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Free State Tax Filing 2012

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Free State Tax Filing 2012

Free state tax filing 2012 Publication 925 - Main Content Table of Contents Passive Activity LimitsWho Must Use These Rules? Passive Activity Loss Passive Activity Credit Publicly Traded Partnership Excess Farm Loss Passive Activities Activities That Are Not Passive Activities Passive Activity Income and Deductions Grouping Your Activities Recharacterization of Passive Income Dispositions How To Report Your Passive Activity Loss Comprehensive ExampleGeneral Information At-Risk LimitsWho Is Affected? Activities Covered by the At-Risk Rules At-Risk Amounts Amounts Not At Risk Reductions of Amounts At Risk Recapture Rule How To Get Tax HelpLow Income Taxpayer Clinics Passive Activity Limits Who Must Use These Rules? The passive activity rules apply to: Individuals, Estates, Trusts (other than grantor trusts), Personal service corporations, and Closely held corporations. Free state tax filing 2012 Even though the rules do not apply to grantor trusts, partnerships, and S corporations directly, they do apply to the owners of these entities. Free state tax filing 2012 For information about personal service corporations and closely held corporations, including definitions and how the passive activity rules apply to these corporations, see Form 8810 and its instructions. Free state tax filing 2012 Before applying the passive activity limits, you must first determine the amount of the deductions disallowed under the basis, excess farm loss, or at-risk rules. Free state tax filing 2012 See Passive Activity Deductions, later. Free state tax filing 2012 Passive Activity Loss Generally, the passive activity loss for the tax year is not allowed. Free state tax filing 2012 However, there is a special allowance under which some or all of your passive activity loss may be allowed. Free state tax filing 2012 See Special $25,000 allowance , later. Free state tax filing 2012 Definition of passive activity loss. Free state tax filing 2012    Generally, your passive activity loss for the tax year is the excess of your passive activity deductions over your passive activity gross income. Free state tax filing 2012 See Passive Activity Income and Deductions , later. Free state tax filing 2012   For a closely held corporation, the passive activity loss is the excess of passive activity deductions over the sum of passive activity gross income and net active income. Free state tax filing 2012 For details on net active income, see the Instructions for Form 8810. Free state tax filing 2012 For the definition of passive activity gross income, see Passive Activity Income , later. Free state tax filing 2012 For the definition of passive activity deductions, see Passive Activity Deductions , later. Free state tax filing 2012 Identification of Disallowed Passive Activity Deductions If all or a part of your passive activity loss is disallowed for the tax year, you may need to allocate the disallowed passive activity loss among different passive activities and among different deductions within a passive activity. Free state tax filing 2012 Allocation of disallowed passive activity loss among activities. Free state tax filing 2012   If all or any part of your passive activity loss is disallowed for the tax year, a ratable portion of the loss (if any) from each of your passive activities is disallowed. Free state tax filing 2012 The ratable portion of a loss from an activity is computed by multiplying the passive activity loss that is disallowed for the tax year by the fraction obtained by dividing: The loss from the activity for the tax year; by The sum of the losses for the tax year from all activities having losses for the tax year. Free state tax filing 2012 Use Worksheet 5 of Form 8582 to figure the ratable portion of the loss from each activity that is disallowed. Free state tax filing 2012 Loss from an activity. Free state tax filing 2012   The term “loss from an activity” means: The amount by which the passive activity deductions (defined later) from the activity for the tax year exceed the passive activity gross income (defined later) from the activity for the tax year; reduced by Any part of such amount that is allowed under the Special $25,000 Allowance , later. Free state tax filing 2012   If your passive activity gross income from significant participation passive activities (defined later) for the tax year is more than your passive activity deductions from those activities for the tax year, those activities shall be treated, solely for purposes of figuring your loss from the activity, as a single activity that does not have a loss for such taxable year. Free state tax filing 2012 See Significant Participation Passive Activities , later. Free state tax filing 2012 Example. Free state tax filing 2012 John Pine holds interests in three passive activities, A, B, and C. Free state tax filing 2012 The gross income and deductions from these activities for the taxable year are as follows:   A B C Total Gross income $7,000 $4,000 $12,000 $23,000 Deductions (16,000) (20,000) (8,000) (44,000)           Net income (loss) ($9,000) ($16,000) $4,000 ($21,000)   John Pine’s $21,000 passive activity loss for the taxable year is disallowed. Free state tax filing 2012 Therefore, a ratable portion of the losses from activities A and B is disallowed. Free state tax filing 2012 He figures the disallowed portion of each loss as follows: A: $21,000 x $9,000/$25,000 $7,560 B: $21,000 x $16,000/$25,000 13,440     Total $21,000 Allocation within loss activities. Free state tax filing 2012   If all or any part of your loss from an activity is disallowed under Allocation of disallowed passive activity loss among activities for the tax year, a ratable portion of each of your passive activity deductions (defined later), other than an excluded deduction (defined below) from such activity is disallowed. Free state tax filing 2012 The ratable portion of a passive activity deduction is the amount of the disallowed portion of the loss from the activity for the tax year multiplied by the fraction obtained by dividing: The amount of such deduction; by The sum of all of your passive activity deductions (other than excluded deductions) from that activity from the tax year. Free state tax filing 2012 Excluded deductions. Free state tax filing 2012    “Excluded deduction” means any passive activity deduction that is taken into account in computing your net income from an item of property for a taxable year in which an amount of the taxpayer's gross income from such item of property is treated as not from a passive activity. Free state tax filing 2012 See Recharacterization of Passive Income , later. Free state tax filing 2012 Separately identified deductions. Free state tax filing 2012   In identifying the deductions from an activity that are disallowed, you do not need to account separately for a deduction unless such deduction may, if separately taken into account, result in an income tax liability for any tax year different from that which would result were such deduction not taken into account separately. Free state tax filing 2012   Use Form 8582, Worksheet 7, for any activity if you have passive activity deductions for that activity that must be separately identified. Free state tax filing 2012   Deductions that must be accounted for separately include (but are not limited to) the following deductions. Free state tax filing 2012 Deductions that arise in a rental real estate activity in tax years in which you actively participate in such activity. Free state tax filing 2012 See Active participation , later. Free state tax filing 2012 Deductions that arise in a rental real estate activity in tax years in which you do not actively participate in such activity. Free state tax filing 2012 See Active participation , later. Free state tax filing 2012 Losses from sales or exchanges of capital assets. Free state tax filing 2012 Section 1231 losses. Free state tax filing 2012 See Section 1231 Gains and Losses in Publication 544, Sales and Other Disposition of Assets, for more information. Free state tax filing 2012 Carryover of Disallowed Deductions In the case of an activity with respect to which any deductions or credits are disallowed for a taxable year (the loss activity), the disallowed deductions are allocated among your activities for the next tax year in a manner that reasonably reflects the extent to which each activity continues the loss activity. Free state tax filing 2012 The disallowed deductions or credits allocated to an activity under the preceding sentence are treated as deductions or credits from the activity for the next tax year. Free state tax filing 2012 For more information, see Regulations section 1. Free state tax filing 2012 469-1(f)(4). Free state tax filing 2012 Passive Activity Credit Generally, the passive activity credit for the tax year is disallowed. Free state tax filing 2012 The passive activity credit is the amount by which the sum of all your credits subject to the passive activity rules exceed your regular tax liability allocable to all passive activities for the tax year. Free state tax filing 2012 Credits that are included in figuring the general business credit are subject to the passive activity rules. Free state tax filing 2012 See the Instructions for Form 8582-CR for more information. Free state tax filing 2012 Publicly Traded Partnership You must apply the rules in this part separately to your income or loss from a passive activity held through a publicly traded partnership (PTP). Free state tax filing 2012 You also must apply the limit on passive activity credits separately to your credits from a passive activity held through a PTP. Free state tax filing 2012 You can offset deductions from passive activities of a PTP only against income or gain from passive activities of the same PTP. Free state tax filing 2012 Likewise, you can offset credits from passive activities of a PTP only against the tax on the net passive income from the same PTP. Free state tax filing 2012 This separate treatment rule also applies to a regulated investment company holding an interest in a PTP for the items attributable to that interest. Free state tax filing 2012 For more information on how to apply the passive activity loss rules to PTPs, and on how to apply the limit on passive activity credits to PTPs, see Publicly Traded Partnerships (PTPs) in the Instructions for Forms 8582 and 8582-CR, respectively. Free state tax filing 2012 Excess Farm Loss If you receive an applicable subsidy for any tax year and you have an excess farm loss for the tax year, special rules apply. Free state tax filing 2012 These rules do not apply to C corporations. Free state tax filing 2012 For information, see the Instructions for Schedule F (Form 1040), Profit or Loss From Farming. Free state tax filing 2012 Passive Activities There are two kinds of passive activities. Free state tax filing 2012 Trade or business activities in which you do not materially participate during the year. Free state tax filing 2012 Rental activities, even if you do materially participate in them, unless you are a real estate professional. Free state tax filing 2012 Material participation in a trade or business is discussed later, under Activities That Are Not Passive Activities . Free state tax filing 2012 Treatment of former passive activities. Free state tax filing 2012   A former passive activity is an activity that was a passive activity in any earlier tax year, but is not a passive activity in the current tax year. Free state tax filing 2012 You can deduct a prior year's unallowed loss from the activity up to the amount of your current year net income from the activity. Free state tax filing 2012 Treat any remaining prior year unallowed loss like you treat any other passive loss. Free state tax filing 2012   In addition, any prior year unallowed passive activity credits from a former passive activity offset the allocable part of your current year tax liability. Free state tax filing 2012 The allocable part of your current year tax liability is that part of this year's tax liability that is allocable to the current year net income from the former passive activity. Free state tax filing 2012 You figure this after you reduce your net income from the activity by any prior year unallowed loss from that activity (but not below zero). Free state tax filing 2012 Trade or Business Activities A trade or business activity is an activity that: Involves the conduct of a trade or business (that is, deductions would be allowable under section 162 of the Internal Revenue Code if other limitations, such as the passive activity rules, did not apply), Is conducted in anticipation of starting a trade or business, or Involves research or experimental expenditures that are deductible under Internal Revenue Code section 174 (or that would be deductible if you chose to deduct rather than capitalize them). Free state tax filing 2012 A trade or business activity does not include a rental activity or the rental of property that is incidental to an activity of holding the property for investment. Free state tax filing 2012 You generally report trade or business activities on Schedule C, C-EZ, F, or in Part II or III of Schedule E. Free state tax filing 2012 Rental Activities A rental activity is a passive activity even if you materially participated in that activity, unless you materially participated as a real estate professional. Free state tax filing 2012 See Real Estate Professional under Activities That Are Not Passive Activities, later. Free state tax filing 2012 An activity is a rental activity if tangible property (real or personal) is used by customers or held for use by customers, and the gross income (or expected gross income) from the activity represents amounts paid (or to be paid) mainly for the use of the property. Free state tax filing 2012 It does not matter whether the use is under a lease, a service contract, or some other arrangement. Free state tax filing 2012 Exceptions. Free state tax filing 2012   Your activity is not a rental activity if any of the following apply. Free state tax filing 2012 The average period of customer use of the property is 7 days or less. Free state tax filing 2012 You figure the average period of customer use by dividing the total number of days in all rental periods by the number of rentals during the tax year. Free state tax filing 2012 If the activity involves renting more than one class of property, multiply the average period of customer use of each class by a fraction. Free state tax filing 2012 The numerator of the fraction is the gross rental income from that class of property and