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Free State Tax Returns

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Free State Tax Returns

Free state tax returns 9. Free state tax returns   Rental Income and Expenses Table of Contents Introduction Useful Items - You may want to see: Rental Income Rental ExpensesVacant while listed for sale. Free state tax returns Repairs and Improvements Other Expenses Property Changed to Rental Use Renting Part of Property Not Rented for Profit Personal Use of Dwelling Unit (Including Vacation Home)Example. Free state tax returns Dividing Expenses Dwelling Unit Used as a Home Reporting Income and Deductions DepreciationChanging your accounting method to deduct unclaimed depreciation. Free state tax returns Limits on Rental LossesAt-Risk Rules Passive Activity Limits How To Report Rental Income and ExpensesSchedule E (Form 1040) Introduction This chapter discusses rental income and expenses. Free state tax returns It also covers the following topics. Free state tax returns Personal use of dwelling unit (including vacation home). Free state tax returns Depreciation. Free state tax returns Limits on rental losses. Free state tax returns How to report your rental income and expenses. Free state tax returns If you sell or otherwise dispose of your rental property, see Publication 544, Sales and Other Dispositions of Assets. Free state tax returns If you have a loss from damage to, or theft of, rental property, see Publication 547, Casualties, Disasters, and Thefts. Free state tax returns If you rent a condominium or a cooperative apartment, some special rules apply to you even though you receive the same tax treatment as other owners of rental property. Free state tax returns See Publication 527, Residential Rental Property, for more information. Free state tax returns Useful Items - You may want to see: Publication 527 Residential Rental Property 534 Depreciating Property Placed in Service Before 1987 535 Business Expenses 925 Passive Activity and At-Risk Rules 946 How To Depreciate Property Form (and Instructions) 4562 Depreciation and Amortization 6251 Alternative Minimum Tax—Individuals 8582 Passive Activity Loss Limitations Schedule E (Form 1040) Supplemental Income and Loss Rental Income In most cases, you must include in your gross income all amounts you receive as rent. Free state tax returns Rental income is any payment you receive for the use or occupation of property. Free state tax returns In addition to amounts you receive as normal rent payments, there are other amounts that may be rental income. Free state tax returns When to report. Free state tax returns   If you are a cash-basis taxpayer, you report rental income on your return for the year you actually or constructively receive it. Free state tax returns You are a cash-basis taxpayer if you report income in the year you receive it, regardless of when it was earned. Free state tax returns You constructively receive income when it is made available to you, for example, by being credited to your bank account. Free state tax returns   For more information about when you constructively receive income, see Accounting Methods in chapter 1. Free state tax returns Advance rent. Free state tax returns   Advance rent is any amount you receive before the period that it covers. Free state tax returns Include advance rent in your rental income in the year you receive it regardless of the period covered or the method of accounting you use. Free state tax returns Example. Free state tax returns You sign a 10-year lease to rent your property. Free state tax returns In the first year, you receive $5,000 for the first year's rent and $5,000 as rent for the last year of the lease. Free state tax returns You must include $10,000 in your income in the first year. Free state tax returns Canceling a lease. Free state tax returns   If your tenant pays you to cancel a lease, the amount you receive is rent. Free state tax returns Include the payment in your income in the year you receive it regardless of your method of accounting. Free state tax returns Expenses paid by tenant. Free state tax returns   If your tenant pays any of your expenses, the payments are rental income. Free state tax returns Because you must include this amount in income, you can deduct the expenses if they are deductible rental expenses. Free state tax returns See Rental Expenses , later, for more information. Free state tax returns Property or services. Free state tax returns   If you receive property or services, instead of money, as rent, include the fair market value of the property or services in your rental income. Free state tax returns   If the services are provided at an agreed upon or specified price, that price is the fair market value unless there is evidence to the contrary. Free state tax returns Security deposits. Free state tax returns   Do not include a security deposit in your income when you receive it if you plan to return it to your tenant at the end of the lease. Free state tax returns But if you keep part or all of the security deposit during any year because your tenant does not live up to the terms of the lease, include the amount you keep in your income in that year. Free state tax returns   If an amount called a security deposit is to be used as a final payment of rent, it is advance rent. Free state tax returns Include it in your income when you receive it. Free state tax returns Part interest. Free state tax returns   If you own a part interest in rental property, you must report your part of the rental income from the property. Free state tax returns Rental of property also used as your home. Free state tax returns   If you rent property that you also use as your home and you rent it less than 15 days during the tax year, do not include the rent you receive in your income and do not deduct rental expenses. Free state tax returns However, you can deduct on Schedule A (Form 1040) the interest, taxes, and casualty and theft losses that are allowed for nonrental property. Free state tax returns See Personal Use of Dwelling Unit (Including Vacation Home) , later. Free state tax returns Rental Expenses This part discusses expenses of renting property that you ordinarily can deduct from your rental income. Free state tax returns It includes information on the expenses you can deduct if you rent part of your property, or if you change your property to rental use. Free state tax returns Depreciation , which you can also deduct from your rental income, is discussed later. Free state tax returns Personal use of rental property. Free state tax returns   If you sometimes use your rental property for personal purposes, you must divide your expenses between rental and personal use. Free state tax returns Also, your rental expense deductions may be limited. Free state tax returns See Personal Use of Dwelling Unit (Including Vacation Home) , later. Free state tax returns Part interest. Free state tax returns   If you own a part interest in rental property, you can deduct expenses that you paid according to your percentage of ownership. Free state tax returns When to deduct. Free state tax returns   If you are a cash-basis taxpayer, you generally deduct your rental expenses in the year you pay them. Free state tax returns Depreciation. Free state tax returns   You can begin to depreciate rental property when it is ready and available for rent. Free state tax returns See Placed-in-Service under When Does Depreciation Begin and End in chapter 2 of Publication 527. Free state tax returns Pre-rental expenses. Free state tax returns   You can deduct your ordinary and necessary expenses for managing, conserving, or maintaining rental property from the time you make it available for rent. Free state tax returns Uncollected rent. Free state tax returns   If you are a cash-basis taxpayer, do not deduct uncollected rent. Free state tax returns Because you have not included it in your income, it is not deductible. Free state tax returns Vacant rental property. Free state tax returns   If you hold property for rental purposes, you may be able to deduct your ordinary and necessary expenses (including depreciation) for managing, conserving, or maintaining the property while the property is vacant. Free state tax returns However, you cannot deduct any loss of rental income for the period the property is vacant. Free state tax returns Vacant while listed for sale. Free state tax returns   If you sell property you held for rental purposes, you can deduct the ordinary and necessary expenses for managing, conserving, or maintaining the property until it is sold. Free state tax returns If the property is not held out and available for rent while listed for sale, the expenses are not deductible rental expenses. Free state tax returns Repairs and Improvements Generally, an expense for repairing or maintaining your rental property may be deducted if you are not required to capitalize the expense. Free state tax returns Improvements. Free state tax returns   You must capitalize any expense you pay to improve your rental property. Free state tax returns An expense is for an improvement if it results in a betterment to your property, restores your property, or adapts your property to a new or different use. Free state tax returns Betterments. Free state tax returns   Expenses that may result in a betterment to your property include expenses for fixing a pre-existing defect or condition, enlarging or expanding your property, or increasing the capacity, strength, or quality of your property. Free state tax returns Restoration. Free state tax returns   Expenses that may be for restoration include expenses for replacing a substantial structural part of your property, repairing damage to your property after you properly adjusted the basis of your property as a result of a casualty loss, or rebuilding your property to a like-new condition. Free state tax returns Adaptation. Free state tax returns   Expenses that may be for adaptation include expenses for altering your property to a use that is not consistent with the intended ordinary use of your property when you began renting the property. Free state tax returns Separate the costs of repairs and improvements, and keep accurate records. Free state tax returns You will need to know the cost of improvements when you sell or depreciate your property. Free state tax returns The expenses you capitalize for improving your property can generally be depreciated as if the improvement were separate property. Free state tax returns Other