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Free state tax help 1. Free state tax help   Traditional IRAs Table of Contents What's New for 2013 What's New for 2014 Introduction Who Can Open a Traditional IRA?What Is Compensation? When Can a Traditional IRA Be Opened? How Can a Traditional IRA Be Opened?Individual Retirement Account Individual Retirement Annuity Individual Retirement Bonds Simplified Employee Pension (SEP) Employer and Employee Association Trust Accounts Required Disclosures How Much Can Be Contributed?Limit. Free state tax help When repayment contributions can be made. Free state tax help No deduction. Free state tax help Reserve component. Free state tax help Figuring your IRA deduction. Free state tax help Reporting the repayment. Free state tax help Example. Free state tax help General Limit Kay Bailey Hutchison Spousal IRA Limit Filing Status Less Than Maximum Contributions More Than Maximum Contributions When Can Contributions Be Made? How Much Can You Deduct?Kay Bailey Hutchison Spousal IRA. Free state tax help Are You Covered by an Employer Plan? Limit if Covered by Employer Plan Reporting Deductible Contributions Nondeductible Contributions Examples — Worksheet for Reduced IRA Deduction for 2013 What if You Inherit an IRA?Treating it as your own. Free state tax help Can You Move Retirement Plan Assets?Transfers to Roth IRAs from other retirement plans. Free state tax help Trustee-to-Trustee Transfer Rollovers Transfers Incident To Divorce Converting From Any Traditional IRA Into a Roth IRA Recharacterizations When Can You Withdraw or Use Assets?Contributions Returned Before Due Date of Return When Must You Withdraw Assets? (Required Minimum Distributions)IRA Owners IRA Beneficiaries Which Table Do You Use To Determine Your Required Minimum Distribution? What Age(s) Do You Use With the Table(s)? Miscellaneous Rules for Required Minimum Distributions Are Distributions Taxable?January 2013 QCDs treated as made in 2012. Free state tax help 2013 Reporting. Free state tax help Additional reporting requirements if you made the election to treat a January 2013 QCD as made in 2012. Free state tax help One-time transfer. Free state tax help Testing period rules apply. Free state tax help More information. Free state tax help Distributions Fully or Partly Taxable Figuring the Nontaxable and Taxable Amounts Recognizing Losses on Traditional IRA Investments Other Special IRA Distribution Situations Reporting and Withholding Requirements for Taxable Amounts What Acts Result in Penalties or Additional Taxes?Prohibited Transactions Investment in Collectibles Excess Contributions Early Distributions Excess Accumulations (Insufficient Distributions) Reporting Additional Taxes What's New for 2013 Traditional IRA contribution and deduction limit. Free state tax help  The contribution limit to your traditional IRA for 2013 will be increased to the smaller of the following amounts: $5,500, or Your taxable compensation for the year. Free state tax help If you were age 50 or older before 2014, the most that can be contributed to your traditional IRA for 2013 will be the smaller of the following amounts: $6,500, or Your taxable compensation for the year. Free state tax help For more information, see How Much Can Be Contributed? in this chapter. Free state tax help Modified AGI limit for traditional IRA contributions increased. Free state tax help  For 2013, if you were covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified AGI is: More than $95,000 but less than $115,000 for a married couple filing a joint return or a qualifying widow(er), More than $59,000 but less than $69,000 for a single individual or head of household, or Less than $10,000 for a married individual filing a separate return. Free state tax help If you either lived with your spouse or file a joint return, and your spouse was covered by a retirement plan at work, but you were not, your deduction is phased out if your modified AGI is more than $178,000 but less than $188,000. Free state tax help If your modified AGI is $188,000 or more, you cannot take a deduction for contributions to a traditional IRA. Free state tax help See How Much Can You Deduct? in this chapter. Free state tax help Net Investment Income Tax. Free state tax help  For purposes of the Net Investment Income Tax (NIIT), net investment income does not include distributions from a qualified retirement plan (for example, 401(a), 403(a), 403(b), 457(b) plans, and IRAs). Free state tax help However, these distributions are taken into account when determining the modified adjusted gross income threshold. Free state tax help Distributions from a nonqualified retirement plan are included in net investment income. Free state tax help See Form 8960, Net Investment Income Tax—Individuals, Estates, and Trusts, and its instructions for more information. Free state tax help What's New for 2014 Modified AGI limit for traditional IRA contributions increased. Free state tax help  For 2014, if you are covered by a retirement plan at work, your deduction for contributions to a traditional IRA is reduced (phased out) if your modified AGI is: More than $96,000 but less than $116,000 for a married couple filing a joint return or a qualifying widow(er), More than $60,000 but less than $70,000 for a single individual or head of household, or Less than $10,000 for a married individual filing a separate return. Free state tax help If you either live with your spouse or file a joint return, and your spouse is covered by a retirement plan at work, but you are not, your deduction is phased out if your modified AGI is more than $181,000 but less than $191,000. Free state tax help If your modified AGI is $191,000 or more, you cannot take a deduction for contributions to a traditional IRA. Free state tax help Introduction This chapter discusses the original IRA. Free state tax help In this publication the original IRA (sometimes called an ordinary or regular IRA) is referred to as a “traditional IRA. Free state tax help ” A traditional IRA is any IRA that is not a Roth IRA or a SIMPLE IRA. Free state tax help The following are two advantages of a traditional IRA: You may be able to deduct some or all of your contributions to it, depending on your circumstances. Free state tax help Generally, amounts in your IRA, including earnings and gains, are not taxed until they are distributed. Free state tax help Who Can Open a Traditional IRA? You can open and make contributions to a traditional IRA if: You (or, if you file a joint return, your spouse) received taxable compensation during the year, and You were not age 70½ by the end of the year. Free state tax help You can have a traditional IRA whether or not you are covered by any other retirement plan. Free state tax help However, you may not be able to deduct all of your contributions if you or your spouse is covered by an employer retirement plan. Free state tax help See How Much Can You Deduct , later. Free state tax help Both spouses have compensation. Free state tax help   If both you and your spouse have compensation and are under age 70½, each of you can open an IRA. Free state tax help You cannot both participate in the same IRA. Free state tax help If you file a joint return, only one of you needs to have compensation. Free state tax help What Is Compensation? Generally, compensation is what you earn from working. Free state tax help For a summary of what compensation does and does not include, see Table 1-1. Free state tax help Compensation includes all of the items discussed next (even if you have more than one type). Free state tax help Wages, salaries, etc. Free state tax help   Wages, salaries, tips, professional fees, bonuses, and other amounts you receive for providing personal services are compensation. Free state tax help The IRS treats as compensation any amount properly shown in box 1 (Wages, tips, other compensation) of Form W-2, Wage and Tax Statement, provided that amount is reduced by any amount properly shown in box 11 (Nonqualified plans). Free state tax help Scholarship and fellowship payments are compensation for IRA purposes only if shown in box 1 of Form W-2. Free state tax help Commissions. Free state tax help   An amount you receive that is a percentage of profits or sales price is compensation. Free state tax help Self-employment income. Free state tax help   If you are self-employed (a sole proprietor or a partner), compensation is the net earnings from your trade or business (provided your personal services are a material income-producing factor) reduced by the total of: The deduction for contributions made on your behalf to retirement plans, and The deduction allowed for the deductible part of your self-employment taxes. Free state tax help   Compensation includes earnings from self-employment even if they are not subject to self-employment tax because of your religious beliefs. Free state tax help Self-employment loss. Free state tax help   If you have a net loss from self-employment, do not subtract the loss from your salaries or wages when figuring your total compensation. Free state tax help Alimony and separate maintenance. Free state tax help   For IRA purposes, compensation includes any taxable alimony and separate maintenance payments you receive under a decree of divorce or separate maintenance. Free state tax help Nontaxable combat pay. Free state tax help   If you were a member of the U. Free state tax help S. Free state tax help Armed Forces, compensation includes any nontaxable combat pay you received. Free state tax help This amount should be reported in box 12 of your 2013 Form W-2 with code Q. Free state tax help Table 1-1. Free state tax help Compensation for Purposes of an IRA Includes . Free state tax help . Free state tax help . Free state tax help Does not include . Free state tax help . Free state tax help . Free state tax help   earnings and profits from property. Free state tax help wages, salaries, etc. Free state tax help     interest and dividend income. Free state tax help commissions. Free state tax help     pension or annuity income. Free state tax help self-employment income. Free state tax help     deferred compensation. Free state tax help alimony and separate maintenance. Free state tax help     income from certain  partnerships. Free state tax help nontaxable combat pay. Free state tax help     any amounts you exclude from income. Free state tax help     What Is Not Compensation? Compensation does not include any of the following items. Free state tax help Earnings and profits from property, such as rental income, interest income, and dividend income. Free state tax help Pension or annuity income. Free state tax help Deferred compensation received (compensation payments postponed from a past year). Free state tax help Income from a partnership for which you do not provide services that are a material income-producing factor. Free state tax help Conservation Reserve Program (CRP) payments reported on Schedule SE (Form 1040), line 1b. Free state tax help Any amounts (other than combat pay) you exclude from income, such as foreign earned income and housing costs. Free state tax help When Can a Traditional IRA Be Opened? You can open a traditional IRA at any time. Free state tax help However, the time for making contributions for any year is limited. Free state tax help See When Can Contributions Be Made , later. Free state tax help How Can a Traditional IRA Be Opened? You can open different kinds of IRAs with a variety of organizations. Free state tax help You can open an IRA at a bank or other financial institution or with a mutual fund or life insurance company. Free state tax help You can also open an IRA through your stockbroker. Free state tax help Any IRA must meet Internal Revenue Code requirements. Free state tax help The requirements for the various arrangements are discussed below. Free state tax help Kinds of traditional IRAs. Free state tax help   Your traditional IRA can be an individual retirement account or annuity. Free state tax help It can be part of either a simplified employee pension (SEP) or an employer or employee association trust account. Free state tax help Individual Retirement Account An individual retirement account is a trust or custodial account set up in the United States for the exclusive benefit of you or your beneficiaries. Free state tax help The account is created by a written document. Free state tax help The document must show that the account meets all of the following requirements. Free state tax help The trustee or custodian must be a bank, a federally insured credit union, a savings and loan association, or an entity approved by the IRS to act as trustee or custodian. Free state tax help The trustee or custodian generally cannot accept contributions of more than the deductible amount for the year. Free state tax help However, rollover contributions and employer contributions to a simplified employee pension (SEP) can be more than this amount. Free state tax help Contributions, except for rollover contributions, must be in cash. Free state tax help See Rollovers , later. Free state tax help You must have a nonforfeitable right to the amount at all times. Free state tax help Money in your account cannot be used to buy a life insurance policy. Free state tax help Assets in your account cannot be combined with other property, except in a common trust fund or common investment fund. Free state tax help You must start receiving distributions by April 1 of the year following the year in which you reach age 70½. Free state tax help See When Must You Withdraw Assets? (Required Minimum Distributions) , later. Free state tax help Individual Retirement Annuity You can open an individual retirement annuity by purchasing an annuity contract or an endowment contract from a life insurance company. Free state tax help An individual retirement annuity must be issued in your name as the owner, and either you or your beneficiaries who survive you are the only ones who can receive the benefits or payments. Free state tax help An individual retirement annuity must meet all the following requirements. Free state tax help Your entire interest in the contract must be nonforfeitable. Free state tax help The contract must provide that you cannot transfer any portion of it to any person other than the issuer. Free state tax help There must be flexible premiums so that if your compensation changes, your payment can also change. Free state tax help This provision applies to contracts issued after November 6, 1978. Free state tax help The contract must provide that contributions cannot be more than the deductible amount for an IRA for the year, and that you must use any refunded premiums to pay for future premiums or to buy more benefits before the end of the calendar year after the year in which you receive the refund. Free state tax help Distributions must begin by April 1 of the year following the year in which you reach age 70½. Free state tax help See When Must You Withdraw Assets? (Required Minimum Distributions) , later. Free state tax help Individual Retirement Bonds The sale of individual retirement bonds issued by the federal government was suspended after April 30, 1982. Free state tax help The bonds have the following features. Free state tax help They stop earning interest when you reach age 70½. Free state tax help If you die, interest will stop 5 years after your death, or on the date you would have reached age 70½, whichever is earlier. Free state tax help You cannot transfer the bonds. Free state tax help If you cash (redeem) the bonds before the year in which you reach age 59½, you may be subject to a 10% additional tax. Free state tax help See Age 59½ Rule under Early Distributions, later. Free state tax help You can roll over redemption proceeds into IRAs. Free state tax help Simplified Employee Pension (SEP) A simplified employee pension (SEP) is a written arrangement that allows your employer to make deductible contributions to a traditional IRA (a SEP IRA) set up for you to receive such contributions. Free state tax help Generally, distributions from SEP IRAs are subject to the withdrawal and tax rules that apply to traditional IRAs. Free state tax help See Publication 560 for more information about SEPs. Free state tax help Employer and Employee Association Trust Accounts Your employer or your labor union or other employee association can set up a trust to provide