the denominator is the activity's total gross rental income. Free state tax filing 2012 The activity's average period of customer use will equal the sum of the amounts for each class. Free state tax filing 2012 The average period of customer use of the property, as figured in (1) above, is 30 days or less and you provide significant personal services with the rentals. Free state tax filing 2012 Significant personal services include only services performed by individuals. Free state tax filing 2012 To determine if personal services are significant, all relevant facts and circumstances are taken into consideration, including the frequency of the services, the type and amount of labor required to perform the services, and the value of the services relative to the amount charged for use of the property. Free state tax filing 2012 Significant personal services do not include the following. Free state tax filing 2012 Services needed to permit the lawful use of the property, Services to repair or improve property that would extend its useful life for a period substantially longer than the average rental, and Services that are similar to those commonly provided with long-term rentals of real estate, such as cleaning and maintenance of common areas or routine repairs. Free state tax filing 2012 You provide extraordinary personal services in making the rental property available for customer use. Free state tax filing 2012 Services are extraordinary personal services if they are performed by individuals and the customers' use of the property is incidental to their receipt of the services. Free state tax filing 2012 The rental is incidental to a nonrental activity. Free state tax filing 2012 The rental of property is incidental to an activity of holding property for investment if the main purpose of holding the property is to realize a gain from its appreciation and the gross rental income from the property is less than 2% of the smaller of the property's unadjusted basis or fair market value. Free state tax filing 2012 The unadjusted basis of property is its cost not reduced by depreciation or any other basis adjustment. Free state tax filing 2012 The rental of property is incidental to a trade or business activity if all of the following apply. Free state tax filing 2012 You own an interest in the trade or business activity during the year. Free state tax filing 2012 The rental property was used mainly in that trade or business activity during the current year, or during at least 2 of the 5 preceding tax years. Free state tax filing 2012 Your gross rental income from the property is less than 2% of the smaller of its unadjusted basis or fair market value. Free state tax filing 2012 Lodging provided to an employee or the employee's spouse or dependents is incidental to the activity or activities in which the employee performs services if the lodging is furnished for the employer's convenience. Free state tax filing 2012 You customarily make the rental property available during defined business hours for nonexclusive use by various customers. Free state tax filing 2012 You provide the property for use in a nonrental activity in your capacity as an owner of an interest in the partnership, S corporation, or joint venture conducting that activity. Free state tax filing 2012    If you meet any of the exceptions listed above, see the instructions for Form 8582 for information about how to report any income or loss from the activity. Free state tax filing 2012 Special $25,000 allowance. Free state tax filing 2012   If you or your spouse actively participated in a passive rental real estate activity, the amount of the passive activity loss that is disallowed is decreased and you therefore can deduct up to $25,000 of loss from the activity from your nonpassive income. Free state tax filing 2012 This special allowance is an exception to the general rule disallowing the passive activity loss. Free state tax filing 2012 Similarly, you can offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception. Free state tax filing 2012   If you are married, filing a separate return, and lived apart from your spouse for the entire tax year, your special allowance cannot be more than $12,500. Free state tax filing 2012 If you lived with your spouse at any time during the year and are filing a separate return, you cannot use the special allowance to reduce your nonpassive income or tax on nonpassive income. Free state tax filing 2012   The maximum special allowance is reduced if your modified adjusted gross income exceeds certain amounts. Free state tax filing 2012 See Phaseout rule , later. Free state tax filing 2012 Example. Free state tax filing 2012 Kate, a single taxpayer, has $70,000 in wages, $15,000 income from a limited partnership, a $26,000 loss from rental real estate activities in which she actively participated, and is not subject to the modified adjusted gross income phaseout rule. Free state tax filing 2012 She can use $15,000 of her $26,000 loss to offset her $15,000 passive income from the partnership. Free state tax filing 2012 She actively participated in her rental real estate activities, so she can use the remaining $11,000 rental real estate loss to offset $11,000 of her nonpassive income (wages). Free state tax filing 2012 Commercial revitalization deduction (CRD). Free state tax filing 2012   The special allowance must first be applied to losses from rental real estate activities figured without the CRD. Free state tax filing 2012 Any remaining part of the special allowance is available for the CRD from the rental real estate activities and is not subject to the active participation rules or the phaseout based on modified adjusted gross income. Free state tax filing 2012 You cannot claim a CRD for a building placed in service after December 31, 2009. Free state tax filing 2012 Active participation. Free state tax filing 2012   Active participation is not the same as material participation (defined later). Free state tax filing 2012 Active participation is a less stringent standard than material participation. Free state tax filing 2012 For example, you may be treated as actively participating if you make management decisions in a significant and bona fide sense. Free state tax filing 2012 Management decisions that count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions. Free state tax filing 2012   Only individuals can actively participate in rental real estate activities. Free state tax filing 2012 However, a decedent's estate is treated as actively participating for its tax years ending less than 2 years after the decedent's death, if the decedent would have satisfied the active participation requirement for the activity for the tax year the decedent died. Free state tax filing 2012   A decedent's qualified revocable trust can also be treated as actively participating if both the trustee and the executor (if any) of the estate choose to treat the trust as part of the estate. Free state tax filing 2012 The choice applies to tax years ending after the decedent's death and before: 2 years after the decedent's death if no estate tax return is required, or 6 months after the estate tax liability is finally determined if an estate tax return is required. Free state tax filing 2012   The choice is irrevocable and cannot be made later than the due date for the estate's first income tax return (including any extensions). Free state tax filing 2012   Limited partners are not treated as actively participating in a partnership's rental real estate activities. Free state tax filing 2012   You are not treated as actively participating in a rental real estate activity unless your interest in the activity (including your spouse's interest) was at least 10% (by value) of all interests in the activity throughout the year. Free state tax filing 2012   Active participation is not required to take the low-income housing credit, the rehabilitation investment credit, or CRD from rental real estate activities. Free state tax filing 2012 Example. Free state tax filing 2012 Mike, a single taxpayer, had the following income and loss during the tax year: Salary $42,300 Dividends 300 Interest 1,400 Rental loss (4,000) The rental loss came from a house Mike owned. Free state tax filing 2012 He advertised and rented the house to the current tenant himself. Free state tax filing 2012 He also collected the rents and did the repairs or hired someone to do them. Free state tax filing 2012 Even though the rental loss is a loss from a passive activity, Mike can use the entire $4,000 loss to offset his other income because he actively participated. Free state tax filing 2012 Phaseout rule. Free state tax filing 2012   The maximum special allowance of $25,000 ($12,500 for married individuals filing separate returns and living apart at all times during the year) is reduced by 50% of the amount of your modified adjusted gross income that is more than $100,000 ($50,000 if you are married filing separately). Free state tax filing 2012 If your modified adjusted gross income is $150,000 or more ($75,000 or more if you are married filing separately), you generally cannot use the special allowance. Free state tax filing 2012    Modified adjusted gross income for this purpose is your adjusted gross income figured without the following. Free state tax filing 2012 Taxable social security and tier 1 railroad retirement benefits. Free state tax filing 2012 Deductible contributions to individual retirement accounts (IRAs) and section 501(c)(18) pension plans. Free state tax filing 2012 The exclusion from income of interest from qualified U. Free state tax filing 2012 S. Free state tax filing 2012 savings bonds used to pay qualified higher education expenses. Free state tax filing 2012 The exclusion from income of amounts received from an employer's adoption assistance program. Free state tax filing 2012 Passive activity income or loss included on Form 8582. Free state tax filing 2012 Any rental real estate loss allowed because you materially participated in the rental activity as a Real Estate Professional (as discussed later, under Activities That Are Not Passive Activities). Free state tax filing 2012 Any overall loss from a publicly traded partnership (see Publicly Traded Partnerships (PTPs) in the instructions for Form 8582). Free state tax filing 2012 The deduction for the employer-equivalent portion of self-employment tax. Free state tax filing 2012 The deduction for domestic production activities. Free state tax filing 2012 The deduction allowed for interest on student loans. Free state tax filing 2012 The deduction for qualified tuition and related expenses. Free state tax filing 2012 Example. Free state tax filing 2012 During 2013, John was unmarried and was not a real estate professional. Free state tax filing 2012 For 2013, he had $120,000 in salary and a $31,000 loss from his rental real estate activities in which he actively participated. Free state tax filing 2012 His modified adjusted gross income is $120,000. Free state tax filing 2012 When he files his 2013 return, he can deduct only $15,000 of his passive activity loss. Free state tax filing 2012 He must carry over the remaining $16,000 passive activity loss to 2014. Free state tax filing 2012 He figures his deduction and carryover as follows: Adjusted gross income, modified as required $120,000       Minus amount not subject to phaseout 100,000 Amount subject to phaseout rule $20,000 Multiply by 50% × 50% Required reduction to special allowance $10,000 Maximum special allowance $25,000 Minus required reduction (see above) 10,000 Adjusted special allowance $15,000 Passive loss from rental real estate $31,000 Deduction allowable/Adjusted  special allowance (see above) 15,000       Amount that must be carried forward $16,000 Exceptions to the phaseout rules. Free state tax filing 2012   A higher phaseout range applies to rehabilitation investment credits from rental real estate activities. Free state tax filing 2012 For those credits, the phaseout of the $25,000 special allowance starts when your modified adjusted gross income exceeds $200,000 ($100,000 if you are a married individual filing a separate return and living apart at all times during the year). Free state tax filing 2012   There is no phaseout of the $25,000 special allowance for low-income housing credits or for the CRD. Free state tax filing 2012 Ordering rules. Free state tax filing 2012   If you have more than one of the exceptions to the phaseout rules in the same tax year, you must apply the $25,000 phaseout against your passive activity losses and credits in the following order. Free state tax filing 2012 The portion of passive activity losses not attributable to the CRD. Free state tax filing 2012 The portion of passive activity losses attributable to the CRD. Free state tax filing 2012 The portion of passive activity credits attributable to credits other than the rehabilitation and low-income housing credits. Free state tax filing 2012 The portion of passive activity credits attributable to the rehabilitation credit. Free state tax filing 2012 The portion of passive activity credits attributable to the low-income housing credit. Free state tax filing 2012 Activities That Are Not Passive Activities The following are not passive activities. Free state tax filing 2012 Trade or business activities in which you materially participated for the tax year. Free state tax filing 2012 A working interest in an oil or gas well which you hold directly or through an entity that does not limit your liability (such as a general partner interest in a partnership). Free state tax filing 2012 It does not matter whether you materially participated in the activity for the tax year. Free state tax filing 2012 However, if your liability was limited for part of the year (for example, you converted your general partner interest to a limited partner interest during the year) and you had a net loss from the well for the year, some of your income and deductions from the working interest may be treated as passive activity gross income and passive activity deductions. Free state tax filing 2012  See Temporary Regulations section 1. Free state tax filing 2012 469-1T(e)(4)(ii). Free state tax filing 2012 The rental of a dwelling unit that you also used for personal purposes during the year for more than the greater of 14 days or 10% of the number of days during the year that the home was rented at a fair rental. Free state tax filing 2012 An activity of trading personal property for the account of those who own interests in the activity. Free state tax filing 2012 See Temporary Regulations section 1. Free state tax filing 2012 469-1T(e)(6). Free state tax filing 2012 Rental real estate activities in which you materially participated