Expenses Other expenses you can deduct from your rental income include advertising, cleaning and maintenance, utilities, fire and liability insurance, taxes, interest, commissions for the collection of rent, ordinary and necessary travel and transportation, and other expenses, discussed next. Free state tax returns Insurance premiums paid in advance. Free state tax returns   If you pay an insurance premium for more than one year in advance, for each year of coverage you can deduct the part of the premium payment that will apply to that year. Free state tax returns You cannot deduct the total premium in the year you pay it. Free state tax returns Legal and other professional fees. Free state tax returns   You can deduct, as a rental expense, legal and other professional expenses, such as tax return preparation fees you paid to prepare Schedule E (Form 1040), Part I. Free state tax returns For example, on your 2013 Schedule E, you can deduct fees paid in 2013 to prepare your 2012 Schedule E, Part I. Free state tax returns You can also deduct, as a rental expense, any expense (other than federal taxes and penalties) you paid to resolve a tax underpayment related to your rental activities. Free state tax returns Local benefit taxes. Free state tax returns   In most cases, you cannot deduct charges for local benefits that increase the value of your property, such as charges for putting in streets, sidewalks, or water and sewer systems. Free state tax returns These charges are nondepreciable capital expenditures, and must be added to the basis of your property. Free state tax returns However, you can deduct local benefit taxes that are for maintaining, repairing, or paying interest charges for the benefits. Free state tax returns Local transportation expenses. Free state tax returns    You may be able to deduct your ordinary and necessary local transportation expenses if you incur them to collect rental income or to manage, conserve, or maintain your rental property. Free state tax returns However, transportation expenses incurred to travel between your home and a rental property generally constitute nondeductible commuting costs unless you use your home as your principal place of business. Free state tax returns See Publication 587, Business Use of Your Home, for information on determining if your home office qualifies as a principal place of business. Free state tax returns   Generally, if you use your personal car, pickup truck, or light van for rental activities, you can deduct the expenses using one of two methods: actual expenses or the standard mileage rate. Free state tax returns For 2013, the standard mileage rate for business use is 56. Free state tax returns 5 cents per mile. Free state tax returns For more information, see chapter 26. Free state tax returns    To deduct car expenses under either method, you must keep records that follow the rules in chapter 26. Free state tax returns In addition, you must complete Form 4562, Part V, and attach it to your tax return. Free state tax returns Rental of equipment. Free state tax returns   You can deduct the rent you pay for equipment that you use for rental purposes. Free state tax returns However, in some cases, lease contracts are actually purchase contracts. Free state tax returns If so, you cannot deduct these payments. Free state tax returns You can recover the cost of purchased equipment through depreciation. Free state tax returns Rental of property. Free state tax returns   You can deduct the rent you pay for property that you use for rental purposes. Free state tax returns If you buy a leasehold for rental purposes, you can deduct an equal part of the cost each year over the term of the lease. Free state tax returns Travel expenses. Free state tax returns   You can deduct the ordinary and necessary expenses of traveling away from home if the primary purpose of the trip is to collect rental income or to manage, conserve, or maintain your rental property. Free state tax returns You must properly allocate your expenses between rental and nonrental activities. Free state tax returns You cannot deduct the cost of traveling away from home if the primary purpose of the trip was to improve your property. Free state tax returns You recover the cost of improvements by taking depreciation. Free state tax returns For information on travel expenses, see chapter 26. Free state tax returns    To deduct travel expenses, you must keep records that follow the rules in chapter 26. Free state tax returns   See Rental Expenses in Publication 527 for more information. Free state tax returns Property Changed to Rental Use If you change your home or other property (or a part of it) to rental use at any time other than the beginning of your tax year, you must divide yearly expenses, such as taxes and insurance, between rental use and personal use. Free state tax returns You can deduct as rental expenses only the part of the expense that is for the part of the year the property was used or held for rental purposes. Free state tax returns You cannot deduct depreciation or insurance for the part of the year the property was held for personal use. Free state tax returns However, you can include the home mortgage interest, qualified mortgage insurance premiums, and real estate tax expenses for the part of the year the property was held for personal use as an itemized deduction on Schedule A (Form 1040). Free state tax returns Example. Free state tax returns Your tax year is the calendar year. Free state tax returns You moved from your home in May and started renting it out on June 1. Free state tax returns You can deduct as rental expenses seven-twelfths of your yearly expenses, such as taxes and insurance. Free state tax returns Starting with June, you can deduct as rental expenses the amounts you pay for items generally billed monthly, such as utilities. Free state tax returns Renting Part of Property If you rent part of your property, you must divide certain expenses between the part of the property used for rental purposes and the part of the property used for personal purposes, as though you actually had two separate pieces of property. Free state tax returns You can deduct the expenses related to the part of the property used for rental purposes, such as home mortgage interest, qualified mortgage insurance premiums, and real estate taxes, as rental expenses on Schedule E (Form 1040). Free state tax returns You can also deduct as rental expenses a portion of other expenses that normally are nondeductible personal expenses, such as expenses for electricity or painting the outside of your house. Free state tax returns There is no change in the types of expenses deductible for the personal-use part of your property. Free state tax returns Generally, these expenses may be deducted only if you itemize your deductions on Schedule A (Form 1040). Free state tax returns You cannot deduct any part of the cost of the first phone line even if your tenants have unlimited use of it. Free state tax returns You do not have to divide the expenses that belong only to the rental part of your property. Free state tax returns For example, if you paint a room that you rent, or if you pay premiums for liability insurance in connection with renting a room in your home, your entire cost is a rental expense. Free state tax returns If you install a second phone line strictly for your tenants' use, all of the cost of the second line is deductible as a rental expense. Free state tax returns You can deduct depreciation, discussed later, on the part of the house used for rental purposes as well as on the furniture and equipment you use for rental purposes. Free state tax returns How to divide expenses. Free state tax returns   If an expense is for both rental use and personal use, such as mortgage interest or heat for the entire house, you must divide the expense between the rental use and the personal use. Free state tax returns You can use any reasonable method for dividing the expense. Free state tax returns It may be reasonable to divide the cost of some items (for example, water) based on the number of people using them. Free state tax returns The two most common methods for dividing an expense are based on (1) the number of rooms in your home, and (2) the square footage of your home. Free state tax returns Not Rented for Profit If you do not rent your property to make a profit, you can deduct your rental expenses only up to the amount of your rental income. Free state tax returns You cannot deduct a loss or carry forward to the next year any rental expenses that are more than your rental income for the year. Free state tax returns For more information about the rules for an activity not engaged in for profit, see Not-for-Profit Activities in chapter 1 of Publication 535. Free state tax returns Where to report. Free state tax returns   Report your not-for-profit rental income on Form 1040, line 21. Free state tax returns For example, you can include your mortgage interest and any qualified mortgage insurance premiums (if you use the property as your main home or second home), real estate taxes, and casualty losses on the appropriate lines of Schedule A (Form 1040) if you itemize your deductions. Free state tax returns   If you itemize your deductions, claim your other rental expenses, subject to the rules explained in chapter 1 of Publication 535, as miscellaneous itemized deductions on Form 1040, Schedule A, line 23. Free state tax returns You can deduct these expenses only if they, together with certain other miscellaneous itemized deductions, total more than 2% of your adjusted gross income. Free state tax returns Personal Use of Dwelling Unit (Including Vacation Home) If you have any personal use of a dwelling unit (including a vacation home) that you rent, you must divide your expenses between rental use and personal use. Free state tax returns In general, your rental expenses will be no more than your total expenses multiplied by a fraction; the denominator of which is the total number of days the dwelling unit is used and the numerator of which is the total number of days actually rented at a fair rental price. Free state tax returns Only your rental expenses may be deducted on Schedule E (Form 1040). Free state tax returns Some of your personal expenses may be deductible if you itemize your deductions on Schedule A (Form 1040). Free state tax returns You must also determine if the dwelling unit is considered a home. Free state tax returns The amount of rental expenses that you can deduct may be limited if