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Free 2010 Turbotax

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Free 2010 Turbotax

Free 2010 turbotax 7. Free 2010 turbotax   Coverdell Education Savings Account (ESA) Table of Contents Introduction What Is a Coverdell ESAQualified Education Expenses ContributionsContribution Limits Additional Tax on Excess Contributions Rollovers and Other TransfersRollovers Changing the Designated Beneficiary Transfer Because of Divorce DistributionsTax-Free Distributions Taxable Distributions When Assets Must Be Distributed Introduction If your modified adjusted gross income (MAGI) is less than $110,000 ($220,000 if filing a joint return), you may be able to establish a Coverdell ESA to finance the qualified education expenses of a designated beneficiary. Free 2010 turbotax For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return. Free 2010 turbotax There is no limit on the number of separate Coverdell ESAs that can be established for a designated beneficiary. Free 2010 turbotax However, total contributions for the beneficiary in any year cannot be more than $2,000, no matter how many accounts have been established. Free 2010 turbotax See Contributions , later. Free 2010 turbotax This benefit applies not only to higher education expenses, but also to elementary and secondary education expenses. Free 2010 turbotax What is the tax benefit of the Coverdell ESA. Free 2010 turbotax   Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. Free 2010 turbotax   If, for a year, distributions from an account are not more than a designated beneficiary's qualified education expenses at an eligible educational institution, the beneficiary will not owe tax on the distributions. Free 2010 turbotax See Tax-Free Distributions , later. Free 2010 turbotax    Table 7-1 summarizes the main features of the Coverdell ESA. Free 2010 turbotax Table 7-1. Free 2010 turbotax Coverdell ESA at a Glance Do not rely on this table alone. Free 2010 turbotax It provides only general highlights. Free 2010 turbotax See the text for definitions of terms in bold type and for more complete explanations. Free 2010 turbotax Question Answer What is a Coverdell ESA? A savings account that is set up to pay the qualified education expenses of a designated beneficiary. Free 2010 turbotax Where can it be established? It can be opened in the United States at any bank or other IRS-approved entity that offers Coverdell ESAs. Free 2010 turbotax Who can have a Coverdell ESA? Any beneficiary who is under age 18 or is a special needs beneficiary. Free 2010 turbotax Who can contribute to a Coverdell ESA? Generally, any individual (including the beneficiary) whose modified adjusted gross income for the year is less than $110,000 ($220,000 in the case of a joint return). Free 2010 turbotax Are distributions tax free? Yes, if the distributions are not more than the beneficiary's adjusted qualified education expenses for the year. Free 2010 turbotax What Is a Coverdell ESA A Coverdell ESA is a trust or custodial account created or organized in the United States only for the purpose of paying the qualified education expenses of the Designated beneficiary (defined later) of the account. Free 2010 turbotax When the account is established, the designated beneficiary must be under age 18 or a special needs beneficiary. Free 2010 turbotax To be treated as a Coverdell ESA, the account must be designated as a Coverdell ESA when it is created. Free 2010 turbotax The document creating and governing the account must be in writing and must satisfy the following requirements. Free 2010 turbotax The trustee or custodian must be a bank or an entity approved by the IRS. Free 2010 turbotax The document must provide that the trustee or custodian can only accept a contribution that meets all of the following conditions. Free 2010 turbotax The contribution is in cash. Free 2010 turbotax The contribution is made before the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. Free 2010 turbotax The contribution would not result in total contributions for the year (not including rollover contributions) being more than $2,000. Free 2010 turbotax Money in the account cannot be invested in life insurance contracts. Free 2010 turbotax Money in the account cannot be combined with other property except in a common trust fund or common investment fund. Free 2010 turbotax The balance in the account generally must be distributed within 30 days after the earlier of the following events. Free 2010 turbotax The beneficiary reaches age 30, unless the beneficiary is a special needs beneficiary. Free 2010 turbotax The beneficiary's death. Free 2010 turbotax Qualified Education Expenses Generally, these are expenses required for the enrollment or attendance of the designated beneficiary at an eligible educational institution. Free 2010 turbotax For purposes of Coverdell ESAs, the expenses can be either qualified higher education expenses or qualified elementary and secondary education expenses. Free 2010 turbotax Designated beneficiary. Free 2010 turbotax   This is the individual named in the document creating the trust or custodial account to receive the benefit of the funds in the account. Free 2010 turbotax Contributions to a qualified tuition program (QTP). Free 2010 turbotax   A contribution to a QTP is a qualified education expense if the contribution is on behalf of the designated beneficiary of the Coverdell ESA. Free 2010 turbotax In the case of a change in beneficiary, this is a qualified expense only if the new beneficiary is a family member of that designated beneficiary. Free 2010 turbotax See chapter 8, Qualified Tuition Program . Free 2010 turbotax Eligible Educational Institution For purposes of Coverdell ESAs, an eligible educational institution can be either an eligible postsecondary school or an eligible elementary or secondary school. Free 2010 turbotax Eligible postsecondary school. Free 2010 turbotax   This is any college, university, vocational school, or other postsecondary educational institution eligible to participate in a student aid program administered by the U. Free 2010 turbotax S. Free 2010 turbotax Department of Education. Free 2010 turbotax It includes virtually all accredited public, nonprofit, and proprietary (privately owned profit-making) postsecondary institutions. Free 2010 turbotax The educational institution should be able to tell you if it is an eligible educational institution. Free 2010 turbotax   Certain educational institutions located outside the United States also participate in the U. Free 2010 turbotax S. Free 2010 turbotax Department of Education's Federal Student Aid (FSA) programs. Free 2010 turbotax Eligible elementary or secondary school. Free 2010 turbotax   This is any public, private, or religious school that provides elementary or secondary education (kindergarten through grade 12), as determined under state law. Free 2010 turbotax Qualified Higher Education Expenses These are expenses related to enrollment or attendance at an eligible postsecondary school. Free 2010 turbotax As shown in the following list, to be qualified, some of the expenses must be required by the school and some must be incurred by students who are enrolled at least half-time. Free 2010 turbotax The following expenses must be required for enrollment or attendance of a designated beneficiary at an eligible postsecondary school. Free 2010 turbotax Tuition and fees. Free 2010 turbotax Books, supplies, and equipment. Free 2010 turbotax Expenses for special needs services needed by a special needs beneficiary must be incurred in connection with enrollment or attendance at an eligible postsecondary school. Free 2010 turbotax Expenses for room and board must be incurred by students who are enrolled at least half-time (defined below). Free 2010 turbotax The expense for room and board qualifies only to the extent that it is not more than the greater of the following two amounts. Free 2010 turbotax The allowance for room and board, as determined by the school, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student. Free 2010 turbotax The actual amount charged if the student is residing in housing owned or operated by the school. Free 2010 turbotax Half-time student. Free 2010 turbotax   A student is enrolled “at least half-time” if he or she is enrolled for at least half the full-time academic work load for the course of study the student is pursuing, as determined under the standards of the school where the student is enrolled. Free 2010 turbotax Qualified Elementary and Secondary Education Expenses These are expenses related to enrollment or attendance at an eligible elementary or secondary school. Free 2010 turbotax As shown in the following list, to be qualified, some of the expenses must be required or provided by the school. Free 2010 turbotax There are special rules for computer-related expenses. Free 2010 turbotax The following expenses must be incurred by a designated beneficiary in connection with enrollment or attendance at an eligible elementary or secondary school. Free 2010 turbotax Tuition and fees. Free 2010 turbotax Books, supplies, and equipment. Free 2010 turbotax Academic tutoring. Free 2010 turbotax Special needs services for a special needs beneficiary. Free 2010 turbotax The following expenses must be required or provided by an eligible elementary or secondary school in connection with attendance or enrollment at the school. Free 2010 turbotax Room and board. Free 2010 turbotax Uniforms. Free 2010 turbotax Transportation. Free 2010 turbotax Supplementary items and services (including extended day programs). Free 2010 turbotax The purchase of computer technology, equipment, or Internet access and related services is a qualified elementary and secondary education expense if it is to be used by the beneficiary and the beneficiary's family during any of the years the beneficiary is in elementary or secondary school. Free 2010 turbotax (This does not include expenses for computer software designed for sports, games, or hobbies unless the software is predominantly educational in nature. Free 2010 turbotax ) Contributions Any individual (including the designated beneficiary) can contribute to a Coverdell ESA if the individual's MAGI (defined later under Contribution Limits ) for the year is less than $110,000. Free 2010 turbotax For individuals filing joint returns, that amount is $220,000. Free 2010 turbotax Organizations, such as corporations and trusts, can also contribute to Coverdell ESAs. Free 2010 turbotax There is no requirement that an organization's income be below a certain level. Free 2010 turbotax Contributions must meet all of the following requirements. Free 2010 turbotax They must be in cash. Free 2010 turbotax They cannot be made after the beneficiary reaches age 18, unless the beneficiary is a special needs beneficiary. Free 2010 turbotax They must be made by the due date of the contributor's tax return (not including extensions). Free 2010 turbotax Contributions can be made to one or several Coverdell ESAs for the same designated beneficiary provided that the total contributions are not more than the contribution limits (defined later) for a year. Free 2010 turbotax Contributions can be made, without penalty, to both a Coverdell ESA and a QTP in the same year for the same beneficiary. Free 2010 turbotax Table 7-2 summarizes many of the features of contributing to a Coverdell ESA. Free 2010 turbotax When contributions considered made. Free 2010 turbotax   Contributions made to a Coverdell ESA for the preceding tax year are considered to have been made on the last day of the preceding year. Free 2010 turbotax They must be made by the due date (not including extensions) for filing your return for the preceding year. Free 2010 turbotax   For example, if you make a contribution to a Coverdell ESA in February 2014, and you designate it as a contribution for 2013, you are considered to have made that contribution on December 31, 2013. Free 2010 turbotax Contribution Limits There are two yearly limits: One on the total amount that can be contributed for each designated beneficiary in any year, and One on the amount that any individual can contribute for any one designated beneficiary for a year. Free 2010 turbotax Limit for each designated beneficiary. Free 2010 turbotax   For 2013, the total of all contributions to all Coverdell ESAs set up for the benefit of any one designated beneficiary cannot be more than $2,000. Free 