free 2009 tax software Form 2848, Power of Attorney and Declaration of Representative, may be used for this purpose. Free 2009 tax software A completed Tax Information Sheet (or facsimile) shown on the next page. Free 2009 tax software Sign and date the Disclosure and Perjury Statement (or facsimile) at the end of the tax information sheet. Free 2009 tax software This statement must be signed by the retiree or the survivor annuitant. Free 2009 tax software It cannot be signed by a representative. Free 2009 tax software Tax Information Sheet Please click here for the text description of the image. Free 2009 tax software Tax Information Sheet Please click here for the text description of the image. Free 2009 tax software Tax Information Sheet (continued) How To Get Tax Help Whether it's help with a tax issue, preparing your tax return or a need for a free publication or form, get the help you need the way you want it: online, use a smart phone, call or walk in to an IRS office or volunteer site near you. Free 2009 tax software Free help with your tax return. Free 2009 tax software   You can get free help preparing your return nationwide from IRS-certified volunteers. Free 2009 tax software The Volunteer Income Tax Assistance (VITA) program helps low-to-moderate income, elderly, people with disabilities, and limited English proficient taxpayers. Free 2009 tax software The Tax Counseling for the Elderly (TCE) program helps taxpayers age 60 and older with their tax returns. Free 2009 tax software Most VITA and TCE sites offer free electronic filing and all volunteers will let you know about credits and deductions you may be entitled to claim. Free 2009 tax software In addition, some VITA and TCE sites provide taxpayers the opportunity to prepare their own return with help from an IRS-certified volunteer. Free 2009 tax software To find the nearest VITA or TCE site, you can use the VITA Locator Tool on IRS. Free 2009 tax software gov, download the IRS2Go app, or call 1-800-906-9887. Free 2009 tax software   As part of the TCE program, AARP offers the Tax-Aide counseling program. Free 2009 tax software To find the nearest AARP Tax-Aide site, visit AARP's website at www. Free 2009 tax software aarp. Free 2009 tax software org/money/taxaide or call 1-888-227-7669. Free 2009 tax software For more information on these programs, go to IRS. Free 2009 tax software gov and enter “VITA” in the search box. Free 2009 tax software Internet. Free 2009 tax software    IRS. Free 2009 tax software gov and IRS2Go are ready when you are —24 hours a day, 7 days a week. Free 2009 tax software Download the free IRS2Go app from the iTunes app store or from Google Play. Free 2009 tax software Use it to check your refund status, order transcripts of your tax returns or tax account, watch the IRS YouTube channel, get IRS news as soon as it's released to the public, subscribe to filing season updates or daily tax tips, and follow the IRS Twitter news feed, @IRSnews, to get the latest federal tax news, including information about tax law changes and important IRS programs. Free 2009 tax software Check the status of your 2013 refund with the Where's My Refund? application on IRS. Free 2009 tax software gov or download the IRS2Go app and select the Refund Status option. Free 2009 tax software The IRS issues more than 9 out of 10 refunds in less than 21 days. Free 2009 tax software Using these applications, you can start checking on the status of your return within 24 hours after we receive your e-filed return or 4 weeks after you mail a paper return. 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Free 2009 tax software gov which contain general individual and business tax information or by searching the IRS Tax Map, which includes an international subject index. Free 2009 tax software You can use the IRS Tax Map, to search publications and instructions by topic or keyword. Free 2009 tax software The IRS Tax Map integrates forms and publications into one research tool and provides single-point access to tax law information by subject. Free 2009 tax software When the user searches the IRS Tax Map, they will be provided with links to related content in existing IRS publications, forms and instructions, questions and answers, and Tax Topics. Free 2009 tax software Coming this filing season, you can immediately view and print for free all 5 types of individual federal tax transcripts (tax returns, tax account, record of account, wage and income statement, and certification of non-filing) using Get Transcript. 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