the dwelling unit is considered a home. Free state tax returns Whether a dwelling unit is considered a home depends on how many days during the year are considered to be days of personal use. Free state tax returns There is a special rule if you used the dwelling unit as a home and you rented it for less than 15 days during the year. Free state tax returns Dwelling unit. Free state tax returns   A dwelling unit includes a house, apartment, condominium, mobile home, boat, vacation home, or similar property. Free state tax returns It also includes all structures or other property belonging to the dwelling unit. Free state tax returns A dwelling unit has basic living accommodations, such as sleeping space, a toilet, and cooking facilities. Free state tax returns   A dwelling unit does not include property used solely as a hotel, motel, inn, or similar establishment. Free state tax returns Property is used solely as a hotel, motel, inn, or similar establishment if it is regularly available for occupancy by paying customers and is not used by an owner as a home during the year. Free state tax returns Example. Free state tax returns   You rent a room in your home that is always available for short-term occupancy by paying customers. Free state tax returns You do not use the room yourself, and you allow only paying customers to use the room. Free state tax returns The room is used solely as a hotel, motel, inn, or similar establishment and is not a dwelling unit. Free state tax returns Dividing Expenses If you use a dwelling unit for both rental and personal purposes, divide your expenses between the rental use and the personal use based on the number of days used for each purpose. Free state tax returns When dividing your expenses, follow these rules. Free state tax returns Any day that the unit is rented at a fair rental price is a day of rental use even if you used the unit for personal purposes that day. Free state tax returns This rule does not apply when determining whether you used the unit as a home. Free state tax returns Any day that the unit is available for rent but not actually rented is not a day of rental use. Free state tax returns Example. Free state tax returns Your beach cottage was available for rent from June 1 through August 31 (92 days). Free state tax returns During that time, except for the first week in August (7 days) when you were unable to find a renter, you rented the cottage at a fair rental price. Free state tax returns The person who rented the cottage for July allowed you to use it over the weekend (2 days) without any reduction in or refund of rent. Free state tax returns Your family also used the cottage during the last 2 weeks of May (14 days). Free state tax returns The cottage was not used at all before May 17 or after August 31. Free state tax returns You figure the part of the cottage expenses to treat as rental expenses as follows. Free state tax returns The cottage was used for rental a total of 85 days (92 − 7). Free state tax returns The days it was available for rent but not rented (7 days) are not days of rental use. Free state tax returns The July weekend (2 days) you used it is rental use because you received a fair rental price for the weekend. Free state tax returns You used the cottage for personal purposes for 14 days (the last 2 weeks in May). Free state tax returns The total use of the cottage was 99 days (14 days personal use + 85 days rental use). Free state tax returns Your rental expenses are 85/99 (86%) of the cottage expenses. Free state tax returns Note. Free state tax returns When determining whether you used the cottage as a home, the July weekend (2 days) you used it is considered personal use even though you received a fair rental price for the weekend. Free state tax returns Therefore, you had 16 days of personal use and 83 days of rental use for this purpose. Free state tax returns Because you used the cottage for personal purposes more than 14 days and more than 10% of the days of rental use (8 days), you used it as a home. Free state tax returns If you have a net loss, you may not be able to deduct all of the rental expenses. Free state tax returns See Dwelling Unit Used as a Home, next. Free state tax returns Dwelling Unit Used as a Home If you use a dwelling unit for both rental and personal purposes, the tax treatment of the rental expenses you figured earlier under Dividing Expenses and rental income depends on whether you are considered to be using the dwelling unit as a home. Free state tax returns You use a dwelling unit as a home during the tax year if you use it for personal purposes more than the greater of: 14 days, or 10% of the total days it is rented to others at a fair rental price. Free state tax returns See What is a day of personal use , later. Free state tax returns Fair rental price. Free state tax returns   A fair rental price for your property generally is the amount of rent that a person who is not related to you would be willing to pay. Free state tax returns The rent you charge is not a fair rental price if it is substantially less than the rents charged for other properties that are similar to your property in your area. Free state tax returns   If a dwelling unit is used for personal purposes on a day it is rented at a fair rental price, do not count that day as a day of rental use in applying (2) above. Free state tax returns Instead, count it as a day of personal use in applying both (1) and (2) above. Free state tax returns What is a day of personal use?   A day of personal use of a dwelling unit is any day that the unit is used by any of the following persons. Free state tax returns You or any other person who has an interest in the unit, unless you rent it to another owner as his or her main home under a shared equity financing agreement (defined later). Free state tax returns However, see Days used as a main home before or after renting , later. Free state tax returns A member of your family or a member of the family of any other person who owns an interest in the unit, unless the family member uses the dwelling unit as his or her main home and pays a fair rental price. Free state tax returns Family includes only your spouse, brothers and sisters, half-brothers and half-sisters, ancestors (parents, grandparents, etc. Free state tax returns ), and lineal descendants (children, grandchildren, etc. Free state tax returns ). Free state tax returns Anyone under an arrangement that lets you use some other dwelling unit. Free state tax returns Anyone at less than a fair rental price. Free state tax returns Main home. Free state tax returns   If the other person or member of the family in (1) or (2) above has more than one home, his or her main home is ordinarily the one he or she lived in most of the time. Free state tax returns Shared equity financing agreement. Free state tax returns   This is an agreement under which two or more persons acquire undivided interests for more than 50 years in an entire dwelling unit, including the land, and one or more of the co-owners is entitled to occupy the unit as his or her main home upon payment of rent to the other co-owner or owners. Free state tax returns Donation of use of property. Free state tax returns   You use a dwelling unit for personal purposes if: You donate the use of the unit to a charitable organization, The organization sells the use of the unit at a fund-raising event, and The “purchaser” uses the unit. Free state tax returns Examples. Free state tax returns   The following examples show how to determine days of personal use. Free state tax returns Example 1. Free state tax returns You and your neighbor are co-owners of a condominium at the beach. Free state tax returns Last year, you rented the unit to vacationers whenever possible. Free state tax returns The unit was not used as a main home by anyone. Free state tax returns Your neighbor used the unit for 2 weeks last year; you did not use it at all. Free state tax returns Because your neighbor has an interest in the unit, both of you are considered to have used the unit for personal purposes during those 2 weeks. Free state tax returns Example 2. Free state tax returns You and your neighbors are co-owners of a house under a shared equity financing agreement. Free state tax returns Your neighbors live in the house and pay you a fair rental price. Free state tax returns Even though your neighbors have an interest in the house, the days your neighbors live there are not counted as days of personal use by you. Free state tax returns This is because your neighbors rent the house as their main home under a shared equity financing agreement. Free state tax returns Example 3. Free state tax returns You own a rental property that you rent to your son. Free state tax returns Your son does not own any interest in this property. Free state tax returns He uses it as his main home and pays you a fair rental price. Free state tax returns Your son's use of the property is not personal use by you because your son is using it as his main home, he owns no interest in the property, and he is paying you a fair rental price. Free state tax returns Example 4. Free state tax returns You rent your beach house to Joshua. Free state tax returns Joshua rents his cabin in the mountains to you. Free state tax returns You each pay a fair rental price. Free state tax returns You are using your house for personal purposes on the days that Joshua uses it because your house is used by Joshua under an arrangement that allows you to use his house. Free state tax returns Days used for repairs and maintenance. Free state tax returns   Any day that you spend working substantially full time repairing and maintaining (not improving) your property is not counted as a day of personal use. Free state tax returns Do not count such a day as a day of personal use even if family members use the property for recreational purposes on the same day. Free state tax returns Days used as a main home before or after renting. Free state tax returns   For purposes of determining whether a dwelling unit was used as a home, you may not have to count days you used the property as your main home before or after renting it or offering it for rent as days of personal use. Free state tax returns Do not count them as days of personal use if: You rented or tried to rent the property for 12 or more consecutive months. Free state tax returns You rented or tried to rent the property for a period of less than 12 consecutive months and the period ended because you sold or exchanged the property. Free