as a real estate professional. Free state tax filing 2012 See Real Estate Professional , later. Free state tax filing 2012 You should not enter income and losses from these activities on Form 8582. Free state tax filing 2012 Instead, enter them on the forms or schedules you would normally use. Free state tax filing 2012 Material Participation A trade or business activity is not a passive activity if you materially participated in the activity. Free state tax filing 2012 Material participation tests. Free state tax filing 2012    You materially participated in a trade or business activity for a tax year if you satisfy any of the following tests. Free state tax filing 2012 You participated in the activity for more than 500 hours. Free state tax filing 2012 Your participation was substantially all the participation in the activity of all individuals for the tax year, including the participation of individuals who did not own any interest in the activity. Free state tax filing 2012 You participated in the activity for more than 100 hours during the tax year, and you participated at least as much as any other individual (including individuals who did not own any interest in the activity) for the year. Free state tax filing 2012 The activity is a significant participation activity, and you participated in all significant participation activities for more than 500 hours. Free state tax filing 2012 A significant participation activity is any trade or business activity in which you participated for more than 100 hours during the year and in which you did not materially participate under any of the material participation tests, other than this test. Free state tax filing 2012 See Significant Participation Passive Activities , under Recharacterization of Passive Income, later. Free state tax filing 2012 You materially participated in the activity for any 5 (whether or not consecutive) of the 10 immediately preceding tax years. Free state tax filing 2012 The activity is a personal service activity in which you materially participated for any 3 (whether or not consecutive) preceding tax years. Free state tax filing 2012 An activity is a personal service activity if it involves the performance of personal services in the fields of health (including veterinary services), law, engineering, architecture, accounting, actuarial science, performing arts, consulting, or any other trade or business in which capital is not a material income-producing factor. Free state tax filing 2012 Based on all the facts and circumstances, you participated in the activity on a regular, continuous, and substantial basis during the year. Free state tax filing 2012   You did not materially participate in the activity under test (7) if you participated in the activity for 100 hours or less during the year. Free state tax filing 2012 Your participation in managing the activity does not count in determining whether you materially participated under this test if: Any person other than you received compensation for managing the activity, or Any individual spent more hours during the tax year managing the activity than you did (regardless of whether the individual was compensated for the management services). Free state tax filing 2012 Participation. Free state tax filing 2012   In general, any work you do in connection with an activity in which you own an interest is treated as participation in the activity. Free state tax filing 2012 Work not usually performed by owners. Free state tax filing 2012   You do not treat the work you do in connection with an activity as participation in the activity if both of the following are true. Free state tax filing 2012 The work is not work that is customarily done by the owner of that type of activity. Free state tax filing 2012 One of your main reasons for doing the work is to avoid the disallowance of any loss or credit from the activity under the passive activity rules. Free state tax filing 2012 Participation as an investor. Free state tax filing 2012   You do not treat the work you do in your capacity as an investor in an activity as participation unless you are directly involved in the day-to-day management or operations of the activity. Free state tax filing 2012 Work you do as an investor includes: Studying and reviewing financial statements or reports on operations of the activity, Preparing or compiling summaries or analyses of the finances or operations of the activity for your own use, and Monitoring the finances or operations of the activity in a nonmanagerial capacity. Free state tax filing 2012 Spouse's participation. Free state tax filing 2012   Your participation in an activity includes your spouse's participation. Free state tax filing 2012 This applies even if your spouse did not own any interest in the activity and you and your spouse do not file a joint return for the year. Free state tax filing 2012 Proof of participation. Free state tax filing 2012 You can use any reasonable method to prove your participation in an activity for the year. Free state tax filing 2012 You do not have to keep contemporaneous daily time reports, logs, or similar documents if you can establish your participation in some other way. Free state tax filing 2012 For example, you can show the services you performed and the approximate number of hours spent by using an appointment book, calendar, or narrative summary. Free state tax filing 2012 Limited partners. Free state tax filing 2012   If you owned an activity as a limited partner, you generally are not treated as materially participating in the activity. Free state tax filing 2012 However, you are treated as materially participating in the activity if you met test (1), (5), or (6) under Material participation tests , discussed earlier, for the tax year. Free state tax filing 2012   You are not treated as a limited partner, however, if you also were a general partner in the partnership at all times during the partnership's tax year ending with or within your tax year (or, if shorter, during that part of the partnership's tax year in which you directly or indirectly owned your limited partner interest). Free state tax filing 2012 Retired or disabled farmer and surviving spouse of a farmer. Free state tax filing 2012   If you are a retired or disabled farmer, you are treated as materially participating in a farming activity if you materially participated for 5 or more of the 8 years before your retirement or disability. Free state tax filing 2012 Similarly, if you are a surviving spouse of a farmer, you are treated as materially participating in a farming activity if the real property used in the activity meets the estate tax rules for special valuation of farm property passed from a qualifying decedent, and you actively manage the farm. Free state tax filing 2012 Corporations. Free state tax filing 2012   A closely held corporation or a personal service corporation is treated as materially participating in an activity only if one or more shareholders holding more than 50% by value of the outstanding stock of the corporation materially participate in the activity. Free state tax filing 2012   A closely held corporation can also satisfy the material participation standard by meeting the first two requirements for the qualifying business exception from the at-risk limits. Free state tax filing 2012 See Special exception for qualified corporations under Activities Covered by the At-Risk Rules, later. Free state tax filing 2012 Real Estate Professional Generally, rental activities are passive activities even if you materially participated in them. Free state tax filing 2012 However, if you qualified as a real estate professional, rental real estate activities in which you materially participated are not passive activities. Free state tax filing 2012 For this purpose, each interest you have in a rental real estate activity is a separate activity, unless you choose to treat all interests in rental real estate activities as one activity. Free state tax filing 2012 See the Instructions for Schedule E (Form 1040), Supplemental Income and Loss, for information about making this choice. Free state tax filing 2012 If you qualified as a real estate professional for 2013, report income or losses from rental real estate activities in which you materially participated as nonpassive income or losses, and complete line 43 of Schedule E (Form 1040). Free state tax filing 2012 If you also have an unallowed loss from these activities from an earlier year when you did not qualify, see Treatment of former passive activities under Passive Activities, earlier. Free state tax filing 2012 Qualifications. Free state tax filing 2012   You qualified as a real estate professional for the year if you met both of the following requirements. Free state tax filing 2012 More than half of the personal services you performed in all trades or businesses during the tax year were performed in real property trades or businesses in which you materially participated. Free state tax filing 2012 You performed more than 750 hours of services during the tax year in real property trades or businesses in which you materially participated. Free state tax filing 2012   Do not count personal services you performed as an employee in real property trades or businesses unless you were a 5% owner of your employer. Free state tax filing 2012 You were a 5% owner if you owned (or are considered to have owned) more than 5% of your employer's outstanding stock, outstanding voting stock, or capital or profits interest. Free state tax filing 2012   If you file a joint return, do not count your spouse's personal services to determine whether you met the preceding requirements. Free state tax filing 2012 However, you can count your spouse's participation in an activity in determining if you materially participated. Free state tax filing 2012 Real property trades or businesses. Free state tax filing 2012   A real property trade or business is a trade or business that does any of the following with real property. Free state tax filing 2012 Develops or redevelops it. Free state tax filing 2012 Constructs or reconstructs it. Free state tax filing 2012 Acquires it. Free state tax filing 2012 Converts it. Free state tax filing 2012 Rents or leases it. Free state tax filing 2012 Operates or manages it. Free state tax filing 2012 Brokers it. Free state tax filing 2012 Closely held corporations. Free state tax filing 2012   A closely held corporation can qualify as a real estate professional if more than 50% of the gross receipts for its tax year came from real property trades or businesses in which it materially participated. Free state tax filing 2012 Passive Activity Income and Deductions In figuring your net income or loss from a passive activity, take into account only passive activity income and passive activity deductions. Free state tax filing 2012 Self-charged interest. Free state tax filing 2012   Certain self-charged interest income or deductions may be treated as passive activity gross income or passive activity deductions if the loan proceeds are used in a passive activity. Free state tax filing 2012   Generally, self-charged interest income and deductions result from loans between you and a partnership or S corporation in which you had a direct or indirect ownership interest. Free state tax filing 2012 This includes both loans you made to the partnership or S corporation and loans the partnership or S corporation made to you. Free state tax filing 2012   It also includes loans from one partnership or S corporation to another partnership or S corporation if each owner in the borrowing entity has the same proportional ownership interest in the lending entity. Free state tax filing 2012    Exception. Free state tax filing 2012 The self-charged interest rules do not apply to your interest in a partnership or S corporation if the entity made an election under Regulations section 1. Free state tax filing 2012 469-7(g) to avoid the application of these rules. Free state tax filing 2012 For more details on the self-charged interest rules, see Regulations section 1. Free state tax filing 2012 469-7. Free state tax filing 2012 Passive Activity Income Passive activity income includes all income from passive activities and generally includes gain from disposition of an interest in a passive activity or property used in a passive activity. Free state tax filing 2012 Passive activity income does not include the following items. Free state tax filing 2012 Income from an activity that is not a passive activity. Free state tax filing 2012 These activities are discussed under Activities That Are Not Passive Activities , earlier. Free state tax filing 2012 Portfolio income. Free state tax filing 2012 This includes interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business. Free state tax filing 2012 It includes gain or loss from the disposition of property that produces these types of income or that is held for investment. Free state tax filing 2012 The exclusion for portfolio income does not apply to self-charged interest treated as passive activity income. Free state tax filing 2012 For more information on self-charged interest, see Self-charged interest , earlier. Free state tax filing 2012 Personal service income. Free state tax filing 2012 This includes salaries, wages, commissions, self-employment income from trade or business activities in which you materially participated, deferred compensation, taxable social security and other retirement benefits, and payments from partnerships to partners for personal services. Free state tax filing 2012 Income from positive section 481 adjustments allocated to activities other than passive activities. Free state tax filing 2012 (Section 481 adjustments are adjustments that must be made due to changes in your accounting method. Free state tax filing 2012 ) Income or gain from investments of working capital. Free state tax filing 2012 Income from an oil or gas property if you treated any loss from a working interest in the property for any tax year beginning after 1986 as a nonpassive loss, as discussed in item (2) under Activities That Are Not Passive Activities , earlier. Free state tax filing 2012 This also applies to income from other oil and gas property the basis of which is determined wholly or partly by the basis of the property in the preceding sentence. Free state tax filing 2012 Any income from intangible property, such as a patent, copyright, or literary, musical, or artistic composition, if your personal efforts significantly contributed to the creation of the property. Free state tax filing 2012 Any other income that must be treated as nonpassive income. Free state tax filing 2012 See Recharacterization of Passive Income , later. Free state tax filing 2012 