2010 turbotax This includes contributions (other than rollovers) to all the beneficiary's Coverdell ESAs from all sources. Free 2010 turbotax Rollovers are discussed under Rollovers and Other Transfers , later. Free 2010 turbotax Example. Free 2010 turbotax When Maria Luna was born in 2012, three separate Coverdell ESAs were set up for her, one by her parents, one by her grandfather, and one by her aunt. Free 2010 turbotax In 2013, the total of all contributions to Maria's three Coverdell ESAs cannot be more than $2,000. Free 2010 turbotax For example, if her grandfather contributed $2,000 to one of her Coverdell ESAs, no one else could contribute to any of her three accounts. Free 2010 turbotax Or, if her parents contributed $1,000 and her aunt $600, her grandfather or someone else could contribute no more than $400. Free 2010 turbotax These contributions could be put into any of Maria's Coverdell ESA accounts. Free 2010 turbotax Limit for each contributor. Free 2010 turbotax   Generally, you can contribute up to $2,000 for each designated beneficiary for 2013. Free 2010 turbotax This is the most you can contribute for the benefit of any one beneficiary for the year, regardless of the number of Coverdell ESAs set up for the beneficiary. Free 2010 turbotax Example. Free 2010 turbotax The facts are the same as in the previous example except that Maria Luna's older brother, Edgar, also has a Coverdell ESA. Free 2010 turbotax If their grandfather contributed $2,000 to Maria's Coverdell ESA in 2013, he could also contribute $2,000 to Edgar's Coverdell ESA. Free 2010 turbotax Reduced limit. Free 2010 turbotax   Your contribution limit may be reduced. Free 2010 turbotax If your MAGI (defined on this page) is between $95,000 and $110,000 (between $190,000 and $220,000 if filing a joint return), the $2,000 limit for each designated beneficiary is gradually reduced (see Figuring the limit , later). Free 2010 turbotax If your MAGI is $110,000 or more ($220,000 or more if filing a joint return), you cannot contribute to anyone's Coverdell ESA. Free 2010 turbotax Table 7-2. Free 2010 turbotax Coverdell ESA Contributions at a Glance Do not rely on this table alone. Free 2010 turbotax It provides only general highlights. Free 2010 turbotax See the text for more complete explanations. Free 2010 turbotax Question Answer Are contributions deductible? No. Free 2010 turbotax What is the annual contribution limit per designated beneficiary? $2,000 for each designated beneficiary. Free 2010 turbotax What if more than one Coverdell ESA has been opened for the same designated beneficiary? The annual contribution limit is $2,000 for each beneficiary, no matter how many Coverdell ESAs are set up for that beneficiary. Free 2010 turbotax What if more than one individual makes contributions for the same designated beneficiary? The annual contribution limit is $2,000 per beneficiary, no matter how many individuals contribute. Free 2010 turbotax Can contributions other than cash be made to a Coverdell ESA? No. Free 2010 turbotax When must contributions stop? No contributions can be made to a beneficiary's Coverdell ESA after he or she reaches age 18, unless the beneficiary is a special needs beneficiary. Free 2010 turbotax Modified adjusted gross income (MAGI). Free 2010 turbotax   For most taxpayers, MAGI is adjusted gross income (AGI) as figured on their federal income tax return. Free 2010 turbotax MAGI when using Form 1040A. Free 2010 turbotax   If you file Form 1040A, your MAGI is the AGI on line 22 of that form. Free 2010 turbotax MAGI when using Form 1040. Free 2010 turbotax   If you file Form 1040, your MAGI is the AGI on line 38 of that form, modified by adding back any: Foreign earned income exclusion, Foreign housing exclusion, Foreign housing deduction, Exclusion of income by bona fide residents of American Samoa, and Exclusion of income by bona fide residents of Puerto Rico. Free 2010 turbotax MAGI when using Form 1040NR. Free 2010 turbotax   If you file Form 1040NR, your MAGI is the AGI on line 36 of that form. Free 2010 turbotax MAGI when using Form 1040NR-EZ. Free 2010 turbotax   If you file Form 1040NR-EZ, your MAGI is the AGI on line 10 of that form. Free 2010 turbotax   If you have any of these adjustments, you can use Worksheet 7-1. Free 2010 turbotax MAGI for a Coverdell ESA , later, to figure your MAGI for Form 1040. Free 2010 turbotax Worksheet 7-1. Free 2010 turbotax MAGI for a Coverdell ESA 1. Free 2010 turbotax Enter your adjusted gross income  (Form 1040, line 38)   1. Free 2010 turbotax   2. Free 2010 turbotax Enter your foreign earned income exclusion and/or housing exclusion (Form 2555, line 45, or Form 2555-EZ, line 18)   2. Free 2010 turbotax       3. Free 2010 turbotax Enter your foreign housing deduction (Form 2555, line 50)   3. Free 2010 turbotax         4. Free 2010 turbotax Enter the amount of income from Puerto Rico you are excluding   4. Free 2010 turbotax       5. Free 2010 turbotax Enter the amount of income from American Samoa you are excluding (Form 4563, line 15)   5. Free 2010 turbotax       6. Free 2010 turbotax Add lines 2, 3, 4, and 5   6. Free 2010 turbotax   7. Free 2010 turbotax Add lines 1 and 6. Free 2010 turbotax This is your  modified adjusted gross income   7. Free 2010 turbotax   Figuring the limit. Free 2010 turbotax    To figure the limit on the amount you can contribute for each designated beneficiary, multiply $2,000 by a fraction. Free 2010 turbotax The numerator (top number) is your MAGI minus $95,000 ($190,000 if filing a joint return). Free 2010 turbotax The denominator (bottom number) is $15,000 ($30,000 if filing a joint return). Free 2010 turbotax Subtract the result from $2,000. Free 2010 turbotax This is the amount you can contribute for each beneficiary. Free 2010 turbotax You can use Worksheet 7-2. Free 2010 turbotax Coverdell ESA Contribution Limit to figure the limit on contributions. Free 2010 turbotax    Worksheet 7-2. Free 2010 turbotax Coverdell ESA Contribution Limit 1. Free 2010 turbotax Maximum contribution   1. Free 2010 turbotax $2,000 2. Free 2010 turbotax Enter your modified adjusted gross income (MAGI) for purposes of figuring the contribution limit to a Coverdell ESA (see definition or Worksheet 7-1, earlier)   2. Free 2010 turbotax   3. Free 2010 turbotax Enter $190,000 if married filing jointly; $95,000 for all other filers   3. Free 2010 turbotax   4. Free 2010 turbotax Subtract line 3 from line 2. Free 2010 turbotax If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. Free 2010 turbotax   5. Free 2010 turbotax Enter $30,000 if married filing jointly; $15,000 for all other filers   5. Free 2010 turbotax     Note. Free 2010 turbotax If the amount on line 4 is greater than or equal to the amount on line 5, stop here. Free 2010 turbotax You are not allowed to contribute to a Coverdell ESA for 2013. Free 2010 turbotax       6. Free 2010 turbotax Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. Free 2010 turbotax . Free 2010 turbotax 7. Free 2010 turbotax Multiply line 1 by line 6   7. Free 2010 turbotax   8. Free 2010 turbotax Subtract line 7 from line 1   8. Free 2010 turbotax   Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. Free 2010 turbotax Example. Free 2010 turbotax Paul, who is single, had a MAGI of $96,500 for 2013. Free 2010 turbotax Paul can contribute up to $1,800 in 2013 for each beneficiary, as shown in the illustrated Worksheet 7-2, Coverdell ESA Contribution Limit–Illustrated. Free 2010 turbotax Worksheet 7-2. Free 2010 turbotax Coverdell ESA Contribution Limit—Illustrated 1. Free 2010 turbotax Maximum contribution   1. Free 2010 turbotax $2,000 2. Free 2010 turbotax Enter your modified adjusted gross  income (MAGI) for purposes of figuring the contribution limit to a Coverdell ESA (see definition or Worksheet 7-1, earlier)   2. Free 2010 turbotax 96,500 3. Free 2010 turbotax Enter $190,000 if married filing jointly; $95,000 for all other filers   3. Free 2010 turbotax 95,000 4. Free 2010 turbotax Subtract line 3 from line 2. Free 2010 turbotax If zero or less, enter -0- on line 4, skip lines 5 through 7, and enter $2,000 on line 8   4. Free 2010 turbotax 1,500 5. Free 2010 turbotax Enter $30,000 if married filing jointly; $15,000 for all other filers   5. Free 2010 turbotax 15,000   Note. Free 2010 turbotax If the amount on line 4 is greater than or equal to the amount on line 5,  stop here. Free 2010 turbotax You are not allowed to  contribute to a Coverdell ESA for 2013. Free 2010 turbotax       6. Free 2010 turbotax Divide line 4 by line 5 and enter the result as a decimal (rounded to at least 3 places)   6. Free 2010 turbotax . Free 2010 turbotax 100 7. Free 2010 turbotax Multiply line 1 by line 6   7. Free 2010 turbotax 200 8. Free 2010 turbotax Subtract line 7 from line 1   8. Free 2010 turbotax 1,800 Note: The total Coverdell ESA contributions from all sources for the designated beneficiary during the tax year may not exceed $2,000. Free 2010 turbotax Additional Tax on Excess Contributions The beneficiary must pay a 6% excise tax each year on excess contributions that are in a Coverdell ESA at the end of the year. Free 2010 turbotax Excess contributions are the total of the following two amounts. Free 2010 turbotax Contributions to any designated beneficiary's Coverdell ESA for the year that are more than $2,000 (or, if less, the total of each contributor's limit for the year, as discussed earlier). Free 2010 turbotax Excess contributions for the preceding year, reduced by the total of the following two amounts: Distributions (other than those rolled over as discussed later) during the year, and The contribution limit for the current year minus the amount contributed for the current year. Free 2010 turbotax Exceptions. Free 2010 turbotax   The excise tax does not apply if excess contributions made during 2013 (and any earnings on them) are distributed before the first day of the sixth month of the following tax year (June 1, 2014, for a calendar year taxpayer). Free 2010 turbotax   However, you must include the distributed earnings in gross income for the year in which the excess contribution was made. Free 2010 turbotax You should receive Form 1099-Q, Payments From Qualified Education Programs, from each institution from which excess contributions were distributed. Free 2010 turbotax Box 2 of that form will show the amount of earnings on your excess contributions. Free 2010 turbotax Code “2” or “3” entered in the blank box below boxes 5 and 6 indicate the year in which the earnings are taxable. Free 2010 turbotax See Instructions for Recipient on the back of copy B of your Form 1099-Q. Free 2010 turbotax Enter the amount of earnings on line 21 of Form 1040 (or Form 1040NR) for the applicable tax year. Free 2010 turbotax For more information, see Taxable Distributions , later. Free 2010 turbotax   The excise tax does not apply to any rollover contribution. Free 2010 turbotax Note. Free 2010 turbotax Contributions made in one year for the preceding tax year are considered to have been made on the last day of the preceding year. Free 2010 turbotax Example. Free 2010 turbotax In 2012, Greta's parents and grandparents contributed a total of $2,300 to Greta's Coverdell ESA— an excess contribution of $300. Free 2010 turbotax Because Greta did not withdraw the excess before June 1, 2013, she had to pay an additional tax of $18 (6% × $300) when she filed her 2012 tax return. Free 2010 turbotax In 2013, excess contributions of $500 were made to Greta's account, however, she withdrew $250 from that account to use for qualified education expenses. Free 2010 turbotax Using the steps shown earlier under Additional Tax on Excess Contributions , Greta figures the excess contribution in her account at the end of 2013 as follows. Free 2010 turbotax (1)   $500 excess contributions made in 2013     + (2)   $300 excess contributions in ESA at end of 2012     − (2a)   $250 distribution during 2013         $550 excess at end of 2013   × 6%=$33           If Greta limits 2014 contributions to $1,450 ($2,000 maximum allowed − $550 excess contributions from 2013), she will not owe any additional tax in 2014 for excess contributions. Free 2010 turbotax Figuring and reporting the additional tax. Free 2010 turbotax   You figure this excise tax in Part V of Form 5329. Free 2010 turbotax Report the additional tax on Form 1040, line 58 (or Form 1040NR, line 56). Free 2010 turbotax Rollovers and Other Transfers Assets can be rolled over from one Coverdell ESA to another or the