individual retirement accounts for employees or members. Free state tax help The requirements for individual retirement accounts apply to these traditional IRAs. Free state tax help Required Disclosures The trustee or issuer (sometimes called the sponsor) of your traditional IRA generally must give you a disclosure statement at least 7 days before you open your IRA. Free state tax help However, the sponsor does not have to give you the statement until the date you open (or purchase, if earlier) your IRA, provided you are given at least 7 days from that date to revoke the IRA. Free state tax help The disclosure statement must explain certain items in plain language. Free state tax help For example, the statement should explain when and how you can revoke the IRA, and include the name, address, and telephone number of the person to receive the notice of cancellation. Free state tax help This explanation must appear at the beginning of the disclosure statement. Free state tax help If you revoke your IRA within the revocation period, the sponsor must return to you the entire amount you paid. Free state tax help The sponsor must report on the appropriate IRS forms both your contribution to the IRA (unless it was made by a trustee-to-trustee transfer) and the amount returned to you. Free state tax help These requirements apply to all sponsors. Free state tax help How Much Can Be Contributed? There are limits and other rules that affect the amount that can be contributed to a traditional IRA. Free state tax help These limits and rules are explained below. Free state tax help Community property laws. Free state tax help   Except as discussed later under Kay Bailey Hutchison Spousal IRA Limit , each spouse figures his or her limit separately, using his or her own compensation. Free state tax help This is the rule even in states with community property laws. Free state tax help Brokers' commissions. Free state tax help   Brokers' commissions paid in connection with your traditional IRA are subject to the contribution limit. Free state tax help For information about whether you can deduct brokers' commissions, see Brokers' commissions , later, under How Much Can You Deduct. Free state tax help Trustees' fees. Free state tax help   Trustees' administrative fees are not subject to the contribution limit. Free state tax help For information about whether you can deduct trustees' fees, see Trustees' fees , later, under How Much Can You Deduct. Free state tax help Qualified reservist repayments. Free state tax help   If you were a member of a reserve component and you were ordered or called to active duty after September 11, 2001, you may be able to contribute (repay) to an IRA amounts equal to any qualified reservist distributions (defined later under Early Distributions) you received. Free state tax help You can make these repayment contributions even if they would cause your total contributions to the IRA to be more than the general limit on contributions. Free state tax help To be eligible to make these repayment contributions, you must have received a qualified reservist distribution from an IRA or from a section 401(k) or 403(b) plan or a similar arrangement. Free state tax help Limit. Free state tax help   Your qualified reservist repayments cannot be more than your qualified reservist distributions, explained under Early Distributions , later. Free state tax help When repayment contributions can be made. Free state tax help   You cannot make these repayment contributions later than the date that is 2 years after your active duty period ends. Free state tax help No deduction. Free state tax help   You cannot deduct qualified reservist repayments. Free state tax help Reserve component. Free state tax help   The term “reserve component” means the: Army National Guard of the United States, Army Reserve, Naval Reserve, Marine Corps Reserve, Air National Guard of the United States, Air Force Reserve, Coast Guard Reserve, or Reserve Corps of the Public Health Service. Free state tax help Figuring your IRA deduction. Free state tax help   The repayment of qualified reservist distributions does not affect the amount you can deduct as an IRA contribution. Free state tax help Reporting the repayment. Free state tax help   If you repay a qualified reservist distribution, include the amount of the repayment with nondeductible contributions on line 1 of Form 8606. Free state tax help Example. Free state tax help   In 2013, your IRA contribution limit is $5,500. Free state tax help However, because of your filing status and AGI, the limit on the amount you can deduct is $3,500. Free state tax help You can make a nondeductible contribution of $2,000 ($5,500 - $3,500). Free state tax help In an earlier year you received a $3,000 qualified reservist distribution, which you would like to repay this year. Free state tax help   For 2013, you can contribute a total of $8,500 to your IRA. Free state tax help This is made up of the maximum deductible contribution of $3,500; a nondeductible contribution of $2,000; and a $3,000 qualified reservist repayment. Free state tax help You contribute the maximum allowable for the year. Free state tax help Since you are making a nondeductible contribution ($2,000) and a qualified reservist repayment ($3,000), you must file Form 8606 with your return and include $5,000 ($2,000 + $3,000) on line 1 of Form 8606. Free state tax help The qualified reservist repayment is not deductible. Free state tax help Contributions on your behalf to a traditional IRA reduce your limit for contributions to a Roth IRA. Free state tax help See chapter 2 for information about Roth IRAs. Free state tax help General Limit For 2013, the most that can be contributed to your traditional IRA generally is the smaller of the following amounts: $5,500 ($6,500 if you are age 50 or older), or Your taxable compensation (defined earlier) for the year. Free state tax help Note. Free state tax help This limit is reduced by any contributions to a section 501(c)(18) plan (generally, a pension plan created before June 25, 1959, that is funded entirely by employee contributions). Free state tax help This is the most that can be contributed regardless of whether the contributions are to one or more traditional IRAs or whether all or part of the contributions are nondeductible. Free state tax help (See Nondeductible Contributions , later. Free state tax help ) Qualified reservist repayments do not affect this limit. Free state tax help Examples. Free state tax help George, who is 34 years old and single, earns $24,000 in 2013. Free state tax help His IRA contributions for 2013 are limited to $5,500. Free state tax help Danny, an unmarried college student working part time, earns $3,500 in 2013. Free state tax help His IRA contributions for 2013 are limited to $3,500, the amount of his compensation. Free state tax help More than one IRA. Free state tax help   If you have more than one IRA, the limit applies to the total contributions made on your behalf to all your traditional IRAs for the year. Free state tax help Annuity or endowment contracts. Free state tax help   If you invest in an annuity or endowment contract under an individual retirement annuity, no more than $5,500 ($6,500 if you are age 50 or older) can be contributed toward its cost for the tax year, including the cost of life insurance coverage. Free state tax help If more than this amount is contributed, the annuity or endowment contract is disqualified. Free state tax help Kay Bailey Hutchison Spousal IRA Limit For 2013, if you file a joint return and your taxable compensation is less than that of your spouse, the most that can be contributed for the year to your IRA is the smaller of the following two amounts: $5,500 ($6,500 if you are age 50 or older), or The total compensation includible in the gross income of both you and your spouse for the year, reduced by the following two amounts. Free state tax help Your spouse's IRA contribution for the year to a traditional IRA. Free state tax help Any contributions for the year to a Roth IRA on behalf of your spouse. Free state tax help This means that the total combined contributions that can be made for the year to your IRA and your spouse's IRA can be as much as $11,000 ($12,000 if only one of you is age 50 or older or $13,000 if both of you are age 50 or older). Free state tax help Note. Free state tax help This traditional IRA limit is reduced by any contributions to a section 501(c)(18) plan (generally, a pension plan created before June 25, 1959, that is funded entirely by employee contributions). Free state tax help Example. Free state tax help Kristin, a full-time student with no taxable compensation, marries Carl during the year. Free state tax help Neither of them was age 50 by the end of 2013. Free state tax help For the year, Carl has taxable compensation of $30,000. Free state tax help He plans to contribute (and deduct) $5,500 to a traditional IRA. Free state tax help If he and Kristin file a joint return, each can contribute $5,500 to a traditional IRA. Free state tax help This is because Kristin, who has no compensation, can add Carl's compensation, reduced by the amount of his IRA contribution ($30,000 − $5,500 = $24,500), to her own compensation (-0-) to figure her maximum contribution to a traditional IRA. Free state tax help In her case, $5,500 is her contribution limit, because $5,500 is less than $24,500 (her compensation for purposes of figuring her contribution limit). Free state tax help Filing Status Generally, except as discussed earlier under Kay Bailey Hutchison Spousal IRA Limit , your filing status has no effect on the amount of allowable contributions to your traditional IRA. Free state tax help However, if during the year either you or your spouse was covered by a retirement plan at work, your deduction may be reduced or eliminated, depending on your filing status and income. Free state tax help See How Much Can You Deduct , later. Free state tax help Example. Free state tax help Tom and Darcy are married and both are 53. Free state tax help They both work and each has a traditional IRA. Free state tax help Tom earned $3,800 and Darcy earned $48,000 in 2013. Free state tax help Because of the Kay Bailey Hutchison Spousal IRA limit rule, even though Tom earned less than $6,500, they can contribute up to $6,500 to his IRA for 2013 if they file a joint return. Free state tax help They can contribute up to $6,500 to Darcy's IRA. Free state tax help If they file separate returns, the amount that can be contributed to Tom's IRA is limited by his earned income, $3,800. Free state tax help Less Than Maximum Contributions If contributions to your traditional IRA for a year were less than the limit, you cannot contribute more after the due date of your return for that year to make up the difference. Free state tax help Example. Free state tax help Rafael, who is 40, earns $30,000 in 2013. Free state tax help Although he can contribute up to $5,500 for 2013, he contributes only $3,000. Free state tax help After April 15, 2014, Rafael cannot make up the difference between his actual contributions for 2013 ($3,000) and his 2013 limit ($5,500). Free state tax help He cannot contribute $2,500 more than the limit for any later year. Free state tax help More Than Maximum Contributions If contributions to your IRA for a year were more than the limit, you can apply the excess contribution in one year to a later year if the contributions for that later year are less than the maximum allowed for that year. Free state tax help However, a penalty or additional tax may apply. Free state tax help See Excess Contributions , later, under What Acts Result in Penalties or Additional Taxes. Free state tax help When Can Contributions Be Made? As soon as you open your traditional IRA, contributions can be made to it through your chosen sponsor (trustee or other administrator). Free state tax help Contributions must be in the form of money (cash, check, or money order). Free state tax help Property cannot be contributed. Free state tax help Although property cannot be contributed, your IRA may invest in certain property. Free state tax help For example, your IRA may purchase shares of stock. Free state tax help For other restrictions on the use of funds in your IRA, see Prohibited Transactions , later in this chapter. Free state tax help You may be able to transfer or roll over certain property from one retirement plan to another. Free state tax help See the discussion of rollovers and other transfers later in this chapter under Can You Move Retirement Plan Assets . Free state tax help You can make a contribution to your IRA by having your income tax refund (or a portion of your refund), if any, paid directly to your traditional IRA, Roth IRA, or SEP IRA. Free state tax help For details, see the instructions for your income tax return or Form 8888, Allocation of Refund (Including Savings Bond Purchases). Free state tax help Contributions can be made to your traditional IRA for each year that you receive compensation and have not reached age 70½. Free state tax help For any year in which you do not work, contributions cannot be made to your IRA unless you receive alimony, nontaxable combat pay, military differential pay, or file a joint return with a spouse who has compensation. Free state tax help See Who Can Open a Traditional IRA , earlier. Free state tax help Even if contributions cannot be made for the current year, the amounts contributed for years in which you did qualify can remain in your IRA. Free state tax help Contributions can resume for any years that you qualify. Free state tax help Contributions must be made by due date. Free state tax help   Contributions can be made to your traditional IRA for a year at any time during the year or by the due date for filing your return for that year, not including extensions. Free state tax help For most people, this means that contributions for 2013 must be made by April 15, 2014, and contributions for 2014 must be made by April 15, 2015. Free state tax help Age 70½ rule. Free state tax help   Contributions cannot be made to your traditional IRA for the year in which you reach age 70½ or for any later year. Free state tax help   You attain age 70½ on the date that is 6 calendar months after the 70th anniversary of your birth. Free state tax help If you were born on or before June 30, 1943, you cannot contribute for 2013 or any later year. Free state tax help Designating year for which contribution is made. Free state tax help   If an amount is contributed to your traditional IRA between January 1 and April 15, you should tell the sponsor which year (the current year or the previous year) the contribution is for. Free state tax help If you do not tell the sponsor which year it is for, the sponsor can assume, and report to the IRS, that the contribution is for the current year (the year the sponsor received it). Free state tax help Filing before a contribution is made. Free state tax help    You can file your return claiming a traditional IRA contribution before the contribution is actually made. Free state tax help Generally, the contribution must be made by the due date of your return, not including extensions. Free state tax help Contributions not required. Free state tax help   You do not have to contribute to your traditional IRA for every tax year, even if you can. Free state tax help How Much Can You Deduct? Generally, you can deduct the lesser of: The contributions to your traditional IRA for the year, or The general limit (or the Kay Bailey Hutchison Spousal IRA limit, if applicable) explained earlier under How Much Can Be Contributed . Free state tax help However, if you or your spouse was covered by an employer retirement plan, you may not be able to deduct this amount. Free state tax help See Limit if Covered by Employer Plan , later. Free state tax help You may be able to claim a credit for contributions to your traditional IRA. Free state tax help For more information, see chapter 4. Free state tax help Trustees' fees. Free state tax help   Trustees' administrative fees that are billed separately and paid in connection with your traditional IRA are not deductible as IRA contributions. Free state tax help However, they may be deductible as a miscellaneous itemized deduction on Schedule A (Form 1040). Free state tax help For information about miscellaneous itemized deductions, see Publication 