Overall gain from any interest in a publicly traded partnership. Free state tax filing 2012 See Publicly Traded Partnerships (PTPs) in the instructions for Form 8582. Free state tax filing 2012 State, local, and foreign income tax refunds. Free state tax filing 2012 Income from a covenant not to compete. Free state tax filing 2012 Reimbursement of a casualty or theft loss included in gross income to recover all or part of a prior year loss deduction, if the loss deduction was not a passive activity deduction. Free state tax filing 2012 Alaska Permanent Fund dividends. Free state tax filing 2012 Cancellation of debt income, if at the time the debt is discharged the debt is not allocated to passive activities under the interest expense allocation rules. Free state tax filing 2012 See chapter 4 of Publication 535, Business Expenses, for information about the rules for allocating interest. Free state tax filing 2012 Disposition of property interests. Free state tax filing 2012   Gain on the disposition of an interest in property generally is passive activity income if, at the time of the disposition, the property was used in an activity that was a passive activity in the year of disposition. Free state tax filing 2012 The gain generally is not passive activity income if, at the time of disposition, the property was used in an activity that was not a passive activity in the year of disposition. Free state tax filing 2012 An exception to this general rule may apply if you previously used the property in a different activity. Free state tax filing 2012 Exception for more than one use in the preceding 12 months. Free state tax filing 2012   If you used the property in more than one activity during the 12-month period before its disposition, you must allocate the gain between the activities on a basis that reasonably reflects the property's use during that period. Free state tax filing 2012 Any gain allocated to a passive activity is passive activity income. Free state tax filing 2012   For this purpose, an allocation of the gain solely to the activity in which the property was mainly used during that period reasonably reflects the property's use if the fair market value of your interest in the property is not more than the lesser of: $10,000, or 10% of the total of the fair market value of your interest in the property and the fair market value of all other property used in that activity immediately before the disposition. Free state tax filing 2012 Exception for substantially appreciated property. Free state tax filing 2012   The gain is passive activity income if the fair market value of the property at disposition was more than 120% of its adjusted basis and either of the following conditions applies. Free state tax filing 2012 You used the property in a passive activity for 20% of the time you held your interest in the property. Free state tax filing 2012 You used the property in a passive activity for the entire 24-month period before its disposition. Free state tax filing 2012 If neither condition applies, the gain is not passive activity income. Free state tax filing 2012 However, it is treated as portfolio income only if you held the property for investment for more than half of the time you held it in nonpassive activities. Free state tax filing 2012   For this purpose, treat property you held through a corporation (other than an S corporation) or other entity whose owners receive only portfolio income as property held in a nonpassive activity and as property held for investment. Free state tax filing 2012 Also, treat the date you agree to transfer your interest for a fixed or determinable amount as the disposition date. Free state tax filing 2012   If you used the property in more than one activity during the 12-month period before its disposition, this exception applies only to the part of the gain allocated to a passive activity under the rules described in the preceding discussion. Free state tax filing 2012 Disposition of property converted to inventory. Free state tax filing 2012   If you disposed of property that you had converted to inventory from its use in another activity (for example, you sold condominium units you previously held for use in a rental activity), a special rule may apply. Free state tax filing 2012 Under this rule, you disregard the property's use as inventory and treat it as if it were still used in that other activity at the time of disposition. Free state tax filing 2012 This rule applies only if you meet all of the following conditions. Free state tax filing 2012 At the time of disposition, you held your interest in the property in a dealing activity (an activity that involves holding the property or similar property mainly for sale to customers in the ordinary course of a trade or business). Free state tax filing 2012 Your other activities included a nondealing activity (an activity that does not involve holding similar property for sale to customers in the ordinary course of a trade or business) in which you used the property for more than 80% of the period you held it. Free state tax filing 2012 You did not acquire or hold your interest in the property for the main purpose of selling it to customers in the ordinary course of a trade or business. Free state tax filing 2012 Passive Activity Deductions Generally, a deduction is a passive activity deduction for a taxable year if and only if such deduction either: Arises in connection with the conduct of an activity that is a passive activity for the tax year; or Is treated as a deduction from an activity for the tax year because it was disallowed by the passive activity rules in the preceding year and carried forward to the tax year. Free state tax filing 2012 For purposes of item (1), above, an item of deduction arises in the taxable year in which the item would be allowable as a deduction under the taxpayer's method of accounting if taxable income for all taxable years were determined without regard to the passive activity rules and without regard to the basis, excess farm loss, and at-risk limits. Free state tax filing 2012 See Coordination with other limitations on deductions that apply before the passive activity rules , later. Free state tax filing 2012 Passive activity deductions generally include losses from dispositions of property used in a passive activity at the time of the disposition and losses from a disposition of less than your entire interest in a passive activity. Free state tax filing 2012 Exceptions. Free state tax filing 2012   Passive activity deductions do not include the following items. Free state tax filing 2012 Deductions for expenses (other than interest expense) that are clearly and directly allocable to portfolio income. Free state tax filing 2012 Qualified home mortgage interest, capitalized interest expenses, and other interest expenses (other than self-charged interest) properly allocable to passive activities. Free state tax filing 2012 For more information on self-charged interest, see Self-charged interest under Passive Activity Income and Deductions, earlier. Free state tax filing 2012 Losses from dispositions of property that produce portfolio income or property held for investment. Free state tax filing 2012 State, local, and foreign income taxes. Free state tax filing 2012 Miscellaneous itemized deductions that may be disallowed because of the 2%-of-adjusted-gross-income limit. Free state tax filing 2012 Charitable contribution deductions. Free state tax filing 2012 Net operating loss deductions. Free state tax filing 2012 Percentage depletion carryovers for oil and gas wells. Free state tax filing 2012 Capital loss carrybacks and carryovers. Free state tax filing 2012 Items of deduction from a passive activity that are disallowed under the limits on deductions that apply before the passive activity rules. Free state tax filing 2012 See Coordination with other limitations on deductions that apply before the passive activity rules , later. Free state tax filing 2012 Deductions and losses that would have been allowed for tax years beginning before 1987 but for basis or at-risk limits. Free state tax filing 2012 Net negative section 481 adjustments allocated to activities other than passive activities. Free state tax filing 2012 (Section 481 adjustments are adjustments required due to changes in accounting methods. Free state tax filing 2012 ) Casualty and theft losses, unless losses similar in cause and severity recur regularly in the activity. Free state tax filing 2012 The deduction for the employer-equivalent portion of self-employment tax. Free state tax filing 2012 Coordination with other limitations on deductions that apply before the passive activity rules. Free state tax filing 2012   An item of deduction from a passive activity that is disallowed for a tax year under the basis or at-risk limitations is not a passive activity deduction for the tax year. Free state tax filing 2012 The following sections provide rules for figuring the extent to which items of deduction from a passive activity are disallowed for a tax year under the basis or at-risk limitations. Free state tax filing 2012 Proration of deductions disallowed under basis limitations. Free state tax filing 2012   If any amount of your distributive share of a partnership's loss for the tax year is disallowed under the basis limitation, a ratable portion of your distributive share of each item of deduction or loss of the partnership is disallowed for the tax year. Free state tax filing 2012 For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing: The amount of your distributive share of partnership loss that is disallowed for the taxable year; by The sum of your distributive shares of all items of deduction and loss of the partnership for the tax year. Free state tax filing 2012   If any amount of your pro rata share of an S corporation's loss for the tax year is disallowed under the basis limitation, a ratable portion of your pro rata share of each item of deduction or loss of the S corporation is disallowed for the tax year. Free state tax filing 2012 For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing: The amount of your share of S corporation loss that is disallowed for the tax year; by The sum of your pro rata shares of all items of deduction and loss of the corporation for the tax year. Free state tax filing 2012 Proration of deductions disallowed under at-risk limitation. Free state tax filing 2012   If any amount of your loss from an activity (as defined in Activities Covered by the At-Risk Rules , later) is disallowed under the at-risk rules for the tax year, a ratable portion of each item of deduction or loss from the activity is disallowed for the tax year. Free state tax filing 2012 For this purpose, the ratable portion of an item of deduction or loss is the amount of such item multiplied by the fraction obtained by dividing: The amount of the loss from the activity that is disallowed for the tax year; by The sum of all deductions from the activity for the taxable year. Free state tax filing 2012 Coordination of basis and at-risk limitations. Free state tax filing 2012   The portion of any item of deduction or loss that is disallowed for the tax year under the basis limitations is not taken into account for the taxable year in determining the loss from an activity (as defined in Activities Covered by the At-Risk Rules , later) for purposes of applying the at-risk rules. Free state tax filing 2012 Separately identified items of deduction and loss. Free state tax filing 2012   In identifying the items of deduction and loss from an activity that are not disallowed under the basis and at-risk limitations (and that therefore may be treated as passive activity deductions), you need not account separately for any item of deduction or loss unless such item may, if separately taken into account, result in an income tax liability different from that which would result were such item of deduction or loss taken into account separately. Free state tax filing 2012   Items of deduction or loss that must be accounted for separately include (but are not limited to) items of deduction or loss that: Are attributable to separate activities. Free state tax filing 2012 See Grouping Your Activities , later. Free state tax filing 2012 Arise in a rental real estate activity in tax years in which you actively participate in such activity; Arise in a rental real estate activity in taxable years in which you do not actively participate in such activity; Arose in a taxable year beginning before 1987 and were not allowed for such taxable year under the basis or at-risk limitations; Are taken into account under section 613A(d) (relating to limitations on certain depletion deductions); Are taken into account under section 1211 (relating to the limitation on capital losses); Are taken into account under section 1231 (relating to property used in a trade or business and involuntary conversions). Free state tax filing 2012 See Section 1231 Gains and Losses in Publication 544 for more information. Free state tax filing 2012 Are attributable to pre-enactment interests in activities. Free state tax filing 2012 See Regulations section 1. Free state tax filing 2012 469-11T(c). Free state tax filing 2012 Grouping Your Activities You can treat one or more trade or business activities, or rental activities, as a single activity if those activities form an appropriate economic unit for measuring gain or loss under the passive activity rules. Free state tax filing 2012 Grouping is important for a number of reasons. Free state tax filing 2012 If you group two activities into one larger activity, you need only show material participation in the activity as a whole. Free state tax filing 2012 But if the two activities are separate, you must show material participation in each one. Free state tax filing 2012 On the other hand, if you group two activities into one larger activity and you dispose of one of the two, then you have disposed of only part of your entire interest in the activity. Free state tax filing 2012 But if the two activities are separate and you dispose of one of them, then you have disposed of your entire interest in that activity. Free state tax filing 2012 Grouping can also be important in determining whether you meet the 10% ownership requirement for actively participating in a rental real estate activity. Free state tax filing 2012 Appropriate Economic Units Generally, to determine if activities form an appropriate economic unit, you must consider all the relevant facts and circumstances. Free state tax filing 2012 You can use any reasonable method of applying the relevant facts and circumstances in grouping activities. Free state tax filing 2012 The following factors have the greatest weight in determining