state tax returns However, this special rule does not apply when dividing expenses between rental and personal use. Free state tax returns Examples. Free state tax returns   The following examples show how to determine whether you used your rental property as a home. Free state tax returns Example 1. Free state tax returns You converted the basement of your home into an apartment with a bedroom, a bathroom, and a small kitchen. Free state tax returns You rented the basement apartment at a fair rental price to college students during the regular school year. Free state tax returns You rented to them on a 9-month lease (273 days). Free state tax returns You figured 10% of the total days rented to others at a fair rental price is 27 days. Free state tax returns During June (30 days), your brothers stayed with you and lived in the basement apartment rent free. Free state tax returns Your basement apartment was used as a home because you used it for personal purposes for 30 days. Free state tax returns Rent-free use by your brothers is considered personal use. Free state tax returns Your personal use (30 days) is more than the greater of 14 days or 10% of the total days it was rented (27 days). Free state tax returns Example 2. Free state tax returns You rented the guest bedroom in your home at a fair rental price during the local college's homecoming, commencement, and football weekends (a total of 27 days). Free state tax returns Your sister-in-law stayed in the room, rent free, for the last 3 weeks (21 days) in July. Free state tax returns You figured 10% of the total days rented to others at a fair rental price is 3 days. Free state tax returns The room was used as a home because you used it for personal purposes for 21 days. Free state tax returns That is more than the greater of 14 days or 10% of the 27 days it was rented (3 days). Free state tax returns Example 3. Free state tax returns You own a condominium apartment in a resort area. Free state tax returns You rented it at a fair rental price for a total of 170 days during the year. Free state tax returns For 12 of those days, the tenant was not able to use the apartment and allowed you to use it even though you did not refund any of the rent. Free state tax returns Your family actually used the apartment for 10 of those days. Free state tax returns Therefore, the apartment is treated as having been rented for 160 (170 − 10) days. Free state tax returns You figured 10% of the total days rented to others at a fair rental price is 16 days. Free state tax returns Your family also used the apartment for 7 other days during the year. Free state tax returns You used the apartment as a home because you used it for personal purposes for 17 days. Free state tax returns That is more than the greater of 14 days or 10% of the 160 days it was rented (16 days). Free state tax returns Minimal rental use. Free state tax returns   If you use the dwelling unit as a home and you rent it less than 15 days during the year, that period is not treated as rental activity. Free state tax returns See Used as a home but rented less than 15 days , later, for more information. Free state tax returns Limit on deductions. Free state tax returns   Renting a dwelling unit that is considered a home is not a passive activity. Free state tax returns Instead, if your rental expenses are more than your rental income, some or all of the excess expenses cannot be used to offset income from other sources. Free state tax returns The excess expenses that cannot be used to offset income from other sources are carried forward to the next year and treated as rental expenses for the same property. Free state tax returns Any expenses carried forward to the next year will be subject to any limits that apply for that year. Free state tax returns This limitation will apply to expenses carried forward to another year even if you do not use the property as your home for that subsequent year. Free state tax returns   To figure your deductible rental expenses for this year and any carryover to next year, use Worksheet 9-1. Free state tax returns Reporting Income and Deductions Property not used for personal purposes. Free state tax returns   If you do not use a dwelling unit for personal purposes, see How To Report Rental Income and Expenses , later, for how to report your rental income and expenses. Free state tax returns Property used for personal purposes. Free state tax returns   If you do use a dwelling unit for personal purposes, then how you report your rental income and expenses depends on whether you used the dwelling unit as a home. Free state tax returns Not used as a home. Free state tax returns   If you use a dwelling unit for personal purposes, but not as a home, report all the rental income in your income. Free state tax returns Since you used the dwelling unit for personal purposes, you must divide your expenses between the rental use and the personal use as described earlier in Dividing Expenses . Free state tax returns The expenses for personal use are not deductible as rental expenses. Free state tax returns   Your deductible rental expenses can be more than your gross rental income; however, see Limits on Rental Losses , later. Free state tax returns Used as a home but rented less than 15 days. Free state tax returns   If you use a dwelling unit as a home and you rent it less than 15 days during the year, its primary function is not considered to be rental and it should not be reported on Schedule E (Form 1040). Free state tax returns You are not required to report the rental income and rental expenses from this activity. Free state tax returns The expenses, including qualified mortgage interest, property taxes, and any qualified casualty loss will be reported as normally allowed on Schedule A (Form 1040). Free state tax returns See the Instructions for Schedule A (Form 1040) for more information on deducting these expenses. Free state tax returns Used as a home and rented 15 days or more. Free state tax returns   If you use a dwelling unit as a home and rent it 15 days or more during the year, include all your rental income in your income. Free state tax returns Since you used the dwelling unit for personal purposes, you must divide your expenses between the rental use and the personal use as described earlier in Dividing Expenses . Free state tax returns The expenses for personal use are not deductible as rental expenses. Free state tax returns   If you had a net profit from renting the dwelling unit for the year (that is, if your rental income is more than the total of your rental expenses, including depreciation), deduct all of your rental expenses. Free state tax returns You do not need to use Worksheet 9-1. Free state tax returns   However, if you had a net loss from renting the dwelling unit for the year, your deduction for certain rental expenses is limited. Free state tax returns To figure your deductible rental expenses and any carryover to next year, use Worksheet 9-1. Free state tax returns Depreciation You recover the cost of income-producing property through yearly tax deductions. Free state tax returns You do this by depreciating the property; that is, by deducting some of the cost each year on your tax return. Free state tax returns Three factors determine how much depreciation you can deduct each year: (1) your basis in the property, (2) the recovery period for the property, and (3) the depreciation method used. Free state tax returns You cannot simply deduct your mortgage or principal payments, or the cost of furniture, fixtures, and equipment, as an expense. Free state tax returns You can deduct depreciation only on the part of your property used for rental purposes. Free state tax returns Depreciation reduces your basis for figuring gain or loss on a later sale or exchange. Free state tax returns You may have to use Form 4562 to figure and report your depreciation. Free state tax returns See How To Report Rental Income and Expenses , later. Free state tax returns Alternative minimum tax (AMT). Free state tax returns    If you use accelerated depreciation, you may be subject to the AMT. Free state tax returns Accelerated depreciation allows you to deduct more depreciation earlier in the recovery period than you could deduct using a straight line method (same deduction each year). Free state tax returns Claiming the correct amount of depreciation. Free state tax returns   You should claim the correct amount of depreciation each tax year. Free state tax returns If you did not claim all the depreciation you were entitled to deduct, you must still reduce your basis in the property by the full amount of depreciation that you could have deducted. Free state tax returns   If you deducted an incorrect amount of depreciation for property in any year, you may be able to make a correction by filing Form 1040X, Amended U. Free state tax returns S Individual Income Tax Return. Free state tax returns If you are not allowed to make the correction on an amended return, you can change your accounting method to claim the correct amount of depreciation. Free state tax returns See Claiming the correct amount of depreciation in chapter 2 of Publication 527 for more information. Free state tax returns Changing your accounting method to deduct unclaimed depreciation. Free state tax returns   To change your accounting method, you generally must file Form 3115, Application for Change in Accounting Method, to get the consent of the IRS. Free state tax returns In some instances, that consent is automatic. Free state tax returns For more information, see chapter 1 of Publication 946. Free state tax returns Land. Free state tax returns   You cannot depreciate the cost of land because land generally does not wear out, become obsolete, or get used up. Free state tax returns The costs of clearing, grading, planting, and landscaping are usually all part of the cost of land and cannot be depreciated. Free state tax returns More information. Free state tax returns   See Publication 527 for more information about depreciating rental property and see Publication 946 for more information about depreciation. Free state tax returns Limits on Rental Losses If you have a loss from your rental real estate activity, two sets of rules may limit the amount of loss you can deduct. Free state tax returns You must consider these rules in the order shown below. Free state tax returns At-risk rules. Free state tax returns These rules are applied first if there is investment in your rental real estate activity for which you are