529, Miscellaneous Deductions. Free state tax help Brokers' commissions. Free state tax help   These commissions are part of your IRA contribution and, as such, are deductible subject to the limits. Free state tax help Full deduction. Free state tax help   If neither you nor your spouse was covered for any part of the year by an employer retirement plan, you can take a deduction for total contributions to one or more of your traditional IRAs of up to the lesser of: $5,500 ($6,500 if you are age 50 or older), or 100% of your compensation. Free state tax help   This limit is reduced by any contributions made to a 501(c)(18) plan on your behalf. Free state tax help Kay Bailey Hutchison Spousal IRA. Free state tax help   In the case of a married couple with unequal compensation who file a joint return, the deduction for contributions to the traditional IRA of the spouse with less compensation is limited to the lesser of: $5,500 ($6,500 if the spouse with the lower compensation is age 50 or older), or The total compensation includible in the gross income of both spouses for the year reduced by the following three amounts. Free state tax help The IRA deduction for the year of the spouse with the greater compensation. Free state tax help Any designated nondeductible contribution for the year made on behalf of the spouse with the greater compensation. Free state tax help Any contributions for the year to a Roth IRA on behalf of the spouse with the greater compensation. Free state tax help   This limit is reduced by any contributions to a section 501(c)(18) plan on behalf of the spouse with the lesser compensation. Free state tax help Note. Free state tax help If you were divorced or legally separated (and did not remarry) before the end of the year, you cannot deduct any contributions to your spouse's IRA. Free state tax help After a divorce or legal separation, you can deduct only the contributions to your own IRA. Free state tax help Your deductions are subject to the rules for single individuals. Free state tax help Covered by an employer retirement plan. Free state tax help   If you or your spouse was covered by an employer retirement plan at any time during the year for which contributions were made, your deduction may be further limited. Free state tax help This is discussed later under Limit if Covered by Employer Plan . Free state tax help Limits on the amount you can deduct do not affect the amount that can be contributed. Free state tax help Are You Covered by an Employer Plan? The Form W-2 you receive from your employer has a box used to indicate whether you were covered for the year. Free state tax help The “Retirement Plan” box should be checked if you were covered. Free state tax help Reservists and volunteer firefighters should also see Situations in Which You Are Not Covered , later. Free state tax help If you are not certain whether you were covered by your employer's retirement plan, you should ask your employer. Free state tax help Federal judges. Free state tax help   For purposes of the IRA deduction, federal judges are covered by an employer plan. Free state tax help For Which Year(s) Are You Covered? Special rules apply to determine the tax years for which you are covered by an employer plan. Free state tax help These rules differ depending on whether the plan is a defined contribution plan or a defined benefit plan. Free state tax help Tax year. Free state tax help   Your tax year is the annual accounting period you use to keep records and report income and expenses on your income tax return. Free state tax help For almost all people, the tax year is the calendar year. Free state tax help Defined contribution plan. Free state tax help   Generally, you are covered by a defined contribution plan for a tax year if amounts are contributed or allocated to your account for the plan year that ends with or within that tax year. Free state tax help However, also see Situations in Which You Are Not Covered , later. Free state tax help   A defined contribution plan is a plan that provides for a separate account for each person covered by the plan. Free state tax help In a defined contribution plan, the amount to be contributed to each participant's account is spelled out in the plan. Free state tax help The level of benefits actually provided to a participant depends on the total amount contributed to that participant's account and any earnings and losses on those contributions. Free state tax help Types of defined contribution plans include profit-sharing plans, stock bonus plans, and money purchase pension plans. Free state tax help Example. Free state tax help Company A has a money purchase pension plan. Free state tax help Its plan year is from July 1 to June 30. Free state tax help The plan provides that contributions must be allocated as of June 30. Free state tax help Bob, an employee, leaves Company A on December 31, 2012. Free state tax help The contribution for the plan year ending on June 30, 2013, is made February 15, 2014. Free state tax help Because an amount is contributed to Bob's account for the plan year, Bob is covered by the plan for his 2013 tax year. Free state tax help   A special rule applies to certain plans in which it is not possible to determine if an amount will be contributed to your account for a given plan year. Free state tax help If, for a plan year, no amounts have been allocated to your account that are attributable to employer contributions, employee contributions, or forfeitures, by the last day of the plan year, and contributions are discretionary for the plan year, you are not covered for the tax year in which the plan year ends. Free state tax help If, after the plan year ends, the employer makes a contribution for that plan year, you are covered for the tax year in which the contribution is made. Free state tax help Example. Free state tax help Mickey was covered by a profit-sharing plan and left the company on December 31, 2012. Free state tax help The plan year runs from July 1 to June 30. Free state tax help Under the terms of the plan, employer contributions do not have to be made, but if they are made, they are contributed to the plan before the due date for filing the company's tax return. Free state tax help Such contributions are allocated as of the last day of the plan year, and allocations are made to the accounts of individuals who have any service during the plan year. Free state tax help As of June 30, 2013, no contributions were made that were allocated to the June 30, 2013, plan year, and no forfeitures had been allocated within the plan year. Free state tax help In addition, as of that date, the company was not obligated to make a contribution for such plan year and it was impossible to determine whether or not a contribution would be made for the plan year. Free state tax help On December 31, 2013, the company decided to contribute to the plan for the plan year ending June 30, 2013. Free state tax help That contribution was made on February 15, 2014. Free state tax help Mickey is an active participant in the plan for his 2014 tax year but not for his 2013 tax year. Free state tax help No vested interest. Free state tax help   If an amount is allocated to your account for a plan year, you are covered by that plan even if you have no vested interest in (legal right to) the account. Free state tax help Defined benefit plan. Free state tax help   If you are eligible to participate in your employer's defined benefit plan for the plan year that ends within your tax year, you are covered by the plan. Free state tax help This rule applies even if you: Declined to participate in the plan, Did not make a required contribution, or Did not perform the minimum service required to accrue a benefit for the year. Free state tax help   A defined benefit plan is any plan that is not a defined contribution plan. Free state tax help In a defined benefit plan, the level of benefits to be provided to each participant is spelled out in the plan. Free state tax help The plan administrator figures the amount needed to provide those benefits and those amounts are contributed to the plan. Free state tax help Defined benefit plans include pension plans and annuity plans. Free state tax help Example. Free state tax help Nick, an employee of Company B, is eligible to participate in Company B's defined benefit plan, which has a July 1 to June 30 plan year. Free state tax help Nick leaves Company B on December 31, 2012. Free state tax help Because Nick is eligible to participate in the plan for its year ending June 30, 2013, he is covered by the plan for his 2013 tax year. Free state tax help No vested interest. Free state tax help   If you accrue a benefit for a plan year, you are covered by that plan even if you have no vested interest in (legal right to) the accrual. Free state tax help Situations in Which You Are Not Covered Unless you are covered by another employer plan, you are not covered by an employer plan if you are in one of the situations described below. Free state tax help Social security or railroad retirement. Free state tax help   Coverage under social security or railroad retirement is not coverage under an employer retirement plan. Free state tax help Benefits from previous employer's plan. Free state tax help   If you receive retirement benefits from a previous employer's plan, you are not covered by that plan. Free state tax help Reservists. Free state tax help   If the only reason you participate in a plan is because you are a member of a reserve unit of the Armed Forces, you may not be covered by the plan. Free state tax help You are not covered by the plan if both of the following conditions are met. Free state tax help The plan you participate in is established for its employees by: The United States, A state or political subdivision of a state, or An instrumentality of either (a) or (b) above. Free state tax help You did not serve more than 90 days on active duty during the year (not counting duty for training). Free state tax help Volunteer firefighters. Free state tax help   If the only reason you participate in a plan is because you are a volunteer firefighter, you may not be covered by the plan. Free state tax help You are not covered by the plan if both of the following conditions are met. Free state tax help The plan you participate in is established for its employees by: The United States, A state or political subdivision of a state, or An instrumentality of either (a) or (b) above. Free state tax help Your accrued retirement benefits at the beginning of the year will not provide more than $1,800 per year at retirement. Free state tax help Limit if Covered by Employer Plan As discussed earlier, the deduction you can take for contributions made to your traditional IRA depends on whether you or your spouse was covered for any part of the year by an employer retirement plan. Free state tax help Your deduction is also affected by how much income you had and by your filing status. Free state tax help Your deduction may also be affected by social security benefits you received. Free state tax help Reduced or no deduction. Free state tax help   If either you or your spouse was covered by an employer retirement plan, you may be entitled to only a partial (reduced) deduction or no deduction at all, depending on your income and your filing status. Free state tax help   Your deduction begins to decrease (phase out) when your income rises above a certain amount and is eliminated altogether when it reaches a higher amount. Free state tax help These amounts vary depending on your filing status. Free state tax help   To determine if your deduction is subject to the phaseout, you must determine your modified adjusted gross income (AGI) and your filing status, as explained later under Deduction Phaseout . Free state tax help Once you have determined your modified AGI and your filing status, you can use Table 1-2 or Table 1-3 to determine if the phaseout applies. Free state tax help Social Security Recipients Instead of using Table 1-2 or Table 1-3 and Worksheet 1-2, Figuring Your Reduced IRA Deduction for 2013, later, complete the worksheets in Appendix B of this publication if, for the year, all of the following apply. Free state tax help You received social security benefits. Free state tax help You received taxable compensation. Free state tax help Contributions were made to your traditional IRA. Free state tax help You or your spouse was covered by an employer retirement plan. Free state tax help Use the worksheets in Appendix B to figure your IRA deduction, your nondeductible contribution, and the taxable portion, if any, of your social security benefits. Free state tax help Appendix B includes an example with filled-in worksheets to assist you. Free state tax help Table 1-2. Free state tax help Effect of Modified AGI1 on Deduction if You Are Covered by a Retirement Plan at Work If you are covered by a retirement plan at work, use this table to determine if your modified AGI affects the amount of your deduction. Free state tax help IF your filing status is . Free state tax help . Free state tax help . Free state tax help AND your modified adjusted gross income (modified AGI) is . Free state tax help . Free state tax help . Free state tax help THEN you can take . Free state tax help . Free state tax help . Free state tax help single or head of household $59,000 or less a full deduction. Free state tax help more than $59,000 but less than $69,000 a partial deduction. Free state tax help $69,000 or more no deduction. Free state tax help married filing jointly or  qualifying widow(er) $95,000 or less a full deduction. Free state tax help more than $95,000 but less than $115,000 a partial deduction. Free state tax help $115,000 or more no deduction. Free state tax help married filing separately2 less than $10,000 a partial deduction. Free state tax help $10,000 or more no deduction. Free state tax help 1 Modified AGI (adjusted gross income). Free state tax help See Modified adjusted gross income (AGI) , later. Free state tax help  2 If you did not live with your spouse at any time during the year, your filing status is considered Single for this purpose (therefore, your IRA deduction is determined under the “Single” filing status). Free state tax help Table 1-3. Free state tax help Effect of Modified AGI1 on Deduction if You Are NOT Covered by a Retirement Plan at Work If you are not covered by a retirement plan at work, use this table to determine if your modified AGI affects the amount of your deduction. Free state tax help IF your filing status is . Free state tax help . Free state tax help . Free state tax help AND your modified adjusted gross income (modified AGI) is . Free state tax help . Free state tax help . Free state tax help THEN you can take . Free state tax help . Free state tax help . Free state tax help single, head of household, or qualifying widow(er) any amount a full deduction. Free state tax help married filing jointly or separately with a spouse who is not covered by a plan at work any amount a full deduction. Free state tax help married filing jointly with a spouse who is covered by a plan at work $178,000 or less a full deduction. Free state tax help more than $178,000 but less than $188,000 a partial deduction. Free state tax help $188,000 or more no deduction. Free state tax help married filing separately with a spouse who is covered by a plan at work2 less than $10,000 a partial deduction. Free state tax help $10,000 or more no deduction. Free state tax help 1 Modified AGI (adjusted gross income). Free state tax help See Modified adjusted gross income (AGI) , later. Free state tax help  2 You are entitled to the full deduction if you did not live with your spouse at any time during the year. Free state tax help For 2014, if you are not covered by a retirement plan at work and you are married filing jointly with a spouse who is covered by a plan at work, your deduction is phased out if your modified AGI is more than $181,000 but less than $191,000. Free state tax help If your AGI is $191,000 or more, you cannot take a deduction for a contribution to a traditional IRA. Free state tax help Deduction Phaseout The amount of any reduction in the limit on your IRA deduction (phaseout) depends on whether you or your spouse was covered by an employer retirement plan. Free state tax help Covered by a retirement plan. Free state tax help   If you are covered by an