whether activities form an appropriate economic unit. Free state tax filing 2012 All of the factors do not have to apply to treat more than one activity as a single activity. Free state tax filing 2012 The factors that you should consider are: The similarities and differences in the types of trades or businesses, The extent of common control, The extent of common ownership, The geographical location, and The interdependencies between or among activities, which may include the extent to which the activities: Buy or sell goods between or among themselves, Involve products or services that are generally provided together, Have the same customers, Have the same employees, or Use a single set of books and records to account for the activities. Free state tax filing 2012 Example 1. Free state tax filing 2012 John Jackson owns a bakery and a movie theater at a shopping mall in Baltimore and a bakery and movie theater in Philadelphia. Free state tax filing 2012 Based on all the relevant facts and circumstances, there may be more than one reasonable method for grouping John's activities. Free state tax filing 2012 For example, John may be able to group the movie theaters and the bakeries into: One activity, A movie theater activity and a bakery activity, A Baltimore activity and a Philadelphia activity, or Four separate activities. Free state tax filing 2012 Example 2. Free state tax filing 2012 Betty is a partner in ABC partnership, which sells nonfood items to grocery stores. Free state tax filing 2012 Betty is also a partner in DEF (a trucking business). Free state tax filing 2012 ABC and DEF are under common control. Free state tax filing 2012 The main part of DEF's business is transporting goods for ABC. Free state tax filing 2012 DEF is the only trucking business in which Betty is involved. Free state tax filing 2012 Based on the rules of this section, Betty treats ABC's wholesale activity and DEF's trucking activity as a single activity. Free state tax filing 2012 Consistency and disclosure requirement. Free state tax filing 2012   Generally, when you group activities into appropriate economic units, you may not regroup those activities in a later tax year. Free state tax filing 2012 You must meet any disclosure requirements of the IRS when you first group your activities and when you add or dispose of any activities in your groupings. Free state tax filing 2012   However, if the original grouping is clearly inappropriate or there is a material change in the facts and circumstances that makes the original grouping clearly inappropriate, you must regroup the activities and comply with any disclosure requirements of the IRS. Free state tax filing 2012   See Disclosure Requirement , later. Free state tax filing 2012 Regrouping by the IRS. Free state tax filing 2012   If any of the activities resulting from your grouping is not an appropriate economic unit and one of the primary purposes of your grouping (or failure to regroup) is to avoid the passive activity rules, the IRS may regroup your activities. Free state tax filing 2012 Rental activities. Free state tax filing 2012   In general, you cannot group a rental activity with a trade or business activity. Free state tax filing 2012 However, you can group them together if the activities form an appropriate economic unit and: The rental activity is insubstantial in relation to the trade or business activity, The trade or business activity is insubstantial in relation to the rental activity, or Each owner of the trade or business activity has the same ownership interest in the rental activity, in which case the part of the rental activity that involves the rental of items of property for use in the trade or business activity may be grouped with the trade or business activity. Free state tax filing 2012 Example. Free state tax filing 2012 Herbert and Wilma are married and file a joint return. Free state tax filing 2012 Healthy Food, an S corporation, is a grocery store business. Free state tax filing 2012 Herbert is Healthy Food's only shareholder. Free state tax filing 2012 Plum Tower, an S corporation, owns and rents out the building. Free state tax filing 2012 Wilma is Plum Tower's only shareholder. Free state tax filing 2012 Plum Tower rents part of its building to Healthy Food. Free state tax filing 2012 Plum Tower's grocery store rental business and Healthy Food's grocery business are not insubstantial in relation to each other. Free state tax filing 2012 Herbert and Wilma file a joint return, so they are treated as one taxpayer for purposes of the passive activity rules. Free state tax filing 2012 The same owner (Herbert and Wilma) owns both Healthy Food and Plum Tower with the same ownership interest (100% in each). Free state tax filing 2012 If the grouping forms an appropriate economic unit, as discussed earlier, Herbert and Wilma can group Plum Tower's grocery store rental and Healthy Food's grocery business into a single trade or business activity. Free state tax filing 2012 Grouping of real and personal property rentals. Free state tax filing 2012   In general, you cannot treat an activity involving the rental of real property and an activity involving the rental of personal property as a single activity. Free state tax filing 2012 However, you can treat them as a single activity if you provide the personal property in connection with the real property or the real property in connection with the personal property. Free state tax filing 2012 Certain activities may not be grouped. Free state tax filing 2012   In general, if you own an interest as a limited partner or a limited entrepreneur in one of the following activities, you may not group that activity with any other activity in another type of business. Free state tax filing 2012 Holding, producing, or distributing motion picture films or video tapes. Free state tax filing 2012 Farming. Free state tax filing 2012 Leasing any section 1245 property (as defined in section 1245(a)(3) of the Internal Revenue Code). Free state tax filing 2012 For a list of section 1245 property, see Section 1245 property under Activities Covered by the At-Risk Rules , later. Free state tax filing 2012 Exploring for, or exploiting, oil and gas resources. Free state tax filing 2012 Exploring for, or exploiting, geothermal deposits. Free state tax filing 2012   If you own an interest as a limited partner or a limited entrepreneur in an activity described in the list above, you may group that activity with another activity in the same type of business if the grouping forms an appropriate economic unit as discussed earlier. Free state tax filing 2012 Limited entrepreneur. Free state tax filing 2012   A limited entrepreneur is a person who: Has an interest in an enterprise other than as a limited partner, and Does not actively participate in the management of the enterprise. Free state tax filing 2012 Activities conducted through another entity. Free state tax filing 2012   A personal service corporation, closely held corporation, partnership, or S corporation must group its activities using the rules discussed in this section. Free state tax filing 2012 Once the entity groups its activities, you, as the partner or shareholder of the entity, may group those activities (following the rules of this section): With each other, With activities conducted directly by you, or With activities conducted through other entities. Free state tax filing 2012    You may not treat activities grouped together by the entity as separate activities. Free state tax filing 2012 Personal service and closely held corporations. Free state tax filing 2012   You may group an activity conducted through a personal service or closely held corporation with your other activities only to determine whether you materially or significantly participated in those other activities. Free state tax filing 2012 See Material Participation , earlier, and Significant Participation Passive Activities , later. Free state tax filing 2012 Publicly traded partnership (PTP). Free state tax filing 2012   You may not group activities conducted through a PTP with any other activity, including an activity conducted through another PTP. Free state tax filing 2012 Partial dispositions. Free state tax filing 2012   If you dispose of substantially all of an activity during your tax year, you may treat the part disposed of as a separate activity. Free state tax filing 2012 However, you can do this only if you can show with reasonable certainty: The amount of deductions and credits disallowed in prior years under the passive activity rules that is allocable to the part of the activity disposed of, and The amount of gross income and any other deductions and credits for the current tax year that is allocable to the part of the activity disposed of. Free state tax filing 2012 Disclosure Requirement For tax years beginning after January 24, 2010, the following disclosure requirements for groupings apply. Free state tax filing 2012 You are required to report certain changes to your groupings that occur during the tax year to the IRS. Free state tax filing 2012 If you fail to report these changes, each trade or business activity or rental activity will be treated as a separate activity. Free state tax filing 2012 You will be considered to have made a timely disclosure if you filed all affected income tax returns consistent with the claimed grouping and make the required disclosure on the income tax return for the year in which you first discovered the failure to disclose. Free state tax filing 2012 If the IRS discovered the failure to disclose, you must have reasonable cause for not making the required disclosure. Free state tax filing 2012 New grouping. Free state tax filing 2012   You must file a written statement with your original income tax return for the first tax year in which two or more activities are originally grouped into a single activity. Free state tax filing 2012 The statement must provide the names, addresses, and employer identification numbers (EINs), if applicable, for the activities being grouped as a single activity. Free state tax filing 2012 In addition, the statement must contain a declaration that the grouped activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. Free state tax filing 2012 Addition to an existing grouping. Free state tax filing 2012   You must file a written statement with your original income tax return for the tax year in which you add a new activity to an existing group. Free state tax filing 2012 The statement must provide the name, address, and EIN, if applicable, for the activity that is being added and for the activities in the existing group. Free state tax filing 2012 In addition, the statement must contain a declaration that the activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. Free state tax filing 2012 Regrouping. Free state tax filing 2012   You must file a written statement with your original income tax return for the tax year in which you regroup the activities. Free state tax filing 2012 The statement must provide the names, addresses, and EINs, if applicable, for the activities that are being regrouped. Free state tax filing 2012 If two or more activities are being regrouped into a single activity, the statement must contain a declaration that the regrouped activities make up an appropriate economic unit for the measurement of gain or loss under the passive activity rules. Free state tax filing 2012 In addition, the statement must contain an explanation of the material change in the facts and circumstances that made the original grouping clearly inappropriate. Free state tax filing 2012 Groupings by partnerships and S corporations. Free state tax filing 2012   Partnerships and S corporations are not subject to the rules for new grouping, addition to an existing grouping, or regrouping. Free state tax filing 2012 Instead, they must comply with the disclosure instructions for grouping activities provided in their Form 1065, U. Free state tax filing 2012 S. Free state tax filing 2012 Return of Partnership Income, or Form 1120S, U. Free state tax filing 2012 S. Free state tax filing 2012 Income Tax Return for an S Corporation, whichever is applicable. Free state tax filing 2012   The partner or shareholder is not required to make a separate disclosure of the groupings disclosed by the entity unless the partner or shareholder: Groups together any of the activities that the entity does not group together, Groups the entity's activities with activities conducted directly by the partner or shareholder, or Groups an entity's activities with activities conducted through another entity. Free state tax filing 2012   A partner or shareholder may not treat activities grouped together by the entity as separate activities. Free state tax filing 2012 Recharacterization of Passive Income Net income from the following passive activities may have to be recharacterized and excluded from passive activity income. Free state tax filing 2012 Significant participation passive activities, Rental of property when less than 30% of the unadjusted basis of the property is subject to depreciation, Equity-financed lending activities, Rental of property incidental to development activities, Rental of property to nonpassive activities, and Licensing of intangible property by  pass-through entities. Free state tax filing 2012 If you are engaged in or have an interest in one of these activities during the tax year (either directly or through a partnership or an S corporation), combine the income and losses from the activity to determine if you have a net loss or net income from that activity. Free state tax filing 2012 If the result is a net loss, treat the income and losses the same as any other income or losses from that type of passive activity (trade or business activity or rental activity). Free state tax filing 2012 If the result is net income, do not enter any of the income or losses from the activity or property on Form 8582 or its worksheets. Free state tax filing 2012 Instead, enter income or losses on the form and schedules you normally use. Free state tax filing 2012 However, see Significant Participation Passive Activities , later, if the activity is a significant participation passive activity and you also have a net loss from a different significant participation passive activity. Free state tax filing 2012 Limit on recharacterized passive income. Free state tax filing 2012   The total amount that you treat as nonpassive income under the rules described later in this discussion for significant participation passive activities, rental of nondepreciable property, and equity-financed lending activities cannot exceed the greatest amount that you treat as nonpassive income under any one of these rules. Free state tax