designated beneficiary can be changed. Free 2010 turbotax The beneficiary's interest can be transferred to a spouse or former spouse because of divorce. Free 2010 turbotax Rollovers Any amount distributed from a Coverdell ESA is not taxable if it is rolled over to another Coverdell ESA for the benefit of the same beneficiary or a member of the beneficiary's family (including the beneficiary's spouse) who is under age 30. Free 2010 turbotax This age limitation does not apply if the new beneficiary is a special needs beneficiary. Free 2010 turbotax An amount is rolled over if it is paid to another Coverdell ESA within 60 days after the date of the distribution. Free 2010 turbotax Do not report qualifying rollovers (those that meet the above criteria) anywhere on Form 1040 or 1040NR. Free 2010 turbotax These are not taxable distributions. Free 2010 turbotax Members of the beneficiary's family. Free 2010 turbotax   For these purposes, the beneficiary's family includes the beneficiary's spouse and the following other relatives of the beneficiary. Free 2010 turbotax Son, daughter, stepchild, foster child, adopted child, or a descendant of any of them. Free 2010 turbotax Brother, sister, stepbrother, or stepsister. Free 2010 turbotax Father or mother or ancestor of either. Free 2010 turbotax Stepfather or stepmother. Free 2010 turbotax Son or daughter of a brother or sister. Free 2010 turbotax Brother or sister of father or mother. Free 2010 turbotax Son-in-law, daughter-in-law, father-in-law, mother-in-law, brother-in-law, or sister-in-law. Free 2010 turbotax The spouse of any individual listed above. Free 2010 turbotax First cousin. Free 2010 turbotax Example. Free 2010 turbotax When Aaron graduated from college last year he had $5,000 left in his Coverdell ESA. Free 2010 turbotax He wanted to give this money to his younger sister, who was still in high school. Free 2010 turbotax In order to avoid paying tax on the distribution of the amount remaining in his account, Aaron contributed the same amount to his sister's Coverdell ESA within 60 days of the distribution. Free 2010 turbotax Only one rollover per Coverdell ESA is allowed during the 12-month period ending on the date of the payment or distribution. Free 2010 turbotax This rule does not apply to the rollover of a military death gratuity or payment from Servicemembers' Group Life Insurance (SGLI). Free 2010 turbotax Military death gratuity. Free 2010 turbotax   If you received a military death gratuity or a payment from Servicemembers' Group Life Insurance (SGLI), you may roll over all or part of the amount received to one or more Coverdell ESAs for the benefit of members of the beneficiary's family (see Members of the beneficiary's family , earlier). Free 2010 turbotax Such payments are made to an eligible survivor upon the death of a member of the armed forces. Free 2010 turbotax The contribution to a Coverdell ESA from survivor benefits received cannot be made later than 1 year after the date on which you receive the gratuity or SGLI payment. Free 2010 turbotax   This rollover contribution is not subject to (but is in addition to) the contribution limits discussed earlier under Contribution Limits . Free 2010 turbotax The amount you roll over cannot exceed the total survivor benefits you received, reduced by contributions from these benefits to a Roth IRA or other Coverdell ESAs. Free 2010 turbotax   The amount contributed from the survivor benefits is treated as part of your basis (cost) in the Coverdell ESA, and will not be taxed when distributed. Free 2010 turbotax See Distributions , later. Free 2010 turbotax The limit of one rollover per Coverdell ESA during a 12-month period does not apply to a military death gratuity or SGLI payment. Free 2010 turbotax Changing the Designated Beneficiary The designated beneficiary can be changed. Free 2010 turbotax See Members of the beneficiary's family , earlier. Free 2010 turbotax There are no tax consequences if, at the time of the change, the new beneficiary is under age 30 or is a special needs beneficiary. Free 2010 turbotax Example. Free 2010 turbotax Assume the same situation for Aaron as in the last example (see Rollovers , earlier). Free 2010 turbotax Instead of closing his Coverdell ESA and paying the distribution into his sister's Coverdell ESA, Aaron could have instructed the trustee of his account to simply change the name of the beneficiary on his account to that of his sister. Free 2010 turbotax Transfer Because of Divorce If a spouse or former spouse receives a Coverdell ESA under a divorce or separation instrument, it is not a taxable transfer. Free 2010 turbotax After the transfer, the spouse or former spouse treats the Coverdell ESA as his or her own. Free 2010 turbotax Example. Free 2010 turbotax In their divorce settlement, Peg received her ex-husband's Coverdell ESA. Free 2010 turbotax In this process, the account was transferred into her name. Free 2010 turbotax Peg now treats the funds in this Coverdell ESA as if she were the original owner. Free 2010 turbotax Distributions The designated beneficiary of a Coverdell ESA can take a distribution at any time. Free 2010 turbotax Whether the distributions are tax free depends, in part, on whether the distributions are equal to or less than the amount of Adjusted qualified education expenses (defined later) that the beneficiary has in the same tax year. Free 2010 turbotax See Table 7-3, Coverdell ESA Distributions at a Glance, for highlights. Free 2010 turbotax Table 7-3. Free 2010 turbotax Coverdell ESA Distributions at a Glance Do not rely on this table alone. Free 2010 turbotax It provides only general highlights. Free 2010 turbotax See the text for definitions of terms in bold type and for more complete explanations. Free 2010 turbotax Question Answer Is a distribution from a Coverdell ESA to pay for a designated beneficiary's qualified education expenses tax free? Generally, yes, to the extent the amount of the distribution is not more than the designated beneficiary's adjusted qualified education expenses. Free 2010 turbotax After the designated beneficiary completes his or her education at an eligible educational institution, can amounts remaining in the Coverdell ESA be distributed? Yes. Free 2010 turbotax Amounts must be distributed when the designated beneficiary reaches age 30, unless he or she is a special needs beneficiary. Free 2010 turbotax Also, certain transfers to members of the beneficiary's family are permitted. Free 2010 turbotax Does the designated beneficiary need to be enrolled for a minimum number of courses to take a tax-free distribution? No. Free 2010 turbotax Adjusted qualified education expenses. Free 2010 turbotax   To determine if total distributions for the year are more than the amount of qualified education expenses, reduce total qualified education expenses by any tax-free educational assistance. Free 2010 turbotax Tax-free educational assistance includes: The tax-free part of scholarships and fellowships (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Pell grants (see Pell Grants and Other Title IV Need-Based Education Grants in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), and Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Free 2010 turbotax The amount you get by subtracting tax-free educational assistance from your total qualified education expenses is your adjusted qualified education expenses. Free 2010 turbotax Tax-Free Distributions Generally, distributions are tax free if they are not more than the beneficiary's adjusted qualified education expenses for the year. Free 2010 turbotax Do not report tax-free distributions (including qualifying rollovers) on your tax return. Free 2010 turbotax Taxable Distributions A portion of the distributions is generally taxable to the beneficiary if the total distributions are more than the beneficiary's adjusted qualified education expenses for the year. Free 2010 turbotax Excess distribution. Free 2010 turbotax   This is the part of the total distribution that is more than the beneficiary's adjusted qualified education expenses for the year. Free 2010 turbotax Earnings and basis. Free 2010 turbotax   You will receive a Form 1099-Q for each of the Coverdell ESAs from which money was distributed in 2013. Free 2010 turbotax The amount of your gross distribution will be shown in box 1. Free 2010 turbotax For 2013, instead of dividing the gross distribution between your earnings (box 2) and your basis (already-taxed amount) (box 3), the payer or trustee may report the fair market value (account balance) of the Coverdell ESA as of December 31, 2013. Free 2010 turbotax This will be shown in the blank box below boxes 5 and 6. Free 2010 turbotax   The amount contributed from survivor benefits (see Military death gratuity , earlier) is treated as part of your basis and will not be taxed when distributed. Free 2010 turbotax Figuring the Taxable Portion of a Distribution The taxable portion is the amount of the excess distribution that represents earnings that have accumulated tax free in the account. Free 2010 turbotax Figure the taxable portion for 2013 as shown in the following steps. Free 2010 turbotax Multiply the total amount distributed by a fraction. Free 2010 turbotax The numerator is the basis (contributions not previously distributed) at the end of 2012 plus total contributions for 2013 and the denominator is the value (balance) of the account at the end of 2013 plus the amount distributed during 2013. Free 2010 turbotax Subtract the amount figured in (1) from the total amount distributed during 2013. Free 2010 turbotax The result is the amount of earnings included in the distribution(s). Free 2010 turbotax Multiply the amount of earnings figured in (2) by a fraction. Free 2010 turbotax The numerator is the adjusted qualified education expenses paid during 2013 and the denominator is the total amount distributed during 2013. Free 2010 turbotax Subtract the amount figured in (3) from the amount figured in (2). Free 2010 turbotax The result is the amount the beneficiary must include in income. Free 2010 turbotax The taxable amount must be reported on Form 1040 or Form 1040NR, line 21. Free 2010 turbotax Example. Free 2010 turbotax You received an $850 distribution from your Coverdell ESA, to which $1,500 had been contributed before 2013. Free 2010 turbotax There were no contributions in 2013. Free 2010 turbotax This is your first distribution from the account, so your basis in the account on December 31, 2012, was $1,500. Free 2010 turbotax The value (balance) of your account on December 31, 2013, was $950. Free 2010 turbotax You had $700 of adjusted qualified education expenses (AQEE) for the year. Free 2010 turbotax Using the steps in Figuring the Taxable Portion of a Distribution , earlier, figure the taxable portion of your distribution as follows. Free 2010 turbotax   1. Free 2010 turbotax $850 (distribution) × $1,500 basis + $0 contributions  $950 value + $850 distribution       =$708 (basis portion of distribution)     2. Free 2010 turbotax $850 (distribution)−$708 (basis portion of distribution)     =$142 (earnings included in distribution)   3. Free 2010 turbotax $142 (earnings) × $700 AQEE  $850 distribution           =$117 (tax-free earnings)     4. Free 2010 turbotax $142 (earnings)−$117 (tax-free earnings)=$25 (taxable earnings)                 You must include $25 in income as distributed earnings not used for qualified education expenses. Free 2010 turbotax Report this amount on Form 1040, line 21, listing the type and amount of income on the dotted line. Free 2010 turbotax Worksheet 7-3, Coverdell ESA–Taxable Distributions and Basis , at the end of this chapter, can help you figure your adjusted qualified education expenses, how much of your distribution must be included in income, and the remaining basis in your Coverdell ESA(s). Free 2010 turbotax Coordination With American Opportunity and Lifetime Learning Credits The American opportunity or lifetime learning credit can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits. Free 2010 turbotax This means the beneficiary must reduce qualified higher education expenses by tax-free educational assistance, and then further reduce them by any expenses taken into account in determining an American opportunity or lifetime learning credit. Free 2010 turbotax Example. Free 2010 turbotax Derek Green had $5,800 of qualified higher education expenses for 2013, his first year in college. Free 2010 turbotax He paid his