employer retirement plan and you did not receive any social security retirement benefits, your IRA deduction may be reduced or eliminated depending on your filing status and modified AGI, as shown in Table 1-2. Free state tax help For 2014, if you are covered by a retirement plan at work, your IRA deduction will not be reduced (phased out) unless your modified AGI is: More than $60,000 but less than $70,000 for a single individual (or head of household), More than $96,000 but less than $116,000 for a married couple filing a joint return (or a qualifying widow(er)), or Less than $10,000 for a married individual filing a separate return. Free state tax help If your spouse is covered. Free state tax help   If you are not covered by an employer retirement plan, but your spouse is, and you did not receive any social security benefits, your IRA deduction may be reduced or eliminated entirely depending on your filing status and modified AGI as shown in Table 1-3. Free state tax help Filing status. Free state tax help   Your filing status depends primarily on your marital status. Free state tax help For this purpose, you need to know if your filing status is single or head of household, married filing jointly or qualifying widow(er), or married filing separately. Free state tax help If you need more information on filing status, see Publication 501, Exemptions, Standard Deduction, and Filing Information. Free state tax help Lived apart from spouse. Free state tax help   If you did not live with your spouse at any time during the year and you file a separate return, your filing status, for this purpose, is single. Free state tax help Modified adjusted gross income (AGI). Free state tax help   You can use Worksheet 1-1 to figure your modified AGI. Free state tax help If you made contributions to your IRA for 2013 and received a distribution from your IRA in 2013, see Both contributions for 2013 and distributions in 2013 , later. Free state tax help    Do not assume that your modified AGI is the same as your compensation. Free state tax help Your modified AGI may include income in addition to your compensation (discussed earlier) such as interest, dividends, and income from IRA distributions. Free state tax help Form 1040. Free state tax help   If you file Form 1040, refigure the amount on the page 1 “adjusted gross income” line without taking into account any of the following amounts. Free state tax help IRA deduction. Free state tax help Student loan interest deduction. Free state tax help Tuition and fees deduction. Free state tax help Domestic production activities deduction. Free state tax help Foreign earned income exclusion. Free state tax help Foreign housing exclusion or deduction. Free state tax help Exclusion of qualified savings bond interest shown on Form 8815. Free state tax help Exclusion of employer-provided adoption benefits shown on Form 8839. Free state tax help This is your modified AGI. Free state tax help Form 1040A. Free state tax help   If you file Form 1040A, refigure the amount on the page 1 “adjusted gross income” line without taking into account any of the following amounts. Free state tax help IRA deduction. Free state tax help Student loan interest deduction. Free state tax help Tuition and fees deduction. Free state tax help Exclusion of qualified savings bond interest shown on Form 8815. Free state tax help This is your modified AGI. Free state tax help Form 1040NR. Free state tax help   If you file Form 1040NR, refigure the amount on the page 1 “adjusted gross income” line without taking into account any of the following amounts. Free state tax help IRA deduction. Free state tax help Student loan interest deduction. Free state tax help Domestic production activities deduction. Free state tax help Exclusion of qualified savings bond interest shown on Form 8815. Free state tax help Exclusion of employer-provided adoption benefits shown on Form 8839. Free state tax help This is your modified AGI. Free state tax help Income from IRA distributions. Free state tax help   If you received distributions in 2013 from one or more traditional IRAs and your traditional IRAs include only deductible contributions, the distributions are fully taxable and are included in your modified AGI. Free state tax help Both contributions for 2013 and distributions in 2013. Free state tax help   If all three of the following apply, any IRA distributions you received in 2013 may be partly tax free and partly taxable. Free state tax help You received distributions in 2013 from one or more traditional IRAs, You made contributions to a traditional IRA for 2013, and Some of those contributions may be nondeductible contributions. Free state tax help (See Nondeductible Contributions and Worksheet 1-2, later. Free state tax help ) If this is your situation, you must figure the taxable part of the traditional IRA distribution before you can figure your modified AGI. Free state tax help To do this, you can use Worksheet 1-5, later. Free state tax help   If at least one of the above does not apply, figure your modified AGI using Worksheet 1-1, later. Free state tax help How To Figure Your Reduced IRA Deduction If you or your spouse is covered by an employer retirement plan and you did not receive any social security benefits, you can figure your reduced IRA deduction by using Worksheet 1-2. Free state tax help Figuring Your Reduced IRA Deduction for 2013. Free state tax help The Instructions for Form 1040, Form 1040A, and Form 1040NR include similar worksheets that you can use instead of the worksheet in this publication. Free state tax help If you or your spouse is covered by an employer retirement plan, and you received any social security benefits, see Social Security Recipients , earlier. Free state tax help Note. Free state tax help If you were married and both you and your spouse contributed to IRAs, figure your deduction and your spouse's deduction separately. Free state tax help Worksheet 1-1. Free state tax help Figuring Your Modified AGI Use this worksheet to figure your modified AGI for traditional IRA purposes. Free state tax help 1. Free state tax help Enter your adjusted gross income (AGI) from Form 1040, line 38; Form 1040A, line 22; or Form 1040NR, line 37, figured without taking into account the amount from Form 1040, line 32; Form 1040A, line 17; or Form 1040NR, line 32 1. Free state tax help   2. Free state tax help Enter any student loan interest deduction from Form 1040, line 33; Form 1040A, line 18; or Form 1040NR, line 33 2. Free state tax help   3. Free state tax help Enter any tuition and fees deduction from Form 1040, line 34, or Form 1040A, line 19 3. Free state tax help   4. Free state tax help Enter any domestic production activities deduction from Form 1040, line 35, or Form 1040NR, line 34 4. Free state tax help   5. Free state tax help Enter any foreign earned income exclusion and/or housing exclusion from Form 2555, line 45, or Form 2555-EZ, line 18 5. Free state tax help   6. Free state tax help Enter any foreign housing deduction from Form 2555, line 50 6. Free state tax help   7. Free state tax help Enter any excludable savings bond interest from Form 8815, line 14 7. Free state tax help   8. Free state tax help Enter any excluded employer-provided adoption benefits from Form 8839, line 28 8. Free state tax help   9. Free state tax help Add lines 1 through 8. Free state tax help This is your Modified AGI for traditional IRA purposes 9. Free state tax help   Reporting Deductible Contributions If you file Form 1040, enter your IRA deduction on line 32 of that form. Free state tax help If you file Form 1040A, enter your IRA deduction on line 17 of that form. Free state tax help If you file Form 1040NR, enter your IRA deduction on line 32 of that form. Free state tax help You cannot deduct IRA contributions on Form 1040EZ or Form 1040NR-EZ. Free state tax help Self-employed. Free state tax help   If you are self-employed (a sole proprietor or partner) and have a SIMPLE IRA, enter your deduction for allowable plan contributions on Form 1040, line 28. Free state tax help If you file Form 1040NR, enter your deduction on line 28 of that form. Free state tax help Nondeductible Contributions Although your deduction for IRA contributions may be reduced or eliminated, contributions can be made to your IRA of up to the general limit or, if it applies, the Kay Bailey Hutchison Spousal IRA limit. Free state tax help The difference between your total permitted contributions and your IRA deduction, if any, is your nondeductible contribution. Free state tax help Example. Free state tax help Tony is 29 years old and single. Free state tax help In 2013, he was covered by a retirement plan at work. Free state tax help His salary is $62,000. Free state tax help His modified AGI is $70,000. Free state tax help Tony makes a $5,500 IRA contribution for 2013. Free state tax help Because he was covered by a retirement plan and his modified AGI is above $69,000, he cannot deduct his $5,500 IRA contribution. Free state tax help He must designate this contribution as a nondeductible contribution by reporting it on Form 8606. Free state tax help Repayment of reservist distributions. Free state tax help   Nondeductible contributions may include repayments of qualified reservist distributions. Free state tax help For more information, see Qualified reservist repayments under How Much Can Be Contributed, earlier. Free state tax help Form 8606. Free state tax help   To designate contributions as nondeductible, you must file Form 8606. Free state tax help (See the filled-in Forms 8606 in this chapter. Free state tax help )   You do not have to designate a contribution as nondeductible until you file your tax return. Free state tax help When you file, you can even designate otherwise deductible contributions as nondeductible contributions. Free state tax help   You must file Form 8606 to report nondeductible contributions even if you do not have to file a tax return for the year. Free state tax help    A Form 8606 is not used for the year that you make a rollover from a qualified retirement plan to a traditional IRA and the rollover includes nontaxable amounts. Free state tax help In those situations, a Form 8606 is completed for the year you take a distribution from that IRA. Free state tax help See Form 8606 under Distributions Fully or Partly Taxable, later. Free state tax help Failure to report nondeductible contributions. Free state tax help   If you do not report nondeductible contributions, all of the contributions to your traditional IRA will be treated like deductible contributions when withdrawn. Free state tax help All distributions from your IRA will be taxed unless you can show, with satisfactory evidence, that nondeductible contributions were made. Free state tax help Penalty for overstatement. Free state tax help   If you overstate the amount of nondeductible contributions on your Form 8606 for any tax year, you must pay a penalty of $100 for each overstatement, unless it was due to reasonable cause. Free state tax help Penalty for failure to file Form 8606. Free state tax help   You will have to pay a $50 penalty if you do not file a required Form 8606, unless you can prove that the failure was due to reasonable cause. Free state tax help Tax on earnings on nondeductible contributions. Free state tax help   As long as contributions are within the contribution limits, none of the earnings or gains on contributions (deductible or nondeductible) will be taxed until they are distributed. Free state tax help Cost basis. Free state tax help   You will have a cost basis in your traditional IRA if you made any nondeductible contributions. Free state tax help Your cost basis is the sum of the nondeductible contributions to your IRA minus any withdrawals or distributions of nondeductible contributions. Free state tax help    Commonly, distributions from your traditional IRAs will include both taxable and nontaxable (cost basis) amounts. Free state tax help See Are Distributions Taxable, later, for more information. Free state tax help Recordkeeping. Free state tax help There is a recordkeeping worksheet, Appendix A. Free state tax help Summary Record of Traditional IRA(s) for 2013 , that you can use to keep a record of deductible and nondeductible IRA contributions. Free state tax help Examples — Worksheet for Reduced IRA Deduction for 2013 The following examples illustrate the use of Worksheet 1-2, Figuring Your Reduced IRA Deduction for 2013. Free state tax help Example 1. Free state tax help For 2013, Tom and Betty file a joint return on Form 1040. Free state tax help They are both 39 years old. Free state tax help They are both employed and Tom is covered by his employer's retirement plan. Free state tax help Tom's salary is $59,000 and Betty's is $32,555. Free state tax help They each have a traditional IRA and their combined modified AGI, which includes $5,000 interest and dividend income, is $96,555. Free state tax help Because their modified AGI is between $95,000 and $115,000 and Tom is covered by an employer plan, Tom is subject to the deduction phaseout discussed earlier under Limit if Covered by Employer Plan . Free state tax help For 2013, Tom contributed $5,500 to his IRA and Betty contributed $5,500 to hers. Free state tax help Even though they file a joint return, they must use separate worksheets to figure the IRA deduction for each of them. Free state tax help Tom can take a deduction of only $5,080. Free state tax help He can choose to treat the $5,080 as either deductible or nondeductible contributions. Free state tax help He can either leave the $420 ($5,500 − $5,080) of nondeductible contributions in his IRA or withdraw them by April 15, 2014. Free state tax help He decides to treat the $5,080 as deductible contributions and leave the $420 of nondeductible contributions in his IRA. Free state tax help Using Worksheet 1-2, Figuring Your Reduced IRA Deduction for 2013, Tom figures his deductible and nondeductible amounts as shown on Worksheet 1-2. Free state tax help Figuring Your Reduced IRA Deduction for 2013—Example 1 Illustrated. Free state tax help Betty figures her IRA deduction as follows. Free state tax help Betty can treat all or part of her contributions as either deductible or nondeductible. Free state tax help This is because her $5,500 contribution for 2013 is not subject to the deduction phaseout discussed earlier under Limit if Covered by Employer Plan . Free state tax help She does not need to use Worksheet 1-2, Figuring Your Reduced IRA Deduction for 2013, because their modified AGI is not within the phaseout range that applies. Free state tax help Betty decides to treat her $5,500 IRA contributions as deductible. Free state tax help The IRA deductions of $5,080 and $5,500 on the joint return for Tom and Betty total $10,580. Free state tax help Example 2. Free state tax help For 2013, Ed and Sue file a joint return on Form 1040. Free state tax help They are both 39 years old. Free state tax help Ed is covered by his employer's retirement plan. Free state tax help Ed's salary is $45,000. Free state tax help Sue had no compensation for the year and did not contribute to an IRA. Free state tax help Sue is not covered by an employer plan. Free state tax help Ed contributed $5,500 to his traditional IRA and $5,500 to a traditional IRA for Sue (a Kay Bailey Hutchison Spousal IRA). Free state tax help Their combined modified AGI, which includes $2,000 interest and dividend income and a large capital gain from the sale of stock, is $180,555. Free state tax help Because the combined modified AGI is $115,000 or more, Ed cannot deduct any of the contribution to his traditional IRA. Free state tax help He can either leave the $5,500 of nondeductible contributions in his IRA or withdraw them by April 15, 2014. Free state tax help Sue figures her IRA deduction as shown on Worksheet 1-2. Free state tax help Figuring Your Reduced IRA Deduction for 2013—Example 2 Illustrated. Free state tax help Worksheet 1-2. Free state tax help Figuring Your Reduced IRA Deduction for 2013 (Use only if you or your spouse is covered by an employer plan and your modified AGI falls between the two amounts shown below for your coverage situation and filing status. Free state tax help ) Note. Free state tax help If you were married and both you and your spouse contributed to IRAs, figure your deduction and your spouse's deduction separately. Free