not at risk. Free state tax returns This applies only if the real property was placed in service after 1986. Free state tax returns Passive activity limits. Free state tax returns Generally, rental real estate activities are considered passive activities and losses are not deductible unless you have income from other passive activities to offset them. Free state tax returns However, there are exceptions. Free state tax returns At-Risk Rules You may be subject to the at-risk rules if you have: A loss from an activity carried on as a trade or business or for the production of income, and Amounts invested in the activity for which you are not fully at risk. Free state tax returns Losses from holding real property (other than mineral property) placed in service before 1987 are not subject to the at-risk rules. Free state tax returns In most cases, any loss from an activity subject to the at-risk rules is allowed only to the extent of the total amount you have at risk in the activity at the end of the tax year. Free state tax returns You are considered at risk in an activity to the extent of cash and the adjusted basis of other property you contributed to the activity and certain amounts borrowed for use in the activity. Free state tax returns See Publication 925 for more information. Free state tax returns Passive Activity Limits In most cases, all rental real estate activities (except those of certain real estate professionals, discussed later) are passive activities. Free state tax returns For this purpose, a rental activity is an activity from which you receive income mainly for the use of tangible property, rather than for services. Free state tax returns Limits on passive activity deductions and credits. Free state tax returns    Deductions or losses from passive activities are limited. Free state tax returns You generally cannot offset income, other than passive income, with losses from passive activities. Free state tax returns Nor can you offset taxes on income, other than passive income, with credits resulting from passive activities. Free state tax returns Any excess loss or credit is carried forward to the next tax year. Free state tax returns   For a detailed discussion of these rules, see Publication 925. Free state tax returns    You may have to complete Form 8582 to figure the amount of any passive activity loss for the current tax year for all activities and the amount of the passive activity loss allowed on your tax return. Free state tax returns Real estate professionals. Free state tax returns   Rental activities in which you materially participated during the year are not passive activities if, for that year, you were a real estate professional. Free state tax returns For a detailed discussion of the requirements, see Publication 527. Free state tax returns For a detailed discussion of material participation, see Publication 925. Free state tax returns Exception for Personal Use of Dwelling Unit If you used the rental property as a home during the year, any income, deductions, gain, or loss allocable to such use shall not be taken into account for purposes of the passive activity loss limitation. Free state tax returns Instead, follow the rules explained in Personal Use of Dwelling Unit (Including Vacation Home), earlier. Free state tax returns Exception for Rental Real Estate Activities With Active Participation If you or your spouse actively participated in a passive rental real estate activity, you may be able to deduct up to $25,000 of loss from the activity from your nonpassive income. Free state tax returns This special allowance is an exception to the general rule disallowing losses in excess of income from passive activities. Free state tax returns Similarly, you may be able to offset credits from the activity against the tax on up to $25,000 of nonpassive income after taking into account any losses allowed under this exception. Free state tax returns Active participation. Free state tax returns   You actively participated in a rental real estate activity if you (and your spouse) owned at least 10% of the rental property and you made management decisions or arranged for others to provide services (such as repairs) in a significant and bona fide sense. Free state tax returns Management decisions that may count as active participation include approving new tenants, deciding on rental terms, approving expenditures, and similar decisions. Free state tax returns Maximum special allowance. Free state tax returns   The maximum special allowance is: $25,000 for single individuals and married individuals filing a joint return for the tax year, $12,500 for married individuals who file separate returns for the tax year and lived apart from their spouses at all times during the tax year, and $25,000 for a qualifying estate reduced by the special allowance for which the surviving spouse qualified. Free state tax returns   If your modified adjusted gross income (MAGI) is $100,000 or less ($50,000 or less if married filing separately), you can deduct your loss up to the amount specified above. Free state tax returns If your MAGI is more than $100,000 (more than $50,000 if married filing separately), your special allowance is limited to 50% of the difference between $150,000 ($75,000 if married filing separately) and your MAGI. Free state tax returns   Generally, if your MAGI is $150,000 or more ($75,000 or more if you are married filing separately), there is no special allowance. Free state tax returns More information. Free state tax returns   See Publication 925 for more information on the passive loss limits, including information on the treatment of unused disallowed passive losses and credits and the treatment of gains and losses realized on the disposition of a passive activity. Free state tax returns How To Report Rental Income and Expenses The basic form for reporting residential rental income and expenses is Schedule E (Form 1040). Free state tax returns However, do not use that schedule to report a not-for-profit activity. Free state tax returns See Not Rented for Profit, earlier. Free state tax returns Providing substantial services. Free state tax returns   If you provide substantial services that are primarily for your tenant's convenience, such as regular cleaning, changing linen, or maid service, report your rental income and expenses on Schedule C (Form 1040), Profit or Loss From Business, or Schedule C-EZ (Form 1040), Net Profit From Business (Sole Proprietorship). Free state tax returns Substantial services do not include the furnishing of heat and light, cleaning of public areas, trash collection, etc. Free state tax returns For information, see Publication 334, Tax Guide for Small Business. Free state tax returns You also may have to pay self-employment tax on your rental income using Schedule SE (Form 1040), Self-Employment Tax. Free state tax returns   Use Form 1065, U. Free state tax returns S. Free state tax returns Return of Partnership Income, if your rental activity is a partnership (including a partnership with your spouse unless it is a qualified joint venture). Free state tax returns Qualified joint venture. Free state tax returns   If you and your spouse each materially participate as the only members of a jointly owned and operated real estate business, and you file a joint return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership. Free state tax returns This election, in most cases, will not increase the total tax owed on the joint return, but it does give each of you credit for social security earnings on which retirement benefits are based and for Medicare coverage if your rental income is subject to self-employment tax. Free state tax returns For more information, see Publication 527. Free state tax returns Form 1098, Mortgage Interest Statement. Free state tax returns    If you paid $600 or more of mortgage interest on your rental property to any one person, you should receive a Form 1098, or similar statement showing the interest you paid for the year. Free state tax returns If you and at least one other person (other than your spouse if you file a joint return) were liable for, and paid interest on the mortgage, and the other person received the Form 1098, report your share of the interest on Schedule E (Form 1040), line 13. Free state tax returns Attach a statement to your return showing the name and address of the other person. Free state tax returns In the left margin of Schedule E, next to line 13, enter “See attached. Free state tax returns ” Schedule E (Form 1040) If you rent buildings, rooms, or apartments, and provide basic services such as heat and light, trash collection, etc. Free state tax returns , you normally report your rental income and expenses on Schedule E, Part I. Free state tax returns List your total income, expenses, and depreciation for each rental property. Free state tax returns Be sure to enter the number of fair rental and personal use days on line 2. Free state tax returns If you have more than three rental or royalty properties, complete and attach as many Schedules E as are needed to list the properties. Free state tax returns Complete lines 1 and 2 for each property. Free state tax returns However, fill in lines 23a through 26 on only one Schedule E. Free state tax returns On Schedule E, page 1, line 18, enter the depreciation you are claiming for each property. Free state tax returns To find out if you need to attach Form 4562, see Form 4562, in chapter 3 of Publication 527. Free state tax returns If you have a loss from your rental real estate activity, you also may need to complete one or both of the following forms. Free state tax returns Form 6198, At-Risk Limitations. Free state tax returns See At-Risk Rules , earlier. Free state tax returns Also see Publication 925. Free state tax returns Form 8582, Passive Activity Loss Limitations. Free state tax returns See Passive Activity Limits , earlier. Free state tax returns Page 2 of Schedule E is used to report income or loss from partnerships, S corporations, estates, trusts, and real estate mortgage investment conduits. Free state tax returns If you need to use page 2 of Schedule E, be sure to use page 2 of the same Schedule E you used to enter your rental activity on page 1. Free state tax returns Also, include the amount from line 26 (Part I) in the “Total income or (loss)” on line 41 (Part V). Free state tax returns Worksheet 9-1. Free state tax returns Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home Use this worksheet only if you answer “yes” to all of the following