college expenses from the following sources. Free 2010 turbotax     Partial tuition scholarship (tax free) $1,500     Coverdell ESA distribution 1,000     Gift from parents 2,100     Earnings from part-time job 1,200           Of his $5,800 of qualified higher education expenses, $4,000 was tuition and related expenses that also qualified for an American opportunity credit. Free 2010 turbotax Derek's parents claimed a $2,500 American opportunity credit (based on $4,000 expenses) on their tax return. Free 2010 turbotax Before Derek can determine the taxable portion of his Coverdell ESA distribution, he must reduce his total qualified higher education expenses. Free 2010 turbotax     Total qualified higher education expenses $5,800     Minus: Tax-free educational assistance −1,500     Minus: Expenses taken into account in  figuring American opportunity credit − 4,000     Equals: Adjusted qualified higher education  expenses (AQHEE) $ 300           Since the adjusted qualified higher education expenses ($300) are less than the Coverdell ESA distribution ($1,000), part of the distribution will be taxable. Free 2010 turbotax The balance in Derek's account was $1,800 on December 31, 2013. Free 2010 turbotax Prior to 2013, $2,100 had been contributed to this account. Free 2010 turbotax Contributions for 2013 totaled $400. Free 2010 turbotax Using the four steps outlined earlier, Derek figures the taxable portion of his distribution as shown below. Free 2010 turbotax   1. Free 2010 turbotax $1,000 (distribution) × $2,100 basis + $400 contributions  $1,800 value + $1,000 distribution           =$893 (basis portion of distribution)     2. Free 2010 turbotax $1,000 (distribution)−$893 (basis portion of distribution)     = $107 (earnings included in distribution)   3. Free 2010 turbotax $107 (earnings) × $300 AQHEE  $1,000 distribution       =$32 (tax-free earnings)     4. Free 2010 turbotax $107 (earnings)−$32 (tax-free earnings)=$75 (taxable earnings)                 Derek must include $75 in income (Form 1040, line 21). Free 2010 turbotax This is the amount of distributed earnings not used for adjusted qualified higher education expenses. Free 2010 turbotax Coordination With Qualified Tuition Program (QTP) Distributions If a designated beneficiary receives distributions from both a Coverdell ESA and a QTP in the same year, and the total distribution is more than the beneficiary's adjusted qualified higher education expenses, those expenses must be allocated between the distribution from the Coverdell ESA and the distribution from the QTP before figuring how much of each distribution is taxable. Free 2010 turbotax The following two examples illustrate possible allocations. Free 2010 turbotax Example 1. Free 2010 turbotax In 2013, Beatrice graduated from high school and began her first semester of college. Free 2010 turbotax That year, she had $1,000 of qualified elementary and secondary education expenses (QESEE) for high school and $3,000 of qualified higher education expenses (QHEE) for college. Free 2010 turbotax To pay these expenses, Beatrice withdrew $800 from her Coverdell ESA and $4,200 from her QTP. Free 2010 turbotax No one claimed Beatrice as a dependent, nor was she eligible for an education credit. Free 2010 turbotax She did not receive any tax-free educational assistance in 2013. Free 2010 turbotax Beatrice must allocate her total qualified education expenses between the two distributions. Free 2010 turbotax Beatrice knows that tax-free treatment will be available if she applies her $800 Coverdell ESA distribution toward her $1,000 of qualified education expenses for high school. Free 2010 turbotax The qualified expenses are greater than the distribution, making the $800 Coverdell ESA distribution tax free. Free 2010 turbotax Next, Beatrice matches her $4,200 QTP distribution to her $3,000 of QHEE, and finds she has an excess QTP distribution of $1,200 ($4,200 QTP − $3,000 QHEE). Free 2010 turbotax She cannot use the extra $200 of high school expenses (from (1) above) against the QTP distribution because those expenses do not qualify a QTP for tax-free treatment. Free 2010 turbotax Finally, Beatrice figures the taxable and tax-free portions of her QTP distribution based on her $3,000 of QHEE. Free 2010 turbotax (See Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program for more information. Free 2010 turbotax ) Example 2. Free 2010 turbotax Assume the same facts as in Example 1 , except that Beatrice withdrew $1,800 from her Coverdell ESA and $3,200 from her QTP. Free 2010 turbotax In this case, she allocates her qualified education expenses as follows. Free 2010 turbotax Using the same reasoning as in Example 1, Beatrice matches $1,000 of her Coverdell ESA distribution to her $1,000 of QESEE—she has $800 of her distribution remaining. Free 2010 turbotax Because higher education expenses can also qualify a Coverdell ESA distribution for tax-free treatment, Beatrice allocates her $3,000 of QHEE between the remaining $800 Coverdell ESA and the $3,200 QTP distributions ($4,000 total). Free 2010 turbotax   $3,000 QHEE × $800 ESA distribution  $4,000 total distribution = $600 QHEE (ESA)     $3,000 QHEE × $3,200 QTP distribution  $4,000 total distribution = $2,400 QHEE (QTP)   Beatrice then figures the taxable part of her: Coverdell ESA distribution based on qualified education expenses of $1,600 ($1,000 QESEE + $600 QHEE). Free 2010 turbotax See Figuring the Taxable Portion of a Distribution , earlier, in this chapter. Free 2010 turbotax   QTP distribution based on her $2,400 of QHEE (see Figuring the Taxable Portion of a Distribution in chapter 8, Qualified Tuition Program). Free 2010 turbotax The above examples show two types of allocation between distributions from a Coverdell ESA and a QTP. Free 2010 turbotax However, you do not have to allocate your expenses in the same way. Free 2010 turbotax You can use any reasonable method. Free 2010 turbotax Losses on Coverdell ESA Investments If you have a loss on your investment in a Coverdell ESA, you may be able to deduct the loss on your income tax return. Free 2010 turbotax You can deduct the loss only when all amounts from that account have been distributed and the total distributions are less than your unrecovered basis. Free 2010 turbotax Your basis is the total amount of contributions to that Coverdell ESA. Free 2010 turbotax You claim the loss as a miscellaneous itemized deduction on Schedule A (Form 1040), line 23 (Schedule A (Form 1040NR), line 9), subject to the 2%-of-adjusted-gross-income limit. Free 2010 turbotax If you have distributions from more than one Coverdell ESA account during a year, you must combine the information (amount of distribution, basis, etc. Free 2010 turbotax ) from all such accounts in order to determine your taxable earnings for the year. Free 2010 turbotax By doing this, the loss from one ESA account reduces the distributed earnings (if any) from any other ESA account. Free 2010 turbotax For examples of the calculation, see Losses on QTP Investments in chapter 8, Qualified Tuition Program. Free 2010 turbotax Additional Tax on Taxable Distributions Generally, if you receive a taxable distribution, you also must pay a 10% additional tax on the amount included in income. Free 2010 turbotax Exceptions. Free 2010 turbotax   The 10% additional tax does not apply to distributions: Paid to a beneficiary (or to the estate of the designated beneficiary) on or after the death of the designated beneficiary. Free 2010 turbotax Made because the designated beneficiary is disabled. Free 2010 turbotax A person is considered to be disabled if he or she shows proof that he or she cannot do any substantial gainful activity because of his or her physical or mental condition. Free 2010 turbotax A physician must determine that his or her condition can be expected to result in death or to be of long-continued and indefinite duration. Free 2010 turbotax Included in income because the designated beneficiary received: A tax-free scholarship or fellowship (see Tax-Free Scholarships and Fellowships in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Veterans' educational assistance (see Veterans' Benefits in chapter 1, Scholarships, Fellowships, Grants, and Tuition Reductions), Employer-provided educational assistance (see chapter 11, Employer-Provided Educational Assistance ), or Any other nontaxable (tax-free) payments (other than gifts or inheritances) received as educational assistance. Free 2010 turbotax Made on account of the attendance of the designated beneficiary at a U. Free 2010 turbotax S. Free 2010 turbotax military academy (such as the USMA at West Point). Free 2010 turbotax This exception applies only to the extent that the amount of the distribution does not exceed the costs of advanced education (as defined in section 2005(d)(3) of title 10 of the U. Free 2010 turbotax S. Free 2010 turbotax Code) attributable to such attendance. Free 2010 turbotax Included in income only because the qualified education expenses were taken into account in determining the American opportunity or lifetime learning credit (see Coordination With American Opportunity and Lifetime Learning Credits , earlier). Free 2010 turbotax Made before June 1, 2014, of an excess 2013 contribution (and any earnings on it). Free 2010 turbotax The distributed earnings must be included in gross income for the year in which the excess contribution was made. Free 2010 turbotax Exception (3) applies only to the extent the distribution is not more than the scholarship, allowance, or payment. Free 2010 turbotax Figuring the additional tax. Free 2010 turbotax    Use Part II of Form 5329, to figure any additional tax. Free 2010 turbotax Report the amount on Form 1040, line 58, or Form 1040NR, line 56. Free 2010 turbotax When Assets Must Be Distributed Any assets remaining in a Coverdell ESA must be distributed when either one of the following two events occurs. Free 2010 turbotax The designated beneficiary reaches age 30. Free 2010 turbotax In this case, the remaining assets must be distributed within 30 days after the beneficiary reaches age 30. Free 2010 turbotax However, this rule does not apply if the beneficiary is a special needs beneficiary. Free 2010 turbotax The designated beneficiary dies before reaching age 30. Free 2010 turbotax In this case, the remaining assets must generally be distributed within 30 days after the date of death. Free 2010 turbotax Exception for Transfer to Surviving Spouse or Family Member If a Coverdell ESA is transferred to a surviving spouse or other family member as the result of the death of the designated beneficiary, the Coverdell ESA retains its status. Free 2010 turbotax (“Family member” was defined earlier under Rollovers . Free 2010 turbotax ) This means the spouse or other family member can treat the Coverdell ESA as his or her own and does not need to withdraw the assets until he or she reaches age 30. Free 2010 turbotax This age limitation does not apply if the new beneficiary is a special needs beneficiary. Free 2010 turbotax There are no tax consequences as a result of the transfer. Free 2010 turbotax How To Figure the Taxable Earnings When a total distribution is made because the designated beneficiary either reached age 30 or died, the earnings that accumulated tax free in the account must be included in taxable income. Free 2010 turbotax You determine these earnings as shown in the following two steps. Free 2010 turbotax Multiply the amount distributed by a fraction. Free 2010 turbotax The numerator is the basis (contributions not previously distributed) at the end of 2012 plus total contributions for 2013 and the denominator is the balance in the account at the end of 2013 plus the amount distributed during 2013. Free 2010 turbotax Subtract the amount figured in (1) from the total amount distributed during 2013. Free 2010 turbotax The result is the amount of earnings included in the distribution. Free 2010 turbotax For an example, see steps (1) and (2) of the Example under Figuring the Taxable Portion of a Distribution, earlier. Free 2010 turbotax The beneficiary or other person receiving the distribution must report this amount on Form 1040, line 21, or Form 1040NR, line 21, listing the type and amount of income on the dotted line. Free 2010 turbotax Worksheet 7-3 Instructions. Free 2010 turbotax Coverdell ESA—Taxable Distributions and Basis Line G. Free 2010 turbotax Enter the total distributions received from all Coverdell ESAs during 2013. Free 2010 