state tax help IF you . Free state tax help . Free state tax help . Free state tax help AND your  filing status is . Free state tax help . Free state tax help . Free state tax help AND your modified AGI is over . Free state tax help . Free state tax help . Free state tax help THEN enter on  line 1 below . Free state tax help . Free state tax help . Free state tax help       are covered by an employer plan single or head of household $59,000 $69,000     married filing jointly or qualifying widow(er) $95,000 $115,000     married filing separately $0 $10,000     are not covered by an employer plan, but your spouse is covered married filing jointly $178,000 $188,000     married filing separately $0 $10,000     1. Free state tax help Enter applicable amount from table above 1. Free state tax help   2. Free state tax help Enter your modified AGI (that of both spouses, if married filing jointly) 2. Free state tax help     Note. Free state tax help If line 2 is equal to or more than the amount on line 1, stop here. Free state tax help  Your IRA contributions are not deductible. Free state tax help See Nondeductible Contributions , earlier. Free state tax help     3. Free state tax help Subtract line 2 from line 1. Free state tax help If line 3 is $10,000 or more ($20,000 or more if married filing jointly or qualifying widow(er) and you are covered by an employer plan), stop here. Free state tax help You can take a full IRA deduction for contributions of up to $5,500 ($6,500 if you are age 50 or older) or 100% of your (and if married filing jointly, your spouse's) compensation, whichever is less 3. Free state tax help   4. Free state tax help Multiply line 3 by the percentage below that applies to you. Free state tax help If the result is not a multiple of $10, round it to the next highest multiple of $10. Free state tax help (For example, $611. Free state tax help 40 is rounded to $620. Free state tax help ) However, if the result is less than $200, enter $200. Free state tax help         Married filing jointly or qualifying widow(er) and you are covered by an employer plan, multiply line 3 by 27. Free state tax help 5% (. Free state tax help 275) (by 32. Free state tax help 5% (. Free state tax help 325) if you are age 50 or older). Free state tax help All others, multiply line 3 by 55% (. Free state tax help 55) (by 65% (. Free state tax help 65) if you are age 50 or older). Free state tax help 4. Free state tax help   5. Free state tax help Enter your compensation minus any deductions on Form 1040 or Form 1040NR, line 27 (deductible part of self-employment tax) and line 28 (self-employed SEP, SIMPLE, and qualified plans). Free state tax help If you are filing a joint return and your compensation is less than your spouse's, include your spouse's compensation reduced by his or her traditional IRA and Roth IRA contributions for this year. Free state tax help If you file Form 1040 or Form 1040NR, do not reduce your compensation by any losses from self-employment 5. Free state tax help   6. Free state tax help Enter contributions made, or to be made, to your IRA for 2013, but do not enter more than $5,500 ($6,500 if you are age 50 or older). Free state tax help If contributions are more than $5,500 ($6,500 if you are age 50 or older), see Excess Contributions , later. Free state tax help 6. Free state tax help   7. Free state tax help IRA deduction. Free state tax help Compare lines 4, 5, and 6. Free state tax help Enter the smallest amount (or a smaller amount if you choose) here and on the Form 1040, 1040A, or 1040NR line for your IRA, whichever applies. Free state tax help If line 6 is more than line 7 and you want to make a nondeductible contribution, go to line 8 7. Free state tax help   8. Free state tax help Nondeductible contribution. Free state tax help Subtract line 7 from line 5 or 6, whichever is smaller. Free state tax help  Enter the result here and on line 1 of your Form 8606 8. Free state tax help   Worksheet 1-2. Free state tax help Figuring Your Reduced IRA Deduction for 2013—Example 1 Illustrated (Use only if you or your spouse is covered by an employer plan and your modified AGI falls between the two amounts shown below for your coverage situation and filing status. Free state tax help ) Note. Free state tax help If you were married and both you and your spouse contributed to IRAs, figure your deduction and your spouse's deduction separately. Free state tax help IF you . Free state tax help . Free state tax help . Free state tax help AND your  filing status is . Free state tax help . Free state tax help . Free state tax help AND your modified AGI is over . Free state tax help . Free state tax help . Free state tax help THEN enter on  line 1 below . Free state tax help . Free state tax help . Free state tax help       are covered by an employer plan single or head of household $59,000 $69,000     married filing jointly or qualifying widow(er) $95,000 $115,000     married filing separately $0 $10,000     are not covered by an employer plan, but your spouse is covered married filing jointly $178,000 $188,000     married filing separately $0 $10,000     1. Free state tax help Enter applicable amount from table above 1. Free state tax help 115,000 2. Free state tax help Enter your modified AGI (that of both spouses, if married filing jointly) 2. Free state tax help 96,555   Note. Free state tax help If line 2 is equal to or more than the amount on line 1, stop here. Free state tax help  Your IRA contributions are not deductible. Free state tax help See Nondeductible Contributions , earlier. Free state tax help     3. Free state tax help Subtract line 2 from line 1. Free state tax help If line 3 is $10,000 or more ($20,000 or more if married filing jointly or qualifying widow(er) and you are covered by an employer plan), stop here. Free state tax help You can take a full IRA deduction for contributions of up to $5,500 ($6,500 if you are age 50 or older) or 100% of your (and if married filing jointly, your spouse's) compensation, whichever is less 3. Free state tax help 18,445 4. Free state tax help Multiply line 3 by the percentage below that applies to you. Free state tax help If the result is not a multiple of $10, round it to the next highest multiple of $10. Free state tax help (For example, $611. Free state tax help 40 is rounded to $620. Free state tax help ) However, if the result is less than $200, enter $200. Free state tax help         Married filing jointly or qualifying widow(er) and you are covered by an employer plan, multiply line 3 by 27. Free state tax help 5% (. Free state tax help 275) (by 32. Free state tax help 5% (. Free state tax help 325) if you are age 50 or older). Free state tax help All others, multiply line 3 by 55% (. Free state tax help 55) (by 65% (. Free state tax help 65) if you are age 50 or older). Free state tax help 4. Free state tax help 5,080 5. Free state tax help Enter your compensation minus any deductions on Form 1040 or Form 1040NR, line 27 (deductible part of self-employment tax) and line 28 (self-employed SEP, SIMPLE, and qualified plans). Free state tax help If you are filing a joint return and your compensation is less than your spouse's, include your spouse's compensation reduced by his or her traditional IRA and Roth IRA contributions for this year. Free state tax help If you file Form 1040 or Form 1040NR, do not reduce your compensation by any losses from self-employment 5. Free state tax help 59,000 6. Free state tax help Enter contributions made, or to be made, to your IRA for 2013, but do not enter more than $5,500 ($6,500 if you are age 50 or older). Free state tax help If contributions are more than $5,500 ($6,500 if you are age 50 or older), see Excess Contributions , later. Free state tax help 6. Free state tax help 5,500 7. Free state tax help IRA deduction. Free state tax help Compare lines 4, 5, and 6. Free state tax help Enter the smallest amount (or a smaller amount if you choose) here and on the Form 1040, 1040A, or 1040NR line for your IRA, whichever applies. Free state tax help If line 6 is more than line 7 and you want to make a nondeductible contribution, go to line 8 7. Free state tax help 5,080 8. Free state tax help Nondeductible contribution. Free state tax help Subtract line 7 from line 5 or 6, whichever is smaller. Free state tax help  Enter the result here and on line 1 of your Form 8606 8. Free state tax help 420 Worksheet 1-2. Free state tax help Figuring Your Reduced IRA Deduction for 2013—Example 2 Illustrated (Use only if you or your spouse is covered by an employer plan and your modified AGI falls between the two amounts shown below for your coverage situation and filing status. Free state tax help ) Note. Free state tax help If you were married and both you and your spouse contributed to IRAs, figure your deduction and your spouse's deduction separately. Free state tax help IF you . Free state tax help . Free state tax help . Free state tax help AND your  filing status is . Free state tax help . Free state tax help . Free state tax help AND your modified AGI is over . Free state tax help . Free state tax help . Free state tax help THEN enter on  line 1 below . Free state tax help . Free state tax help . Free state tax help       are covered by an employer plan single or head of household $59,000 $69,000     married filing jointly or qualifying widow(er) $95,000 $115,000     married filing separately $0 $10,000     are not covered by an employer plan, but your spouse is covered married filing jointly $178,000 $188,000     married filing separately $0 $10,000     1. Free state tax help Enter applicable amount from table above 1. Free state tax help 188,000 2. Free state tax help Enter your modified AGI (that of both spouses, if married filing jointly) 2. Free state tax help 180,555   Note. Free state tax help If line 2 is equal to or more than the amount on line 1, stop here. Free state tax help  Your IRA contributions are not deductible. Free state tax help See Nondeductible Contributions , earlier. Free state tax help     3. Free state tax help Subtract line 2 from line 1. Free state tax help If line 3 is $10,000 or more ($20,000 or more if married filing jointly or qualifying widow(er) and you are covered by an employer plan), stop here. Free state tax help You can take a full IRA deduction for contributions of up to $5,500 ($6,500 if you are age 50 or older) or 100% of your (and if married filing jointly, your spouse's) compensation, whichever is less 3. Free state tax help 7,445 4. Free state tax help Multiply line 3 by the percentage below that applies to you. Free state tax help If the result is not a multiple of $10, round it to the next highest multiple of $10. Free state tax help (For example, $611. Free state tax help 40 is rounded to $620. Free state tax help ) However, if the result is less than $200, enter $200. Free state tax help         Married filing jointly or qualifying widow(er) and you are covered by an employer plan, multiply line 3 by 27. Free state tax help 5% (. Free state tax help 275) (by 32. Free state tax help 5% (. Free state tax help 325) if you are age 50 or older). Free state tax help All others, multiply line 3 by 55% (. Free state tax help 55) (by 65% (. Free state tax help 65) if you are age 50 or older). Free state tax help 4. Free state tax help 4,100 5. Free state tax help Enter your compensation minus any deductions on Form 1040 or Form 1040NR, line 27 (deductible part of self-employment tax) and line 28 (self-employed SEP, SIMPLE, and qualified plans). Free state tax help If you are filing a joint return and your compensation is less than your spouse's, include your spouse's compensation reduced by his or her traditional IRA and Roth IRA contributions for this year. Free state tax help If you file Form 1040 or Form 1040NR, do not reduce your compensation by any losses from self-employment 5. Free state tax help 39,500 6. Free state tax help Enter contributions made, or to be made, to your IRA for 2013, but do not enter more than $5,500 ($6,500 if you are age 50 or older). Free state tax help If contributions are more than $5,500 ($6,500 if you are age 50 or older), see Excess Contributions , later. Free state tax help 6. Free state tax help 5,500 7. Free state tax help IRA deduction. Free state tax help Compare lines 4, 5, and 6. Free state tax help Enter the smallest amount (or a smaller amount if you choose) here and on the Form 1040, 1040A, or 1040NR line for your IRA, whichever applies. Free state tax help If line 6 is more than line 7 and you want to make a nondeductible contribution, go to line 8 7. Free state tax help 4,100 8. Free state tax help Nondeductible contribution. Free state tax help Subtract line 7 from line 5 or 6, whichever is smaller. Free state tax help  Enter the result here and on line 1 of your Form 8606 8. Free state tax help 1,400 What if You Inherit an IRA? If you inherit a traditional IRA, you are called a beneficiary. Free state tax help A beneficiary can be any person or entity the owner chooses to receive the benefits of the IRA after he or she dies. Free state tax help Beneficiaries of a traditional IRA must include in their gross income any taxable distributions they receive. Free state tax help Inherited from spouse. Free state tax help   If you inherit a traditional IRA from your spouse, you generally have the following three choices. Free state tax help You can: Treat it as your own IRA by designating yourself as the account owner. Free state tax help Treat it as your own by rolling it over into your IRA, or to the extent it is taxable, into a: Qualified employer plan, Qualified employee annuity plan (section 403(a) plan), Tax-sheltered annuity plan (s
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The Free State Tax Help

Free state tax help 8. Free state tax help   Business Expenses Table of Contents Introduction Useful Items - You may want to see: Bad DebtsAccrual method. Free state tax help Cash method. Free state tax help Car and Truck ExpensesOffice in the home. Free state tax help Methods for Deducting Car and Truck Expenses Reimbursing Your Employees for Expenses Depreciation Employees' PayFringe benefits. Free state tax help InsuranceHow to figure the deduction. Free state tax help Interest Legal and Professional FeesTax preparation fees. Free state tax help Pension Plans Rent Expense Taxes Travel, Meals, and EntertainmentTransportation. Free state tax help Taxi, commuter bus, and limousine. Free state tax help Baggage and shipping. Free state tax help Car or truck. Free state tax help Meals and lodging. Free state tax help Cleaning. Free state tax help Telephone. Free state tax help Tips. Free state tax help More information. Free state tax help Business Use of Your HomeExceptions to exclusive use. Free state tax help Other Expenses You Can Deduct Expenses You Cannot Deduct Introduction You can deduct the costs of operating your business. Free state tax help These costs are known as business expenses. Free state tax help These are costs you do not have to capitalize or include in the cost of goods sold but can deduct in the current year. Free state tax help To be deductible, a business expense must be both ordinary and necessary. Free state tax help An ordinary expense is one that is common and accepted in your field of business. Free state tax help A necessary expense is one that is helpful and appropriate for your business. Free state tax help An expense does not have to be indispensable to be considered necessary. Free state tax help For more information about the general rules for deducting business expenses, see chapter 1 in Publication 535, Business Expenses. Free state tax help If you have an expense that is partly for business and partly personal, separate the personal part from the business part. Free state tax help The personal part is not deductible. Free state tax help Useful Items - You may want to see: Publication 463 Travel, Entertainment, Gift, and Car Expenses 535 Business Expenses 946 How To Depreciate Property See chapter 12 for information about getting publications and forms. Free state tax help Bad Debts If someone owes you money you cannot collect, you have a bad debt. Free state tax help There are two kinds of bad debts, business bad debts and nonbusiness bad debts. Free state tax help A business bad debt is generally one that comes from operating your trade or business. Free state tax help You may be able to deduct business bad