questions. Free state tax returns Did you use the dwelling unit as a home this year? (See Dwelling Unit Used as a Home . Free state tax returns ) Did you rent the dwelling unit at a fair rental price 15 days or more this year? Is the total of your rental expenses and depreciation more than your rental income? PART I. Free state tax returns Rental Use Percentage A. Free state tax returns Total days available for rent at fair rental price A. Free state tax returns       B. Free state tax returns Total days available for rent (line A) but not rented B. Free state tax returns       C. Free state tax returns Total days of rental use. Free state tax returns Subtract line B from line A C. Free state tax returns       D. Free state tax returns Total days of personal use (including days rented at less than fair rental price) D. Free state tax returns       E. Free state tax returns Total days of rental and personal use. Free state tax returns Add lines C and D E. Free state tax returns       F. Free state tax returns Percentage of expenses allowed for rental. Free state tax returns Divide line C by line E     F. Free state tax returns   PART II. Free state tax returns Allowable Rental Expenses 1. Free state tax returns Enter rents received 1. Free state tax returns   2a. Free state tax returns Enter the rental portion of deductible home mortgage interest and qualified mortgage insurance premiums (see instructions) 2a. Free state tax returns       b. Free state tax returns Enter the rental portion of real estate taxes b. Free state tax returns       c. Free state tax returns Enter the rental portion of deductible casualty and theft losses (see instructions) c. Free state tax returns       d. Free state tax returns Enter direct rental expenses (see instructions) d. Free state tax returns       e. Free state tax returns Fully deductible rental expenses. Free state tax returns Add lines 2a–2d. Free state tax returns Enter here and  on the appropriate lines on Schedule E (see instructions) 2e. Free state tax returns   3. Free state tax returns Subtract line 2e from line 1. Free state tax returns If zero or less, enter -0- 3. Free state tax returns   4a. Free state tax returns Enter the rental portion of expenses directly related to operating or maintaining  the dwelling unit (such as repairs, insurance, and utilities) 4a. Free state tax returns       b. Free state tax returns Enter the rental portion of excess mortgage interest and qualified mortgage insurance premiums (see instructions) b. Free state tax returns       c. Free state tax returns Carryover of operating expenses from 2012 worksheet c. Free state tax returns       d. Free state tax returns Add lines 4a–4c d. Free state tax returns       e. Free state tax returns Allowable expenses. Free state tax returns Enter the smaller of line 3 or line 4d (see instructions) 4e. Free state tax returns   5. Free state tax returns Subtract line 4e from line 3. Free state tax returns If zero or less, enter -0- 5. Free state tax returns   6a. Free state tax returns Enter the rental portion of excess casualty and theft losses (see instructions) 6a. Free state tax returns       b. Free state tax returns Enter the rental portion of depreciation of the dwelling unit b. Free state tax returns       c. Free state tax returns Carryover of excess casualty losses and depreciation from 2012 worksheet c. Free state tax returns       d. Free state tax returns Add lines 6a–6c d. Free state tax returns       e. Free state tax returns Allowable excess casualty and theft losses and depreciation. Free state tax returns Enter the smaller of  line 5 or line 6d (see instructions) 6e. Free state tax returns   PART III. Free state tax returns Carryover of Unallowed Expenses to Next Year 7a. Free state tax returns Operating expenses to be carried over to next year. Free state tax returns Subtract line 4e from line 4d 7a. Free state tax returns   b. Free state tax returns Excess casualty and theft losses and depreciation to be carried over to next year. Free state tax returns  Subtract line 6e from line 6d b. Free state tax returns   Worksheet 9-1 Instructions. Free state tax returns Worksheet for Figuring Rental Deductions for a Dwelling Unit Used as a Home Caution. Free state tax returns Use the percentage determined in Part I, line F, to figure the rental portions to enter on lines 2a–2c, 4a–4b, and 6a–6b of  Part II. Free state tax returns Line 2a. Free state tax returns Figure the mortgage interest on the dwelling unit that you could deduct on Schedule A as if you had not rented the unit. Free state tax returns Do not include interest on a loan that did not benefit the dwelling unit. Free state tax returns For example, do not include interest on a home equity loan used to pay off credit cards or other personal loans, buy a car, or pay college tuition. Free state tax returns Include interest on a loan used to buy, build, or improve the dwelling unit, or to refinance such a loan. Free state tax returns Include the rental portion of this interest in the total you enter on line 2a of the worksheet. Free state tax returns   Figure the qualified mortgage insurance premiums on the dwelling unit that you could deduct on line 13 of Schedule A as if you had not rented the unit. Free state tax returns See the Schedule A instructions. Free state tax returns However, figure your adjusted gross income (Form 1040, line 38) without your rental income and expenses from the dwelling unit. Free state tax returns See Line 4b to deduct the part of the qualified mortgage insurance premiums not allowed because of the adjusted gross income limit. Free state tax returns Include the rental portion of the amount from Schedule A, line 13, in the total you enter on line 2a of the worksheet. Free state tax returns   Note. Free state tax returns Do not file this Schedule A or use it to figure the amount to deduct on line 13 of that schedule. Free state tax returns Instead, figure the personal portion on a separate Schedule A. Free state tax returns If you have deducted mortgage interest or qualified mortgage insurance premiums on the dwelling unit on other forms, such as Schedule C or F, remember to reduce your Schedule A deduction by that amount. Free state tax returns           Line 2c. Free state tax returns Figure the casualty and theft losses related to the dwelling unit that you could deduct on Schedule A as if you had not rented the dwelling unit. Free state tax returns To do this, complete Section A of Form 4684, Casualties and Thefts, treating the losses as personal losses. Free state tax returns If any of the loss is due to a federally declared disaster, see the Instructions for Form 4684. Free state tax returns On Form 4684, line 17, enter 10% of your adjusted gross income figured without your rental income and expenses from the dwelling unit. Free state tax returns Enter the rental portion of the result from Form 4684, line 18, on line 2c of this worksheet. Free state tax returns   Note. Free state tax returns Do not file this Form 4684 or use it to figure your personal losses on Schedule A. Free state tax returns Instead, figure the personal portion on a separate Form 4684. Free state tax returns           Line 2d. Free state tax returns Enter the total of your rental expenses that are directly related only to the rental activity. Free state tax returns These include interest on loans used for rental activities other than to buy, build, or improve the dwelling unit. Free state tax returns Also include rental agency fees, advertising, office supplies, and depreciation on office equipment used in your rental activity. Free state tax returns           Line 2e. Free state tax returns You can deduct the amounts on lines 2a, 2b, 2c, and 2d as rental expenses on Schedule E even if your rental expenses are more than your rental income. Free state tax returns Enter the amounts on lines 2a, 2b, 2c, and 2d on the appropriate lines of Schedule E. Free state tax returns           Line 4b. Free state tax returns On line 2a, you entered the rental portion of the mortgage interest and qualified mortgage insurance premiums you could deduct on Schedule A if you had not rented the dwelling unit. Free state tax returns If you had additional mortgage interest and qualified mortgage insurance premiums that would not be deductible on Schedule A because of limits imposed on them, enter on line 4b of this worksheet the rental portion of those excess amounts. Free state tax returns Do not include interest on a loan that did not benefit the dwelling unit (as explained in the line 2a instructions). Free state tax returns           Line 4e. Free state tax returns You can deduct the amounts on lines 4a, 4b, and 4c as rental expenses on Schedule E only to the extent they are not more than the amount on line 4e. Free state tax returns *           Line 6a. Free state tax returns To find the rental portion of excess casualty and theft losses, use the Form 4684 you prepared for line 2c of this worksheet. Free state tax returns   A. Free state tax returns Enter the amount from Form 4684, line 10       B. Free state tax returns Enter the rental portion of line A       C. Free state tax returns Enter the amount from line 2c of this worksheet       D. Free state tax returns Subtract line C from line B. Free state tax returns Enter the result here and on line 6a of this worksheet               Line 6e. Free state tax returns You can deduct the amounts on lines 6a, 6b, and 6c as rental expenses on Schedule E only to the extent they are not more than the amount on line 6e. Free state tax returns * *Allocating the limited deduction. Free state tax returns If you cannot deduct all of the amount on line 4d or 6d this year, you can allocate the allowable deduction in any way you wish among the expenses included on line 4d or 6d. Free state tax returns Enter the amount you allocate to each expense on the appropriate line of Schedule E, Part I. Free state tax returns Prev  Up  Next   Home   More Online Publications
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The Free State Tax Returns