turbotax Do not include amounts rolled over to another ESA within 60 days (only one rollover is allowed during any 12-month period). Free 2010 turbotax Also, do not include excess contributions that were distributed with the related earnings (or less any loss) before the first day of the sixth month of the tax year following the year for which the contributions were made. Free 2010 turbotax Line 2. Free 2010 turbotax Your basis (amount already taxed) in this Coverdell ESA as of December 31, 2012, is the total of:   •All contributions to this Coverdell ESA before 2013 •Minus the tax-free portion of any distributions from this Coverdell ESA before 2013. Free 2010 turbotax   If your last distribution from this Coverdell ESA was before 2013, you must start with the basis in your account as of the end of the last year in which you took a distribution. Free 2010 turbotax For years before 2002, you can find that amount on the last line of the worksheet in the Instructions for Form 8606, Nondeductible IRAs, that you completed for that year. Free 2010 turbotax For years after 2001, you can find that amount by using the ending basis from the worksheet in Publication 970 for that year. Free 2010 turbotax You can determine your basis in this Coverdell ESA as of December 31, 2012, by adding to the basis as of the end of that year any contributions made to that account after the year of the distribution and before 2013. Free 2010 turbotax Line 4. Free 2010 turbotax Enter the total distributions received from this Coverdell ESA in 2013. Free 2010 turbotax Do not include amounts rolled over to another Coverdell ESA within 60 days (only one rollover is allowed during any 12-month period). Free 2010 turbotax   Also, do not include excess contributions that were distributed with the related earnings (or less any loss) before the first day of the sixth month of the tax year following the year of the contributions. Free 2010 turbotax Line 7. Free 2010 turbotax Enter the total value of this Coverdell ESA as of December 31, 2013, plus any outstanding rollovers contributed to the account after 2012, but before the end of the 60-day rollover period. Free 2010 turbotax A statement should be sent to you by January 31, 2014, for this Coverdell ESA showing the value on December 31, 2013. Free 2010 turbotax   A rollover is a tax-free withdrawal from one Coverdell ESA that is contributed to another Coverdell ESA. Free 2010 turbotax An outstanding rollover is any amount withdrawn within 60 days before the end of 2013 (November 2 through December 31) that was rolled over after December 31, 2013, but within the 60-day rollover period. Free 2010 turbotax Worksheet 7-3. Free 2010 turbotax Coverdell ESA—Taxable Distributions and Basis How to complete this worksheet. Free 2010 turbotax • • • Complete Part I, lines A through H, on only one worksheet. Free 2010 turbotax  Complete a separate Part II, lines 1 through 15, for each of your Coverdell ESAs. Free 2010 turbotax  Complete Part III, the Summary (line 16), on only one worksheet. Free 2010 turbotax Part I. Free 2010 turbotax Qualified Education Expenses (Complete for total expenses)       A. Free 2010 turbotax Enter your total qualified education expenses for 2013   A. Free 2010 turbotax   B. Free 2010 turbotax Enter those qualified education expenses paid for with tax-free educational assistance (for example, tax-free scholarships, veterans' educational benefits, Pell grants, employer-provided educational assistance)   B. Free 2010 turbotax         C. Free 2010 turbotax Enter those qualified higher education expenses deducted on Schedule C or C-EZ (Form 1040). Free 2010 turbotax Schedule F (Form 1040), or as a miscellaneous itemized deduction on Schedule A (Form 1040 or 1040NR)   C. Free 2010 turbotax         D. Free 2010 turbotax Enter those qualified higher education expenses on which  an American opportunity or lifetime learning credit was based   D. Free 2010 turbotax         E. Free 2010 turbotax Add lines B, C, and D   D. Free 2010 turbotax   F. Free 2010 turbotax Subtract line E from line A. Free 2010 turbotax This is your adjusted qualified education expense for 2013   E. Free 2010 turbotax   G. Free 2010 turbotax Enter your total distributions from all Coverdell ESAs during 2013. Free 2010 turbotax Do not include rollovers  or the return of excess contributions (see instructions)   F. Free 2010 turbotax   H. Free 2010 turbotax Divide line F by line G. Free 2010 turbotax Enter the result as a decimal (rounded to at least 3 places). Free 2010 turbotax If the  result is 1. Free 2010 turbotax 000 or more, enter 1. Free 2010 turbotax 000   G. Free 2010 turbotax . Free 2010 turbotax Part II. Free 2010 turbotax Taxable Distributions and Basis (Complete separately for each account) 1. Free 2010 turbotax Enter the amount contributed to this Coverdell ESA for 2013, including contributions made for 2013 from January 1, 2014, through April 15, 2014. Free 2010 turbotax Do not include rollovers or the return of excess contributions   1. Free 2010 turbotax   2. Free 2010 turbotax Enter your basis in this Coverdell ESA as of December 31, 2012 (see instructions)   2. Free 2010 turbotax   3. Free 2010 turbotax Add lines 1 and 2   3. Free 2010 turbotax   4. Free 2010 turbotax Enter the total distributions from this Coverdell ESA during 2013. Free 2010 turbotax Do not include rollovers  or the return of excess contributions (see instructions)   4. Free 2010 turbotax   5. Free 2010 turbotax Multiply line 4 by line H. Free 2010 turbotax This is the amount of adjusted qualified  education expense attributable to this Coverdell ESA   5. Free 2010 turbotax         6. Free 2010 turbotax Subtract line 5 from line 4   6. Free 2010 turbotax         7. Free 2010 turbotax Enter the total value of this Coverdell ESA as of December 31, 2013,  plus any outstanding rollovers (see instructions)   7. Free 2010 turbotax         8. Free 2010 turbotax Add lines 4 and 7   8. Free 2010 turbotax         9. Free 2010 turbotax Divide line 3 by line 8. Free 2010 turbotax Enter the result as a decimal (rounded to  at least 3 places). Free 2010 turbotax If the result is 1. Free 2010 turbotax 000 or more, enter 1. Free 2010 turbotax 000   9. Free 2010 turbotax . Free 2010 turbotax       10. Free 2010 turbotax Multiply line 4 by line 9. Free 2010 turbotax This is the amount of basis allocated to your  distributions, and is tax free   10. Free 2010 turbotax     Note. Free 2010 turbotax If line 6 is zero, skip lines 11 through 13, enter -0- on line 14, and go to line 15. Free 2010 turbotax       11. Free 2010 turbotax Subtract line 10 from line 4   11. Free 2010 turbotax   12. Free 2010 turbotax Divide line 5 by line 4. Free 2010 turbotax Enter the result as a decimal (rounded to  at least 3 places). Free 2010 turbotax If the result is 1. Free 2010 turbotax 000 or more, enter 1. Free 2010 turbotax 000   12. Free 2010 turbotax . Free 2010 turbotax       13. Free 2010 turbotax Multiply line 11 by line 12. Free 2010 turbotax This is the amount of qualified education  expenses allocated to your distributions, and is tax free   13. Free 2010 turbotax   14. Free 2010 turbotax Subtract line 13 from line 11. Free 2010 turbotax This is the portion of the distributions from this  Coverdell ESA in 2013 that you must include in income   14. Free 2010 turbotax   15. Free 2010 turbotax Subtract line 10 from line 3. Free 2010 turbotax This is your basis in this Coverdell ESA as of December 31, 2013   15. Free 2010 turbotax   Part III. Free 2010 turbotax Summary (Complete only once)       16. Free 2010 turbotax Taxable amount. Free 2010 turbotax Add together all amounts on line 14 for all your Coverdell ESAs. Free 2010 turbotax Enter here  and include on Form 1040, line 21, or Form 1040NR, line 21, listing the type and amount of income on the dotted line   16. Free 2010 turbotax   Prev  Up  Next   Home   More Online Publications
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The Free 2010 Turbotax

Free 2010 turbotax 10. Free 2010 turbotax   Installment Sales Table of Contents Introduction Topics - This chapter discusses: Useful Items - You may want to see: Installment Sale of a Farm Installment MethodWhen to elect out. Free 2010 turbotax Revoking the election. Free 2010 turbotax More information. Free 2010 turbotax Figuring Installment Sale Income Payments Received or Considered Received ExampleSection 1231 gains. Free 2010 turbotax Summary. Free 2010 turbotax Introduction An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. Free 2010 turbotax If you realize a gain on an installment sale, you may be able to report part of your gain when you receive each payment. Free 2010 turbotax This method of reporting gain is called the installment method. Free 2010 turbotax You cannot use the installment method to report a loss. Free 2010 turbotax You can choose to report all of your gain in the year of sale. Free 2010 turbotax Installment obligation. Free 2010 turbotax   The buyer's obligation to make future payments to you can be in the form of a deed of trust, note, land contract, mortgage, or other evidence of the buyer's debt to you. Free 2010 turbotax Topics - This chapter discusses: The general rules that apply to using the installment method Installment sale of a farm Useful Items - You may want to see: Publication 523 Selling Your Home 535 Business Expenses 537 Installment Sales 538 Accounting Periods and Methods 544 Sales and Other Dispositions of Assets Form (and Instructions) 4797 Sales of Business Property 6252 Installment Sale Income See chapter 16 for information about getting publications and forms. Free 2010 turbotax Installment Sale of a Farm The installment sale of a farm for one overall price under a single contract is not the sale of a single asset. Free 2010 turbotax It generally includes the sale of real property and personal property reportable on the installment method. Free 2010 turbotax It may also include the sale of property for which you must maintain an inventory, which cannot be reported on the installment method. Free 2010 turbotax See Inventory , later. Free 2010 turbotax The selling price must be allocated to determine the amount received for each class of asset. Free 2010 turbotax The tax treatment of the gain or loss on the sale of each class of assets is determined by its classification as a capital asset, as property used in the business, or as property held for sale and by the length of time the asset was held. Free 2010 turbotax (See chapter 8 for a discussion of capital assets and chapter 9 for a discussion of property used in the business. Free 2010 turbotax ) Separate computations must be made to figure the gain or loss for each class of asset sold. Free 2010 turbotax See Sale of a Farm in chapter 8. Free 2010 turbotax If you report the sale of property on the installment method, any depreciation recapture under section 1245 or 1250 of the Internal Revenue Code is generally taxable as ordinary income in the year of sale. Free 2010 turbotax See Depreciation recapture , later. Free 2010 turbotax This applies even if no payments are received in that year. Free 2010 turbotax Installment Method An installment sale is a sale of property where you receive at least one payment after the tax year of the sale. Free 2010 turbotax A farmer who is not required to maintain an inventory can use the installment method to report gain from the sale of property used or produced in farming. Free 2010 turbotax See Inventory , later, for information on the sale of farm property where inventory items are included in the assets sold. Free 2010 turbotax If a sale qualifies as an installment sale, the gain must be reported under the installment method unless you elect out of using the installment method. Free 2010 turbotax Electing out of the installment method. Free 2010 turbotax   If you elect not to use the installment method, you generally report the entire gain in the year of sale, even though you do not receive all the sale proceeds in that year. Free 2010 turbotax   To make this election, do not report your sale on Form 6252. Free 2010 turbotax Instead, report it on Schedule D (Form 1040), Form 4797, or both. Free 2010 turbotax When to elect out. Free 2010 turbotax   Make this election by the due date, including extensions, for filing your tax return for the year the sale takes place. Free 2010 turbotax   However, if you timely file your tax return for the year the sale takes place without making the election, you still can make the election by filing an