filing 2012 Investment income and investment expense. Free state tax filing 2012   To figure your investment interest expense limitation on Form 4952, treat as investment income any net passive income recharacterized as nonpassive income from rental of nondepreciable property, equity-financed lending activity, or licensing of intangible property by a pass-through entity. Free state tax filing 2012 Significant Participation Passive Activities A significant participation passive activity is any trade or business activity in which you participated for more than 100 hours during the tax year but did not materially participate. Free state tax filing 2012 If your gross income from all significant participation passive activities is more than your deductions from those activities, a part of your net income from each significant participation passive activity is treated as nonpassive income. Free state tax filing 2012 Corporations. Free state tax filing 2012   An activity of a personal service corporation or closely held corporation is a significant participation passive activity if both of the following statements are true. Free state tax filing 2012 The corporation is not treated as materially participating in the activity for the year. Free state tax filing 2012 One or more individuals, each of whom is treated as significantly participating in the activity, directly or indirectly hold (in total) more than 50% (by value) of the corporation's outstanding stock. Free state tax filing 2012 Worksheet A. Free state tax filing 2012   Complete Worksheet A. Free state tax filing 2012 Significant Participation Passive Activities , below, if you have income or losses from any significant participation activity. Free state tax filing 2012 Begin by entering the name of each activity in the left column. Free state tax filing 2012 Column (a). Free state tax filing 2012   Enter the number of hours you participated in each activity and total the column. Free state tax filing 2012   If the total is more than 500, do not complete Worksheet A or B. Free state tax filing 2012 None of the activities are passive activities because you satisfy test 4 for material participation. Free state tax filing 2012 (See Material participation tests , earlier. Free state tax filing 2012 ) Report all the income and losses from these activities on the forms and schedules you normally use. Free state tax filing 2012 Do not include the income and losses on Form 8582. Free state tax filing 2012 Column (b). Free state tax filing 2012   Enter the net loss, if any, from the activity. Free state tax filing 2012 Net loss from an activity means either: The activity's current year net loss (if any) plus prior year unallowed losses (if any), or The excess of prior year unallowed losses over the current year net income (if any). Free state tax filing 2012 Enter -0- here if the prior year unallowed loss is the same as the current year net income. Free state tax filing 2012 Column (c). Free state tax filing 2012   Enter net income (if any) from the activity. Free state tax filing 2012 Net income means the excess of the current year's net income from the activity over any prior year unallowed losses from the activity. Free state tax filing 2012 Column (d). Free state tax filing 2012   Combine amounts in the Totals row for columns (b) and (c) and enter the total net income or net loss in the Totals row of column (d). Free state tax filing 2012 If column (d) is a net loss, skip Worksheet B, Significant Participation Activities With Net Income. Free state tax filing 2012 Include the income and losses in Worksheet 3 of Form 8582 (or Worksheet 2 in the Form 88
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The Free State Tax Filing 2012

Free state tax filing 2012 8. Free state tax filing 2012   Dividends and Other Distributions Table of Contents Reminder Introduction Useful Items - You may want to see: General InformationDividends not reported on Form 1099-DIV. Free state tax filing 2012 Reporting tax withheld. Free state tax filing 2012 Nominees. Free state tax filing 2012 Ordinary DividendsQualified Dividends Dividends Used to Buy More Stock Money Market Funds Capital Gain DistributionsBasis adjustment. Free state tax filing 2012 Nondividend DistributionsLiquidating Distributions Distributions of Stock and Stock Rights Other DistributionsInformation reporting requirement. Free state tax filing 2012 Alternative minimum tax treatment. Free state tax filing 2012 How To Report Dividend IncomeInvestment interest deducted. Free state tax filing 2012 Reminder Foreign-source income. Free state tax filing 2012  If you are a U. Free state tax filing 2012 S. Free state tax filing 2012 citizen with dividend income from sources outside the United States (foreign-source income), you must report that income on your tax return unless it is exempt by U. Free state tax filing 2012 S. Free state tax filing 2012 law. Free state tax filing 2012 This is true whether you reside inside or outside the United States and whether or not you receive a Form 1099 from the foreign payer. Free state tax filing 2012 Introduction This chapter discusses the tax treatment of: Ordinary dividends, Capital gain distributions, Nondividend distributions, and Other distributions you may receive from a corporation or a mutual fund. Free state tax filing 2012 This chapter also explains how to report dividend income on your tax return. Free state tax filing 2012 Dividends are distributions of money, stock, or other property paid to you by a corporation or by a mutual fund. Free state tax filing 2012 You also may receive dividends through a partnership, an estate, a trust, or an association that is taxed as a corporation. Free state tax filing 2012 However, some amounts you receive that are called dividends are actually interest income. Free state tax filing 2012 (See Dividends that are actually interest under Taxable Interest in chapter 7. Free state tax filing 2012 ) Most distributions are paid in cash (or check). Free state tax filing 2012 However, distributions can consist of more stock, stock rights, other property, or services. Free state tax filing 2012 Useful Items - You may want to see: Publication 514 Foreign Tax Credit for Individuals 550 Investment Income and Expenses Form (and Instructions) Schedule B (Form 1040A or 1040) Interest and Ordinary Dividends General Information This section discusses general rules for dividend income. Free state tax filing 2012 Tax on unearned income of certain children. Free state tax filing 2012   Part of a child's 2013 unearned income may be taxed at the parent's tax rate. Free state tax filing 2012 If it is, Form 8615, Tax for Certain Children Who Have Unearned Income, must be completed and attached to the child's tax return. Free state tax filing 2012 If not, Form 8615 is not required and the child's income is taxed at his or her own tax rate. Free state tax filing 2012    Some parents can choose to include the child's interest and dividends on the parent's return if certain requirements are met. Free state tax filing 2012 Use Form 8814, Parents' Election To Report Child's Interest and Dividends, for this purpose. Free state tax filing 2012   For more information about the tax on unearned income of children and the parents' election, see chapter 31. Free state tax filing 2012 Beneficiary of an estate or trust. Free state tax filing 2012    Dividends and other distributions you receive as a beneficiary of an estate or trust are generally taxable income. Free state tax filing 2012 You should receive a Schedule K-1 (Form 1041), Beneficiary's Share of Income, Deductions, Credits, etc. Free state tax filing 2012 , from the fiduciary. Free state tax filing 2012 Your copy of Schedule K-1 (Form 1041) and its instructions will tell you where to report the income on your Form 1040. Free state tax filing 2012 Social security number (SSN) or individual taxpayer identification number (ITIN). Free state tax filing 2012    You must give your SSN or ITIN to any person required by federal tax law to make a return, statement, or other document that relates to you. Free state tax filing 2012 This includes payers of dividends. Free state tax filing 2012 If you do not give your SSN or ITIN to the payer of dividends, you may have to pay a penalty. Free state tax filing 2012 For more information on SSNs and ITINs, see Social Security Number (SSN) in chapter 1. Free state tax filing 2012 Backup withholding. Free state tax filing 2012   Your dividend income is generally not subject to regular withholding. Free state tax filing 2012 However, it may be subject to backup withholding to ensure that income tax is collected on the income. Free state tax filing 2012 Under backup withholding, the payer of dividends must withhold, as income tax, on the amount you are paid, applying the appropriate withholding rate. Free state tax filing 2012   Backup withholding may also be required if the IRS has determined that you underreported your interest or dividend income. Free state tax filing 2012 For more information, see Backup Withholding in chapter 4. Free state tax filing 2012 Stock certificate in two or more names. Free state tax filing 2012   If two or more persons hold stock as joint tenants, tenants by the entirety, or tenants in common, each person's share of any dividends from the stock is determined by local law. Free state tax filing 2012 Form 1099-DIV. Free state tax filing 2012   Most corporations and mutual funds use Form 1099-DIV, Dividends and Distributions, to show you the distributions you received from them during the year. Free state tax filing 2012 Keep this form with your records. Free state tax filing 2012 You do not have to attach it to your tax return. Free state tax filing 2012 Dividends not reported on Form 1099-DIV. Free state tax filing 2012   Even if you do not receive Form 1099-DIV, you must still report all your taxable dividend income. Free state tax filing 2012 For example, you may receive distributive shares of dividends from partnerships or S corporations. Free state tax filing 2012 These dividends are reported to you on Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc. Free state tax filing 2012 , and Schedule K-1 (Form 1120S), Shareholder's Share of Income, Deductions, Credits, etc. Free state tax filing 2012 Reporting tax withheld. Free state tax filing 2012   If tax is withheld from your dividend income, the payer must give you a Form 1099-DIV that indicates the amount withheld. Free state tax filing 2012 Nominees. Free state tax filing 2012   If someone receives distributions as a nominee for you, that person should give you a Form 1099-DIV, which will show distributions received on your behalf. Free state tax filing 2012 Form 1099-MISC. Free state tax filing 2012   Certain substitute payments in lieu of dividends or tax-exempt interest received by a broker on your behalf must be reported to you on Form 1099-MISC, Miscellaneous Income, or a similar statement. Free state tax filing 2012 See Reporting Substitute Payments under Short Sales in chapter 4 of Publication 550 for more information about reporting these payments. Free state tax filing 2012 Incorrect amount shown on a Form 1099. Free state tax filing 2012   If you receive a Form 1099 that shows an incorrect amount (or other incorrect information), you should ask the issuer for a corrected form. Free state tax filing 2012 The new Form 1099 you receive will be marked “Corrected. Free state tax filing 2012 ” Dividends on stock sold. Free state tax filing 2012   If stock is sold, exchanged, or otherwise disposed of after a dividend is declared but before it is paid, the owner of record (usually the payee shown on the dividend check) must include the dividend in income. Free state tax filing 2012 Dividends received in January. Free state tax filing 2012   If a mutual fund (or other regulated investment company) or real estate investment trust (REIT) declares a dividend (including any exempt-interest dividend or capital gain distribution) in October, November, or December, payable to shareholders of record on a date in one of those months but actually pays the dividend during January of the next calendar year, you are considered to have received the dividend on December 31. Free state tax filing 2012 You report the dividend in the year it was declared. Free state tax filing 2012 Ordinary Dividends Ordinary (taxable) dividends are the most common type of distribution from a corporation or a mutual fund. Free state tax filing 2012 They are paid out of earnings and profits and are ordinary income to you. Free state tax filing 2012 This means they are not capital gains. Free state tax filing 2012 You can assume that any dividend you receive on common or preferred stock is an ordinary dividend unless the paying corporation or mutual fund tells you otherwise. Free state tax filing 2012 Ordinary dividends will be shown in box 1a of the Form 1099-DIV you receive. Free state tax filing 2012 Qualified Dividends Qualified dividends are the ordinary dividends subject to the same 0%, 15%, or 20% maximum tax rate that applies to net capital gain. Free state tax filing 2012 They should be shown in box 1b of the Form 1099-DIV you receive. Free state tax filing 2012 The maximum rate of tax on qualified dividends is: 0% on any amount that otherwise would be taxed at a 10% or 15% rate. Free state tax filing 2012 15% on any amount that otherwise would be taxed at rates greater than 15% but less than 39. Free state tax filing 2012 6%. Free state tax filing 2012 20% on any amount that otherwise would be taxed at a 39. Free state tax filing 2012 6% rate. Free state tax filing 2012 To qualify for the maximum rate, all of the following requirements must be met. Free state tax filing 2012 The dividends must have been paid by a U. Free state tax filing 2012 S. Free state tax filing 2012 corporation or a qualified foreign corporation. Free state tax filing 2012 (See Qualified foreign corporation , later. Free state tax filing 2012 ) The dividends are not of the type listed later under Dividends that are not qualified dividends . Free state tax filing 2012 You meet the holding period (discussed next). Free state tax filing 2012 Holding period. Free state tax filing 2012   You must have held the stock for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. Free state tax filing 2012 The ex-dividend date is the first date following the declaration of a dividend on which the buyer of a stock is not entitled to receive the next dividend payment. Free state tax filing 2012 Instead, the seller will get the dividend. Free state tax filing 2012   When counting the number of days you held the stock, include the day you disposed of the stock, but not the day you acquired it. Free state tax filing 2012 See the examples