debts as an expense on your business tax return. Free state tax help Business bad debt. Free state tax help   A business bad debt is a loss from the worthlessness of a debt that was either of the following. Free state tax help Created or acquired in your business. Free state tax help Closely related to your business when it became partly or totally worthless. Free state tax help A debt is closely related to your business if your primary motive for incurring the debt is a business reason. Free state tax help   Business bad debts are mainly the result of credit sales to customers. Free state tax help They can also be the result of loans to suppliers, clients, employees, or distributors. Free state tax help Goods and services customers have not paid for are shown in your books as either accounts receivable or notes receivable. Free state tax help If you are unable to collect any part of these accounts or notes receivable, the uncollectible part is a business bad debt. Free state tax help    You can take a bad debt deduction for these accounts and notes receivable only if the amount you were owed was included in your gross income either for the year the deduction is claimed or for a prior year. Free state tax help Accrual method. Free state tax help   If you use an accrual method of accounting, you normally report income as you earn it. Free state tax help You can take a bad debt deduction for an uncollectible receivable if you have included the uncollectible amount in income. Free state tax help Cash method. Free state tax help   If you use the cash method of accounting, you normally report income when you receive payment. Free state tax help You cannot take a bad debt deduction for amounts owed to you that you have not received and cannot collect if you never included those amounts in income. Free state tax help More information. Free state tax help   For more information about business bad debts, see chapter 10 in Publication 535. Free state tax help Nonbusiness bad debts. Free state tax help   All other bad debts are nonbusiness bad debts and are deductible as short-term capital losses on Form 8949 and Schedule D (Form 1040). Free state tax help For more information on nonbusiness bad debts, see Publication 550, Investment Income and Expenses. Free state tax help Car and Truck Expenses If you use your car or truck in your business, you may be able to deduct the costs of operating and maintaining your vehicle. Free state tax help You also may be able to deduct other costs of local transportation and traveling away from home overnight on business. Free state tax help You may qualify for a tax credit for qualified plug-in electric vehicles, qualified plug-in electric drive motor vehicles, and alternative motor vehicles you place in service during the year. Free state tax help See Form 8936 and Form 8910 for more information. Free state tax help Local transportation expenses. Free state tax help   Local transportation expenses include the ordinary and necessary costs of all the following. Free state tax help Getting from one workplace to another in the course of your business or profession when you are traveling within the city or general area that is your tax home. Free state tax help Tax home is defined later. Free state tax help Visiting clients or customers. Free state tax help Going to a business meeting away from your regular workplace. Free state tax help Getting from your home to a temporary workplace when you have one or more regular places of work. Free state tax help These temporary workplaces can be either within the area of your tax home or outside that area. Free state tax help Local business transportation does not include expenses you have while traveling away from home overnight. Free state tax help Those expenses are deductible as travel expenses and are discussed later under Travel, Meals, and Entertainment. Free state tax help However, if you use your car while traveling away from home overnight, use the rules in this section to figure your car expense deduction. Free state tax help   Generally, your tax home is your regular place of business, regardless of where you maintain your family home. Free state tax help It includes the entire city or general area in which your business or work is located. Free state tax help Example. Free state tax help You operate a printing business out of rented office space. Free state tax help You use your van to deliver completed jobs to your customers. Free state tax help You can deduct the cost of round-trip transportation between your customers and your print shop. Free state tax help    You cannot deduct the costs of driving your car or truck between your home and your main or regular workplace. Free state tax help These costs are personal commuting expenses. Free state tax help Office in the home. Free state tax help   Your workplace can be your home if you have an office in your home that qualifies as your principal place of business. Free state tax help For more information, see Business Use of Your Home, later. Free state tax help Example. Free state tax help You are a graphics designer. Free state tax help You operate your business out of your home. Free state tax help Your home qualifies as your principal place of business. Free state tax help You occasionally have to drive to your clients to deliver your completed work. Free state tax help You can deduct the cost of the round-trip transportation between your home and your clients. Free state tax help Methods for Deducting Car and Truck Expenses For local transportation or overnight travel by car or truck, you generally can use one of the following methods to figure your expenses. Free state tax help Standard mileage rate. Free state tax help Actual expenses. Free state tax help Standard mileage rate. Free state tax help   You may be able to use the standard mileage rate to figure the deductible costs of operating your car, van, pickup, or panel truck for business purposes. Free state tax help For 2013, the standard mileage rate is 56. Free state tax help 5 cents per mile. Free state tax help    If you choose to use the standard mileage rate for a year, you cannot deduct your actual expenses for that year except for business-related parking fees and tolls. Free state tax help Choosing the standard mileage rate. Free state tax help   If you want to use the standard mileage rate for a car or truck you own, you must choose to use it in the first year the car is available for use in your business. Free state tax help In later years, you can choose to use either the standard mileage rate or actual expenses. Free state tax help   If you use the standard mileage rate for a car you lease, you must choose to use it for the entire lease period (including renewals). Free state tax help Standard mileage rate not allowed. Free state tax help   You cannot use the standard mileage rate if you: Operate five or more cars at the same time, Claimed a depreciation deduction using any method other than straight line, for example, ACRS or MACRS, Claimed a section 179 deduction on the car, Claimed the special depreciation allowance on the car, Claimed actual car expenses for a car you leased, or Are a rural mail carrier who received a qualified reimbursement. Free state tax help Parking fees and tolls. Free state tax help   In addition to using the standard mileage rate, you can deduct any business-related parking fees and tolls. Free state tax help (Parking fees you pay to park your car at your place of work are nondeductible commuting expenses. Free state tax help ) Actual expenses. Free state tax help   If you do not choose to use the standard mileage rate, you may be able to deduct your actual car or truck expenses. Free state tax help    If you qualify to use both methods, figure your deduction both ways to see which gives you a larger deduction. Free state tax help   Actual car expenses include the costs of the following items. Free state tax help Depreciation Lease payments Registration Garage rent Licenses Repairs Gas Oil Tires Insurance Parking fees Tolls   If you use your vehicle for both business and personal purposes, you must divide your expenses between business and personal use. Free state tax help You can divide your expenses based on the miles driven for each purpose. Free state tax help Example. Free state tax help You are the sole proprietor of a flower shop. Free state tax help You drove your van 20,000 miles during the year. Free state tax help 16,000 miles were for delivering flowers to customers and 4,000 miles were for personal use (including commuting miles). Free state tax help You can claim only 80% (16,000 ÷ 20,000) of the cost of operating your van as a business expense. Free state tax help More information. Free state tax help   For more information about the rules for claiming car and truck expenses, see Publication 463. Free state tax help Reimbursing Your Employees for Expenses You generally can deduct the amount you reimburse your employees for car and truck expenses. Free state tax help The reimbursement you deduct and the manner in which you deduct it depend in part on whether you reimburse the expenses under an accountable plan or a nonaccountable plan. Free state tax help For details, see chapter 11 in Publication 535. Free state tax help That chapter explains accountable and nonaccountable plans and tells you whether to report the reimbursement on your employee's Form W-2, Wage and Tax Statement. Free state tax help Depreciation If property you acquire to use in your business is expected to last more than 1 year, you generally cannot deduct the entire cost as a business expense in the year you acquire it. Free state tax help You must spread the cost over more than 1 tax year and deduct part of it each year on Schedule C. Free state tax help This method of deducting the cost of business property is called depreciation. Free state tax help The discussion here is brief. Free state tax help You will find more information about depreciation in Publication 946. Free state tax help What property can be depreciated?   You can depreciate property if it meets all the following requirements. Free state tax help It must be property you own. Free state tax help It must be used in business or held to produce income. Free state tax help You never can depreciate inventory (explained in chapter 2) because it is not held for use in your business. Free state tax help It must have a useful life that extends substantially beyond the year it is placed in service. Free state tax help It must have a determinable useful life, which means that it must be something that wears out, decays, gets used up, becomes obsolete, or loses its value from natural causes. Free state tax help You never can depreciate the cost of land because land does not wear out, become obsolete, or get used up. Free state tax help It must not be excepted property. Free state tax help This includes property placed in service and disposed of in the same year. Free state tax help Repairs. Free state tax help    You cannot depreciate repairs and replacements that do not increase the value of your property, make it more useful, or lengthen its useful life. Free state tax help You can deduct these amounts on line 21 of Schedule C or line 2 of Schedule C-EZ. Free state tax help Depreciation method. Free state tax help   The method for depreciating most business and investment property placed in service after 1986 is called the Modified Accelerated Cost Recovery System (MACRS). Free state tax help MACRS is discussed in detail in Publication 946. Free state tax help Section 179 deduction. Free state tax help   You can elect to deduct a limited amount of the cost of certain depreciable property in the year you place the property in service. Free state tax help This deduction is known as the “section 179 deduction. Free state tax help ” The maximum amount you can elect to deduct during 2013 is generally $500,000 (higher limits apply to certain property). Free state tax help See IRC 179(e). Free state tax help   This limit is generally reduced by the amount by which the cost of the property placed in service during the tax year exceeds $2 million. Free state tax help The total amount of depreciation (including the section 179 deduction) you can take for a passenger automobile you use in your business and first place in service in 2013 is $3,160 ($11,160 if you take the special depreciation allowance for qualified passenger automobiles placed in service in 2013). Free state tax help Special rules apply to trucks and vans. Free state tax help For more information, see Publication 946. Free state tax help It explains what property qualifies for the deduction, what limits apply to the deduction, and when and how to recapture the deduction. Free state tax help    Your section 179 election for the cost of any sport utility vehicle (SUV) and certain other vehicles is limited to $25,000. Free state tax help For more information, see the Instructions for Form 4562 or Publication 946. Free state tax help Listed property. Free state tax help   You must follow special rules and recordkeeping requirements when depreciating listed property. Free state tax help Listed property is any of the following. Free state tax help Most passenger automobiles. Free state tax help Most other property used for transportation. Free state tax help Any property of a type generally used for entertainment, recreation, or amusement. Free state tax help Certain computers and related peripheral equipment. Free state tax help   For more information about listed property, see Publication 946. Free state tax help Form 4562. Free state tax help   Use Form 4562, Depreciation and Amortization, if you are claiming any of the following. Free state tax help Depreciation on property placed in service during the current tax year. Free state tax help A section 179 deduction. Free state tax help Depreciation on any listed property (regardless of when it was placed in service). Free state tax help    If you have to use Form 4562, you must file Schedule C. Free state tax help You cannot use Schedule C-EZ. Free state tax help   Employees' Pay You can generally deduct on Schedule C the pay you give your employees for the services they perform for your business. Free state tax help The pay may be in cash, property, or services. Free state tax help To be deductible, your employees' pay must be an ordinary and necessary expense and you must pay or incur it in the tax year. Free state tax help In addition, the pay must meet both the following tests. Free state tax help The pay must be reasonable. Free state tax help The pay must be for services performed. Free state tax help Chapter 2 in Publication 535 explains and defines these requirements. Free state tax help You cannot deduct your own salary or any personal withdrawals you make from your business. Free state tax help As a sole proprietor, you are not an employee of the business. Free state tax help If you had employees during the year, you must use Schedule C. Free state tax help You cannot use Schedule C-EZ. Free state tax help Kinds of pay. Free state tax help   Some of the ways you may provide pay to your employees are listed below. Free state tax help For an explanation of each of these items, see chapter 2 in Publication 535. Free state tax help Awards. Free state tax help Bonuses. Free state tax help Education expenses. Free state tax help Fringe benefits (discussed later). Free state tax help Loans or advances you do not expect the employee to repay if they are for personal services actually performed. Free state tax help Property you transfer to an employee as payment for services. Free state tax help Reimbursements for employee business expenses. Free state tax help Sick pay. Free state tax help Vacation pay. Free state tax help Fringe benefits. Free state tax help   A fringe benefit is a form of pay for the performance of services. Free state tax help The following are examples of fringe benefits. Free state tax help Benefits under qualified employee benefit programs. Free state tax help Meals and lodging. Free state tax help The use of a car. Free state tax help Flights on airplanes. Free state tax help Discounts on property or services. Free state tax help Memberships in country clubs or other social clubs. Free state tax help Tickets to entertainment or sporting events. Free state tax help   Employee benefit programs include the following. Free state tax help