Free state tax returns 1. Free state tax returns   Scholarships, Fellowships, Grants, and Tuition Reductions Table of Contents Reminder Introduction Scholarships and FellowshipsTax-Free Scholarships and Fellowships Taxable Scholarships and Fellowships Reporting Scholarships and Fellowships Other Types of Educational AssistanceFulbright Grants Pell Grants and Other Title IV Need-Based Education Grants Payment to Service Academy Cadets Veterans' Benefits Qualified Tuition Reduction Reminder Individual retirement arrangements (IRAs). Free state tax returns  You can set up and make contributions to an IRA if you receive taxable compensation. Free state tax returns Under this rule, a taxable scholarship or fellowship is compensation only if it is shown in box 1 of your Form W-2, Wage and Tax Statement. Free state tax returns For more information about IRAs, see Publication 590. Free state tax returns Introduction This chapter discusses the income tax treatment of various types of educational assistance you may receive if you are studying, teaching, or researching in the United States. Free state tax returns The educational assistance can be for a primary or secondary school, a college or university, or a vocational school. Free state tax returns Included are discussions of: Scholarships, Fellowships, Need-based education grants, such as a Pell Grant, and Qualified tuition reductions. Free state tax returns Many types of educational assistance are tax free if they meet the requirements discussed here. Free state tax returns Special rules apply to U. Free state tax returns S. Free state tax returns citizens and resident aliens who have received scholarships or fellowships for studying, teaching, or researching abroad. Free state tax returns For information about these rules, see Publication 54, Tax Guide for U. Free state tax returns S. Free state tax returns Citizens and Resident Aliens Abroad. Free state tax returns Scholarships and Fellowships A scholarship is generally an amount paid or allowed to, or for the benefit of, a student (whether an undergraduate or a graduate) at an educational institution to aid in the pursuit of his or her studies. Free state tax returns A fellowship is generally an amount paid for the benefit of an individual to aid in the pursuit of study or research. Free state tax returns Amount of scholarship or fellowship. Free state tax returns   The amount of a scholarship or fellowship includes the following: The value of contributed services and accommodations. Free state tax returns This includes such services and accommodations as room (lodging), board (meals), laundry service, and similar services or accommodations that are received by an individual as a part of a scholarship or fellowship. Free state tax returns The amount of tuition, matriculation, and other fees that are paid or remitted to the student to aid the student in pursuing study or research. Free state tax returns Any amount received in the nature of a family allowance as a part of a scholarship or fellowship. Free state tax returns Tax-Free Scholarships and Fellowships A scholarship or fellowship is tax free (excludable from gross income) only if you are a candidate for a degree at an eligible educational institution. Free state tax returns A scholarship or fellowship is tax free only to the extent: It does not exceed your expenses; It is not designated or earmarked for other purposes (such as room and board), and does not require (by its terms) that it cannot be used for qualified education expenses; and It does not represent payment for teaching, research, or other services required as a condition for receiving the scholarship. Free state tax returns (But for exceptions, see Payment for services,later. Free state tax returns Use Worksheet 1–1 to figure the amount of a scholarship or fellowship you can exclude from gross income. Free state tax returns Candidate for a degree. Free state tax returns   You are a candidate for a degree if you: Attend a primary or secondary school or are pursuing a degree at a college or university, or Attend an educational institution that: Provides a program that is acceptable for full credit toward a bachelor's or higher degree, or offers a program of training to prepare students for gainful employment in a recognized occupation; and Is authorized under federal or state law to provide such a program and is accredited by a nationally recognized accreditation agency. Free state tax returns Eligible educational institution. Free state tax returns   An eligible educational institution is one whose primary function is the presentation of formal instruction and that normally maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities. Free state tax returns Qualified education expenses. Free state tax returns   For purposes of tax-free scholarships and fellowships, these are expenses for: Tuition and fees required to enroll at or attend an eligible educational institution, and Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. Free state tax returns These items must be required of all students in your course of instruction. Free state tax returns Expenses that do not qualify. Free state tax returns   Qualified education expenses do not include the cost of: Room and board, Travel, Research, Clerical help, or Equipment and other expenses that are not required for enrollment in or attendance at an eligible educational institution. Free state tax returns Payment for services. Free state tax returns   Generally, you cannot exclude from your gross income the part of any scholarship or fellowship that represents payment for teaching, research, or other services required as a condition for receiving the scholarship. Free state tax returns This applies even if all candidates for a degree must perform the services to receive the degree. Free state tax returns (See exceptions next. Free state tax returns ) Exceptions. Free state tax returns   You do not have to treat as payment for services the part of any scholarship or fellowship that represents payment for teaching, research, or other services if you receive the amount under: The National Health Service Corps Scholarship Program, or The Armed Forces Health Professions Scholarship and Financial Assistance Program. Free state tax returns Example 1. Free state tax returns You received a scholarship of $2,500. Free state tax returns The scholarship was not received under either of the exceptions mentioned above. Free state tax returns As a condition for receiving the scholarship, you must serve as a part-time teaching assistant. Free state tax returns Of the $2,500 scholarship, $1,000 represents payment for teaching. Free state tax returns The provider of your scholarship gives you a Form W-2 showing $1,000 as income. Free state tax returns Your qualified education expenses were at least $1,500. Free state tax returns Assuming that all other conditions are met, $1,500 of your scholarship is tax free. Free state tax returns The $1,000 you received for teaching is taxable. Free state tax returns Example 2. Free state tax returns You are a candidate for a degree at a medical school. Free state tax returns You receive a scholarship (not under either of the exceptions mentioned above) for your medical education and training. Free state tax returns The terms of your scholarship require you to perform future services. Free state tax returns A substantial penalty applies if you do not comply. Free state tax returns The entire amount of your grant is taxable as payment for services in the year it is received. Free state tax returns Athletic Scholarships An athletic scholarship is tax free only if and to the extent it meets the requirements discussed later. Free state tax returns Worksheet 1-1. Free state tax returns    You can use Worksheet 1-1, Taxable Scholarship and Fellowship Income , later, to figure the tax-free and taxable parts of your athletic scholarship. Free state tax returns    Worksheet 1-1. Free state tax returns Taxable Scholarship and Fellowship Income 1. Free state tax returns Enter the total amount of any scholarship or fellowship for 2013. Free state tax returns See Amount of scholarship or fellowship, earlier. Free state tax returns 1. Free state tax returns       If you are a degree candidate at an eligible educational institution, go to line 2. Free state tax returns If you are not a degree candidate at an eligible educational institution, stop here. Free state tax returns The entire amount is taxable. Free state tax returns For information on how to report this amount on your tax return, see Reporting Scholarships and Fellowships , earlier, in this chapter. Free state tax returns       2. Free state tax returns Enter the amount from line 1 that was for teaching, research, or any other services required as a condition for receiving the scholarship. Free state tax returns (Do not include amounts received for these items under the National Health Service Corps Scholarship Program or the Armed Forces Health Professions Scholarship and Financial Assistance Program. Free state tax returns ) 2. Free state tax returns     3. Free state tax returns Subtract line 2 from line 1 3. Free state tax returns     4. Free state tax returns Enter the amount from line 3 that your scholarship or fellowship required you to use for other than qualified education expenses 4. Free state tax returns     5. Free state tax returns Subtract line 4 from line 3 5. Free state tax returns     6. Free state tax returns Enter the amount of your qualified education expenses 6. Free state tax returns     7. Free state tax returns Enter the smaller of line 5 or line 6. Free state tax returns This amount is the most you can exclude from your gross income (the tax-free part of the scholarship or fellowship) 7. Free state tax returns     8. Free state tax returns Subtract line 7 from line 5 8. Free state tax returns     9. Free state tax returns Taxable part. Free state tax returns Add lines 2, 4, and 8. Free state tax returns See Reporting Scholarships and Fellowships , earlier, for how to report this amount on your tax return 9. Free state tax returns     Taxable Scholarships and Fellowships If and to the extent your scholarship or fellowship does not meet the requirements described earlier, it is taxable and must be included in gross income. Free state tax returns You can use Worksheet 1–1, Taxable Scholarship and Fellowship Income, later, to figure the tax-free and taxable parts of your scholarship or fellowship. Free state tax returns Reporting Scholarships and Fellowships Whether you must report your scholarship or fellowship depends on whether you must file a return and whether any part of your scholarship or fellowship is taxable. Free state tax returns If your only income is a completely tax-free scholarship or fellowship, you do not have to file a tax return and no reporting is necessary. Free state tax returns If all or part of your scholarship or fellowship is taxable and you are required to file a tax return, report the taxable amount as explained below. Free