amended return within 6 months of the due date of the return (excluding extensions). Free 2010 turbotax Write “Filed pursuant to section 301. Free 2010 turbotax 9100-2” at the top of the amended return and file it where the original return was filed. Free 2010 turbotax Revoking the election. Free 2010 turbotax   Once made, the election can be revoked only with IRS approval. Free 2010 turbotax A revocation is retroactive. Free 2010 turbotax More information. Free 2010 turbotax   See Electing Out of the Installment Method in Publication 537 for more information. Free 2010 turbotax Inventory. Free 2010 turbotax   The sale of farm inventory items cannot be reported on the installment method. Free 2010 turbotax All gain or loss on their sale must be reported in the year of sale, even if you receive payment in later years. Free 2010 turbotax   If inventory items are included in an installment sale, you may have an agreement stating which payments are for inventory and which are for the other assets being sold. Free 2010 turbotax If you do not, each payment must be allocated between the inventory and the other assets sold. Free 2010 turbotax Sale at a loss. Free 2010 turbotax   If your sale results in a loss, you cannot use the installment method. Free 2010 turbotax If the loss is on an installment sale of business assets, you can deduct it only in the tax year of sale. Free 2010 turbotax Figuring Installment Sale Income Each payment on an installment sale usually consists of the following three parts. Free 2010 turbotax Interest income. Free 2010 turbotax Return of your adjusted basis in the property. Free 2010 turbotax Gain on the sale. Free 2010 turbotax In each year you receive a payment, you must include in income both the interest part and the part that is your gain on the sale. Free 2010 turbotax You do not include in income the part that is the return of your basis in the property. Free 2010 turbotax Basis is the amount of your investment in the property for installment sale purposes. Free 2010 turbotax Interest income. Free 2010 turbotax   You must report interest as ordinary income. Free 2010 turbotax Interest is generally not included in a down payment. Free 2010 turbotax However, you may have to treat part of each later payment as interest, even if it is not called interest in your agreement with the buyer. Free 2010 turbotax Interest provided in the agreement is called stated interest. Free 2010 turbotax If the agreement does not provide for enough stated interest, there may be unstated interest or original issue discount. Free 2010 turbotax See Unstated interest , later. Free 2010 turbotax    You must continue to report the interest income on payments you receive in subsequent years as interest income. Free 2010 turbotax Adjusted basis and installment sale income (gain on sale). Free 2010 turbotax   After you have determined how much of each payment to treat as interest, you treat the rest of each payment as if it were made up of two parts. Free 2010 turbotax A tax-free return of your adjusted basis in the property, and Your gain (referred to as “installment sale income” on Form 6252). Free 2010 turbotax Figuring adjusted basis for installment sale purposes. Free 2010 turbotax   You can use Worksheet 10-1 to figure your adjusted basis in the property for installment sale purposes. Free 2010 turbotax When you have completed the worksheet, you will also have determined the gross profit percentage necessary to figure your installment sale income (gain) for this year. Free 2010 turbotax    Worksheet 10-1. Free 2010 turbotax Figuring Adjusted Basis and Gross Profit Percentage 1. Free 2010 turbotax Enter the selling price for the property   2. Free 2010 turbotax Enter your adjusted basis for the property     3. Free 2010 turbotax Enter your selling expenses     4. Free 2010 turbotax Enter any depreciation recapture     5. Free 2010 turbotax Add lines 2, 3, and 4. Free 2010 turbotax  This is your adjusted basis  for installment sale purposes   6. Free 2010 turbotax Subtract line 5 from line 1. Free 2010 turbotax If zero or less, enter -0-. Free 2010 turbotax  This is your gross profit     If the amount entered on line 6 is zero, Stop here. Free 2010 turbotax You cannot use the installment method. Free 2010 turbotax   7. Free 2010 turbotax Enter the contract price for the property   8. Free 2010 turbotax Divide line 6 by line 7. Free 2010 turbotax This is your gross profit percentage   Selling price. Free 2010 turbotax   The selling price is the total cost of the property to the buyer and includes the following. Free 2010 turbotax Any money you are to receive. Free 2010 turbotax The fair market value (FMV) of any property you are to receive (FMV is discussed at Property used as a payment under Payments Received or Considered Received ). Free 2010 turbotax Any existing mortgage or other debt the buyer pays, assumes, or takes (a note, mortgage, or any other liability, such as a lien, accrued interest, or taxes you owe on the property). Free 2010 turbotax Any of your selling expenses the buyer pays. Free 2010 turbotax Do not include stated interest, unstated interest, any amount recomputed or recharacterized as interest, or original issue discount. Free 2010 turbotax Adjusted basis for installment sale purposes. Free 2010 turbotax   Your adjusted basis is the total of the following three items. Free 2010 turbotax Adjusted basis. Free 2010 turbotax Selling expenses. Free 2010 turbotax Depreciation recapture. Free 2010 turbotax Adjusted basis. Free 2010 turbotax   Basis is your investment in the property for installment sale purposes. Free 2010 turbotax The way you figure basis depends on how you acquire the property. Free 2010 turbotax The basis of property you buy is generally its cost. Free 2010 turbotax The basis of property you inherit, receive as a gift, build yourself, or receive in a tax-free exchange is figured differently. Free 2010 turbotax   While you own property, various events may change your original basis. Free 2010 turbotax Some events, such as adding rooms or making permanent improvements, increase basis. Free 2010 turbotax Others, such as deductible casualty losses or depreciation previously allowed or allowable, decrease basis. Free 2010 turbotax The result is adjusted basis. Free 2010 turbotax See chapter 6 and Publication 551, Basis of Assets, for more information. Free 2010 turbotax Selling expenses. Free 2010 turbotax   Selling expenses relate to the sale of the property. Free 2010 turbotax They include commissions, attorney fees, and any other expenses paid on the sale. Free 2010 turbotax Selling expenses are added to the basis of the sold property. Free 2010 turbotax Depreciation recapture. Free 2010 turbotax   If the property you sold was depreciable property, you may need to recapture part of the gain on the sale as ordinary income. Free 2010 turbotax See Depreciation Recapture in chapter 9 and Depreciation Recapture Income in Publication 537. Free 2010 turbotax Gross profit. Free 2010 turbotax   Gross profit is the total gain you report on the installment method. Free 2010 turbotax   To figure your gross profit, subtract your adjusted basis for installment sale purposes from the selling price. Free 2010 turbotax If the property you sold was your home, subtract from the gross profit any gain you can exclude. Free 2010 turbotax Contract price. Free 2010 turbotax   Contract price equals: The selling price, minus The mortgages, debts, and other liabilities assumed or taken by the buyer, plus The amount by which the mortgages, debts, and other liabilities assumed or taken by the buyer exceed your adjusted basis for installment sale purposes. Free 2010 turbotax Gross profit percentage. Free 2010 turbotax   A certain percentage of each payment (after subtracting interest) is reported as installment sale income. Free 2010 turbotax This percentage is called the gross profit percentage and is figured by dividing your gross profit from the sale by the contract price. Free 2010 turbotax   The gross profit percentage generally remains the same for each payment you receive. Free 2010 turbotax However, see the example under Selling price reduced , later, for a situation where the gross profit percentage changes. Free 2010 turbotax Amount to report as installment sale income. Free 2010 turbotax   Multiply the payments you receive each year (less interest) by the gross profit percentage. Free 2010 turbotax The result is your installment sales income for the tax year. Free 2010 turbotax In certain circumstances, you may be treated as having received a payment, even though you received nothing directly. Free 2010 turbotax A receipt of property or the assumption of a mortgage on the property sold may be treated as a payment. Free 2010 turbotax For a detailed discussion, see Payments Received or Considered Received , later. Free 2010 turbotax Selling price reduced. Free 2010 turbotax   If the selling price is reduced at a later date, the gross profit on the sale also will change. Free 2010 turbotax You then must refigure the gross profit percentage for the remaining payments. Free 2010 turbotax Refigure your gross profit using Worksheet 10-2. Free 2010 turbotax New Gross Profit Percentage — Selling Price Reduced. Free 2010 turbotax You will spread any remaining gain over future installments. Free 2010 turbotax    Worksheet 10-2. Free 2010 turbotax New Gross Profit Percentage — Selling Price Reduced 1. Free 2010 turbotax Enter the reduced selling  price for the property   2. Free 2010 turbotax Enter your adjusted  basis for the  property     3. Free 2010 turbotax Enter your selling  expenses     4. Free 2010 turbotax Enter any depreciation  recapture     5. Free 2010 turbotax Add lines 2, 3, and 4. Free 2010 turbotax   6. Free 2010 turbotax Subtract line 5 from line 1. Free 2010 turbotax  This is your adjusted  gross profit   7. Free 2010 turbotax Enter any installment sale  income reported in  prior year(s)   8. Free 2010 turbotax Subtract line 7 from line 6   9. Free 2010 turbotax Future installments     10. Free 2010 turbotax Divide line 8 by line 9. Free 2010 turbotax  This is your new  gross profit percentage*. Free 2010 turbotax   * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. Free 2010 turbotax Example. Free 2010 turbotax In 2011, you sold land with a basis of $40,000 for $100,000. Free 2010 turbotax Your gross profit was $60,000. Free 2010 turbotax You received a $20,000 down payment and the buyer's note for $80,000. Free 2010 turbotax The note provides for monthly payments of $1,953 each, figured at 8% interest, amortized over four years, beginning in January 2012. Free 2010 turbotax Your gross profit percentage was 60%. Free 2010 turbotax You received the down payment of $20,000 in 2011 and total payments of $23,436 in 2012, of which $17,675 was principal and $5,761 was interest according to the amortization schedule. Free 2010 turbotax You reported a gain of $12,000 on the down payment received in 2011 and $10,605 ($17,675 X 60% (. Free 2010 turbotax 60)) in 2012. Free 2010 turbotax In January 2013, you and the buyer agreed to reduce the purchase price to $85,000 and payments during 2013, 2014, and 2015 are reduced to $1,483 a month amortized over the remaining three years. Free 2010 turbotax The new gross profit percentage, 47. Free 2010 turbotax 32%, is figured in Example — Worksheet 10-2. Free 2010 turbotax Example — Worksheet 10-2. Free 2010 turbotax New Gross Profit Percentage — Selling Price Reduced 1. Free 2010 turbotax Enter the reduced selling  price for the property 85,000 2. Free 2010 turbotax Enter your adjusted  basis for the  property 40,000   3. Free 2010 turbotax Enter your selling  expenses -0-   4. Free 2010 turbotax Enter any depreciation  recapture -0-   5. Free 2010 turbotax Add lines 2, 3, and 4. Free 2010 turbotax 40,000 6. Free 2010 turbotax Subtract line 5 from line 1. Free 2010 turbotax  This is your adjusted  gross profit 45,000 7. Free 2010 turbotax Enter any installment sale  income reported in  prior year(s) 22,605 8. Free 2010 turbotax Subtract line 7 from line 6 22,395 9. Free 2010 turbotax Future installments   47,325 10. Free 2010 turbotax Divide line 8 by line 9. Free 2010 turbotax  This is your new  gross profit percentage*. Free 2010 turbotax 47. Free 2010 turbotax 32% * Apply this percentage to all future payments to determine how much of each of those payments is installment sale income. Free 2010 turbotax You will report installment sale income of $6,878 (47. Free 2010 turbotax 