Accident and health plans. Free state tax help Adoption assistance. Free state tax help Cafeteria plans. Free state tax help Dependent care assistance. Free state tax help Educational assistance. Free state tax help Group-term life insurance coverage. Free state tax help Welfare benefit funds. Free state tax help   You can generally deduct the cost of fringe benefits you provide on your Schedule C in whatever category the cost falls. Free state tax help For example, if you allow an employee to use a car or other property you lease, deduct the cost of the lease as a rent or lease expense. Free state tax help If you own the property, include your deduction for its cost or other basis as a section 179 deduction or a depreciation deduction. Free state tax help    You may be able to exclude all or part of the fringe benefits you provide from your employees' wages. Free state tax help For more information about fringe benefits and the exclusion of benefits, see Publication 15-B, Employer's Tax Guide to Fringe Benefits. Free state tax help Insurance You can generally deduct premiums you pay for the following kinds of insurance related to your business. Free state tax help Fire, theft, flood, or similar insurance. Free state tax help Credit insurance that covers losses from business bad debts. Free state tax help Group hospitalization and medical insurance for employees, including long-term care insurance. Free state tax help Liability insurance. Free state tax help Malpractice insurance that covers your personal liability for professional negligence resulting in injury or damage to patients or clients. Free state tax help Workers' compensation insurance set by state law that covers any claims for bodily injuries or job-related diseases suffered by employees in your business, regardless of fault. Free state tax help Contributions to a state unemployment insurance fund are deductible as taxes if they are considered taxes under state law. Free state tax help Overhead insurance that pays for business overhead expenses you have during long periods of disability caused by your injury or sickness. Free state tax help Car and other vehicle insurance that covers vehicles used in your business for liability, damages, and other losses. Free state tax help If you operate a vehicle partly for personal use, deduct only the part of the insurance premium that applies to the business use of the vehicle. Free state tax help If you use the standard mileage rate to figure your car expenses, you cannot deduct any car insurance premiums. Free state tax help Life insurance covering your employees if you are not directly or indirectly the beneficiary under the contract. Free state tax help Business interruption insurance that pays for lost profits if your business is shut down due to a fire or other cause. Free state tax help Nondeductible premiums. Free state tax help   You cannot deduct premiums on the following kinds of insurance. Free state tax help Self-insurance reserve funds. Free state tax help You cannot deduct amounts credited to a reserve set up for self-insurance. Free state tax help This applies even if you cannot get business insurance coverage for certain business risks. Free state tax help However, your actual losses may be deductible. Free state tax help For more information, see Publication 547, Casualties, Disasters, and Thefts. Free state tax help Loss of earnings. Free state tax help You cannot deduct premiums for a policy that pays for your lost earnings due to sickness or disability. Free state tax help However, see item (8) in the previous list. Free state tax help Certain life insurance and annuities. Free state tax help For contracts issued before June 9, 1997, you cannot deduct the premiums on a life insurance policy covering you, an employee, or any person with a financial interest in your business if you are directly or indirectly a beneficiary of the policy. Free state tax help You are included among possible beneficiaries of the policy if the policy owner is obligated to repay a loan from you using the proceeds of the policy. Free state tax help A person has a financial interest in your business if the person is an owner or part owner of the business or has lent money to the business. Free state tax help For contracts issued after June 8, 1997, you generally cannot deduct the premiums on any life insurance policy, endowment contract, or annuity contract if you are directly or indirectly a beneficiary. Free state tax help The disallowance applies without regard to whom the policy covers. Free state tax help Insurance to secure a loan. Free state tax help If you take out a policy on your life or on the life of another person with a financial interest in your business to get or protect a business loan, you cannot deduct the premiums as a business expense. Free state tax help Nor can you deduct the premiums as interest on business loans or as an expense of financing loans. Free state tax help In the event of death, the proceeds of the policy are not taxed as income even if they are used to liquidate the debt. Free state tax help Self-employed health insurance deduction. Free state tax help   You may be able to deduct the amount you paid for medical and dental insurance and qualified long-term care insurance for you and your family. Free state tax help How to figure the deduction. Free state tax help   Generally, you can use the worksheet in the Form 1040 instructions to figure your deduction. Free state tax help However, if any of the following apply, you must use the worksheet in chapter 6 of Publication 535. Free state tax help You have more than one source of income subject to self-employment tax. Free state tax help You file Form 2555 or Form 2555-EZ (relating to foreign earned income). Free state tax help You are using amounts paid for qualified long-term care insurance to figure the deduction. Free state tax help Prepayment. Free state tax help   You cannot deduct expenses in advance, even if you pay them in advance. Free state tax help This rule applies to any expense paid far enough in advance to, in effect, create an asset with a useful life extending substantially beyond the end of the current tax year. Free state tax help Example. Free state tax help In 2013, you signed a 3-year insurance contract. Free state tax help Even though you paid the premiums for 2013, 2014, and 2015 when you signed the contract, you can only deduct the premium for 2013 on your 2013 tax return. Free state tax help You can deduct in 2014 and 2015 the premium allocable to those years. Free state tax help More information. Free state tax help   For more information about deducting insurance, see chapter 6 in Publication 535. Free state tax help Interest You can generally deduct as a business expense all interest you pay or accrue during the tax year on debts related to your business. Free state tax help Interest relates to your business if you use the proceeds of the loan for a business expense. Free state tax help It does not matter what type of property secures the loan. Free state tax help You can deduct interest on a debt only if you meet all of the following requirements. Free state tax help You are legally liable for that debt. Free state tax help Both you and the lender intend that the debt be repaid. Free state tax help You and the lender have a true debtor-creditor relationship. Free state tax help You cannot deduct on Schedule C or C-EZ the interest you paid on personal loans. Free state tax help If a loan is part business and part personal, you must divide the interest between the personal part and the business part. Free state tax help Example. Free state tax help In 2013, you paid $600 interest on a car loan. Free state tax help During 2013, you used the car 60% for business and 40% for personal purposes. Free state tax help You are claiming actual expenses on the car. Free state tax help You can only deduct $360 (60% × $600) for 2013 on Schedule C or C-EZ. Free state tax help The remaining interest of $240 is a nondeductible personal expense. Free state tax help More information. Free state tax help   For more information about deducting interest, see chapter 4 in Publication 535. Free state tax help That chapter explains the following items. Free state tax help Interest you can deduct. Free state tax help Interest you cannot deduct. Free state tax help How to allocate interest between personal and business use. Free state tax help When to deduct interest. Free state tax help The rules for a below-market interest rate loan. Free state tax help (This is generally a loan on which no interest is charged or on which interest is charged at a rate below the applicable federal rate. Free state tax help ) Legal and Professional Fees Legal and professional fees, such as fees charged by accountants, that are ordinary and necessary expenses directly related to operating your business are deductible on Schedule C or C-EZ. Free state tax help However, you usually cannot deduct legal fees you pay to acquire business assets. Free state tax help Add them to the basis of the property. Free state tax help If the fees include payments for work of a personal nature (such as making a will), you can take a business deduction only for the part of the fee related to your business. Free state tax help The personal part of legal fees for producing or collecting taxable income, doing or keeping your job, or for tax advice may be deductible on Schedule A (Form 1040) if you itemize deductions. Free state tax help For more information, see Publication 529, Miscellaneous Deductions. Free state tax help Tax preparation fees. Free state tax help   You can deduct on Schedule C or C-EZ the cost of preparing that part of your tax return relating to your business as a sole proprietor or statutory employee. Free state tax help You can deduct the remaining cost on Schedule A (Form 1040) if you itemize your deductions. Free state tax help   You can also deduct on Schedule C or C-EZ the amount you pay or incur in resolving asserted tax deficiencies for your business as a sole proprietor or statutory employee. Free state tax help Pension Plans You can set up and maintain the following small business retirement plans for yourself and your employees. Free state tax help SEP (Simplified Employee Pension) plans. Free state tax help SIMPLE (Savings Incentive Match Plan for Employees) plans. Free state tax help Qualified plans (including Keogh or H. Free state tax help R. Free state tax help 10 plans). Free state tax help SEP, SIMPLE, and qualified plans offer you and your employees a tax favored way to save for retirement. Free state tax help You can deduct contributions you make to the plan for your employees on line 19 of Schedule C. Free state tax help If you are a sole proprietor, you can deduct contributions you make to the plan for yourself on line 28 of Form 1040. Free state tax help You can also deduct trustees' fees if contributions to the plan do not cover them. Free state tax help Earnings on the contributions are generally tax free until you or your employees receive distributions from the plan. Free state tax help You may also be able to claim a tax credit of 50% of the first $1,000 of qualified startup costs if you begin a new qualified defined benefit or defined contribution plan (including a 401(k) plan), SIMPLE plan, or simplified employee pension. Free state tax help Under certain plans, employees can have you contribute limited amounts of their before-tax pay to a plan. Free state tax help These amounts (and earnings on them) are generally tax free until your employees receive distributions from the plan. Free state tax help For more information on retirement plans for small business, see Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans). Free state tax help Publication 590, Individual Retirement Arrangements (IRAs), discusses other tax favored ways to save for retirement. Free state tax help Rent Expense Rent is any amount you pay for the use of property you do not own. Free state tax help In general, you can deduct rent as a business expense only if the rent is for property you use in your business. Free state tax help If you have or will receive equity in or title to the property, you cannot deduct the rent. Free state tax help Unreasonable rent. Free state tax help   You cannot take a rental deduction for unreasonable rents. Free state tax help Ordinarily, the issue of reasonableness arises only if you and the lessor are related. Free state tax help Rent paid to a related person is reasonable if it is the same amount you would pay to a stranger for use of the same property. Free state tax help Rent is not unreasonable just because it is figured as a percentage of gross receipts. Free state tax help   Related persons include members of your immediate family, including only brothers and sisters (either whole or half), your spouse, ancestors, and lineal descendants. Free state tax help For a list of the other related persons, see section 267 of the Internal Revenue Code. Free state tax help Rent on your home. Free state tax help   If you rent your home and use part of it as your place of business, you may be able to deduct the rent you pay for that part. Free state tax help You must meet the requirements for business use of your home. Free state tax help For more information, see Business Use of Your Home , later. Free state tax help Rent paid in advance. Free state tax help   Generally, rent paid in your business is deductible in the year paid or accrued. Free state tax help If you pay rent in advance, you can deduct only the amount that applies to your use of the rented property during the tax year. Free state tax help You can deduct the rest of your payment only over the period to which it applies. Free state tax help More information. Free state tax help   For more information about rent, see chapter 3 in Publication 535. Free state tax help Taxes You can deduct on Schedule C or C-EZ various federal, state, local, and foreign taxes directly attributable to your business. Free state tax help Income taxes. Free state tax help   You can deduct on Schedule C or C-EZ a state tax on gross income (as distinguished from net income) directly attributable to your business. Free state tax help You can deduct other state and local income taxes on Schedule A (Form 1040) if you itemize your deductions. Free state tax help Do not deduct federal income tax. Free state tax help Employment taxes. Free state tax help   You can deduct the social security, Medicare, and federal unemployment (FUTA) taxes you paid out of your own funds as an employer. Free state tax help Employment taxes are discussed briefly in chapter 1. Free state tax help You can also deduct payments you made as an employer to a state unemployment compensation fund or to a state disability benefit fund. Free state tax help Deduct these payments as taxes. Free state tax help Self-employment tax. Free state tax help   You can deduct one-half of your self-employment tax on line 27 of Form 1040. Free state tax help Self-employment tax is discussed in chapters 1 and 10. Free state tax help Personal property tax. Free state tax help   You can deduct on Schedule C or C-EZ any tax imposed by a state or local government on personal property used in your business. Free state tax help   You can also deduct registration fees for the right to use property within a state or local area. Free state tax help Example. Free state tax help May and Julius Winter drove their car 7,000 business miles out of a total of 10,000 miles. Free state tax help They had to pay $25 for their annual state license tags and $20 for their city registration sticker. Free state tax help They also paid $235 in city personal property tax on the car, for a total of $280. Free state tax help They are claiming their actual car expenses. Free state tax help Because they used the car 70% for business, they can deduct 70% of the $280, or $196, as a business expense. Free state tax help Real estate taxes. Free state tax help   You can deduct on Schedule C or C-EZ the real estate taxes you pay on your business property. Free state tax help Deductible real estate taxes are any state, local, or foreign taxes on real estate levied for the general public welfare. Free state tax help The taxing authority must base the taxes on the assessed value of the real estate and charge them uniformly against all property under its jurisdiction. Free state tax help   For more