state tax returns You must report the taxable amount whether or not you received a Form W-2. Free state tax returns If you receive an incorrect Form W-2, ask the payer for a corrected one. Free state tax returns For information on whether you must file a return, see Publication 501, Exemptions, Standard Deduction, and Filing Information, or your income tax form instructions. Free state tax returns How To Report How you report any taxable scholarship or fellowship income depends on which return you file. Free state tax returns Form 1040EZ. Free state tax returns   If you file Form 1040EZ, include the taxable amount in the total on line 1. Free state tax returns If the taxable amount was not reported on Form W-2, also enter “SCH” and the taxable amount in the space to the left of line 1. Free state tax returns Form 1040A. Free state tax returns   If you file Form 1040A, include the taxable amount in the total on line 7. Free state tax returns If the taxable amount was not reported on Form W-2, also enter “SCH” and the taxable amount in the space to the left of line 7. Free state tax returns Form 1040. Free state tax returns   If you file Form 1040, include the taxable amount in the total on line 7. Free state tax returns If the taxable amount was not reported on Form W-2, also enter “SCH” and the taxable amount on the dotted line next to line 7. Free state tax returns Schedule SE (Form 1040). Free state tax returns   To determine your net earnings from self-employment, include amounts you receive under a scholarship as pay for your services that are reported to you on Form 1099-MISC, Miscellaneous Income. Free state tax returns If your net earnings are $400 or more, you must pay self-employment tax. Free state tax returns Use Schedule SE, Self-Employment Tax, to figure this tax. Free state tax returns Form 1040NR. Free state tax returns   If you file Form 1040NR, report the taxable amount on line 12. Free state tax returns Generally, you must report the amount shown in box 2 of Form(s) 1042-S, Foreign Person's U. Free state tax returns S. Free state tax returns Source Income Subject to Withholding. Free state tax returns See the Instructions for Form 1040NR for more information. Free state tax returns Form 1040NR-EZ. Free state tax returns   If you file Form 1040NR-EZ, report the taxable amount on line 5. Free state tax returns Generally, you must report the amount shown in box 2 of Form(s) 1042-S. Free state tax returns See the Instructions for Form 1040NR-EZ for more information. Free state tax returns Other Types of Educational Assistance The following discussions deal with other common types of educational assistance. Free state tax returns Fulbright Grants A Fulbright grant is generally treated as a scholarship or fellowship in figuring how much of the grant is tax free. Free state tax returns Pell Grants and Other Title IV Need-Based Education Grants These need-based grants are treated as scholarships for purposes of determining their tax treatment. Free state tax returns They are tax free to the extent used for qualified education expenses during the period for which a grant is awarded. Free state tax returns Payment to Service Academy Cadets An appointment to a United States military academy is not a scholarship or fellowship. Free state tax returns Payment you receive as a cadet or midshipman at an armed services academy is pay for personal services and will be reported to you in box 1 of Form W-2. Free state tax returns Include this pay in your income in the year you receive it unless one of the exceptions, discussed earlier under Payment for services , applies. Free state tax returns Veterans' Benefits Payments you receive for education, training, or subsistence under any law administered by the Department of Veterans Affairs (VA) are tax free. Free state tax returns Do not include these payments as income on your federal tax return. Free state tax returns If you qualify for one or more of the education benefits discussed in chapters 2 through 12, you may have to reduce the amount of education expenses qualifying for a specific benefit by part or all of your VA payments. Free state tax returns This applies only to the part of your VA payments that is required to be used for education expenses. Free state tax returns You may want to visit the Veteran's Administration website at www. Free state tax returns gibill. Free state tax returns va. Free state tax returns gov for specific information about the various VA benefits for education. Free state tax returns Example. Free state tax returns You have returned to college and are receiving two education benefits under the latest GI Bill: (1) a $1,534 monthly basic housing allowance (BHA) that is directly deposited to your checking account, and (2) $3,840 paid directly to your college for tuition. Free state tax returns Neither of these benefits is taxable and you do not report them on your tax return. Free state tax returns You also want to claim an American opportunity credit on your return. Free state tax returns You paid $5,000 in qualified education expenses (see chapter 2, American Opportunity Credit , later). Free state tax returns To figure the amount of credit, you must first subtract the $3,840 from your qualified education expenses because this payment under the GI Bill was required to be used for education expenses. Free state tax returns You do not subtract any amount of the BHA because it was paid to you and its use was not restricted. Free state tax returns Qualified Tuition Reduction If you are allowed to study tuition free or for a reduced rate of tuition, you may not have to pay tax on this benefit. Free state tax returns This is called a “tuition reduction. Free state tax returns ” You do not have to include a qualified tuition reduction in your income. Free state tax returns A tuition reduction is qualified only if you receive it from, and use it at, an eligible educational institution. Free state tax returns You do not have to use the tuition reduction at the eligible educational institution from which you received it. Free state tax returns In other words, if you work for an eligible educational institution and the institution arranges for you to take courses at another eligible educational institution without paying any tuition, you may not have to include the value of the free courses in your income. Free state tax returns The rules for determining if a tuition reduction is qualified, and therefore tax free, are different if the education provided is below the graduate level or is graduate education. Free state tax returns You must include in your income any tuition reduction you receive that is payment for your services. Free state tax returns Eligible educational institution. Free state tax returns   An eligible educational institution is one that maintains a regular faculty and curriculum and normally has a regularly enrolled body of students in attendance at the place where it carries on its educational activities. Free state tax returns Officers, owners, and highly compensated employees. Free state tax returns   Qualified tuition reductions apply to officers, owners, or highly compensated employees only if benefits are available to employees on a nondiscriminatory basis. Free state tax returns This means that the tuition reduction benefits must be available on substantially the same basis to each member of a group of employees. Free state tax returns The group must be defined under a reasonable classification set up by the employer. Free state tax returns The classification must not discriminate in favor of owners, officers, or highly compensated employees. Free state tax returns Payment for services. Free state tax returns   Generally, you must include in income the part of any qualified tuition reduction that represents payment for teaching, research, or other services by the student required as a condition of receiving the qualified tuition reduction. Free state tax returns This applies even if all candidates for a degree must perform the services to receive the degree. Free state tax returns (See below for exceptions. Free state tax returns ) Exceptions. Free state tax returns   You do not have to include in income the part of any scholarship or fellowship that represents payment for teaching, research, or other services if you receive the amount under: The National Health Service Corps Scholarship Program, or The Armed Forces Health Professions Scholarship and Financial Assistance Program. Free state tax returns Education Below the Graduate Level If you receive a tuition reduction for education below the graduate level (including primary, secondary, or high school), it is a qualified tuition reduction, and therefore tax free, only if your relationship to the educational institution providing the benefit is described below. Free state tax returns You are an employee of the eligible educational institution. Free state tax returns You were an employee of the eligible educational institution, but you retired or left on disability. Free state tax returns You are a widow or widower of an individual who died while an employee of the eligible educational institution or who retired or left on disability. Free state tax returns You are the dependent child or spouse of an individual described in (1) through (3), above. Free state tax returns Child of deceased parents. Free state tax returns   For purposes of the qualified tuition reduction, a child is a dependent child if the child is under age 25 and both parents have died. Free state tax returns Child of divorced parents. Free state tax returns   For purposes of the qualified tuition reduction, a dependent child of divorced parents is treated as the dependent of both parents. Free state tax returns Graduate Education A tuition reduction you receive for graduate education is qualified, and therefore tax free, if both of the following requirements are met. Free state tax returns It is provided by an eligible educational institution. Free state tax returns You are a graduate student who performs teaching or research activities for the educational institution. Free state tax returns You must include in income any other tuition reductions for graduate education that you receive. Free state tax returns How To Report Any tuition reduction that is taxable should be included as wages in box 1 of your Form W-2. Free state tax returns Report the amount from Form W-2, box 1, on line 7 (Form 1040 or Form 1040A) or line 1 (Form 1040EZ). Free state tax returns Prev  Up  Next   Home   More Online Publications