32% of $14,535) in 2013, $7,449 (47. Free 2010 turbotax 32% of $15,742) in 2014, and $8,067 (47. Free 2010 turbotax 32% of $17,048) in 2015. Free 2010 turbotax Form 6252. Free 2010 turbotax   Use Form 6252 to report an installment sale in the year it takes place and to report payments received, or considered received because of related party resales, in later years. Free 2010 turbotax Attach it to your tax return for each year. Free 2010 turbotax Disposition of Installment Obligation If you are using the installment method and you dispose of the installment obligation, generally you will have a gain or loss to report. Free 2010 turbotax It is considered gain or loss on the sale of the property for which you received the installment obligation. Free 2010 turbotax Cancellation. Free 2010 turbotax   If an installment obligation is canceled or otherwise becomes unenforceable, it is treated as a disposition other than a sale or exchange. Free 2010 turbotax Your gain or loss is the difference between your basis in the obligation and its fair market value (FMV) at the time you cancel it. Free 2010 turbotax If the parties are related, the FMV of the obligation is considered to be no less than its full face value. Free 2010 turbotax Transfer due to death. Free 2010 turbotax   The transfer of an installment obligation (other than to a buyer) as a result of the death of the seller is not a disposition. Free 2010 turbotax Any unreported gain from the installment obligation is not treated as gross income to the decedent. Free 2010 turbotax No income is reported on the decedent's return due to the transfer. Free 2010 turbotax Whoever receives the installment obligation as a result of the seller's death is taxed on the installment payments the same as the seller would have been had the seller lived to receive the payments. Free 2010 turbotax   However, if the installment obligation is canceled, becomes unenforceable, or is transferred to the buyer because of the death of the holder of the obligation, it is a disposition. Free 2010 turbotax The estate must figure its gain or loss on the disposition. Free 2010 turbotax If the holder and the buyer were related, the FMV of the installment obligation is considered to be no less than its full face value. Free 2010 turbotax More information. Free 2010 turbotax   For more information on the disposition of an installment obligation, see Publication 537. Free 2010 turbotax Sale of depreciable property. Free 2010 turbotax   You generally cannot report gain from the sale of depreciable property to a related person on the installment method. Free 2010 turbotax See Sale to a Related Person in Publication 537. Free 2010 turbotax   You cannot use the installment method to report any depreciation recapture income up to the gain on the sale. Free 2010 turbotax However, report any gain greater than the recapture income on the installment method. Free 2010 turbotax   The recapture income reported in the year of sale is included in your installment sale basis to determine your gross profit on the installment sale. Free 2010 turbotax   Figure your depreciation recapture income (including the section 179 deduction and the section 179A deduction recapture) in Part III of Form 4797. Free 2010 turbotax Report the depreciation recapture income in Part II of Form 4797 as ordinary income in the year of sale. Free 2010 turbotax    If you sell depreciable business property, prepare Form 4797 first in order to figure the amount to enter on line 12 of Part I, Form 6252. Free 2010 turbotax See the Form 6252 instructions for details. Free 2010 turbotax   For more information on the section 179 deduction, see Section 179 Expense Deduction in chapter 7. Free 2010 turbotax For more information on depreciation recapture, see Depreciation Recapture in  chapter 9. Free 2010 turbotax Payments Received or Considered Received You must figure your gain each year on the payments you receive, or are treated as receiving, from an installment sale. Free 2010 turbotax In certain situations, you are considered to have received a payment, even though the buyer does not pay you directly. Free 2010 turbotax These situations occur when the buyer assumes or pays any of your debts, such as a loan, or pays any of your expenses, such as a sales commission. Free 2010 turbotax However, as discussed later, the buyer's assumption of your debt is treated as a recovery of basis, rather than as a payment, in many cases. Free 2010 turbotax Buyer pays seller's expenses. Free 2010 turbotax   If the buyer pays any of your expenses related to the sale of your property, it is considered a payment to you in the year of sale. Free 2010 turbotax Include these expenses in the selling and contract prices when figuring the gross profit percentage. Free 2010 turbotax Buyer assumes mortgage. Free 2010 turbotax   If the buyer assumes or pays off your mortgage, or otherwise takes the property subject to the mortgage, the following rules apply. Free 2010 turbotax Mortgage less than basis. Free 2010 turbotax   If the buyer assumes a mortgage that is not more than your installment sale basis in the property, it is not considered a payment to you. Free 2010 turbotax It is considered a recovery of your basis. Free 2010 turbotax The contract price is the selling price minus the mortgage. Free 2010 turbotax Example. Free 2010 turbotax You sell property with an adjusted basis of $19,000. Free 2010 turbotax You have selling expenses of $1,000. Free 2010 turbotax The buyer assumes your existing mortgage of $15,000 and agrees to pay you $10,000 (a cash down payment of $2,000 and $2,000 (plus 8% interest) in each of the next 4 years). Free 2010 turbotax The selling price is $25,000 ($15,000 + $10,000). Free 2010 turbotax Your gross profit is $5,000 ($25,000 − $20,000 installment sale basis). Free 2010 turbotax The contract price is $10,000 ($25,000 − $15,000 mortgage). Free 2010 turbotax Your gross profit percentage is 50% ($5,000 ÷ $10,000). Free 2010 turbotax You report half of each $2,000 payment received as gain from the sale. Free 2010 turbotax You also report all interest you receive as ordinary income. Free 2010 turbotax Mortgage more than basis. Free 2010 turbotax   If the buyer assumes a mortgage that is more than your installment sale basis in the property, you recover your entire basis. Free 2010 turbotax The part of the mortgage greater than your basis is treated as a payment received in the year of sale. Free 2010 turbotax   To figure the contract price, subtract the mortgage from the selling price. Free 2010 turbotax This is the total amount (other than interest) you will receive directly from the buyer. Free 2010 turbotax Add to this amount the payment you are considered to have received (the difference between the mortgage and your installment sale basis). Free 2010 turbotax The contract price is then the same as your gross profit from the sale. Free 2010 turbotax    If the mortgage the buyer assumes is equal to or more than your installment sale basis, the gross profit percentage always will be 100%. Free 2010 turbotax Example. Free 2010 turbotax The selling price for your property is $9,000. Free 2010 turbotax The buyer will pay you $1,000 annually (plus 8% interest) over the next 3 years and assume an existing mortgage of $6,000. Free 2010 turbotax Your adjusted basis in the property is $4,400. Free 2010 turbotax You have selling expenses of $600, for a total installment sale basis of $5,000. Free 2010 turbotax The part of the mortgage that is more than your installment sale basis is $1,000 ($6,000 − $5,000). Free 2010 turbotax This amount is included in the contract price and treated as a payment received in the year of sale. Free 2010 turbotax The contract price is $4,000: Selling price $9,000 Minus: Mortgage (6,000) Amount actually received $3,000 Add difference:   Mortgage $6,000   Minus: Installment sale basis 5,000 1,000 Contract price $4,000   Your gross profit on the sale is also $4,000: Selling price $9,000 Minus: Installment sale basis (5,000) Gross profit $4,000   Your gross profit percentage is 100%. Free 2010 turbotax Report 100% of each payment (less interest) as gain from the sale. Free 2010 turbotax Treat the $1,000 difference between the mortgage and your installment sale basis as a payment and report 100% of it as gain in the year of sale. Free 2010 turbotax Buyer assumes other debts. Free 2010 turbotax   If the buyer assumes any other debts, such as a loan or back taxes, it may be considered a payment to you in the year of sale. Free 2010 turbotax   If the buyer assumes the debt instead of paying it off, only part of it may have to be treated as a payment. Free 2010 turbotax Compare the debt to your installment sale basis in the property being sold. Free 2010 turbotax If the debt is less than your installment sale basis, none of it is treated as a payment. Free 2010 turbotax If it is more, only the difference is treated as a payment. Free 2010 turbotax If the buyer assumes more than one debt, any part of the total that is more than your installment sale basis is considered a payment. Free 2010 turbotax These rules are the same as the rules discussed earlier under Buyer assumes mortgage . Free 2010 turbotax However, they apply only to the following types of debt the buyer assumes. Free 2010 turbotax Those acquired from ownership of the property you are selling, such as a mortgage, lien, overdue interest, or back taxes. Free 2010 turbotax Those acquired in the ordinary course of your business, such as a balance due for inventory you purchased. Free 2010 turbotax   If the buyer assumes any other type of debt, such as a personal loan or your legal fees relating to the sale, it is treated as if the buyer had paid off the debt at the time of the sale. Free 2010 turbotax The value of the assumed debt is then considered a payment to you in the year of sale. Free 2010 turbotax Property used as a payment. Free 2010 turbotax   If you receive property rather than money from the buyer, it is still considered a payment in the year received. Free 2010 turbotax However, see Trading property for like-kind property , later. Free 2010 turbotax Generally, the amount of the payment is the property's FMV on the date you receive it. Free 2010 turbotax Exception. Free 2010 turbotax   If the property the buyer gives you is payable on demand or readily tradable (see examples later), the amount you should consider as payment in the year received is: The FMV of the property on the date you receive it if you use the cash method of accounting, The face amount of the obligation on the date you receive it if you use an accrual method of accounting, or The stated redemption price at maturity less any original issue discount (OID) or, if there is no OID, the stated redemption price at maturity appropriately discounted to reflect total unstated interest. Free 2010 turbotax See Unstated interest , later. Free 2010 turbotax Examples. Free 2010 turbotax If you receive a note from the buyer as payment, and the note stipulates that you can demand payment from the buyer at any time, the note is payable on demand. Free 2010 turbotax If you receive marketable securities from the buyer as payment, and you can sell the securities on an established securities market (such as the New York Stock Exchange) at any time, the securities are readily tradable. Free 2010 turbotax In these examples, use the above rules to determine the amount you should consider as payment in the year received. Free 2010 turbotax Debt not payable on demand. Free 2010 turbotax   Any evidence of debt you receive from the buyer that is not payable on demand is not considered a payment. Free 2010 turbotax This is true even if the debt is guaranteed by a third party, including a government agency. Free 2010 turbotax Fair market value (FMV). Free 2010 turbotax   This is the price at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having a reasonable knowledge of all the necessary facts. Free 2010 turbotax Third-party note. Free 2010 turbotax   If the property the buyer gives you is a third-party note (or other obligation of a third party), you are considered to have received a payment equal to the note's FMV. Free 2010 turbotax Because the FMV of the note is itself a payment on your installment sale, any payments you later receive from the third party are not considered payments on the sale. Free 2010 turbotax The excess of the note's face value over its FMV is interest. Free 2010 turbotax Exclude this interest in determining