information about real estate taxes, see chapter 5 in Publication 535. Free state tax help That chapter explains special rules for deducting the following items. Free state tax help Taxes for local benefits, such as those for sidewalks, streets, water mains, and sewer lines. Free state tax help Real estate taxes when you buy or sell property during the year. Free state tax help Real estate taxes if you use an accrual method of accounting and choose to accrue real estate tax related to a definite period ratably over that period. Free state tax help Sales tax. Free state tax help   Treat any sales tax you pay on a service or on the purchase or use of property as part of the cost of the service or property. Free state tax help If the service or the cost or use of the property is a deductible business expense, you can deduct the tax as part of that service or cost. Free state tax help If the property is merchandise bought for resale, the sales tax is part of the cost of the merchandise. Free state tax help If the property is depreciable, add the sales tax to the basis for depreciation. Free state tax help For information on the basis of property, see Publication 551, Basis of Assets. Free state tax help    Do not deduct state and local sales taxes imposed on the buyer that you must collect and pay over to the state or local government. Free state tax help Do not include these taxes in gross receipts or sales. Free state tax help Excise taxes. Free state tax help   You can deduct on Schedule C or C-EZ all excise taxes that are ordinary and necessary expenses of carrying on your business. Free state tax help Excise taxes are discussed briefly in chapter 1. Free state tax help Fuel taxes. Free state tax help   Taxes on gasoline, diesel fuel, and other motor fuels you use in your business are usually included as part of the cost of the fuel. Free state tax help Do not deduct these taxes as a separate item. Free state tax help   You may be entitled to a credit or refund for federal excise tax you paid on fuels used for certain purposes. Free state tax help For more information, see Publication 510, Excise Taxes. Free state tax help Travel, Meals, and Entertainment This section briefly explains the kinds of travel and entertainment expenses you can deduct on Schedule C or C-EZ. Free state tax help Table 8-1. Free state tax help When Are Entertainment Expenses Deductible? (Note. Free state tax help The following is a summary of the rules for deducting entertainment expenses. Free state tax help For more details about these rules, see Publication 463. Free state tax help ) General rule You can deduct ordinary and necessary expenses to entertain a client, customer, or employee if the expenses meet the directly-related test or the associated test. Free state tax help Definitions Entertainment includes any activity generally considered to provide entertainment, amusement, or recreation, and includes meals provided to a customer or client. Free state tax help An ordinary expense is one that is common and accepted in your field of business, trade, or profession. Free state tax help A necessary expense is one that is helpful and appropriate, although not necessarily required, for your business. Free state tax help Tests to be met Directly-related test Entertainment took place in a clear business setting, or Main purpose of entertainment was the active conduct of business, and You did engage in business with the person during the entertainment period, and You had more than a general expectation of getting income or some other specific business benefit. Free state tax help   Associated test Entertainment is associated with your trade or business, and Entertainment directly precedes or follows a substantial business discussion. Free state tax help Other rules You cannot deduct the cost of your meal as an entertainment expense if you are claiming the meal as a travel expense. Free state tax help You cannot deduct expenses that are lavish or extravagant under the circumstances. Free state tax help You generally can deduct only 50% of your unreimbursed entertainment expenses. Free state tax help Travel expenses. Free state tax help   These are the ordinary and necessary expenses of traveling away from home for your business. Free state tax help You are traveling away from home if both the following conditions are met. Free state tax help Your duties require you to be away from the general area of your tax home (defined later) substantially longer than an ordinary day's work. Free state tax help You need to get sleep or rest to meet the demands of your work while away from home. Free state tax help Generally, your tax home is your regular place of business, regardless of where you maintain your family home. Free state tax help It includes the entire city or general area in which your business is located. Free state tax help See Publication 463 for more information. Free state tax help   The following is a brief discussion of the expenses you can deduct. Free state tax help Transportation. Free state tax help   You can deduct the cost of travel by airplane, train, bus, or car between your home and your business destination. Free state tax help Taxi, commuter bus, and limousine. Free state tax help   You can deduct fares for these and other types of transportation between the airport or station and your hotel, or between the hotel and your work location away from home. Free state tax help Baggage and shipping. Free state tax help   You can deduct the cost of sending baggage and sample or display material between your regular and temporary work locations. Free state tax help Car or truck. Free state tax help   You can deduct the costs of operating and maintaining your vehicle when traveling away from home on business. Free state tax help You can deduct actual expenses or the standard mileage rate (discussed earlier under Car and Truck Expenses), as well as business-related tolls and parking. Free state tax help If you rent a car while away from home on business, you can deduct only the business-use portion of the expenses. Free state tax help Meals and lodging. Free state tax help   You can deduct the cost of meals and lodging if your business trip is overnight or long enough that you need to stop for sleep or rest to properly perform your duties. Free state tax help In most cases, you can deduct only 50% of your meal expenses. Free state tax help Cleaning. Free state tax help   You can deduct the costs of dry cleaning and laundry while on your business trip. Free state tax help Telephone. Free state tax help   You can deduct the cost of business calls while on your business trip, including business communication by fax machine or other communication devices. Free state tax help Tips. Free state tax help   You can deduct the tips you pay for any expense in this list. Free state tax help More information. Free state tax help   For more information about travel expenses, see Publication 463. Free state tax help Entertainment expenses. Free state tax help   You may be able to deduct business-related entertainment expenses for entertaining a client, customer, or employee. Free state tax help In most cases, you can deduct only 50% of these expenses. Free state tax help   The following are examples of entertainment expenses. Free state tax help Entertaining guests at nightclubs, athletic clubs, theaters, or sporting events. Free state tax help Providing meals, a hotel suite, or a car to business customers or their families. Free state tax help To be deductible, the expenses must meet the rules listed in Table 8-1. Free state tax help For details about these rules, see Publication 463. Free state tax help Reimbursing your employees for expenses. Free state tax help   You generally can deduct the amount you reimburse your employees for travel and entertainment expenses. Free state tax help The reimbursement you deduct and the manner in which you deduct it depend in part on whether you reimburse the expenses under an accountable plan or a nonaccountable plan. Free state tax help For details, see chapter 11 in Publication 535. Free state tax help That chapter explains accountable and nonaccountable plans and tells you whether to report the reimbursement on your employee's Form W-2, Wage and Tax Statement. Free state tax help Business Use of Your Home To deduct expenses related to the part of your home used for business, you must meet specific requirements. Free state tax help Even then, your deduction may be limited. Free state tax help To qualify to claim expenses for business use of your home, you must meet the following tests. Free state tax help Your use of the business part of your home must be: Exclusive (however, see Exceptions to exclusive use , later), Regular, For your business, and The business part of your home must be one of the following: Your principal place of business (defined later), A place where you meet or deal with patients, clients, or customers in the normal course of your business, or A separate structure (not attached to your home) you use in connection with your business. Free state tax help Exclusive use. Free state tax help   To qualify under the exclusive use test, you must use a specific area of your home only for your trade or business. Free state tax help The area used for business can be a room or other separately identifiable space. Free state tax help The space does not need to be marked off by a permanent partition. Free state tax help   You do not meet the requirements of the exclusive use test if you use the area in question both for business and for personal purposes. Free state tax help Example. Free state tax help You are an attorney and use a den in your home to write legal briefs and prepare clients' tax returns. Free state tax help Your family also uses the den for recreation. Free state tax help The den is not used exclusively in your profession, so you cannot claim a business deduction for its use. Free state tax help Exceptions to exclusive use. Free state tax help   You do not have to meet the exclusive use test if you use part of your home in either of the following ways. Free state tax help For the storage of inventory or product samples. Free state tax help As a daycare facility. Free state tax help For an explanation of these exceptions, see Publication 587, Business Use of Your Home (Including Use by Daycare Providers). Free state tax help Regular use. Free state tax help   To qualify under the regular use test, you must use a specific area of your home for business on a continuing basis. Free state tax help You do not meet the test if your business use of the area is only occasional or incidental, even if you do not use that area for any other purpose. Free state tax help Principal place of business. Free state tax help   You can have more than one business location, including your home, for a single trade or business. Free state tax help To qualify to deduct the expenses for the business use of your home under the principal place of business test, your home must be your principal place of business for that business. Free state tax help To determine your principal place of business, you must consider all the facts and circumstances. Free state tax help   Your home office will qualify as your principal place of business for deducting expenses for its use if you meet the following requirements. Free state tax help You use it exclusively and regularly for administrative or management activities of your business. Free state tax help You have no other fixed location where you conduct substantial administrative or management activities of your business. Free state tax help   Alternatively, if you use your home exclusively and regularly for your business, but your home office does not qualify as your principal place of business based on the previous rules, you determine your principal place of business based on the following factors. Free state tax help The relative importance of the activities performed at each location. Free state tax help If the relative importance factor does not determine your principal place of business, you can also consider the time spent at each location. Free state tax help   If, after considering your business locations, your home cannot be identified as your principal place of business, you cannot deduct home office expenses. Free state tax help However, for other ways to qualify to deduct home office expenses, see Publication 587. Free state tax help Deduction limit. Free state tax help   If your gross income from the business use of your home equals or exceeds your total business expenses (including depreciation), you can deduct all your business expenses related to the use of your home. Free state tax help If your gross income from the business use is less than your total business expenses, your deduction for certain expenses for the business use of your home is limited. Free state tax help   Your deduction of otherwise nondeductible expenses, such as insurance, utilities, and depreciation (with depreciation taken last), allocable to the business is limited to the gross income from the business use of your home minus the sum of the following. Free state tax help The business part of expenses you could deduct even if you did not use your home for business (such as mortgage interest, real estate taxes, and casualty and theft losses that are allowable as itemized deductions on Schedule A (Form 1040)). Free state tax help The business expenses that relate to the business activity in the home (for example, business phone, supplies, and depreciation on equipment), but not to the use of the home itself. Free state tax help Do not include in (2) above your deduction for one-half of your self-employment tax. Free state tax help   Use Form 8829, Expenses for Business Use of Your Home, to figure your deduction. Free state tax help New simplified method. Free state tax help    The IRS now provides a simplified method to determine your expenses for business use of your home. Free state tax help The simplified method is an alternative to calculating and substantiating actual expenses. Free state tax help In most cases, you will figure your deduction by multiplying $5 by the area of your home used for a qualified business use. Free state tax help The area you use to figure your deduction is limited to 300 square feet. Free state tax help For more information, see the Instructions for Schedule C. Free state tax help More information. Free state tax help   For more information on deducting expenses for the business use of your home, see Publication 587. Free state tax help Other Expenses You Can Deduct You may also be able to deduct the following expenses. Free state tax help See Publication 535 to find out whether you can deduct them. Free state tax help Advertising. Free state tax help Bank fees. Free state tax help Donations to business organizations. Free state tax help Education expenses. Free state tax help Energy efficient commercial buildings deduction expenses. Free state tax help Impairment-related expenses. Free state tax help Interview expense allowances. Free state tax help Licenses and regulatory fees. Free state tax help Moving machinery. Free state tax help Outplacement services. Free state tax help Penalties and fines you pay for late performance or nonperformance of a contract. Free state tax help Repairs that keep your property in a normal efficient operating condition. Free state tax help Repayments of income. Free state tax help Subscriptions to trade or professional publications. Free state tax help Supplies and materials. Free state tax help Utilities. Free state tax help Expenses You Cannot Deduct You usually cannot deduct the following as business expenses. Free state tax help For more information, see Publication 535. Free state tax help Bribes and kickbacks. Free state tax help Charitable contributions. Free state tax help Demolition expenses or losses. Free state tax help Dues to business, social, athletic, luncheon, sporting, airline, and hotel clubs. Free state tax help Lobbying expenses. Free state tax help Penalties and fines you pay to a governmental agency or instrumentality because you broke the law. Free state tax help Personal, living, and family expenses. Free state tax help Political contributions. Free state tax help Repairs that add to the value of your property or significantly increase its life. Free state tax help Prev  Up  Next   Home   More Online Publications