later. Free state tax filing 2012 Exception for preferred stock. Free state tax filing 2012   In the case of preferred stock, you must have held the stock more than 90 days during the 181-day period that begins 90 days before the ex-dividend date if the dividends are due to periods totaling more than 366 days. Free state tax filing 2012 If the preferred dividends are due to periods totaling less than 367 days, the holding period in the previous paragraph applies. Free state tax filing 2012 Example 1. Free state tax filing 2012 You bought 5,000 shares of XYZ Corp. Free state tax filing 2012 common stock on July 9, 2013. Free state tax filing 2012 XYZ Corp. Free state tax filing 2012 paid a cash dividend of 10 cents per share. Free state tax filing 2012 The ex-dividend date was July 16, 2013. Free state tax filing 2012 Your Form 1099-DIV from XYZ Corp. Free state tax filing 2012 shows $500 in box 1a (ordinary dividends) and in box 1b (qualified dividends). Free state tax filing 2012 However, you sold the 5,000 shares on August 12, 2013. Free state tax filing 2012 You held your shares of XYZ Corp. Free state tax filing 2012 for only 34 days of the 121-day period (from July 10, 2013, through August 12, 2013). Free state tax filing 2012 The 121-day period began on May 17, 2013 (60 days before the ex-dividend date), and ended on September 14, 2013. Free state tax filing 2012 You have no qualified dividends from XYZ Corp. Free state tax filing 2012 because you held the XYZ stock for less than 61 days. Free state tax filing 2012 Example 2. Free state tax filing 2012 Assume the same facts as in Example 1 except that you bought the stock on July 15, 2013 (the day before the ex-dividend date), and you sold the stock on September 16, 2013. Free state tax filing 2012 You held the stock for 63 days (from July 16, 2013, through September 16, 2013). Free state tax filing 2012 The $500 of qualified dividends shown in box 1b of your Form 1099-DIV are all qualified dividends because you held the stock for 61 days of the 121-day period (from July 16, 2013, through September 14, 2013). Free state tax filing 2012 Example 3. Free state tax filing 2012 You bought 10,000 shares of ABC Mutual Fund common stock on July 9, 2013. Free state tax filing 2012 ABC Mutual Fund paid a cash dividend of 10 cents a share. Free state tax filing 2012 The ex-dividend date was July 16, 2013. Free state tax filing 2012 The ABC Mutual Fund advises you that the portion of the dividend eligible to be treated as qualified dividends equals 2 cents per share. Free state tax filing 2012 Your Form 1099-DIV from ABC Mutual Fund shows total ordinary dividends of $1,000 and qualified dividends of $200. Free state tax filing 2012 However, you sold the 10,000 shares on August 12, 2013. Free state tax filing 2012 You have no qualified dividends from ABC Mutual Fund because you held the ABC Mutual Fund stock for less than 61 days. Free state tax filing 2012 Holding period reduced where risk of loss is diminished. Free state tax filing 2012   When determining whether you met the minimum holding period discussed earlier, you cannot count any day during which you meet any of the following conditions. Free state tax filing 2012 You had an option to sell, were under a contractual obligation to sell, or had made (and not closed) a short sale of substantially identical stock or securities. Free state tax filing 2012 You were grantor (writer) of an option to buy substantially identical stock or securities. Free state tax filing 2012 Your risk of loss is diminished by holding one or more other positions in substantially similar or related property. Free state tax filing 2012   For information about how to apply condition (3), see Regulations section 1. Free state tax filing 2012 246-5. Free state tax filing 2012 Qualified foreign corporation. Free state tax filing 2012   A foreign corporation is a qualified foreign corporation if it meets any of the following conditions. Free state tax filing 2012 The corporation is incorporated in a U. Free state tax filing 2012 S. Free state tax filing 2012 possession. Free state tax filing 2012 The corporation is eligible for the benefits of a comprehensive income tax treaty with the United States that the Treasury Department determines is satisfactory for this purpose and that includes an exchange of information program. Free state tax filing 2012 For a list of those treaties, see Table 8-1. Free state tax filing 2012 The corporation does not meet (1) or (2) above, but the stock for which the dividend is paid is readily tradable on an established securities market in the United States. Free state tax filing 2012 See Readily tradable stock , later. Free state tax filing 2012 Exception. Free state tax filing 2012   A corporation is not a qualified foreign corporation if it is a passive foreign investment company during its tax year in which the dividends are paid or during its previous tax year. Free state tax filing 2012 Readily tradable stock. Free state tax filing 2012   Any stock (such as common, ordinary, or preferred) or an American depositary receipt in respect of that stock is considered to satisfy requirement (3) under Qualified foreign corporation , if it is listed on a national securities exchange that is registered under section 6 of the Securities Exchange Act of 1934 or on the Nasdaq Stock Market. Free state tax filing 2012 For a list of the exchanges that meet these requirements, see www. Free state tax filing 2012 sec. Free state tax filing 2012 gov/divisions/marketreg/mrexchanges. Free state tax filing 2012 shtml. Free state tax filing 2012 Dividends that are not qualified dividends. Free state tax filing 2012   The following dividends are not qualified dividends. Free state tax filing 2012 They are not qualified dividends even if they are shown in box 1b of Form 1099-DIV. Free state tax filing 2012 Capital gain distributions. Free state tax filing 2012 Dividends paid on deposits with mutual savings banks, cooperative banks, credit unions, U. Free state tax filing 2012 S. Free state tax filing 2012 building and loan associations, U. Free state tax filing 2012 S. Free state tax filing 2012 savings and loan associations, federal savings and loan associations, and similar financial institutions. Free state tax filing 2012 (Report these amounts as interest income. Free state tax filing 2012 ) Dividends from a corporation that is a tax-exempt organization or farmer's cooperative during the corporation's tax year in which the dividends were paid or during the corporation's previous tax year. Free state tax filing 2012 Dividends paid by a corporation on employer securities held on the date of record by an employee stock ownership plan (ESOP) maintained by that corporation. Free state tax filing 2012 Dividends on any share of stock to the extent you are obligated (whether under a short sale or otherwise) to make related payments for positions in substantially similar or related property. Free state tax filing 2012 Payments in lieu of dividends, but only if you know or have reason to know the payments are not qualified dividends. Free state tax filing 2012 Payments shown in Form 1099-DIV, box 1b, from a foreign corporation to the extent you know or have reason to know the payments are not qualified dividends. Free state tax filing 2012 Table 8-1. Free state tax filing 2012 Income Tax Treaties Income tax treaties the United States has with the following countries satisfy requirement (2) under Qualified foreign corporation. Free state tax filing 2012 Australia Indonesia Romania Austria Ireland Russian Bangladesh Israel Federation Barbados Italy Slovak Belgium Jamaica Republic Bulgaria Japan Slovenia Canada Kazakhstan South Africa China Korea Spain Cyprus Latvia Sri Lanka Czech Lithuania Sweden Republic Luxembourg Switzerland Denmark Malta Thailand Egypt Mexico Trinidad and Estonia Morocco Tobago Finland Netherlands Tunisia France New Zealand Turkey Germany Norway Ukraine Greece Pakistan United Hungary Philippines Kingdom Iceland Poland Venezuela India Portugal     Dividends Used to Buy More Stock The corporation in which you own stock may have a dividend reinvestment plan. Free state tax filing 2012 This plan lets you choose to use your dividends to buy (through an agent) more shares of stock in the corporation instead of receiving the dividends in cash. Free state tax filing 2012 Most mutual funds also permit shareholders to automatically reinvest distributions in more shares in the fund, instead of receiving cash. Free state tax filing 2012 If you use your dividends to buy more stock at a price equal to its fair market value, you still must report the dividends as income. Free state tax filing 2012 If you are a member of a dividend reinvestment plan that lets you buy more stock at a price less than its fair market value, you must report as dividend income the fair market value of the additional stock on the dividend payment date. Free state tax filing 2012 You also must report as dividend income any service charge subtracted from your cash dividends before the dividends are used to buy the additional stock. Free state tax filing 2012 But you may be able to deduct the service charge. Free state tax filing 2012 See chapter 28 for more information about deducting expenses of producing income. Free state tax filing 2012 In some dividend reinvestment plans, you can invest more cash to buy shares of stock at a price less than fair market value. Free state tax filing 2012 If you choose to do this, you must report as dividend income the difference between the cash you invest and the fair market value of the stock you buy. Free state tax filing 2012 When figuring this amount, use the fair market value of the stock on the dividend payment date. Free state tax filing 2012 Money Market Funds Report amounts you receive from money market funds as dividend income. Free state tax filing 2012 Money market funds are a type of mutual fund and should not be confused with bank money market accounts that pay interest. Free state tax filing 2012 Capital Gain Distributions Capital gain distributions (also called capital gain dividends) are paid to you or credited to your account by mutual funds (or other regulated investment companies) and real estate investment trusts (REITs). Free state tax filing 2012 They will be shown in box 2a of the Form 1099-DIV you receive from the mutual fund or REIT. Free state tax filing 2012 Report capital gain distributions as long-term capital gains, regardless of how long you owned your shares in the mutual fund or REIT. Free state tax filing 2012 Undistributed capital gains of mutual funds and REITs. Free state tax filing 2012    Some mutual funds and REITs keep their long-term capital gains and pay tax on them. Free state tax filing 2012 You must treat your share of these gains as distributions, even though you did not actually receive them. Free state tax filing 2012 However, they are not included on Form 1099-DIV. Free state tax filing 2012 Instead, they are reported to you in box 1a of Form 2439. Free state tax filing 2012   Report undistributed capital gains (box 1a of Form 2439) as long-term capital gains on Schedule D (Form 1040), column (h), line 11. Free state tax filing 2012   The tax paid on these gains by the mutual fund or REIT is shown in box 2 of Form 2439. Free state tax filing 2012 You take credit for this tax by including it on Form 1040, line 71, and checking box a on that line. Free state tax filing 2012 Attach Copy B of Form 2439 to your return, and keep Copy C for your records. Free state tax filing 2012 Basis adjustment. Free state tax filing 2012   Increase your basis in your mutual fund, or your interest in a REIT, by the difference between the gain you report and the credit you claim for the tax paid. Free state tax filing 2012 Additional information. Free state tax filing 2012   For more information on the treatment of distributions from mutual funds, see Publication 550. Free state tax filing 2012 Nondividend Distributions A nondividend distribution is a distribution that is not paid out of the earnings and profits of a corporation or a mutual fund. Free state tax filing 2012 You should receive a Form 1099-DIV or other statement showing the nondividend distribution. Free state tax filing 2012 On Form 1099-DIV, a nondividend distribution will be shown in box 3. Free state tax filing 2012 If you do not receive such a statement, you report the distribution as an ordinary dividend. Free state tax filing 2012 Basis adjustment. Free state tax filing 2012   A nondividend distribution reduces the basis of your stock. Free state tax filing 2012 It is not taxed until your basis in the stock is fully recovered. Free state tax filing 2012 This nontaxable portion is also called a return of capital; it is a return of your investment in the stock of the company. Free state tax filing 2012 If you buy stock in a corporation in different lots at different times, and you cannot definitely identify the shares subject to the nondividend distribution, reduce the basis of your earliest purchases first. Free state tax filing 2012   When the basis of your stock has been reduced to zero, report any additional nondividend distribution you receive as a capital gain. Free state tax filing 2012 Whether you report it as a long-term or short-term capital gain depends on how long you have held the stock. Free state tax filing 2012 See Holding Period in chapter 14. Free state tax filing 2012 Example. Free state tax filing 2012 You bought stock in 2000 for $100. Free state tax filing 2012 In 2003, you received a nondividend distribution of $80. Free state tax filing 2012 You did not include this amount in your income, but you reduced the basis of your stock to $20. Free state tax filing 2012 You received a nondividend distribution of $30 in 2013. Free state tax filing 2012 The first $20 of this amount reduced your basis to zero. Free state tax filing 2012 You report the other $10 as a long-term capital gain for 2013. Free state tax filing 2012 You must report as a long-term capital gain any nondividend distribution you receive on this stock in later years. Free state tax filing 2012 Liquidating Distributions Liquidating distributions, sometimes called liquidating dividends, are distributions you receive during a partial or complete liquidation of a corporation. Free state tax filing 2012 These distributions are, at least in part, one form of a return of capital. Free state tax filing 2012 They may be paid in one or more installments. Free state tax filing 2012 You will receive Form 1099-DIV from the corporation showing you the amount of the liquidating distribution in box 8 or 9. Free state tax filing 2012 For more information on liquidating distributions, see chapter 1 of Publication 550. Free state tax