the selling price of the property. Free 2010 turbotax However, see Exception under Property used as a payment , earlier. Free 2010 turbotax Example. Free 2010 turbotax You sold real estate in an installment sale. Free 2010 turbotax As part of the down payment, the buyer assigned to you a $50,000, 8% third-party note. Free 2010 turbotax The FMV of the third-party note at the time of the sale was $30,000. Free 2010 turbotax This amount, not $50,000, is a payment to you in the year of sale. Free 2010 turbotax The third-party note had an FMV equal to 60% of its face value ($30,000 ÷ $50,000), so 60% of each principal payment you receive on this note is a nontaxable return of capital. Free 2010 turbotax The remaining 40% is interest taxed as ordinary income. Free 2010 turbotax Bond. Free 2010 turbotax   A bond or other evidence of debt you receive from the buyer that is payable on demand or readily tradable in an established securities market is treated as a payment in the year you receive it. Free 2010 turbotax For more information on the amount you should treat as a payment, see Exception under Property used as a payment , earlier. Free 2010 turbotax   If you receive a government or corporate bond for a sale before October 22, 2004, and the bond has interest coupons attached or can be readily traded in an established securities market, you are considered to have received payment equal to the bond's FMV. Free 2010 turbotax However, see Exception under Property used as a payment , earlier. Free 2010 turbotax Buyer's note. Free 2010 turbotax   The buyer's note (unless payable on demand) is not considered payment on the sale. Free 2010 turbotax However, its full face value is included when figuring the selling price and the contract price. Free 2010 turbotax Payments you receive on the note are used to figure your gain in the year received. Free 2010 turbotax Sale to a related person. Free 2010 turbotax   If you sell depreciable property to a related person and the sale is an installment sale, you may not be able to report the sale using the installment method. Free 2010 turbotax For information on these rules, see the Instructions for Form 6252 and Sale to a Related Person in Publication 537. Free 2010 turbotax Trading property for like-kind property. Free 2010 turbotax   If you trade business or investment property solely for the same kind of property to be held as business or investment property, you can postpone reporting the gain. Free 2010 turbotax See Like-Kind Exchanges in chapter 8 for a discussion of like-kind property. Free 2010 turbotax   If, in addition to like-kind property, you receive an installment obligation in the exchange, the following rules apply to determine installment sale income each year. Free 2010 turbotax The contract price is reduced by the FMV of the like-kind property received in the trade. Free 2010 turbotax The gross profit is reduced by any gain on the trade that can be postponed. Free 2010 turbotax Like-kind property received in the trade is not considered payment on the installment obligation. Free 2010 turbotax Unstated interest. Free 2010 turbotax   An installment sale contract may provide that each deferred payment on the sale will include interest or that there will be an interest payment in addition to the principal payment. Free 2010 turbotax Interest provided in the contract is called stated interest. Free 2010 turbotax   If an installment sale contract does not provide for adequate stated interest, part of the stated principal amount of the contract may be recharacterized as interest. Free 2010 turbotax If Internal Revenue Code section 483 applies to the contract, this interest is called unstated interest. Free 2010 turbotax   If Internal Revenue Code section 1274 applies to the contract, this interest is called original issue discount (OID). Free 2010 turbotax   Generally, if a buyer gives a debt in consideration for personal use property, the unstated interest rules do not apply. Free 2010 turbotax Therefore, the buyer cannot deduct the unstated interest. Free 2010 turbotax The seller must report the unstated interest as income. Free 2010 turbotax Personal-use property is any property in which substantially all of its use by the buyer is not in connection with a trade or business or an investment activity. Free 2010 turbotax   If the debt is subject to the Internal Revenue Code section 483 rules and is also subject to the below-market loan rules, such as a gift loan, compensation-related loan or corporation-shareholder loan, then both parties are subject to the below-market loan rules rather than the unstated interest rules. Free 2010 turbotax   Unstated interest reduces the stated selling price of the property and the buyer's basis in the property. Free 2010 turbotax It increases the seller's interest income and the buyer's interest expense. Free 2010 turbotax   In general, an installment sale contract provides for adequate stated interest if the stated interest rate (based on an appropriate compounding period) is at least equal to the applicable federal rate (AFR). Free 2010 turbotax    The AFRs are published monthly in the Internal Revenue Bulletin (IRB). Free 2010 turbotax You can get this information by contacting an IRS office. Free 2010 turbotax IRBs are also available at IRS. Free 2010 turbotax gov. Free 2010 turbotax More information. Free 2010 turbotax   For more information, see Unstated Interest and Original Issue Discount (OID) in Publication 537. Free 2010 turbotax Example. Free 2010 turbotax You sell property at a contract price of $6,000 and your gross profit is $1,500. Free 2010 turbotax Your gross profit percentage is 25% ($1,500 ÷ $6,000). Free 2010 turbotax After subtracting interest, you report 25% of each payment, including the down payment, as installment sale income from the sale for the tax year you receive the payment. Free 2010 turbotax The remainder (balance) of each payment is the tax-free return of your adjusted basis. Free 2010 turbotax Example On January 3, 2013, you sold your farm, including the home, farm land and buildings. Free 2010 turbotax You received $50,000 down and the buyer's note for $200,000. Free 2010 turbotax In addition, the buyer assumed an outstanding $50,000 mortgage on the farm land. Free 2010 turbotax The total selling price was $300,000. Free 2010 turbotax The note payments of $25,000 each, plus adequate interest, are due every July 1 and January 1, beginning in July 2013. Free 2010 turbotax Your selling expenses were $15,000. Free 2010 turbotax Adjusted basis and depreciation. Free 2010 turbotax   The adjusted basis and depreciation claimed on each asset sold are as follows:   Depreciation Adjusted Asset Claimed Basis Home* -0- $33,743 Farm land -0- 73,610 Buildings $31,500 35,130 * Owned and used as main home for at least 2 of the 5 years prior to the sale Gain on each asset. Free 2010 turbotax   The following schedule shows the assets included in the sale, each asset's selling price based on its respective value, the selling expense allocated to each asset, the adjusted basis of each asset, and the gain on each asset. Free 2010 turbotax The selling expense for each asset is 5% of the selling price ($15,000 selling expense ÷ $300,000 selling price). Free 2010 turbotax   Selling Selling Adjusted     Price Expense Basis Gain Home* $60,000 $3,000 $33,743 $23,257 Farm land  165,000  8,250  73,610  83,140 Buildings 75,000 3,750 35,130 36,120   $300,000 $15,000 $142,483 $142,517 * Owned and used as main home for at least 2 of the 5 years prior to the sale Depreciation recapture. Free 2010 turbotax   The buildings are section 1250 property. Free 2010 turbotax There is no depreciation recapture income for them because they were depreciated using the straight line method. Free 2010 turbotax See chapter 9 for more information on depreciation recapture. Free 2010 turbotax   Special rules may apply when you sell section 1250 assets depreciated under the straight line method. Free 2010 turbotax See the Unrecaptured Section 1250 Gain Worksheet in the Instructions for Schedule D (Form 1040). Free 2010 turbotax See chapter 3 of Publication 544, Sales and Other Dispositions of Assets, for more information on section 1250 assets. Free 2010 turbotax Installment sale basis and gross profit. Free 2010 turbotax   The following table shows each asset reported on the installment method, its selling price, installment sale basis, and gross profit. Free 2010 turbotax     Installment     Selling Sale Gross   Price Basis Profit Farm land $165,000 $73,610 $83,140 Buildings 75,000 35,130 36,120   $240,000 $108,740 $119,260 Section 1231 gains. Free 2010 turbotax   The gain on the farm land and buildings is reported as section 1231 gains. Free 2010 turbotax See Section 1231 Gains and Losses in chapter 9. Free 2010 turbotax Contract price and gross profit percentage. Free 2010 turbotax   The contract price is $250,000 for the part of the sale reported on the installment method. Free 2010 turbotax This is the selling price ($300,000) minus the mortgage assumed ($50,000). Free 2010 turbotax   Gross profit percentage for the sale is 47. Free 2010 turbotax 70% ($119,260 gross profit ÷ $250,000 contract price). Free 2010 turbotax The gross profit percentage for each asset is figured as follows:   Percent Farm land ($83,140 ÷ $250,000) 33. Free 2010 turbotax 256 Buildings ($36,120 ÷ $250,000) 14. Free 2010 turbotax 448 Total 47. Free 2010 turbotax 70 Figuring the gain to report on the installment method. Free 2010 turbotax   One hundred percent (100%) of each payment is reported on the installment method. Free 2010 turbotax The total amount received on the sale in 2013 is $75,000 ($50,000 down payment + $25,000 payment on July 1). Free 2010 turbotax The installment sale part of the total payments received in 2013 is also $75,000. Free 2010 turbotax Figure the gain to report for each asset by multiplying its gross profit percentage times $75,000. Free 2010 turbotax   Income Farm land—33. Free 2010 turbotax 256% × $75,000 $24,942 Buildings—14. Free 2010 turbotax 448% × $75,000 10,836 Total installment income for 2013 $35,778 Reporting the sale. Free 2010 turbotax   Report the installment sale on Form 6252. Free 2010 turbotax Then report the amounts from Form 6252 on Form 4797 and Schedule D (Form 1040). Free 2010 turbotax Attach a separate page to Form 6252 that shows the computations in the example. Free 2010 turbotax If you sell depreciable business property, prepare Form 4797 first in order to figure the amount to enter on line 12 of Part I, Form 6252. Free 2010 turbotax Section 1231 gains. Free 2010 turbotax   The gains on the farm land and buildings are section 1231 gains. Free 2010 turbotax They may be reported as either capital or ordinary gain depending on the net balance when combined with other section 1231 losses. Free 2010 turbotax A net 1231 gain is capital gain and a net 1231 loss is an ordinary loss. Free 2010 turbotax Installment income for years after 2013. Free 2010 turbotax   You figure installment income for the years after 2013 by applying the same gross profit percentages to the payments you receive each year. Free 2010 turbotax If you receive $50,000 during the year, the entire $50,000 is considered received on the installment sale (100% × $50,000). Free 2010 turbotax You realize income as follows:   Income Farm land—33. Free 2010 turbotax 256% × $50,000 $16,628 Buildings—14. Free 2010 turbotax 448% × $50,000 7,224 Total installment income $23,852   In this example, no gain ever is recognized from the sale of your home. Free 2010 turbotax You will combine your section 1231 gains from this sale with section 1231 gains and losses from other sales in each of the later years to determine whether to report them as ordinary or capital gains. Free 2010 turbotax The interest received with each payment will be included in full as ordinary income. Free 2010 turbotax Summary. Free 2010 turbotax   The installment income (rounded to the nearest dollar) from the sale of the farm is reported as follows: Selling price $190,000 Minus: Installment basis (108,740) Gross profit $81,260     Gain reported in 2012 (year of sale) $35,778 Gain reported in 2013:   $50,000 × 47. Free 2010 turbotax 70% 23,850 Gain reported in 2014:   $50,000 × 47. Free 2010 turbotax 70% 23,850 Gain reported in 2015:   $50,000 × 47. Free 2010 turbotax 70% 23,850 Gain reported in 2016:   $25,000 × 47. Free 2010 turbotax 70% 11,925 Total gain reported $119,253 Prev  Up  Next   Home   More Online Publications