filing 2012 Distributions of Stock and Stock Rights Distributions by a corporation of its own stock are commonly known as stock dividends. Free state tax filing 2012 Stock rights (also known as “stock options”) are distributions by a corporation of rights to acquire the corporation's stock. Free state tax filing 2012 Generally, stock dividends and stock rights are not taxable to you, and you do not report them on your return. Free state tax filing 2012 Taxable stock dividends and stock rights. Free state tax filing 2012   Distributions of stock dividends and stock rights are taxable to you if any of the following apply. Free state tax filing 2012 You or any other shareholder have the choice to receive cash or other property instead of stock or stock rights. Free state tax filing 2012 The distribution gives cash or other property to some shareholders and an increase in the percentage interest in the corporation's assets or earnings and profits to other shareholders. Free state tax filing 2012 The distribution is in convertible preferred stock and has the same result as in (2). Free state tax filing 2012 The distribution gives preferred stock to some common stock shareholders and common stock to other common stock shareholders. Free state tax filing 2012 The distribution is on preferred stock. Free state tax filing 2012 (The distribution, however, is not taxable if it is an increase in the conversion ratio of convertible preferred stock made solely to take into account a stock dividend, stock split, or similar event that would otherwise result in reducing the conversion right. Free state tax filing 2012 )   The term “stock” includes rights to acquire stock, and the term “shareholder” includes a holder of rights or of convertible securities. Free state tax filing 2012 If you receive taxable stock dividends or stock rights, include their fair market value at the time of distribution in your income. Free state tax filing 2012 Preferred stock redeemable at a premium. Free state tax filing 2012   If you hold preferred stock having a redemption price higher than its issue price, the difference (the redemption premium) generally is taxable as a constructive distribution of additional stock on the preferred stock. Free state tax filing 2012 For more information, see chapter 1 of Publication 550. Free state tax filing 2012 Basis. Free state tax filing 2012   Your basis in stock or stock rights received in a taxable distribution is their fair market value when distributed. Free state tax filing 2012 If you receive stock or stock rights that are not taxable to you, see Stocks and Bonds under Basis of Investment Property in chapter 4 of Publication 550 for information on how to figure their basis. Free state tax filing 2012 Fractional shares. Free state tax filing 2012    You may not own enough stock in a corporation to receive a full share of stock if the corporation declares a stock dividend. Free state tax filing 2012 However, with the approval of the shareholders, the corporation may set up a plan in which fractional shares are not issued but instead are sold, and the cash proceeds are given to the shareholders. Free state tax filing 2012 Any cash you receive for fractional shares under such a plan is treated as an amount realized on the sale of the fractional shares. Free state tax filing 2012 Report this transaction on Form 8949, Sales and Other Dispositions of Capital Assets. Free state tax filing 2012 Enter your gain or loss, the difference between the cash you receive and the basis of the fractional shares sold, in column (h) of Schedule D (Form 1040) in Part I or Part II, whichever is appropriate. Free state tax filing 2012    Report these transactions on Form 8949 with the correct box checked. Free state tax filing 2012   For more information on Form 8949 and Schedule D (Form 1040), see chapter 4 of Publication 550. Free state tax filing 2012 Also see the Instructions for Form 8949 and the Instructions for Schedule D (Form 1040). Free state tax filing 2012 Example. Free state tax filing 2012 You own one share of common stock that you bought on January 3, 2004, for $100. Free state tax filing 2012 The corporation declared a common stock dividend of 5% on June 29, 2013. Free state tax filing 2012 The fair market value of the stock at the time the stock dividend was declared was $200. Free state tax filing 2012 You were paid $10 for the fractional-share stock dividend under a plan described in the discussion above. Free state tax filing 2012 You figure your gain or loss as follows: Fair market value of old stock $200. Free state tax filing 2012 00 Fair market value of stock dividend (cash received) +10. Free state tax filing 2012 00 Fair market value of old stock and stock dividend $210. Free state tax filing 2012 00 Basis (cost) of old stock after the stock dividend (($200 ÷ $210) × $100) $95. Free state tax filing 2012 24 Basis (cost) of stock dividend (($10 ÷ $210) × $100) + 4. Free state tax filing 2012 76 Total $100. Free state tax filing 2012 00 Cash received $10. Free state tax filing 2012 00 Basis (cost) of stock dividend − 4. Free state tax filing 2012 76 Gain $5. Free state tax filing 2012 24 Because you had held the share of stock for more than 1 year at the time the stock dividend was declared, your gain on the stock dividend is a long-term capital gain. Free state tax filing 2012 Scrip dividends. Free state tax filing 2012   A corporation that declares a stock dividend may issue you a scrip certificate that entitles you to a fractional share. Free state tax filing 2012 The certificate is generally nontaxable when you receive it. Free state tax filing 2012 If you choose to have the corporation sell the certificate for you and give you the proceeds, your gain or loss is the difference between the proceeds and the portion of your basis in the corporation's stock allocated to the certificate. Free state tax filing 2012   However, if you receive a scrip certificate that you can choose to redeem for cash instead of stock, the certificate is taxable when you receive it. Free state tax filing 2012 You must include its fair market value in income on the date you receive it. Free state tax filing 2012 Other Distributions You may receive any of the following distributions during the year. Free state tax filing 2012 Exempt-interest dividends. Free state tax filing 2012   Exempt-interest dividends you receive from a mutual fund or other regulated investment company, including those received from a qualified fund of funds in any tax year beginning after December 22, 2010, are not included in your taxable income. Free state tax filing 2012 Exempt-interest dividends should be shown in box 10 of Form 1099-DIV. Free state tax filing 2012 Information reporting requirement. Free state tax filing 2012   Although exempt-interest dividends are not taxable, you must show them on your tax return if you have to file a return. Free state tax filing 2012 This is an information reporting requirement and does not change the exempt-interest dividends to taxable income. Free state tax filing 2012 Alternative minimum tax treatment. Free state tax filing 2012   Exempt-interest dividends paid from specified private activity bonds may be subject to the alternative minimum tax. Free state tax filing 2012 See Alternative Minimum Tax (AMT) in chapter 30 for more information. Free state tax filing 2012 Dividends on insurance policies. Free state tax filing 2012    Insurance policy dividends the insurer keeps and uses to pay your premiums are not taxable. Free state tax filing 2012 However, you must report as taxable interest income the interest that is paid or credited on dividends left with the insurance company. Free state tax filing 2012    If dividends on an insurance contract (other than a modified endowment contract) are distributed to you, they are a partial return of the premiums you paid. Free state tax filing 2012 Do not include them in your gross income until they are more than the total of all net premiums you paid for the contract. Free state tax filing 2012 Report any taxable distributions on insurance policies on Form 1040, line 21. Free state tax filing 2012 Dividends on veterans' insurance. Free state tax filing 2012   Dividends you receive on veterans' insurance policies are not taxable. Free state tax filing 2012 In addition, interest on dividends left with the Department of Veterans Affairs is not taxable. Free state tax filing 2012 Patronage dividends. Free state tax filing 2012   Generally, patronage dividends you receive in money from a cooperative organization are included in your income. Free state tax filing 2012   Do not include in your income patronage dividends you receive on: Property bought for your personal use, or Capital assets or depreciable property bought for use in your business. Free state tax filing 2012 But you must reduce the basis (cost) of the items bought. Free state tax filing 2012 If the dividend is more than the adjusted basis of the assets, you must report the excess as income. Free state tax filing 2012   These rules are the same whether the cooperative paying the dividend is a taxable or tax-exempt cooperative. Free state tax filing 2012 Alaska Permanent Fund dividends. Free state tax filing 2012    Do not report these amounts as dividends. Free state tax filing 2012 Instead, report these amounts on Form 1040, line 21; Form 1040A, line 13; or Form 1040EZ, line 3. Free state tax filing 2012 How To Report Dividend Income Generally, you can use either Form 1040 or Form 1040A to report your dividend income. Free state tax filing 2012 Report the total of your ordinary dividends on line 9a of Form 1040 or Form 1040A. Free state tax filing 2012 Report qualified dividends on line 9b of Form 1040 or Form 1040A. Free state tax filing 2012 If you receive capital gain distributions, you may be able to use Form 1040A or you may have to use Form 1040. Free state tax filing 2012 See Exceptions to filing Form 8949 and Schedule D (Form 1040) in chapter 16. Free state tax filing 2012 If you receive nondividend distributions required to be reported as capital gains, you must use Form 1040. Free state tax filing 2012 You cannot use Form 1040EZ if you receive any dividend income. Free state tax filing 2012 Form 1099-DIV. Free state tax filing 2012   If you owned stock on which you received $10 or more in dividends and other distributions, you should receive a Form 1099-DIV. Free state tax filing 2012 Even if you do not receive Form 1099-DIV, you must report all your dividend income. Free state tax filing 2012   See Form 1099-DIV for more information on how to report dividend income. Free state tax filing 2012 Form 1040A or 1040. Free state tax filing 2012    You must complete Schedule B (Form 1040A or 1040), Part II, and attach it to your Form 1040A or 1040, if: Your ordinary dividends (Form 1099-DIV, box 1a) are more than $1,500, or You received, as a nominee, dividends that actually belong to someone else. Free state tax filing 2012 If your ordinary dividends are more than $1,500, you must also complete Schedule B (Form 1040A or 1040), Part III. Free state tax filing 2012   List on Schedule B (Form 1040A or 1040), Part II, line 5, each payer's name and the ordinary dividends you received. Free state tax filing 2012 If your securities are held by a brokerage firm (in “street name”), list the name of the brokerage firm shown on Form 1099-DIV as the payer. Free state tax filing 2012 If your stock is held by a nominee who is the owner of record, and the nominee credited or paid you dividends on the stock, show the name of the nominee and the dividends you received or for which you were credited. Free state tax filing 2012   Enter on line 6 the total of the amounts listed on line 5. Free state tax filing 2012 Also enter this total on line 9a of Form 1040A or 1040. Free state tax filing 2012 Qualified dividends. Free state tax filing 2012   Report qualified dividends (Form 1099-DIV, box 1b) on line 9b of Form 1040 or Form 1040A. Free state tax filing 2012 The amount in box 1b is already included in box 1a. Free state tax filing 2012 Do not add the amount in box 1b to, or substract it from, the amount in box 1a. Free state tax filing 2012   Do not include any of the following on line 9b. Free state tax filing 2012 Qualified dividends you received as a nominee. Free state tax filing 2012 See Nominees under How to Report Dividend Income in chapter 1 of Publication 550. Free state tax filing 2012 Dividends on stock for which you did not meet the holding period. Free state tax filing 2012 See Holding period , earlier under Qualified Dividends. Free state tax filing 2012 Dividends on any share of stock to the extent you are obligated (whether under a short sale or otherwise) to make related payments for positions in substantially similar or related property. Free state tax filing 2012 Payments in lieu of dividends, but only if you know or have reason to know the payments are not qualified dividends. Free state tax filing 2012 Payments shown in Form 1099-DIV, box 1b, from a foreign corporation to the extent you know or have reason to know the payments are not qualified dividends. Free state tax filing 2012   If you have qualified dividends, you must figure your tax by completing the Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 or 1040A instructions or the Schedule D Tax Worksheet in the Schedule D (Form 1040) instructions, whichever applies. Free state tax filing 2012 Enter qualified dividends on line 2 of the worksheet. Free state tax filing 2012 Investment interest deducted. Free state tax filing 2012   If you claim a deduction for investment interest, you may have to reduce the amount of your qualified dividends that are eligible for the 0%, 15%, or 20% tax rate. Free state tax filing 2012 Reduce it by the qualified dividends you choose to include in investment income when figuring the limit on your investment interest deduction. Free state tax filing 2012 This is done on the Qualified Dividends and Capital Gain Tax Worksheet or the Schedule D Tax Worksheet. Free state tax filing 2012 For more information about the limit on investment interest, see Investment expenses in chapter 23. Free state tax filing 2012 Expenses related to dividend income. Free state tax filing 2012   You may be able to deduct expenses related to dividend income if you itemize your deductions on Schedule A (Form 1040). Free state tax filing 2012 See chapter 28 for general information about deducting expenses of producing income. Free state tax filing 2012 More information. Free state tax filing 2012    For more information about how to report dividend income, see chapter 1 of Publication 550 or the instructions for the form you must file. Free state tax filing 2012 Prev  Up  Next   Home   More Online Publications